AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 19, 1998
REGISTRATION NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
----------------
MEDIACOM LLC
MEDIACOM CAPITAL CORPORATION
(EXACT NAME OF REGISTRANTS AS SPECIFIED IN THEIR CHARTERS)
NEW YORK NEW YORK 4841 4841 06-1433421
(STATE OR OTHER JURISDICTION (PRIMARY STANDARD INDUSTRIAL 06-1513997
OF INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) (I.R.S. EMPLOYER
IDENTIFICATION NUMBER)
100 CRYSTAL RUN ROAD
MIDDLETOWN, NEW YORK 10941
(914) 695-2600
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING
AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
ROCCO B. COMMISSO
MANAGER
MEDIACOM LLC
100 CRYSTAL RUN ROAD
MIDDLETOWN, NEW YORK 10941
(914) 695-2600
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE
NUMBER, INCLUDING AREA CODE, OF AGENT FOR SERVICE)
COPIES TO:
ROBERT L. WINIKOFF, ESQ.
COOPERMAN LEVITT WINIKOFF LESTER & NEWMAN, P.C.
800 THIRD AVENUE
NEW YORK, NEW YORK 10022
(212) 688-7000
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after this Registration Statement becomes effective.
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If the securities being registered on this form are being offered in
connection with the formation of a holding company and there is compliance
with General Instruction G, check the following box. [_]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
----------------
CALCULATION OF REGISTRATION FEE
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PROPOSED
PROPOSED MAXIMUM
TITLE OF EACH CLASS OF MAXIMUM AGGREGATE AMOUNT OF
SECURITIES TO BE AMOUNT TO OFFERING PRICE OFFERING REGISTRATION
REGISTERED BE REGISTERED PER UNIT(1) PRICE(1) FEE
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8 1/2% Senior Notes due
2008.................. $200,000,000 100% $200,000,000 $59,000
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(1) Estimated solely for the purpose of calculating the amount of the
registration fee in accordance with Rule 457 under the Securities Act of
1933.
THE REGISTRANTS HEREBY AMEND THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANTS
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION
STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE
COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
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++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES 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. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED JUNE 19, 1998
PROSPECTUS
OFFER TO EXCHANGE
SERIES B 8 1/2% SENIOR NOTES DUE 2008
FOR ALL OUTSTANDING 8 1/2% SENIOR NOTES DUE 2008
OF
MEDIACOM LLC
MEDIACOM CAPITAL CORPORATION
----------
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON , 1998
UNLESS EXTENDED.
Mediacom LLC, a New York limited liability company ("Mediacom" and, together
with its operating subsidiaries, the "Company"), and Mediacom Capital
Corporation, a New York corporation ("Mediacom Capital" and together with
Mediacom, the "Issuers"), hereby offer (the "Exchange Offer"), upon the terms
and subject to the conditions set forth in this Prospectus (the "Prospectus")
and the accompanying Letter of Transmittal (the "Letter of Transmittal"), to
exchange $1,000 principal amount of their Series B 8 1/2% Senior Notes due 2008
(the "Series B Notes"), which have been registered under the Securities Act of
1933, as amended (the "Securities Act"), pursuant to a Registration Statement
of which this Prospectus is a part, for each $1,000 principal amount of their
outstanding 8 1/2% Senior Notes due 2008 (the "Series A Notes"), of which
$200,000,000 in aggregate principal amount are outstanding on the date hereof.
The form and terms of the Series B Notes are the same as the form and terms of
the Series A Notes (which they replace) except that the Series B Notes will
bear a "Series B" designation and will have been registered under the
Securities Act and, therefore, will not bear legends restricting their
transfer, and holders of the Series B Notes will not be entitled to certain
rights of holders of Series A Notes under the Exchange and Registration Rights
Agreement (as defined), which rights will terminate upon the consummation of
the Exchange Offer. The Series B Notes will evidence the same debt as the
Series A Notes (which they replace) and will be entitled to the benefits of an
Indenture dated as of April 1, 1998 governing the Series A Notes and the Series
B Notes (the "Indenture"). The Series A Notes and the Series B Notes are
sometimes referred to herein collectively as the "Notes." See "Description of
the Notes" and "The Exchange Offer."
Interest on the Notes will be payable semi-annually on April 15 and October
15 of each year, commencing on October 15, 1998, The Notes will mature on April
15, 2008. Except as described below, the Issuers may not redeem the Series B
Notes prior to April 15, 2003. On and after such date, the Issuers may redeem
the Series B Notes, in whole or in part, at the redemption prices set forth
herein, together with accrued and unpaid interest, if any, to the date of
redemption. In addition, at any time on or prior to April 15, 2001, the Issuers
may redeem up to 35% of the original principal amount of the Series B Notes
with the Net Cash Proceeds (as defined) of one or more Equity Offerings (as
defined) by Mediacom, at a redemption price in cash equal to 108.5% of the
principal amount to be redeemed plus accrued and unpaid interest, if any, to
the date of redemption; provided that at least 65% of the original aggregate
principal amount of the Series B Notes remains outstanding immediately after
each such redemption. The Series B Notes will not be subject to any sinking
fund requirement. Upon the occurrence of a Change of Control (as defined), each
holder of the Series B Notes will have the right to require the Issuers to
repurchase all or any part of such holder's Series B Notes at a price equal to
101% of the principal amount thereof plus accrued and unpaid interest, if any,
to the date of repurchase. See "Description of the Notes--Optional Redemption"
and "--Repurchase at the Option of Holders--Change of Control." There can be no
assurance that sufficient funds will be available if necessary to make any
required repurchases. See "Risk Factors--Ability to Purchase Notes Upon a
Change of Control."
The Series B Notes will be unsecured, senior obligations of the Issuers
ranking pari passu in right of payment with all other existing and future
unsecured Indebtedness of the Issuers, other than any Subordinated Obligations
(as defined). The Series B Notes will be effectively subordinated in right of
payment to any secured Indebtedness of the Issuers. Mediacom is a holding
company and conducts its business through its Subsidiaries (as defined).
Accordingly, the Series B Notes will be effectively subordinated to all
existing and future Indebtedness and other liabilities (including trade
payables) of the Subsidiaries. As of March 31, 1998, after giving pro forma
effect to the Series A Notes Offering (as defined) and the use of the net
proceeds therefrom, the Company would have had approximately $321.3 million of
Indebtedness outstanding (including approximately $121.3 million of
Indebtedness of the Subsidiaries). The Indenture permits the Company to incur
additional Indebtedness, including secured Indebtedness, subject to certain
restrictions. See "Capitalization" and "Description of the Notes--Ranking."
Each Series B Note will bear interest from its issuance date. Holders of
Series A Notes that are accepted for exchange will receive, in cash, accrued
interest thereon to, but not including, the issuance date of the Series B
Notes. Such interest will be paid with the first interest payment on the Series
B Notes. Interest on the Series A Notes accepted for exchange will cease to
accrue upon issuance of the Series B Notes.
The Issuers will accept for exchange any and all validly tendered Series A
Notes not withdrawn prior to 5:00 p.m., New York City time, on , 1998,
unless extended by the Issuers in their sole discretion (the "Expiration
Date"). Tenders of Series A Notes may be withdrawn at any time prior to 5:00
p.m., New York City time, on the Expiration Date. The Exchange Offer is subject
to certain customary conditions. See "The Exchange Offer--Conditions." Series A
Notes may be tendered only in integral multiples of $1,000. In the event the
Issuers terminate the Exchange Offer and do not accept for exchange any Series
A Notes, the Issuers will promptly return all previously tendered Series A
Notes to the holders thereof.
SEE "RISK FACTORS," WHICH BEGINS ON PAGE 17 OF THIS PROSPECTUS, FOR A
DESCRIPTION OF CERTAIN RISKS TO BE CONSIDERED BY HOLDERS WHO TENDER THEIR
SERIES A NOTES IN THE EXCHANGE OFFER.
(Continued on following page)
----------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
----------
THE DATE OF THIS PROSPECTUS IS , 1998
(Continued from previous page)
The Series A Notes were sold by the Issuers on April 1, 1998 to the Initial
Purchaser (as defined) in a transaction not registered under the Securities
Act in reliance upon an exemption under the Securities Act (the "Series A
Notes Offering"). The Initial Purchaser subsequently resold the Series A Notes
within the United States to qualified institutional buyers in reliance upon
Rule 144A under the Securities Act and outside the United States in accordance
with Regulation S under the Securities Act. Accordingly, the Series A Notes
may not be reoffered, resold or otherwise transferred in the United States
unless registered under the Securities Act or unless an applicable exemption
from the registration requirements of the Securities Act is available. The
Series B Notes are being offered hereunder in order to satisfy the obligations
of the Issuers under the Exchange and Registration Rights Agreement. See "The
Exchange Offer."
Based on no-action letters issued by the staff of the Securities and
Exchange Commission (the "Commission") to third parties, the Issuers believe
the Series B Notes issued pursuant to the Exchange Offer may be offered for
resale, resold and otherwise transferred by any holder thereof (other than any
such holder that is an "affiliate" of the Issuers within the meaning of Rule
405 under the Securities Act) without compliance with the registration and
prospectus delivery provisions of the Securities Act, provided that such
Series B Notes are acquired in the ordinary course of such holder's business
and that such holder does not intend to participate and has no arrangement or
understanding with any person to participate in the distribution of such
Series B Notes. See "The Exchange Offer--Purpose and Effect of the Exchange
Offer" and "--Resale of the Series B Notes." Each holder of the Series A Notes
who wishes to exchange the Series A Notes for Series B Notes in the Exchange
Offer will be required to represent in the Letter of Transmittal that at the
time of the consummation of the Exchange Offer (i) it is not an affiliate of
the Issuers or, if it is such an affiliate, such holder will comply with the
registration and prospectus delivery requirements of the Securities Act to the
extent applicable, (ii) the Series B Notes to be received by it are being
acquired in the ordinary course of its business and (iii) it has no
arrangements or understanding with any person to participate in the
distribution of the Series A or Series B Notes within the meaning of the
Securities Act. Each broker-dealer (a "Participating Broker-Dealer") that
receives Series B Notes for its own account pursuant to the Exchange Offer
must acknowledge that it will deliver a prospectus in connection with any
resale of such Series B Notes. The Letter of Transmittal states that by so
acknowledging and by delivering a prospectus, a Participating Broker-Dealer
will not be deemed to admit that it is an "underwriter" within the meaning of
the Securities Act. This Prospectus, as it may be amended or supplemented from
time to time, may be used in connection with resales of Series B Notes
received in exchange for Series A Notes only by Participating Broker-Dealers
("Eligible Participating Broker-Dealers") who acquired such Series A Notes as
a result of market-making activities or other trading activities and not by
Participating Broker-Dealers who acquired such Series A Notes directly from
the Issuers. The Issuers have agreed that, for a period of 90 days after the
Expiration Date, they will make this Prospectus available to any Eligible
Participating Broker-Dealer for use in connection with any such resale. See
"Plan of Distribution."
Holders of Series A Notes not tendered and accepted in the Exchange Offer
will continue to hold such Series A Notes and will be entitled to all the
rights and benefits and will be subject to the limitations applicable thereto
under the Indenture and with respect to transfer under the Securities Act. The
Issuers will pay all the expenses incurred by them incident to the Exchange
Offer. See "The Exchange Offer."
There has not previously been any public market for the Series A Notes or
the Series B Notes. The Issuers do not intend to list the Series B Notes on
any securities exchange or to seek approval for quotation through any
automated quotation system. There can be no assurance that an active market
for the Series B Notes will develop. See "Risk Factors--Absence of Public
Market; Restrictions on Transfer." Moreover, to the extent that Series A Notes
are tendered and accepted in the Exchange Offer, the trading market for
untendered and tendered but unaccepted Series A Notes could be adversely
affected.
The Series B Notes will be available initially only in book-entry form. The
Issuers expect that the Series B Notes issued pursuant to this Exchange Offer
will be issued in the form of a Global Note (as defined), which will be
deposited with, or on behalf of, The Depository Trust Company (the
"Depository") and registered in its name or in the name of Cede & Co., its
nominee. Beneficial interests in the Global Note representing the Series B
Notes will be shown on, and transfers thereof to qualified institutional
buyers or to foreign purchasers will be effected through, records maintained
by the Depository and its participants. After the initial issuance of the
Global Note, Series B Notes in certified form will be issued in exchange for
the Global Note only on the terms set forth in the Indenture. See "Book
Entry--Delivery and Form."
HISTORICAL AND PRO FORMA FINANCIAL STATEMENTS
THE FINANCIAL STATEMENTS AND DATA OF THE ENTITIES INDICATED HEREIN ARE OF
BUSINESSES ACQUIRED BY THE COMPANY SINCE ITS COMMENCEMENT OF OPERATIONS IN
1996. SUCH COMPANIES HAVE HAD DIFFERENT MANAGEMENT AND COST STRUCTURES. THE
FINANCIAL STATEMENTS AND DATA INCLUDED HEREIN ALSO INCLUDE HISTORICAL
CONSOLIDATED FINANCIAL STATEMENTS AND DATA OF THE COMPANY AND SUCH BUSINESSES.
THE FINANCIAL STATEMENTS AND DATA INCLUDED HEREIN, IN PARTICULAR THE UNAUDITED
PRO FORMA CONSOLIDATED FINANCIAL DATA, DO NOT NECESSARILY INDICATE THE RESULTS
OF OPERATIONS OR FINANCIAL CONDITION OF THE COMPANY THAT WOULD HAVE BEEN
REPORTED FOR THE PERIODS INDICATED FOR A VARIETY OF REASONS, INCLUDING
DIFFERENCES IN OPERATING AND OTHER COSTS, DIFFERENCES IN ACCOUNTING POLICIES
AND PROCEDURES AND DIFFERENCES IN COST OF CAPITAL. IN ADDITION, THE UNAUDITED
PRO FORMA CONSOLIDATED FINANCIAL DATA HAVE NOT BEEN PREPARED IN ACCORDANCE
WITH UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES ("GAAP") BECAUSE
GAAP DOES NOT ALLOW FOR THE AGGREGATION OF FINANCIAL DATA FOR ENTITIES THAT
ARE NOT UNDER COMMON OWNERSHIP. SUCH PRO FORMA CONSOLIDATED FINANCIAL DATA ARE
INCLUDED HEREIN FOR INFORMATIONAL PURPOSES AND WHILE MANAGEMENT BELIEVES THAT
THEY MAY BE HELPFUL IN UNDERSTANDING THE PAST OPERATIONS OF THE ENTITIES, ON
SUCH A CONSOLIDATED BASIS, UNDUE RELIANCE SHOULD NOT BE PLACED THEREON.
MARKET DATA
UNLESS OTHERWISE INDICATED HEREIN, THE CABLE TELEVISION INDUSTRY AVERAGES
FOR SUBSCRIBER GROWTH, PREMIUM PENETRATION AND AVERAGE MONTHLY REVENUES PER
BASIC SUBSCRIBER HAVE BEEN OBTAINED FROM A LEADING CABLE TELEVISION INDUSTRY
PUBLICATION RELEASED IN JUNE 1997.
i
SUMMARY
The following summary is qualified in its entirety by, and should be read in
conjunction with, the more detailed information, risk factors and historical
and pro forma financial statements, including the related notes, appearing
elsewhere in this Prospectus. As used in this Prospectus, unless the context
otherwise requires: (i) "Issuers" refers, collectively, to Mediacom LLC
("Mediacom") and Mediacom Capital Corporation ("Mediacom Capital"), a wholly-
owned subsidiary of Mediacom; (ii) "Company" refers to Mediacom and its
operating subsidiaries (the "Subsidiaries"), presently comprising Mediacom
Southeast LLC ("Mediacom Southeast"), Mediacom California LLC ("Mediacom
California"), Mediacom Arizona LLC ("Mediacom Arizona") and Mediacom Delaware
LLC ("Mediacom Delaware"); (iii) "1997 Systems" refers to the cable television
systems owned by the Company as of December 31, 1997; (iv) "1998 Systems"
refers to the cable television systems acquired by the Company in January 1998
from affiliates of Cablevision Systems Corporation (the "Cablevision Systems")
and from Jones Cable Income Fund 1-B/C Venture whose general partners are
affiliates of Jones Intercable, Inc. (the "Jones System"); (v) "Systems" refers
to the 1997 Systems and the 1998 Systems; and (vi) all references to the
Company's business and financial performance "on a pro forma basis" give effect
to the Systems as if owned by the Company at the beginning of the related
period or as of the applicable date. See "Glossary" for the definition of
certain terms appearing herein.
THE COMPANY
OVERVIEW
Mediacom was founded in July 1995 by Rocco B. Commisso principally to
acquire, operate and develop cable television systems through its Subsidiaries
in selected non-metropolitan markets of the United States. Mr. Commisso is the
Chairman and Chief Executive Officer of Mediacom and has over 20 years of
experience with the cable television industry. To date, the Company has
completed eight acquisitions of cable television systems that, as of March 31,
1998, passed approximately 482,800 homes and served approximately 343,700 basic
subscribers. The Company is currently among the top 25 multiple system
operators ("MSOs") in the United States, operating in 14 states and serving 309
franchised communities.
In pursuing its business strategy, the Company has sought to take advantage
of market opportunities to acquire underperforming and undervalued cable
television systems principally in non-metropolitan markets and to build
subscriber clusters through regionalized operations. From March 1996 to
December 1997, the Company completed six acquisitions of cable television
systems that, as of March 31, 1998, served approximately 64,300 basic
subscribers in California, Arizona, Delaware and Maryland (the "1997 Systems").
In January 1998, the Company acquired cable television systems in two separate
transactions that, as of March 31, 1998, served approximately 279,400 basic
subscribers in eleven states, principally Alabama, California, Florida,
Kentucky, Missouri and North Carolina (the "1998 Systems"). The aggregate
purchase price for the 1997 Systems and the 1998 Systems (collectively, the
"Systems") was approximately $428.2 million (before closing costs and
adjustments), representing an acquisition price of approximately $1,246 per
basic subscriber. On a pro forma basis, for the three months ended March 31,
1998, the Company's annualized revenues were approximately $126.7 million,
annualized System Cash Flow (as defined) was approximately $54.6 million and
annualized EBITDA (as defined) was approximately $48.8 million.
1
The Systems, taken as a whole, serve communities with favorable demographic
characteristics. During the five year period ended December 31, 1997, basic
subscribers served by the Systems have grown at a compound annual rate of
approximately 4.2%, compared to the cable television industry's estimated
growth rate of 3.4% over the same period. Furthermore, the Systems have
experienced a strong demand for premium service units, as reflected by the
premium penetration of approximately 117.7% as of March 31, 1998 compared to
the estimated year-end 1997 industry average of 77.0%. Because the Systems
serve geographically and economically diverse communities in smaller markets
across fourteen states, the Company believes that it is more resistant to any
individual regional economic downturn and is less susceptible to any local
competitive threat, providing the Company with more stable revenues and System
Cash Flow.
Mr. Commisso has assembled a management team with significant business
experience in acquiring, operating and financing cable television operations.
The eleven most senior executives and managers of the Company have an average
of over 18 years of experience with the cable television industry. Prior to
founding Mediacom, Mr. Commisso served as the Executive Vice President, Chief
Financial Officer and Director of Cablevision Industries Corporation ("CVI")
from August 1986 to March 1995. At the time of Mr. Commisso's arrival, CVI was
a regional cable company serving fewer than 300,000 basic subscribers in four
states. During his tenure, CVI completed 40 acquisitions of cable television
systems with an aggregate value exceeding $1.2 billion. Mr. Commisso was
directly responsible for all aspects of CVI's financing activities, including
the completion of over 35 separate financing transactions with aggregate
capital commitments exceeding $5.0 billion. At the time of its sale to Time
Warner, Inc. in January 1996, CVI had become the eighth largest MSO in the
United States, serving 1.3 million basic subscribers in 18 states, primarily in
non-metropolitan markets.
BUSINESS STRATEGY
The Company's business strategy is to: (i) acquire underperforming and
undervalued cable television systems primarily in non-metropolitan markets, as
well as related telecommunications businesses; (ii) implement operating plans
and system improvements designed to enhance the long-term operational and
financial performance of the Company; and (iii) deploy a flexible financing
strategy to complement the Company's growth objectives and operating plans. The
key elements of the Company's business strategy are:
Selectively Pursue Strategic Acquisitions. The Company actively seeks to
acquire undervalued and underperforming cable television systems, principally
in non-metropolitan markets, that it believes can benefit from its operating
strategy. The Company generally targets systems in close proximity to its
existing operations since it is more cost effective to provide cable television
and advanced telecommunications services over an expanded subscriber base
within a concentrated geographic area. The Company believes that it may be able
to purchase "fill-in" acquisitions at favorable prices in geographic areas
where it is the dominant provider of cable television services. The Company may
also expand its base of operations into other markets or pursue related
telecommunications businesses if such acquisitions are consistent with its
overall business strategy. The Company generally considers the following
factors in analyzing potential acquisitions: (i) the demographics of the
market, including income levels, housing densities and prospects for subscriber
growth; (ii) the potential for clustering or regionalization; (iii) the
competitive environment; (iv) the quality of the system's technical
infrastructure, including the cost of upgrading; (v) the system's operating
expense structure; (vi) existing subscriber rates; (vii) the cost to deploy new
services such as pay-per-view,
2
Internet access and high-speed data transmission; (viii) the potential for
developing local advertising business; and (ix) franchise expiration, terms and
conditions. The Company believes that acquisition opportunities continue to
exist in non-metropolitan markets. Currently, the Company does not have any
definitive agreements to acquire any cable television systems.
Target Non-Metropolitan Markets. The Company believes that there are
operating, regulatory, competitive and economic advantages in acquiring and
operating cable television systems in non-metropolitan markets. Typically, in
smaller communities, cable television service is necessary in order to receive
a full complement of off-air broadcast stations, and there are fewer
competitive entertainment alternatives available to the customer. Consequently,
non-metropolitan cable television systems are generally characterized by higher
basic penetration rates, lower subscriber turnover and lower operating costs,
thus providing for more predictable revenue streams and higher cash flow
margins than cable television systems serving urban and suburban markets. The
Systems, taken as a whole, serve communities that generally have experienced
higher than average growth rates in population and households. The Company
believes that such favorable demographic profiles of the markets in which it
operates will enable the Company to increase its basic subscriber base. The
Company believes that it will continue to benefit from favorable rate
regulation under the "small system rules" adopted by the Federal Communications
Commission ("FCC") in 1995, and that operating in smaller markets generally
poses fewer regulatory burdens. See "Legislation and Regulation." The Company
also believes that non-metropolitan markets have less appeal to other local
hardwire and wireless video service providers due to the lower housing
densities which result in higher capital expenditures per household to
construct competing video delivery systems. Lastly, as a result of the recent
trend by larger MSOs in the cable television industry toward redirecting their
resources to urban and suburban markets, evidenced by their ongoing divestiture
of smaller market cable television systems, the Company believes that there
will be continuing opportunities to acquire its targeted cable television
systems at favorable prices.
Promote and Expand Service Offerings. To date, the Company generally has
sought to acquire cable television systems that have underserved their
customers. As a result, the Company believes that significant opportunities
exist to increase the revenues of the Systems by promoting and expanding the
programming services available to its customers. The Systems generate lower
average monthly revenues per basic subscriber compared to the cable television
industry in general. On a pro forma basis, for the three months ended March 31,
1998, the average monthly revenue per basic subscriber for the Systems was
approximately $30.72, compared to the estimated year-end 1997 cable television
industry average of $38.49, providing the Company with pricing flexibility as
it introduces new programming services. The weighted average channel capacity
for the Systems is 51 channels, of which five channels on average are unused
and available for additional programming. The Company intends to introduce new
programming services aggressively by activating current unused channel capacity
in the near term, and by increasing channel availability through planned system
improvements in the longer term. In an effort to increase revenues from pay-
per-view movies and events, and to increase the penetration of premium
programming services (such as Home Box Office ("HBO") and Showtime), the
Company plans to deploy additional addressable converters in the customers'
homes. Currently, approximately 63.0% of the Company's basic subscribers are
served by systems that offer addressable technology, and approximately 23.0% of
the Company's basic subscribers have addressable converters installed in their
homes. The Company plans to market its services aggressively utilizing a full
range of marketing techniques including direct door-to-door sales,
telemarketing, direct mail, print and broadcast advertising, billing inserts
and cross-channel promotion.
3
In addition, the Company believes that there are significant opportunities to
increase local advertising revenues, particularly in the Company's larger cable
television systems. On a pro forma basis, for the three months ended March 31,
1998, the Systems generated local advertising revenues of only $0.21 per basic
subscriber per month.
Invest in System Improvements. As part of its commitment to customer service,
the Company endeavors to maintain high technical performance standards in all
of its cable television systems. To accomplish this, the Company has embarked
on a capital investment program to upgrade the Systems selectively. This
program, which involves the use of fiber optic technology, will expand channel
capacities, enhance signal quality, improve technical reliability, augment
addressability and provide a platform to develop high-speed data services and
Internet access. The Company believes that such technical upgrades create
additional revenue opportunities, enhance operating efficiencies, increase
customer satisfaction, improve franchising relations and solidify the Company's
position as the dominant provider of video services in the markets in which it
operates. Over the next five years, the Company intends to spend approximately:
(i) $70.0 million to establish a technical standard of 550MHz bandwidth
capacity (78 analog channels) in cable television systems serving over 80.0% of
its basic subscribers; (ii) $64.0 million for ongoing maintenance and
replacement and for installations and extensions to the cable plant related to
customer growth; and (iii) $6.0 million for the purchase of additional
addressable converters. The Company is currently evaluating the economic
viability of upgrading its larger systems to 750MHz bandwidth capacity (112
analog channels), which would require additional capital investment. During
1997 and the first quarter of 1998, the Company completed upgrade projects
affecting approximately 31,300 basic subscribers served by the 1997 Systems as
of March 31, 1998, and as a result, over 74.0% of the 1997 Systems' basic
subscribers are currently served by cable television systems with at least 62
channel capacity. As part of this upgrade program, the Company in the fourth
quarter of 1997 began the 550MHz upgrade of its largest cable television system
which is located in lower Delaware, serving approximately 28,720 basic
subscribers as of March 31, 1998, and expects completion of this project by
mid-1999. In addition, the Company has already begun 550MHz upgrade projects in
the 1998 Systems affecting over 100,000 basic subscribers, with expected
completion by year-end 1999. The Company is continually evaluating new
technical developments and the economic feasibility of introducing new services
and programming delivery capabilities, such as video-on-demand, digital
compression and other interactive and high-speed data applications.
Realize Operating Efficiencies. After consummating an acquisition, the
Company implements managerial, operational, purchasing and technical changes
designed to improve operating efficiencies. By regionalizing certain
managerial, sales and administrative functions and imposing additional cost
controls at its 1997 Systems, the Company reduced operating costs, while
increasing the emphasis on customer service. With respect to the 1998 Systems,
the Company is currently evaluating the consolidation of certain regional,
administrative and customer service operations, which should improve System
Cash Flow margins. On a pro forma basis, for the three months ended March 31,
1998, the System Cash Flow margin (System Cash Flow divided by revenues) for
the 1997 Systems was 53.0%, compared to 40.6% for the 1998 Systems. In
addition, the Company plans to consolidate headend facilities, thereby reducing
technical operating costs and capital expenditures associated with the
introduction of new video services, while also facilitating the Company's
ability to pursue local advertising, Internet access, and high-speed data
applications. The Company plans to eliminate at least 24 of the 157 headend
facilities in the Systems.
Deliver Advanced Telecommunications Services. The Company believes that
additional revenue opportunities exist in non-metropolitan markets by providing
advanced telecommunication services,
4
such as Internet access and the delivery of high-speed data services, including
local area network applications for residential and commercial customers. The
Company believes these smaller markets have limited appeal to the larger
telecommunications companies and that its technical platform will provide such
services at higher speeds and lower cost, giving the Company a competitive
advantage over other telecommunication providers in the markets in which it
operates. In Ridgecrest, California, where its cable television system passed
approximately 17,700 homes and served approximately 9,900 basic subscribers as
of March 31, 1998, the Company provides Internet access to over 3,500 customers
through both the telephone modem and the cable modem. The cable modem provides
Internet access at download speeds of up to 100 times faster than telephone
modem connections. The Company plans to introduce Internet access via the cable
modem in its larger systems and will seek to complement this service with the
telephone modem connection through acquisitions and initial start-ups of local
Internet access businesses.
Focus on Customer Satisfaction. The Company believes that providing superior
customer service is a key element for its long-term success. The Company seeks
to achieve a high level of customer satisfaction by employing a well-trained
staff of customer service representatives and experienced field technicians.
Over 75% of the Company's basic subscribers are provided toll-free access to
the Company's regional calling centers on a 24-hour, 7-day per week basis. The
Company believes customer service is also enhanced by the regional calling
centers' ability to coordinate effectively technical service and installation
appointments and to speed response to customer inquiries. The Company also
believes that the regional calling center structure increases the effectiveness
of its marketing campaigns. The Company is presently evaluating the possibility
of extending the same 24-hour service to its other customers. Additionally, as
part of its plans to introduce new programming services, the Company regularly
evaluates the programming packages and pricing options available, and surveys
its customers for their preferences for new programming services.
Deploy Flexible Financing Strategy. The Company has deployed a financing
strategy which utilizes a prudent blend of equity and debt capital to
complement the Company's acquisition and operating activities. Through its
holding company structure, the Company has raised equity from its members and
intends to issue public long-term debt (including the Notes) at the holding
company level, while utilizing the Subsidiaries to access debt capital in the
bank and private placement markets through multiple stand-alone borrowing
groups. The Company believes that this financing strategy is beneficial because
it broadens the Company's access to various debt markets, enhances its
flexibility in managing the Company's capital structure, reduces the overall
cost of debt capital and permits the Company to maintain a substantial
liquidity position in the form of unused and available bank credit commitments.
To date, the Company has raised $135.5 million of equity capital, of which
$125.0 million has been invested in Mediacom. In addition, the Company has
established two subsidiary borrowing groups which have obtained in the
aggregate $325.0 million of committed bank credit facilities. Such credit
facilities are non-recourse to Mediacom, have no cross-default provisions
relating directly to each other and permit the relevant Subsidiaries, subject
to covenant and other restrictions, to make distributions to Mediacom. As of
March 31, 1998, on a pro forma basis after giving effect to the Series A Notes
Offering and the use of the net proceeds therefrom, the Company would have had
approximately $207.0 million of unused credit commitments, of which
approximately $184.0 million could have been borrowed and distributed to
Mediacom under the most restrictive covenants in the Subsidiaries' credit
agreements. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Liquidity and Capital Resources" and "Description of
Other Indebtedness."
5
OPERATING REGIONS
To manage and operate the Systems, the Company has established four operating
regions: Southeast, Mid-Atlantic, Central and Western. Each region is
subdivided into groups of cable television systems ("Regional Clusters") which
are organized and operated geographically. The following table is a summary of
selected subscriber and operating data for the Systems as of March 31, 1998:
AVERAGE
BASIC SERVICE PREMIUM SERVICE MONTHLY
----------------------- ------------------------- REVENUES
REGIONAL HOMES BASIC BASIC PREMIUM PREMIUM PER BASIC
OPERATING REGION CLUSTERS PASSED SUBSCRIBERS PENETRATION SERVICE UNITS PENETRATION SUBSCRIBER(1)
- ---------------- -------- ------- ----------- ----------- ------------- ----------- -------------
Southeast............... 4 178,580 130,750 73.2% 199,990 153.0% $31.21
Mid-Atlantic............ 3 106,170 82,390 77.6 82,620 100.3 28.43
Central................. 4 116,210 77,430 66.6 100,500 129.8 29.77
Western................. 4 81,840 53,130 64.9 21,290 40.1 34.47
--- ------- ------- ----- ------- ------ ------
Total.................. 15 482,800 343,700 71.2% 404,400 117.7% $30.72
=== ======= ======= ===== ======= ====== ======
- --------
(1) Represents average monthly revenues for the three months ended March 31,
1998, divided by the number of basic subscribers as of the end of such
period.
RECENT DEVELOPMENTS
Acquisitions and Related Financings. On January 9, 1998, Mediacom California
completed the acquisition of the Jones System, serving approximately 17,200
basic subscribers on such date, for a purchase price of $21.4 million (before
closing costs and adjustments). The acquisition of the Jones System and related
closing costs and adjustments was financed with cash on hand and borrowings
under a $100.0 million senior credit facility (the "Western Credit Facility")
which was entered into by Mediacom California, Mediacom Arizona and Mediacom
Delaware (collectively, the "Western Group") in June 1997.
On January 23, 1998, Mediacom Southeast completed the acquisition of the
Cablevision Systems, serving approximately 260,100 basic subscribers on such
date, for an aggregate purchase price of approximately $308.7 million (before
closing costs and adjustments). The acquisition of the Cablevision Systems and
related closing costs and adjustments was financed with: (i) $211.0 million of
borrowings under a new $225.0 million senior credit facility (the "Southeast
Credit Facility" and, together with the Western Credit Facility, the
"Subsidiary Credit Facilities") made available to Mediacom Southeast; (ii) the
proceeds of $20.0 million aggregate principal amount of term notes (the
"Holding Company Notes") issued by Mediacom; and (iii) $94.0 million of equity
capital contributed to Mediacom by its members.
On April 1, 1998, the Company completed the Series A Notes Offering. The
Company used the net proceeds of the Series A Notes Offering (approximately
$193.5 million) to repay in full the Holding Company Notes and to make
contributions to Mediacom Southeast and the Western Group for purposes of
repaying certain indebtedness under the Subsidiary Credit Facilities. See "--
The Series A Notes Offering" and "Use of Proceeds."
Service Rate Increases. In January and February 1998, the Company gave notice
of basic service rate increases to approximately 237,000 basic subscribers,
effective in March 1998. For the month of March 1998, partly as a result of
these basic service rate increases, the Company's annualized revenues were
approximately $131.5 million. The Company also gave notice of basic service
rate increases to approximately 22,000 basic subscribers, effective in April
1998. In most cases, such rate increases were implemented in connection with
the introduction of new programming services,
6
resulting from the activation of unused channels in the 1998 Systems. There can
be no assurance that because of these basic service rate increases or
otherwise, the Company's basic subscribers affected by such rate increases will
not reduce their level of service or cancel their cable television service
altogether. The Company's actual results for future periods may be materially
different as a result.
ORGANIZATIONAL STRUCTURE AND MANAGEMENT
Mediacom was organized as a New York limited liability company to serve as
the holding company for its various Subsidiaries, each of which is a Delaware
limited liability company. The Subsidiaries are wholly-owned by Mediacom,
except for a 1.0% ownership interest in Mediacom California held by Mediacom
Management Corporation ("Mediacom Management"). Mediacom Capital, a New York
corporation wholly-owned by Mediacom, was formed specifically to effect the
Series A Notes Offering and does not conduct operations of its own. The Series
A Notes are, and the Series B Notes will be, joint and several obligations of
Mediacom and Mediacom Capital, although Mediacom received all the net proceeds
of the Series A Notes Offering.
Pursuant to separate management agreements with the Subsidiaries, Mediacom
Management, a Delaware corporation wholly-owned by Mr. Commisso, is paid
management fees for managing the day-to-day operations of the Subsidiaries. In
accordance with the Operating Agreement (as defined) of Mediacom, Mr. Commisso
is the sole manager (the "Manager") of Mediacom and has overall management and
effective control of the business and affairs of the Company. See "Certain
Relationships and Related Transactions" and "Description of the Operating
Agreement."
----------------
The Company's principal corporate offices are located at 100 Crystal Run
Road, Middletown, New York 10941, and its telephone number is (914) 695-2600.
7
THE SERIES A NOTES OFFERING
Series A Notes.............. The Series A Notes were sold by the Issuers on
April 1, 1998 to Chase Securities Inc. (the
"Initial Purchaser") pursuant to a Purchase
Agreement dated March 27, 1998 (the "Purchase
Agreement"). The Initial Purchaser subsequently
resold the Series A Notes (i) within the United
States only to qualified institutional buyers in
reliance upon Rule 144A under the Securities Act
and (ii) outside the United States in accordance
with Regulation S under the Securities Act.
Exchange and Registration
Rights Agreement............
Pursuant to the Purchase Agreement, the Issuers
and the Initial Purchaser entered into an
Exchange and Registration Rights Agreement dated
April 1, 1998 (the "Exchange and Registration
Rights Agreement"), which grants the holders of
the Series A Notes certain exchange and
registration rights. The Exchange Offer is
intended to satisfy such exchange rights which
terminate upon the consummation of the Exchange
Offer.
THE EXCHANGE OFFER
Issuers..................... Mediacom LLC and Mediacom Capital Corporation.
Securities Offered.......... $200,000,000 aggregate principal amount of Series
B 8 1/2% Senior Notes due 2008.
The Exchange Offer.......... $1,000 principal amount of the Series B Notes in
exchange for each $1,000 principal amount of
Series A Notes. As of the date hereof,
$200,000,000 aggregate principal amount of Series
A Notes are outstanding. The Issuers will issue
the Series B Notes to holders on or promptly
after the Expiration Date.
Based on no-action letters issued by the staff of
the Commission to third parties, the Issuers
believe the Series B Notes issued pursuant to the
Exchange Offer may be offered for resale, resold
and otherwise transferred by any holder thereof
(other than any such holder that is an
"affiliate" of the Issuers within the meaning of
Rule 405 under the Securities Act) without
compliance with the registration and prospectus
delivery provisions of the Securities Act,
provided that such Series B Notes are acquired in
the ordinary course of such holder's business and
that such holder does not intend to participate
and has no arrangement or understanding with any
person to participate in the distribution of such
Series B Notes.
Each Participating Broker-Dealer that receives
Series B Notes for its own account pursuant to
the Exchange Offer must acknowledge that it will
deliver a prospectus in connection
8
with any resale of such Series B Notes. The
Letter of Transmittal states that by so
acknowledging and by delivering a prospectus, a
Participating Broker-Dealer will not be deemed to
admit that it is an "underwriter" within the
meaning of the Securities Act. This Prospectus,
as it may be amended or supplemented from time to
time, may be used in connection with resales of
Series B Notes received in exchange for Series A
Notes only by Participating Broker-Dealers
("Eligible Participating Broker-Dealers") who
acquired such Series A Notes as a result of
market-making activities or other trading
activities and not by Participating Broker-
Dealers who acquired such Series A Notes directly
from the Issuers. The Issuers have agreed that,
for a period of 90 days after the Expiration
Date, they will make this Prospectus available to
any Eligible Participating Broker-Dealer for use
in connection with any such resale. See "Plan of
Distribution."
Any holder who tenders in the Exchange Offer with
the intention to participate, or for the purpose
of participating, in a distribution of the Series
B Notes could not rely on the position of the
staff of the Commission communicated in no-action
letters and, in the absence of an exception
therefrom, must comply with the registration and
prospectus delivery requirements of the
Securities Act in connection with any resale
transaction. Failure to comply with such
requirements in such instance may result in such
holder incurring liability under the Securities
Act for which the holder is not indemnified by
the Company.
Expiration Date............. 5:00 p.m., New York City time, on , 1998,
unless the Exchange Offer is extended, in which
case the term "Expiration Date" means the latest
date and time to which the Exchange Offer is
extended.
Accrued Interest on the
Series B Notes and the
Series A Notes..............
Each Series B Note will bear interest from its
issuance date. Holders of Series A Notes that are
accepted for exchange will receive, in cash,
accrued interest thereon to, but not including,
the issuance date of the Series B Notes. Such
interest will be paid with the first interest
payment on the Series B Notes. Interest on the
Series A Notes accepted for exchange will cease
to accrue upon issuance of the Series B Notes.
Conditions to the Exchange The Exchange Offer is subject to certain
Offer....................... customary conditions, which may be waived by the
Issuers. See "The Exchange Offer--Conditions."
Procedures for Tendering
Series A Notes..............
Each holder of Series A Notes wishing to accept
the Exchange Offer must complete, sign and date
the accompanying Letter of Transmittal, or a
facsimile thereof, in accordance with the
instructions contained herein and therein,
9
and mail or otherwise deliver such Letter of
Transmittal, or such facsimile, together with the
Series A Notes and any other required
documentation to the Exchange Agent (as defined)
at the address set forth therein. By executing
the Letter of Transmittal, each holder will
represent to the Issuers that, among other
things, the Series B Notes acquired pursuant to
the Exchange Offer are being obtained in the
ordinary course of business of the person
receiving such Series B Notes, whether or not
such person is the holder, that neither the
holder nor any such other person has any
arrangement or understanding with any person to
participate in the distribution of such Series B
Notes and that neither the holder nor any such
other person is an "affiliate," as defined under
Rule 405 of the Securities Act, of the Issuers.
See "The Exchange Offer--Purpose and Effect of
the Exchange Offer" and "--Procedures for
Tendering."
Untendered Series A Notes... Following the consummation of the Exchange Offer,
holders of Series A Notes eligible to participate
but who do not tender their Series A Notes will
not have any further exchange rights and such
Series A Notes will continue to be subject to
certain restrictions on transfer. Accordingly,
the liquidity of the market for such Series A
Notes could be adversely affected.
Consequences of Failure to
Exchange....................
The Series A Notes that are not exchanged
pursuant to the Exchange Offer will remain
restricted securities. Accordingly, such Series A
Notes may be resold only: (i) to the Issuers;
(ii) pursuant to Rule 144A or Rule 144 under the
Securities Act or pursuant to another exemption
under the Securities Act; (iii) outside the
United States to a foreign person pursuant to the
requirements of Rule 904 under the Securities
Act; (iv) to certain institutional "accredited
investors" within the meaning of Rule 501(a)
under the Securities Act subject to a minimum
principal amount of $250,000; or (v) pursuant to
an effective registration statement under the
Securities Act. See "The Exchange Offer--
Consequences of Failure to Exchange."
Shelf Registration If: (i) because of any change in law or
Statement................... applicable interpretations thereof by the
Commission's staff the Issuers are not permitted
to effect the Exchange Offer as contemplated
hereby; (ii) any Series A Notes validly tendered
pursuant to the Exchange Offer are not exchanged
for Series B Notes within 180 days after April 1,
1998; (iii) the Initial Purchaser so requests
with respect to certain Notes; (iv) any
applicable law or interpretations do not permit
any holder to participate in the Exchange Offer;
(v) any holder that participates in the Exchange
Offer does not receive freely transferable Series
B Notes in exchange for tendered Series A Notes;
or (vi) the Issuers so elect, then the Issuers
have agreed to use their reasonable best efforts
to file as promptly
10
as practicable (but in no event more than 30 days
after so required or requested pursuant to
Section 2 of the Exchange and Registration Rights
Agreement) with the Commission a shelf
registration statement (the "Shelf Registration
Statement") and use their reasonable best efforts
to cause it to be declared effective. The Issuers
have agreed to use their reasonable best efforts
to maintain the effectiveness of the Shelf
Registration Statement for, under certain
circumstances, a maximum of two years, to cover
resales of the Series A Notes held by any such
holders.
Special Procedures for
Beneficial Owners...........
Any beneficial owner whose Series A Notes are
registered in the name of a broker, dealer,
commercial bank, trust company or other nominee
and who wishes to tender should contact such
registered holder promptly and instruct such
registered holder to tender on such beneficial
owner's behalf. If such beneficial owner wishes
to tender on such owner's own behalf, such owner
must, prior to completing and executing the
Letter of Transmittal and delivering its Series A
Notes, either make appropriate arrangements to
register ownership of the Series A Notes in such
owner's name or obtain a properly completed bond
power from the registered holder. The transfer of
registered ownership may take considerable time.
The Company will keep the Exchange Offer open for
not less than thirty days in order to provide for
the transfer of registered ownership.
Guaranteed Delivery Holders of Series A Notes who wish to tender
Procedure................... their Series A Notes and whose Series A Notes are
not immediately available or who cannot deliver
their Series A Notes, the Letter of Transmittal
or any other documents required by the Letter of
Transmittal to the Exchange Agent (or comply with
the procedures for book-entry transfer) prior to
the Expiration Date must tender their Series A
Notes according to the guaranteed delivery
procedures set forth in "The Exchange Offer--
Guaranteed Delivery Procedures."
Withdrawal Rights........... Tenders may be withdrawn at any time prior to
5:00 p.m., New York City time, on the Expiration
Date.
Acceptance of Series A
Notes and Delivery of
Series B Notes.............. The Issuers will accept for exchange any and all
Series A Notes which are properly tendered in the
Exchange Offer prior to 5:00 p.m., New York City
time, on the Expiration Date. The Series B Notes
issued pursuant to the Exchange Offer will be
delivered on or promptly after the Expiration
Date. See "The Exchange Offer--Terms of the
Exchange Offer."
Use of Proceeds............. There will be no cash proceeds to the Company
from the exchange pursuant to the Exchange Offer.
Exchange Agent.............. Bank of Montreal Trust Company (the "Exchange
Agent").
11
THE SERIES B NOTES
General..................... The form and terms of the Series B Notes are the
same as the form and terms of the Series A Notes
except that (i) the Series B Notes will bear a
"Series B" designation, (ii) the Series B Notes
will have been registered under the Securities
Act and, therefore, will not bear legends
restricting their transfer, and (iii) the holders
of Series B Notes will not be entitled to certain
rights of holders of Series A Notes under the
Exchange and Registration Rights Agreement,
including the provisions providing for an
increase in the interest rate on the Series A
Notes in certain circumstances relating to the
timing of the Exchange Offer, which rights will
terminate when the Exchange Offer is consummated.
See "The Exchange Offer--Purpose and Effect of
the Exchange Offer." The Series B Notes will
evidence the same debt as the Series A Notes
(which they replace) and will be entitled to the
benefits of the Indenture. See "Description of
the Notes."
Securities Offered.......... $200,000,000 aggregate principal amount of Series
B 8 1/2% Senior Subordinated Notes due 2008.
Maturity.................... April 15, 2008.
Interest Rate and Payment The Series B Notes will bear interest at a rate
Dates....................... of 8 1/2% per annum. Interest on the Series B
Notes will be payable semi-annually on each April
15 and October 15.
Sinking Fund................ None.
Mandatory Redemption........ None.
Optional Redemption......... Except as described below, the Issuers may not
redeem the Series B Notes prior to April 15,
2003. On and after such date, the Issuers may
redeem the Series B Notes, in whole or in part,
at the redemption prices set forth herein,
together with accrued and unpaid interest, if
any, to the date of redemption. In addition, at
any time on or prior to April 15, 2001, the
Issuers may redeem up to 35% of the original
principal amount of the Notes with the Net Cash
Proceeds of one or more Equity Offerings of
Mediacom, at a redemption price in cash equal to
108.5% of the principal amount to be redeemed
plus accrued and unpaid interest, if any, to the
date of redemption; provided that at least 65% of
the original aggregate principal amount of Notes
remains outstanding immediately after each such
redemption. See "Description of the Notes--
Optional Redemption."
Change of Control........... Upon the occurrence of a Change of Control, each
holder of the Series B Notes will have the right
to require the Issuers to repurchase all or any
part of such holder's Series B Notes at
12
a price equal to 101% of the principal amount
thereof plus accrued and unpaid interest, if any,
to the date of repurchase. See "Description of
the Notes--Optional Redemption" and "--Repurchase
at the Option of Holders--Change of Control."
There can be no assurance that sufficient funds
will be available if necessary to make any
required repurchases. See "Risk Factors--Ability
to Purchase Notes Upon a Change of Control."
Ranking..................... The Series B Notes will be unsecured, senior
obligations of the Issuers ranking pari passu in
right of payment with all other existing and
future unsecured Indebtedness of the Issuers,
other than any Subordinated Obligations. The
Series B Notes will be effectively subordinated
in right of payment to any secured Indebtedness
of the Issuers. Since Mediacom is a holding
company and conducts its business through its
Subsidiaries, the Series B Notes will be
effectively subordinated to all existing and
future Indebtedness and other liabilities
(including trade payables) of the Subsidiaries.
As of March 31, 1998, on a pro forma basis, after
giving effect to the Series A Notes Offering and
the use of the net proceeds therefrom, the
Company would have had approximately $321.3
million of Indebtedness outstanding (including
approximately $121.3 million of Indebtedness of
the Subsidiaries), with the Subsidiaries having
the ability to borrow up to an additional $207.0
million in the aggregate under the Subsidiary
Credit Facilities (as defined). See
"Capitalization" and "Description of the Notes--
Ranking."
Certain Covenants........... The Indenture will limit, among other things: (i)
the incurrence of additional Indebtedness by
Mediacom and its Restricted Subsidiaries (as
defined); (ii) the payment of dividends on, and
redemption of, Equity Interests (as defined) of
Mediacom and its Restricted Subsidiaries; (iii)
certain other restricted payments, including
certain investments; (iv) sales of assets and
Equity Interests of the Restricted Subsidiaries;
(v) certain transactions with affiliates; (vi)
the creation of liens; and (vii) consolidations,
mergers and transfers of all or substantially all
of the Issuers' assets. The Indenture also will
prohibit certain restrictions on distributions
from Restricted Subsidiaries. However, all of
those limitations and prohibitions will be
subject to a number of important qualifications
and exceptions. See "Description of the Notes--
Covenants."
For more information regarding the Series B Notes, including definitions of
certain capitalized terms used above, see "Description of the Notes." For a
discussion of the risk factors that should be considered by holders who tender
their Series A Notes in the Exchange Offer, see "Risk Factors."
13
SUMMARY HISTORICAL AND PRO FORMA CONSOLIDATED FINANCIAL AND OPERATING DATA
The following table presents: (i) summary historical financial data as of and
for the years ended December 31, 1993, 1994 and 1995 derived from audited
financial statements of Benchmark Acquisition Fund II Limited Partnership (the
"Predecessor Company"); (ii) summary historical consolidated financial and
operating data as of and for the period from the commencement of operations
(March 12, 1996) to December 31, 1996 and for the year ended December 31, 1997
derived from the Company's audited consolidated financial statements and should
be read in conjunction with those statements, which are included in this
Prospectus; and (iii) unaudited summary historical consolidated financial data
for the three months ended March 31, 1997 and unaudited summary historical
consolidated financial data as of and for the three months ended March 31,
1998, all of which have been derived from the unaudited consolidated financial
statements of the Company, and summary historical consolidated operating data
for the three months ended March 31, 1997. In the opinion of management, such
unaudited interim financial statements have been prepared on the same basis as
the audited financial statements and include all adjustments, which consist
only of normal recurring adjustments, necessary to present fairly the financial
position and the results of operations for the interim periods. Financial and
operating results for the three months ended March 31, 1998 are not necessarily
indicative of the results that may be expected for the full year.
In addition, the following table presents unaudited summary pro forma
consolidated financial and operating data for the Company for the year ended
December 31, 1997 and as of and for the three months ended March 31, 1998, as
adjusted to give pro forma effect to: (i) in the case of statement of
operations and other financial and operating data, the Series A Notes Offering
and the use of the net proceeds therefrom and the acquisitions of the Systems
as if such transactions had been consummated on January 1, 1997; and (ii) in
the case of balance sheet data, the Series A Notes Offering and the use of the
net proceeds therefrom as if such transactions had been consummated on March
31, 1998. The unaudited pro forma consolidated financial and operating data
give effect to the acquisitions of the Systems under the purchase method of
accounting, certain other operating assumptions and the impact of the Series A
Notes Offering.
The unaudited summary pro forma consolidated financial data have been
prepared by the Company based upon the historical financial statements and do
not purport to represent what the Company's results of operations or financial
condition would have actually been or what operations of the Company in any
future period would be if the transactions that give rise to the pro forma
adjustments had occurred on the dates assumed. The following information is
qualified by reference to and should be read in conjunction with "Unaudited Pro
Forma Consolidated Financial Data," "Capitalization," "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and the
financial statements and related notes thereto included elsewhere in this
Prospectus.
14
SUMMARY HISTORICAL AND PRO FORMA CONSOLIDATED FINANCIAL AND OPERATING DATA
PREDECESSOR COMPANY(1) THE COMPANY(2) PRO FORMA
---------------------------- ------------------------------------- -------------------
THREE
YEAR YEAR YEAR MARCH 12 YEAR YEAR MONTHS
ENDED ENDED ENDED THROUGH ENDED ENDED ENDED
DEC. 31, DEC. 31, DEC. 31, DEC. 31, DEC. 31, THREE MONTHS DEC. 31, MARCH 31,
1993 1994 1995 1996 1997 ENDED MARCH 31, 1997 1998
-------- -------- -------- -------- -------- ----------------- -------- ---------
1997 1998
------- --------
(DOLLARS IN THOUSANDS, EXCEPT PER SUBSCRIBER DATA)
STATEMENT OF OPERATIONS
DATA:
STATEMENT OF OPERATIONS
DATA:
Revenues................. $ 5,279 $ 5,075 $ 5,171 $ 5,411 $ 17,634 $ 2,894 $ 25,943 $119,091 $ 31,679
Service costs............ 1,254 1,322 1,536 1,511 5,547 890 9,822 44,286 12,033
Selling, general and
administrative expenses.. 1,072 1,016 1,059 931 2,696 434 5,303 23,191 5,988
Management fee expense... 263 252 261 270 882 145 1,207 5,389 1,465
Depreciation and
amortization............. 4,337 4,092 3,945 2,157 7,636 1,607 11,229 57,506 13,720
------- ------- ------- ------- -------- ------- -------- -------- --------
Operating income (loss).. (1,647) (1,607) (1,630) 542 873 (182) (1,618) (11,281) (1,527)
Interest expense,
net(3)................... 903 878 935 1,528 4,829 889 5,017 26,154 6,557
Other expenses........... 26 -- -- 967 640 3 3,340 3,940 3,340
------- ------- ------- ------- -------- ------- -------- -------- --------
Net loss................. $(2,576) $(2,485) $(2,565) $(1,953) $ (4,596) $(1,074) $(9,975) $(41,375) $(11,424)
======= ======= ======= ======= ======== ======= ======== ======== ========
OTHER DATA:
System Cash Flow(4)...... $ 2,953 $ 2,737 $ 2,576 $ 2,969 $ 9,391 $ 1,570 $ 10,818 $ 51,614 $ 13,658
System Cash Flow
margin(5)................ 55.9% 53.9% 49.8% 54.9% 53.3% 54.3% 41.7% 43.3% 43.1%
Annualized System Cash
Flow(6).................. $ 54,632
EBITDA(7)................ $ 2,690 $ 2,485 $ 2,315 $ 2,699 $ 8,509 $ 1,425 $ 9,611 $ 46,225 $ 12,193
EBITDA margin(8)......... 51.0% 49.0% 44.8% 49.9% 48.3% 49.2% 37.0% 38.8% 38.5%
Annualized EBITDA(9)..... $ 48,772
Ratio of total
Indebtedness to
annualized EBITDA........ 6.6x
Ratio of EBITDA to
interest expense, net.... 1.9x
OPERATING DATA (end of period, except
average):
Homes passed............. 38,749 87,750 38,749 479,655 482,800
Basic subscribers........ 27,153 64,350 26,561 341,725 343,700
Basic penetration........ 70.1% 73.3% 68.5% 71.2% 71.2%
Premium service units.... 11,691 39,288 13,126 403,281 404,400
Premium penetration...... 43.1% 61.1% 49.4% 118.0% 117.7%
Average monthly revenues
per basic
subscriber(10)........... $ 30.72
Annual System Cash Flow
per basic
subscriber(11)........... $ 159
Annual EBITDA per basic
subscriber(12)........... $ 142
BALANCE SHEET DATA (end of period):
Total assets............. $15,296 $11,755 $ 8,149 $46,560 $102,791 $444,963 $451,463
Total Indebtedness....... 14,213 13,294 12,217 40,529 72,768 314,760 321,260
Total members' equity.... 481 (2,003) (4,568) 4,537 24,441 108,466 108,466
(footnotes on following page)
15
NOTES TO SUMMARY HISTORICAL AND PRO FORMA CONSOLIDATED FINANCIAL AND OPERATING
DATA
(DOLLARS IN THOUSANDS, EXCEPT PER SUBSCRIBER DATA)
(1) The summary historical financial data for the years ended December 31,
1993, 1994 and 1995 have been derived from the audited financial
statements of the Predecessor Company.
(2) The Company commenced operations on March 12, 1996 with the acquisition of
the Ridgecrest System (as defined) and has since completed seven
additional acquisitions. See "Business--Acquisition History." The
historical amounts represent the results of operations of the Systems
acquired from the date of acquisition to the end of the period presented.
(3) Net of interest income.
(4) Represents EBITDA (as defined below) before management fees. The Company
believes that System Cash Flow is a meaningful measure of performance as
it is commonly used in the cable television industry to analyze and
compare cable television companies on the basis of operating performance,
leverage and liquidity. In addition, the Subsidiary Credit Facilities and
the Indenture contain certain covenants, compliance with which is measured
by computations similar to those used in determining System Cash Flow.
System Cash Flow is not intended to be a performance measure that should
be regarded as an alternative either to operating income or net income as
an indicator of operating performance or to cash flows as a measure of
liquidity, as determined in accordance with generally accepted accounting
principles.
(5) Represents System Cash Flow as a percentage of revenues.
(6) Represents System Cash Flow multiplied by four.
(7) Represents operating income (loss) before depreciation and amortization.
The Company believes that EBITDA is a meaningful measure of performance as
it is commonly used in the cable television industry to analyze and
compare cable television companies on the basis of operating performance,
leverage and liquidity. In addition, the Subsidiary Credit Facilities and
the Indenture contain certain covenants, compliance with which is measured
by computations similar to those used in determining EBITDA. EBITDA is not
intended to be a performance measure that should be regarded as an
alternative either to operating income or net income as an indicator of
operating performance or to cash flows as a measure of liquidity, as
determined in accordance with generally accepted accounting principles.
(8) Represents EBITDA as a percentage of revenues.
(9) Represents EBITDA multiplied by four.
(10) Represents average monthly revenues for the period divided by the number
of basic subscribers as of the end of such period.
(11) Represents annualized System Cash Flow for the period divided by the
number of basic subscribers at the end of such period.
(12) Represents annualized EBITDA for the period divided by the number of basic
subscribers at the end of such period.
16
RISK FACTORS
The following risk factors, in addition to the other information contained
elsewhere in this Prospectus, should be carefully considered by prospective
investors in connection with an investment in the Series B Notes.
HIGHLY LEVERAGED CAPITAL STRUCTURE
The Company is, and will continue to be, highly leveraged as a result of the
substantial Indebtedness it has incurred, and intends to incur, to finance
acquisitions and expand its operations. As of March 31, 1998, the Company's
consolidated Indebtedness was approximately $314.8 million. As of March 31,
1998, on a pro forma basis after giving effect to the Series A Notes Offering
and the use of the net proceeds therefrom, the Company would have had
approximately $321.3 million of consolidated Indebtedness. See "Unaudited Pro
Forma Consolidated Financial Data." The Issuers do not have any Indebtedness
expressly subordinated by its terms in right and priority of payment to the
Series A Notes. In addition, subject to the restrictions in the Subsidiary
Credit Facilities and the Indenture, the Company plans to incur additional
Indebtedness from time to time, to finance acquisitions in the future, for
capital expenditures or for general business purposes. The Company's highly
leveraged capital structure could adversely affect the Issuers' ability to
service the Series B Notes and could have important consequences to holders of
the Series B Notes, including, but not limited to, the following: (i)
increasing the Company's vulnerability to adverse changes in general economic
conditions or increases in prevailing interest rates as compared to competing
companies that are not as highly leveraged; (ii) limiting the Company's
ability to obtain additional financing for working capital, capital
expenditures, acquisitions and general corporate purposes; (iii) a substantial
portion of the Company's cash flow from operations must be dedicated to debt
service requirements, thereby reducing the funds available for operations and
future business opportunities and expansion; and (iv) the Company will be
exposed to increases in interest rates given that a portion of the Company's
borrowings will be at variable rates of interest. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resources" and "Description of Other Indebtedness."
INSUFFICIENCY OF EARNINGS TO COVER FIXED CHARGES
The consolidated historical earnings of the Company were insufficient to
cover its fixed charges for the three months ended March 31, 1998 and the year
ended December 31, 1997 by approximately $10.0 million and $4.6 million,
respectively. On a pro forma basis, after giving effect to the Series A Notes
Offering and the use of the net proceeds therefrom, the combined earnings of
the Company would have been insufficient to cover its fixed charges for the
three months ended March 31, 1998 and the year ended December 31, 1997 by
approximately $11.4 million and $41.4 million, respectively. See "Unaudited
Pro Forma Consolidated Financial Data." However, for both periods, earnings
are reduced by substantial non-cash charges, principally consisting of
depreciation and amortization.
Since the Company's commencement of operations in March 1996, the Company's
cash generated from operating activities has been sufficient to meet the
Company's debt service, working capital and capital expenditure requirements
and, together with cash from equity contributions and bank borrowings, also
has been sufficient to finance the Company's acquisitions. The ability of the
Company to meet its debt service and other obligations will depend upon the
future performance of the Company which, in turn, is subject to general
economic conditions and to financial, political, competitive, regulatory and
other factors, many of which are beyond the Company's control. The Company's
ability to meet its debt service and other obligations also may be affected by
changes in prevailing interest rates, as a portion of the borrowings under the
Subsidiary Credit Facilities will bear
17
interest at floating rates, subject to certain interest rate protection
agreements. The Company believes that it will continue to generate cash and
obtain financing sufficient to meet such requirements in the future; however,
there can be no assurance that the Company will be able to meet its debt
service and other obligations. If the Company were unable to do so, it would
have to refinance its Indebtedness or obtain new financing. Although in the
past the Company has been able to obtain financing principally through equity
contributions and bank borrowings, there can be no assurances that the Company
will be able to do so in the future or that, if the Company were able to do
so, the terms available will be favorable to the Company. See "Selected
Historical and Pro Forma Consolidated Financial and Operating Data,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," "Description of the Notes" and "Description of Other
Indebtedness."
HOLDING COMPANY STRUCTURE
Mediacom is a holding company which has no significant assets other than its
investments in and advances to the Subsidiaries. Mediacom Capital, a wholly-
owned subsidiary of Mediacom, was formed solely for the purpose of serving as
a co-issuer of the Notes and has no operations or assets from which it will be
able to repay the Series B Notes. The Issuers' ability to make interest and
principal payments when due to holders of the Series B Notes will be dependent
upon the receipt of sufficient funds from the Subsidiaries. Under the terms of
the Subsidiary Credit Facilities, upon the occurrence of an event of default
or if certain financial performance tests or other conditions are not met, the
Subsidiaries are restricted from making payments to Mediacom. There can be no
assurance that the Subsidiaries will be able to satisfy the financial tests
and the related conditions set forth in the Subsidiary Credit Facilities to
make such payments to Mediacom, or that the Subsidiaries will not be in
default of their respective financial covenants or otherwise under the
Subsidiary Credit Facilities which could prevent Mediacom from making any
payment in respect of the Series B Notes. In addition, because the
Subsidiaries will not guarantee the payment of principal of and interest on
the Series B Notes, the claims of holders of the Series B Notes effectively
will be subordinated to all existing and future claims of the creditors of
such entities including the lenders under the Subsidiary Credit Facilities and
the Subsidiaries' trade creditors. The ability of the holders of the Series B
Notes to realize upon any Subsidiary's assets upon its liquidation or
reorganization will be subject to the prior claims of such Subsidiary's
creditors including the lenders under the respective Subsidiary Credit
Facilities. As of March 31, 1998, on a pro forma basis after giving effect to
the Series A Notes Offering and the use of the net proceeds therefrom, the
Subsidiaries had approximately $142.9 million of total liabilities, including
approximately $121.3 million of Indebtedness. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resources" and "Description of Other Indebtedness."
As a result of the restrictions referred to in the preceding paragraph,
there can be no assurance that the Issuers will be able to gain access to the
cash flow or assets of their Subsidiaries in a timely manner or in amounts
sufficient to pay interest on or principal of the Series B Notes or of
Mediacom's other Indebtedness when due, if any. The Company's ability to meet
debt service and repay its obligations (including the obligations under the
Series B Notes) will depend on the future operating performance and financial
results of the Subsidiaries, which will be subject, in part, to factors beyond
the control of the Subsidiaries, including prevailing economic conditions and
financial, business and other factors. See "Description of the Notes--
Ranking." The Indenture will permit the Subsidiaries to incur additional
Indebtedness under certain circumstances. See "Description of the Notes" and
"Description of Other Indebtedness."
All of Mediacom's membership interests in the Subsidiaries are pledged by
Mediacom as collateral under the respective Subsidiary Credit Facilities.
Therefore, if Mediacom were unable to pay the principal or interest on the
Series B Notes when due (whether at maturity, upon acceleration or otherwise),
the ability of the holders of the Series B Notes to proceed against the
membership interests of the Subsidiaries to satisfy such amounts would be
subject to the ability of such holders to obtain a
18
judgment against Mediacom and the prior satisfaction in full of all amounts
owing under the Subsidiary Credit Facilities. As secured creditors, the
lenders under the Subsidiary Credit Facilities would control the disposition
and sale of the membership interests of the Subsidiaries after an event of
default under the Subsidiary Credit Facilities, and would not be legally
required to take into account the interests of unsecured creditors of
Mediacom, such as the holders of the Series B Notes, with respect to any such
disposition or sale. There can be no assurance that the assets of Mediacom,
after the satisfaction of claims of its secured creditors, would be sufficient
to satisfy any amounts owing with respect to the Series B Notes.
RESTRICTIONS IMPOSED BY TERMS OF THE COMPANY'S INDEBTEDNESS
Each of the Subsidiary Credit Facilities and the Indenture impose
restrictions that, among other things, limit the amount of additional
Indebtedness that may be incurred by the Company and impose limitations on,
among other things, investments, loans and other payments, certain
transactions with affiliates and certain mergers and acquisitions. See
"Description of the Notes--Covenants" and "Description of Other Indebtedness."
The Subsidiary Credit Facilities also require the Subsidiaries to maintain
specified financial ratios and meet certain financial tests. The ability of
the Subsidiaries to comply with such covenants and restrictions can be
affected by events beyond their control, and there can be no assurance that
the Company will achieve operating results that would permit compliance with
such provisions. The breach of certain provisions of either of the Subsidiary
Credit Facilities would, under certain circumstances, result in defaults
thereunder, permitting the lenders thereunder to prevent distributions to
Mediacom and to accelerate the Indebtedness thereunder.
KEY PERSONNEL
The Company's business is substantially dependent upon the performance of
certain key individuals, including its Chairman and Chief Executive Officer,
Rocco B. Commisso. The Subsidiary Credit Facilities provide that a default
will result if Mr. Commisso ceases to be the Chairman and Chief Executive
Officer of Mediacom Management. See "Description of Other Indebtedness--
Subsidiary Credit Facilities." While Mr. Commisso has a significant ownership
position in the Company, events beyond the control of the Company could result
in the loss of his services and, although the Company maintains a strong
management team, the loss of the services of Mr. Commisso or other such
individuals could have a material adverse effect on the Company. The Company
has not entered into an employment agreement, nor does it carry key man life
insurance, for Mr. Commisso or any of its other key personnel.
LIMITED OPERATING HISTORY
The Company was founded in July 1995, commenced its operations in March 1996
and has grown principally through acquisitions. The Company has only recently
acquired the 1998 Systems which substantially increased the size of its
operations. Prospective investors, therefore, have limited historical
financial information about the Company and the results that can be achieved
by the Company in operating the cable television systems not previously owned
by the Company. The past performance of management with other companies does
not guarantee similar results for the Company. There can be no assurance that
the Company will be able to implement successfully its business strategy.
SIGNIFICANT CAPITAL EXPENDITURES
Consistent with its business strategy, the Company expects to make capital
expenditures to upgrade a significant portion of its cable television
distribution systems over the next several years (e.g., to increase bandwidth
and channel capacity and expand addressability). The Company's potential
inability to fund these capital expenditures could adversely affect its
ability to upgrade the
19
cable television distribution systems which could have a material adverse
effect on its operations and competitive position. See "Business" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
SIGNIFICANT COMPETITION IN THE CABLE TELEVISION INDUSTRY
Cable television systems face competition from alternative methods of
receiving and distributing television signals and from other sources of news,
information and entertainment, such as off-air television broadcast
programming, newspapers, movie theaters, live sporting events, online computer
services and home video products, including videotape cassette recorders.
Because the Company's franchises are generally non-exclusive, there is the
potential for competition with the Company's systems from other operators of
cable television systems, including systems operated by local governmental
authorities. Other distribution systems capable of delivering programming to
homes or businesses, including satellite master antenna television service
("SMATV"), direct broadcast satellite ("DBS") systems and multichannel,
multipoint distribution service ("MMDS") systems now compete with the Company.
In recent years, there has been significant national growth in the number of
subscribers to DBS services and such growth is expected to continue. See
"Business--Competition."
Additionally, recent changes in federal law and recent administrative and
judicial decisions have removed certain of the restrictions that have limited
entry into the cable television business by potential competitors such as
telephone companies, registered utility holding companies and their
subsidiaries. Such developments will enable local telephone companies to
provide a wide variety of video services in the telephone company's own
service area which will be directly competitive with services provided by
cable television systems. Other new technologies, including Internet-based
services, may also become competitive with services that cable television
operators can offer.
Many of the Company's potential competitors have substantially greater
resources than the Company, and the Company cannot predict the extent to which
competition will materialize in its franchise areas from other cable
television operators, other distribution systems for delivering video
programming and other broadband telecommunications services to the home, or
from other potential competitors, or, if such competition materializes, the
extent of its effect on the Company. See "Business--Competition" and
"Legislation and Regulation."
RISKS RELATING TO NEW LINES OF BUSINESS
The Company plans to upgrade selectively its cable television systems to
enhance the potential for increasing revenues through the introduction of new
technologies and services, such as cable Internet access and high-speed data
transmission. See "Business--Business Strategy." While the Company is
optimistic about the prospects for these new lines of business, there can be
no assurances that it will be able to enter them successfully or to generate
additional cash flow. Moreover, many of these new lines of business are likely
to have significant competition from businesses that may have substantial
financial resources and market presence such as local telephone companies,
long distance interexchange carriers and traditional online Internet service
providers.
NON-EXCLUSIVE FRANCHISES; NON-RENEWAL OR TERMINATION OF FRANCHISES
Cable television companies operate under franchises granted by local
authorities which are subject to renewal and renegotiation from time to time.
A franchise is generally granted for a fixed term ranging from five to fifteen
years, but in many cases is terminable if the franchisee fails to comply with
its material provisions. The Company's business is dependent upon the
retention and renewal of its local franchises. Franchises typically impose
conditions relating to the operation of cable television systems, including
requirements relating to the payment of fees, bandwidth capacity, customer
service requirements, franchise renewal and termination. The Cable Television
Consumer Protection and
20
Competition Act of 1992 (the "1992 Cable Act") prohibits franchising
authorities from granting exclusive cable television franchises and from
unreasonably refusing to award additional competitive franchises; it also
permits municipal authorities to operate cable television systems in their
communities without franchises. The Cable Communication Policy Act of 1984
(the "1984 Cable Act" and collectively with the 1992 Cable Act, the "Cable
Acts") provides, among other things, for an orderly franchise renewal process
in which franchise renewal will not be unreasonably withheld or, if renewal is
denied and the franchising authority acquires ownership of the system or
effects a transfer of the system to another person, the operator generally is
entitled to the "fair market value" for the system covered by such franchise.
Historically, franchises have been renewed for cable operators that have
provided satisfactory services and have complied with the terms of their
franchises. Although the Company believes that it generally has good
relationships with its franchise authorities, no assurance can be given that
the Company will be able to retain or renew such franchises or that the terms
of any such renewals will be on terms as favorable to the Company as the
Company's existing franchises. Furthermore, it is possible that a franchise
authority might grant a franchise to another cable company. The non-renewal or
termination of franchises relating to a significant portion of the Company's
subscribers could have a material adverse effect on the Company's results of
operations. See "Business--Franchises."
REGULATION IN THE CABLE TELEVISION INDUSTRY
The cable television industry is subject to extensive regulation by federal,
local and, in some instances, state governmental agencies. The Cable Acts,
both of which amended the Communications Act of 1934 (as amended, the
"Communications Act"), established a national policy to guide the development
and regulation of cable television systems. The Communications Act was
recently substantially amended by the Telecommunications Act of 1996 (the
"1996 Telecom Act"). Principal responsibility for implementing the policies of
the Cable Acts and the 1996 Telecom Act has been allocated between the FCC and
state or local regulatory authorities. It is not possible to predict the
effect that ongoing or future developments might have on the cable
communications industry or on the operations of the Company. See "Legislation
and Regulation."
Federal Law and Regulation
The 1992 Cable Act and the FCC's rules implementing that act generally have
increased the administrative and operational expenses of cable television
systems and have resulted in additional regulatory oversight by the FCC and
local or state franchise authorities. The Cable Acts and the corresponding FCC
regulations have established, among other things: (i) rate regulations; (ii)
mandatory carriage and retransmission consent requirements that require a
cable television system under certain circumstances to carry a local broadcast
station or to obtain consent to carry a local or distant broadcast station;
(iii) rules for franchise renewals and transfers; and (iv) other requirements
covering a variety of operational areas such as equal employment opportunity,
technical standards and customer service requirements.
The 1996 Telecom Act deregulates rates for cable programming services tiers
("CPST") commencing in March 1999 and, for certain small cable operators,
immediately eliminates rate regulation of CPST, and, in certain limited
circumstances, basic services. The FCC is currently developing permanent
regulations to implement the rate deregulation provisions of the 1996 Telecom
Act. The Company is currently unable to predict the ultimate effect of the
1992 Cable Act or the 1996 Telecom Act.
The FCC and Congress continue to be concerned that rates for regulated
programming services are rising at a rate exceeding inflation. It is therefore
possible that the FCC will further restrict the ability of cable television
operators to implement rate increases and/or Congress will enact legislation
which would, for example, delay or suspend the scheduled March 1999
termination of CPST rate regulation.
21
State and Local Regulation
Cable television systems generally operate pursuant to non-exclusive
franchises, permits or licenses granted by a municipality or other state or
local governmental entity. The terms and conditions of franchises vary
materially from jurisdiction to jurisdiction. A number of states subject cable
television systems to the jurisdiction of centralized state governmental
agencies. To date, other than Delaware, no state in which the Company
currently operates has enacted state level regulation. The Company cannot
predict whether any of the states in which it currently operates will engage
in such regulation in the future. See "Legislation and Regulation."
RISKS RELATING TO ACQUISITION STRATEGY
The Company expects that a portion of its future growth may be achieved
through the acquisition of additional cable television systems. There can be
no assurance that the Company in the future will be able to successfully
complete acquisitions or exchanges of additional cable television systems
consistent with its business strategy. Furthermore, there can be no assurance
that the Company will successfully obtain financing to complete such
acquisitions, if needed, or that the terms thereof will be favorable to the
Company.
In carrying out its acquisition strategy, the Company attempts to minimize
the risk of unexpected liabilities and contingencies associated with acquired
businesses through planning, investigation and negotiation, but such
liabilities and contingencies may nevertheless accompany acquisitions. There
can be no assurance that the Company will be able to integrate successfully
any acquired businesses into its operations or realize any efficiencies
through the implementation of its operating strategies.
ABILITY TO PURCHASE NOTES UPON A CHANGE OF CONTROL
Upon the occurrence of a Change of Control, the Issuers could be required to
make an offer to purchase all outstanding Series B Notes at a purchase price
equal to 101% of the principal amount thereof, together with accrued and
unpaid interest, if any, to the date of repurchase. If a Change of Control
were to occur, there can be no assurance that the Company would have
sufficient financial resources, or would be able to arrange financing or be
permitted under the terms of other outstanding or future Indebtedness
arrangements, to pay the purchase price for all Series B Notes tendered by
holders thereof. In addition, the Subsidiary Credit Facilities include "change
of control" provisions that permit the lenders thereunder to accelerate the
repayment of Indebtedness thereunder. The Subsidiary Credit Facilities will
not permit the Subsidiaries to make distributions to the Issuers so as to
permit the Issuers to effect a purchase of the Series B Notes upon a Change of
Control without the prior satisfaction of certain financial tests and other
conditions. See "--Holding Company Structure" above and "Description of Other
Indebtedness." Any future credit agreements or other agreements relating to
other Indebtedness to which the Company becomes a party may contain similar
restrictions and provisions. In the event a Change of Control occurs at a time
when the Company is prohibited from repurchasing Series B Notes, the Company
could seek the consent of its lenders to repurchase Series B Notes or could
attempt to refinance the borrowings that contain such prohibition. If the
Company does not obtain such consent or repay such borrowing, the Company
would remain prohibited from repurchasing Series B Notes. In such case, the
Company's failure to repurchase tendered Series B Notes would constitute an
Event of Default under the Indenture. See "Description of the Notes--
Repurchase at the Option of Holders--Change of Control."
ABSENCE OF PUBLIC MARKET; RESTRICTIONS ON TRANSFER
Prior to the Exchange Offer, there has not been any public market for the
Series A Notes. The Series A Notes have not been registered under the
Securities Act and will be subject to restrictions on transferability to the
extent that they are not exchanged for Series B Notes by holders who are
entitled to participate in this Exchange Offer. The holders of Series A Notes
(other than any such holder that
22
is an "affiliate" of the Issuers within the meaning of Rule 405 under the
Securities Act) who are not eligible to participate in the Exchange Offer are
entitled to certain registration rights, and the Issuers are required to file
a Shelf Registration Statement with respect to such Series A Notes. The Series
B Notes will constitute a new issue of securities with no established trading
market. Although the Initial Purchaser has informed the Issuers that it
currently intends to make a market in the Series B Notes, it is not obligated
to do so and any such market making may be discontinued at any time without
notice in the sole discretion of the Initial Purchaser. In addition, such
market making activity will be subject to the limits imposed by the Securities
Act and the Securities Exchange Act of 1934, as amended (the "Exchange Act"),
and may be limited during the pendency of the Exchange Offer or the
effectiveness of a shelf registration statement in lieu thereof. Accordingly,
there can be no assurance as to the development or liquidity of any market for
the Series B Notes. The Series B Notes are expected to be eligible for trading
by qualified buyers in the PORTAL market. If an active public market does not
develop, the market price and liquidity of the Series B Notes may be adversely
affected. If a trading market develops for the Series B Notes, the future
trading prices thereof will depend on many factors including, among other
things, the Company's results of operations, prevailing interest rates, the
market for securities with similar terms and the market for securities of
other companies in similar businesses. The Issuers do not intend to apply for
listing of the Series B Notes on any securities exchange or for their
quotation through an automated dealer quotation system.
The Series A Notes were offered in reliance upon an exemption from
registration under the Securities Act and applicable state securities laws.
Therefore, the Series A Notes may be transferred or resold only in a
transaction registered under, or exempt from, the Securities Act and
applicable state securities laws. Pursuant to the Exchange and Registration
Rights Agreement, the Company has agreed to file the Exchange Offer
Registration Statement with the Commission and to use its reasonable best
efforts to cause such registration statement to become effective with respect
to the Series B Notes. After the registration statement becomes effective, the
Series B Notes generally will be permitted to be resold or otherwise
transferred (subject to the restrictions described under "Exchange and
Registration Rights Agreement" and "Transfer Restrictions") by each holder
without the requirement of further registration. The Series B Notes, however,
also will constitute a new issue of securities with no established trading
market and will be issued only in the amount of Series A Notes being tendered
for exchange. No assurance can be given as to the liquidity of the trading
market for the Series B Notes, or, in the case of non-tendering holders of
Series A Notes, the trading market for the Series A Notes following the
Exchange Offer.
FAILURE TO FOLLOW EXCHANGE OFFER PROCEDURES COULD ADVERSELY AFFECT HOLDERS
Issuance of the Series B Notes in exchange for the Series A Notes pursuant
to the Exchange Offer will be made only after a timely receipt by the Company
of such Series A Notes, a properly completed and duly executed Letter of
Transmittal and all other required documents. Therefore, holders of the Series
A Notes desiring to tender such Series A Notes in exchange for Series B Notes
should allow sufficient time to ensure timely delivery. The Company is under
no duty to give notification of defects or irregularities with respect to the
tenders of Series A Notes for exchange. Series A Notes that are not tendered
or are tendered but not accepted will, following the consummation of the
Exchange Offer, continue to be subject to the existing restrictions upon
transfer thereof and, upon consummation of the Exchange Offer, certain
registration rights under the Exchange and Registration Rights Agreement will
terminate. In addition, any holder of Series A Notes who tenders in the
Exchange Offer for the purpose of participating in a distribution of the
Series B Notes may be deemed to have received restricted securities and, if
so, will be required to comply with the registration and prospectus delivery
requirements of the Securities Act in connection with any resale transactions.
Each holder of the Series A Notes who wishes to exchange the Series A Notes
for Series B Notes in the Exchange Offer will be required to represent in the
Letter of Transmittal that at the time of the
23
consummation of the Exchange Offer: (i) it is not an affiliate of the Issuers
or, if it is such an affiliate, such holder will comply with the registration
and prospectus delivery requirements of the Securities Act to the extent
applicable; (ii) the Series B Notes to be received by it are being acquired in
the ordinary course of its business; and (iii) it has no arrangement or
understanding with any person to participate in the distribution of the Series
A or Series B Notes within the meaning of the Securities Act. Each
Participating Broker-Dealer that receives Series B Notes for its own account
in exchange for Series A Notes, where such Series A Notes were acquired by
such Participating Broker-Dealer as a result of market-making activities or
other trading activities, must acknowledge that it will deliver a prospectus
in connection with any resale of such Series B Notes. See "Plan of
Distribution." To the extent that Series A Notes are tendered and accepted in
the Exchange Offer, the trading market for untendered and tendered but
unaccepted Series A Notes could be adversely affected. See "The Exchange
Offer."
FORWARD-LOOKING STATEMENTS
This Prospectus contains certain forward-looking statements concerning the
Company's operations, economic performance and financial condition, including,
in particular, the likelihood of the Company's success in developing and
expanding its business following the consummation of the Exchange Offer. The
statements are based upon a number of assumptions and estimates which are
inherently subject to significant uncertainties and contingencies, many of
which are beyond the control of the Company, and reflect future business
decisions which are subject to change. The foregoing description of risk
factors specifies the principal contingencies and uncertainties to which the
Company believes it is subject. Some of these assumptions inevitably will not
materialize, and unanticipated events will occur which will affect the
Company's results.
24
USE OF PROCEEDS
The Exchange Offer is intended to satisfy certain of the Issuers'
obligations under the Exchange and Registration Rights Agreement. The Issuers
will not receive any cash proceeds from the issuance of the Series B Notes in
the Exchange Offer. The net proceeds received by Mediacom from the Series A
Notes Offering were approximately $193.5 million. Of such net proceeds,
Mediacom: (i) used $20.0 million to repay in full the principal of and accrued
interest on the Holding Company Notes; (ii) contributed $120.0 million to
Mediacom Southeast as a preferred equity capital contribution; and (iii)
contributed $53.5 million to the Western Group in the form of subordinated
loans. Mediacom Southeast and the Western Group used such amounts to repay a
portion of the outstanding principal Indebtedness and related accrued interest
under the revolving credit lines of the respective Subsidiary Credit
Facilities. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Liquidity and Capital Resources" and "Description
of Other Indebtedness."
CAPITALIZATION
The following table sets forth the Company's capitalization as of March 31,
1998: (i) on an actual basis; and (ii) on a pro forma basis after giving
effect to the Series A Notes Offering and the use of the net proceeds
therefrom. This table should be read in conjunction with the Consolidated
Financial Statements and related notes thereto, "Unaudited Pro Forma
Consolidated Financial Data," "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Description of Other
Indebtedness" included elsewhere in this Prospectus.
AS OF MARCH 31, 1998
--------------------
ACTUAL PRO FORMA
------ ---------
(IN THOUSANDS)
Long-term debt (including current maturities):
Mediacom:
Holding Company Notes.................................. $ 20.0 $ --
Senior Notes due 2008.................................. -- 200.0
Subsidiaries:
Southeast Credit Facility(1)........................... 201.0 81.0
Western Credit Facility(2)............................. 90.5 37.0
Seller Note............................................ 3.3 3.3
------ ------
Total long-term debt................................. 314.8 321.3
Total members' equity(3)................................... 108.5 108.5
------ ------
Total capitalization................................. $423.3 $429.8
====== ======
- --------
(1) Pro forma for the Series A Notes Offering, Mediacom Southeast had
approximately $144.0 million of unused credit commitments, of which
approximately $130.0 million could have been borrowed by Mediacom
Southeast and distributed to Mediacom under the most restrictive covenants
of the Southeast Credit Facility.
(2) Pro forma for the Series A Notes Offering, the Western Group had
approximately $63.0 million of unused credit commitments, of which
approximately $54.0 million could have been borrowed by the Western Group
and distributed to Mediacom under the most restrictive covenants of the
Western Credit Facility.
(3) Actual and pro forma represent $125.0 million of invested equity capital
less accumulated losses since the commencement of operations.
25
SELECTED HISTORICAL AND PRO FORMA
CONSOLIDATED FINANCIAL AND OPERATING DATA
The following table presents: (i) selected historical financial data as of
and for the years ended December 31, 1993, 1994 and 1995 derived from the
audited financial statements of Benchmark Acquisition Fund II Limited
Partnership (the "Predecessor Company"); (ii) selected historical consolidated
financial and operating data as of and for the period from the commencement of
operations (March 12, 1996) to December 31, 1996 and for the year ended
December 31, 1997 derived from the Company's audited consolidated financial
statements and should be read in conjunction with those statements, which are
included in this Prospectus; and (iii) unaudited selected historical
consolidated financial data for the three months ended March 31, 1997 and
unaudited selected historical consolidated financial data as of and for the
three months ended March 31, 1998, all of which have been derived from the
unaudited consolidated financial statements of the Company, and selected
historical consolidated operating data for the three months ended March 31,
1997. In the opinion of management, such unaudited interim financial
statements have been prepared on the same basis as the audited financial
statements and include all adjustments, which consist only of normal recurring
adjustments, necessary to present fairly the financial position and the
results of operations for the interim periods. Financial and operating results
for the three months ended March 31,1998 are not necessarily indicative of the
results that may be expected for the full year.
In addition, the following table presents unaudited selected pro forma
consolidated financial and operating data for the Company for the year ended
December 31, 1997 and as of and for the three months ended March 31, 1998, as
adjusted to give pro forma effect to: (i) in the case of statement of
operations and other financial and operating data, the Series A Notes Offering
and the use of the net proceeds therefrom and the acquisitions of the Systems
as if such transactions had been consummated on January 1, 1997; and (ii) in
the case of balance sheet data, the Series A Notes Offering and the use of the
net proceeds therefrom as if such transactions had been consummated on March
31, 1998. The unaudited pro forma consolidated financial and operating data
give effect to the acquisitions of the Systems under the purchase method of
accounting, certain other operating assumptions and the impact of the Series A
Notes Offering.
The unaudited selected pro forma consolidated financial data have been
prepared by the Company based upon the historical financial statements and do
not purport to represent what the Company's results of operations or financial
condition would have actually been or what operations of the Company in any
future period would be if the transactions that give rise to the pro forma
adjustments had occurred on the dates assumed. The following information is
qualified by reference to and should be read in conjunction with "Unaudited
Pro Forma Consolidated Financial Data," "Capitalization," "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the financial statements and related notes thereto included elsewhere in this
Prospectus.
26
SELECTED HISTORICAL AND PRO FORMA CONSOLIDATED FINANCIAL AND OPERATING DATA
PREDECESSOR COMPANY(1) THE COMPANY(2) PRO FORMA
--------------------------- ------------------------------------- -------------------
THREE
YEAR YEAR YEAR MARCH 12 YEAR THREE MONTHS YEAR MONTHS
ENDED ENDED ENDED THROUGH ENDED ENDED MARCH 31, ENDED ENDED
DEC.31, DEC. 31, DEC. 31, DEC. 31, DEC. 31, ----------------- DEC. 31, MARCH 31,
1993 1994 1995 1996 1997 1997 1998 1997 1998
------- -------- -------- -------- -------- ------- -------- -------- ---------
(DOLLARS IN THOUSANDS, EXCEPT PER SUBSCRIBER DATA)
STATEMENT OF OPERATIONS DATA:
Revenues.......................... $ 5,279 $ 5,075 $ 5,171 $ 5,411 $ 17,634 $ 2,894 $ 25,943 $119,091 $ 31,679
Service costs..................... 1,254 1,322 1,536 1,511 5,547 890 9,822 44,286 $ 12,033
Selling, general and
administrative expenses........... 1,072 1,016 1,059 931 2,696 434 5,303 23,191 $ 5,988
Management fee expense............ 263 252 261 270 882 145 1,207 5,389 $ 1,465
Depreciation and amortization..... 4,337 4,092 3,945 2,157 7,636 1,607 11,229 57,506 $ 13,720
------- ------- ------- ------- -------- ------- -------- -------- --------
Operating income (loss)........... (1,647) (1,607) (1,630) 542 873 (182) (1,618) (11,281) (1,527)
Interest expense, net(3).......... 903 878 935 1,528 4,829 889 5,017 26,154 $ 6,557
Other expenses.................... 26 -- -- 967 640 3 3,340 3,940 $ 3,340
------- ------- ------- ------- -------- ------- -------- -------- --------
Net loss.......................... $(2,576) $(2,485) $(2,565) $(1,953) $ (4,596) $(1,074) $ (9,975) $(41,375) $(11,424)
======= ======= ======= ======= ======== ======= ======== ======== ========
OTHER DATA:
System Cash Flow(4)............... $ 2,953 $ 2,737 $ 2,576 $ 2,969 $ 9,391 $ 1,570 $ 10,818 $ 51,614 $ 13,658
System Cash Flow margin(5)........ 55.9% 53.9% 49.8% 54.9% 53.3% 54.3% 41.7% 43.3% 43.1%
Annualized System Cash Flow(6).... $ 54,632
EBITDA(7)......................... $ 2,690 $ 2,485 $ 2,315 $ 2,699 $ 8,509 $ 1,425 $ 9,611 $ 46,225 $ 12,193
EBITDA margin(8).................. 51.0% 49.0% 44.8% 49.9% 48.3% 49.2% 37.0% 38.8% 38.5%
Annualized EBITDA(9).............. $ 48,772
Deficiency of earnings to fixed
charges(10)....................... $ 2,576 $ 2,485 $ 2,565 $ 1,953 $ 4,596 $ 1,074 $ 9,975 $ 41,375 $ 11,424
Ratio of total indebtedness to
annualized EBITDA................. 6.6x
Ratio of EBITDA to interest
expense, net...................... 1.9x
Ratio of total Indebtedness to
annualized EBITDA.................
Ratio of EBITDA to interest
expense, net......................
OPERATING DATA (end of period, except
average):
Homes passed...................... 38,749 87,750 38,749 479,655 482,800
Basic subscribers................. 27,153 64,350 26,561 341,725 343,700
Basic penetration................. 70.1% 73.3% 68.5% 71.2% 71.2%
Premium service units............. 11,691 39,288 13,126 403,281 404,400
Premium penetration............... 43.1% 61.1% 49.4% 118.0% 117.7%
Average monthly revenues per basic
subscriber(11).................... $ 30.72
Annual System Cash Flow per basic
subscriber(12).................... $ 159
Annual EBITDA per basic
subscriber(13).................... $ 142
BALANCE SHEET DATA (end of period):
Total assets...................... $15,296 $11,755 $ 8,149 46,560 $102,791 $444,963 $451,463
Total Indebtedness................ 14,213 13,294 12,217 40,529 72,768 314,760 321,260
Total members' equity............. 481 (2,003) (4,568) 4,537 24,441 108,466 108,466
(footnotes on following page)
27
NOTES TO SELECTED HISTORICAL AND PRO FORMA CONSOLIDATED FINANCIAL AND
OPERATING DATA
(DOLLARS IN THOUSANDS, EXCEPT PER SUBSCRIBER DATA)
(1) The selected historical financial data for the years ended December 31,
1993, 1994 and 1995 have been derived from the audited financial
statements of the Predecessor Company.
(2) The Company commenced operations on March 12, 1996 with the acquisition
of the Ridgecrest System (as defined) and has since completed seven
additional acquisitions. See "Business--Acquisition History." The
historical amounts represent the results of operations of the Systems
acquired from the date of acquisition to the end of the period presented.
(3) Net of interest income.
(4) Represents EBITDA before management fees. The Company believes that
System Cash Flow is a meaningful measure of performance as it is commonly
used in the cable television industry to analyze and compare cable
television companies on the basis of operating performance, leverage and
liquidity. In addition, the Subsidiary Credit Facilities and the
Indenture contain certain covenants, compliance with which is measured by
computations similar to those used in determining System Cash Flow.
System Cash Flow is not intended to be a performance measure that should
be regarded as an alternative either to operating income or net income as
an indicator of operating performance or to cash flows as a measure of
liquidity, as determined in accordance with generally accepted accounting
principles.
(5) Represents System Cash Flow as a percentage of revenues.
(6) Represents System Cash Flow multiplied by four.
(7) Represents operating income (loss) before depreciation and amortization.
The Company believes that EBITDA is a meaningful measure of performance
as it is commonly used in the cable television industry to analyze and
compare cable television companies on the basis of operating performance,
leverage and liquidity. In addition the Subsidiary Credit Facilities and
the Indenture contain certain covenants, compliance with which is
measured by computations similar to those used in determining EBITDA.
EBITDA is not intended to be a performance measure that should be
regarded as an alternative either to operating income or net income as an
indicator of operating performance or to cash flows as a measure of
liquidity, as determined in accordance with generally accepted accounting
principles.
(8) Represents EBITDA as a percentage of revenues.
(9) Represents EBITDA multiplied by four.
(10) For purposes of this computation, earnings are defined as income (loss)
before income taxes and fixed charges. Fixed charges are interest costs.
(11) Represents average monthly revenues for the period divided by the number
of basic subscribers as of the end of such period.
(12) Represents annualized System Cash Flow for the period divided by the
number of basic subscribers at the end of such period.
(13) Represents annualized EBITDA for the period divided by the number of
basic subscribers at the end of such period.
28
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL DATA
The unaudited pro forma consolidated financial data presented below is
derived from the historical consolidated financial statements of the Company
and the Systems. The unaudited pro forma consolidated balance sheet data as of
March 31, 1998 give pro forma effect to the Series A Notes Offering and the
use of the net proceeds therefrom as if such transactions had been consummated
on March 31, 1998. The unaudited pro forma consolidated statements of
operations for the year ended December 31, 1997, and for the three months
ended March 31, 1998, give pro forma effect to the Series A Notes Offering and
the purchase of the Systems as if such transactions had been consummated on
January 1, 1997.
The unaudited pro forma consolidated financial data give effect to the
acquisition of the 1998 Systems under the purchase method of accounting and
are based upon the assumptions and adjustments described in the accompanying
notes to the unaudited pro forma consolidated financial statements represented
on the following pages. The adjustments included in the unaudited pro forma
consolidated financial data represent the Company's preliminary determination
of those adjustments based on available information, although no appraisal or
other valuation has yet been completed and such adjustments do not include
many of the effects of purchase accounting. There can be no assurance that the
actual adjustments will not differ significantly from the pro forma
adjustments reflected in the pro forma consolidated financial data.
The unaudited pro forma consolidated financial data does not purport to
represent what the Company's results of operations or financial condition
would have actually been or what operations would be if the transactions that
give rise to the pro forma adjustments had occurred on the dates assumed. The
unaudited pro forma consolidated financial data presented below should be read
in conjunction with the audited and unaudited historical financial statements
and related notes thereto of the Company and certain of the Systems and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere in this Prospectus.
29
MEDIACOM LLC AND SUBSIDIARIES
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
AS OF MARCH 31, 1998
(DOLLARS IN THOUSANDS)
HISTORICAL OFFERING PRO
COMPANY ADJUSTMENTS FORMA
---------- ----------- --------
ASSETS:
Cash and equivalents......................... $ 1,495 $ -- $ 1,495
Subscriber accounts receivable, net.......... 4,074 -- 4,074
Prepaid expenses and other current assets.... 2,639 -- 2,639
Inventory.................................... 1,293 -- 1,293
Property, plant and equipment, net........... 179,122 -- 179,122
Intangible assets, net....................... 242,482 -- 242,482
Other assets, net............................ 13,858 6,500(a) 20,358
-------- ------ --------
Total assets................................ $444,963 $6,500 $451,463
======== ====== ========
LIABILITIES AND MEMBERS' EQUITY:
Debt......................................... $314,760 $6,500(b) $321,260
Accounts payable and accrued expenses........ 20,598 -- 20,598
Subscriber advance payments and deposits..... 614 -- 614
Management fees payable...................... 525 -- 525
-------- ------ --------
Total liabilities........................... $336,497 $6,500 $342,997
-------- ------ --------
Capital contributions........................ $124,990 $ -- $124,990
Accumulated deficit.......................... (16,524) -- (16,524)
-------- ------ --------
Total members' equity....................... $108,466 $ -- $108,466
-------- ------ --------
Total liabilities and members' equity....... $444,963 $6,500 $451,463
======== ====== ========
See Accompanying Notes To Unaudited Pro Forma Consolidated Balance Sheet.
30
MEDIACOM LLC AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
AS OF MARCH 31, 1998
(DOLLARS IN THOUSANDS)
For purposes of determining the pro forma effect of the transactions
described above on the Company's consolidated balance sheet as of March 31,
1998, the following adjustments have been made:
(a) Represents the adjustments to other assets, net resulting from the payment
of estimated fees and expenses of the Series A Notes Offering.
(b) Represents the following adjustments to debt related to the Series A Notes
Offering and the use of proceeds therefrom:
Gross proceeds from Series A Notes Offering.................... $ 200,000
Repayment of Holding Company Notes............................. (20,000)
Repayment of Southeast Credit Facility......................... (120,000)
Repayment of Western Credit Facility........................... (53,500)
---------
Net increase in debt......................................... $ 6,500
=========
31
MEDIACOM LLC AND SUBSIDIARIES
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
(DOLLARS IN THOUSANDS)
1997 SYSTEMS 1998 SYSTEMS
--------------------------------- ------------------------------
SYSTEMS
HISTORICAL AS JONES CABLEVISION PRIOR TO OFFERING PRO
COMPANY ADJUSTMENTS ADJUSTED SYSTEM SYSTEMS ADJUSTMENTS OFFERING ADJUSTMENTS FORMA
---------- ----------- -------- ------ ----------- ----------- -------- ----------- --------
Revenues............... $17,634 $ 6,485 (a) $ 24,119 $5,956 $ 89,016 $ -- $119,091 -- $119,091
Service costs.......... 5,547 2,237 (b) 7,784 1,973 38,513 (3,984)(g) 44,286 -- 44,286
Selling, general and
administrative
expenses.............. 2,696 1,470 (c) 4,166 1,236 22,099 (4,310)(g) 23,191 -- 23,191
Management fee
expense............... 882 324 (d) 1,206 298 -- 3,885 (h) 5,389 -- 5,389
Depreciation and
amortization.......... 7,636 6,925 (e) 14,561 1,204 46,116 (5,025)(i) 56,856 650 (l) 57,506
------- ------- -------- ------ -------- ------ -------- ----- --------
Operating income
(loss)............... 873 (4,471) (3,598) 1,245 (17,712) 9,434 (10,631) (650) (11,281)
Interest expense, net.. 4,829 1,230 (f) 6,059 12 12,702 7,120 (j) 25,893 261(m) 26,154
Other expenses......... 640 -- 640 339 400 2,561 (k) 3,940 -- 3,940
------- ------- -------- ------ -------- ------ -------- ----- --------
Net income (loss)..... $(4,596) $(5,701) $(10,297) $ 894 $(30,814) $ (247) $(40,464) $(911) $(41,375)
======= ======= ======== ====== ======== ====== ======== ===== ========
Deficiency of earnings
to fixed charges..... $ 41,375
========
See Accompanying Notes To Unaudited Pro Forma Consolidated Statement of
Operations.
32
MEDIACOM LLC AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
(DOLLARS IN THOUSANDS)
For purposes of determining the pro forma effects of the transactions
described above on the Company's consolidated statement of operations for the
twelve months ended December 31, 1997, the following adjustments have been
made:
(a) Represents revenues of certain of the 1997 Systems earned prior to the
dates of their respective acquisitions. See "Business--Acquisition
History."
(b) Represents service costs of certain of the 1997 Systems incurred prior to
the date of their respective acquisitions. See "Business--Acquisition
History."
(c) Represents selling, general and administrative expenses of certain of the
1997 Systems incurred prior to the dates of their respective acquisitions.
See "Business--Acquisition History."
(d) Represents the net adjustment to record pro forma effect of management
fees payable to Mediacom Management resulting from the additional revenues
of the 1997 Systems. Management fees are calculated as follows: (i) 5.0%
of the first $50,000 in annual gross operating revenues of the Company;
(ii) 4.5% of such revenues in excess thereof up to $75,000; and (iii) 4.0%
of such revenues in excess of $75,000. See "Certain Relationships and
Related Transactions--Management Agreements."
(e) Represents the change in depreciation and amortization expense as if the
acquisitions of the 1997 Systems had occurred on January 1, 1997. Pro
forma depreciation and amortization is calculated on a straight-line basis
over periods that are consistent with the Company's stated accounting
policy. The basis of the purchased assets utilized in these calculations
is based on preliminary asset allocations between property, plant and
equipment and intangible assets and are subject to final allocation
adjustments.
(f) Represents the net adjustment to: (i) record interest expense on
incremental indebtedness arising from the purchase of the 1997 Systems as
if such purchase occurred on January 1, 1997; and (ii) reverse historical
interest expense of the 1997 Systems. Adjustments to interest expense are
calculated as if the incremental indebtedness had been incurred on January
1, 1997 with interest accruing on total indebtedness, including such
incremental indebtedness, at annual rates as follows: 8.51% weighted
average interest on $68,100 of average borrowings under the Subsidiary
Credit Facilities and 9.00% on $2,929 of the Seller Note. An 1/8% change
in the interest rates will increase or decrease the interest expense per
annum on the bank debt by $45 after adjusting for interest rate swap
agreements.
(g) Represents the net adjustment to: (i) eliminate corporate overhead in
selling, general and administrative expenses billed by the previous owners
of the 1998 Systems under allocation arrangements that have been replaced
by management fees paid to Mediacom Management; (ii) reflect the addition
of increased programming fees in service costs of approximately $3,200
incurred by the Company had the Systems been subject to the Company's
current programming fee structure for the period; (iii) eliminate deferred
stock compensation expense in selling, general and administrative expenses
incurred by the previous owners; and (iv) reclassify certain fees, taxes
and expenses of the previous owners from service costs to selling, general
and administrative expenses. See "Certain Relationships and Related
Transactions--Management Agreements."
(h) Represents the net adjustment to record pro forma effect of management
fees payable to Mediacom Management resulting from the additional revenues
of the 1998 Systems. Management fees are calculated as follows: (i) 5.0%
of the first $50,000 in annual gross operating revenues of the Company;
(ii) 4.5% of such revenues in excess thereof up to $75,000; and (iii) 4.0%
of such revenues in excess of $75,000. See "Certain Relationships and
Related Transactions--Management Agreements."
(i) Represents the change in depreciation and amortization expense as if the
acquisitions of the 1998 Systems had occurred on January 1, 1997. Pro
forma depreciation and amortization is calculated on a straight-line basis
over periods that are consistent with the Company's stated accounting
policy. The basis of the purchased assets utilized in these calculations
is based on preliminary asset allocations between property, plant and
equipment and intangible assets and are subject to final allocation
adjustments.
33
MEDIACOM LLC AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997--(CONTINUED)
(DOLLARS IN THOUSANDS)
(j) Represents the net adjustment to: (i) record interest expense on
incremental indebtedness arising from the purchase of the 1998 Systems as
if such purchase occurred on January 1, 1997; and (ii) reverse historical
interest expense of the 1998 Systems. Adjustments to interest expense are
calculated as if the incremental indebtedness had been incurred on January
1, 1997 with interest accruing on total indebtedness, including such
incremental indebtedness, at annual rates as follows: 8.08% weighted
average interest on $296,900 of average borrowings under the Subsidiary
Credit Facilities; 8.18% on the $20,000 Holding Company Notes; and 9.00%
on $2,929 of the Seller Note. An 1/8% change in the interest rate will
increase or decrease the interest expense per annum on the debt by $294
after adjusting for interest rate swap agreements.
(k) Represents the net adjustment to record acquisition fees payable to
Mediacom Management and the elimination of historical other expense of the
1998 Systems. The calculation of acquisition fees are based on 1.0% of the
recorded purchase price of the 1998 Systems. See "Certain Relationships
and Related Transactions--Transaction Fees and Expense Reimbursement."
(l) Represents adjustment to record amortization of $6,500 in fees and
expenses relating to the Series A Notes Offering as if the Series A Notes
Offering had occurred on January 1, 1997.
(m) Represents the net adjustment to: (i) record interest expense on total
indebtedness after giving pro forma effect to the Series A Notes Offering
and the application of net proceeds therefrom as if such Series A Notes
Offering occurred on January 1, 1997; and (ii) eliminate the interest
expense of the Systems prior to the Series A Notes Offering. Adjustments
to interest expense are calculated as if total indebtedness, after giving
pro forma effect to the Series A Notes Offering and the application of the
net proceeds therefrom, had been incurred on January 1, 1997 with interest
accruing at annual rates as follows: 8.50% interest rate on $200,000 of
the Notes; 7.21% weighted average interest rate on $123,400 of average
borrowings under the Subsidiary Credit Facilities; and 9.00% interest rate
on $2,929 of the Seller Note. An 1/8% change in the interest rate will
increase or decrease the interest expense per annum on the debt by $77
after adjusting for interest rate swap agreements.
34
MEDIACOM LLC AND SUBSIDIARIES
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31,1998
(DOLLARS IN THOUSANDS)
1998 SYSTEMS
-------------------------------
SYSTEMS
HISTORICAL JONES CABLEVISION PRIOR TO OFFERING PRO
COMPANY SYSTEM SYSTEMS ADJUSTMENTS OFFERING ADJUSTMENTS FORMA
---------- ------ ----------- ----------- -------- ----------- --------
Revenues................ $25,943 $ 133 $ 5,603 $ -- $ 31,679 $ -- $ 31,679
Service costs........... 9,822 152 2,272 (213)(a) 12,033 -- 12,033
Selling, general and
administrative
expenses............... 5,303 139 1,839 (1,293)(a) 5,988 -- 5,988
Management fee expense.. 1,207 7 -- 251 (b) 1,465 -- 1,465
Depreciation and
amortization........... 11,229 30 2,780 (482)(c) 13,557 163 (f) 13,720
------- ------ ------- ------ -------- ----- --------
Operating income
(loss)................ (1,618) (195) (1,288) 1,737 (1,364) (163) (1,527)
Interest expense, net... 5,017 -- 742 750 (d) 6,509 48 (g) 6,557
Other expenses.......... 3,340 -- 71 (71)(e) 3,340 -- 3,340
------- ------ ------- ------ -------- ----- --------
Net income (loss)...... $(9,975) $(195) $(2,101) $1,058 $(11,213) $(211) $(11,424)
======= ====== ======= ====== ======== ===== ========
Deficiency of earnings
to fixed charges....... $ 11,424
========
See Accompanying Notes To Unaudited Pro Forma Consolidated Statement of
Operations.
35
MEDIACOM LLC AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1998
(DOLLARS IN THOUSANDS)
For purposes of determining the pro forma effects of the transactions
described above on the Company's consolidated statement of operations for the
three months ended March 31, 1998, the following adjustments have been made:
(a) Represents the net adjustment to: (i) eliminate corporate overhead in
selling, general and administrative expenses billed by the previous owners
of the 1998 Systems under allocation arrangements that have been replaced
by management fees paid to Mediacom Management; (ii) reflect addition of
increased programming fees in service costs of approximately $800 incurred
by the Company had the Systems been subject to the Company's current
programming fee structure for the period; and (iii) reclassify certain
fees, taxes and expenses of the previous owners from service costs to
selling, general and administrative expenses. See "Certain Relationships
and Related Transactions--Management Agreements."
(b) Represents the net adjustment to record pro forma effect of management
fees payable to Mediacom Management resulting from the additional revenues
of the 1997 Systems. Management fees are calculated as follows: (i) 5.0%
of the first $50,000 in annual gross operating revenues of the Company;
(ii) 4.5% of such revenues in excess thereof up to $75,000; and (iii) 4.0%
of such revenues in excess of $75,000. See "Certain Relationships and
Related Transactions--Management Agreements."
(c) Represents the change in depreciation and amortization expense as if the
acquisitions of the 1998 Systems had occurred on January 1, 1998. Pro
forma depreciation and amortization is calculated on a straight-line basis
over periods that are consistent with the Company's stated accounting
policy. The basis of the purchased assets utilized in these calculations
is based on preliminary asset allocations between property, plant and
equipment and intangible assets and are subject to final allocation
adjustments.
(d) Represents the net adjustment to: (i) record interest expense on
incremental indebtedness arising from the purchase of the 1998 Systems as
if such purchase occurred on January 1, 1998; and (ii) reverse historical
interest expense of the 1998 Systems. Adjustments to interest expense are
calculated as if the incremental indebtedness had been incurred on January
1, 1998 with interest accruing on total indebtedness, including such
incremental indebtedness, at annual rates as follows: 8.12% weighted
average interest on $296,900 of average borrowings under the Subsidiary
Credit Facilities; 8.23% on the $20,000 Holding Company Notes; and 9.00%
on $3,193 of the Seller Note. An 1/8% change in the interest rate will
increase or decrease the interest expense per annum on the debt by $294
after adjusting for interest rate swap agreements.
(e) Represents the elimination of historical other expenses of the 1998
Systems.
(f) Represents the net adjustment to record amortization of $6,500 in fees and
expenses relating to the Series A Notes Offering as if the Series A Notes
Offering had occurred on January 1, 1998.
(g) Represents the net adjustment to: (i) record interest expense on total
indebtedness after giving pro forma effect to the Series A Notes Offering
and the application of net proceeds therefrom as if such Series A Notes
Offering occurred on January 1, 1998; and (ii) eliminate the interest
expense of the Systems prior to the Series A Notes Offering. Adjustments
to interest expense are calculated as if total Indebtedness, after giving
pro forma effect to the Series A Notes Offering and the application of
the net proceeds therefrom, had been incurred on January 1, 1998 with
interest accruing at annual rates as follows: 8.50% interest rate on
$200,000 of the Series A Notes; 7.25% weighted average interest rate on
$123,400 of average borrowings under the Subsidiary Credit Facilities;
and 9.00% interest rate on $3,193 of the Seller Note. An 1/8% change in
the interest rate will increase or decrease the interest expense per
annum on the debt by $77 after adjusting for interest rate swap
agreements.
36
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
INTRODUCTION
The Company was formed in July 1995 and commenced operations in March 1996
with the acquisition of its first cable television system, and has since
completed seven additional acquisitions of cable television systems. A
significant portion of the Company's basic subscribers were acquired in
January 1998 with the purchase of the 1998 Systems for an aggregate purchase
price of $330.1 million (before closing costs and adjustments). The 1998
Systems passed approximately 392,430 homes and served approximately 279,400
basic subscribers as of March 31, 1998. In addition, as of such date, the
Company owned the 1997 Systems which passed approximately 90,370 homes and
served approximately 64,300 basic subscribers. See "Business--Acquisition
History." Accordingly, the purchase of the 1998 Systems resulted in a
substantial increase in the number of basic subscribers and the revenues and
expenses of the Company. As a result of the Company's limited operating
history and the effect of the purchase of the 1998 Systems, the Company
believes that its actual results of operations for the period ended December
31, 1996, the year ended December 31, 1997, and the three months ended March
31, 1998 are not indicative of the Company's results of operations in the
future. All acquisitions have been accounted for under the purchase method of
accounting and, therefore, the Company's historical results of operations
include the results of operations for each acquired system subsequent to its
respective acquisition date.
GENERAL
The Company's revenues are primarily attributable to monthly subscription
fees charged to basic subscribers for the Company's basic and premium cable
television programming services. Basic revenues consist of monthly
subscription fees for all services (other than premium programming) as well as
monthly charges for customer equipment rental. Premium revenues consist of
monthly subscription fees for programming provided on a per channel basis. In
addition, other revenues are derived from installation and reconnection fees
charged to basic subscribers to commence or discontinue service, pay-per-view
charges, late payment fees, franchise fees, advertising revenues and
commissions related to the sale of goods by home shopping services.
The Company's operating expenses consist of service costs and selling,
general and administrative expenses directly attributable to the Systems.
Service costs include fees paid to programming suppliers, expenses related to
copyright fees, wages and salaries of technical personnel and plant operating
costs. Programming fees have historically increased at rates in excess of
inflation due to increases in the number of programming services offered by
the Company and improvements in the quality of programming. The Company
believes that under the FCC's existing cable rate regulations, it will be able
to increase its rates for cable television services enough to more than cover
any increases in the costs of programming. See "Legislation and Regulation."
Moreover, the Company benefits from its membership in a cooperative with over
eight million basic subscribers which provides its members with significant
volume discounts from programming suppliers and cable equipment vendors.
Selling, general and administrative expenses directly attributable to the
Systems include wages and salaries for customer service and administrative
personnel, franchise fees and expenses related to billing, marketing,
advertising sales and office administration.
The Company relies on Mediacom Management for all of its strategic,
managerial, financial and operational oversight and advice. Mediacom
Management also coordinates and provides advice with respect to programming
arrangements, engineering in the areas of routine maintenance, system
improvements and new technologies, and the financing of acquisitions and the
operations of the Company's cable television systems. In exchange for all such
services to the Company, Mediacom Management is entitled to receive annual
management fees of 5.0% of the first $50.0 million of annual gross operating
revenues of the Company, 4.5% of such revenues in excess thereof up to $75.0
million, and 4.0% of such revenues in excess of $75.0 million. Pursuant to the
Operating Agreement
37
(as defined), Mediacom Management is entitled to receive a fee of 1.0% of the
purchase price of acquisitions made by the Company until the Company's pro
forma consolidated annual gross operating revenues equal $75.0 million, and
0.5% of such purchase price thereafter. See "Certain Relationships and Related
Transactions."
The high level of depreciation and amortization associated with the
Company's acquisition activities as well as the interest expense related to
its financing activities have caused the Company to report net losses in its
limited operating history. The Company believes that such net losses are
common for cable television companies and anticipates that it will continue to
incur net losses for the foreseeable future.
RESULTS OF OPERATIONS
ACTUAL
Three Months Ended March 31, 1998 Compared to Three Months Ended March 31,
1997
The table below sets forth, for the three month periods ended March 31, 1998
and 1997, selected statement of operations and operating data of the Company.
The following historical information includes the results of operations of the
Lower Delaware System (acquired on June 24, 1997), the Sun City System
(acquired on September 19, 1997), the Jones System (acquired on January 9,
1998) and the Cablevision Systems (acquired on January 23, 1998) only for that
portion of the respective period that such cable television systems were owned
by the Company. See "Business--Acquisition History."
THREE MONTHS ENDED THREE MONTHS ENDED
MARCH 31, 1997 MARCH 31, 1998
-------------------- ---------------------
% OF % OF
AMOUNT REVENUES AMOUNT REVENUES
--------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
STATEMENT OF OPERATIONS DATA:
Revenues............................ $ 2,894 100.0% $ 25,943 100.0%
Operating expenses:
Service costs..................... 890 30.8 9,822 37.9
Selling, general and
administrative expenses.......... 434 15.0 5,303 20.4
--------- -------- ---------- --------
System Cash Flow(1)................. 1,570 54.2 10,818 41.7
Management fee expense.............. 145 5.0 1,207 4.7
--------- -------- ---------- --------
EBITDA(1)........................... $ 1,425 49.2% $ 9,611 37.0%
========= ======== ========== ========
OPERATING DATA (end of period):
Basic subscribers................... 26,560 343,700
Premium services units.............. 13,125 404,400
- --------
(1) The Company believes that System Cash Flow and EBITDA are meaningful
measures of performance as they are commonly used in the cable television
industry to analyze and compare cable television companies on the basis of
operating performance, leverage and liquidity. In addition, the Subsidiary
Credit Facilities and the Indenture contain certain covenants, compliance
with which is measured by computations similar to those used in
determining System Cash Flow and EBITDA. Neither System Cash Flow nor
EBITDA is intended to be a performance measure that should be regarded as
an alternative either to operating income as an indicator of operating
performance or to cash flows as a measure of liquidity, as determined in
accordance with generally accepted accounting principles.
A significant portion of the Company's basic subscribers were acquired after
March 31, 1997, with the purchase of the Lower Delaware System, the Sun City
System and the 1998 Systems. See "Business--Acquisition History." At March 31,
1998, these systems served approximately 317,800 basic subscribers,
representing 92.5% of the approximately 343,700 basic subscribers served by
the Systems at the end of the first quarter of 1998. As such, the Company's
acquisition activities during the period from March 31, 1997 through March 31,
1998 have resulted in substantial increases in the revenues, operating
expenses, System Cash Flow, management fee expense and EBITDA of the
38
Company for the three month period ended March 31, 1998, compared to the
corresponding period of 1997. Consequently, the Company believes that any
comparisons of the Company's results of operations between the two periods are
not indicative of the Company's results of operations in the future.
Revenues increased to approximately $25.9 million for the three months ended
March 31, 1998 from approximately $2.9 million for the three months ended
March 31, 1997, largely because of the inclusion of the results of operations
of: (i) the Lower Delaware System and the Sun City System for the full quarter
ended March 31, 1998; and (ii) the 1998 Systems from their respective
acquisition dates. Similarly, operating expenses, System Cash Flow, management
fee expense and EBITDA increased significantly between periods. System Cash
Flow as a percentage of revenues decreased to 41.7% for the three months ended
March 31, 1998 from 54.2% for the corresponding period of 1997. Such decrease
in the EBITDA margin was attributable to the inclusion of the results of
operations of the 1998 Systems (from the date of their respective
acquisitions), with such results of operations reflecting lower EBITDA
margins.
March 1998
The results of operations of the Company for the three month period ended
March 31, 1998 reflect only the results of operations of the 1998 Systems from
their respective acquisition dates. Because the Jones System and the
Cablevision Systems were acquired on January 9, 1998 and January 23, 1998,
respectively, and as a result of the implementation of basic service rate
increases affecting approximately 237,000 basic subscribers in March 1998, the
Company believes that the financial results for the month of March 1998 are
more indicative of the Company's current and future operating performance. See
"Summary--Recent Developments."
For the month of March 1998, the Company's annualized revenues were
approximately $131.5 million, annualized System Cash Flow was approximately
$59.8 million, annualized EBITDA was approximately $53.8 million, annualized
interest expense was approximately $26.3 million, and the Company's
consolidated debt as of March 31, 1998 was $314.8 million. Consequently, the
ratio of the Company's consolidated debt as of March 31, 1998 to annualized
EBITDA for the month of March 1998 was 5.9x and the ratio of annualized EBITDA
to annualized interest expense was 2.0x for such period.
In April 1998, the Company increased basic service rates affecting
approximately 22,000 basic subscribers. There can be no assurance that because
of these rate increases or otherwise, the Company's basic subscribers affected
by such rate increases will not reduce their level of service or cancel their
cable television service altogether. The Company's actual results for future
periods may be materially different as a result.
Year Ended December 31, 1997 Compared to the Period from March 12, 1996 to
December 31, 1996
The table below sets forth, for the year ended December 31, 1997 and the
period from March 12, 1996 (commencement of operations) to December 31, 1996,
selected statement of operations and operating data of the Company. The
following historical information includes the results of operations of the
Ridgecrest System (acquired on March 12, 1996), the Kern Valley System
(acquired on June 28, 1996), the Valley Center and Nogales Systems (acquired
on December 27, 1996), the Lower Delaware System (acquired on June 24, 1997)
and the Sun City System (acquired on September 19, 1997) only for that portion
of the respective period that such Systems were owned by the Company. See
"Business--Acquisition History."
39
MARCH 12 TO YEAR ENDED
DECEMBER 31, DECEMBER 31,
1996 1997
--------------- ----------------
% OF % OF
AMOUNT REVENUES AMOUNT REVENUES
------ -------- ------- --------
(DOLLARS IN THOUSANDS)
STATEMENT OF OPERATIONS DATA:
Revenues...................................... $5,411 100.0% $17,634 100.0%
Operating expenses:
Service costs............................... 1,511 27.9 5,547 31.4
Selling, general and administrative
expenses................................... 931 17.2 2,696 15.3
------ ----- ------- -----
System Cash Flow.............................. 2,969 54.9 9,391 53.3
Management fee expense........................ 270 5.0 882 5.0
------ ----- ------- -----
EBITDA........................................ $2,699 49.9% $ 8,509 48.3%
====== ===== ======= =====
OPERATING DATA (end of period):
Basic subscribers............................. 27,153 64,350
Premium services units........................ 11,691 39,288
The growth over the period ended December 31, 1996 in revenues, operating
expenses, System Cash Flow, management fee expense, EBITDA, basic subscribers
and premium service units was principally attributable to the inclusion of:
(i) the full year of results of operations of the Ridgecrest System, the Kern
Valley System, the Nogales System and the Valley Center System; (ii) results
of operations of the Lower Delaware System from the date of its acquisition on
June 24, 1997; and (iii) results of operations of the Sun City System from the
date of its acquisition on September 19, 1997.
Period from March 12, 1996 to December 31, 1996 Compared to Year Ended
December 31, 1995
The table below sets forth the selected statement of operations and
operating data of the Company for the period from March 12, 1996 (commencement
of operations) to December 31, 1996, as compared to the selected statement of
operations and operating data of the Predecessor Company (see below) for the
year ended December 31, 1995. The following historical information for the
period ended December 31, 1996 includes the results of operations of the
Ridgecrest System (acquired on March 12, 1996), the Kern Valley System
(acquired on June 28, 1996) and the Valley Center and Nogales Systems
(acquired on December 27, 1996) only for that portion of the respective period
that such Systems were owned by the Company. The Company acquired
substantially all of the assets of Benchmark Acquisition Fund II LImited
Partnership (the "Predecessor Company") on March 12, 1996 in its purchase of
the Ridgecrest System. See "Business--Acquisition History."
YEAR ENDED DECEMBER MARCH 12, 1996 TO
31, 1995 DECEMBER 31, 1996
--------------------- -------------------
% OF % OF
AMOUNT REVENUES AMOUNT REVENUES
---------- ---------- --------- ---------
(DOLLARS IN THOUSANDS)
STATEMENT OF OPERATIONS DATA:
Revenues........................... $ 5,171 100.0% $ 5,411 100.0%
Operating expenses:
Service costs.................... 1,536 29.7 1,511 27.9
Selling, general and
administrative expenses......... 1,059 20.5 931 17.2
---------- --------- --------- --------
System Cash Flow................... 2,576 49.8 2,969 54.9
Management fee expense............. 261 5.0 270 5.0
---------- --------- --------- --------
EBITDA............................. $ 2,315 44.8% $ 2,699 49.9%
========== ========= ========= ========
OPERATING DATA (end of period):
Basic subscribers.................. 10,300 27,153
Premium service units.............. 6,700 11,691
40
The growth over the year ended December 31, 1995, in revenues, System Cash
Flow, management fee expense, EBITDA, basic subscribers and premium service
units was principally attributable to: (i) the inclusion of results of
operations of the Kern Valley System from its date of acquisition on June 28,
1996; (ii) the inclusion of basic subscribers and premium service units of the
Valley Center and Nogales Systems as of their date of acquisition on December
27, 1996; and (iii) operating efficiencies realized by the Company in the
Ridgecrest and Kern Valley Systems during the period ended December 31, 1996.
Pro Forma Results for Three Months Ended March 31, 1998 Compared to Pro Forma
Results for Three Months Ended March 31, 1997
The Company has reported the results of operations of the Systems from the
date of their respective acquisition. The table below sets forth, for the
three months ended March 31, 1998 and 1997, the unaudited pro forma operating
results of the Company assuming the acquisitions of the Systems had been
consummated on January 1, 1997. See "Business--Acquisition History."
PRO FORMA RESULTS FOR THE
THREE MONTHS ENDED MARCH 31,
---------------------------------
1997 1998
---------------- ----------------
% OF % OF
AMOUNT REVENUES AMOUNT REVENUES
------- -------- ------- --------
(DOLLARS IN THOUSANDS)
Revenues..................................... $29,239 100.0% $31,679 100.0%
Operating expenses:
Service costs.............................. 11,119 38.0 12,033 38.0
Selling, general and administrative
expenses.................................. 5,266 18.0 5,988 18.9
------- ----- ------- -----
System Cash Flow............................. 12,854 44.0 13,658 43.1
Management fee expense....................... 1,352 4.7 1,465 4.6
------- ----- ------- -----
EBITDA....................................... $11,502 39.3% $12,193 38.5%
======= ===== ======= =====
Revenues increased to approximately $31.7 million for the three months ended
March 31, 1998, from approximately $29.2 million for the three months ended
March 31, 1997. The growth in revenues was attributable principally to
internal subscriber growth and an increase in average monthly revenue per
subscriber. Operating expenses in the aggregate increased to approximately
$18.0 million in the 1998 period from approximately $16.4 million in the 1997
period, principally due to the addition of service costs and selling, general
and administrative expenses associated with the increase in the subscriber
base. As a result, System Cash Flow and EBITDA as a percentage of revenues
were 43.1% and 38.5%, respectively, in the 1998 period as compared to 44.0%
and 39.3%, respectively, in the 1997 period.
Depreciation and Amortization and Interest Expense
The Company's recent acquisition activities and related financing activities
have caused the Company to report significantly higher depreciation and
amortization and interest expense. The Company believes that high levels of
such expenses are common for cable television companies and anticipates that
it will continue to report high levels of depreciation and amortization and
interest expense in the foreseeable future.
LIQUIDITY AND CAPITAL RESOURCES
The cable television business is a capital intensive business that generally
requires financing for the upgrade, expansion and maintenance of the technical
infrastructure. In addition, the Company has pursued, and continues to pursue,
a business strategy that includes selective acquisitions. The Company has
funded its working capital requirements, capital expenditures and acquisitions
through a combination of internally generated funds, long-term borrowings and
equity contributions. The Company intends to continue to finance such
expenditures through these same sources.
41
From March 12, 1996 to December 31, 1997, the Company's capital expenditures
(other than those related to acquisitions) were approximately $5.4 million,
and for the three months ended March 31, 1998, the Company's capital
expenditures were approximately $4.5 million. During 1997 and the first
quarter of 1998, the Company upgraded certain 1997 Systems which served
approximately 31,300 basic subscribers as of March 31, 1998. As a result, over
74.0% of the 1997 Systems' basic subscribers are currently served by cable
television systems with at least 62 channel capacity. As part of this upgrade
program, the Company in the fourth quarter of 1997 began the 550MHz (78 analog
channels) upgrade of its largest cable television system which is located in
lower Delaware, serving approximately 28,720 basic subscribers as of March 31,
1998, and expects completion of this project by mid-1999 at an estimated total
cost of $6.4 million. Since the acquisition of the 1998 Systems, the Company
has initiated several 550MHz (78 analog channels) upgrade projects in the 1998
Systems affecting over 100,000 basic subscribers, with expected completion by
year-end 1999 at an estimated total cost of $30.4 million.
The Company has budgeted approximately $140.0 million for capital
expenditures over the five-year period ending December 31, 2002, inclusive of
the aforementioned capital expenditures for the Lower Delaware System and 1998
Systems. Over this period, the Company intends to spend approximately: (i)
$70.0 million to establish a technical standard of 550MHz bandwidth capacity
in cable television systems serving over 80.0% of its basic subscribers; (ii)
$64.0 million for ongoing maintenance and replacement and for installations
and extensions to the cable plant related to customer growth; and (iii) $6.0
million for the purchase of additional addressable converters. The Company is
evaluating the economic viability of upgrading its larger systems to 750MHz
bandwidth capacity, which would require additional capital investment.
Overall, based on its capital expenditures budget, the Company plans to invest
approximately $79 per basic subscriber in each year during such five-year
period. See "Business--Business Strategy" for a discussion of the Company's
strategic capital investment strategy.
From the Company's commencement through December 31, 1997, the Company
invested approximately $98.1 million (before closing costs and adjustments) to
acquire the 1997 Systems which served approximately 64,300 basic subscribers
as of March 31, 1998. In January 1998, the Company invested approximately
$330.1 million (before closing costs and adjustments) to acquire the 1998
Systems which served approximately 279,400 basic subscribers as of March 31,
1998. In the aggregate, the Company has invested approximately $428.2 million
(before closing costs and adjustments) to acquire the Systems, which served
approximately 343,700 basic subscribers as of March 31, 1998, representing an
acquisition price of approximately $1,246 per basic subscriber.
Mediacom is a limited liability company which serves as the holding company
for its various Subsidiaries, each of which is also a limited liability
company. The Company's financing strategy is to raise equity from its members
and issue public long-term debt (including the Notes) at the holding company
level, while utilizing the Subsidiaries to access debt capital in the bank and
private placement markets through multiple stand-alone borrowing groups. The
Company believes that this financing strategy is beneficial because it
broadens the Company's access to various debt markets, enhances its
flexibility in managing the Company's capital structure, reduces the overall
cost of debt capital and permits the Company to maintain a substantial
liquidity position in the form of unused and available bank credit
commitments.
Financings of the Subsidiaries are currently effected through two stand-
alone borrowing groups, each with separate lending groups. The credit
arrangements in these borrowing groups are non-recourse to Mediacom, have no
cross-default provisions relating directly to each other, have different
revolving credit and term periods and contain separately negotiated covenants
tailored for each borrowing group. These credit arrangements permit the
relevant Subsidiaries, subject to covenant restrictions, to make distributions
to Mediacom.
42
Prior to the date of the Series A Notes Offering, in order to finance its
working capital requirements, capital expenditures and acquisitions, and to
provide liquidity for future capital requirements, the Company completed the
following financing arrangements: (i) a $100.0 million senior credit facility
for the Western Group expiring in September 2005; (ii) a $225.0 million senior
credit facility for Mediacom Southeast expiring in June 2006; (iii) a seller
note (the "Seller Note") in the original principal amount of $2.8 million
issued by the Western Group; (iv) the Holding Company Notes in the aggregate
principal amount of $20.0 million, which were issued by Mediacom in connection
with the acquisition of the Cablevision Systems; and (v) $135.5 million of
equity capital, of which $125.0 million has been invested to date in Mediacom.
See "Description of Other Indebtedness."
On April 1, 1998, Mediacom and Mediacom Capital jointly issued $200 million
aggregate principal amount of 8.5% Series A Notes due on April 15, 2008.
Mediacom used approximately $20.0 million of the net proceeds of the Series A
Notes Offering to repay in full the principal amount of the Holding Company
Notes. Mediacom contributed the remaining net proceeds of approximately $173.5
million in the form of preferred equity capital contributions to Mediacom
Southeast and subordinated loans to the Western Group. Such Subsidiaries used
the full amount of such capital contributions and loans to repay portions of
the outstanding principal Indebtedness and related accrued interest under the
revolving credit facilities of the respective Subsidiary Credit Facilities.
See "Use of Proceeds."
As of March 31, 1998, the Company had entered into interest rate swap
agreements to hedge a notional amount of $62.0 million of borrowings under the
Subsidiary Credit Facilities with expiration dates of September 1998 through
October 2002. As a result of the Company's interest rate swap agreements, and
after giving pro forma effect to the issuance of the Series A Notes,
approximately 84.0% of the Company's Indebtedness was at fixed interest rates
or subject to interest rate protection as of March 31, 1998.
As a result of the financing transactions described above, including the
effect of the Series A Notes Offering and the use of the net proceeds
therefrom, on a pro forma basis as of March 31, 1998, the Company would have
had approximately $207.0 million of unused credit commitments, of which
approximately $184.0 million could have been borrowed and distributed to
Mediacom under the most restrictive covenants in the Subsidiary Credit
Facilities. Determined as of March 31, 1998, and after giving effect to the
aforementioned interest rate swap agreements, the weighted average interest
rate on all Indebtedness outstanding under the Subsidiary Credit Facilities
was approximately 8.1%. After giving effect to the Series A Notes Offering,
the use of the net proceeds therefrom and said interest rate swap agreements,
such rate would have been approximately 7.3%. See "Description of Other
Indebtedness."
In certain limited circumstances, Mediacom's members have the right to
require Mediacom to redeem their membership interests if necessary to satisfy
legal restrictions relating to such ownership, as described under "Description
of the Operating Agreement--Put Rights."
Although the Company has not generated earnings sufficient to cover fixed
charges, the Company has generated cash and obtained financing sufficient to
meet its debt service, working capital, capital expenditure and acquisition
requirements. The Company expects that it will continue to be able to generate
funds and obtain financing sufficient to service its obligations under the
Notes. There can be no assurance that the Company will be able to refinance
its Indebtedness or obtain new financing in the future or, if the Company were
able to do so, that the terms would be favorable to the Company.
INFLATION AND CHANGING PRICES
The Company's costs and expenses are subject to inflation and price
fluctuations. However, because changes in costs are generally passed through
to subscribers, such changes are not expected to have a material effect on the
Company's results of operations.
43
RECENT DEVELOPMENTS
Acquisitions and Related Financings. On January 9, 1998, Mediacom California
completed the acquisition of the Jones System, serving approximately 17,200
basic subscribers on such date, for a purchase price of $21.4 million (before
closing costs and adjustments). The acquisition of the Jones System and
related closing costs and adjustments was financed with cash on hand and
borrowings under a $100.0 million senior credit facility (the "Western Credit
Facility") which was entered into by Mediacom California, Mediacom Arizona and
Mediacom Delaware (collectively, the "Western Group") in June 1997.
On January 23, 1998, Mediacom Southeast completed the acquisition of the
Cablevision Systems, serving approximately 260,100 basic subscribers on such
date, for an aggregate purchase price of approximately $308.7 million (before
closing costs and adjustments). The acquisition of the Cablevision Systems and
related closing costs and adjustments was financed with: (i) $211.0 million of
borrowings under a new $225.0 million senior credit facility (the "Southeast
Credit Facility" and, together with the Western Credit Facility, the
"Subsidiary Credit Facilities") made available to Mediacom Southeast; (ii) the
proceeds of $20.0 million aggregate principal amount of term notes (the
"Holding Company Notes") issued by Mediacom; and (iii) $94.0 million of equity
capital contributed to Mediacom by its members.
On April 1, 1998, the Company completed the Series A Notes Offering. The
Company used the net proceeds of the Series A Notes Offering (approximately
$193.5 million) to repay in full the Holding Company Notes and to make
contributions to Mediacom Southeast and the Western Group for purposes of
repaying certain indebtedness under the Subsidiary Credit Facilities. See "Use
of Proceeds."
Service Rate Increases. In January and February 1998, the Company gave
notice of basic service rate increases to approximately 237,000 basic
subscribers, effective in March 1998. For the month of March 1998, partly as a
result of these basic service rate increases, the Company's annualized
revenues were approximately $131.5 million. The Company also gave notice of
basic service rate increases to approximately 22,000 basic subscribers,
effective in April 1998. In most cases, such rate increases were implemented
in connection with the introduction of new programming services, resulting
from the activation of unused channels in the 1998 Systems. There can be no
assurance that because of these basic service rate increases or otherwise, the
Company's basic subscribers affected by such rate increases will not reduce
their level of service or cancel their cable television service altogether.
The Company's actual results for future periods may be materially different as
a result.
YEAR 2000
The Company has performed a review of its Year 2000 preparedness relative to
the Systems, its accounting software and its computer hardware. The Company
believes that it will not incur material costs in connection with becoming
Year 2000 compliant. In addition, the Company has received communications from
its significant third party vendors and service providers stating that they
are generally on target to become Year 2000 compliant in 1999 if they have not
already done so. There can be no assurance that these third party vendors and
service providers will complete their own Year 2000 compliant projects in a
timely manner and that failure to do so would not have an adverse impact on
the Company's business.
44
BUSINESS
OVERVIEW
Mediacom was founded in July 1995 by Rocco B. Commisso principally to
acquire, operate and develop cable television systems through its Subsidiaries
in selected non-metropolitan markets of the United States. Mr. Commisso is the
Chairman and Chief Executive Officer of Mediacom and has over 20 years of
experience with the cable television industry. To date, the Company has
completed eight acquisitions of cable television systems that, as of March 31,
1998, passed approximately 482,800 homes and served approximately 343,700
basic subscribers. The Company is currently among the top 25 MSOs in the
United States, operating in 14 states and serving 309 franchised communities.
In pursuing its business strategy, the Company has sought to take advantage
of market opportunities to acquire underperforming and undervalued cable
television systems principally in non-metropolitan markets and to build
subscriber clusters through regionalized operations. From March 1996 to
December 1997, the Company completed six acquisitions of cable television
systems that, as of March 31, 1998, served approximately 64,300 basic
subscribers in California, Arizona, Delaware and Maryland. In January 1998,
the Company acquired cable television systems in two separate transactions
that, as of March 31, 1998, served approximately 279,400 basic subscribers in
eleven states principally Alabama, California, Florida, Kentucky, Missouri and
North Carolina. The aggregate purchase price for the Systems was approximately
$428.2 million (before closing costs and adjustments), representing an
acquisition price of approximately $1,246 per basic subscriber. On a pro forma
basis, for the three months ended March 31, 1998, the Company's annualized
revenues were approximately $126.7 million, annualized System Cash Flow was
approximately $54.6 million and annualized EBITDA was approximately $48.8
million.
The Systems, taken as a whole, serve communities with favorable demographic
characteristics. During the five year period ended December 31, 1997, basic
subscribers served by the Systems have grown at a compound annual rate of
approximately 4.2%, compared to the cable television industry's estimated
growth rate of 3.4% over the same period. Furthermore, the Systems have
experienced a strong demand for premium service units, as reflected by the
premium penetration of approximately 117.7% as of March 31, 1998 compared to
the estimated year-end 1997 industry average of 77.0%. Because the Systems
serve geographically and economically diverse communities in smaller markets
across fourteen states, the Company believes that it is more resistant to any
individual regional economic downturn and is less susceptible to any local
competitive threat, providing the Company with more stable revenues and System
Cash Flow.
Mr. Commisso has assembled a management team with significant business
experience in acquiring, operating and financing cable television operations.
The eleven most senior executives and managers of the Company have an average
of over 18 years of experience with the cable television industry. Prior to
founding Mediacom, Mr. Commisso served as the Executive Vice President, Chief
Financial Officer and Director of CVI from August 1986 to March 1995. At the
time of Mr. Commisso's arrival, CVI was a regional cable company serving fewer
than 300,000 basic subscribers in four states. During his tenure, CVI
completed 40 acquisitions of cable television systems with an aggregate value
exceeding $1.2 billion. Mr. Commisso was directly responsible for all aspects
of CVI's financing activities, including the completion of over 35 separate
financing transactions with aggregate capital commitments exceeding $5.0
billion. At the time of its sale to Time Warner, Inc. in January 1996, CVI had
become the eighth largest MSO in the United States, serving 1.3 million basic
subscribers in 18 states, primarily in non-metropolitan markets.
45
BUSINESS STRATEGY
The Company's business strategy is to: (i) acquire underperforming and
undervalued cable television systems primarily in non-metropolitan markets, as
well as related telecommunications businesses; (ii) implement operating plans
and system improvements designed to enhance the long-term operational and
financial performance of the Company; and (iii) deploy a flexible financing
strategy to complement the Company's growth objectives and operating plans.
The key elements of the Company's business strategy are:
Selectively Pursue Strategic Acquisitions. The Company actively seeks to
acquire undervalued and underperforming cable television systems, principally
in non-metropolitan markets, that it believes can benefit from its operating
strategy. The Company generally targets systems in close proximity to its
existing operations since it is more cost effective to provide cable
television and advanced telecommunications services over an expanded
subscriber base within a concentrated geographic area. The Company believes
that it may be able to purchase "fill-in" acquisitions at favorable prices in
geographic areas where it is the dominant provider of cable television
services. The Company may also expand its base of operations into other
markets or pursue related telecommunications businesses if such acquisitions
are consistent with its overall business strategy. The Company generally
considers the following factors in analyzing potential acquisitions: (i) the
demographics of the market, including income levels, housing densities and
prospects for subscriber growth; (ii) the potential for clustering or
regionalization; (iii) the competitive environment; (iv) the quality of the
system's technical infrastructure, including the cost of upgrading; (v) the
system's operating expense structure; (vi) existing subscriber rates; (vii)
the cost to deploy new services such as pay-per-view, Internet access and
high-speed data transmission; (viii) the potential for developing local
advertising business; and (ix) franchise expiration, terms and conditions. The
Company believes that acquisition opportunities continue to exist in non-
metropolitan markets. Currently, the Company does not have any definitive
agreements to acquire any cable television systems.
Target Non-Metropolitan Markets. The Company believes that there are
operating, regulatory, competitive and economic advantages in acquiring and
operating cable television systems in non-metropolitan markets. Typically, in
smaller communities, cable television is necessary in order to receive a full
complement of off-air broadcast stations, and there are fewer competitive
entertainment alternatives available to the customer. Consequently, non-
metropolitan cable television systems are generally characterized by higher
basic penetration rates, lower subscriber turnover and lower operating costs,
thus providing for more predictable revenue streams and higher cash flow
margins than cable television systems serving urban and suburban markets. The
Systems, taken as a whole, serve communities that generally have experienced
higher than average growth rates in population and households. The Company
believes that such favorable demographic profiles of the markets in which it
operates will enable the Company to increase its basic subscriber base. The
Company believes that it will continue to benefit from favorable rate
regulation under the "small system rules" adopted by the FCC in 1995, and that
operating in smaller markets generally poses fewer regulatory burdens. See
"Legislation and Regulation." The Company also believes that non-metropolitan
markets have less appeal to other local hardwire and wireless video service
providers due to the lower housing densities which result in higher capital
expenditures per household to construct competing video delivery systems.
Lastly, as a result of the recent trend by larger MSOs in the cable television
industry toward redirecting their resources to urban and suburban markets,
evidenced by their ongoing divestiture of smaller market cable television
systems, the Company believes that there will be continuing opportunities to
acquire its targeted cable television systems at favorable prices.
Promote and Expand Service Offerings. To date, the Company generally has
sought to acquire cable television systems that have underserved their
customers. As a result, the Company believes that significant opportunities
exist to increase the revenues of the Systems by promoting and
46
expanding the programming services available to its customers. The Systems
generate lower average monthly revenue per basic subscriber compared to the
cable television industry in general. On a pro forma basis, for the three
months ended March 31, 1998, the average monthly revenues per basic subscriber
for the Systems was approximately $30.72, compared to the estimated year-end
1997 cable television industry average of $38.49, providing the Company with
pricing flexibility as it introduces new programming services. The weighted
average channel capacity for the Systems is 51 channels, of which five
channels on average are unused and available for additional programming. The
Company intends to introduce new programming services aggressively by
activating current unused channel capacity and by increasing channel
availability through planned system improvements in the longer term. In an
effort to increase revenues from pay-per-view movies and events, and to
increase the penetration of premium programming services (such as HBO and
Showtime), the Company plans to deploy additional addressable converters in
the customers' homes. Currently, approximately 63.0% of the Company's basic
subscribers are served by systems that offer addressable technology, and
approximately 23.0% of the Company's basic subscribers have addressable
converters installed in their homes. The Company plans to market its services
aggressively utilizing a full range of marketing techniques including direct
door-to-door sales, telemarketing, direct mail, print and broadcast
advertising, billing inserts and cross-channel promotion. In addition, the
Company believes that there are significant opportunities to increase local
advertising revenues, particularly in the Company's larger cable television
systems. On a pro forma basis, for the three months ended March 31, 1998, the
Systems generated local advertising revenues of only $0.21 per basic
subscriber per month.
Invest in System Improvements. As part of its commitment to customer
service, the Company endeavors to maintain high technical performance
standards in all of its cable television systems. To accomplish this, the
Company has embarked on a capital investment program to upgrade the Systems
selectively. This program, which involves the use of fiber optic technology,
will expand channel capacities, enhance signal quality, improve technical
reliability, augment addressability and provide a platform to develop high-
speed data services and Internet access. The Company believes that such
technical upgrades create additional revenue opportunities, enhance operating
efficiencies, increase customer satisfaction, improve franchising relations
and solidify the Company's position as the dominant provider of video services
in the markets in which it operates. Over the next five years, the Company
intends to spend approximately: (i) $70.0 million to establish a technical
standard of 550MHz bandwidth capacity (78 analog channels) in cable television
systems serving over 80.0% of its basic subscribers; (ii) $64.0 million for
ongoing maintenance and replacement and for installations and extensions to
the cable plant related to customer growth; and (iii) $6.0 million for the
purchase of additional addressable converters. The Company is currently
evaluating the economic viability of upgrading its larger systems to 750MHz
bandwidth capacity (112 analog channels), which would require additional
capital investment. During 1997 and the first quarter of 1998, the Company
completed upgrade projects affecting approximately 31,300 basic subscribers
served by the 1997 Systems as of March 31, 1998, and as a result, over 74.0%
of the 1997 Systems' basic subscribers are currently served by cable
television systems with at least 62 channel capacity. As part of this upgrade
program, the Company in the fourth quarter of 1997 began the 550MHz upgrade of
its largest cable television system which is located in lower Delaware,
serving approximately 28,720 basic subscribers as of March 31, 1998, and
expects completion of this project by mid-1999. In addition, the Company has
already begun 550MHz upgrade projects in the 1998 Systems affecting over
100,000 basic subscribers, with expected completion by year-end 1999. The
Company is continually evaluating new technical developments and the economic
feasibility of introducing new services and programming delivery capabilities,
such as video-on-demand, digital compression and other interactive and high-
speed data application.
Realize Operating Efficiencies. After consummating an acquisition, the
Company implements managerial, operational, purchasing and technical changes
designed to improve operating efficiencies.
47
By regionalizing certain managerial, sales and administrative functions and
imposing additional cost controls at its 1997 Systems, the Company reduced
operating costs, while increasing the emphasis on customer service. With
respect to the 1998 Systems, the Company is currently evaluating the
consolidation of certain regional, administrative and customer service
operations, which should improve System Cash Flow margins. On a pro forma
basis, for the three months ended March 31, 1998, the System Cash Flow margin
(System Cash Flow divided by revenues) for the 1997 Systems was 53.0%,
compared to 40.6% for the 1998 Systems. In addition, the Company plans to
consolidate headend facilities, thereby reducing technical operating costs and
capital expenditures associated with the introduction of new video services,
while also facilitating the Company's ability to pursue local advertising,
Internet access and high-speed data applications. The Company plans to
eliminate at least 24 of the 157 headend facilities in the Systems.
Deliver Advanced Telecommunications Services. The Company believes that
additional revenue opportunities exist in non-metropolitan markets by
providing advanced telecommunication services, such as Internet access and the
delivery of high-speed data services, including local area network
applications for residential and commercial customers. The Company believes
these smaller markets have limited appeal to the larger telecommunications
companies and that its technical platform will provide such services at higher
speeds and lower cost, giving the Company a competitive advantage over other
telecommunication providers in the markets in which it operates. In
Ridgecrest, California, where its cable television system passed approximately
17,700 homes and served approximately 9,900 basic subscribers as of March 31,
1998, the Company provides Internet access to over 3,500 customers through
both the telephone modem and the cable modem. The cable modem provides
Internet access at download speeds of up to 100 times faster than telephone
modem connections. The Company plans to introduce Internet access via the
cable modem in its larger systems and will seek to complement this service
with the telephone modem connection through acquisitions and initial start-ups
of local Internet access businesses.
Focus on Customer Satisfaction. The Company believes that providing superior
customer service is a key element for its long-term success. The Company seeks
to achieve a high level of customer satisfaction by employing a well-trained
staff of customer service representatives and experienced field technicians.
Over 75% of the Company's basic subscribers are provided toll-free access to
the Company's regional calling centers on a 24-hour, 7-day per week basis. The
Company believes customer service is also enhanced by the regional calling
centers' ability to coordinate effectively technical service and installation
appointments and to speed response to customer inquiries. The Company also
believes that the regional calling center structure increases the
effectiveness of its marketing campaigns. The Company is presently evaluating
the possibility of extending the same 24-hour service to its other customers.
Additionally, as part of its plans to introduce new programming services, the
Company regularly evaluates the programming packages and pricing options
available, and surveys its customers for their preferences for new programming
services.
Deploy Flexible Financing Strategy. The Company has deployed a financing
strategy which utilizes a prudent blend of equity and debt capital to
complement the Company's acquisition and operating activities. Through its
holding company structure, the Company has raised equity from its members and
intends to issue public long-term debt (including the Notes) at the holding
company level, while utilizing the Subsidiaries to access debt capital in the
bank and private placement markets through multiple stand-alone borrowing
groups. The Company believes that this financing strategy is beneficial
because it broadens the Company's access to various debt markets, enhances its
flexibility in managing the Company's capital structure, reduces the overall
cost of debt capital and permits the Company to maintain a substantial
liquidity position in the form of unused and available bank credit
commitments. To date, the Company has raised $135.5 million of equity capital,
of which $125.0 million has been invested in Mediacom. In addition, the
Company has established two subsidiary
48
borrowing groups which have obtained in the aggregate $325.0 million of
committed bank credit facilities. Such credit facilities are non-recourse to
Mediacom, have no cross-default provisions relating directly to each other and
permit the relevant Subsidiaries, subject to covenant and other restrictions,
to make distributions to Mediacom. As of March 31 1998, on a pro forma basis
after giving effect to the Series A Notes Offering and the use of the net
proceeds therefrom, the Company would have had approximately $207.0 million of
unused credit commitments, of which approximately $184.0 million could have
been borrowed and distributed to Mediacom under the most restrictive covenants
in the Subsidiaries' credit agreements. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resources" and "Description of Other Indebtedness."
THE CABLE TELEVISION INDUSTRY
A cable television system receives television, radio and data signals that
are transmitted to the system's headend site by means of off-air antennas,
microwave relay systems and satellite earth stations. These signals are then
modulated, amplified and distributed, primarily through coaxial, and in some
instances, fiber optic cable, to customers who pay a fee for this service.
Cable television systems may also originate their own television programming
and other information services for distribution through the system. Cable
television systems generally are constructed and operated pursuant to non-
exclusive franchises or similar licenses granted by local governmental
authorities for a specified term of years, generally for extended periods of
up to 15 years.
The cable television industry developed in the United States in the late
1940's and early 1950's in response to the needs of residents in predominantly
rural and mountainous areas of the country where the quality of off-air
television reception was inadequate due to factors such as topography and
remoteness from television broadcast towers. In the late 1960's, cable
television systems also developed in small and medium-sized cities and
suburban areas that had a limited availability of clear off-air television
station signals. All of these markets are regarded within the cable industry
as "classic" cable television station markets. In more recent years, cable
television systems have been constructed in large urban cities and nearby
suburban areas, where good off-air reception from multiple television stations
usually is already available, in order to receive the numerous, satellite-
delivered channels carried by cable television systems which are not otherwise
available via broadcast television reception.
Cable television systems offer customers various levels (or "tiers") of
cable television services consisting of: (i) off-air television signals of
local network, independent and educational stations; (ii) a limited number of
television signals from so-called "superstations" originating from distant
cities (such as WGN); (iii) various satellite-delivered, non-broadcast
channels (such as Cable News Network ("CNN"), MTV: Music Television, the USA
Network ("USA"), Entertainment and Sports Programming Network ("ESPN") and
Turner Network Television ("TNT")); (iv) certain programming originated
locally by the cable television system (such as public, governmental and
educational access programs); and (v) informational displays featuring news,
weather, stock market and financial reports and public service announcements.
For an extra monthly charge, cable television systems also offer premium
television services to their customers. These services (such as Home Box
Office ("HBO"), Showtime and regional sports networks) are satellite-delivered
channels consisting principally of feature films, live sports events, concerts
and other special entertainment features, usually presented without commercial
interruption.
A customer generally pays an initial installation charge and fixed monthly
fees for basic and premium television services and for other services (such as
the rental of converters and remote control devices). Such monthly service
fees constitute the primary source of revenue for cable television operators.
In addition to customer revenue from these services, cable television
operators generate
49
revenue from additional fees paid by customers for pay-per-view programming of
movies and special events and from the sale of available advertising spots on
advertiser-supported programming. Cable television operators frequently also
offer to their customers home shopping services, which pay the systems a share
of revenue from sales of products in the systems' service areas. See "--
Marketing, Programming and Rates."
ACQUISITION HISTORY
Founded in July 1995, the Company commenced operations in March 1996 with
the acquisition of its first cable television system serving certain
communities in and around Ridgecrest, California. Since then, the Company has
completed seven additional acquisitions of cable television systems. The
following table summarizes certain information relating to the acquisitions of
the Systems in chronological order:
PURCHASE
LOCATION OF PURCHASE PRICE BASIC PRICE PER
SYSTEMS PREDECESSOR OWNER (SYSTEM)(1) DATE ACQUIRED (IN MILLIONS)(2) SUBSCRIBERS(3) SUBSCRIBER
- ----------------- ----------------------------------- ------------------ ---------------- -------------- ----------
Ridgecrest, CA Benchmark Communications March 12, 1996 $ 18.8 9,870 $1,905
(the "Ridgecrest System")
Kern Valley, CA Booth American Company June 28, 1996 11.0 6,240 1,763
(the "Kern Valley System")
Nogales, AZ Saguaro Cable TV Investors, L.P. December 27, 1996 11.4 7,780 1,465
(the "Nogales System")
Valley Center, CA Valley Center Cablesystems, L.P. December 27, 1996 2.5 2,020 1,238
(the "Valley Center System")
Lower Delaware American Cable TV Investors 5, Ltd. June 24, 1997 42.9 28,720 1,494
(the "Lower Delaware System")
Sun City, CA CoxCom, Inc. September 19, 1997 11.5 9,670 1,189
(the "Sun City System")
Clearlake, CA Jones Intercable, Inc. January 9, 1998 21.4 17,550 1,219
(the "Jones System")
Various States Cablevision Systems Corporation January 23, 1998 308.7 261,850 1,179
(the "Cablevision Systems") ------ ------- ------
Total $428.2 343,700 $1,246
====== ======= ======
- --------
(1) Purchased from either the named party, one or more of its affiliates or
the controlling or managing operator.
(2) Represents the final purchase price before closing costs and adjustments.
(3) As of March 31,1998.
50
DESCRIPTION OF THE OPERATING REGIONS
To manage and operate the Systems, the Company has established four
operating regions: Southeast, Mid-Atlantic, Central and Western. In turn, each
region is subdivided into groups of cable television systems ("Regional
Clusters") which are organized and operated geographically. On a pro forma
basis, the table below and the discussion that follows provide an overview of
selected financial, operating and technical statistics for each of the
Company's four operating regions as of and for the three months ended March
31, 1998 (unless otherwise indicated).
SOUTHEAST MID-ATLANTIC CENTRAL WESTERN TOTAL
--------- ------------ ------- ------- --------
(DOLLARS IN THOUSANDS, EXCEPT PER SUBSCRIBER
DATA)
FINANCIAL DATA:
Annualized revenues........ $48,975 $28,105 $27,660 $21,975 $126,715
Annualized operating
expenses.................. 30,410 15,975 14,925 10,775 72,085
------- ------- ------- ------- --------
Annualized System Cash
Flow...................... $18,565 $12,130 $12,735 $11,200 $ 54,630
System Cash Flow margin.... 37.9% 43.2% 46.0% 51.0% 43.1%
Annual System Cash Flow per
basic subscriber(1)....... $ 142 $ 147 $ 165 $ 211 $ 159
Average monthly basic
revenues per basic
subscriber(2)............. $ 21.68 $ 21.79 $ 22.17 $ 27.15 $ 22.66
Average monthly revenues
per basic subscriber(3)... $ 31.21 $ 28.43 $ 29.77 $ 34.47 $ 30.72
OPERATING AND TECHNICAL
DATA (end of period,
except average):
Homes passed............... 178,580 106,170 116,210 81,840 482,800
Miles of plant............. 4,690 2,860 2,870 1,260 11,680
Density(4)................. 38 37 41 65 41
Basic subscribers.......... 130,750 82,390 77,430 53,130 343,700
Basic penetration.......... 73.2% 77.6% 66.6% 64.9% 71.2%
Premium service units...... 199,990 82,620 100,500 21,290 404,400
Premium penetration........ 153.0% 100.3% 129.8% 40.1% 117.7%
Regional Clusters.......... 4 3 4 4 15
Weighted average channel
capacity(5)............... 57 47 42 58 51
- --------
(1) Represents annualized System Cash Flow for the period divided by basic
subscribers at the end of the period.
(2) Represents revenues from basic programming services for the last three
months of the period divided by basic subscribers at the end of the
period.
(3) Represents average monthly revenues for the three months ended March 31,
1998 divided by the number of basic subscribers as of the end of such
period.
(4) Homes passed divided by miles of plant.
(5) Determined on a per subscriber basis.
SOUTHEAST REGION. The cable television systems in the Southeast Region, the
Company's largest region, were purchased in January 1998 as part of the
acquisition of the Cablevision Systems. Over 81.0% of the region's basic
subscribers are located in the suburbs and outlying areas of Pensacola, Fort
Walton Beach and Panama City, Florida, Mobile and Huntsville, Alabama and
Biloxi, Mississippi. On a pro forma basis, for the three months ended March
31, 1998, the region's annualized revenues were approximately $49.0 million,
and annualized System Cash Flow was approximately $18.6 million, resulting in
a System Cash Flow margin of 37.9% and annual System Cash Flow per basic
subscriber of $142. The region's systems passed approximately 178,580 homes
and served approximately 130,750 basic subscribers in 90 franchised
communities. All of the region's basic subscribers are serviced from a
regional customer service center in Gulf Breeze, Florida, which provides 24-
hour, 7-day per week service. According to National Decision Systems, 1997
("NDS"), projected median household growth in the counties served by the
region's systems for the five-year period ending 2002 is 5.5%, exceeding the
projected U.S. median household growth for the same period of 3.4%.
51
At March 31, 1998, the region generated monthly revenues per basic
subscriber of $31.21 compared to the estimated year-end 1997 industry average
of $38.49 (the "Industry Average"), and had an average monthly rate for basic
programming services of $21.68. The weighted average channel capacity of the
region's systems was 57 channels, with over 44.0% of the region's basic
subscribers being served by systems with at least five unused channels,
providing the Company with flexibility in the near term as it introduces new
basic and other programming services. The region's video services are
delivered through 57 headend facilities. Over the next two years, the Company
plans to upgrade certain systems to 78 channel capacity, affecting
approximately 26,800 of the region's basic subscribers and expects to
eliminate 12 headend facilities in the Systems. After completion of these
projects, approximately 54.0% of the region's basic subscribers will be served
by systems with 78 channel capacity. As part of its technical improvement
program, the Company also plans to accelerate the deployment of addressable
converters in the region. Currently, over 69.0% of the region's basic
subscribers are served by systems that offer addressable technology and over
32.0% of the region's basic subscribers have addressable converters in their
homes. In addition, the Company intends to promote more aggressively the
region's local advertising sales, which generated monthly revenues of only
$0.08 per basic subscriber during the first quarter of 1998. The Southeast
Region is organized in four Regional Clusters: the Panhandle Cluster, the
Mobile Cluster, the Huntsville Cluster and the Central Alabama/Mississippi
Cluster.
The Panhandle Cluster. The cable television systems in the Panhandle Cluster
serve approximately 56,950 basic subscribers in the suburbs and outlying areas
of Pensacola, Fort Walton Beach and Panama City, Florida. The largest system
in the cluster is located in the suburbs of Pensacola, Florida, serving
approximately 28,600 basic subscribers from two headend facilities. This
system has 78 channel capacity, of which 8 are unused, and 42.6 miles of fiber
backbone. This system's basic subscribers have increased at a 6.6% compound
annual growth rate ("CAGR") over the 1992-1997 period, reflecting the
favorable population and housing growth trends in these markets. The cluster
also serves the high-growth resort area of Gulf Shores, Alabama. The basic
subscribers served by the Gulf Shores system have increased at a CAGR of 10.0%
over the same five-year period. The Gulf Shores system serves approximately
6,900 basic subscribers from one headend facility and has 27.5 miles of fiber
backbone. This system was upgraded in late 1997 to 78 channel capacity,
resulting in 34 unused channels.
The Mobile Cluster. The cable television systems in the Mobile Cluster serve
approximately 34,800 basic subscribers in the suburbs and outlying areas of
Mobile, Alabama and Biloxi, Mississippi. The largest system serves
approximately 17,000 basic subscribers from three headend facilities. Over the
next two years, the Company plans to upgrade this system to 78 channel
capacity, which will also result in the elimination of two headend facilities.
This cluster's basic subscribers increased at a CAGR of 4.7% over the 1992-
1997 period.
The Huntsville Cluster. The cable television systems in the Huntsville
Cluster serve approximately 16,200 basic subscribers, principally in the high-
growth suburbs of Huntsville, Alabama. The largest cable television system
serves approximately 90.0% of this cluster's basic subscribers from two
headend facilities, has 25 miles of fiber backbone, and is capable of
delivering 54 channels, of which 3 channels are unused. The Huntsville
Cluster's basic subscribers have increased at a CAGR of 5.9% over the 1992-
1997 period.
The Central Alabama/Mississippi Cluster. The cable television systems in the
Central Alabama/Mississippi Cluster serve approximately 22,800 basic
subscribers principally in the outlying areas of Jackson, Meridian, and
Tupelo, Mississippi and Montgomery and Tuscaloosa, Alabama. Approximately
45.0% of this cluster's basic subscribers are served by systems capable of
delivering 54 channels, with at least 7 unused channels. This cluster's basic
subscribers have increased at a CAGR of 1.6% over the 1992-1997 period.
52
MID-ATLANTIC REGION. The cable television systems in the Mid-Atlantic Region
serve communities in lower Delaware and southeastern Maryland and northeastern
and western areas of North Carolina. The Lower Delaware System was acquired in
June 1997 from an affiliate of Tele-Communications, Inc., and the region's
remaining systems were purchased in January 1998 as part of the acquisition of
the Cablevision Systems. On a pro forma basis, for the three months ended
March 31, 1998, the region's annualized revenues were approximately $28.1
million, and annualized System Cash Flow was approximately $12.1 million,
resulting in a System Cash Flow margin of 43.2% and annual System Cash Flow
per basic subscriber of $147. The region's systems passed approximately
106,170 homes and served approximately 82,390 basic subscribers in 59
franchised communities. According to NDS, projected median household growth in
the counties served by the Mid-Atlantic Region for the five-year period ending
2002 is 5.3%, exceeding the projected U.S. median household growth rate for
the same period of 3.4%.
At March 31, 1998, the region generated monthly revenues per basic
subscriber of $28.43 compared to the Industry Average of $38.49, and had an
average monthly rate for basic programming services of $21.79. The weighted
average channel capacity of the region's systems was 47 channels, with
approximately 22.0% of the basic subscribers served by systems with excess
channel capacity. The region's video services are delivered through 17 headend
facilities. Over the next two years, the Company expects to upgrade to 78
channel capacity systems serving approximately 76.0% of the region's basic
subscribers and expects to eliminate four headend facilities in the region.
After these system improvements, over 84.0% of the region's basic subscribers
will be served by systems with at least 54 channel capacity. These planned
improvements will also include the elimination of up to four headend
facilities. In addition, the Company plans to accelerate the deployment of
addressable converters in the region. Currently, over 84.0% of the region's
basic subscribers are served by systems that offer addressable technology and
over 23.0% of the region's basic subscribers have addressable converters in
their homes. The Company intends to promote more aggressively the region's
local advertising sales, which generated monthly revenue of only $0.35 per
basic subscriber during the first quarter of 1998. The Mid-Atlantic Region is
organized in three Regional Clusters: the Lower Delaware Cluster, the Western
Carolina Cluster and the Eastern Carolina Cluster.
The Lower Delaware Cluster. The cable television system in the Lower
Delaware Cluster serves approximately 28,720 basic subscribers in lower
Delaware and southeastern Maryland, adjacent to Ocean City, Maryland. This
system is served from a single headend facility and has over 65 miles of fiber
backbone. An upgrade to 78 channel capacity was initiated in the fourth
quarter of 1997, utilizing both fiber-to-the-feeder and fiber backbone
architecture, with an expected completion date of mid-1999. The Company is
currently evaluating the coordination of this system's customer service
functions with the regional calling center in Hendersonville, North Carolina
in order to provide to the customers of this cluster 24-hour, 7-day per week
service. This cluster's basic subscribers have increased at a CAGR of 4.4%
over the 1992-1997 period.
The Western Carolina Cluster. The cable television systems in the Western
Carolina Cluster serve approximately 36,490 basic subscribers principally
located in Hendersonville, North Carolina and the suburbs and outlying areas
of Asheville, North Carolina, and Greenville and Spartanburg, South Carolina.
The largest system serves approximately 22,250 basic subscribers in Henderson
County, North Carolina, from a single headend facility and has 29.5 miles of
fiber backbone. Over the next two years, the Company intends to upgrade
systems serving approximately 84.0% of the cluster's basic subscribers to 78
channel capacity, utilizing both fiber-to-the-feeder and fiber backbone
architecture. This cluster's basic subscribers increased at a CAGR of 6.8%
over the 1992-1997 period. Both the Western and Eastern Carolina Clusters are
serviced from a regional customer service center located in Hendersonville,
North Carolina, which provides 24-hour, 7-day per week service.
The Eastern Carolina Cluster. The cable television systems in the Eastern
Carolina Cluster serve approximately 17,180 basic subscribers principally
located in the northeastern coastal area of North
53
Carolina. Within the next two years, the Company intends to upgrade two
systems serving approximately 6,700 basic subscribers to 78 channel capacity
from their current channel capacity of 36 channels. This cluster's basic
subscribers increased at a CAGR of 3.8% over the 1992-1997 period.
CENTRAL REGION. The cable television systems in the Central Region were
acquired in January 1998 as part of the acquisition of the Cablevision
Systems. This region's systems serve the suburbs and outlying areas of Kansas
City and Springfield, Missouri and Topeka, Kansas, and the western portion of
Kentucky. On a pro forma basis, for the three months ended March 31, 1998, the
region's annualized revenues were approximately $27.7 million, and annualized
System Cash Flow was approximately $12.7 million, resulting in a System Cash
Flow margin of 46.0% and annual System Cash Flow per basic subscriber of $165.
The systems passed 116,210 homes and served 77,430 basic subscribers in 144
franchised communities. According to NDS, projected median household growth in
the counties served by the Central Region for the five-year period ending 2002
is 3.8%, exceeding the projected U.S. median household growth rate for the
same period of 3.4%.
At March 31, 1998, the region generated monthly revenue per basic subscriber
of $29.77 compared to the Industry Average of $38.49, and had an average
monthly rate for basic programming services of $22.17. The weighted average
channel capacity of the region's cable television systems was 42 channels,
with approximately 22.0% of the region's basic subscribers being served by
systems with at least five unused channels. The region's video services are
delivered through 74 headend facilities. In the near term, the Company plans
to utilize excess channel capacity to introduce new basic programming
services. Over the next two years, the Company expects to upgrade several of
the region's systems to 78 channel capacity and to eliminate eight headend
facilities in the region. After completion of these projects, approximately
47.0% of the region's basic subscribers will be served by systems with at
least 54 channel capacity. As part of its technical improvement program, the
Company also plans to increase the deployment of addressable converters in the
region, which are currently installed in the homes of only 3.1% of the
region's basic subscribers. In addition, the Company plans to improve the
region's local advertising sales which generated monthly revenues of only
$0.04 per basic subscriber during the first quarter of 1998. The Central
Region is organized in four Regional Clusters: the Western Kentucky Cluster,
the Springfield Cluster, the Kansas City Cluster and the Topeka Cluster.
The Western Kentucky Cluster. The cable television systems in the Western
Kentucky Cluster serve approximately 34,800 basic subscribers principally
located in the communities surrounding the Land Between Lakes recreational
area of Western Kentucky and outlying areas of Bowling Green, Kentucky. This
cluster also serves communities in southern Illinois, primarily within 40
miles of St. Louis, Missouri. Within the next two years, the Company intends
to upgrade certain systems in this cluster to 78 channel capacity, affecting
approximately 13,400 basic subscribers. This cluster's basic subscribers
increased at a CAGR of 4.8% over the 1992-1997 period.
The Springfield Cluster. The cable television systems in the Springfield
Cluster serve approximately 19,450 basic subscribers located in suburbs and
outlying areas of Springfield, Missouri. Within the next two years, the
Company intends to upgrade certain systems in this cluster affecting
approximately 6,500 basic subscribers to 78 channel capacity from their
current channel capacity of 36 channels. This cluster's basic subscribers
increased at a CAGR of 4.0% over the 1992-1997 period.
The Kansas City Cluster. The cable television systems in the Kansas City
Cluster serve approximately 13,470 basic subscribers located in suburbs and
outlying areas of Kansas City, Missouri. Within the next two years, the
Company intends to upgrade certain systems in this cluster affecting
approximately 5,600 basic subscribers to 78 channel capacity from their
current channel capacity of 36 channels. This cluster's basic subscribers
increased at a CAGR of 3.2% over the 1992-1997 period.
54
The Topeka Cluster. The cable television systems in the Topeka Cluster serve
approximately 9,710 basic subscribers located in suburbs and outlying areas of
Topeka, Kansas. Within the next two years, the Company intends to upgrade a
certain system in this cluster affecting approximately 1,600 basic subscribers
to 78 channel capacity from its current channel capacity of 36 channels. This
cluster's basic subscribers increased at a CAGR of 1.6% over the 1992-1997
period.
WESTERN REGION. The cable television systems in the Western Region were
acquired in separate asset purchase transactions, beginning on March 12, 1996
with the purchase of the Ridgecrest System and concluding with the purchase of
the Jones System on January 9, 1998. The region's systems serve communities
in: (i) areas north of Napa Valley, California; (ii) the Indian Wells Valley
in central California; (iii) portions of Riverside County and San Diego
County, California; and (iv) Nogales, Arizona and outlying areas. On a pro
forma basis, for the three months ended March 31, 1998, the region's
annualized revenues were approximately $22.0 million, and annualized System
Cash Flow was approximately $11.2 million, resulting in a System Cash Flow
margin of 51.0% and annual System Cash Flow per basic subscriber of $211. The
region's systems passed 81,840 homes and served 53,130 basic subscribers in 16
franchised communities. According to NDS, projected median household growth in
the counties served by the Western Region for the five-year period ending 2002
is 9.5%, exceeding the projected U.S. median household growth rate for the
same period of 3.4%.
At March 31, 1998, the region generated monthly revenues per basic
subscriber of $34.47 compared to the Industry Average of $38.49 and had an
average monthly rate for basic programming services of $27.15. The weighted
average channel capacity of the region's cable television systems was 58
channels, with approximately 32.0% of the region's basic subscribers being
served by systems having at least five unused channels. The region's video
services are delivered through nine headend facilities. Over the next two
years, the Company expects to upgrade the region's largest system from 36 to
78 channel capacity. After completion of this project, approximately 98.0% of
the region's basic subscribers will be served by systems with at least 62
channel capacity. As part of its technical improvement program, the Company
also plans to accelerate the deployment of addressable converters in the
region. The region's systems are 100% addressable and approximately 28.0% of
the region's basic subscribers have addressable converters in their homes. In
addition, the Company plans to promote more aggressively the region's local
advertising sales, which generated monthly revenues of only $0.63 per basic
subscriber during the first quarter of 1998. The Western Region is organized
in four Regional Clusters: the Clearlake Cluster, the Ridgecrest Cluster, the
Sun City Cluster and the Nogales Cluster.
The Clearlake Cluster. The cable television system in the Clearlake Cluster,
acquired on January 9, 1998 from affiliates of Jones Intercable, Inc., serves
approximately 17,550 basic subscribers in certain communities of Lake County,
California. This system is served by a single headend facility. The Company
has already initiated an upgrade of this system to 78 channel capacity from
its current channel capacity of 36 channels and plans to utilize both fiber-
to-the-feeder and fiber backbone architecture. Completion of this upgrade
project is expected in late 1999. This cluster's basic subscribers increased
at a CAGR of 4.0% over the 1992-1997 period.
The Ridgecrest Cluster. The cable television systems in the Ridgecrest
Cluster serve approximately 16,110 basic subscribers located in Ridgecrest,
Kernville, Lake Isabella and Trona, California and their surrounding areas.
All of the systems in this cluster have the capability of delivering 62
channels. The Company currently offers Internet access via both the telephone
modem and cable modem to over 3,500 customers in the Ridgecrest community at
monthly rates of between $17.95 and $19.95 for the telephone modem customers
and between $29.95 and $34.95 for the cable modem customers. The Company
intends to introduce this same combination of Internet access services in its
larger systems. Also, the Ridgecrest Cluster's local advertising business
generated monthly revenues
55
per basic subscriber of approximately $1.10 during the first quarter of 1998.
This cluster's basic subscribers decreased by approximately 1,600 over the
1992-1997 period.
The Sun City Cluster. The cable television systems in the Sun City Cluster
serve approximately 11,690 basic subscribers in Sun City and Valley Center,
California from two headend facilities. As a result of completing technical
upgrades since their acquisition, these systems now have the capability to
deliver between 62 channels and 78 channels of programming. This cluster's
basic subscribers increased at a CAGR of 1.8% over the 1992-1997 period.
The Nogales Cluster. The cable television systems in the Nogales Cluster
serve approximately 7,780 basic subscribers in Nogales, and its surrounding
communities, and Ajo, Arizona, from three headend facilities. As a result of
completing technical upgrades since their acquisition, over 85.0% of the
cluster's basic subscribers are now served by systems with the capability to
deliver between 62 channels and 78 channels. This cluster's basic subscribers
increased at a CAGR of 1.0% over the 1992-1997 period.
TECHNOLOGICAL DEVELOPMENTS
As part of its commitment to customer service, the Company endeavors to
maintain high technical performance standards in all of its cable television
systems. To accomplish this, the Company has embarked on a capital investment
program to upgrade the Systems selectively. This program, which involves the
use of fiber optic technology, will expand channel capacities, enhance signal
quality, improve technical reliability, augment addressability and provide a
platform to develop high-speed data services and Internet access. The Company
believes that such technical upgrades create additional revenue opportunities,
enhance operating efficiencies, increase customer satisfaction, improve
franchising relations and solidify the Company's position as the dominant
provider of video services in the markets in which it operates. Before
committing the capital to upgrade or rebuild a system, the Company carefully
assesses: (i) the existing technical reliability and picture quality of the
system; (ii) basic subscribers' demand for more channels; (iii) requirements
in connection with franchise renewals; (iv) programming alternatives offered
by competitors; (v) customers' demand for other cable television and broadband
telecommunications services; and (vi) the return on investment of any such
capital outlay.
The table below summarizes the Company's existing technical profile as of
March 31, 1998. On such date, the Systems had a weighted average channel
capacity of 51 channels and delivered, on average, 46 channels of programming
to its basic subscribers.
BASIC PERCENTAGE OF BASIC SUBSCRIBERS BY CHANNEL CAPACITY WEIGHTED
SUBSCRIBERS ----------------------------------------------------------------------- AVERAGE
AS OF MARCH 30 CHANNELS 36 CHANNELS 42 CHANNELS 54 CHANNELS 62 CHANNELS 78 CHANNELS CHANNEL
OPERATING REGIONS 31, 1998 (270 MHZ) (300 MHZ) (330 MHZ) (400 MHZ) (450 MHZ) (550 MHZ) CAPACITY
----------------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- --------
Southeast............... 130,750 1.0% 22.8% 16.7% 4.6% 21.9% 33.0% 57
Mid-Atlantic............ 82,390 0.0 25.6 53.2 0.7 6.0 14.5 47
Central................. 77,430 1.9 40.4 43.4 4.7 9.6 0.0 42
Western................. 53,130 0.0 32.4 2.0 0.0 34.4 31.2 58
------- ---- ----- ----- ---- ----- ----- ---
Total................. 343,700 0.8% 29.0% 29.2% 3.0% 17.2% 20.8% 51
======= ==== ===== ===== ==== ===== ===== ===
56
Over the next five years, the Company intends to spend approximately: (i)
$70.0 million to establish a technical standard of 550MHz bandwidth capacity
(78 analog channels) in cable television systems serving over 80% of its basic
subscribers (the "System Improvement Program"); (ii) $64.0 million for ongoing
maintenance and replacement and for installations and extensions to the cable
plant related to customer growth; and (iii) $6.0 million for the purchase of
additional addressable converters. The table below summarizes the Company's
expected technical profile upon completion of the System Improvement Program.
BASIC PERCENTAGE OF BASIC SUBSCRIBERS BY CHANNEL CAPACITY WEIGHTED
SUBSCRIBERS ----------------------------------------------------------------------- AVERAGE
AS OF MARCH 30 CHANNELS 36 CHANNELS 42 CHANNELS 54 CHANNELS 62 CHANNELS 78 CHANNELS CHANNEL
OPERATING REGIONS 31, 1998 (270 MHZ) (300 MHZ) (330 MHZ) (400 MHZ) (450 MHZ) (550 MHZ) CAPACITY
----------------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- --------
Southeast............... 130,750 0.0% 1.0% 0.8% 3.0% 16.6% 78.6% 74
Mid-Atlantic............ 82,390 0.0 0.0 0.0 0.0 6.0 94.0 77
Central................. 77,430 0.0 4.0 4.0 3.6 9.7 78.7 72
Western................. 53,130 0.0 0.0 0.0 0.0 34.6 65.4 72
------- ---- ---- ---- ---- ----- ----- ---
Total................. 343,700 0.0% 1.3% 1.2% 1.9% 15.3% 80.3% 74
======= ==== ==== ==== ==== ===== ===== ===
Over 63.0% of the Company's basic subscribers currently have access to
addressable technology and over 23.0% have addressable converters in their
homes. During the next five years, the Company expects that the number of its
basic subscribers with addressable converters deployed in their homes will
double. Addressable technology enables the Company to electronically control
the cable television services being delivered to the customer's home. As a
result, the Company can electronically upgrade or downgrade services to a
customer immediately, from its regional calling centers and local customer
service centers, without the delay or expense associated with dispatching a
technician to the customer's home. Addressable technology also reduces premium
service theft, is an effective enforcement tool in the collection of
delinquent payments and enables the Company to offer pay-per-view services,
including movies and events.
The Company's active use of fiber optic technology as an alternative to
coaxial cable is playing a major role in expanding channel capacity and
improving the performance of its cable television systems. Fiber optic strands
are capable of carrying hundreds of video, data and voice channels over
extended distances without the extensive signal amplification typically
required for coaxial cable. The Company will use fiber backbone architecture
to eliminate headend facilities and to reduce amplifier cascades, thereby
improving picture quality, system reliability and headend and maintenance
expenditures. The Company plans to utilize fiber backbone architecture to
eliminate at least 24 of the 157 headend facilities in the Systems. To date,
the Company has utilized fiber optic technology in all of its 550MHz upgrade
projects, using a combination of fiber-to-feeder and fiber backbone
architecture. In addition, a number of fiber upgrade projects are underway
affecting 125,000 basic subscribers. Upon completion of the System Improvement
Program, the Company expects that fiber optic technology will be utilized in
systems serving over 90% of its basic subscribers.
Recently, high-speed cable modems and set-top boxes using digital
compression technology have become commercially viable. These developments
allow for the introduction of high-speed data services and Internet access and
will increase programming services available to customers. The Company now
offers Internet access both through the telephone modem and cable modem in one
of the Western Region's systems and intends to introduce a combination of
these services in its larger systems. Digital compression technology provides
for a significant expansion of channel capacity with up to 16 digital channels
to be carried in the bandwidth of one analog channel. The Company is currently
evaluating the economic feasibility of deploying digital compression
technology in one or more of its larger systems.
57
MARKETING, PROGRAMMING AND RATES
The Company's marketing programs and campaigns are based upon offering a
variety of cable services creatively packaged and tailored to appeal to its
different markets and to segments within each market. The Company routinely
surveys its customer base to ensure that it is meeting the demands of its
customers and stays abreast of its competition in order to effectively counter
competitors' promotional campaigns. The Company uses a coordinated array of
marketing techniques to attract and retain customers and to increase premium
service penetration, including door-to-door and direct mail solicitation,
telemarketing, media advertising, local promotional events typically sponsored
by programming services and cross-channel promotion of new services and pay-
per-view. Over 75.0% of the Systems' basic subscribers are serviced by
regional calling centers where the Company concentrates its telemarketing
efforts with a well-trained staff of telemarketers.
The Company has various contracts to obtain basic and premium programming
for the Systems from program suppliers whose compensation is typically based
on a fixed fee per customer. The Company's programming contracts are generally
for a fixed period of time and are subject to negotiated renewal. Some program
suppliers provide volume discount pricing structures or offer marketing
support to the Company. The Company's successful marketing of multiple premium
service packages emphasizing customer value enables the Company to take
advantage of such cost incentives. In addition, the Company is a member of the
National Cable Television Cooperative, Inc., a programming consortium
consisting of small to medium-sized MSOs serving, in the aggregate, over eight
million cable subscribers. The consortium was formed to help create
efficiencies in the areas of securing and administering programming contracts,
as well as to establish more favorable programming rates and contract terms
for small to medium-sized operators. The Company intends to negotiate
programming contract renewals both directly and through the consortium to
obtain the best available contract terms. The Company's programming costs are
expected to increase in the future due to additional programming being
provided to its customers, increased costs to purchase programming,
inflationary increases and other factors affecting the cable television
industry. The Company believes that it will be able to pass through expected
increases in its programming costs to customers, although there can be no
assurance that it will be able to do so. The Company also has various
retransmission consent arrangements with commercial broadcast stations which
generally expire in December 1999 and beyond. None of these consents require
payment of fees for carriage, however, the Company has entered into agreements
with certain stations to carry satellite-delivered cable programming which is
affiliated with the network carried by such stations. See "Legislation and
Regulation."
Although services vary from system to system due to differences in channel
capacity, viewer interests and community demographics, the majority of the
Systems offer a "basic service tier," consisting of local television channels
(network and independent stations) available over-the-air, satellite-delivered
"superstations" originating from distant cities (such as WGN), and local
public, governmental, home-shopping and leased access channels. The majority
of the Systems offer, for a monthly fee, an expanded basic tier of various
satellite-delivered, non-broadcast channels (such as CNN, MTV, USA, ESPN and
TNT). In addition to these services, the Systems typically provide one or more
premium services such as HBO, Cinemax, Showtime, The Movie Channel, Starz! and
The Disney Channel, which are combined in different formats to appeal to the
various segments of the viewing audience. These services are satellite-
delivered channels consisting principally of feature films, original
programming, live sports events, concerts and other special entertainment
features, usually presented without commercial interruption. Such premium
programming services are offered by the Systems both on a per-channel basis
and as part of premium service packages designed to enhance customer value and
to enable the Company to take advantage of programming agreements offering
cost incentives based on premium service unit growth. Basic subscribers may
subscribe for one or more premium service units. A "premium service unit" is a
single premium service for which a subscriber must pay an additional monthly
fee in order to receive the service. The Company plans to
58
upgrade certain of the Systems using fiber optic technology, which will allow
the Company to expand its ability to use "tiered" packaging strategies for
marketing premium services and promoting niche programming services. The
Company believes that this ability will increase basic and premium penetration
as well as revenue per basic subscriber. The Systems also typically provide
one or more pay-per-view services purchased from independent suppliers such as
Request, Viewer's Choice, Showtime Event Television, etc. These services are
satellite-delivered channels, consisting principally of feature films, live
sporting events, concerts and other special "events," usually presented
without commercial interruption. Such pay-per-view services are offered by the
Company on a "per viewing" basis, with subscribers only paying for programs
which they select for viewing.
Monthly customer rates for services vary from market to market, primarily
according to the amount of programming provided. At March 31, 1998, the
Company's monthly basic service rates for residential customers ranged from
$3.89 to $16.00, the Company's monthly expanded basic service rates for
residential customers ranged from $13.87 to $22.55 and per-channel premium
service rates (not including special promotions) ranged from $1.75 to $12.50
per service. For the three months ended March 31, 1998, on a pro forma basis,
the weighted average price for the Company's monthly combined basic and
expanded basic service was approximately $22.66.
A one-time installation fee, which the Company may wholly or partially waive
during a promotional period, is usually charged to new customers. The Company
charges monthly fees for converters and remote control tuning devices. The
Company also charges administrative fees for delinquent payments for service.
Customers are free to discontinue service at any time without additional
charge in the majority of the systems and may be charged a reconnection fee to
resume service. Commercial customers, such as hotels, motels and hospitals,
are charged negotiated monthly fees and a non-recurring fee for the
installation of service. Multiple dwelling unit accounts may be offered a bulk
rate in exchange for single-point billing and basic service to all units.
In addition to customer fees, the Company derives a modest amount of revenue
from the sale of local spot advertising time on locally originated and
satellite-delivered programming. The Company also derives modest amounts of
revenues from affiliations with home shopping services (which offer
merchandise for sale to customers and compensate system operators with a
percentage of their sales receipts).
The Company is an eligible "small cable company" under certain FCC rules,
which enables it to utilize a simplified rate setting methodology for most of
the Systems in establishing maximum rates for basic and expanded basic
services. This methodology almost always results in rates which exceed those
produced by the cost-of-service rules applicable to larger cable television
operators. Approximately 82% of the basic subscribers served by the Systems
are covered by such FCC rules. The Company believes that its rate practices
are generally consistent with the current practices in the industry. See
"Legislation and Regulation--Federal Regulation--Rate Regulation."
CUSTOMER SERVICE AND COMMUNITY RELATIONS
The Company is dedicated to providing superior customer service. The
Company's plans to make significant system improvements are designed in part
to strengthen customer service through greater system reliability and the
introduction of new services. The Company seeks a high level of customer
satisfaction by also employing a well-trained staff of customer service
representatives and experienced field technicians. The Company's three
regional calling centers offer 24-hour, 7-day per week coverage to over 75% of
the Systems' customers on a toll-free basis. The Company believes customer
service is also enhanced by the regional calling centers' ability to
coordinate effectively technical service and installation appointments and to
speed response to customer inquiries. The Company also believes that the
regional calling center structure increases the effectiveness of its marketing
campaigns.
59
In addition, the Company is dedicated to fostering strong community
relations in the communities served by the Systems. The Company supports local
charities and community causes through staged events and promotional
campaigns. The Company also installs and provides free cable television
service and Internet access to public schools, government buildings and not-
for-profit hospitals in its franchise areas. The Company believes that its
relations with the communities in which the Systems operate are generally
good.
FRANCHISES
Cable television systems are generally operated under non-exclusive
franchises granted by local governmental authorities. These franchises
typically contain many conditions, such as: time limitations on commencement
and completion of construction; conditions of service, including number of
channels, types of programming and the provision of free service to schools
and certain other public institutions; and the maintenance of insurance and
indemnity bonds. The provisions of local franchises are subject to federal
regulation under the Communications Act. See "Legislation and Regulation."
As of March 31, 1998, the Systems were subject to 309 franchises. These
franchises, which are non-exclusive, provide for the payment of fees to the
issuing authority. In most of the Systems, such franchise fees are passed
through directly to the customers. The Cable Acts prohibit franchising
authorities from imposing franchise fees in excess of 5% of gross revenue and
also permit the cable television system operator to seek renegotiation and
modification of franchise requirements if warranted by changed circumstances.
See "Legislation and Regulation."
Substantially all of the Systems' basic subscribers are in service areas
that require a franchise. The table below groups the franchises of the Systems
by date of expiration and presents the approximate number and percentage of
basic subscribers for each group of franchises as of March 31, 1998.
PERCENTAGE OF NUMBER OF PERCENTAGE OF
YEAR OF FRANCHISE NUMBER OF TOTAL BASIC TOTAL BASIC
EXPIRATION FRANCHISES FRANCHISES SUBSCRIBERS SUBSCRIBERS
----------------- ---------- ------------- ----------- -------------
1998 through 2001....... 88 28.5% 88,880 25.9%
2002 and thereafter..... 221 71.5 254,820 74.1
--- ------ ------- ------
Total................. 309 100.0% 343,700 100.0%
=== ====== ======= ======
The Cable Acts provide, among other things, for an orderly franchise renewal
process in which franchise renewal will not be unreasonably withheld or, if
renewal is denied and the franchising authority acquires ownership of the
system or effects a transfer of the system to another person, the operator
generally is entitled to the "fair market value" for the system covered by
such franchise. In addition, the Cable Acts established comprehensive renewal
procedures which require that an incumbent franchisee's renewal application be
assessed on its own merits and not as part of a comparative process with
competing applications. See "Legislation and Regulation."
The Company believes that it generally has good relationships with its
franchising communities. The Company has never had a franchise revoked or
failed to have a franchise renewed. In addition, all of the franchises of the
Company eligible for renewal have been renewed or extended at or prior to
their stated expirations, and no franchise community has refused to consent to
a franchise transfer to the Company.
COMPETITION
Cable television systems face competition from alternative methods of
distributing video programming and from other sources of news, information and
entertainment such as off-air television
60
broadcast programming, newspapers, movie theaters, live sporting events,
interactive online computer services and home video products, including
videotape cassette recorders. The extent to which a cable television system is
competitive depends, in part, upon that system's ability to provide, at a
reasonable price to customers, a greater variety of programming and other
communications services than those which are available off-air or through
other alternative delivery sources and upon superior technical performance and
customer service.
Cable television systems generally operate pursuant to franchises granted on
a nonexclusive basis. The 1992 Cable Act prohibits franchising authorities
from unreasonably denying requests for additional franchises and permits
franchising authorities to operate cable television systems. See "Legislation
and Regulation." Well-financed businesses from outside the cable television
industry (such as the public utilities that own the poles to which cable is
attached) may become competitors for franchises or providers of competing
services. See "Legislation and Regulation." Competition from other video
service providers exists in areas served by the Company. In a limited number
of the franchise areas served by the Systems, the Company faces direct
competition from other franchised cable television operators. There can be no
assurance, however, that additional cable television systems will not be
constructed in other franchise areas of the Systems.
Cable television operators also face competition from private satellite
master antenna television ("SMATV") systems that serve condominiums, apartment
and office complexes and private residential developments. SMATV systems offer
both improved reception of local television stations and many of the same
satellite-delivered program services offered by franchised cable television
systems. SMATV operators often enter into exclusive agreements with building
owners or homeowners associations, although some states have enacted laws that
authorize franchised cable television operators access to such private
complexes. These laws have been challenged in the courts with varying results.
In addition, some companies are developing and/or offering to these private
residential and commercial developments packages of telephony, data and video
services. Under the 1996 Telecom Act, SMATV systems can interconnect non-
commonly owned buildings without having to comply with local, state and
federal regulatory requirements that are imposed on cable television systems
providing similar services, as long as they do not use public rights-of-way.
For instance, while a franchised cable television system typically is
obligated to extend service to all areas of a community regardless of
population density or economic risk, a SMATV system may confine its operation
to small areas that are easy to serve and are more likely to be profitable.
The ability of the Company to compete for customers in residential and
commercial developments served by SMATV operators is uncertain.
The FCC has recently allocated a sizable amount of spectrum in the 27-31 GHz
band for use by a new wireless service, Local Multipoint Distribution Service
("LMDS"), which among other uses, can deliver over 100 channels of programming
directly to consumers' homes. The FCC completed an auction of this spectrum to
the public in March 1998, with cable television operators and local telephone
companies restricted in their participation in this auction. The extent to
which the winning licensees in this service will use this spectrum in
particular regions of the country to deliver multichannel video programming
and other services to subscribers, and therefore provide competition to
franchises cable television systems, is uncertain at this time.
Individuals presently have the option to purchase earth stations, which
allow the direct reception of satellite-delivered broadcast and non-broadcast
program services formerly available only to cable television subscribers. Most
satellite-distributed program signals are electronically scrambled so as to
permit reception only with authorized decoding equipment for which the
consumer must pay a fee. The 1992 Cable Act enhances the right of satellite
distributors and other competitors to purchase non-broadcast satellite-
delivered programming. The fastest growing method of satellite distribution is
by high-powered direct broadcast satellites (DBS) utilizing video compression
technology. This technology has the capability of providing more than 100
channels of programming over a single high- powered DBS satellite with
significantly higher capacity available if multiple satellites are placed in
the same
61
orbital position. DBS service can be received virtually anywhere in the United
States through the installation of a small rooftop or side-mounted antenna.
DBS service is presently being heavily marketed on a nationwide basis by three
service providers. The 1996 Telecom Act and FCC regulations preempt certain
local restrictions on the location and use of DBS and other satellite receiver
dishes.
DBS systems currently have certain advantages over cable television systems
with respect to programming and digital quality, as well as disadvantages that
include high upfront costs and a lack of local programming, service and
equipment distribution. One DBS provider, EchoStar, has announced plans to
offer some local signals in a limited number of markets. A review by the U.S.
Copyright Office is underway to determine if such offerings are permissible
under the copyright law. In addition, legislation has been introduced in
Congress to include carriage of local signals by DBS providers under the
copyright law. The ability of DBS to deliver local signals would eliminate a
significant advantage that cable television operators currently have over DBS
providers. The Company will magnify its competitive service price points and
seek to maintain programming parity with DBS by selectively increasing channel
capacities of the Systems to between 54 and 78 channels and introducing new
premium channels, pay-per-view and other services.
Cable television systems also compete with wireless program distribution
services such as MMDS, which uses low power microwave frequencies to transmit
video programming over the air to customers. Wireless distribution services
generally provide many of the programming services provided by cable
television systems, and digital compression technology is likely to increase
significantly the channel capacity of their systems. MMDS service requires
unobstructed "line of sight" transmission paths. In the majority of the
Company's franchise service areas, prohibitive topography and "line of sight"
access have and are likely to continue to limit competition from MMDS systems.
Moreover, in the majority of the Company's franchise areas, MMDS operators
face significant barriers to growth since the lower population densities make
these areas less attractive. The Company is not aware of any significant MMDS
operation currently within its cable television franchise service areas.
However, Wireless One, Inc., an MMDS operator, does compete in five market
areas in the Southeast Region. The Company estimates that Wireless One's
overall penetration in these markets is less than 1.5%. The Company is not
aware of any other MMDS operator in any of its other markets.
The 1996 Telecom Act makes it easier for local exchange carriers ("LECs")
and others to provide a wide variety of video services competitive with
services provided by cable television systems and to provide cable television
services directly to subscribers. For example, telephone companies may now
provide video programming directly to their subscribers in their telephone
service territory, subject to certain regulatory requirements. See
"Legislation and Regulation." Various LECs currently are providing video
programming services within and outside their telephone service areas through
a variety of distribution methods, including both the deployment of broadband
wire facilities and the use of wireless transmission facilities. Cable
television systems could be placed at a competitive disadvantage if the
delivery of video programming services by LECs becomes widespread, since LECs
are not required, under certain circumstances, to obtain local franchises to
deliver such video services or to comply with the variety of obligations
imposed upon cable television systems under such franchises. Issues of cross-
subsidization by LECs of video and telephony services also pose strategic
disadvantages for cable television operators seeking to compete with LECs that
provide video services. The Company cannot predict the likelihood of success
of video service ventures by LECs or the impact on the Company of such
competitive ventures. The Company believes, however, that the non-metropolitan
markets in which it provides or expects to provide cable television services
are unlikely to support competition in the provision of video and
telecommunications broadband services given the lower population densities and
higher capital costs per household of installing plant. The 1996 Telecom Act's
provision promoting facilities-based broadband competition is primarily
targeted at larger markets, and its prohibition on buy-outs and joint ventures
between incumbent cable television
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operators and LECs exempts small cable television operators and carriers
meeting certain criteria. See "Legislation and Regulation." The Company
believes that significant growth opportunities exist for the Company by
establishing cooperative rather than competitive relationships with LECs
within its service areas, to the extent permitted by law.
Other new technologies, including Internet-based services, may become
competitive with services that cable television systems can offer. The 1996
Telecom Act directed the FCC to establish, and the FCC has adopted,
regulations and policies for the issuance of licenses for digital television
("DTV") to incumbent television broadcast licensees. DTV is expected to
deliver high definition television pictures, multiple digital-quality program
streams, as well as CD-quality audio programming and advanced digital
services, such as data transfer or subscription video. The FCC also has
authorized television broadcast stations to transmit textual and graphic
information useful both to consumers and businesses. The FCC also permits
commercial and noncommercial FM stations to use their subcarrier frequencies
to provide nonbroadcast services including data transmissions. The FCC
established an over-the-air Interactive Video and Data Service that will
permit two-way interaction with commercial and educational programming along
with informational and data services. LECs and other common carriers provide
facilities for the transmission and distribution to homes and businesses of
video services, including interactive computer-based services like the
Internet, data and other nonvideo services.
The 1996 Telecom Act provides that registered utility holding companies and
their subsidiaries may provide telecommunications services (including cable
television) notwithstanding the Public Utilities Holding Company Act of 1935,
as amended. Electric utilities must establish separate subsidiaries known as
"exempt telecommunications companies" and must apply to the FCC for operating
authority. Due to their resources, electric utilities could be formidable
competitors to traditional cable television systems.
Advances in communications technology as well as changes in the marketplace
and the regulatory and legislative environments are constantly occurring.
Thus, it is not possible to predict the effect that ongoing or future
developments might have on the cable industry or on the operations of the
Company.
EMPLOYEES
Other than the Executive Officers named under "Management" below, the
Issuers have no employees. As of May 29, 1998, the Subsidiaries had
approximately 621 full-time equivalent employees. None of the Company's
employees is represented by a labor union. The Company considers its relations
with its employees to be good.
PROPERTIES
The Company's principal physical assets consist of cable television
operating plant and equipment, including signal receiving, encoding and
decoding devices, headends and distribution systems and customer house drop
equipment for each of its cable television systems. The signal receiving
apparatus typically includes a tower, antenna, ancillary electronic equipment
and earth stations for reception of satellite signals. Headends, consisting of
associated electronic equipment necessary for the reception, amplification and
modulation of signals, are located near the receiving devices. Some basic
subscribers of the Systems utilize converters that can be addressed by sending
coded signals from the headend facility over the cable network. See "--
Technological Developments" above. The Company's distribution system consists
primarily of coaxial and fiber optic cables and related electronic equipment.
The Company owns or leases parcels of real property for signal reception
sites (antenna towers and headends), microwave facilities and business
offices, and owns all of its service vehicles. The
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Company believes that its properties, both owned and leased, are in good
condition and are suitable and adequate for the Company's operations.
The Company's cables generally are attached to utility poles under pole
rental agreements with local public utilities, although in some areas the
distribution cable is buried in underground ducts or trenches. The physical
components of the Systems require periodic upgrading to improve system
performance and capacity.
LEGAL PROCEEDINGS
There are no material pending legal proceedings to which the Company is a
party or to which any of its properties are subject.
64
LEGISLATION AND REGULATION
The cable television industry is regulated by the FCC, some state
governments and substantially all local governments. In addition, various
legislative and regulatory proposals under consideration from time to time by
the Congress and various federal agencies have in the past, and may in the
future, materially affect the Company and the cable television industry. The
following is a summary of federal laws and regulations materially affecting
the growth and operation of the cable television industry and a description of
certain state and local laws. The Company believes that the regulation of its
industry remains a matter of interest to Congress, the FCC and other
regulatory authorities. There can be no assurance as to what, if any, future
actions such legislative and regulatory authorities may take or the effect
thereof on the Company.
FEDERAL LEGISLATION
The principal federal statute governing the cable television industry is the
Communications Act. As it affects the cable television industry, the
Communications Act has been significantly amended on three occasions, by the
1984 Cable Act, the 1992 Cable Act and the 1996 Telecom Act. The 1996 Telecom
Act altered the regulatory structure governing the nation's telecommunications
providers. It removed barriers to competition in both the cable television
market and the local telephone market. Among other things, it also reduced the
scope of cable rate regulation. In addition, the 1996 Telecom Act required the
FCC to undertake a host of rulemakings to implement the 1996 Telecom Act, the
final outcome of which cannot yet be determined.
FEDERAL REGULATION
The FCC, the principal federal regulatory agency with jurisdiction over
cable television, has adopted regulations covering such areas as cross-
ownership between cable television systems and other communications
businesses, carriage of television broadcast programming, cable rates,
consumer protection and customer service, leased access, indecent programming,
programmer access to cable television systems, programming agreements,
technical standards, consumer electronics equipment compatibility, ownership
of home wiring, program exclusivity, equal employment opportunity, consumer
education and lockbox enforcement, origination cablecasting and sponsorship
identification, children's programming, signal leakage and frequency use,
maintenance of various records, and antenna structure notification, marking
and lighting, The FCC has the authority to enforce these regulations through
the imposition of substantial fines, the issuance of cease and desist orders
and/or the imposition of other administrative sanctions, such as the
revocation of FCC licenses needed to operate certain transmission facilities
often used in connection with cable operations. A brief summary of certain of
these federal regulations as adopted to date follows.
Rate Regulation
The 1984 Cable Act codified existing FCC preemption of rate regulation for
premium channels and optional nonbasic program tiers. The 1984 Cable Act also
deregulated basic cable rates for cable television systems determined by the
FCC to be subject to effective competition. The 1992 Cable Act substantially
changed the previous statutory and FCC rate regulation standards. The 1992
Cable Act replaced the FCC's old standard for determining effective
competition, under which most cable television systems were not subject to
local rate regulation, with a statutory provision that resulted in nearly all
cable television systems becoming subject to local rate regulation of basic
service. The 1996 Telecom Act expands the definition of effective competition
to cover situations where a local telephone company or its affiliate, or any
multichannel video provider using telephone company facilities, offers
comparable video service by any means except DBS. Satisfaction of this test
deregulates both basic and nonbasic tiers. Additionally, the 1992 Cable Act
required the FCC to adopt a formula, for franchising authorities to implement
to assure that basic cable rates are reasonable; allowed the FCC
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to review rates for cable programming service tiers ("CPST") (other than per-
channel or per-program services) in response to complaints filed by
franchising authorities and/or cable customers; prohibited cable television
systems from requiring basic subscribers to purchase service tiers above basic
service in order to purchase premium services if the system is technically
capable of doing so; required the FCC to adopt regulations to establish, on
the basis of actual costs, the price for installation of cable service, remote
controls, converter boxes and additional outlets; and allowed the FCC to
impose restrictions on the retiering and rearrangement of cable services under
certain limited circumstances. The 1996 Telecom Act limits the class of
complainants regarding CPST rates to franchising authorities only, after first
receiving two rate complaints from local subscribers, and ends FCC regulation
of CPST rates immediately for small systems owned by small cable operators and
on March 31, 1999 for all other cable television systems.
The FCC's implementing regulations contain standards for the regulation of
basic service and CPST rates (other than per-channel or per-program services).
Local franchising authorities and the FCC, respectively, are empowered to
order a reduction of existing rates which exceed the maximum permitted level
for basic and CPST services and associated equipment, and refunds can be
required. The FCC adopted a benchmark price cap system for measuring the
reasonableness of existing basic service and CPST rates. Alternatively, cable
operators have the opportunity to make cost-of-service showings which, in some
cases, may justify rates above the applicable benchmarks. The rules also
require that charges for cable-related equipment (e.g., converter boxes and
remote control devices) and installation services be unbundled from the
provision of cable service and based upon actual costs plus a reasonable
profit. The regulations also provide that future rate increases may not exceed
an inflation-indexed amount, plus increases in certain costs beyond the cable
operator's control, such as taxes, franchise fees and increased programming
costs. Cost-based adjustments to these capped rates can also be made in the
event a cable television operator adds or deletes channels. In addition, new
product tiers consisting of services new to the cable television system can be
created free of rate regulation as long as certain conditions are met such as
not moving services from existing tiers to the new tier. There is also a
streamlined cost-of-service methodology available to justify a rate increase
on basic and regulated CPST tiers for "significant" system rebuilds or
upgrades.
As a further alternative, in 1995 the FCC adopted a simplified cost-of-
service methodology which can be used by "small cable systems" owned by "small
cable companies" (the "small system rules"). A "small system" is defined as a
cable television system which has, on a headend basis, 15,000 or fewer basic
subscribers. A "small cable company" is defined as an entity serving a total
of 400,000 or fewer basic subscribers that is not affiliated with a larger
cable television company, (i.e., a larger cable television company does not
own more than a 20 percent equity share or exercise de jure control). This
small system rate-setting methodology establishes maximum rates for the basic
and CPST services, as well as for installation and equipment charges. This
methodology almost always results in rates which exceed those produced by the
cost-of-service rules applicable to larger cable television operators. Under
this simplified cost-of-service methodology, a small cable company's rate
showing is presumed reasonable so long as the aggregate monthly per-
subscriber, per-channel charge for all regulated services does not exceed
$1.24. Once the initial rates are set they can be adjusted periodically for
inflation and external cost changes as described above. When an eligible
"small system" grows larger than 15,000 basic subscribers, it can maintain its
then current rates but it cannot increase its rates in the normal course until
an increase would be warranted under the rules applicable to other systems.
When a "small cable company" grows larger than 400,000 basic subscribers, the
qualified systems it then owns will not lose their small system eligibility.
If a small cable company sells a qualified system, or if the company itself is
sold, the qualified systems retain that status even if the acquiring company
is not a small cable company. The Company is an eligible "small cable company"
under these rules because it has fewer than 400,000 basic subscribers and is
not affiliated with another MSO that would bring it over that limit.
Approximately 82% of the basic subscribers served by the Systems are covered
by the small system rules.
66
The 1996 Telecom Act provides for immediate deregulation of the CPST (or the
basic tier if that was the only tier being offered as of December 31, 1994)
for small cable television systems owned by "small cable operators" (the "1996
Rules"). An eligible small system is one where the cable television operator
does not serve more than 50,000 basic subscribers in any one franchise area
(as opposed to the system size definition used in the 1995 rules). An eligible
small cable operator is one which does not serve, directly or through an
affiliate, one percent or more of basic subscribers nationwide and is not
affiliated with any entity or entities whose gross annual revenues aggregate
more than $250 million. The FCC has proposed in a pending rulemaking
proceeding to use the same affiliation standard (i.e., 20 percent ownership)
in the 1996 Rules as it uses for the small system rules. If the FCC were to
adopt this rule as proposed, the Company would not be eligible for immediate
deregulation of the CPST under the 1996 Telecom Act because an investor in the
Company owns more than 20 percent of the Company and that investor has in
excess of $250 million in annual revenues. The FCC has concluded that its
small system rules and the 1996 Rules will coexist.
Finally, there are regulations which require cable television systems to
permit customers to purchase video programming on a per channel or a per
program basis without the necessity of subscribing to any tier of service,
other than the basic service tier, unless the cable television system is
technically incapable of doing so. Generally, this exemption from compliance
with the statute for cable television systems that do not have such technical
capability is available until a cable television system obtains the
capability, but not later than December 2002.
Carriage of Broadcast Television Signals
The 1992 Cable Act contains signal carriage requirements which allow
commercial television broadcast stations that are "local" to a cable
television system, (i.e., the system is located in the station's Area of
Dominant Influence) to elect every three years whether to require the cable
television system to carry the station, subject to certain exceptions, or
whether the cable television system will have to negotiate for "retransmission
consent" to carry the station. The next election between must-carry and
retransmission consent will be October 1, 1999. A cable television system is
generally required to devote up to one-third of its activated channel capacity
for the carriage of local commercial television stations whether pursuant to
mandatory carriage requirements or retransmission consent requirements of the
1992 Cable Act. Local non-commercial television stations are also given
mandatory carriage rights, subject to certain exceptions, within the larger
of: (i) a 50 mile radius from the station's city of license; or (ii) the
station's Grade B contour (a measure of signal strength). Unlike commercial
stations, noncommercial stations are not given the option to negotiate
retransmission consent for the carriage of their signal. In addition, cable
television systems have to obtain retransmission consent for the carriage of
all "distant" commercial broadcast stations, except for certain
"superstations" (i.e., commercial satellite-delivered independent stations
such as WGN). To date, compliance with the "retransmission consent" and "must
carry" provisions of the 1992 Cable Act has not had a material effect on the
Company, although this result may change in the future depending on such
factors as market conditions, channel capacity and similar matters when such
arrangements are renegotiated. The FCC will soon initiate a rulemaking
proceeding on the carriage of television signals in high definition and
digital formats. The outcome of this proceeding could have a material effect
on the number of services that a cable operator will be required to carry.
Franchise Fees
Although franchising authorities may impose franchise fees under the 1984
Cable Act, such payments cannot exceed 5% of a cable television system's
annual gross revenues. Under the 1996 Telecom Act, franchising authorities may
not exact franchise fees from revenues derived from telecommunications
services although they may be able to exact some additional compensation for
the use of public rights-of-way. Franchising authorities are also empowered in
awarding new franchises or renewing existing franchises to require cable
television operators to provide cable-related facilities and
67
equipment and to enforce compliance with voluntary commitments. In the case of
franchises in effect prior to the effective date of the 1984 Cable Act,
franchising authorities may enforce requirements contained in the franchise
relating to facilities, equipment and services, whether or not cable-related.
The 1984 Cable Act, under certain limited circumstances, permits a cable
operator to obtain modifications of franchise obligations.
Renewal of Franchises
The 1984 Cable Act established renewal procedures and criteria designed to
protect incumbent franchisees against arbitrary denials of renewal. While
these formal procedures are not mandatory unless timely invoked by either the
cable television operator or the franchising authority, they can provide
substantial protection to incumbent franchisees. Even after the formal renewal
procedures are invoked, franchising authorities and cable television operators
remain free to negotiate a renewal outside the formal process. Nevertheless,
renewal is by no means assured, as the franchisee must meet certain statutory
standards. Even if a franchise is renewed, a franchising authority may impose
new and more onerous requirements such as upgrading facilities and equipment,
although the municipality must take into account the cost of meeting such
requirements. Historically, franchises have been renewed for cable television
operators that have provided satisfactory services and have complied with the
terms of their franchises. At this time, the Company is not aware of any
current or past material failure on its part to comply with its franchise
agreements. The Company believes that it has generally complied with the terms
of its franchises and has provided quality levels of service.
The 1992 Cable Act makes several changes to the process under which a cable
television operator seeks to enforce his renewal rights which could make it
easier in some cases for a franchising authority to deny renewal. Franchising
authorities may consider the "level" of programming service provided by a
cable television operator in deciding whether to renew. For alleged franchise
violations occurring after December 29, 1984, franchising authorities are no
longer precluded from denying renewal based on failure to substantially comply
with the material terms of the franchise where the franchising authority has
"effectively acquiesced" to such past violations. Rather, the franchising
authority is estopped if, after giving the cable television operator notice
and opportunity to cure, it fails to respond to a written notice from the
cable television operator of its failure or inability to cure. Courts may not
reverse a denial of renewal based on procedural violations found to be
"harmless error."
Channel Set-Asides
The 1984 Cable Act permits local franchising authorities to require cable
television operators to set aside certain television channels for public,
educational and governmental access programming. The 1984 Cable Act further
requires cable television systems with thirty-six or more activated channels
to designate a portion of their channel capacity for commercial leased access
by unaffiliated third parties to provide programming that may compete with
services offered by the cable television operator. The 1992 Cable Act requires
leased access rates to be set according to a formula determined by the FCC.
The leased access rules, which were recently modified by the FCC to provide
for lower rates, are being appealed to establish even lower rates for access.
If this appeal is successful, the Company's control over its channel line-up
would be reduced and the quality of that line-up might decline.
Ownership
The 1996 Telecom Act repealed the statutory ban against local exchange
telephone companies ("LECs") providing video programming directly to customers
within their local exchange telephone service areas. Thus, under the 1996
Telecom Act and FCC rules recently adopted to implement the 1996 Telecom Act,
LECs may now provide video service as broadcasters, common carriers, or cable
operators. In addition, LECs and others may also provide video service through
"open video systems"
68
("OVS"), a regulatory regime that may give them more flexibility than
traditional cable television systems. OVS operators (including LECs) may
operate open video systems without obtaining a local cable franchise, although
they can be required to make payments to local governmental bodies in lieu of
cable franchise fees. In general, OVS operators must make their systems
available to programming providers on rates, terms and conditions that are
reasonable and nondiscriminatory. Where carriage demand by programming
providers exceeds the channel capacity of an open video system, two-thirds of
the channels must be made available to programmers unaffiliated with the OVS
operator.
The 1996 Telecom Act generally prohibits LECs from purchasing cable
television systems (i.e, any ownership interest exceeding 10%) located within
the LEC's telephone service area, prohibits cable operators from purchasing
LECs whose service areas are located within the cable operator's franchise
area, and prohibits joint ventures between operators of cable television
systems and LECs operating in overlapping markets. There are some statutory
exceptions, including a rural exemption that permits buyouts in which the
purchased cable television system or LEC serves a non-urban area with fewer
than 35,000 inhabitants, and exemptions for the purchase of small cable
television systems located in non-urbanized areas. Also, the FCC may grant
waivers of the buyout provisions in cases where: (i) the operator of a cable
television system or the LEC would be subject to undue economic distress if
such provisions were enforced; (ii) the system or facilities would not be
economically viable in the absence of a buyout or a joint venture; or (iii)
the anticompetitive effects of the proposed transaction are clearly outweighed
by the transaction's effect in light of community needs. The respective local
franchising authority must approve any such waiver.
Pursuant to the 1992 Cable Act, the FCC has imposed limits on the number of
cable television systems which a single cable television operator can own. In
general, no cable television operator can have an attributable interest in
cable television systems which pass more than 30% of all homes nationwide.
Attributable interests for these purposes include voting interests of 5% or
more (unless there is another single holder of more than 50% of the voting
stock), officerships, directorships and general partnership interests. The FCC
has stayed the effectiveness of these rules pending the outcome of petitions
for reconsideration and the appeal from the U.S. District Court decision
holding the multiple ownership limit provision of the 1992 Cable Act
unconstitutional.
The FCC has also adopted rules which limit the number of channels on a cable
television system which can be occupied by national video programming services
in which the entity which owns the cable television system has an attributable
interest. The limit is 40% of the first 75 activated channels.
The 1996 Telecom Act provides that registered utility holding companies and
subsidiaries may provide telecommunications services (including cable
television) notwithstanding the Public Utilities Holding Company Act of 1935,
as amended. Electric utilities must establish separate subsidiaries known as
"exempt telecommunications companies" and must apply to the FCC for operating
authority. Due to their resources, electric utilities could be formidable
competitors to traditional cable television systems.
EEO
The 1984 Cable Act includes provisions to ensure that minorities and women
are provided equal employment opportunities within the cable television
industry. The statute requires the FCC to adopt reporting and certification
rules that apply to all cable television system operators with more than five
full-time employees. Pursuant to the requirements of the 1992 Cable Act, the
FCC has imposed more detailed annual EEO reporting requirements on cable
operators and has expanded those requirements to all multichannel video
service distributors. Failure to comply with the EEO requirements can result
in the imposition of fines and/or other administrative sanctions, or may, in
certain circumstances, be cited by a franchising authority as a reason for
denying a franchisee's renewal request.
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Privacy
The 1984 Cable Act imposes a number of restrictions on the manner in which
cable television operators can collect and disclose data about individual
system customers. The statute also requires that the system operator
periodically provide all customers with written information about its policies
regarding the collection and handling of data about customers, their privacy
rights under federal law and their enforcement rights. In the event that a
cable television operator were found to have violated the customer privacy
provisions of the 1984 Cable Act, it could be required to pay damages,
attorneys' fees and other costs. Under the 1992 Cable Act, the privacy
requirements were strengthened to require that cable television operators take
such actions as are necessary to prevent unauthorized access to personally
identifiable information.
Franchise Transfers
The 1992 Cable Act requires franchising authorities to act on any franchise
transfer request within 120 days after receipt of all information required by
FCC regulations and by the franchising authority. Approval is deemed to be
granted if the franchising authority fails to act within such period.
Technical Requirements
The FCC has imposed technical standards applicable to all classes of
channels which carry downstream National Television System Committee (NTSC)
video programming. The FCC also has adopted additional standards applicable to
cable television systems using frequencies in the 108-137MHz and 225-400MHz
bands in order to prevent harmful interference with aeronautical navigation
and safety radio services and has also established limits on cable television
system signal leakage. Periodic testing by cable television operators for
compliance with the technical standards and signal leakage limits is required
and an annual filing of the results of these measurements is required. The
1992 Cable Act requires the FCC to periodically update its technical standards
to take into account changes in technology. Under the 1996 Telecom Act, local
franchising authorities may not prohibit, condition or restrict a cable
television system's use of any type of subscriber equipment or transmission
technology.
The FCC has adopted regulations to implement the requirements of the 1992
Cable Act designed to improve the compatibility of cable television systems
and consumer electronics equipment. These regulations, inter alia, generally
prohibit cable television operators from scrambling their basic service tier
and from changing the infrared codes used in their existing customer premises
equipment. This latter requirement could make it more difficult or costly for
cable television operators to upgrade their customer premises equipment and
the FCC has been asked to reconsider its regulations. The 1996 Telecom Act
directs the FCC to set only minimal standards to assure compatibility between
television sets, VCRs and cable television systems, and to rely on the
marketplace. Pursuant to this statutory mandate, the FCC has adopted rules to
assure the competitive availability to consumers of customer premises
equipment, such as converters, used to access the services offered by cable
television systems and other multichannel video programming distributors
("MVPD"). Pursuant to those rules, consumers are given the right to attach
compatible equipment to the facilities of their MVPD so long as the equipment
does not harm the network, does not interfere with the services purchased by
other customers, and is not used to receive unauthorized services. As of July
1, 2000, MVPDs (other than DBS operators) are required to separate security
from non-security functions in the customer premises equipment which they sell
or lease to their customers and offer their customers the option of using
component security modules obtained from the MVPD with set-top units purchased
or leased from retail outlets. As of January 1, 2005, MVPDs will be prohibited
from distributing new set-top equipment integrating both security and non-
security functions to their customers.
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Pursuant to the 1992 Cable Act, the FCC has adopted rules implementing an
Emergency Alert System ("EAS"). The rules require all cable television systems
to provide an audio and video EAS message on at least one programmed channel
and a video interruption and an audio alert message on all programmed
channels. The audio alert message is required to state which channel is
carrying the full audio and video EAS message. The FCC rules permit cable
television systems either to provide a separate means of alerting persons with
hearing disabilities of EAS messages, such as a terminal that displays EAS
messages and activates other alerting mechanisms or lights, or to provide
audio and video EAS messages on all channels. Cable television systems with
10,000 or more basic subscribers per headend will be required to install EAS
equipment capable of providing audio and video EAS messages on all programmed
channels by December 31, 1998. Cable television systems with 5,000 or more but
fewer than 10,000 basic subscribers per headend will have until October 1,
2002 to comply with that requirement. Cable television systems with fewer than
5,000 basic subscribers per headend will have a choice of providing either a
national level EAS message on all programmed channels or installing EAS
equipment capable of providing audio alert messages on all programmed
channels, a video interrupt on all channels, and an audio and video EAS
message on one programmed channel. This must be accomplished by October 1,
2002.
Pole Attachments
The FCC currently regulates the rates and conditions imposed by investor-
owned public utilities for use of their poles and conduits unless state public
service commissions are able to demonstrate that they adequately regulate the
rates, terms and conditions of cable television pole attachments. A number of
states and the District of Columbia have certified to the FCC that they
adequately regulate the rates, terms and conditions for pole attachments. Of
the states in which the Company operates, California, Delaware and Kentucky
have made such certification. In the absence of state regulation, the FCC
administers such pole attachment and conduit use rates through use of a
formula which it has devised. Pursuant to the 1996 Telecom Act, the FCC has
adopted a new rate formula for any attaching party, including cable television
systems, which offer telecommunications services. This new formula will result
in higher attachment rates than at present, but they will apply only to cable
television systems which elect to offer telecommunications services. Any
increases pursuant to this new formula will not begin until 2001, and will be
phased in by equal increments over the five ensuing years. The FCC has also
initiated a proceeding to determine whether it should adjust certain elements
of the current rate formula. If adopted, these adjustments could increase
rates for pole attachments and conduit space.
Other FCC Matters
FCC regulation pursuant to the Communications Act also includes matters
regarding a cable television system's carriage of local sports programming;
restrictions on origination and cablecasting by cable television operators;
rules governing political broadcasts; nonduplication of network programming;
deletion of syndicated programming; registration procedure and reporting
requirements; customer service; closed captioning; obscenity and indecency;
program access and exclusivity arrangements; and limitations on advertising
contained in nonbroadcast children's programming.
The FCC recently adopted new procedural guidelines governing the disposition
of home run wiring (a line running to an individual subscriber's unit from a
common feeder or riser cable) in multi-dwelling units ("MDUs"). MDU owners can
use these new rules to attempt to force cable television operators without
contracts to either sell, abandon or remove home run wiring and terminate
service to MDU subscribers unless operators retain rights under common or
state law to maintain ownership rights in the home run wiring.
The 1996 Telecom Act requires video programming distributors to employ
technology to restrict the reception of programming by persons not subscribing
to those channels. In the case of channels
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primarily dedicated to sexually-oriented programming, the distributor must
fully block reception of the audio and video portion of the channels; a
distributor that is unable to comply with this requirement may only provide
such programming during a "safe harbor" period when children are not likely to
be in the audience, as determined by the FCC. With respect to other kinds of
channels, the 1996 Telecom Act requires that the audio and video portions of
the channel be fully blocked, at no charge, upon request of the person not
subscribing to the channel.
Copyright
Cable television systems are subject to federal copyright licensing covering
carriage of broadcast signals. In exchange for making semi-annual payments to
a federal copyright royalty pool and meeting certain other obligations, cable
television operators obtain a statutory license to retransmit broadcast
signals. The amount of this royalty payment varies, depending on the amount of
system revenues from certain sources, the number of distant signals carried,
and the location of the cable television system with respect to over-the-air
television stations. Any future adjustment to the copyright royalty rates will
be done through an arbitration process to be supervised by the U.S. Copyright
Office. Cable television operators are liable for interest on underpaid and
unpaid royalty fees, but are not entitled to collect interest on refunds
received for overpayment of copyright fees.
Various bills have been introduced into Congress over the past several years
that would eliminate or modify the cable television compulsory license.
Without the compulsory license, cable television operators would have to
negotiate rights from the copyright owners for all of the programming on the
broadcast stations carried by cable television systems. Such negotiated
agreements would likely increase the cost to cable television operators of
carrying broadcast signals. The 1992 Cable Act's retransmission consent
provisions expressly provide that retransmission consent agreements between
television broadcast stations and cable television operators do not obviate
the need for cable operators to obtain a copyright license for the programming
carried on each broadcaster's signal.
Copyrighted music performed in programming supplied to cable television
systems by pay cable networks (such as HBO) and basic cable networks (such as
USA Network) is licensed by the networks through private agreements with the
American Society of Composers and Publishers ("ASCAP") and BMI, Inc. ("BMI"),
the two major performing rights organizations in the United States. As a
result of extensive litigation, both ASCAP and BMI now offer "through to the
viewer" licenses to the cable networks which cover the retransmission of the
cable networks' programming by cable television systems to their customers.
Licenses to perform copyrighted music by cable television systems
themselves, including on local origination channels, in advertisements
inserted locally on cable television networks, and in cross promotional
announcements, must be obtained by the cable television operator. Cable
television industry negotiations with ASCAP, BMI and SESAC, Inc. (a smaller
performing rights organization) are in progress.
STATE AND LOCAL REGULATION
Cable television systems generally are operated pursuant to nonexclusive
franchises, permits or licenses granted by a municipality or other state or
local government entity. The terms and conditions of franchises vary
materially from jurisdiction to jurisdiction, and even from city to city
within the same state, historically ranging from reasonable to highly
restrictive or burdensome. Franchises generally contain provisions governing
fees to be paid to the franchising authority, length of the franchise term,
renewal, sale or transfer of the franchise, territory of the franchise, design
and technical performance of the system, use and occupancy of public streets
and number and types of cable television services provided. The terms and
conditions of each franchise and the laws and regulations under which it was
granted directly affect the profitability of the cable television system. The
1984 Cable Act places certain
72
limitations on a franchising authority's ability to control the operation of a
cable television system. The 1992 Cable Act prohibits exclusive franchises,
and allows franchising authorities to exercise greater control over the
operation of franchised cable television systems, especially in the area of
customer service and rate regulation. The 1992 Cable Act also allows
franchising authorities to operate their own multichannel video distribution
system without having to obtain a franchise and permits states or local
franchising authorities to adopt certain restrictions on the ownership of
cable television systems. Moreover, franchising authorities are immunized from
monetary damage awards arising from regulation of cable television systems or
decisions made on franchise grants, renewals, transfers and amendments. The
1996 Telecom Act prohibits a franchising authority from either requiring or
limiting a cable television operator's provision of telecommunications
services.
Various proposals have been introduced at the state and local levels with
regard to the regulation of cable television systems, and a number of states
have adopted legislation subjecting cable television systems to the
jurisdiction of centralized state governmental agencies, some of which impose
regulation of a character similar to that of a public utility. To date, other
than Delaware, no state in which the Company currently operates has enacted
state level regulation.
The foregoing does not purport to describe all present and proposed federal,
state and local regulations and legislation relating to the cable television
industry. Other existing federal regulations, copyright licensing and, in many
jurisdictions, state and local franchise requirements, currently are the
subject of a variety of judicial proceedings, legislative hearings and
administrative and legislative proposals which could change, in varying
degrees, the manner in which cable television systems operate. Neither the
outcome of these proceedings nor their impact upon the cable television
industry or the Company can be predicted at this time.
73
MANAGEMENT
The following table sets forth certain information concerning the executive
officers of Mediacom (the "Executive Officers"), none of whom are compensated
by the Company for their respective services to the Company. The Executive
Officers are instead compensated by Mediacom Management which receives
management fees pursuant to management agreements with the Company. All such
Executive Officers hold the same positions in Mediacom Management and the
Subsidiaries. Mr. Commisso is also the sole manager of Mediacom (the
"Manager") pursuant to the Operating Agreement, and the President and sole
Director of Mediacom Management and Mediacom Capital. Mr. Stephan is also the
Treasurer and Secretary of Mediacom Capital. Mr. Commisso and Mr. Stephan are
members of the Executive Committee (as defined) of Mediacom, for which Mr.
Commisso acts as Chairman.
EXECUTIVE OFFICERS
NAME AGE POSITION
---- --- --------
Rocco B. Commisso........ 48 Chairman and Chief Executive Officer
Mark E. Stephan.......... 41 Senior Vice President, Chief Financial Officer
and Treasurer
Joseph Van Loan.......... 56 Senior Vice President-Technology
Italia Commisso Weinand.. 44 Senior Vice President-Programming and
Human Resources and Secretary
John G. Pascarelli....... 36 Vice President-Marketing
Brian M. Walsh........... 32 Vice President and Controller
The following table sets forth information concerning persons who hold key
operating management positions within the Subsidiaries of the Company.
FIELD MANAGEMENT
NAME AGE POSITION
---- --- --------
James M. Carey........... 47 Senior Vice President-Operations of
Mediacom Southeast
Gene E. Brock............ 55 Regional Manager-Southeast Region
Richard L. Hale.......... 49 Regional Manager-Central Region
Frederick D. Lord........ 42 Regional Manager-Western Region
Donald E. Zagorski....... 39 General Manager-Lower Delaware Cluster
ROCCO B. COMMISSO has over 20 years of experience with the cable television
industry and has served as the Chairman and Chief Executive Officer since
founding Mediacom in July 1995. From August 1986 to March 1995, Mr. Commisso
served as Executive Vice President, Chief Financial Officer and Director of
Cablevision Industries Corporation ("CVI"). At the time of Mr. Commisso's
arrival, CVI was a regional cable company serving less than 300,000 basic
subscribers in four states. During his tenure, CVI completed 40 acquisitions
of cable television systems with an aggregate value exceeding $1.2 billion.
Mr. Commisso was directly responsible for all aspects of CVI's financing
activities, including the completion of over 35 separate financing
transactions with aggregate capital commitments exceeding $5.0 billion.
Prior to that time, Mr. Commisso served as Senior Vice President of Royal
Bank of Canada's affiliate in the United States from 1981 where he founded and
directed a specialized lending group to manage the bank's lending activities
to media and communications companies. Mr. Commisso began his association with
the cable television industry in 1978 at The Chase Manhattan Bank, where he
was
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assigned to manage the bank's lending activities to communications firms
including the nascent cable television industry. Mr. Commisso holds a Bachelor
of Science in Industrial Engineering and a Masters of Business Administration
from Columbia University.
MARK E. STEPHAN has 11 years of experience with the cable television
industry and has served as the Senior Vice President, Chief Financial Officer
and Treasurer since March 1996. Previously, Mr. Stephan served as Vice
President, Finance for CVI from July 1993 to February 1996. From 1987 to June
1993, he served for six years as Manager of the telecommunications and media
lending group of Royal Bank of Canada where he engaged in financing activities
for the cable television, wireless telecommunications and diversified media
industries. Mr. Stephan holds a Bachelor of Science in Economics from Colorado
State University.
JOSEPH VAN LOAN has 22 years of experience in the cable television industry
and has served as the Senior Vice President-Technology since November 1996.
Previously, Mr. Van Loan served as Senior Vice President of Engineering for
CVI from 1990. From 1988 to 1990, he managed a private telecommunications
consulting practice specializing in domestic and international cable
television and broadcasting. Prior to that time, Mr. Van Loan served as Vice
President of Engineering for Viacom Cable from 1976 to 1988. Mr. Van Loan
received the 1986 Vanguard Award for Science and Technology from the National
Cable Television Association. Mr. Van Loan holds a Bachelor of Science in
Electrical Engineering from California State Polytechnic University.
ITALIA COMMISSO WEINAND has 20 years of experience in the cable television
industry and has served as the Senior Vice President-Programming and Human
Resources and Secretary since February 1998. Ms. Weinand joined the Company in
April 1996 as Vice President-Operations. Previously, she served as System
Manager and Regional Manager for Comcast Corporation from July 1985 to June
1997. Ms. Weinand held various management positions in system operations,
marketing, customer service, and government relations with Time Warner Inc.,
Times Mirror Cable, and Tele-Communications, Inc. from June 1978 to July 1985.
Ms. Weinand holds a Bachelor of Science in Marketing from Fordham University.
Ms. Weinand is the sister of Mr. Commisso.
JOHN G. PASCARELLI has 18 years of experience in the cable television
industry and joined the Company as Vice President-Marketing in March 1998.
Previously, Mr. Pascarelli served as Vice President of Marketing for Helicon
Corporation from January 1996 to February 1998, and as Corporate and
Divisional Director of Marketing for CVI from November 1988 to December 1995.
Mr. Pascarelli has worked in the cable television industry since 1980 when he
joined Continental Cablevision as a sales manager and thereafter held
positions in sales and marketing with Cablevision Systems Corporation
("Cablevision") and Storer Communications.
BRIAN M. WALSH has 10 years of experience in the cable television industry
and has served as Vice President and Controller since February 1998. Mr. Walsh
joined the Company in April 1996 as Director of Accounting. Previously, he
served as Divisional Business Manager-Metro Systems for CVI from January 1994
to December 1995 and as Regional Business Manager for CVI's South Carolina
region from January 1992 to December 1993. Mr. Walsh has worked in the cable
television industry since 1988 when he joined CVI as a staff accountant. Mr.
Walsh holds a Bachelor of Science in Accounting from Siena College.
JAMES M. CAREY has 17 years of experience in the cable television industry
and has served as the Senior Vice President-Operations of Mediacom Southeast
since February 1998, and as a consultant to Mediacom since September 1997.
Previously, Mr. Carey was founder and President of Infinet Results, a
consulting firm to the telecommunications industry, from December 1996 to
August 1997. Prior to that time, Mr. Carey served as Executive Vice President
of Operations at MediaOne Inc. from August 1995 to November 1996, responsible
for MediaOne's Atlanta cluster consisting of 500,000 basic subscribers. From
December 1988 to July 1995, he served as Regional Vice President of CVI's
75
southeast region serving 180,000 basic subscribers. Mr. Carey holds a Bachelor
of Business Administration in Management from Georgia College.
GENE E. BROCK has 34 years of experience in the cable television industry
and has served as Regional Manager of the Southeast Region since January 1998.
Previously, Mr. Brock served as Regional Manager for Cablevision's Kentucky
and Florida regions from March 1992 to December 1997. Prior to that time he
served as Regional Engineer for MultiVision Cable Television from 1988 to 1992
and as the Vice President of Engineering for Cardiff Cablevision from 1982 to
1987.
RICHARD L. HALE has 15 years of experience in the cable television industry
and has served as the Regional Manager of the Central Region since January
1998. Previously, Mr. Hale served as Regional Manager of Cablevision's
Kentucky/Missouri Region from February 1996 to December 1997, as General
Manager of Cablevision's cable television systems in Arkansas and Missouri
from 1992 to 1996 and as a Regional Sales and Marketing Director of such
systems from 1988 to 1991. Mr. Hale began his career in the cable television
industry in 1984 as a Regional Sales and Marketing Director of Adams-Russell,
Inc.
FREDERICK D. LORD has 19 years of experience in the cable television
industry and served as the Regional Manager of the Western Region since
February 1998. Mr. Lord joined the Company in May 1997 as General Manager of
the Ridgecrest Cluster. Prior to that time, Mr. Lord served as the General
Manager of Saipan Cable Television from February 1993 to December 1996. From
1979 to 1993, Mr. Lord held various marketing, franchising and sales
management positions with Time Warner Inc., Group W Cable, and Wometco Cable
TV Inc. Mr. Lord has a Bachelor of Arts in Broadcast Journalism from the
University of Maine.
DONALD E. ZAGORSKI has 17 years of experience in the cable television
industry and has been the General Manager of the Lower Delaware Cluster since
June 1997. Previously, Mr. Zagorski served as system and regional manager for
Tele-Media Company from March 1990 to June 1997. From 1981 to 1988, Mr.
Zagorski held various technical and supervisory positions with Outer Banks
Cablevision and Group W Cable. Mr. Zagorski holds a Bachelor of Arts in
Business Administration from the State University of New York.
MANAGEMENT AND EXECUTIVE COMMITTEE
The Operating Agreement provides that one Manager shall have overall
management and control of the business and affairs of the Company, and that
Rocco B. Commisso is to serve as the Manager until his resignation and (other
than as set forth in the following sentence) the approval of his successor by
the vote of a majority of the outstanding membership interests. Without the
consent or approval of members, Mr. Commisso may designate a corporation or
other entity controlled by him and of which he and members of his immediate
family own at least 51% of the equity interests to serve as Manager of
Mediacom. The Manager may resign at any time and may be removed for gross
negligence or willful misconduct by a vote of no less than two-thirds of the
outstanding membership interests (exclusive of those held by the Manager).
The Operating Agreement provides for the establishment of a five-member
executive committee (the "Executive Committee") to whom Mr. Commisso, as
Manager, is required to report with respect to certain matters. Approval of
the Executive Committee must be obtained for certain extraordinary actions.
Pursuant to the Operating Agreement, Mr. Commisso serves as Chairman of the
Executive Committee and is entitled to designate two additional members, one
of whom may be an employee of Mediacom Management or a Subsidiary. The
remaining two members of the Executive Committee are designated by the other
member or members of Mediacom having the largest equity holdings. See
"Description of the Operating Agreement."
76
EXECUTIVE AND OTHER COMPENSATION
Pursuant to the Operating Agreement, the Company will not make any payments
in respect of compensation to any of its executive management personnel.
Rather, executive management personnel receive compensation from Mediacom
Management. Accordingly, Mediacom Management utilizes fees received from the
Company to pay for all of its operating expenses for managing the day-to-day
affairs of the Systems, as well as executive management salaries, benefits and
overhead, but excluding certain out-of-pocket expenses to be reimbursed
pursuant to the terms of the Operating Agreement. No employee of the
Subsidiaries received compensation in excess of $100,000 in 1997. See "Certain
Relationships and Related Transactions."
401(K) PLAN
The Company maintains a retirement plan (the "401(k) Plan") established in
conformity with Section 401(k) of the Internal Revenue Code of 1986, as
amended (the "Code"), covering all of the eligible employees of the Company.
Pursuant to the 401(k) Plan, employees may elect to defer up to 15% of their
current pre-tax compensation and have the amount of such deferral contributed
to the 401(k) Plan. The maximum elective deferral contribution was $10,000 in
1997, subject to adjustment for cost-of-living in subsequent years. Certain
highly compensated employees may be subject to a lesser limit on their maximum
elective deferral contribution. The 401(k) Plan permits, but does not require,
matching contributions and non-matching (profit sharing) contributions to be
made by the Company up to a maximum dollar amount or maximum percentage of
participant contributions, as determined annually by the Company. The Company
presently matches 50% on the first 6% of employee contributions. The Company's
contributions under such Plan totaled approximately $10,000 for the period
from commencement of operations (March 12, 1996) to December 31, 1996,
approximately $14,000 for the year ended December 31, 1997 and approximately
$6,990 for the three months ended March 31, 1998. The 401(k) Plan is qualified
under Section 401 of the Code so that contributions by employees and employer,
if any, to the 401(k) Plan, and income earned on plan contributions, are not
taxable to employees until withdrawn from the 401(k) Plan, and so that
contributions by the Company, if any, will be deductible by the Company when
made.
77
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
MANAGEMENT AGREEMENTS
Pursuant to the Operating Agreement, the Manager or its affiliate, including
Mediacom Management, is to be paid compensation for management services
performed for the Company. In accordance with the Operating Agreement and
separate management agreements with each of the Subsidiaries, Mediacom
Management, which is wholly-owned by Mr. Commisso, is paid management fees for
managing the day-to-day operations of the Company. Pursuant to the Operating
Agreement and such management agreements, Mediacom Management is entitled to
receive annual management fees of 5.0% of the first $50.0 million of annual
gross operating revenues of the Company, 4.5% of such revenues in excess
thereof up to $75.0 million, and 4.0% of such revenues in excess of $75.0
million. The respective Subsidiary Credit Facilities prohibit the payment of
these management fees by the Subsidiaries if an event of default is continuing
thereunder. The aggregate amount of management fees paid to Mediacom
Management was approximately $270,000 and $882,000 in 1996 and 1997,
respectively, and approximately $1,207,000 for the three months ended March
31, 1998. See "Management--Executive and Other Compensation" and "Description
of the Operating Agreement--Management and Executive Committee."
TRANSACTION FEES AND EXPENSE REIMBURSEMENT
Pursuant to the Operating Agreement, Mediacom Management is entitled to
receive a fee of 1.0% of the purchase price of acquisitions made by the
Company until the Company's pro forma consolidated operating revenues equal
$75.0 million, and 0.5% of such purchase price thereafter. The Company paid
Mediacom Management approximately $453,000 and $544,000 in respect of such
acquisition fees in 1996 and 1997, respectively, and approximately
$3.3 million in connection with the purchase of the 1998 Systems during the
three months ended March 31, 1998. In addition, the Operating Agreement
provides for reimbursement of reasonable out-of-pocket expenses of the Manager
or its affiliates (including Mediacom Management) incurred in connection with
the operation of the business of the Company and acting for or on behalf of
the Company in connection with any potential acquisition of a cable television
system. During 1996, the Company reimbursed Mediacom Management approximately
$514,000 for certain management services incurred in connection with the
start-up of the Company's operations and for other out-of-pocket expenses. In
1997, the Company reimbursed Mediacom Management approximately $59,000 for
out-of-pocket expenses. There were no such reimbursements during the three
months ended March 31, 1998.
OTHER RELATIONSHIPS WITH MEMBERS OF MEDIACOM
Chase Manhattan Capital, L.P. and CB Capital Investors, L.P., which
collectively hold approximately 9.5% of the membership interests in Mediacom,
are affiliates of Chase Securities Inc. as well as The Chase Manhattan Bank.
The Chase Manhattan Bank is the administrative agent and a lender under each
of the Subsidiary Credit Facilities and has received customary fees for acting
in such capacities. The Chase Manhattan Bank received its proportionate share
of any repayment by the Subsidiaries of amounts outstanding under the
respective Subsidiary Credit Facilities from the proceeds of the Series A
Notes Offering. In connection with the financing of the purchase of the
Cablevision Systems, Mediacom issued to The Chase Manhattan Bank $20.0 million
principal amount of the Holding Company Notes, which principal amount plus all
interest accrued thereon was repaid with the proceeds of the Series A Notes
Offering. The Chase Manhattan Bank also issued on August 29, 1997 an
irrevocable letter of credit on behalf of Mediacom in the amount of $15.0
million in favor of the sellers of the Cablevision Systems to secure
Mediacom's performance under the acquisition agreement for the Cablevision
Systems. Such letter of credit was terminated upon the consummation of the
purchase of the Cablevision Systems on January 23, 1998. Chase Securities
Inc., as the Initial Purchaser, received fees in connection with the Series A
Notes Offering. See "Plan of Distribution." Chase Securities Inc. acted as
placement agent in connection with the placement of membership
78
interests in Mediacom and acted as advisory agent in connection with the
Company's purchase of the Cablevision Systems. For such services, Chase
Securities Inc. has received or is entitled to receive fees totaling
approximately $3.5 million.
BMO Financial, Inc., which holds approximately 3.8% of the membership
interests in Mediacom, is an affiliate of Bank of Montreal, a lender under
each of the Subsidiary Credit Facilities. Bank of Montreal has received
customary fees for acting as such. Bank of Montreal Trust Company, an
affiliate of Bank of Montreal, is the Trustee under the Notes.
Morris Communications Corporation, which holds approximately 64.5% of the
membership interests in Mediacom, has received fees totaling approximately
$2.0 million with respect to its equity commitment to Mediacom in connection
with the acquisition of the Cablevision Systems, and is entitled to receive
additional fees in the amount of approximately $270,000 in respect of its
remaining uncalled equity commitment.
SELLER NOTE
In connection with the purchase of a cable television system in Kern County,
California from Booth American Company ("Booth"), Mediacom California issued
to Booth, who holds approximately 6.9% of the membership interests in
Mediacom, the Seller Note in the original principal amount of $2.8 million.
See "Description of Other Indebtedness--Seller Note."
79
MEMBERSHIP INTERESTS OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The table below sets forth as of the date of this Prospectus certain
information regarding each of the beneficial owners of membership interests in
Mediacom. Rocco B. Commisso is the only Executive Officer owning such
interests. Mediacom Capital was incorporated in March 1998 and is a wholly-
owned subsidiary of Mediacom, has no assets and does not conduct any
operations.
The Operating Agreement provides that upon the occurrence of certain events
described therein, including upon the occurrence of certain capital
contributions, the Executive Committee will make a determination of the
aggregate equity value of the Company at such time, and additional membership
units, each having a value upon issuance of $1,000, will be issued to
Mediacom's members based upon such determination. To give effect to the
acquisition of the Cablevision Systems and related equity contributions, the
Executive Committee determined an aggregate equity value of the Company of
$150.0 million, and Mediacom issued additional membership units to its members
on the basis of such determination on January 22, 1998. The table below
reflects such valuation determination and issuance of additional units. To
date, the Company has raised $135.5 million of equity capital, of which $125.0
million has been invested in Mediacom.
NUMBER OF PERCENTAGE OF OUTSTANDING
BENEFICIAL OWNER MEMBERSHIP UNITS MEMBERSHIP INTERESTS
- ---------------- ---------------- -------------------------
Rocco B. Commisso................... 14,474.37 9.65%
c/o Mediacom LLC
100 Crystal Run Road
Middletown, New York 10941
Morris Communications Corporation... 96,776.25 64.51
725 Broad Street
Augusta, GA 30901
CB Capital Investors, L.P.(1)....... 14,306.01 9.54
c/o Chase Manhattan Capital
Corporation
380 Madison Avenue
New York, NY 10017
U.S. Investor, Inc.(2).............. 10,379.76 6.92
333 West Fort Street
Detroit, MI 48226
Private Market Fund, L.P. .......... 7,931.33 5.29
c/o Pacific Corporate Group
1200 Prospect Street, Suite 200
La Jolla, CA 92037
BMO Financial, Inc. ................ 5,682.52 3.79
c/o Bank of Montreal
430 Park Avenue
New York, NY 10022
Other investors..................... 449.76 0.30
---------- ------
Total............................. 150,000.00 100.00%
========== ======
- --------
(1) Includes approximately 2.0% in respect of membership interests owned by
its affiliate, Chase Manhattan Capital, L.P.
(2) An affiliate of Booth American Company.
80
DESCRIPTION OF THE OPERATING AGREEMENT
The following is a summary of certain provisions of the Third Amended and
Restated Operating Agreement of Mediacom dated as of January 20, 1998 (the
"Operating Agreement"). This summary does not purport to be a complete
description of the Operating Agreement, and is qualified in its entirety by
reference to the Operating Agreement which is available upon request of
Mediacom at 100 Crystal Run Road, Middletown, New York 10941, Attention: Chief
Financial Officer.
ESTABLISHMENT, PURPOSE AND DURATION
Mediacom was formed as a limited liability company pursuant to the
provisions of the New York Limited Liability Company Law (the "New York Act")
on July 17, 1995. The purposes of Mediacom, as set forth in the Operating
Agreement, are to acquire, directly or through investments, franchises to
operate, and to own, invest in, design, construct, maintain, manage and
operate, exchange and dispose of, one or more cable television systems or
other businesses providing telecommunications services, and to do all things
reasonably incidental thereto, including borrowing and lending money and
securing such borrowings by mortgage, pledge, or other lien, and leasing or
disposing of such systems or businesses.
Mediacom will be dissolved upon the first to occur of the following: (i)
December 31, 2020; (ii) certain events of bankruptcy involving the Manager or
the occurrence of any other event terminating the continued membership of the
Manager, unless within one hundred eighty days after such event the Company is
continued by the vote or written consent of no less than two-thirds of the
remaining membership interests; or (iii) the entry of a decree of judicial
dissolution.
MANAGEMENT AND EXECUTIVE COMMITTEE
The Operating Agreement provides that one Manager shall have overall
management and control of the business and affairs of the Company, and that
Rocco B. Commisso is to serve as the Manager until his resignation and (other
than as set forth in the following sentence) the approval of his successor by
the vote of a majority of the outstanding membership interests. Without the
consent or approval of members, Mr. Commisso may designate a corporation or
other entity controlled by him and of which he and members of his immediate
family own at least 51% of the equity interests to serve as Manager of
Mediacom. The Manager may resign at any time and may be removed for gross
negligence or willful misconduct by a vote of no less than two-thirds of the
outstanding membership interests (exclusive of those held by the Manager).
The Operating Agreement provides for a five-member Executive Committee to
whom the Manager is required to report with respect to certain matters,
including the financial status of the Company. As Manager, Mr. Commisso is the
Chairman of the Executive Committee and is entitled to designate two
additional members, one of whom may be an employee of Mediacom Management or a
Subsidiary. The remaining two members of the Executive Committee are
designated by the member or members of Mediacom having the largest equity
holdings which presently is Morris Communications Corporation. Informational
meetings must be held at least quarterly.
Approval of the Executive Committee (acting by majority vote) is required
for the following actions: (i) acquisitions requiring a capital call in excess
of $10 million or having a purchase price in excess of $40 million; (ii) the
making of a capital call exceeding $8 million not involving an acquisition;
(iii) financing transactions increasing the Indebtedness of the Company by $40
million or more; (iv) dispositions of assets having a sale price in excess of
$40 million; (v) transactions with affiliates of Mediacom or the Manager
requiring payments in excess of $1 million (exclusive of fee payments and
reimbursement of expenses specified in the Operating Agreement); (vi)
offerings of membership interests or other equity interests in Mediacom, and
any amendments to the Operating Agreement
81
necessary or desirable to complete the offering; (vii) determination of
Mediacom's equity value upon the occurrence of certain events specified in the
Operating Agreement; (viii) proposed transfers of more than 5,000 units of
membership interest by any member (other than to an affiliate of such member);
(ix) the resolution of conflicts of interest between Mediacom and its
affiliates (including the Manager); (x) the merger or consolidation of
Mediacom with or into any other business entity; and (xi) taking any actions
relating to bankruptcy or similar relief.
The number of members of the Executive Committee would be increased to seven
upon the occurrence of any of the following: (i) bankruptcy, incapacity or
withdrawal of the Manager or any other event that terminates the membership of
the Manager; (ii) the Manager is no longer chief executive officer and
controlling shareholder of Mediacom Management while any management agreement
between Mediacom Management and a Subsidiary is in effect; (iii) Mediacom has
not disposed of its assets and redeemed the membership interests of all
members other than Mr. Commisso and his affiliates within two years of the
approval by the members of such a disposition, as discussed below under "--
Voting Rights"; or (iv) consolidated System Cash Flow of the Company for any
two consecutive fiscal quarters is less than 80% of the financial projections
for such fiscal quarters, as provided to lenders of the Company in connection
with proposed acquisitions or refinancings. In such a case, Mr. Commisso and
his affiliates would be entitled to designate three of the members of the
Executive Committee and the other members of Mediacom would designate the
remaining four.
RIGHT OF FIRST OFFER
If the Executive Committee or the members of Mediacom determine to sell any
or all of the Company's assets or Subsidiaries, the Manager has the right of
first offer with respect to such sale. Within 30 days of a determination to
sell, the Manager may present the proposed terms of an offer for purchase to
the members, a majority of which will be necessary to approve the transaction.
Within 30 days of delivery of the Manager's offer, Mediacom shall hold a
meeting at which a vote of the majority of the membership interests not held
by the Manager and his affiliates shall be required to accept or reject the
Manager's offer. If the Manager's offer is rejected, the Executive Committee
would have 120 days within which to solicit offers from prospective buyers
(including other members). If within such 120-day period, the Executive
Committee is unable to solicit a bona fide offer from a qualified buyer or
negotiate a contract on terms at least as favorable as those offered by the
Manager and for a purchase price of not less than 105% of the Manager's
offered purchase price, the Executive Committee must accept the Manager's
offer unless such sale is to be effected prior to December 31, 2004, in which
case it may reject the offer. If the Manager's offer is accepted, Mediacom
(acting through the Executive Committee) and the Manager shall proceed to
prepare a contract of sale.
VOTING RIGHTS
The members of Mediacom do not have the right to vote on any matters, except
that the vote of no less than two-thirds of the outstanding membership
interests is required for (i) the disposition of substantially all of the
assets of the Company which, if to be effected prior to December 31, 2004,
shall also require the approval of the Manager; (ii) the amendment of the
Operating Agreement (other than for administrative purposes); (iii) a material
change to the business purposes of the Company; (iv) the removal of the
Manager for gross negligence or willful misconduct; and (v) the continuation
of the business of Mediacom following the bankruptcy, death, disability, legal
incapacity, removal or withdrawal of the Manager.
CAPITAL CONTRIBUTIONS; CAPITAL CALLS
Under the Operating Agreement, the members of Mediacom have made capital
contributions to Mediacom pursuant to certain capital commitment agreements.
To the extent any member has a capital commitment in excess of such member's
capital contributions (an "Unfunded Capital
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Commitment"), the Manager may make capital calls on a pro rata basis to all
members with respect to no less than 5% of each member's Unfunded Capital
Commitment. The Operating Agreement provides Mediacom with several remedies in
the event a member fails to pay any of the amounts requested pursuant to a
capital call, including redeeming the defaulting member's membership interests
for 50% of the equity value less costs of collection and interest accrued on
unpaid capital call amounts. The Company presently has Unfunded Capital
Commitments in the aggregate amount of $10.5 million from its members.
PUT RIGHTS
Each member has the right to require Mediacom to redeem its membership
interests at any time if the holding of such interests exceeds the amount
permitted, or its otherwise prohibited or becomes unduly burdensome, by any
law to which such member is subject, or, in the case of any member which is a
Small Business Investment Company as defined in and subject to regulation
under the Small Business Investment Act of 1958, as amended, upon a change in
the Company's principal business activities to an activity not eligible for
investment by a Small Business Investment Company or a change in the reported
use of proceeds of a member's investment in Mediacom. If Mediacom is unable to
redeem for cash any or all of such membership interests at such time, Mediacom
will issue as payment for such interests a junior subordinated promissory note
with a five-year maturity date and deferred interest which accrues and
compounds at an annual rate of 5% over prime.
In addition, in connection with the acquisition of the Cablevision Systems
on January 23, 1998, the FCC issued a transactional forbearance from its
cross-ownership restrictions, effective for a period of one year, permitting
CB Capital Investors, L.P. ("CB") to purchase additional units of membership
interest in Mediacom. If at the end of such one-year period, CB's membership
interest in Mediacom remains above the limitations imposed by the FCC's cross-
ownership restrictions, Mediacom will be required to repurchase such number of
CB's units of membership interest which exceed the permissible ownership
level. If such repurchase were to occur on January 23, 1999 (i.e., upon
expiration of the transactional forbearance), and assuming no changes in the
number of outstanding membership units of Mediacom and no changes in such
cross-ownership rules, the repurchase price for such excess membership
interests would be approximately $7.5 million. See "Membership Interests of
Certain Beneficial Owners and Management" and "Legislation and Regulation."
Except as set forth above, no member has the right to have its membership
interests redeemed or its capital contributions returned prior to dissolution
of Mediacom.
TRANSFER OF MEMBERSHIP INTERESTS; PREEMPTIVE RIGHTS
Under the Operating Agreement, members may not transfer their interests in
Mediacom without the Manager's consent, except for transfers to affiliates of
the members, and certain significant transfers that also require the consent
of the Executive Committee. If it becomes illegal for a member to hold
membership interests or if by reason of legal or regulatory restrictions the
cost to such member of holding such interests becomes significantly increased,
the affected member, upon three business days prior notice to the other
members, may transfer its interests to accredited investors and qualified
institutional buyers who are "U.S. Persons" for Federal income tax purposes
and who may lawfully hold such interests under the Communications Act and the
FCC rules and regulations adopted thereunder. Any permitted transferee must
agree to be bound by the provisions of the Operating Agreement.
Mediacom may admit additional members provided that, other than in
connection with an acquisition or other business combination or in
contemplation of an initial public offering of equity securities, notice is
first given to each of the members. Each member shall then have the preemptive
right to purchase a portion of the offered interests up to such member's pro
rata share based upon the ratio of such member's interests to all outstanding
interests. If any member does not exercise its preemptive right, the
exercising members may subscribe for the remaining offered interests.
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DESCRIPTION OF THE NOTES
GENERAL
The Series A Notes are, and the Series B Notes will be, issued under an
Indenture (the "Indenture") dated as of April 1, 1998, among Mediacom and
Mediacom Capital, as joint and several obligors, and Bank of Montreal Trust
Company, as Trustee (the "Trustee"). The Notes initially issued will not be
guaranteed by any Subsidiary of Mediacom, but Mediacom will agree in the
Indenture to cause a Restricted Subsidiary to guarantee payment of the Notes
in certain limited circumstances specified therein. See "Covenants--Limitation
on Guarantees of Certain Indebtedness" below. The Notes will be issued in
fully registered form only, in denominations of $1,000 and integral multiples
thereof. The Notes will be represented by one or more registered Notes in
global form and in certain circumstances may be represented by Notes in
certificated form. See "Book-Entry; Delivery and Form."
The following statements are subject to the detailed provisions of the
Indenture and are qualified in their entirety by reference to the Indenture,
including the terms made a part thereof by the Trust Indenture Act of 1939, as
amended (the "Trust Indenture Act"). A copy of the Indenture will be provided
upon request without charge to each person to whom a copy of this Prospectus
is delivered. Capitalized terms used herein which are not otherwise defined
shall have the meaning assigned to them in the Indenture.
PRINCIPAL, MATURITY AND INTEREST
The Notes initially issued under the Indenture were issued in an aggregate
principal amount of $200.0 million and will mature on April 15, 2008. Interest
on the Notes will accrue at the rate of 8 1/2% per annum from April 1, 1998,
or from the most recent date on which interest has been paid or provided for,
payable semi-annually to holders of record at the close of business on the
April 1 or October 1 (whether or not such day is a business day) immediately
preceding the interest payment date on April 15 and October 15 of each year
commencing October 15, 1998. Interest will be computed on the basis of a 360-
day year comprised of twelve 30-day months. The Indenture provides for the
issuance thereunder of up to $150.0 million aggregate principal amount of
additional Notes having substantially identical terms and conditions to the
Notes offered by the Series A Notes Offering (the "Additional Notes"), subject
to compliance with the covenants contained in the Indenture (including
"Covenants--Limitation on Indebtedness" as a new Incurrence of Indebtedness by
the Issuers). Any Additional Notes will be part of the same issue as the Notes
(and accordingly will participate in purchase offers and partial redemptions)
and will vote on all matters with the Notes. Unless the context otherwise
requires, for purposes of this "Description of the Notes," reference to the
Notes includes Additional Notes.
Principal of, premium, if any, and interest, including Liquidated Damages,
if any, on the Notes will be payable, and the Notes may be exchanged or
transferred, at the office or agency of the Issuers maintained for such
purpose in the Borough of Manhattan, The City of New York (which initially
shall be the corporate trust office of the Trustee at 88 Pine Street, New
York, New York 10005), except that, at the option of the Issuers, payment of
interest and Liquidated Damages, if any, may be made by check mailed to the
registered holders of the Notes at their registered addresses; provided that
all payments with respect to global Notes and certificated Notes the holders
of which have given written wire transfer instructions to the Trustee by no
later than five business days prior to the relevant payment date will be
required to be made by wire transfer of immediately available funds to the
accounts specified by the holders thereof.
RANKING
The Notes will be unsecured, senior obligations of the Issuers, ranking pari
passu in right of payment with all existing and future unsecured Indebtedness
of the Issuers, other than any
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Subordinated Obligations. The Notes will be effectively subordinated to any
secured Indebtedness of the Issuers. Since Mediacom is a holding company and
conducts its business through its Subsidiaries, the Notes will be effectively
subordinated to all existing and future Indebtedness and other liabilities
(including trade payables) of the Subsidiaries.
As of March 31, 1998, after giving pro forma effect to the Series A Notes
Offering and the use of the net proceeds therefrom, the Company would have had
approximately $321.3 million of Indebtedness outstanding (including $121.3
million of Indebtedness of the Subsidiaries), with the Subsidiaries having the
ability to borrow up to an additional $207.0 million in the aggregate under
the Subsidiary Credit Facilities.
OPTIONAL REDEMPTION
Except as set forth below, the Notes are not redeemable prior to April 15,
2003. Thereafter, the Notes will be redeemable, in whole or in part, from time
to time at the option of the Issuers, on not less than 30 and not more than 60
days' notice prior to the redemption date by first class mail to each holder
of Notes to be redeemed at such holder's address appearing in the register of
Notes maintained by the Registrar at the following redemption prices
(expressed as percentages of principal amount) if redeemed during the twelve-
month period beginning with April 15 of the year indicated below, in each case
together with accrued and unpaid interest and Liquidated Damages, if any,
thereon to the date of redemption:
REDEMPTION
YEAR PRICE
---- ----------
2003............................................................ 104.250%
2004............................................................ 102.833%
2005............................................................ 101.417%
2006 and thereafter............................................. 100.000%
In addition, at any time and from time to time, on or prior to April 15,
2001, the Issuers may redeem up to 35% of the original principal amount of the
Notes (calculated to give effect to any issuance of Additional Notes) with the
Net Cash Proceeds of one or more Equity Offerings of Mediacom, at a redemption
price in cash equal to 108.5% of the principal to be redeemed plus accrued and
unpaid interest and Liquidated Damages, if any, to the date of redemption;
provided that at least 65% of the original principal amount of Notes (as so
calculated) remains outstanding immediately after each such redemption. Any
such redemption will be required to occur within 90 days following the closing
of any such Equity Offering.
If fewer than all the Notes are to be redeemed, the Trustee will select the
Notes to be redeemed, if the Notes are listed on a national securities
exchange, in accordance with the rules of such exchange or, if the Notes are
not so listed, on a pro rata basis or by lot or by such other method that the
Trustee deems to be fair and equitable to holders. If any Note is to be
redeemed in part only, the notice of redemption that relates to such Note
shall state the portion of the principal amount thereof to be redeemed and a
new Note or Notes in principal amount equal to the unredeemed principal
portion thereof will be issued; provided, that no Notes of a principal amount
of $1,000 or less shall be redeemed in part. On and after the redemption date,
interest will cease to accrue on Notes or portions thereof called for
redemption as long as the Issuers have deposited with the Paying Agent for the
Notes funds in satisfaction of the applicable redemption price pursuant to the
Indenture.
REPURCHASE AT THE OPTION OF HOLDERS
Change of Control
The Indenture will provide that upon the occurrence of a Change of Control,
each holder of Notes shall have the right to require the Issuers to repurchase
all or any part of such holder's Notes pursuant
85
to an offer described below (the "Change of Control Offer") at a purchase
price equal to 101% of the principal amount thereof plus any accrued and
unpaid interest and Liquidated Damages, if any, thereon to the date of
repurchase (the "Change of Control Payment").
A "Change of Control" means the occurrence of any of the following events:
(i) any Person (as such term is used in Sections 13(d) and 14(d) of the
Exchange Act, including any group acting for the purpose of acquiring, holding
or disposing of securities within the meaning of Rule 13d-5(b)(1) under the
Exchange Act), other than one or more Permitted Holders, is or becomes the
"beneficial owner" (as defined in Rule 13d-3 and 13d-5 under the Exchange Act,
except that a Person shall be deemed to have "beneficial ownership" of all
shares that any such Person has the right to acquire, whether such right is
exercisable immediately or only after the passage of time, upon the happening
of an event or otherwise), directly or indirectly, of more than 50% of the
total voting power of the then outstanding Voting Equity Interests of
Mediacom; (ii) Mediacom consolidates with, or merges with or into, another
Person (other than a Wholly Owned Restricted Subsidiary) or Mediacom or any
its Subsidiaries sells, assigns, conveys, transfers, leases or otherwise
disposes of all or substantially all of the assets of Mediacom and its
Subsidiaries (determined on a consolidated basis) to any Person (other than
Mediacom or any Wholly Owned Restricted Subsidiary), other than any such
transaction where immediately after such transaction the Person or Persons
that "beneficially owned" (as defined in Rule 13d-3 and 13d-5 under the
Exchange Act, except that a Person shall be deemed to have "beneficial
ownership" of all shares that any such Person has the right to acquire,
whether such right is exercisable immediately or only after the passage of
time, upon the happening of an event or otherwise) immediately prior to such
transaction, directly or indirectly, a majority of the total voting power of
the then outstanding Voting Equity Interests of Mediacom, "beneficially own"
(as so determined), directly or indirectly, more than 50% of the total voting
power of the then outstanding Voting Equity Interests of the surviving or
transferee Person; (iii) Mediacom is liquidated or dissolved or adopts a plan
of liquidation or dissolution (whether or not otherwise in compliance with the
provisions of the Indenture); (iv) a majority of the members of the Executive
Committee of Mediacom shall consist of Persons who are not Continuing Members;
or (v) Mediacom ceases to own 100% of the issued and outstanding Equity
Interests of Mediacom Capital, other than by reason of a merger of Mediacom
Capital into and with a corporate successor to Mediacom; provided, however,
that a Change of Control will be deemed not to have occurred in any of the
circumstances described in clauses (i) through (iv) above if after the
occurrence of any such circumstance (A) Rocco B. Commisso continues to be the
manager of Mediacom pursuant to the Operating Agreement and/or the chief
executive officer of Mediacom (or the surviving or transferee Person in the
case of clause (ii) above), or (B) Rocco B. Commisso and the other Permitted
Holders together with their respective designees constitute the majority of
the members of the Executive Committee.
Within 30 days of the occurrence of a Change of Control, the Issuers shall
send by first-class mail, postage prepaid, to the Trustee and to each holder
of the Notes, at the address appearing in the register of Notes maintained by
the Registrar, a notice stating: (1) that the Change of Control Offer is being
made pursuant to this covenant and that all Notes tendered will be accepted
for payment; (2) the purchase price and the purchase date, which shall be a
business day no earlier than 30 days nor later than 60 days from the date such
notice is mailed (the "Change of Control Payment Date"); (3) that any Note not
tendered will continue to accrue interest; (4) that, unless the Issuers
default in the payment of the Change of Control Payment, any Notes accepted
for payment pursuant to the Change of Control Offer shall cease to accrue
interest after the Change of Control Payment Date; (5) that holders accepting
the offer to have their Notes purchased pursuant to a Change of Control Offer
will be required to surrender the Notes to the Paying Agent at the address
specified in the notice prior to the close of business on the business day
preceding the Change of Control Payment Date; (6) that holders will be
entitled to withdraw their acceptance if the Paying Agent receives, not later
than the close of business on the third Business Day preceding the Change of
Control Payment Date, a telegram, telex, facsimile transmission or letter
setting forth the name of the holder, the principal
86
amount of the Notes delivered for purchase, and a statement that such holder
is withdrawing its election to have such Notes purchased; (7) that holders
whose Notes are being purchased only in part will be issued new Notes equal in
principal amount to the unpurchased portion of the Notes surrendered, provided
that each Note purchased and each such new Note issued shall be in an original
principal amount in denominations of $1,000 and integral multiples thereof;
(8) any other procedures that a holder must follow to accept a Change of
Control Offer or effect withdrawal of such acceptance; and (9) the name and
address of the Paying Agent.
On the Change of Control Payment Date, the Issuers shall, to the extent
lawful (i) accept for payment Notes or portions thereof tendered pursuant to
the Change of Control Offer, (ii) deposit with the Paying Agent money
sufficient to pay the purchase price of all Notes or portions thereof so
tendered and (iii) deliver or cause to be delivered to the Trustee Notes so
accepted together with an Officers' Certificate stating the Notes or portions
thereof tendered to the Issuers. The Paying Agent shall promptly mail to each
holder of Notes so accepted payment in an amount equal to the purchase price
for such Notes, and the Issuers shall execute and issue, and the Trustee shall
promptly authenticate and mail to such holder, a new Note equal in principal
amount to any unpurchased portion of the Notes surrendered; provided that each
such new Note shall be issued in an original principal amount in denominations
of $1,000 and integral multiples thereof. The Issuers will send to the Trustee
and the holders of Notes on or as soon as practicable after the Change of
Control Payment Date a notice setting forth the results of the Change of
Control Offer.
The Issuers will not be required to make a Change of Control Offer if a
third party makes the Change of Control Offer in the manner, at the time and
otherwise in compliance with the requirements set forth in the Indenture
applicable to a Change of Control Offer made by the Issuers and purchases all
Notes or portions thereof validly tendered and not withdrawn under such Change
of Control Offer. In addition, the Issuers will not be required to make a
Change of Control Offer in the event of a highly leveraged transaction that
does not constitute a Change of Control.
The Issuers will comply, to the extent applicable, with the requirements of
Section 14(e) of the Exchange Act and any other securities laws or regulations
in connection with the repurchase of Notes pursuant to this covenant.
The Subsidiary Credit Facilities include "change of control" provisions that
permit the lenders thereunder to accelerate the repayment of Indebtedness
thereunder. The Subsidiary Credit Facilities will not permit the Subsidiaries
of Mediacom to make distributions to the Issuers so as to permit the Issuers
to effect a purchase of the Notes upon the Change of Control without the prior
satisfaction of certain financial tests and other conditions. Any future
credit facilities or other agreements relating to Indebtedness to which the
Issuers or Subsidiaries of Mediacom become a party may contain similar
restrictions and provisions. If a Change of Control were to occur, the Issuers
may not have sufficient available funds to pay the Change of Control Payment
for all Notes that might be delivered by holders of the Notes seeking to
accept the Change of Control Offer after first satisfying its obligations
under the Subsidiary Credit Facilities or other agreements relating to
Indebtedness, if accelerated. The failure of the Issuers to make or consummate
the Change of Control Offer or to pay the Change of Control Payment when due
will give the Trustee and the holders of the Notes the rights described under
"Events of Default" below.
The definition of Change of Control includes a phrase relating to the sale,
assignment, conveyance, transfer, lease or other disposition of "all or
substantially all" of the assets of Mediacom and its Subsidiaries. Although
there is a developing body of case law interpreting the phrase "substantially
all," there is not a precise or established definition of the phrase under
applicable law. Accordingly, the ability of a holder of the Notes to require
the Issuers to repurchase such Notes as a result of a sale, assignment,
conveyance, transfer, lease or other disposition of less than all of the
assets of Mediacom and its Subsidiaries to another Person or group may be
uncertain.
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Asset Sales
The Indenture will provide that Mediacom shall not, and shall not permit any
Restricted Subsidiary to, consummate an Asset Sale unless (i) Mediacom or such
Restricted Subsidiary, as the case may be, receives consideration at the time
of such sale or other disposition at least equal to the fair market value
thereof (as determined in good faith by the Executive Committee, whose
determination shall be conclusive and evidenced by a Committee Resolution);
(ii) not less than 75% of the consideration received by Mediacom or such
Restricted Subsidiary, as the case may be, is in the form of cash or Cash
Equivalents; and (iii) the Asset Sale Proceeds received by Mediacom or such
Restricted Subsidiary are applied (a) first, to the extent Mediacom elects, or
is required, to prepay, repay or purchase debt under any then existing
Indebtedness of Mediacom or any Restricted Subsidiary within 360 days
following the receipt of the Asset Sale Proceeds from any Asset Sale or, to
the extent Mediacom elects, to make an investment in assets (including Equity
Interests or other securities purchased in connection with the acquisition of
Equity Interests or property of another Person) used or useful in a Related
Business, provided that such investment occurs and such Asset Sale Proceeds
are so applied within 360 days following the receipt of such Asset Sale
Proceeds (the "Reinvestment Date"), and (b) second, on a pro rata basis (1) to
the repayment of an amount of Other Pari Passu Debt not exceeding the Other
Pari Passu Debt Pro Rata Share (provided that any such repayment shall result
in a permanent reduction of any commitment in respect thereof in an amount
equal to the principal amount so repaid) and (2) if on the Reinvestment Date
with respect to any Asset Sale the Excess Proceeds exceed $10.0 million, the
Issuers shall apply an amount equal to such Excess Proceeds to an offer to
repurchase the Notes, at a purchase price in cash equal to 100% of the
principal amount thereof plus accrued and unpaid interest and Liquidated
Damages, if any, to the date of repurchase (an "Excess Proceeds Offer"). If an
Excess Proceeds Offer is not fully subscribed, the Issuers may retain the
portion of the Excess Proceeds not required to repurchase Notes. For purposes
of determining in clause (ii) above the percentage of cash consideration
received by Mediacom or any Restricted Subsidiary, the amount of any (x)
liabilities (as shown on Mediacom's or such Restricted Subsidiary's most
recent balance sheet) of Mediacom or any Restricted Subsidiary that are
actually assumed by the transferee in such Asset Sale and from which Mediacom
and the Restricted Subsidiaries are fully released shall be deemed to be cash,
and (y) securities, notes or other similar obligations received by Mediacom or
such Restricted Subsidiary from such transferee that are immediately converted
(or are converted within 30 days of the related Asset Sale) by Mediacom or
such Restricted Subsidiary into cash shall be deemed to be cash in an amount
equal to the net cash proceeds realized upon such conversion.
If the Issuers are required to make an Excess Proceeds Offer, the Issuers
shall mail, within 30 days following the Reinvestment Date, a notice to the
holders of Notes stating, among other things: (1) that such holders have the
right to require the Issuers to apply the Excess Proceeds to repurchase such
Notes at a purchase price in cash equal to 100% of the principal amount
thereof plus accrued and unpaid interest and Liquidated Damages, if any, to
the date of purchase; (2) the purchase date, which shall be no earlier than 30
days and not later than 60 days from the date such notice is mailed; (3) the
instructions, determined by the Issuers, that each holder must follow in order
to have such Notes repurchased; and (4) the calculations used in determining
the amount of Excess Proceeds to be applied to the repurchase of such Notes.
If the aggregate principal amount of Notes surrendered by holders thereof
exceeds the amount of Excess Proceeds, the Trustee shall select the Notes to
be purchased on a pro rata basis or by lot or by such other method that the
Trustee deems to be fair and equitable to holders. Upon completion of the
Excess Proceeds Offer, the amount of Excess Proceeds shall be reset to zero.
The Issuers will comply, to the extent applicable, with the requirements of
Section 14(e) of the Exchange Act and any other securities laws or regulations
in connection with the repurchase of Notes pursuant to this covenant.
88
Notwithstanding the foregoing, the Indenture will provide that Mediacom or
any Restricted Subsidiary will be permitted to consummate an Asset Swap if (i)
at the time of entering into the related Asset Swap Agreement or immediately
after giving effect to such Asset Swap no Default or Event of Default shall
have occurred and be continuing or would occur as a consequence thereof and
(ii) such Asset Swap shall have been approved in good faith by the Executive
Committee, whose approval shall be conclusive and evidenced by a Committee
Resolution, which states that such Asset Swap is fair to Mediacom or such
Restricted Subsidiary, as the case may be, from a financial point of view.
If a Restricted Subsidiary were to consummate an Asset Sale, the Subsidiary
Credit Facilities would not permit such Restricted Subsidiary to make a
distribution to the Issuers of the related Asset Sale Proceeds so as to permit
the Issuers to effect an Excess Proceeds Offer with such Asset Sale Proceeds
without the prior satisfaction of certain financial tests and other
conditions. Any future credit agreements or other agreements relating to
Indebtedness to which the Issuers or Subsidiaries of Mediacom become a party
may contain similar restrictions or other provisions which would prohibit the
Issuers from purchasing any Notes from Asset Sale Proceeds. In the event an
Excess Proceeds Offer occurs at a time when the Issuers are prohibited from
receiving Asset Sale Proceeds or purchasing the Notes, the Issuers could seek
the consent of their lenders to the distribution of Asset Sales Proceeds or
the purchase of Notes or could attempt to refinance the Indebtedness that
contains such prohibition. If the Issuers do not obtain such a consent or
repay such Indebtedness, the Issuers may remain prohibited from purchasing the
Notes. In such case, the Issuers' failure to purchase tendered Notes when due
will give the Trustee and the holders of the Notes the rights described under
"Events of Default" below.
EVENTS OF DEFAULT
An Event of Default is defined in the Indenture as being: default in payment
of any principal of, or premium, if any, on the Notes when due; default for 30
days in payment of any interest or Liquidated Damages, if any, on the Notes
when due; default by the Issuers for 60 days after written notice by holders
of not less than 25% in principal amount of the Notes then outstanding in the
observance or performance of any other covenant in the Notes or the Indenture;
default in the payment at maturity (continued for the longer of any applicable
grace period or 30 days) of any Indebtedness aggregating $15.0 million or more
of the Issuers or any Significant Subsidiary or any group of Restricted
Subsidiaries of Mediacom which, if merged into each other, would constitute a
Significant Subsidiary, or the acceleration of any such Indebtedness which
default shall not be cured or waived, or such acceleration shall not be
rescinded or annulled, within 30 days after written notice by holders of not
less than 25% in principal amount of the Notes then outstanding; any final
judgment or judgments for the payment of money in excess of $15.0 million (net
of amounts covered by insurance) shall be rendered against the Issuers or any
Significant Subsidiary or any group of Restricted Subsidiaries of Mediacom
which, if merged into each other, would constitute a Significant Subsidiary,
and shall not be discharged for any period of 60 consecutive days, during
which a stay of enforcement of such judgment shall not be in effect; or
certain events involving bankruptcy, insolvency or reorganization of the
Issuers or a Significant Subsidiary or any group of Restricted Subsidiaries of
Mediacom which, if merged into each other, would constitute a Significant
Subsidiary. The Indenture provides that the Trustee may withhold notice to the
holders of Notes of any default (except in payment of principal of or premium,
if any, or interest on the Notes) if the Trustee considers it to be in the
best interest of the holders of the Notes to do so.
The Indenture will provide that if an Event of Default (other than an Event
of Default resulting from certain events of bankruptcy, insolvency or
reorganization) shall have occurred and be continuing, the Trustee or the
holders of not less than 25% in principal amount of the Notes then outstanding
may declare the principal of all the Notes to be due and payable immediately,
but if the Issuers shall cure (or the holders of a majority in principal
amount of the Notes, if permitted by the Indenture, shall waive) all defaults
(except the nonpayment of principal, interest and premium, if any, on any
Notes which shall
89
have become due by acceleration) and certain other conditions are met, such
declaration may be annulled by the holders of a majority in principal amount
of the Notes then outstanding. In case an Event of Default resulting from
certain events of bankruptcy, insolvency or reorganization shall occur, such
amount with respect to all of the Notes shall be due and payable immediately
without any declaration or other act on the part of the Trustee or the holders
of the Notes.
The holders of a majority in principal amount of the Notes then outstanding
shall have the right to direct the time, method and place of conducting any
proceeding for any remedy available to the Trustee subject to certain
limitations specified in the Indenture. Subject to the provisions of the
Indenture relating to the duties of the Trustee, in case an Event of Default
shall occur and be continuing, the Trustee will be under no obligation to
exercise any of its rights or powers under the Indenture at the request or
direction of any of the holders of the Notes, unless such holders have offered
to the Trustee reasonable indemnity.
COVENANTS
Limitation on Restricted Payments
The Indenture will provide that, so long as any of the Notes remain
outstanding, Mediacom shall not, and shall not permit any Restricted
Subsidiary to, make any Restricted Payment if (i) at the time of such proposed
Restricted Payment, a Default or Event of Default shall have occurred and be
continuing or shall occur as a consequence of such Restricted Payment; (ii)
immediately after giving effect to such proposed Restricted Payment, Mediacom
would not be able to Incur $1.00 of additional Indebtedness under the Debt to
Operating Cash Flow Ratio of the first paragraph of "--Limitation on
Indebtedness" below; or (iii) immediately after giving effect to any such
Restricted Payment, the aggregate of all Restricted Payments which shall have
been made on or after the date of the Indenture (the amount of any Restricted
Payment, if other than cash, to be based upon the fair market value thereof on
the date of such Restricted Payment (without giving effect to subsequent
changes in value) as determined in good faith by the Executive Committee,
whose determination shall be conclusive and evidenced by a Committee
Resolution) would exceed an amount equal to the difference between (a) the
Cumulative Credit and (b) 1.4 times Cumulative Interest Expense.
"Restricted Payment" means (i) any dividend (whether made in cash, property
or securities) on or with respect to any Equity Interests of Mediacom or of
any Restricted Subsidiary (other than with respect to Disqualified Equity
Interests and other than any dividend made to Mediacom or another Restricted
Subsidiary or any dividend payable in Equity Interests of Mediacom or any
Restricted Subsidiary); or (ii) any distribution (whether made in cash,
property or securities) on or with respect to any Equity Interests of Mediacom
or of any Restricted Subsidiary (other than with respect to Disqualified
Equity Interests and other than any distribution made to Mediacom or another
Restricted Subsidiary or any distribution payable in Equity Interests of
Mediacom or any Restricted Subsidiary); or (iii) any redemption, repurchase,
retirement or other direct or indirect acquisition of any Equity Interests of
Mediacom (other than Disqualified Equity Interests), or any warrants, rights
or options to purchase or acquire any such Equity Interests or any securities
exchangeable for or convertible into any such Equity Interests; or (iv) any
redemption, repurchase, retirement or other direct or indirect acquisition for
value or other payment of principal, prior to any scheduled final maturity,
scheduled repayment or scheduled sinking fund payment, of any Subordinated
Obligations; or (v) any Investment (other than a Permitted Investment).
The provisions of the first paragraph of this covenant shall not prevent (i)
the retirement of any of Mediacom's Equity Interests in exchange for, or out
of the proceeds of, the substantially concurrent sale (other than to a
Subsidiary of Mediacom or an employee stock ownership plan or to a trust
established by Mediacom or any Subsidiary of Mediacom for the benefit of its
employees) of Equity Interests of Mediacom; (ii) the payment of any dividend
or distribution on, or redemption of Equity Interests within 60 days after the
date of declaration of such dividend or distribution or the giving of
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formal notice of such redemption, if at the date of such declaration or giving
of such formal notice such payment or redemption would comply with the
provisions of the Indenture; (iii) Investments constituting Restricted
Payments made as a result of the receipt of non-cash consideration from any
Asset Sale made pursuant to and in compliance with the provisions described
under "Repurchase at the Option of Holders--Asset Sales" above; (iv) payments
of compensation to officers, directors and employees of Mediacom or any
Restricted Subsidiary so long as the Executive Committee or the manager of
Mediacom in good faith shall have approved the terms thereof; (v) the payment
of dividends on any Equity Interests of any Restricted Subsidiary following
the issuance thereof in an amount per annum of up to 6% of the net proceeds
received by Mediacom or such Restricted Subsidiary from an Equity Offering of
such Equity Interests; (vi) the payment of management, consulting and advisory
fees, and any related reimbursement of expenses or indemnity, to Mediacom
Management or any Affiliate thereof and other amounts payable pursuant to the
Operating Agreement, other than any dividend or distribution (whether made in
cash, property or securities) on or with respect to any Equity Interests of
Mediacom or any redemption, repurchase, retirement or other direct or indirect
acquisition of any Equity Interests of Mediacom, or any warrants, rights or
options to purchase or acquire any such Equity Interests or any securities
exchangeable for or convertible into any such Equity Interests; (vii) the
payment of amounts in connection with any merger, consolidation, or sale of
assets effected in accordance with the "--Merger or Sales of Assets" covenant
below, provided that no such payment may be made pursuant to this clause (vii)
unless, after giving effect to such transaction (and the Incurrence of any
Indebtedness in connection therewith and the use of the proceeds thereof),
Mediacom would be able to Incur $1.00 of additional Indebtedness in compliance
with the first paragraph of "--Limitation on Indebtedness" below such that
after incurring that $1.00 of additional Indebtedness, the Debt to Operating
Cash Flow Ratio would be less than or equal to 6.0 to 1.0; (viii) the
retirement, redemption or repurchase (a "Regulatory Equity Interest
Repurchase") of any of Mediacom's Equity Interests pursuant to Article 11 of
the Operating Agreement as a result of the occurrence of a Triggering Event
(as defined in the Operating Agreement and which relates to certain small
business investment company, Federal Communications Commission and other
regulatory violations described therein); (ix) the redemption, repurchase,
retirement, defeasance or other acquisition of any Subordinated Obligations in
exchange for, or out of net cash proceeds of the substantially concurrent sale
(other than to a Subsidiary of Mediacom or an employee stock ownership plan or
to a trust established by Mediacom or any Subsidiary of Mediacom (for the
benefit of its employees) of Equity Interests of Mediacom or Subordinated
Obligations of Mediacom; (x) the payment of any dividend or distribution on or
distribution on or with respect to any Equity Interests of any Restricted
Subsidiary to the holders of its Equity Interests on a pro rata basis; (xi)
the making and consummation of (A) an Excess Proceeds Offer in accordance with
the provisions of the Indenture with any Excess Proceeds or (B) a Change of
Control Offer with respect to the Notes in accordance with the provisions of
the Indenture; (xii) during the period Mediacom is treated as a partnership
for U.S. federal income tax purposes and after such period to the extent
relating to the liability for such period, the payment of distributions in
respect of members' or partners' income tax liability with respect to Mediacom
in an amount not to exceed the aggregate amount of tax distributions, if any,
permitted to be made by Mediacom to its members under the Operating Agreement
(such amount not to include amounts in respect of taxes resulting from
Mediacom's reorganization as or change in the status to a corporation); (xiii)
the payment by any Restricted Subsidiary to Mediacom or another Restricted
Subsidiary of principal and interest due in respect of intercompany
Indebtedness and dividends and other distributions in respect of Preferred
Equity Interests in such Restricted Subsidiary; (xiv) the payment by Mediacom
California of all amounts due in respect of the promissory note in the
original principal amount of $2.8 million issued to Booth American Company;
and (xv) the distribution of any Investment originally made by Mediacom or any
Restricted Subsidiary pursuant to the first paragraph of this covenant to
holders of Equity Interests of Mediacom or such Restricted Subsidiary, as the
case may be; provided, however, that in the case of clauses (ii), (v), (vii),
(x), (xi) and (xv) of this paragraph, no Default or Event of Default shall
have occurred and be continuing at the time of such Restricted Payment or as a
result thereof. In determining the aggregate amount of Restricted Payments
made on
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or after the date of the Indenture, Restricted Payments made pursuant to
clauses (ii) and (v) and any Restricted Payment deemed to have been made
pursuant to the "--Limitation on Transactions with Affiliates" covenant below
shall be included in such calculation.
Limitation on Indebtedness
The Indenture will provide that Mediacom shall not, and shall not permit any
Restricted Subsidiary to, directly or indirectly, Incur any Indebtedness
(including Acquired Indebtedness) or issue any Disqualified Equity Interests
except for Permitted Indebtedness; provided, however, that Mediacom or any
Restricted Subsidiary may Incur Indebtedness or issue Disqualified Equity
Interests if, at the time of and immediately after giving pro forma effect to
such Incurrence of Indebtedness or issuance of Disqualified Equity Interests
and the application of the proceeds therefrom, the Debt to Operating Cash Flow
Ratio would be less than or equal to 7.0 to 1.0.
The foregoing limitations will not apply to the Incurrence of any of the
following (collectively, "Permitted Indebtedness"), each of which shall be
given independent effect:
(a) Indebtedness under the Notes issued on the date of the Indenture, the
Exchange Notes and the Indenture;
(b) Indebtedness and Disqualified Equity Interests of Mediacom and the
Restricted Subsidiaries outstanding on the Issue Date other than
Indebtedness described in clause (a), (c), (d) or (f) of this paragraph;
(c) (i) Indebtedness of the Restricted Subsidiaries under the Subsidiary
Credit Facilities (including any refinancing thereof), and (ii)
Indebtedness of the Restricted Subsidiaries (including any refinancing
thereof) if, at the time of and immediately after giving pro forma effect
to the Incurrence of such Indebtedness and the application of the proceeds
therefrom, the Debt to Operating Cash Flow Ratio would be less than or
equal to 6.0 to 1.0; provided, however, that for purposes of the
calculation of such Ratio, the term "Consolidated Total Indebtedness" shall
refer only to the Consolidated Total Indebtedness of the Restricted
Subsidiaries (including Indebtedness Incurred under the Subsidiary Credit
Facilities and the Future Subsidiary Credit Facilities) outstanding as of
the Determination Date (as defined hereafter in the term "Debt to Operating
Cash Flow Ratio") and the term "Operating Cash Flow" shall refer only to
the Subsidiary Operating Cash Flow of the Restricted Subsidiaries for the
related Measurement Period (as defined hereafter in the term "Debt to
Operating Cash Flow Ratio");
(d) Indebtedness and Disqualified Equity Interests of (x) any Restricted
Subsidiary owed to or issued to and held by Mediacom or any Restricted
Subsidiary and (y) Mediacom owed to and held by any Restricted Subsidiary
which is unsecured and subordinated in right of payment to the payment and
performance of the Issuers' obligations under the Indenture and the Notes;
provided, however, that an Incurrence of Indebtedness and Disqualified
Equity Interests that is not permitted by this clause (d) shall be deemed
to have occurred upon (i) any sale or other disposition of any Indebtedness
or Disqualified Equity Interests of Mediacom or a Restricted Subsidiary
referred to in this clause (d) to any Person (other than Mediacom or a
Restricted Subsidiary), (ii) any sale or other disposition of Equity
Interests of a Restricted Subsidiary which holds Indebtedness or
Disqualified Equity Interests of Mediacom or another Restricted Subsidiary
such that such Restricted Subsidiary ceases to be a Restricted Subsidiary
or (iii) any designation of a Restricted Subsidiary which holds
Indebtedness or Disqualified Equity Interests of Mediacom as an
Unrestricted Subsidiary;
(e) guarantees by any Restricted Subsidiary of Indebtedness of Mediacom
or any other Restricted Subsidiary Incurred in accordance with the
provisions of the Indenture;
(f) Hedging Agreements of Mediacom or any Restricted Subsidiary relating
to any Indebtedness of Mediacom or such Restricted Subsidiary, as the case
may be, Incurred in
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accordance with the provisions of the Indenture; provided that such Hedging
Agreements have been entered into for bona fide business purposes and not
for speculation;
(g) Indebtedness or Disqualified Equity Interests of Mediacom or any
Restricted Subsidiary to the extent representing a replacement, renewal,
refinancing or extension (collectively, a "refinancing") of outstanding
Indebtedness or Disqualified Equity Interests of Mediacom or any Restricted
Subsidiary, as the case may be, Incurred in compliance with the Debt to
Operating Cash Flow Ratio of the first paragraph of this covenant or clause
(a) or (b) of this paragraph of this covenant; provided, however, that (i)
Indebtedness or Disqualified Equity Interests of Mediacom may not be
refinanced under this clause (g) with Indebtedness or Disqualified Equity
Interests of any Restricted Subsidiary, (ii) any such refinancing shall not
exceed the sum of the principal amount or liquidation preference or
redemption payment value (or, if such Indebtedness or Disqualified Equity
Interests provides for a lesser amount to be due and payable upon a
declaration of acceleration thereof at the time of such refinancing, an
amount no greater than such lesser amount) of the Indebtedness or
Disqualified Equity Interests being refinanced plus the amount of accrued
interest or dividends thereon and the amount of any reasonably determined
prepayment premium necessary to accomplish such refinancing and such
reasonable fees and expenses incurred in connection therewith, (iii)
Indebtedness representing a refinancing of Indebtedness of Mediacom shall
have a Weighted Average Life to Maturity equal to or greater than the
Weighted Average Life to Maturity of the Indebtedness being refinanced,
(iv) Subordinated Obligations of Mediacom or Disqualified Equity Interests
of Mediacom may only be refinanced with Subordinated Obligations of
Mediacom or Disqualified Equity Interests of Mediacom, and (v) Other Pari
Passu Debt which is unsecured may only be refinanced with unsecured
Indebtedness, which is either Other Pari Passu Debt or Subordinated
Obligations, or with Disqualified Equity Interests;
(h) Indebtedness of Mediacom or a Restricted Subsidiary Incurred as a
result of the pledge by Mediacom or such Restricted Subsidiary of
intercompany indebtedness or Equity Interests in another Restricted
Subsidiary or Equity Interests in an Unrestricted Subsidiary in the
circumstance where recourse to Mediacom or such Restricted Subsidiary is
limited to the value of the intercompany Indebtedness or the Equity
Interests so pledged;
(i) Indebtedness of Mediacom or a Restricted Subsidiary represented by
Capitalized Lease Obligations, mortgage financings, purchase money
obligations or letters of credit, in each case Incurred for the purpose of
financing all or any part of the purchase price or cost of construction or
improvement of property, plant or equipment used in the business of
Mediacom or such Restricted Subsidiary or a Related Business in an
aggregate principal amount not to exceed $15.0 million at any time
outstanding;
(j) Indebtedness of Mediacom Incurred to finance (including any
refinancing thereof) one or more Regulatory Equity Interest Repurchases
occurring in accordance with and pursuant to the Operating Agreement; and
(k) In addition to any Indebtedness described in clauses (a) through (j)
above, Indebtedness of Mediacom or any of the Restricted Subsidiaries so
long as the aggregate principal amount of all such Indebtedness incurred
pursuant to this clause (k) does not exceed $10.0 million at any one time
outstanding.
For purposes of determining compliance with this covenant, in the event that
an item of Indebtedness meets the criteria of more than one of the categories
of Permitted Indebtedness described in clauses (a) through (k) above or is
entitled to be incurred pursuant to the first paragraph of this covenant,
Mediacom shall, in its sole discretion, classify such item of Indebtedness in
any manner that complies with this covenant and such item of Indebtedness
shall be treated as having been incurred pursuant to only one of such clauses
or pursuant to the first paragraph hereof.
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Limitation on Transactions with Affiliates
The Indenture will provide that Mediacom shall not, and shall not permit any
Restricted Subsidiary to, directly or indirectly, engage in any transaction
(or series of related transactions) involving in the aggregate $5.0 million or
more with any Affiliate unless such transaction (or series of related
transactions) shall have been approved pursuant to a Committee Resolution
rendered in good faith by the Executive Committee or, if applicable, a
committee comprising the independent members of the Executive Committee, which
approval in each case shall be conclusive, to the effect that such transaction
(or series of related transactions) is (a) in the best interest of Mediacom or
such Restricted Subsidiary and (b) upon terms which would be obtainable by
Mediacom or a Restricted Subsidiary in a comparable arm's-length transaction
with a Person which is not an Affiliate, except that the foregoing shall not
apply in the case of any of the following transactions (the "Specified
Affiliate Transactions"): (i) the making of any Restricted Payment (including
the making of any Permitted Investment that is permitted pursuant to "--
Limitation on Restricted Payments"); (ii) any transaction or series of
transactions between Mediacom and one or more Restricted Subsidiaries or
between two or more Restricted Subsidiaries; (iii) the payment of compensation
(including, without limitation, amounts paid pursuant to employee benefit
plans) for the personal services of, and indemnity provided on behalf of,
officers, members, directors and employees of Mediacom or any Restricted
Subsidiary, and management, consulting or advisory fees and reimbursements of
expenses and indemnity in each case so long as the Executive Committee in good
faith shall have approved the terms thereof and deemed the services
theretofore or thereafter to be performed for such compensation or fees to be
fair consideration therefor; (iv) any payments for goods or services purchased
in the ordinary course of business, upon terms which would be obtainable by
Mediacom or a Restricted Subsidiary in a comparable arm's-length transaction
with a Person which is not an Affiliate; and (v) any transaction pursuant to
any agreement with any Affiliate in effect on the date of the Indenture
(including, but not limited to, the Operating Agreement and other agreements
relating to the payment of management fees, acquisition fees and expense
reimbursements), including any amendments thereto entered into after the date
of the Indenture, provided, that the terms of any such amendment are not less
favorable to Mediacom than the terms of the relevant agreement in effect prior
to any such amendment, as determined in good faith by the Executive Committee.
The Indenture will further provide that, except in the case of a Specified
Affiliate Transaction, Mediacom shall not, and shall not permit any Restricted
Subsidiary, directly or indirectly, to engage in any transaction (or series of
related transactions) involving in the aggregate $25.0 million or more with
any Affiliate unless (i) such transaction (or series of related transactions)
shall have been approved pursuant to a Committee Resolution rendered in good
faith by the Executive Committee or, if applicable, a committee comprising the
independent members of the Executive Committee to the effect set forth in
clauses (a) and (b) above; and (ii) Mediacom shall have received an opinion
from an independent nationally recognized accounting, appraisal or investment
banking firm experienced in the review of similar types of transactions
stating that the terms of such transaction (or series of related transactions)
are fair to Mediacom or such Restricted Subsidiary, as the case may be, from a
financial point of view. Notwithstanding the foregoing, any transaction (or
series of related transactions) entered into by Mediacom or any Restricted
Subsidiary with any Affiliate without complying with the foregoing provisions
of this covenant shall not constitute a violation of the provisions of this
covenant if Mediacom or such Restricted Subsidiary would be permitted to make
a Restricted Payment pursuant to the first paragraph of "--Limitation on
Restricted Payments" at the time of the completion of such transaction (or
series of related transactions) in an amount equal to the fair market value of
such transaction (or series of related transactions), as determined in good
faith by the Executive Committee, whose determination shall be conclusive and
evidenced by a Committee Resolution. In such a case, Mediacom or such
Restricted Subsidiary, as the case may be, shall be deemed to have made a
Restricted Payment for purposes of the calculation of Restricted Payments
pursuant to clause (iii) of the first paragraph of "--Limitation on Restricted
Payments."
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Limitation on Liens
The Indenture will provide that Mediacom shall not Incur any Indebtedness
secured by a Lien against or on any of its property or assets now owned or
hereafter acquired by Mediacom unless contemporaneously therewith effective
provision is made to secure the Notes equally and ratably with such secured
Indebtedness. This restriction does not, however, apply to Indebtedness
secured by (i) Liens, if any, in effect on the date of the Indenture; (ii)
Liens in favor of governmental bodies to secure progress or advance payments;
(iii) Liens on Equity Interests or Indebtedness existing at the time of the
acquisition thereof (including acquisition through merger or consolidation),
provided that such Liens were not Incurred in anticipation of such
acquisition; (iv) Liens securing industrial revenue or pollution control
bonds; (v) Liens securing the Notes; (vi) Liens securing Indebtedness of
Mediacom in an amount not to exceed $10.0 million at any time outstanding;
(vii) Other Permitted Liens; and (viii) any extension, renewal or replacement
of any Lien referred to in the foregoing clauses (i) through (vii), inclusive.
Limitation on Business Activities of Mediacom Capital
The Indenture will provide that Mediacom Capital shall not hold any material
assets, become liable for any material obligations, engage in any trade or
business, or conduct any business activity, other than the issuance of Equity
Interests to Mediacom or any Wholly Owned Restricted Subsidiary, the
Incurrence of Indebtedness as a co-obligor or guarantor of Indebtedness
Incurred by Mediacom, including the Notes and the Exchange Notes, if any, that
is permitted to be Incurred by Mediacom under "--Limitation on Indebtedness"
above (provided that the net proceeds of such Indebtedness are retained by
Mediacom or loaned to or contributed as capital to one or more of the
Restricted Subsidiaries other than Mediacom Capital), and activities
incidental thereto. Neither Mediacom nor any Restricted Subsidiary shall
engage in any transactions with Mediacom Capital in violation of the
immediately preceding sentence.
Designation of Unrestricted Subsidiaries
The Indenture will provide that Mediacom may designate any Subsidiary
(including any newly acquired or newly formed Subsidiary or a Person becoming
a Subsidiary through merger or consolidation or Investment therein) as an
"Unrestricted Subsidiary" under the Indenture (a "Designation") only if (a) no
Default or Event of Default shall have occurred and be continuing at the time
of or after giving effect to such Designation; (b) at the time of and after
giving effect to such Designation, Mediacom would be able to Incur $1.00 of
additional Indebtedness under the Debt to Operating Cash Flow Ratio of the
first paragraph of "--Limitation on Indebtedness" above; and (c) Mediacom
would be permitted to make a Restricted Payment at the time of Designation
(assuming the effectiveness of such Designation) pursuant to the first
paragraph of "--Limitation on Restricted Payments" above in an amount (the
"Designation Amount") equal to Mediacom's proportionate interest in the fair
market value of such Subsidiary on such date (as determined in good faith by
the Executive Committee, whose determination shall be conclusive and evidenced
by a Committee Resolution). Notwithstanding the foregoing, neither Mediacom
Capital nor any of its Subsidiaries may be designated as Unrestricted
Subsidiaries.
The Indenture will further provide that at the time of Designation all of
the Indebtedness of such Unrestricted Subsidiary shall consist of, and will at
all times thereafter consist of, Non-Recourse Indebtedness, and that neither
Mediacom nor any Restricted Subsidiary shall at any time have any direct or
indirect obligation to (x) make additional Investments (other than Permitted
Investments) in any Unrestricted Subsidiary or (y) maintain or preserve the
financial condition of any Unrestricted Subsidiary or cause any Unrestricted
Subsidiary to achieve any specified levels of operating results or (z) be
party to any agreement, contract, arrangement or understanding with any
Unrestricted Subsidiary unless the terms of any such agreement, contract,
arrangement or understanding are no
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less favorable to Mediacom or such Restricted Subsidiary than those that might
be obtained, in light of all the circumstances, at the time from Persons who
are not Affiliates of Mediacom. If, at any time, any Unrestricted Subsidiary
would violate the foregoing requirements, it shall thereafter cease to be an
Unrestricted Subsidiary for purposes of the Indenture and any Indebtedness of
such Subsidiary shall be deemed to be Incurred as of such date.
Mediacom may revoke any Designation of a Subsidiary as an Unrestricted
Subsidiary (a "Revocation") if (a) no Default or Event of Default shall have
occurred and be continuing at the time of or after giving effect to such
Revocation; (b) at the time of and after giving effect to such Revocation,
Mediacom would be able to Incur $1.00 of additional Indebtedness under the
Debt to Operating Cash Flow Ratio of the first paragraph of "--Limitation on
Indebtedness" above; and (c) all Liens and Indebtedness of such Unrestricted
Subsidiary outstanding immediately following such Revocation would, if
Incurred at such time, have been permitted to be Incurred for all purposes of
the Indenture.
All Designations and Revocations must be evidenced by Committee Resolutions
delivered to the Trustee certifying compliance with the foregoing provisions.
Limitation on Guarantees of Certain Indebtedness
The Indenture will provide that Mediacom shall not (a) permit any Restricted
Subsidiary to guarantee any Indebtedness of either Issuer other than the Notes
(the "Other Indebtedness"), or (b) pledge any intercompany Indebtedness
representing obligations of any of its Restricted Subsidiaries to secure the
payment of Other Indebtedness, in each case unless such Restricted Subsidiary,
the Issuers and the Trustee execute and deliver a supplemental indenture
causing such Restricted Subsidiary to guarantee the Issuers' obligations under
the Indenture and the Notes to the same extent that such Restricted Subsidiary
guaranteed the Issuers' obligations under the Other Indebtedness (including
waiver of subrogation, if any). Thereafter, such Restricted Subsidiary shall
be a Guarantor for all purposes of the Indenture.
The guarantee of a Restricted Subsidiary will be released upon (i) the sale
of all of the Equity Interests, or all or substantially all of the assets, of
the applicable Guarantor (in each case other than to Mediacom or a
Subsidiary), (ii) the designation by Mediacom of the applicable Guarantor as
an Unrestricted Subsidiary, or (iii) the release of the guarantee of such
Guarantor with respect to the obligations which caused such Guarantor to
deliver a guarantee of the Notes in accordance with the preceding paragraph,
in each case in compliance with the Indenture (including, in the event of a
sale of Equity Interests or assets described in clause (i) above, that the net
cash proceeds are applied in accordance with the requirements of the
applicable provision of the Indenture described under "Repurchase at the
Option of Holders--Asset Sales" above).
Limitation on Dividends and Other Payment Restrictions Affecting Subsidiaries
The Indenture will provide that Mediacom shall not, and shall not permit any
Restricted Subsidiary to, directly or indirectly, create or otherwise cause or
suffer to exist or become effective any consensual encumbrance or restriction
of any kind on the ability of any Restricted Subsidiary to (a) pay dividends
or make any other distributions to Mediacom or any Restricted Subsidiary on
its Equity Interests; (b) pay any Indebtedness owed to Mediacom or any
Restricted Subsidiary; (c) make loans or advances, or guarantee any such loans
or advances, to Mediacom or any Restricted Subsidiary; (d) transfer any of its
properties or assets to Mediacom or any Restricted Subsidiary; (e) grant Liens
on the assets of Mediacom or any Restricted Subsidiary in favor of the holders
of the Notes; or (f) guarantee the Notes or any renewals or refinancings
thereof (any of the actions described in clauses (a) through (f) above is
referred to herein as a "Specified Action"), except for (i) such encumbrances
or restrictions arising by reason of Acquired Indebtedness of any Restricted
Subsidiary existing at the time such Person became a Restricted Subsidiary,
provided that such encumbrances or restrictions were not created in
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anticipation of such Person becoming a Restricted Subsidiary and are not
applicable to Mediacom or any other Restricted Subsidiary, (ii) such
encumbrances or restrictions arising under refinancing Indebtedness permitted
by clause (g) of the second paragraph under "--Limitation on Indebtedness"
above; provided that the terms and conditions of any such restrictions are no
less favorable to the holders of Notes than those under the Indebtedness being
refinanced, (iii) customary provisions restricting the assignment of any
contract or interest of Mediacom or any Restricted Subsidiary, (iv)
restrictions contained in the Indenture or any other indenture governing debt
securities that are no more restrictive than those contained in the Indenture,
and (v) restrictions under the Subsidiary Credit Facilities and under the
Future Subsidiary Credit Facilities, provided that, in the case of any Future
Subsidiary Credit Facility Mediacom shall have used commercially reasonable
efforts to include in the agreements relating to such Future Subsidiary Credit
Facility provisions concerning the encumbrance or restriction on the ability
of any Restricted Subsidiary to take any Specified Action that are no more
restrictive than those in effect in the Subsidiary Credit Facilities on the
date of the creation of the applicable restriction in such Future Subsidiary
Credit Facility ("Comparable Restriction Provisions"), and provided further
that if Mediacom shall conclude in its sole discretion based on then
prevailing market conditions that it is not in the best interest of Mediacom
and the Restricted Subsidiaries to comply with the foregoing proviso, the
failure to include Comparable Restriction Provisions in the agreements
relating to such Future Subsidiary Credit Facility shall not constitute a
violation of the provisions of this covenant.
Reports
The Indenture will provide that, whether or not the Issuers are then subject
to Section 13(a) or 15(d) of the Exchange Act or any successor provision
thereto, the Issuers shall file with the SEC (if permitted by SEC practice and
applicable law and regulations) so long as the Notes are outstanding the
annual reports, quarterly reports and other periodic reports which the Issuers
would have been required to file with the SEC pursuant to Section 13(a) or
15(d) or any successor provision thereto if the Issuers were so subject on or
prior to the respective dates (the "Required Filing Dates") by which the
Issuers would have been required to file such documents if the Issuers were so
subject. The Issuers shall also in any event (a) within 15 days of each
Required Filing Date (whether or not permitted or required to be filed with
the SEC) (i) transmit or cause to be transmitted by mail to all holders of
Notes, at such holder's address appearing in the register maintained by the
Registrar, without cost to such holders, and (ii) file with the Trustee,
copies of the annual reports, quarterly reports and other documents which the
Issuers are required to file with the SEC pursuant to the preceding sentence,
or if such filing is not so permitted, information and data of a similar
nature, and (b) if, notwithstanding the preceding sentence, filing such
documents by the Issuers with the SEC is not permitted by SEC practice or
applicable law or regulations, promptly upon written request supply copies of
such documents to any holder of Notes. In addition, for so long as any Notes
remain outstanding and prior to the later of the consummation of the Exchange
Offer and the effectiveness of the Shelf Registration Statement, if required,
the Issuers shall furnish to holders and to securities analysts and
prospective investors, upon their request, the information required to be
delivered pursuant to Rule 144A(d)(4) under the Securities Act.
Merger or Sales of Assets
The Indenture will provide that neither of the Issuers shall consolidate or
merge with or into, or transfer all or substantially all of its assets to,
another Person unless (i) either (A) such Issuer shall be the continuing
Person, or (B) the Person formed by or surviving any such consolidation or
merger (if other than such Issuer), or to which any such transfer shall have
been made, is a corporation, limited liability company or limited partnership
organized and existing under the laws of the United States, any State thereof
or the District of Columbia; (ii) the surviving Person (if other than such
Issuer) expressly assumes by supplemental indenture all the obligations of
such Issuer under the Notes and the Indenture; (iii) immediately after giving
effect to such transaction, no Default or Event of Default shall
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have occurred and be continuing; (iv) immediately after giving effect to such
transaction, the surviving Person would be able to Incur $1.00 of additional
Indebtedness under the Debt to Operating Cash Flow Ratio of the first
paragraph of "--Limitation on Indebtedness" above; and (v) Mediacom shall have
delivered to the Trustee prior to the proposed transaction an Officers'
Certificate and an Opinion of Counsel, each stating that the proposed
consolidation, merger or transfer and such supplemental indenture will comply
with the Indenture.
The Indenture will provide that no Guarantor shall consolidate or merge with
or into, or transfer all or substantially all of its assets to, another Person
unless (i) either (A) such Guarantor shall be the continuing Person, or (B)
the Person formed by or surviving any such consolidation or merger (if other
than such Guarantor), or to which any such transfer shall have been made, is a
corporation, limited liability company or limited partnership organized and
existing under the laws of the United States, any State thereof or the
District of Columbia; (ii) the surviving Person (if other than such Guarantor)
expressly assumes by supplemental indenture all the obligations of such
Guarantor under its guarantee of the Notes and the Indenture; (iii)
immediately after giving effect to such transaction, no Default or Event of
Default shall have occurred and be continuing; and (iv) Mediacom shall have
delivered to the Trustee prior to the proposed transaction an Officers'
Certificate and an Opinion of Counsel, each stating that the proposed
consolidation, merger or transfer and such supplemental indenture will comply
with the Indenture.
CERTAIN DEFINITIONS
Set forth below is a summary of certain of the defined terms used in the
covenants contained in the Indenture. Reference is made to the Indenture for
the full definition of all such terms as well as any other capitalized terms
used herein for which no definition is provided.
"Acquired Indebtedness" means Indebtedness of a Person existing at the time
such Person becomes a Restricted Subsidiary or assumed in connection with an
Asset Acquisition from such Person and not Incurred in connection with, or in
anticipation of, such Person becoming a Restricted Subsidiary or such Asset
Acquisition.
"Affiliate" means (i) any Person that directly, or indirectly through one or
more intermediaries, controls, or is controlled by, or is under common control
with, Mediacom; (ii) any spouse, immediate family member or other relative who
has the same principal residence as any Person described in clause (i) above;
(iii) any trust in which any such Persons described in clauses (i) and (ii)
above has a beneficial interest; and (iv) any corporation or other
organization of which any such Persons described above collectively owns 5% or
more of the equity of such entity. For purposes of this definition, "control "
(including, with correlative meaning, the terms "controlling," "controlled
by " and "under common control with ") when used with respect to any specified
Person includes the direct or indirect beneficial ownership of more than 5% of
the voting securities of such Person or the power to direct or cause the
direction of the management and policies of such Person whether by contract or
otherwise.
"Asset Acquisition" means (i) an Investment by Mediacom or any Restricted
Subsidiary in any other Person pursuant to which such Person shall become a
Restricted Subsidiary or shall be consolidated or merged with or into Mediacom
or any Restricted Subsidiary, or (ii) any acquisition by Mediacom or any
Restricted Subsidiary of the assets of any Person which constitute
substantially all of an operating unit, a division or a line of business of
such Person or which is otherwise outside of the ordinary course of business.
"Asset Sale" means any direct or indirect sale, conveyance, transfer, lease
(that has the effect of a disposition) or other disposition (including,
without limitation, any merger, consolidation or sale-leaseback transaction)
to any Person other than Mediacom or any Wholly Owned Restricted Subsidiary or
any Controlled Subsidiary, in one transaction or a series of related
transactions, of
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(i) any Equity Interest of any Restricted Subsidiary, (ii) any material
license, franchise or other authorization of Mediacom or any Restricted
Subsidiary, (iii) any assets of Mediacom or any Restricted Subsidiary which
constitute substantially all of an operating unit, a division or a line of
business of Mediacom or any Restricted Subsidiary or (iv) any other property
or asset of Mediacom or any Restricted Subsidiary outside of the ordinary
course of business. For the purposes of this definition, the term "Asset Sale"
shall not include (i) any transaction consummated in compliance with
"Repurchase at the Option of Holders--Change of Control" above and
"Covenants--Merger or Sales of Assets" above, and the creation of any Lien not
prohibited under "Covenants--Limitation on Liens" above, (ii) the sale of
property or equipment that has become worn out, obsolete or damaged or
otherwise unsuitable for use in connection with the business of Mediacom or
any Restricted Subsidiary, as the case may be, (iii) any transaction
consummated in compliance with "Covenants--Limitation on Restricted Payments"
above, and (iv) Asset Swaps permitted pursuant to "Repurchase at the Option of
Holders--Asset Sales." In addition, solely for purposes of "Repurchase at the
Option of Holders--Asset Sales" above, any sale, conveyance, transfer, lease
or other disposition, whether in one transaction or a series of related
transactions, involving assets with a fair market value not in excess of $2.0
million in any fiscal year shall be deemed not to be an Asset Sale.
"Asset Sale Proceeds" means, with respect to any Asset Sale, (i) cash
received by Mediacom or any of its Restricted Subsidiaries from such Asset
Sale (including cash received as consideration for the assumption of
liabilities incurred in connection with or in anticipation of such Asset
Sale), after (a) provision for all income or other taxes measured by or
resulting from such Asset Sale, (b) payment of all brokerage commissions,
underwriting, legal, accounting and other fees and expenses related to such
Asset Sale, and any relocation expenses incurred as a result thereof, (c)
provision for minority interest holders in any Restricted Subsidiary as a
result of such Asset Sale by such Restricted Subsidiary, (d) payment of
amounts required to be applied to the repayment of Indebtedness secured by a
Lien on the asset or assets that were the subject of such Asset Sale
(including payments made to obtain or avoid the need for the consent of any
holder of such Indebtedness), and (e) deduction of appropriate amounts to be
provided by Mediacom or such Restricted Subsidiary as a reserve, in accordance
with generally accepted accounting principles consistently applied, against
any liabilities associated with the assets sold or disposed of in such Asset
Sale and retained by Mediacom or such Restricted Subsidiary after such Asset
Sale, including, without limitation, pension and other post employment benefit
liabilities and liabilities related to environmental matters or against any
indemnification obligations associated with the assets sold or disposed of in
such Asset Sale; and (ii) promissory notes and other non-cash consideration
received by Mediacom or any Restricted Subsidiary from such Asset Sale or
other disposition upon the liquidation or conversion of such notes or non-cash
consideration into cash.
"Asset Swap" means the substantially concurrent purchase and sale, or
exchange, of Productive Assets between Mediacom or any of the Restricted
Subsidiaries and another Person or group of affiliated Persons (which Person
or group of affiliated Persons is not affiliated with Mediacom and the
Restricted Subsidiaries) pursuant to an Asset Swap Agreement; it being
understood that an Asset Swap may include a cash equalization payment made in
connection therewith, provided that such cash payment, if received by Mediacom
or any of the Restricted Subsidiaries, shall be deemed to be proceeds received
from an Asset Sale and shall be applied in accordance with "Repurchase at the
Option of Holders--Asset Sales."
"Asset Swap Agreement" means a definitive agreement, subject only to
customary closing conditions that Mediacom in good faith believes will be
satisfied, providing for an Asset Swap; provided, however, that any amendment
to, or waiver of, any closing condition that individually or in the aggregate
is material to such Asset Swap shall be deemed to be a new Asset Swap.
"Available Asset Sale Proceeds" means, with respect to any Asset Sale, the
aggregate Asset Sale Proceeds from such Asset Sale that have not been applied
in accordance with clause (iii)(a) and that
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have not yet been the basis for application in accordance with clause (iii)(b)
of the first paragraph of "Repurchase at the Option of Holders--Asset Sales"
above.
"Capitalized Lease Obligations" means Indebtedness represented by
obligations under a lease that is required to be capitalized for financial
reporting purposes in accordance with generally accepted accounting principles
and the amount of such Indebtedness shall be the capitalized amount of such
obligations determined in accordance with generally accepted accounting
principles consistently applied.
"Cash Equivalents" means (i) United States dollars; (ii) securities issued
or directly and fully guaranteed or insured by the United States government or
any agency or instrumentality thereof having maturities of not more than six
months from the date of acquisition; (iii) certificates of deposit and
eurodollar time deposits with maturities of six months or less from the date
of acquisition, bankers' acceptances with maturities not exceeding six months
and overnight bank deposits, in each case with any lender party to any
Subsidiary Credit Facility or any Future Subsidiary Credit Facility or with
any domestic commercial bank having capital and surplus in excess of $500.0
million; (iv) repurchase obligations with a term of not more than seven days
for underlying securities of the types described in clauses (ii) and (iii)
above entered into with any financial institution meeting the qualifications
specified in clause (iii) above; (v) commercial paper having a rating of at
least P-1 from Moody's or a rating of at least A-1 from S&P; and (vi) money
market mutual or similar funds having assets in excess of $100.0 million, at
least 95% of the assets of which are comprised of assets specified in clauses
(i) through (v) above.
"Committee Resolution" means with respect to Mediacom, a duly adopted
resolution of the Executive Committee of Mediacom.
"Consolidated Income Tax Expense" means, with respect to Mediacom for any
period, the provision for federal, state, local and foreign income taxes
payable by Mediacom and the Restricted Subsidiaries for such period as
determined on a consolidated basis in accordance with generally accepted
accounting principles consistently applied.
"Consolidated Interest Expense" means, with respect to Mediacom and the
Restricted Subsidiaries for any period, without duplication, the sum of (i)
the interest expense of Mediacom and the Restricted Subsidiaries for such
period as determined on a consolidated basis in accordance with generally
accepted accounting principles consistently applied, including, without
limitation, amortization of original issued discount on any Indebtedness and
the interest portion of any deferred payment obligation and after taking into
account the effect of elections made under any Hedging Agreements, however
denominated, with respect to such Indebtedness; (ii) the interest component of
Capitalized Lease Obligations paid, accrued and/or scheduled to be paid or
accrued by Mediacom and the Restricted Subsidiaries during such period as
determined on a consolidated basis in accordance with generally accepted
accounting principles consistently applied; and (iii) dividends and
distributions in respect of Disqualified Equity Interests actually paid in
cash by Mediacom and the Restricted Subsidiaries during such period as
determined on a consolidated basis in accordance with generally accepted
accounting principles consistently applied. For purposes of this definition,
interest on a Capitalized Lease Obligation shall be deemed to accrue at an
interest rate reasonably determined by Mediacom to be the rate of interest
implicit in such Capitalized Lease Obligation in accordance with generally
accepted accounting principles consistently applied.
"Consolidated Net Income" means, with respect to any period, the net income
(loss) of Mediacom and the Restricted Subsidiaries for such period determined
on a consolidated basis in accordance with generally accepted accounting
principles consistently applied, adjusted, to the extent included in
calculating such net income (loss), by excluding, without duplication, (i) all
extraordinary, unusual or nonrecurring items of income or expense and of gains
or losses and all gains and losses from the sale
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or other disposition of assets out of the ordinary course of business (net of
taxes, fees and expenses relating to the transaction giving rise thereto) for
such period; (ii) that portion of such net income (loss) derived from or in
respect of Investments in Persons other than any Restricted Subsidiary, except
to the extent actually received in cash by Mediacom or any Restricted
Subsidiary; (iii) the portion of such net income (loss) allocable to minority
interests in unconsolidated Persons for such period, except to the extent
actually received in cash by Mediacom or any Restricted Subsidiary; (iv) net
income (loss) of any other Person combined with Mediacom or any Restricted
Subsidiary on a "pooling of interests" basis attributable to any period prior
to the date of combination; (v) net income (loss) of any Restricted Subsidiary
to the extent that the declaration or payment of dividends or similar
distributions by that Restricted Subsidiary of that net income (loss) is not
at the date of determination permitted without any prior governmental approval
(which has not been obtained) or, directly or indirectly, by operation of the
terms of its charter or any agreement, instrument, judgment, decree, order,
statute, rule or governmental regulation applicable to that Restricted
Subsidiary or the holders of its Equity Interests; (vi) the cumulative effect
of a change in accounting principles after the date of the Indenture; (vii)
net income (loss) attributable to discontinued operations; (viii) management
fees payable to the "manager" as defined in the Operating Agreement and to
Mediacom Management and its Affiliates pursuant to management agreements with
Subsidiaries of Mediacom accrued for such period that have not been paid
during such period; and (ix) any other item of expense, other than "interest
expense," which appears on Mediacom's consolidated statement of income (loss)
below the line item "Operating Income," determined on a consolidated basis in
accordance with generally accepted accounting principles consistently applied.
"Consolidated Total Indebtedness" means, as at any date of determination, an
amount equal to the aggregate amount of all outstanding Indebtedness and the
aggregate liquidation preference or redemption payment value of all
Disqualified Equity Interests of Mediacom and the Restricted Subsidiaries
outstanding as of such date of determination, less the obligations of Mediacom
or any Restricted Subsidiary under any Hedging Agreement as of such date of
determination that would appear as a liability on the balance sheet of such
Person, in each case determined on a consolidated basis in accordance with
generally accepted accounting principles consistently applied.
"Continuing Member" means, as of the date of determination, any Person who
(i) was a member of the Executive Committee of Mediacom on the date of the
Indenture, (ii) was nominated for election or elected to the Executive
Committee of Mediacom with the affirmative vote of a majority of the
Continuing Members who were members of the Executive Committee at the time of
such nomination or election or (iii) is a representative of, or was approved
by, a Permitted Holder.
"Controlled Subsidiary" means a Restricted Subsidiary which is engaged in a
Related Business (i) 80% or more of the outstanding Equity Interests of which
(other than Equity Interests constituting directors' qualifying shares to the
extent mandated by applicable law) are owned by Mediacom or by one or more
Wholly Owned Restricted Subsidiaries or Controlled Subsidiaries or by Mediacom
and one or more Wholly Owned Restricted Subsidiaries or Controlled
Subsidiaries, (ii) of which Mediacom possesses, directly or indirectly, the
power to direct or cause the direction of the management or policies, whether
through the ownership of Voting Equity Interests, by agreement or otherwise,
and (iii) all of whose Indebtedness is Non-Recourse Indebtedness.
"Cumulative Credit" means the sum of (i) $10.0 million, plus (ii) the
aggregate Net Cash Proceeds received by Mediacom or a Restricted Subsidiary
from the issue or sale (other than to a Restricted Subsidiary) of Equity
Interests of Mediacom or a Restricted Subsidiary (other than Disqualified
Equity Interests) on or after April 1, 1998, plus (iii) the principal amount
(or accreted amount (determined in accordance with generally accepted
accounting principles), if less) of any Indebtedness, or the liquidation
preference or redemption payment value of any Disqualified Equity Interests,
of Mediacom or any Restricted Subsidiary which has been converted into or
exchanged for Equity Interests of Mediacom or a Restricted Subsidiary (other
than Disqualified Equity Interests) on or after April 1, 1998,
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plus (iv) cumulative Operating Cash Flow on or after April 1, 1998, to the end
of the fiscal quarter immediately preceding the date of the proposed
Restricted Payment, or, if cumulative Operating Cash Flow for such period is
negative, minus the amount by which cumulative Operating Cash Flow is less
than zero, plus (v) to the extent not already included in Operating Cash Flow,
if any Investment constituting a Restricted Payment that was made after the
date of the Indenture is sold or otherwise liquidated or repaid or any
Unrestricted Subsidiary which was designated as an Unrestricted Subsidiary
after the date of the Indenture is sold or otherwise liquidated, the fair
market value of such Restricted Payment (less the cost of disposition, if any)
on the date of such sale, liquidation or repayment, as determined in good
faith by the Executive Committee, whose determination shall be conclusive and
evidenced by a Committee Resolution, plus (vi) if any Unrestricted Subsidiary
is redesignated as a Restricted Subsidiary, the value of the Restricted
Payment that would result if such Subsidiary were redesignated as an
Unrestricted Subsidiary at such time, determined in accordance with the
provisions described under "Covenants--Designation of Unrestricted
Subsidiaries" above.
"Cumulative Interest Expense" means the aggregate amount of Consolidated
Interest Expense paid or accrued of the Issuers and the Restricted
Subsidiaries on or after April 1, 1998, to the end of the fiscal quarter
immediately preceding the proposed Restricted Payment.
"Debt to Operating Cash Flow Ratio" means the ratio of (i) the Consolidated
Total Indebtedness as of the date of calculation (the "Determination Date") to
(ii) four times the Operating Cash Flow for the latest three months for which
financial information is available immediately preceding such Determination
Date (the "Measurement Period"). For purposes of calculating Operating Cash
Flow for the Measurement Period immediately prior to the relevant
Determination Date, (I) any Person that is a Restricted Subsidiary on the
Determination Date (or would become a Restricted Subsidiary on such
Determination Date in connection with the transaction that requires the
determination of such Operating Cash Flow) will be deemed to have been a
Restricted Subsidiary at all times during such Measurement Period; (II) any
Person that is not a Restricted Subsidiary on such Determination Date (or
would cease to be a Restricted Subsidiary on such Determination Date in
connection with the transaction that requires the determination of such
Operating Cash Flow) will be deemed not have been a Restricted Subsidiary at
any time during such Measurement Period; and (III) if Mediacom or any
Restricted Subsidiary shall have in any manner (x) acquired (including through
an Asset Acquisition or the commencement of activities constituting such
operating business) or (y) disposed of (including by way of an Asset Sale or
the termination or discontinuance of activities constituting such operating
business) any operating business during such Measurement Period or after the
end of such period and on or prior to such Determination Date, such
calculation will be made on a pro forma basis in accordance with generally
accepted accounting principles consistently applied, as if, in the case of an
Asset Acquisition or the commencement of activities constituting such
operating business, all such transactions had been consummated on the first
day of such Measurement Period, and, in the case of an Asset Sale or
termination or discontinuance of activities constituting such operating
business, all such transactions had been consummated prior to the first day of
such Measurement Period.
"Disqualified Equity Interest" means (i) any Equity Interest issued by
Mediacom which, by its terms (or by the terms of any security into which it is
convertible or for which it is exchangeable at the option of the holder
thereof), or upon the happening of any event, matures or is mandatorily
redeemable, pursuant to a sinking fund obligation or otherwise, or is
redeemable at the option of the holder thereof (except, in each such case,
upon the occurrence of a Change of Control or a Regulatory Equity Interest
Repurchase), in whole or in part, or is exchangeable into Indebtedness, on or
prior to the earlier of the maturity date of the Notes or the date on which no
Notes remain outstanding; and (ii) any Equity Interest issued by any
Restricted Subsidiary which, by its terms (or by the terms of any security
into which it is convertible or for which it is exchangeable at the option of
the holder thereof), or upon the happening of any event, matures or is
mandatorily redeemable, pursuant to a sinking fund obligation or otherwise, or
is redeemable at the option of the holder thereof, in whole or in part, or is
exchangeable into Indebtedness.
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"Equity Interest" in any Person means any and all shares, interests, rights
to purchase, warrants, options, participations or other equivalents of or
interests in (however designated) corporate stock or other equity
participations, including partnership interests, whether general or limited,
and membership interests in such Person, including any Preferred Equity
Interests.
"Equity Offering" means a public or private offering by Mediacom or a
Restricted Subsidiary for cash of its respective Equity Interests (other than
Disqualified Equity Interests) or options, warrants or rights with respect to
such Equity Interests.
"Excess Proceeds" means, with respect to any Asset Sale, the then Available
Asset Sale Proceeds less any such Available Asset Sale Proceeds that are
required to be applied and are applied in accordance with clause (iii)(b)(1)
of the first paragraph of "Repurchase at the Option of Holders--Asset Sales"
above.
"Executive Committee" means (i) so long as Mediacom is a limited liability
company, (x) while the Operating Agreement is in effect, the Executive
Committee authorized thereunder, and (y) at any other time, the manager or
board of managers of Mediacom, or management committee or similar governing
body responsible for the management of the business and affairs of Mediacom;
(ii) if Mediacom were to be reorganized as a corporation, the board of
directors of Mediacom; and (iii) if Mediacom were to be reorganized as a
partnership, the board of directors of the corporate general partner of such
partnership (or if such general partner is itself a partnership, the board of
directors of such general partner's corporate general partner).
"Future Subsidiary Credit Facilities" means one or more debt facilities
(other than the Subsidiary Credit Facilities) entered into from time to time
after the date of the Indenture by one or more Restricted Subsidiaries or
groups of Restricted Subsidiaries with banks or other institutional lenders,
together with all loan documents and instruments thereunder (including,
without limitation, any guarantee agreements and security documents),
including any amendment (including any amendment and restatement),
modification or supplement thereto or any refinancing, refunding, deferral,
renewal, extension or replacement thereof (including, in any such case and
without limitation, adding or removing Subsidiaries of Mediacom as borrowers
or guarantors thereunder), whether by the same or any other lender or group of
lenders.
"Guarantor" means any Subsidiary of Mediacom that guarantees the Issuers'
obligations under the Indenture and the Notes issued after the date of the
Indenture pursuant to "Covenants--Limitation on Guarantees of Certain
Indebtedness" above.
"Hedging Agreement" means any interest rate swap agreement, interest rate
cap agreement, interest rate collar agreement or other similar agreement
providing for the transfer or mitigation of interest rate risks either
generally or under specific contingencies.
"Incur" means, with respect to any Indebtedness or other obligation of any
Person, to create, issue, incur (including by conversion, exchange or
otherwise), assume, guarantee or otherwise become liable in respect of such
Indebtedness or other obligation or the recording, as required pursuant to
generally accepted accounting principles or otherwise, of any such
Indebtedness or other obligation on the balance sheet of such Person (and
"Incurrence", "Incurred" and "Incurring" shall have meanings correlative to
the foregoing). Indebtedness of any Person or any of its Subsidiaries existing
at the time such Person becomes a Restricted Subsidiary (or is merged into or
consolidates with Mediacom or any Restricted Subsidiary), whether or not such
Indebtedness was incurred in connection with, or in contemplation of, such
Person becoming a Restricted Subsidiary (or being merged into or consolidated
with Mediacom or any Restricted Subsidiary), shall be deemed Incurred at the
time any such Person becomes a Restricted Subsidiary or merges into or
consolidates with Mediacom or any Restricted Subsidiary.
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"Indebtedness" means, with respect to any Person, without duplication, any
indebtedness, secured or unsecured, contingent or otherwise, in respect of
borrowed money (whether or not the recourse of the lender is to the whole of
the assets of such Person or only to a portion thereof), or evidenced by
bonds, notes, debentures or similar instruments or letters of credit or
representing the deferred and unpaid balance of the purchase price of property
or services (but excluding trade payables incurred in the ordinary course of
business and non-interest bearing installment obligations and other accrued
liabilities arising in the ordinary course of business) if and to the extent
any of the foregoing indebtedness would appear as a liability upon a balance
sheet of such Person prepared in accordance with generally accepted accounting
principles, and shall also include, to the extent not otherwise included (but
without duplication), (i) any Capitalized Lease Obligations, (ii) obligations
secured by a lien to which any property or assets owned or held by such Person
is subject, whether or not the obligation or obligations secured thereby shall
have been assumed, (iii) guarantees of items of other Persons which would be
included within this definition for such other Persons (whether or not such
items would appear upon the balance sheet of the guarantor), and (iv)
obligations of Mediacom or any Restricted Subsidiary under any Hedging
Agreement applicable to any of the foregoing (if and only to the extent any
amount due in respect of such Hedging Agreement would appear as a liability
upon a balance sheet of such Person prepared in accordance with generally
accepted accounting principles). Indebtedness (i) shall not include
obligations under performance bonds, performance guarantees, surety bonds and
appeal bonds, letters of credit or similar obligations, Incurred in the
ordinary course of business, including in connection with pole rental or
conduit attachments and the like or the requirements of cable television
franchising authorities, and otherwise consistent with industry practice; (ii)
shall not include obligations of any Person (x) arising from the honoring by a
bank or other financial institution of a check, draft or other similar
instrument inadvertently drawn against insufficient funds in the ordinary
course of business, provided such obligations are extinguished within five
business days of their Incurrence, (y) resulting from the endorsement of
negotiable instruments for collection in the ordinary course of business and
consistent with past practice and (z) under stand-by letters of credit to the
extent collateralized by cash or Cash Equivalents; and (iii) which provides
that an amount less than the principal amount thereof shall be due upon any
declaration of acceleration thereof shall be deemed to be Incurred or
outstanding in an amount equal to the accreted value thereof at the date of
determination.
"Investment" means, directly or indirectly, any advance, loan or other
extension of credit (including by means of a guarantee) or capital
contribution to (by means of transfers of property to others, payments for
property or services for the account or use of others or otherwise), the
acquisition, by purchase or otherwise, of any stock, bonds, notes, debentures,
partnership, membership or joint venture interests or other securities or
other evidence of beneficial interest of any Person, provided that the term
"Investment" shall not include any such advance, loan or extension of credit
having a term not exceeding 90 days arising in the ordinary course of business
or any pledge of Equity Interests pursuant to the Subsidiary Credit Facilities
or any Future Subsidiary Credit Facilities. If Mediacom or any Restricted
Subsidiary sells or otherwise disposes of any Voting Equity Interest of any
direct or indirect Restricted Subsidiary such that, after giving effect to
such sale or disposition, Mediacom no longer owns, directly or indirectly,
greater than 50% of the outstanding Voting Equity Interests of such Restricted
Subsidiary, Mediacom shall be deemed to have made an Investment on the date of
any such sale or disposition equal to the fair market value of the Voting
Equity Interests of such former Restricted Subsidiary not sold or disposed of.
"Lien" means any mortgage, pledge, lien, charge, security interest,
hypothecation, assignment for security or encumbrance of any kind (including
any conditional sale or capital lease or other title retention agreement, any
lease in the nature thereof or any agreement to give a security interest).
"Liquidated Damages" has the meaning specified in the section of this
Offering Memorandum entitled "Exchange and Registration Rights Agreement."
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"Mediacom Management" means Mediacom Management Corporation, a Delaware
corporation.
"Moody's" means Moody's Investors Service, Inc.
"Net Cash Proceeds" means, with respect to any issuance or sale of Equity
Interests, the proceeds in the form of cash or Cash Equivalents received by
Mediacom or any Restricted Subsidiary of such issuance or sale net of
attorneys' fees, accountants fees, underwriters' or placement agents' fees,
discounts or commissions and brokerage, consultant and other fees actually
incurred in connection with such issuance or sale and net of taxes paid or
payable as a result thereof.
"Non-Recourse Indebtedness" means Indebtedness of a Person (i) as to which
neither of the Issuers nor any of the Restricted Subsidiaries (other than such
Person or any Subsidiaries of such Person) (a) provides any guarantee or
credit support of any kind (including any undertaking, guarantee, indemnity,
agreement or instrument that would constitute Indebtedness) or (b) is directly
or indirectly liable (as a guarantor or otherwise); and (ii) the incurrence of
which will not result in any recourse against any of the assets of either of
the Issuers or the Restricted Subsidiaries (other than to such Person or to
any Subsidiaries of such Person and other than to the Equity Interests in such
Person or in another Restricted Subsidiary or an Unrestricted Subsidiary
pledged by Mediacom, a Restricted Subsidiary or an Unrestricted Subsidiary);
provided, however, that Mediacom or any Restricted Subsidiary may make a loan
to a Controlled Subsidiary or an Unrestricted Subsidiary, or guarantee a loan
made to a Controlled Subsidiary or an Unrestricted Subsidiary, if such loan or
guarantee is permitted by "Covenants--Limitation on Restricted Payments" above
at the time of the making of such loan or guarantee, and such loan or
guarantee shall not constitute Indebtedness which is not Non-Recourse
Indebtedness.
"Operating Agreement" means the Third Amended and Restated Operating
Agreement of Mediacom dated as of January 20, 1998, as the same may be
amended, supplemented or modified from time to time.
"Operating Cash Flow" means, with respect to Mediacom and the Restricted
Subsidiaries on a consolidated basis, for any period, an amount equal to
Consolidated Net Income for such period increased (without duplication) by the
sum of (i) Consolidated Income Tax Expense accrued for such period to the
extent deducted in determining Consolidated Net Income for such period; (ii)
Consolidated Interest Expense for such period to the extent deducted in
determining Consolidated Net Income for such period; and (iii) depreciation,
amortization and any other non-cash items for such period to the extent
deducted in determining Consolidated Net Income for such period (other than
any non-cash item (other than the management fees referred to in clause (viii)
of the definition of "Consolidated Net Income") which requires the accrual of,
or a reserve for, cash charges for any future period) of Mediacom and the
Restricted Subsidiaries, including, without limitation, amortization of
capitalized debt issuance costs for such period, all of the foregoing
determined on a consolidated basis in accordance with generally accepted
accounting principles consistently applied, and decreased by non-cash items to
the extent they increase Consolidated Net Income (including the partial or
entire reversal of reserves taken in prior periods) for such period.
"Other Pari Passu Debt" means Indebtedness of Mediacom or any Restricted
Subsidiary that does not constitute Subordinated Obligations, is not senior in
right of payment to the Notes and has a stated final maturity which is the
same as the stated final maturity of the Notes.
"Other Pari Passu Debt Pro Rata Share" means the amount of the applicable
Available Asset Sale Proceeds obtained by multiplying the amount of such
Available Asset Sale Proceeds by a fraction, (i) the numerator of which is the
aggregate principal amount and/or accreted value, as the case may be, of all
Other Pari Passu Debt outstanding at the time of the applicable Asset Sale
with respect to which Mediacom or any Restricted Subsidiary is required to use
Available Asset Sale Proceeds to repay or
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make an offer to purchase or repay and (ii) the denominator of which is the
sum of (a) the aggregate principal amount of all Notes outstanding at the time
of the applicable Asset Sale and (b) the aggregate principal amount and/or
accreted value, as the case may be, of all Other Pari Passu Debt outstanding
at the time of the applicable Asset Sale Offer with respect to which Mediacom
or any Restricted Subsidiary is required to use the applicable Available Asset
Sale Proceeds to offer to repay or make an offer to purchase or repay.
"Other Permitted Liens" means (i) Liens imposed by law, such as carriers',
warehousemen's and mechanics' liens and other similar liens arising in the
ordinary course of business which secure payment of obligations that are not
yet delinquent or that are being contested in good faith by appropriate
proceedings promptly instituted and diligently conducted and for which an
appropriate reserve or provision shall have been made in accordance with
generally accepted accounting principles consistently applied; (ii) Liens for
taxes, assessments or governmental charges or claims that are not yet
delinquent or that are being contested in good faith by appropriate
proceedings promptly instituted and diligently conducted and for which an
appropriate reserve or provision shall have been made in accordance with
generally accepted accounting principles consistently applied;
(iii) easements, rights of way, and other restrictions on use of property or
minor imperfections of title that in the aggregate are not material in amount
and do not in any case materially detract from the property subject thereto or
interfere with the ordinary conduct of the business of Mediacom or its
Subsidiaries; (iv) Liens related to Capitalized Lease Obligations, mortgage
financings or purchase money obligations (including refinancings thereof), in
each case Incurred for the purpose of financing all or any part of the
purchase price or cost of construction or improvement of property, plant or
equipment used in the business of Mediacom or any Restricted Subsidiary or a
Related Business, provided that any such Lien encumbers only the asset or
assets so financed, purchased, constructed or improved; (v) Liens resulting
from the pledge by Mediacom of Equity Interests in a Restricted Subsidiary in
connection with a Subsidiary Credit Facility or a Future Subsidiary Credit
Facility or in an Unrestricted Subsidiary in any circumstance, in each such
case where recourse to Mediacom is limited to the value of the Equity
Interests so pledged; (vi) Liens resulting from the pledge by Mediacom of
intercompany indebtedness owed to Mediacom in connection with a Subsidiary
Credit Facility or a Future Subsidiary Credit Facility; (vii) Liens incurred
or deposits made in the ordinary course of business in connection with
workers' compensation, unemployment insurance and other types of social
security; (viii) Liens to secure the performance of statutory obligations,
surety or appeal bonds, performance bonds, deposits to secure the performance
of bids, trade contracts, government contracts, leases or licenses or other
obligations of a like nature incurred in the ordinary course of business
(including without limitation, landlord Liens on leased properties); (ix)
leases or subleases granted to third Persons not interfering with the ordinary
course of business of Mediacom; (x) deposits made in the ordinary course of
business to secure liability to insurance carriers; (xi) Liens securing
reimbursement obligations with respect to letters of credit which encumber
documents and other property relating to such letters of credit and the
products and proceeds thereof; (xii) Liens on the assets of Mediacom to secure
hedging agreements with respect to Indebtedness permitted by the Indenture to
be Incurred; (xiii) attachment or judgment Liens not giving rise to a Default
or an Event of Default; (xiv) any interest or title of a lessor under any
capital lease or operating lease; and (xv) Liens resulting from the pledge of
"Unfunded Capital Commitments" (as defined in the Operating Agreement)
securing the repayment of Indebtedness in respect of reimbursement obligations
for letters of credit given in connection with or in contemplation of the
acquisition of a Related Business.
"Permitted Holder" means (i) Rocco B. Commisso or his spouse or siblings,
any of their lineal descendants and their spouses, (ii) any controlled
Affiliate of any individual described in clause (i) above, (iii) in the event
of the death or incompetence of any individual described in clause (i) above,
such Person's estate, executor, administrator, committee or other personal
representative, in each case who at any particular date will beneficially own
or have the right to acquire, directly or indirectly, Equity Interests of
Mediacom, (iv) any trust or trusts created for the benefit of each Person
described
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in this definition, including any trust for the benefit of the parents or
siblings of any individual described in clause (i) above, (v) any trust for
the benefit of any such trust, (vi) any of the holders of Equity Interests in
Mediacom on the date of the Indenture, or (vii) any of the Affiliates of any
Person described in clause (vi) above.
"Permitted Investments" means (i) Cash Equivalents; (ii) Investments in
prepaid expenses, negotiable instruments held for collection and lease,
utility and workers' compensation, performance and other similar deposits;
(iii) the extension of credit to vendors, suppliers and customers in the
ordinary course of business; (iv) Investments existing as of the date of the
Indenture, and any amendment, modification, extension or renewal thereof to
the extent such amendment, modification, extension or renewal does not require
Mediacom or any Restricted Subsidiary to make any additional cash or non-cash
payments or provide additional services in connection therewith; (v) Hedging
Agreements; (vi) any Investment for which the sole consideration provided is
Equity Interests (other than Disqualified Equity Interests) of Mediacom; (vii)
any Investment consisting of a guarantee permitted under clause (e) of the
second paragraph of "Covenants--Limitation on Indebtedness" above; (viii)
Investments in Mediacom, in any Wholly Owned Restricted Subsidiary or in any
Controlled Subsidiary or any Person that, as a result of or in connection with
such Investment, becomes a Wholly Owned Restricted Subsidiary or a Controlled
Subsidiary or is merged with or into or consolidated with Mediacom or a Wholly
Owned Restricted Subsidiary or a Controlled Subsidiary; (ix) loans and
advances to officers, directors and employees of Mediacom and the Restricted
Subsidiaries for business-related travel expenses, moving expenses and other
similar expenses in each case incurred in the ordinary course of business; (x)
any acquisition of assets solely in exchange for the issuance of Equity
Interests (other than Disqualified Equity Interests) of Mediacom; (xi) Related
Business Investments; and (xii) other Investments made pursuant to this clause
(xii) at any time, and from time to time, after the date of the Indenture, in
addition to any Permitted Investments described in clauses (i) through (xi)
above, in an aggregate amount at any one time outstanding not to exceed $10.0
million.
"Person" means any individual, corporation, partnership, limited liability
company, joint venture, association, joint stock company, trust,
unincorporated organization, government or agency or political subdivision
thereof or any other entity.
"Preferred Equity Interest" means, in any Person, an Equity Interest of any
class or classes, however designated, which is preferred as to the payment of
dividends or distributions, or as to the distribution of assets upon any
voluntary or involuntary liquidation or dissolution of such Person, over
Equity Interests of any other class in such Person.
"Productive Assets" means assets of a kind used or useable by Mediacom and
the Restricted Subsidiaries in any Related Business and specifically includes
assets acquired through Asset Acquisitions (it being understood that "assets"
may include Equity Interests of a Person that owns such Productive Assets,
provided that after giving effect to such transaction, such Person would be a
Restricted Subsidiary).
"Related Business" means a cable television, media and communications,
telecommunications or data transmission business, and businesses ancillary,
complementary or reasonably related thereto, and reasonable extensions
thereof.
"Related Business Investment" means (i) any capital expenditure or
Investment, in each case related to the business of Mediacom and its
Restricted Subsidiaries as conducted on the date of the Indenture and as such
business may thereafter evolve in the fields of Related Businesses, (ii) any
Investment in any other Person primarily engaged in a Related Business and
(iii) any customary deposits or earnest money payments made by Mediacom or any
Restricted Subsidiary in connection with or in contemplation of the
acquisition of a Related Business.
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"Restricted Subsidiary" means any Subsidiary of Mediacom that has not been
designated by the Executive Committee of Mediacom by a Committee Resolution
delivered to the Trustee as an Unrestricted Subsidiary pursuant to
"Covenants--Designation of Unrestricted Subsidiaries" above. Any such
designation may be revoked by a Committee Resolution delivered to the Trustee,
subject to the provisions of such covenant.
"S&P" means Standard & Poor's Ratings Group.
"Significant Subsidiary" means any Restricted Subsidiary which at the time
of determination had (A) total assets which, as of the date of Mediacom's most
recent quarterly consolidated balance sheet, constituted at least 10% of
Mediacom's total assets on a consolidated basis as of such date, or (B)
revenues for the three-month period ending on the date of Mediacom's most
recent quarterly consolidated statement of income which constituted at least
10% of Mediacom's total revenues on a consolidated basis for such period, or
(C) Subsidiary Operating Cash Flow for the three-month period ending on the
date of Mediacom's most recent quarterly consolidated statement of income
which constituted at least 10% of Mediacom's total Operating Cash Flow on a
consolidated basis for such period.
"Subordinated Obligations" means, with respect to either of the Issuers, any
Indebtedness of either of the Issuers which is expressly subordinated in right
of payment to the Notes.
"Subsidiary" means a Person the majority of whose voting stock, membership
interests or other Voting Equity Interests is or are owned by Mediacom or a
Subsidiary. Voting stock in a corporation is Equity Interests having voting
power under ordinary circumstances to elect directors.
"Subsidiary Credit Facilities" means the Southeast Credit Facility and the
Western Credit Facility, together with all loan documents and instruments
thereunder (including, without limitation, any guarantee agreements and
security documents), including any amendment (including any amendment and
restatement), modification or supplement thereto or any refinancing,
refunding, deferral, renewal, extension or replacement thereof (including, in
any such case and without limitation, adding or removing Subsidiaries of
Mediacom as borrowers or guarantors thereunder), whether by the same or any
other lender or group of lenders, pursuant to which (i) an aggregate amount of
Indebtedness up to $325.0 million may be Incurred pursuant to clause (c)(i) of
the second paragraph of "Covenants--Limitation on Indebtedness" and (ii) any
additional amount of Indebtedness in excess of $325.0 million may be Incurred
pursuant to the first paragraph or pursuant to clause (c)(ii) or any other
applicable clause (other than clause (c)(i)) of the second paragraph of
"Covenants--Limitation on Indebtedness."
"Subsidiary Operating Cash Flow" means, with respect to any Subsidiary for
any period, the "Operating Cash Flow" of such Subsidiary and its Subsidiaries
for such period determined by utilizing all of the elements of the definition
of "Operating Cash Flow" in the Indenture, including the defined terms used in
such definition, consistently applied only to such Subsidiary and its
Subsidiaries on a consolidated basis for such period.
"Unrestricted Subsidiary" means any Subsidiary of Mediacom designated as
such pursuant to the provisions of "Covenants--Designation of Unrestricted
Subsidiaries" above, and any Subsidiary of an Unrestricted Subsidiary. Any
such designation may be revoked by a Committee Resolution delivered to the
Trustee, subject to the provisions of such covenant.
"Voting Equity Interests" means Equity Interests in any Person with voting
power under ordinary circumstances entitling the holders thereof to elect the
Executive Committee, the board of managers, board of directors or other
governing body of such Person.
"Weighted Average Life to Maturity" means, when applied to any Indebtedness
at any date, the number of years obtained by dividing (i) the sum of the
products obtained by multiplying (a) the amount
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of each then remaining installment, sinking fund, serial maturity or other
required scheduled payment of principal, including payment of final maturity,
in respect thereof by (b) the number of years (calculated to the nearest one-
twelfth) that will elapse between such date and the making of such payment, by
(ii) the then outstanding aggregate principal amount of such Indebtedness.
"Wholly Owned Restricted Subsidiary" means a Restricted Subsidiary 99% or
more of the outstanding Equity Interests of which (other than Equity Interests
constituting directors' qualifying shares to the extent mandated by applicable
law) are owned by Mediacom or by one or more Wholly Owned Restricted
Subsidiaries or by Mediacom and one or more Wholly Owned Restricted
Subsidiaries.
NO LIABILITY OF MANAGERS, OFFICERS, EMPLOYEES, OR SHAREHOLDERS
No manager, director, officer, employee, member, shareholder, partner or
incorporator of either Issuer or any Subsidiary, as such, will have any
liability for any obligations of the Issuers under the Notes, the Exchange
Notes, if any, or the Indenture or for any claim based on, in respect of, or
by reason of, such obligations or their creation. Each holder of Notes by
accepting a Note waives and releases all such liability. The waiver and
release are part of the consideration for issuance of the Notes. Such waiver
may not be effective to waive liabilities under the Federal securities laws
and the SEC is of the view that such a waiver is against public policy.
DEFEASANCE AND COVENANT DEFEASANCE
The Indenture will provide that the Issuers may elect either (a) to defease
and be discharged from any and all obligations with respect to the Notes
(except for the obligations to register the transfer or exchange of such
Notes, to replace temporary or mutilated, destroyed, lost or stolen Notes, to
maintain an office or agency in respect of the Notes and to hold moneys for
payment in trust) ("defeasance") or (b) to be released from its obligations
with respect to the Notes under certain covenants (and related Events of
Default) contained in the Indenture, including but not limited to those
described above under "Covenants" ("covenant defeasance"), upon the deposit
with the Trustee (or other qualifying trustee), in trust for such purpose, of
money and/or U.S. Government Obligations which through the payment of
principal and interest in accordance with their terms will provide money, in
an amount sufficient to pay the principal of, premium, if any, and interest
and Liquidated Damages, if any, on the Notes, on the scheduled due dates
therefor. Such a trust may only be established if, among other things, (x) no
Default or Event of Default has occurred and is continuing or would arise
therefrom (or, with respect to Events of Default resulting from certain events
of bankruptcy, insolvency or reorganization, would occur at any time in the
period ending on the 91st day after the date of deposit) and (y) Mediacom has
delivered to the Trustee an opinion of counsel (as specified in the Indenture)
to the effect that (i) defeasance or covenant defeasance, as the case may be,
will not require registration of the Issuers, the Trustee or the trust fund
under the Investment Company Act of 1940, as amended, or the Investment
Advisors Act of 1940, as amended, and (ii) the holders of the Notes will
recognize income, gain or loss for Federal income tax on the same amounts, in
the same manner and at the same times as would have been the case if such
defeasance or covenant defeasance had not occurred. Such opinion, in the case
of defeasance under clause (a) above, must refer to and be based upon a
private ruling concerning the Notes of the Internal Revenue Service or a
ruling of general effect published by the Internal Revenue Service.
MODIFICATION OF INDENTURE
From time to time, the Issuers and the Trustee may, without the consent of
holders of the Notes, enter into one or more supplemental indentures for
certain specified purposes, including providing for a successor or successors
to the Issuers, adding guarantees, releasing Guarantors when permitted by the
Indenture, providing for security for the Notes, adding to the covenants of
the Issuers, surrendering
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any right or power conferred upon the Issuers, providing for uncertificated
Notes in addition to or in place of certificated Notes, making any change that
does not adversely affect the rights of any Noteholder, complying with any
requirement of the Trust Indenture Act or curing certain ambiguities, defects
or inconsistencies. The Indenture contains provisions permitting the Issuers
and the Trustee, with the consent of holders of at least a majority in
aggregate principal amount of the Notes at the time outstanding, to modify the
Indenture or any supplemental indenture or the rights of the holders of the
Notes, except that no such modification shall, without the consent of each
holder affected thereby (i) change or extend the fixed maturity of any Notes,
reduce the rate or extend the time of payment of interest or Liquidated
Damages thereon, reduce the principal amount thereof or premium, if any,
thereon or change the currency in which the Notes are payable; (ii) reduce the
premium payable upon any redemption of Notes in accordance with the optional
redemption provisions of the Notes or change the time before which no such
redemption may be made; (iii) waive a default in the payment of principal or
interest or Liquidated Damages on the Notes (except that holders of a majority
in aggregate principal amount of the Notes at the time outstanding may (a)
rescind an acceleration of the Notes that resulted from a non-payment default
and (b) waive the payment default that resulted from such acceleration) or
alter the rights of Noteholders to waive defaults; or (iv) reduce the
aforesaid percentage of Notes, the consent of the holders of which is required
for any such modification. Any existing Event of Default, other than a default
in the payment of principal or interest or Liquidated Damages on the Notes, or
compliance with any provision of the Notes or the Indenture, other than any
provision related to the payment of principal or interest or Liquidated
Damages on the Notes, may be waived with the consent of holders of at least a
majority in aggregate principal amount of the Notes at the time outstanding.
COMPLIANCE CERTIFICATE
The Indenture will provide that Mediacom will deliver to the Trustee within
120 days after the end of each fiscal year of Mediacom an Officers'
Certificate stating whether or not the signers know of any Event of Default
that has occurred. If they do, the certificate will describe the Event of
Default and its status.
CONCERNING THE TRUSTEE
Bank of Montreal Trust Company is to be the Trustee under the Indenture and
has been appointed by the Issuers as Registrar and Paying Agent with regard to
the Notes. Bank of Montreal, an affiliate of the Trustee, is a lender under
each of the Subsidiary Credit Facilities. An affiliate of Bank of Montreal
holds approximately 3.8% of the membership interests in Mediacom.
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DESCRIPTION OF OTHER INDEBTEDNESS
SUBSIDIARY CREDIT FACILITIES
Mediacom has been organized as a holding company for its various
Subsidiaries. The Company's financing strategy is to raise equity from its
members and issue public long-term debt (including the Notes) at the holding
company level, while utilizing the Subsidiaries to access debt capital in the
bank and private placement markets through multiple stand-alone borrowing
groups. The Company believes that this financing strategy is beneficial
because it broadens the Company's access to various debt markets, enhances its
flexibility in managing the Company's capital structure, reduces the overall
cost of debt capital and permits the Company to maintain a substantial
liquidity position in the form of unused and available bank credit
commitments.
Financings of the Subsidiaries are currently effected pursuant to the
Subsidiary Credit Facilities through two stand-alone borrowing groups, the
Western Group and Mediacom Southeast, each having a separate lending group.
The credit arrangements in these borrowing groups are non-recourse to
Mediacom, have no cross-default provisions relating directly to each other,
have different revolving credit and term periods and contain separately
negotiated covenants tailored for each borrowing group. These credit
arrangements permit the relevant Subsidiaries, subject to covenant and other
restrictions, to make distributions to Mediacom.
The financing of the operations of the Subsidiaries in the Western Group is
effected through the Western Credit Facility pursuant to a Second Amended and
Restated Credit Agreement dated as of June 24, 1997, as amended, among the
Subsidiaries included in the Western Group, the lenders party thereto, and The
Chase Manhattan Bank ("Chase"), as administrative agent. Such Subsidiaries
have used the proceeds from borrowings under the Western Credit Facility to
finance, in part, the purchase of the 1997 Systems and the Jones System and
for working capital and other general corporate purposes. The Western Credit
Facility is a $100.0 million senior credit facility which includes a $70.0
million reducing revolving credit facility expiring September 30, 2005 (the
"Western Revolving Credit Facility") and a $30.0 million term loan maturing
September 30, 2005 (the "Western Term Loan"). At March 31, 1998, there was
approximately $60.6 million outstanding under the Western Revolving Credit
Facility and approximately $30.0 million outstanding under the Western Term
Loan. Interest under the Western Credit Facility is payable at the "Eurodollar
Rate" or "Base Rate," as such terms are defined therein, plus a floating
percentage tied to the senior leverage ratio, as defined, ranging from 1.375%
to 2.750% for Eurodollar Rate borrowings. The floating percentage is one
percentage point lower in the case of Base Rate loans. The weighted average
interest rate at March 31, 1998 on the outstanding borrowings under the
Western Credit Facility was approximately 8.05%. At March 31, 1998, separate
interest rate swap agreements had been entered into by the Western Group to
hedge the underlying Eurodollar Rate exposure in notional amount of $62.0
million with expiration dates ranging from September 1998 through October
2002.
The financing of the operations of Mediacom Southeast is effected through
the Southeast Credit Facility pursuant to a Credit Agreement dated as of
January 23, 1998, as amended, among Mediacom Southeast, the lenders party
thereto and Chase, as administrative agent. Mediacom Southeast has used the
proceeds from borrowings under the Southeast Credit Facility to finance, in
part, the purchase of the Cablevision Systems and for working capital and
other general corporate purposes. The Southeast Credit Facility is a $225.0
million senior credit facility which includes a $165.0 million reducing
revolving credit facility expiring June 30, 2006 (the "Southeast Revolving
Credit Facility") and a $60.0 million term loan maturing June 30, 2006 (the
"Southeast Term Loan"). At March 31, 1998, there was $141.0 million
outstanding under the Southeast Revolving Credit Facility and $60.0 million
outstanding under the Southeast Term Loan. The Southeast Credit Facility
includes an additional term loan facility which is available until December
30, 1999, pursuant to which the lenders thereunder may extend, at their
discretion, up to an additional $50.0 million of term loans to Mediacom
Southeast (the
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"Incremental Facility Loans"). Interest under the Southeast Credit Facility is
payable at the "Eurodollar Rate" or "Base Rate," as such terms are defined
therein, plus a floating percentage tied to the senior leverage ratio ranging
from 1.25% to 2.25% for Eurodollar Rate borrowings. The floating percentage is
one percentage point lower in the case of Base Rate loans. The weighted
average interest rate at March 31, 1998 on the outstanding borrowings under
the Southeast Credit Facility was approximately 7.94%.
In general, the Subsidiary Credit Facilities require the respective
borrowing groups to use the proceeds from certain specified equity and debt
issuances, as well as certain asset dispositions, to prepay borrowings under
the respective Subsidiary Credit Facilities and to reduce permanently
commitments thereunder. The Subsidiary Credit Facilities also require
mandatory prepayments of amounts outstanding and permanent reductions in the
commitments thereunder, beginning in 2000, based on a percentage of excess
cash flow, as defined.
The Subsidiary Credit Facilities are secured by Mediacom's pledge of all the
ownership interests in the Subsidiaries and a first priority lien on all the
tangible and intangible assets of the Subsidiaries, other than real property
in the case of the Southeast Credit Facility. The indebtedness under the
Subsidiary Credit Facilities is guaranteed by Mediacom on a limited recourse
basis to the extent of its ownership interests in the Subsidiaries.
The Subsidiary Credit Facilities contain covenants, including, but not
limited to, insurance requirements, limitations on mergers and acquisitions,
consolidations and sales of certain assets, restrictions on certain
transactions with affiliates, the maintenance of certain financial ratios,
limitations on liens, the incurrence of additional indebtedness and certain
restricted payments, and restrictions on the ability to engage in any
business. In addition, among other events, an event of default will occur
under the Subsidiary Credit Facilities if: (i) Mr. Commisso ceases to be the
Chairman and Chief Executive Officer of Mediacom Management; (ii) Mediacom
Management shall cease to act as manager of the Subsidiaries; (iii) Mediacom
ceases to own all of the equity interests of the Subsidiaries that it
currently owns; or (iv) certain "change of control" events specified in the
Subsidiary Credit Facilities occur and are continuing.
As of June 1, 1998, Mediacom had subordinated intercompany loans to and
preferred equity investments in the Subsidiaries in the aggregate amount of
approximately $201.1 million. The Subsidiary Credit Facilities allow the
Subsidiaries to make distributions and other payments to Mediacom, which can
in turn be used to pay interest and principal on the Notes, subject to certain
financial covenants and other conditions. The Subsidiaries are permitted to
pay to Mediacom interest on subordinated intercompany loans and make similar
distributions in respect of preferred equity contributions if no default is
then continuing under the Subsidiary Credit Facilities. Additionally, the
Subsidiaries can repay or redeem, as appropriate, such intercompany loans and
preferred equity investments if: (i) the "leverage ratio" (as set forth in the
Subsidiary Credit Facilities, using System Cash Flow) on a pro forma basis is
less than 5.5 to 1.0 (reducing over five years to 3.0 to 1.0); and (ii) the
Subsidiaries are in compliance with other specified financial covenants and no
default is then continuing. As of March 31, 1998, on a pro forma basis, after
giving effect to the Series A Notes Offering and the application of the net
proceeds therefrom, the leverage ratio of Mediacom Southeast under the
Southeast Credit Facility would be less than 2.1 to 1.0 and the leverage ratio
of the Western Group under the Western Credit Facility would be less than 2.2
to 1.0. Accordingly, the Subsidiaries would be able to make distributions to
Mediacom in respect of such repayments or redemptions in the aggregate amount
of approximately $184.0 million.
SELLER NOTE
In connection with the purchase of the Kern Valley System in June 1996,
Mediacom California issued the Seller Note in the original principal amount of
$2.8 million. Each of the Subsidiaries included
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in the Western Group is a co-obligor under the Seller Note. The Seller Note
matures on June 28, 2006 and accrues interest, payable on such maturity date,
at the rate of 9.0% until June 28, 2001, at which time the rate becomes 15.0%
until June 28, 2003, and becomes 18.0% thereafter. Interest compounds annually
and all interest rate increases described above are deemed retroactive to the
issue date of the Seller Note. The Seller Note contains certain default
provisions as well as restrictive covenants with respect to the issuance of
additional debt by the Western Group.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following discussion (including the opinion of counsel described below)
is based upon current provisions of the Internal Revenue Code of 1986, as
amended, applicable Treasury regulations, judicial authority and
administrative rulings and practice. There can be no assurance that the
Internal Revenue Service (the "Service") will not take a contrary view, and no
ruling from the Service has been or will be sought. Legislative, judicial or
administrative changes or interpretations may be forthcoming that could alter
or modify the statements and conditions set forth herein. Any such changes or
interpretations may or may not be retroactive and could affect the tax
consequences to holders. Certain holders (including insurance companies, tax-
exempt organizations, financial institutions, broker-dealers, foreign
corporations and persons who are not citizens or residents of the United
States) may be subject to special rules not discussed below. The Issuers
recommend that each holder consult such holder's own tax adviser as to the
particular tax consequences of exchanging such holder's Series A Notes for
Series B Notes, including the applicability and effect of any state, local or
foreign tax laws.
Cooperman Levitt Winikoff Lester & Newman, P.C., counsel to the Issuers, has
advised the Issuers that in its opinion, the exchange of the Series A Notes
for Series B Notes pursuant to the Exchange Offer should not be treated as an
"exchange" for federal income tax purposes because the Series B Notes should
not be considered to differ materially in kind or extent from the Series A
Notes. Rather, the Series B Notes received by a holder should be treated as a
continuation of the Series A Notes in the hands of such holder. As a result,
there should be no federal income tax consequences to holders exchanging
Series A Notes for Series B Notes pursuant to the Exchange Offer.
THE EXCHANGE OFFER
The following description of the Exchange and Registration Rights Agreement
is a summary only, does not purport to be complete and is subject to, and
qualified in its entirety by reference to, all provisions of the Exchange and
Registration Rights Agreement, a copy of which is filed as an exhibit to the
Exchange Offer Registration Statement (as defined) of which this Prospectus is
a part.
PURPOSE AND EFFECT OF THE EXCHANGE OFFER
The Series A Notes were originally sold by the Issuers on April 1, 1998 to
the Initial Purchaser pursuant to the Purchase Agreement. The Initial
Purchaser subsequently resold the Series A Notes within the United States to
qualified institutional buyers in reliance on Rule 144A under the Securities
Act and outside the United States in accordance with Regulation S under the
Securities Act. As a condition to the Purchase Agreement, the Issuers and the
Initial Purchaser entered into the Exchange and Registration Rights Agreement
concurrently with the issuance of the Series A Notes. Pursuant to the Exchange
and Registration Rights Agreement, the Issuers agreed to (i) file with the
Commission on or prior to 90 days after the date of issuance of the Series A
Notes (the "Issue Date") a registration statement on Form S-1 or Form S-4, if
the use of such form is then available (the "Exchange Offer Registration
Statement") relating to a registered exchange offer (the "Exchange Offer") for
the Series A Notes under the Securities Act and (ii) use their reasonable best
efforts to cause the
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Exchange Offer Registration Statement to be declared effective under the
Securities Act within 150 days after the Issue Date. As soon as practicable
after the effectiveness of the Exchange Offer Registration Statement, the
Issuers will offer to the holders of Transfer Restricted Securities (as
defined) who are not prohibited by any law or policy of the Commission from
participating in the Exchange Offer the opportunity to exchange their Transfer
Restricted Securities for an issue of a new issue of notes (the "Exchange
Notes") that are identical in all material respects to the Series A Notes
(except that the Exchange Notes will not contain terms with respect to
transfer restrictions) and that would be registered under the Securities Act.
The Issuers will keep the Exchange Offer open for not less than 30 days (or
longer, if required by applicable law) after the date notice of the Exchange
Offer is mailed to the holders of the Series A Notes.
If (i) because of any change in law or applicable interpretations thereof by
the staff of the Commission, the Issuers are not permitted to effect the
Exchange Offer as contemplated hereby, (ii) any Series A Notes validly
tendered pursuant to the Exchange Offer are not exchanged for Exchange Notes
within 180 days after the Issue Date, (iii) the Initial Purchaser so requests
with respect to Series A Notes not eligible to be exchanged for Exchange Notes
in the Exchange Offer, (iv) any applicable law or interpretations do not
permit any holder of Series A Notes to participate in the Exchange Offer, (v)
any holder of Series A Notes that participates in the Exchange Offer does not
receive freely transferable Exchange Notes in exchange for tendered Series A
Notes, or (vi) the Issuers so elect, then the Issuers will file with the
Commission a shelf registration statement (the "Shelf Registration Statement")
to cover resales of Transfer Restricted Securities by such holders who satisfy
certain conditions relating to the provision of information in connection with
the Shelf Registration Statement. For purposes of the foregoing, "Transfer
Restricted Securities" means each Series A Note until (i) the date on which
such Series A Note has been exchanged for a freely transferable Exchange Note
in the Exchange Offer, (ii) the date on which such Series A Note has been
effectively registered under the Securities Act and disposed of in accordance
with the Shelf Registration Statement or (iii) the date on which such Series A
Note is distributed to the public pursuant to Rule 144 under the Securities
Act or is saleable pursuant to Rule 144(k) under the Securities Act.
The Issuers will use their reasonable best efforts to have the Exchange
Offer Registration Statement or, if applicable, a Shelf Registration Statement
(each, a "Registration Statement") declared effective by the Commission as
promptly as practicable after the filing thereof. Unless the Exchange Offer
would not be permitted by a policy of the Commission, the Issuers will
commence the Exchange Offer and will use their reasonable best efforts to
consummate the Exchange Offer as promptly as practicable, but in any event
prior to 180 days after the Issue Date. If applicable, the Issuers will use
their reasonable best efforts to keep the Shelf Registration Statement
effective for a period of two years after the Issue Date.
If (i) the applicable Registration Statement is not filed with the
Commission on or prior to 90 days after the Issue Date, (ii) the Exchange
Offer Registration Statement or the Shelf Registration Statement, as the case
may be, is not declared effective within 150 days after the Issue Date (or in
the case of a Shelf Registration Statement required to be filed in response to
a change in law or interpretation), (iii) the Exchange Offer is not
consummated on or prior to 180 days after the Issue Date or (iv) the Shelf
Registration Statement is filed and declared effective within 150 days after
the Issue Date (or in the case of a Shelf Registration Statement required to
be filed in response to a change in law or the applicable interpretations of
the Commission's staff, if later, within 45 days after publication of the
change in law or interpretation), but shall thereafter cease to be effective
(at any time that the Issuers are obligated to maintain the effectiveness
thereof) without being succeeded within 60 days by an additional Registration
Statement filed and declared effective (each such event referred to in clauses
(i) through (iv), a "Registration Default"), the Issuers will be obligated to
pay liquidated damages ("Liquidated Damages") to each holder of Transfer
Restricted Securities, during the period of one or more such Registration
Defaults, in an amount equal to $0.192 per week per $1,000 principal
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amount of Series A Notes constituting Transfer Restricted Securities held by
such holder until the applicable Registration Statement is filed, the Exchange
Offer Registration Statement is declared effective and the Exchange Offer is
consummated or the Shelf Registration Statement is declared effective or again
becomes effective, as the case may be. All accrued Liquidated Damages shall be
paid to holders in the same manner as interest payments on the Series A Notes
on semi-annual payment dates which correspond to interest payment dates for
the Series A Notes. Following the cure of all Registration Defaults, the
accrual of Liquidated Damages will cease.
The Exchange and Registration Rights Agreement also provides that the
Issuers (i) shall make available for a period of 90 days after the
consummation of the Exchange Offer a prospectus meeting the requirements of
the Securities Act to any broker-dealer for use in connection with any resale
of any such Exchange Notes and (ii) shall pay all expenses incident to the
Exchange Offer (including the expenses of one counsel to the holders of the
Series A Notes) and will indemnify certain holders of the Series A Notes
(including any broker-dealer) against certain liabilities, including
liabilities under the Securities Act. A broker-dealer who delivers such a
prospectus to purchasers in connection with such resales will be subject to
certain of the civil liability provisions under the Securities Act and will be
bound by the provisions of the Exchange and Registration Rights Agreement
(including certain indemnification rights and obligations).
Each holder of the Series A Notes who wishes to exchange such Series A Notes
for Exchange Notes in the Exchange Offer will be required to make certain
representations, including representations that (i) any Exchange Notes to be
received by it will be acquired in the ordinary course of its business, (ii)
it has no arrangements or understanding with any person to participate in the
distribution of the Series A Notes or the Exchange Notes within the meaning of
the Securities Act and (iii) it is not an "affiliate" (as defined in Rule 405
of the Securities Act) of the Issuers or, if it is an affiliate, it will
comply with the registration and prospectus delivery requirements of the
Securities Act to the extent applicable.
If a holder is not a broker-dealer, it will be required to represent that it
is not engaged in, and does not intend to engage in, the distribution of the
Exchange Notes. If a holder is a broker-dealer that will receive Exchange
Notes for its own account in exchange for Series A Notes that were acquired as
a result of market-making activities or other trading activities (an
"Exchanging Dealer"), it will be required to acknowledge that it will deliver
a prospectus in connection with any resale of such Exchange Notes. See "Plan
of Distribution."
Holders of the Series A Notes will be required to make certain
representations to the Issuers (as described above) in order to participate in
the Exchange Offer and will be required to deliver information to be used in
connection with the Shelf Registration Statement in order to have their
Series A Notes included in the Shelf Registration Statement and benefit from
the provisions regarding Liquidated Damages set forth in the preceding
paragraphs. A holder who sells Series A Notes pursuant to the Shelf
Registration Statement generally will be required to be named as a selling
security holder in the related prospectus and to deliver a prospectus to
purchasers, will be subject to certain of the civil liability provisions under
the Securities Act in connection with such sales and will be bound by the
provisions of the Exchange and Registration Rights Agreement which are
applicable to such a holder (including certain indemnification obligations).
For so long as the Series A Notes are outstanding, the Issuers will continue
to provide to holders of the Series A Notes and to prospective purchasers of
the Series A Notes the information required by paragraph (d)(4) of Rule 144A.
Following the consummation of the Exchange Offer, holders of Series A Notes
who were eligible to participate in the Exchange Offer but who did not tender
their Series A Notes will not have any further registration rights and such
Series A Notes will continue to be subject to certain restrictions on
transfer. Accordingly, the liquidity of the market for such Series A Notes
could be adversely affected.
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TERMS OF THE EXCHANGE OFFER
Upon the terms and subject to the conditions set forth in this Prospectus
and in the Letter of Transmittal, the Issuers will accept any and all Series A
Notes validly tendered and not withdrawn prior to 5:00 p.m., New York City
time, on the Expiration Date. The Issuers will issue $1,000 principal amount
of Series B Notes in exchange for each $1,000 principal amount of outstanding
Series A Notes accepted in the Exchange Offer. Holders may tender some or all
of their Series A Notes pursuant to the Exchange Offer. However, Series A
Notes may be tendered only in integral multiples of $1,000.
The form and terms of the Series B Notes are the same as the form and terms
of the Series A Notes except that (i) the Series B Notes bear a "Series B"
designation and a different CUSIP Number from the Series A Notes, (ii) the
Series B Notes have been registered under the Securities Act and hence will
not bear legends restricting the transfer thereof and (iii) the holders of the
Series B Notes will not be entitled to certain rights under the Exchange and
Registration Rights Agreement, which rights will terminate when the Exchange
Offer is terminated. The Series B Notes will evidence the same debt as the
Series A Notes and will be entitled to the benefits of the Indenture.
As of the date of this Prospectus, $200,000,000 aggregate principal amount
of Series A Notes were outstanding. The Issuers have fixed the close of
business on , 1998 as the record date for the Exchange Offer for
purposes of determining the persons to whom this Prospectus and the Letter of
Transmittal will be mailed initially.
Holders of Series A Notes do not have any appraisal or dissenters' rights
under the New York Limited Liability Company Law, the Business Corporation Law
of New York, or the Indenture in connection with the Exchange Offer. The
Issuers intend to conduct the Exchange Offer in accordance with the applicable
requirements of the Exchange Act and the rules and regulations of the
Commission thereunder.
The Issuers shall be deemed to have accepted validly tendered Series A Notes
when, as and if the Issuers have given oral or written notice thereof to the
Exchange Agent. The Exchange Agent will act as agent for the tendering holders
for the purpose of receiving the Series B Notes from the Issuers.
If any tendered Series A Notes are not accepted for exchange because of an
invalid tender, the occurrence of certain other events set forth herein or
otherwise, the certificates for any such unaccepted Series A Notes will be
returned, without expense, to the tendering holder thereof as promptly as
practicable after the Expiration Date.
Holders who tender Series A Notes in the Exchange Offer will not be required
to pay brokerage commissions or fees or, subject to the instructions in the
Letter of Transmittal, transfer taxes with respect to the exchange of Series A
Notes pursuant to the Exchange Offer. The Issuers will pay all charges and
expenses, other than transfer taxes in certain circumstances, in connection
with the Exchange Offer. See "--Fees and Expenses" below.
EXPIRATION DATE; EXTENSIONS; AMENDMENTS
The term "Expiration Date" shall mean 5:00 p.m., New York City time, on
, 1998, unless the Issuers, in their sole discretion, extend the Exchange
Offer, in which case the term "Expiration Date" shall mean the latest date and
time to which the Exchange Offer is extended. Notwithstanding the foregoing,
the Issuers will not extend the Expiration Date beyond , 1998.
In order to extend the Exchange Offer, the Issuers will notify the Exchange
Agent of any extension by oral or written notice and will mail to the
registered holders an announcement thereof, each prior to 9:00 a.m., New York
City time, on the next business day after the previously scheduled expiration
date.
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The Issuers reserve the right, in their sole discretion, (i) to delay
accepting any Series A Notes, to extend the Exchange Offer or to terminate the
Exchange Offer if any of the conditions set forth below under "--Conditions"
shall not have been satisfied, by giving oral or written notice of such delay,
extension or termination to the Exchange Agent or (ii) to amend the terms of
the Exchange Offer in any manner. Any such delay in acceptance, extension,
termination or amendment will be followed as promptly as practicable by oral
or written notice thereof to the registered holders.
INTEREST ON THE SERIES B NOTES
The Series B Notes will bear interest from their date of issuance. Holders
of Series A Notes that are accepted for exchange will receive, in cash,
accrued interest thereon to, but not including, the date of issuance of the
Series B Notes. Such interest will be paid with the first interest payment on
the Series B Notes on October 15, 1998. Interest on the Series A Notes
accepted for exchange will cease to accrue upon issuance of the Series B
Notes.
Interest on the Series B Notes is payable semi-annually on each April 15 and
October 15.
PROCEDURES FOR TENDERING
Only a holder of Series A Notes may tender such Series A Notes in the
Exchange Offer. To tender in the Exchange Offer, a holder must complete, sign
and date the Letter of Transmittal, or a facsimile thereof, have the
signatures thereon guaranteed if required by the Letter of Transmittal, and
mail or otherwise deliver such Letter of Transmittal, or such facsimile,
together with the Series A Notes and any other required documents, to the
Exchange Agent prior to 5:00 p.m., New York City time, on the Expiration Date.
To be tendered effectively, the Series A Notes, Letter of Transmittal and
other required documents must be completed and received by the Exchange Agent
at the address set forth below under "Exchange Agent" prior to 5:00 p.m., New
York City time, on the Expiration Date. Delivery of the Series A Notes may be
made by book-entry transfer in accordance with the procedures described below.
Confirmation of such book-entry transfer must be received by the Exchange
Agent prior to the Expiration Date.
By executing the Letter of Transmittal, each holder will make to the Issuers
the representations set forth above under the heading "--Purpose and Effect of
the Exchange Offer."
The tender by a holder and the acceptance thereof by the Issuers will
constitute the agreement between such holder and the Issuers in accordance
with the terms and subject to the conditions set forth herein and in the
Letter of Transmittal.
THE METHOD OF DELIVERY OF SERIES A NOTES AND THE LETTER OF TRANSMITTAL AND
ALL OTHER REQUIRED DOCUMENTS TO THE EXCHANGE AGENT IS AT THE ELECTION AND SOLE
RISK OF THE HOLDER. AS AN ALTERNATIVE TO DELIVERY BY MAIL, HOLDERS MAY WISH TO
CONSIDER OVERNIGHT OR HAND DELIVERY SERVICE. IN ALL CASES, SUFFICIENT TIME
SHOULD BE ALLOWED TO ASSURE DELIVERY TO THE EXCHANGE AGENT BEFORE THE
EXPIRATION DATE. NO LETTER OF TRANSMITTAL OR SERIES A NOTES SHOULD BE SENT TO
THE ISSUERS. HOLDERS MAY REQUEST THEIR RESPECTIVE BROKERS, DEALERS, COMMERCIAL
BANKS, TRUST COMPANIES OR NOMINEES TO EFFECT THE ABOVE TRANSACTIONS FOR SUCH
HOLDERS.
Any beneficial owner whose Series A Notes are registered in the name of a
broker, dealer, commercial bank, trust company or other nominee and who wishes
to tender should contact such registered holder promptly and instruct such
registered holder to tender on such beneficial owner's behalf. See
"Instructions to Registered Holder and/or Book-Entry Transfer Facility
Participant from Beneficial Owner" included with the Letter of Transmittal.
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Signatures on a Letter of Transmittal or a notice of withdrawal, as the case
may be, must be guaranteed by an Eligible Institution (as defined below)
unless the Series A Notes tendered pursuant thereto are tendered (i) by a
registered holder who has not completed the box entitled "Special Delivery
Instructions" on the Letter of Transmittal or (ii) for the account of an
Eligible Institution. In the event that signatures on a Letter of Transmittal
or a notice of withdrawal, as the case may be, are required to be guaranteed,
such guarantee must be by a member firm of the Medallion System (an "Eligible
Institution").
If the Letter of Transmittal is signed by a person other than the registered
holder of any Series A Notes listed therein, such Series A Notes must be
endorsed or accompanied by a properly completed bond power, signed by such
registered holder as such registered holder's name appears on such Series A
Notes with the signature thereon guaranteed by an Eligible Institution.
If the Letter of Transmittal or any Series A Notes or bond powers are signed
by trustees, executors, administrators, guardians, attorneys-in-fact, officers
of corporations or others acting in a fiduciary or representative capacity,
such persons should so indicate when signing, and evidence satisfactory to the
Issuers of their authority to so act must be submitted with the Letter of
Transmittal.
The Issuers understand that the Exchange Agent will make a request promptly
after the date of this Prospectus to establish accounts with respect to the
Series A Notes at the book-entry transfer facility, The Depository Trust
Company (the "Book-Entry Transfer Facility"), for the purpose of facilitating
the Exchange Offer, and subject to the establishment thereof, any financial
institution that is a participant in the Book-Entry Transfer Facility's system
may make book-entry delivery of Series A Notes by causing such Book-Entry
Transfer Facility to transfer such Series A Notes into the Exchange Agent's
account with respect to the Series A Notes in accordance with the Book-Entry
Transfer Facility's procedures for such transfer. Although delivery of the
Series A Notes may be effected through book-entry transfer into the Exchange
Agent's account at the Book-Entry Transfer Facility, an appropriate Letter of
Transmittal properly completed and duly executed with any required signature
guarantee and all other required documents must in each case be transmitted to
and received or confirmed by the Exchange Agent at its address set forth below
on or prior to the Expiration Date, or, if the guaranteed delivery procedures
described below are complied with, within the time period provided under such
procedures. Delivery of documents to the Book-Entry Transfer Facility does not
constitute delivery to the Exchange Agent.
All questions as to the validity, form, eligibility (including time of
receipt) and acceptance of tendered Series A Notes and withdrawal of tendered
Series A Notes will be determined by the Issuers in their sole discretion,
which determination will be final and binding. The Issuers reserve the
absolute right to reject any and all Series A Notes not properly tendered or
any Series A Notes the Issuers' acceptance of which would, in the opinion of
counsel for the Issuers, be unlawful. The Issuers also reserve the right in
their sole discretion to waive any defects, irregularities or conditions of
tender as to particular Series A Notes. The Issuers' interpretation of the
terms and conditions of the Exchange Offer (including the instructions in the
Letter of Transmittal) will be final and binding on all parties. Unless
waived, any defects or irregularities in connection with tenders of Series A
Notes must be cured within such time as the Issuers shall determine. Although
the Issuers intend to notify holders of defects or irregularities with respect
to tenders of Series A Notes, neither the Issuers, the Exchange Agent nor any
other person shall incur any liability for failure to give such notification.
Tenders of Series A Notes will not be deemed to have been made until such
defects or irregularities have been cured or waived. Any Series A Notes
received by the Exchange Agent that are not properly tendered and as to which
the defects or irregularities have not been cured or waived will be returned
by the Exchange Agent to the tendering holders, unless otherwise provided in
the Letter of Transmittal, as soon as practicable following the Expiration
Date.
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GUARANTEED DELIVERY PROCEDURES
Holders who wish to tender their Series A Notes and (i) whose Series A Notes
are not immediately available, (ii) who cannot deliver their Series A Notes,
the Letter of Transmittal or any other required documents to the Exchange
Agent or (iii) who cannot complete the procedures for book-entry transfer,
prior to the Expiration Date, may effect a tender if;
(a) the tender is made through an Eligible Institution;
(b) prior to the Expiration Date, the Exchange Agent receives from such
Eligible Institution a properly completed and duly executed Notice of
Guaranteed Delivery (by facsimile transmission, mail or hand delivery)
setting forth the name and address of the holder, the certificate number(s)
of such Series A Notes and the principal amount of Series A Notes tendered,
stating that the tender is being made thereby and guaranteeing that, within
five New York Stock Exchange trading days after the Expiration Date, the
Letter of Transmittal (or facsimile thereof) together with the
certificate(s) representing the Series A Notes (or a confirmation of book-
entry transfer of such Series A Notes into the Exchange Agent's account at
the Book-Entry Transfer Facility), and any other documents required by the
Letter of Transmittal will be deposited by the Eligible Institution with
the Exchange Agent; and
(c) such properly completed and executed Letter of Transmittal (of
facsimile thereof), as well as the certificate(s) representing all tendered
Series A Notes in proper form for transfer (or a confirmation of book-entry
transfer of such Series A Notes into the Exchange Agent's account at the
Book-Entry Transfer Facility), and all other documents required by the
Letter of Transmittal are received by the Exchange Agent upon five New York
Stock Exchange trading days after the Expiration Date.
Upon request to the Exchange Agent, a Notice of Guaranteed Delivery will be
sent to holders who wish to tender their Series A Notes according to the
guaranteed delivery procedures set forth above.
WITHDRAWAL OF TENDERS
Except as otherwise provided herein, tenders of Series A Notes may be
withdrawn at any time prior to 5:00 p.m., New York City time, on the
Expiration Date.
To withdraw a tender of Series A Notes in the Exchange Offer, a telegram,
telex, letter or facsimile transmission notice of withdrawal must be received
by the Exchange Agent at its address set forth herein prior to 5:00 p.m., New
York City time, on the Expiration Date. Any such notice of withdrawal must (i)
specify the name of the person having deposited the Series A Notes to be
withdrawn (the "Depositor"), (ii) identify the Series A Notes to be withdrawn
(including the certificate number(s) and principal amount of such Series A
Notes, or, in the case of Series A Notes transferred by book-entry transfer,
the name and number of the account at the Book-Entry Transfer Facility to be
credited), (iii) be signed by the holder in the same manner as the original
signature on the Letter of Transmittal by which such Series A Notes were
tendered (including any required signature guarantees) or be accompanied by
documents of transfer sufficient to have the Trustee with respect to the
Series A Notes register the transfer of such Series A Notes into the name of
the person withdrawing the tender and (iv) specify the name in which any such
Series A Notes are to be registered, if different from that of the Depositor.
All questions as to the validity, form and eligibility (including time of
receipt) of such notices will be determined by the Issuers, whose
determination shall be final and binding on all parties. Any Series A Notes so
withdrawn will be deemed not to have been validly tendered for purposes of the
Exchange Offer and no Series B Notes will be issued with respect thereto
unless the Series A Notes so withdrawn are validly retendered. Any Series A
Notes which have been tendered but which are not accepted for exchange will be
returned to the holder thereof without cost to such holder as soon as
practicable after withdrawal, rejection of tender or termination of the
Exchange Offer. Properly withdrawn Series A Notes may be retendered by
following one of the procedures described above under "--Procedures for
Tendering" at any time prior to the Expiration Date.
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CONDITIONS
Notwithstanding any other term of the Exchange Offer, the Issuers shall not
be required to accept for exchange, or exchange Series B Notes for, any Series
A Notes, and may terminate or amend the Exchange Offer as provided herein
before the acceptance of such Series A Notes, if:
(a) any action or proceeding is instituted or threatened in any court or
by or before any governmental agency with respect to the Exchange Offer
which, in the reasonable judgment of the Issuers, might materially impair
the ability of the Issuers to proceed with the Exchange Offer or any
material adverse development has occurred in any existing action or
proceeding with respect to the Issuers or any of their Subsidiaries; or
(b) any law, rule, regulation or interpretation by the staff of the
Commission is proposed, adopted or enacted, which, in the reasonable
judgment of the Issuers, might materially impair the ability of the Issuers
to proceed with the Exchange Offer or materially impair the contemplated
benefits of the Exchange Offer to the Issuers; or
(c) any governmental approval has not been obtained, which approval the
Issuers shall, in their reasonable discretion, deem necessary for the
consummation of the Exchange Offer and contemplated hereby.
If the Issuers determine in their sole discretion that any of the conditions
are not satisfied, the Issuers may (i) refuse to accept any Series A Notes and
return all tendered Series A Notes to the tendering holders, (ii) extend the
Exchange Offer and retain all Series A Notes tendered prior to the expiration
of the Exchange Offer, subject, however, to the rights of holders to withdraw
such Series A Notes (see "--Withdrawal of Tenders") or (iii) waive such
unsatisfied conditions with respect to the Exchange Offer and accept all
properly tendered Series A Notes which have not been withdrawn.
EXCHANGE AGENT
Bank of Montreal Trust Company has been appointed as Exchange Agent for the
Exchange Offer. Questions and requests for assistance, requests for additional
copies of this Prospectus or of the Letter of Transmittal and requests for
Notice of Guaranteed Delivery should be directed to the Exchange Agent
addressed as follows:
Bank of Montreal Trust Company
88 Pine Street, 19th Floor
New York, New York 10005
Attn: Reorganization Department
FEES AND EXPENSES
The expenses of soliciting tenders will be borne by the Issuers. The
principal solicitation is being made by mail; however, additional solicitation
may be made by telegraph, telecopy, telephone or in person by officers and
regular employees of the Issuers and their affiliates.
The Issuers have not retained any dealer-manager in connection with the
Exchange Offer and will not make any payments to brokers, dealers or others
soliciting acceptances of the Exchange Offer. The Issuers, however, will pay
the Exchange Agent reasonable and customary fees for its services and will
reimburse it for its reasonable out-of-pocket expenses in connection
therewith.
The cash expenses to be incurred in connection with the Exchange Offer will
be paid by the Issuers. Such expenses include fees and expenses of the
Exchange Agent and Trustee, accounting and legal fees and printing costs,
among others.
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ACCOUNTING TREATMENT
The Series B Notes will be recorded at the same carrying value as the Series
A Notes, which is face value, as reflected in the Issuers' accounting records
on the date of exchange. Accordingly, no gain or loss for accounting purposes
will be recognized by the Issuers. The expenses related to the issuance of the
Notes and of the Exchange Offer will be amortized over the term of the
Exchange Notes.
CONSEQUENCES OF FAILURE TO EXCHANGE
The Series A Notes that are not exchanged for Series B Notes pursuant to the
Exchange Offer will remain restricted securities. Accordingly, such Series A
Notes may be resold only (i) to the Issuers (upon redemption thereof or
otherwise), (ii) so long as the Series A Notes are eligible for resale
pursuant to Rule 144A under the Securities Act, to a person inside the United
States whom the seller reasonably believes is a qualified institutional buyer
within the meaning of Rule 144A in a transaction meeting the requirements of
Rule 144A, in accordance with Rule 144 under the Securities Act, or pursuant
to another exemption from the registration requirements of the Securities Act
(and based upon an opinion of counsel reasonably acceptable to the Issuers),
(iii) outside the United States to a foreign person in a transaction meeting
the requirements of Rule 904 under the Securities Act, (iv) to certain
institutional "accredited investors" within the meaning of Rule 501(a) under
the Securities Act, in a minimum principal amount of $250,000, or (v) pursuant
to an effective registration statement under the Securities Act, in each case
in accordance with any applicable securities laws of any state of the United
States.
RESALE OF THE SERIES B NOTES
With respect to resales of Series B Notes, based on no-action letters issued
by the staff of the Commission to third parties, the Issuers believe that a
holder or other person who receives Series B Notes, whether or not such person
is the holder (other than a person that is an "affiliate" of the Issuers
within the meaning of Rule 405 under the Securities Act), who receives Series
B Notes in exchange for Series A Notes in the ordinary course of business and
who is not participating, does not intend to participate, and has no
arrangement or understanding with any person to participate, in the
distribution of the Series B Notes, will be allowed to resell the Series B
Notes to the public without further registration under the Securities Act and
without delivering to the purchasers of the Series B Notes a prospectus that
satisfies the requirements of Section 10 of the Securities Act. However, if
any holder acquires Series B Notes in the Exchange Offer for the purpose of
distributing or participating in a distribution of the Series B Notes, such
holder cannot rely on the position of the staff of the Commission enunciated
in such no-action letters, and must comply with the registration and
prospectus delivery requirements of the Securities Act in connection with any
resale transaction, unless an exemption from registration is otherwise
available. Further, each Participating Broker-Dealer that receives Series B
Notes for its own account in exchange for Series A Notes, where such Series A
Notes were acquired by such Participating Broker-Dealer as a result of market-
making activities or other trading activities, must acknowledge that it will
deliver a prospectus in connection with any resale of such Series B Notes. See
"Plan of Distribution."
As contemplated by these no-action letters and the Exchange and Registration
Rights Agreement, each holder accepting the Exchange Offer is required to
represent to the Issuers in the Letter of Transmittal that (i) the Series B
Notes are to be acquired by the holder or the person receiving such Series B
Notes, whether or not such person is the holder, in the ordinary course of
business, (ii) the holder or any such other person (other than a broker-dealer
referred to in the next sentence) is not engaging and does not intend to
engage, in the distribution of the Series B Notes, (iii) the holder or any
such other person has no arrangement or understanding with any person to
participate in the distribution of the Series B Notes, (iv) neither the holder
nor any such other person is an "affiliate" of the Issuers within the meaning
of Rule 405 under the Securities Act, and (v) the holder or any such other
person acknowledges that if such holder or other person participates in the
Exchange Offer for
121
the purpose of distributing the Series B Notes it must comply with the
registration and prospectus delivery requirements of the Securities Act in
connection with any resale of the Series B Notes and cannot rely on those no-
action letters. As indicated above, each Participating Broker-Dealer that
receives a Series B Note for its own account in exchange for Series A Notes
must acknowledge that it will deliver a prospectus in connection with any
resale of such Series B Notes. For a description of the procedures for such
resales by Participating Broker-Dealers, see "Plan of Distribution."
BOOK-ENTRY; DELIVERY AND FORM
The Series A Notes were offered and sold in connection with the Series A
Notes Offering thereof solely to "qualified institutional buyers," as defined
in Rule 144A under the Securities Act ("QIBs"), pursuant to Rule 144A and in
offshore transactions to persons other than "U.S. persons", as defined in
Regulation S under the Securities Act ("Non-U.S. Persons"), in reliance on
Regulation S.
THE GLOBAL NOTES
Except as described below, the Series B Notes initially will be represented
by permanent global certificates in definitive, fully registered form (the
"Global Notes"). The Global Notes will be deposited on the Issue Date with, or
on behalf of, The Depository Trust Company ("DTC") and registered in the name
of Cede & Co., as nominee of DTC, or will remain in the custody of the Trustee
pursuant to the FAST Balance Certificate Agreement between DTC and the
Trustee.
All interests in the Global Notes, including those held through Morgan
Guaranty Trust Company of New York, Brussels Office, as operator of the
Euroclear System ("Euroclear"), or Cedel Bank, societe anonyme ("Cedel"), may
be subject to the procedures and requirements of DTC. Those interests held
through Euroclear or Cedel may also be subject to the procedures and
requirements of such systems.
Any beneficial interest in one of the Global Notes that is transferred to a
person who takes delivery in the form of an interest in another Global Note
will, upon transfer, cease to be an interest in such Global Note and become an
interest in the other Global Note and, accordingly, will thereafter be subject
to all transfer restrictions, if any, and other procedures applicable to
beneficial interests in such other Global Note for as long as it remains such
an interest.
CERTAIN BOOK-ENTRY PROCEDURES FOR THE GLOBAL NOTES
The descriptions of the operations and procedures of DTC, Euroclear and
Cedel set forth below are provided solely as a matter of convenience. These
operations and procedures are solely within the control of the respective
settlement systems and are subject to change by them from time to time.
Neither the Issuers nor the Initial Purchaser takes any responsibility for
these operations or procedures, and investors are urged to contact the
relevant system or its participants directly to discuss these matters.
DTC has advised the Issuers that it is (i) a limited purpose trust company
organized under the laws of the State of New York, (ii) a "banking
organization" within the meaning of the New York Banking Law, (iii) a member
of the Federal Reserve System, (iv) a "clearing corporation" within the
meaning of the Uniform Commercial Code, as amended, and (v) a "clearing
agency" registered pursuant to Section 17A of the Exchange Act. DTC was
created to hold securities for its participants (collectively, the
"Participants") and facilitates the clearance and settlement of securities
transactions between Participants through electronic book-entry changes to the
accounts of its Participants, thereby eliminating the need for physical
transfer and delivery of certificates. DTC's Participants include securities
brokers and dealers (including the Initial Purchaser), banks and trust
companies, clearing corporations and certain other organizations. Indirect
access to DTC's system is also available to other
122
entities such as banks, brokers, dealers and trust companies (collectively,
the "Indirect Participants") that clear through or maintain a custodial
relationship with a Participant, either directly or indirectly. Investors who
are not Participants may beneficially own securities held by or on behalf of
DTC only through Participants or Indirect Participants.
The Issuers expect that pursuant to procedures established by DTC (i) upon
deposit of each Global Note, DTC will credit the accounts of Participants
designated by the Initial Purchaser with an interest in the Global Note and
(ii) ownership of the Notes will be shown on, and the transfer of ownership
thereof will be effected only through, records maintained by DTC (with respect
to the interests of Participants) and the records of Participants and the
Indirect Participants (with respect to the interests of persons other than
Participants).
The laws of some jurisdictions may require that certain purchasers of
securities take physical delivery of such securities in definitive form.
Accordingly, the ability to transfer interests in the Notes represented by a
Global Note to such persons may be limited. In addition, because DTC can act
only on behalf of its Participants, who in turn act on behalf of persons who
hold interests through Participants, the ability of a person having an
interest in Notes represented by a Global Note to pledge or transfer such
interest to persons or entities that do not participate in DTC's system, or to
otherwise take actions in respect of such interest, may be affected by the
lack of a physical definitive security in respect of such interest.
So long as DTC or its nominee is the registered owner of a Global Note, DTC
or such nominee, as the case may be, will be considered the sole owner or
holder of the Notes represented by the Global Note for all purposes under the
Indenture. Except as provided below, owners of beneficial interests in a
Global Note will not be entitled to have Notes represented by such Global Note
registered in their names, will not receive or be entitled to receive physical
delivery of Certificated Notes, and will not be considered the owners or
holders thereof under the Indenture for any purpose, including with respect to
the giving of any direction, instruction or approval to the Trustee
thereunder. Accordingly, each holder owning a beneficial interest in a Global
Note must rely on the procedures of DTC and, if such holder is not a
Participant or an Indirect Participant, on the procedures of the Participant
through which such holder owns its interest, to exercise any rights of a
holder of Notes under the Indenture or such Global Note. The Issuers
understand that under existing industry practice, in the event that the
Issuers request any action of holders of Notes, or a holder that is an owner
of a beneficial interest in a Global Note desires to take any action that DTC,
as the holder of such Global Note, is entitled to take, DTC would authorize
the Participants to take such action and the Participants would authorize
holders owning through such Participants to take such action or would
otherwise act upon the instruction of such holders. Neither the Issuers nor
the Trustee will have any responsibility or liability for any aspect of the
records relating to or payments made on account of Notes by DTC, or for
maintaining, supervising or reviewing any records of DTC relating to such
Notes.
Payments with respect to the principal of, and premium, if any, Liquidated
Damages, if any, and interest on, any Notes represented by a Global Note
registered in the name of DTC or its nominee on the applicable record date
will be payable by the Trustee to or at the direction of DTC or its nominee in
its capacity as the registered holder of the Global Note representing such
Notes under the Indenture. Under the terms of the Indenture, the Issuers and
the Trustee may treat the persons in whose names the Notes, including the
Global Notes, are registered as the owners thereof for the purpose of
receiving payment thereon and for any and all other purposes whatsoever.
Accordingly, neither the Issuers nor the Trustee have or will have any
responsibility or liability for the payment of such amounts to owners of
beneficial interests in a Global Note (including principal, premium, if any,
Liquidated Damages, if any, and interest). Payments by the Participants and
the Indirect Participants to the owners of beneficial interests in a Global
Note will be governed by standing instructions and customary industry practice
and will be the responsibility of the Participants or the Indirect
Participants and DTC.
123
Transfers between Participants in DTC will be effected in accordance with
DTC's procedures, and will be settled in same-day funds. Transfers between
participants in Euroclear or Cedel will be effected in the ordinary way in
accordance with their respective rules and operating procedures.
Subject to compliance with the transfer restrictions applicable to the
Notes, cross-market transfers between the Participants in DTC, on the one
hand, and Euroclear or Cedel participants, on the other hand, will be effected
through DTC in accordance with DTC's rules on behalf of Euroclear or Cedel, as
the case may be, by its respective depositary; however, such cross-market
transactions will require delivery of instructions to Euroclear or Cedel, as
the case may be, by the counterparts in such system in accordance with the
rules and procedures and within the established deadlines (Brussels time) of
such system. Euroclear or Cedel, as the case may be, will, if the transaction
meets its settlement requirements, deliver instructions to its respective
depositary to take action to effect final settlement on its behalf by
delivering or receiving interests in the relevant Global Notes in DTC, and
making or receiving payment in accordance with normal procedures for same-day
funds settlement applicable to DTC. Euroclear participants and Cedel
participants may not deliver instructions directly to the depositaries for
Euroclear or Cedel.
Because of time zone differences, the securities account of a Euroclear or
Cedel participant purchasing an interest in a Global Note from a Participant
in DTC will be credited, and any such crediting will be reported to the
relevant Euroclear or Cedel participant, during the securities settlement
processing day (which must be a business day for Euroclear and Cedel)
immediately following the settlement date of DTC. Cash received in Euroclear
or Cedel as a result of sales of interest in a Global Security by or through a
Euroclear or Cedel participant to a Participant in DTC will be received with
value on the settlement date of DTC but will be available in the relevant
Euroclear or Cedel cash account only as of the business day for Euroclear or
Cedel following DTC's settlement date.
Although DTC, Euroclear and Cedel have agreed to the foregoing procedures to
facilitate transfers of interests in the Global Notes among participants in
DTC, Euroclear and Cedel, they are under no obligation to perform or to
continue to perform such procedures, and such procedures may be discontinued
at any time. Neither the Issuers nor the Trustee will have any responsibility
for the performance by DTC, Euroclear or Cedel or their respective
participants or indirect participants of their respective obligations under
the rules and procedures governing their operations.
CERTIFICATED NOTES
If (i) the Issuers notify the Trustee in writing that DTC is no longer
willing or able to act as a depositary or DTC ceases to be registered as a
clearing agency under the Exchange Act and a successor depositary is not
appointed within 90 days of such notice or cessation, (ii) the Issuers, at
their option, notify the Trustee in writing that it elects to cause the
issuance of Notes in definitive form under the Indenture or (iii) upon the
occurrence of certain other events as provided in the Indenture, then, upon
surrender by DTC of the Global Notes, Certificated Notes will be issued to
each person that DTC identifies as the beneficial owner of the Notes
represented by the Global Notes. Upon any such issuance, the Trustee is
required to register such Certificated Notes in the name of such person or
persons (or the nominee of any thereof) and cause the same to be delivered
thereto.
Neither the Issuers nor the Trustee shall be liable for any delay by DTC or
any Participant or Indirect Participant in identifying the beneficial owners
of the related Notes and each such person may conclusively rely on, and shall
be protected in relying on, instructions from DTC for all purposes (including
with respect to the registration and delivery, and the respective principal
amounts, of the Notes to be issued).
124
PLAN OF DISTRIBUTION
Each Participating Broker-Dealer that receives Series B Notes for its own
account pursuant to the Exchange Offer must acknowledge that it will deliver a
prospectus in connection with any resale of such Series B Notes. This
Prospectus, as it may be amended or supplemented from time to time, may be
used in connection with resales of Series B Notes received in exchange for
Series A Notes only by Participating Broker-Dealers ("Eligible Participating
Broker-Dealers") who acquired such Series A Notes as a result of market-making
activities or other trading activities and not by Participating Broker-Dealers
who acquired such Series A Notes directly from the Issuers. The Issuers have
agreed that for a period of 90 days after the Expiration Date, they will make
this Prospectus, as amended or supplemented, available to any Eligible
Participating Broker-Dealer for use in connection with any such resale. In
addition, until , 1998, all dealers effecting transactions in the Series B
Notes may be required to deliver a prospectus.
The Issuers will not receive any proceeds from any sales of the Series B
Notes by Participating Broker-Dealers. Series B Notes received by
Participating Broker-Dealers for their own account pursuant to the Exchange
Offer may be sold from time to time in one or more transactions in the over-
the-counter market, in negotiated transactions, through the writing of options
on the Series B Notes or a combination of such methods of resale, at market
prices prevailing at the time of resale, at prices related to such prevailing
market prices or negotiated prices. Any such resale may be made directly to
purchasers or to or through brokers or dealers who may receive compensation in
the form of commissions or concessions from any such Participating Broker-
Dealer and/or the purchasers of any such Series B Notes. Any Participating
Broker-Dealer that resells the Series B Notes that were received by it for its
own account pursuant to the Exchange Offer and any broker or dealer that
participates in a distribution of such Series B Notes may be deemed to be an
"underwriter" within the meaning of the Securities Act and any profit on any
such resale of Series B Notes and any commission or concessions received by
any such persons may be deemed to be underwriting compensation under the
Securities Act. The Letter of Transmittal states that, by acknowledging that
it will deliver and by delivering a prospectus, a Participating Broker-Dealer
will not be deemed to admit that it is an "underwriter" within the meaning of
the Securities Act.
For a period of 90 days after the Expiration Date, the Issuers will promptly
send additional copies of this Prospectus and any amendment or supplement to
this Prospectus to any Eligible Participating Broker-Dealer that requests such
documents in the Letter of Transmittal. The Issuers have agreed to pay all
expenses incident to the Exchange Offer (including the expenses of one counsel
for the Holders of the Notes) other than commissions or concessions of any
Participating Broker-Dealer and will indemnify the Holders of the Notes
(including any Participating Broker-Dealers) against certain liabilities
including liabilities under the Securities Act.
LEGAL MATTERS
Certain legal matters with respect to the Series B Notes offered hereby will
be passed upon for the Issuers by Cooperman Levitt Winikoff Lester & Newman,
P.C., New York, New York. Robert L. Winikoff, a member of the Executive
Committee of Mediacom, is a member of Cooperman Levitt Winikoff Lester &
Newman, P.C.
125
EXPERTS
The consolidated balance sheets of the Company as of December 31, 1997 and
1996 and the consolidated statements of operations and accumulated deficit and
cash flows for the year ended December 31, 1997 and for the period from March
12, 1996 (the commencement of operations) to December 31, 1996 of Mediacom LLC
and the Subsidiaries included in this Prospectus and elsewhere in the
Registration Statement have been audited by Arthur Andersen LLP, independent
public accountants, as indicated in their report with respect thereto, and are
included herein in reliance upon the authority of said firm as experts in
accounting and auditing.
The consolidated balance sheets of the Cablevision Systems as of December
31, 1997 and 1996 and the related consolidated statements of operations,
partners' capital/(deficiency) and cash flows for the year ended December 31,
1997 and for the periods January 1, 1996 to August 12, 1996, and August 13,
1996 to December 31, 1996 and the consolidated balance sheets of the
Cablevision Systems as of December 31, 1996 and 1995 and the related
consolidated statements of operations, partners' capital/(deficiency) and cash
flows for the periods January 1, 1996 to August 12, 1996, and August 13, 1996
to December 31, 1996 and for the years ended December 31, 1995 and 1994, have
been included in this Prospectus and in the Registration Statement in reliance
upon the reports of KPMG Peat Marwick LLP, independent certified public
accountants, appearing elsewhere herein, and upon the authority of said firm
as experts in accounting and auditing. The reports of KPMG Peat Marwick LLP
include an explanatory paragraph relating to a change in cost basis of the
consolidated financial information as a result of a redemption of certain
limited and general partnership interests effective August 13, 1996.
The combined statements of operations and partnership's investment and cash
flows of the Lower Delaware System (as defined in Note 1 to the combined
statements of operations and partnership's investment and cash flows) for the
period from January 1, 1997 to June 23, 1997 and for the year ended December
31, 1996, have been included herein, in reliance upon the report, dated April
30, 1998, of KPMG Peat Marwick LLP, independent certified public accountants,
appearing elsewhere herein, and upon the authority of said firm as experts in
accounting and auditing.
The statements of operations and partners' capital and cash flows of Saguaro
Cable TV Investors Limited Partnership for the period from January 1, 1996 to
December 31, 1996 included in this Prospectus and elsewhere in the
Registration Statement, have been audited by Gustafson, Crandall &
Christensen, Inc., independent public accountants, as indicated in their
report with respect thereto, and are included herein in reliance upon the
authority of said firm as experts in accounting and auditing.
The statements of operations and cash flows of Benchmark Acquisition Fund II
Limited Partnership for the year ended December 31, 1995 included in this
Prospectus and elsewhere in the Registration Statement, have been audited by
Keller Bruner & Company, L.L.C., independent public accountants, as indicated
in their report with respect thereto, and are included herein in reliance upon
the authority of said firm as experts in accounting and auditing.
126
ADDITIONAL AVAILABLE INFORMATION
The Issuers have filed with the Commission a Registration Statement on Form
S-4 (together with all amendments, exhibits and schedules thereto, the
"Registration Statement") under the Securities Act with respect to the Series
B Notes offered hereby. This Prospectus does not contain all the information
set forth in the Registration Statement, certain parts of which are omitted in
accordance with the rules and regulations of the Commission, and to which
reference is hereby made. Statements contained in this Prospectus as to the
contents of any contract, agreement or any other document referred to are not
necessarily complete. With respect to each such contract, agreement or other
document filed as an exhibit to the Registration Statement, reference is made
to such exhibit to the Registration Statement for a more complete description
of the matter involved, and each such statement shall be deemed qualified in
its entirety by such reference.
The Registration Statement can be inspected and copied at the Public
Reference Section of the Commission at Room 1024, 450 Fifth Street, N.W.,
Washington, D.C. 20459, and at the Commission's regional offices at Seven
World Trade Center, New York, New York 10048, and Northwestern Atrium Center,
500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of the
Registration Statement can be obtained from the Public Reference Section of
the Commission at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20459,
at prescribed rates. The Issuers are filing the Registration Statement with
the Commission electronically. The Commission maintains a web site that
contains reports, proxy and information statements and other information
regarding registrants that file electronically with the Commission. The
address of that web site is http://www.sec.gov.
As a result of the Exchange Offer, the Issuers will be subject to the
information reporting requirements of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"). So long as the Issuers are subject to such
periodic reporting requirements under the Exchange Act, they will continue to
furnish the information required thereby to the Commission. The Issuers will
be required to file periodic reports with the Commission pursuant to the
Exchange Act during the Issuers' current fiscal year and thereafter so long as
the Notes are held by at least 300 registered holders. The Issuers do not
anticipate that, for periods following December 31, 1998, the Notes will be
held of record by more than 300 holders. Accordingly, after such date, the
Issuers do not expect to be required to comply with the periodic reporting
obligations imposed under the Exchange Act. However, under the Indenture
relating to the Notes, the Company has agreed that it will, to the extent such
filings are accepted by the Commission, and whether or not the Company has a
class of securities registered under the Exchange Act, file with the
Commission, and provide the Trustee and the holders of the Notes within 15
days after such filings with, annual reports containing the information
required to be contained in Form 10-K promulgated under the Exchange Act,
quarterly reports containing the information required to be contained in Form
10-Q promulgated under the Exchange Act, and from time to time such other
information as is required to be contained in Form 8-K promulgated under the
Exchange Act. If filing such reports with the Commission is not accepted by
the Commission or prohibited by the Exchange Act, the Company will also
provide copies of such reports, at its cost, to prospective purchasers of the
Notes promptly upon written request.
127
GLOSSARY
The following is a description of certain terms used in this Prospectus:
ADDRESSABILITY Addressable technology enables the cable
television operator to electronically control
from its central facilities the cable television
services delivered to the subscriber. This
technology facilitates pay-per-view services,
reduces service theft, and provides a cost-
effective method to upgrade and downgrade
programming services to subscribers.
BASIC PENETRATION Basic subscribers as a percentage of total number
of homes passed.
BASIC SERVICE TIER A package of over-the-air broadcast stations,
local access channels and certain satellite-
delivered cable television services (other than
premium services).
BASIC SUBSCRIBER A subscriber to a cable television system who
receives the Basic Service Tier and who is
usually charged a flat monthly rate for a number
of channels.
CPST Cable programming services other than programming
services provided on the Basic Service Tier or on
a per-channel or per-program basis. Also referred
to as expanded basic service.
CABLE MODEM A device similar to a telephone modem that sends
and receives signals over a cable television
network at speeds exceeding 100 times the
capacity of a telephone modem.
CONVERTER Electronic device that permits tuning of a cable
television signal to permit reception by
subscriber television sets and VCRs and provides
a means of access control for cable television
programming.
COST-OF-SERVICE A rate-setting methodology prescribed by the FCC
which may give a cable television operator the
ability to establish maximum rates for regulated
services in excess of the benchmark rate that
would otherwise be applicable.
DIGITAL COMPRESSION The conversion of the standard analog video
signal into a digital signal, and the compression
of that signal to facilitate multiple channel
transmissions through a single channel's
bandwidth.
DIRECT BROADCAST SATELLITE A service by which packages of television
(DBS) programming are transmitted via high-powered
satellites to individual homes, each served by a
small satellite dish.
EBITDA
Represents operating income (loss) before
depreciation and amortization.
128
FIBER-TO-THE-FEEDER (FTF)
This network architecture, using a combination of
fiber optic cable and coaxial cable transmission
lines, delivers signals deeper into the cable
plant than fiber backbone design. The FTF plant
transmits signals to small neighborhood nodes and
then from the nodes to the end user on a
combination of coaxial cable distribution/feeder
and customer drop lines. FTF design is ideal for
heavily populated areas.
FIBER BACKBONE The principal fiber optic trunk lines that
deliver signals to smaller concentrations of
customers along longer transmission lines than
FTF design. Fiber backbone design is ideal for
scattered pockets of concentrated customers
served from one headend facility.
FIBER OPTIC CABLE Cable made of glass fibers through which signals
are transmitted as pulses of light to the
distribution portion of the cable television
which in turn goes to the customer's home.
Capacity for a very large number of channels can
be more easily provided.
HEADEND A collection of hardware, typically including
satellite receivers, modulators, amplifiers and
video cassette playback machines within which
signals are processed and then combined for
distribution within the cable television network.
HIGH-SPEED DATA NETWORK Any network dedicated to the transmission of data
to residences and commercial establishments.
Includes Local Area Networks (LAN).
HOMES PASSED A home is deemed to be passed if it can be
connected to the distribution system without
further extension of the distribution network.
INTERNET The large, worldwide network of thousands of
smaller, interconnected computer networks.
Originally developed for use by the military and
for academic research purposes, the Internet is
now accessible by millions of users.
LAN Local Area Network. A communications network that
serves users within a confined geographical area,
consisting of servers, workstations, a network
operating system and a communications link.
LOCAL MULTIPOINT A proposed method of distribution for television
DISTRIBUTION SERVICE and information using microwave transmissions at
a higher frequency than MMDS.
MDU Multiple dwelling units such as condominiums,
apartment complexes, hospitals, hotels and other
commercial complexes.
MULTICHANNEL MULTIPOINT
DISTRIBUTION A one-way radio transmission of television
SERVICE (MMDS) channels over microwave frequencies from a fixed
station transmitting to multiple receiving
facilities located at fixed points.
129
MULTIPLE SYSTEM OPERATOR A cable television operator that owns or operates
(MSO) more than one cable television system.
MUST CARRY The provisions of the 1992 Act that require cable
television operators to carry local commercial
and noncommercial television broadcast stations
on their systems.
NON-METROPOLITAN MARKETS Markets consisting of small cities and their
surrounding areas, typically with populations of
500,000 or less, according to the metropolitan
areas measurement of the U.S. Census Bureau.
PAY-PER-VIEW Programming offered by a cable television
operator on a per-program basis which a
subscriber selects and for which a subscriber
pays a separate fee.
PREMIUM PENETRATION Premium service units as a percentage of the
total number of basic service subscribers. A
customer may purchase more than one premium
service, each of which is counted as a separate
premium service unit. This ratio may be greater
than 100% if the average customer subscribes to
more than one premium service unit.
PREMIUM SERVICE Individual cable programming service available
only for monthly subscriptions on a per-channel
basis.
PREMIUM UNITS The number of subscriptions to premium services
which are paid for on an individual basis.
REGIONAL CLUSTER Cable television systems grouped in specific
geographic regions and managed together to
achieve economies of scale and operating
efficiencies in such areas as system management,
marketing, administrative and technical service.
SYSTEM CASH FLOW Represents EBITDA before management fees.
TELEPHONE MODEM A device either inserted in a computer or
attached externally that encodes (modulates) or
decodes (demodulates) an analog telephone signal
to a digital signal to receive data.
UPGRADE
The upgrade of an existing cable television
system, usually undertaken to improve either its
technological performance or to expand the
system's channel or bandwidth capacity in order
to provide more programming and other services.
130
INDEX TO FINANCIAL STATEMENTS
MEDIACOM LLC AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
CONTENTS
Report of Independent Public Accountants................................. F-3
Independent Auditors' Report............................................. F-4
Consolidated Balance Sheets as of December 31, 1997 and 1996............. F-5
Consolidated Statements of Operations for the Year Ended December 31,
1997, for the Period from Commencement of Operations (March 12, 1996) to
December 31, 1996, and for the Year Ended December 31, 1995 ............ F-6
Consolidated Statements of Changes in Members' Equity for the Year Ended
December 31, 1997 and for the Period from Commencement of Operations
(March 12, 1996) to December 31, 1996................................... F-7
Consolidated Statements of Cash Flows for the Years Ended December 31,
1997, for the Period from Commencement of Operations (March 12, 1996) to
December 31, 1996, and for the Year Ended December 31, 1995 ............ F-8
Notes to Consolidated Financial Statements............................... F-9
Consolidated Balance Sheet as of March 31, 1998 (unaudited).............. F-19
Consolidated Statements of Operations for the Three Months Ended March
31, 1998 and 1997 (unaudited)........................................... F-20
Consolidated Statements of Changes in Members' Equity.................... F-21
Consolidated Statements of Cash Flows for the Three Months Ended March
31, 1998 and 1997 (unaudited)........................................... F-22
Notes to Unaudited Interim Consolidated Financial Statements............. F-23
U.S. CABLE TELEVISION GROUP, L.P. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
CONTENTS
Independent Auditors' Report............................................. F-29
Consolidated Balance Sheets as of December 31, 1997 and 1996............. F-30
Consolidated Statements of Operations and Partners' Capital/(Deficiency),
Year Ended December 31, 1997, Period from August 13, 1996 to December
31, 1996, and January 1, 1996 to August 12, 1996........................ F-31
Consolidated Statements of Cash Flows, Year Ended December 31, 1997,
Period from August 13, 1996 to December 31, 1996 and January 1, 1996 to
August 12, 1996 ........................................................ F-32
Notes to Consolidated Financial Statements............................... F-33
Independent Auditors' Report............................................. F-38
Consolidated Balance Sheets as of December 31, 1996 and 1995............. F-39
Consolidated Statements of Operations and Partners' Capital/(Deficiency),
Period from January 1, 1996 to August 12, 1996, and August 13, 1996 to
December 31, 1996, and Years Ended December 31, 1995 and 1994........... F-40
Consolidated Statements of Cash Flows, Period from January 1, 1996 to
August 12, 1996, and August 13, 1996 to December 31, 1996 and Years
Ended December 31, 1995 and 1994........................................ F-41
Notes to Consolidated Financial Statements............................... F-42
F-1
INDEX TO FINANCIAL STATEMENTS (CONT.)
LOWER DELAWARE SYSTEM
COMBINED STATEMENTS OF OPERATIONS AND PARTNERSHIP'S INVESTMENT AND CASH FLOWS
CONTENTS
Independent Auditors' Report.............................................. F-49
Combined Statements of Operations and Partnership's Investment for the
Period from January 1, 1997 to June 23, 1997 and the Year Ended December
31, 1996................................................................. F-50
Combined Statements of Cash Flows for the Period from January 1, 1997 to
June 23, 1997 and the Year Ended December 31, 1996 ...................... F-51
Notes to Combined Statements of Operations and Partnership's Investment
and Cash Flows........................................................... F-52
SAGUARO CABLE TV INVESTORS
LIMITED PARTNERSHIP
FINANCIAL STATEMENTS
CONTENTS
Independent Auditor's Report............................................. F-56
Balance Sheet as of December 26, 1996.................................... F-57
Statement of Operations and Partners' Capital, Period from January 1,
1996 to December 26, 1996............................................... F-58
Statement of Cash Flows, Period from January 1, 1996 to December 26, 1996
........................................................................ F-59
Notes to Financial Statements............................................ F-61
F-2
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Mediacom LLC:
We have audited the accompanying consolidated balance sheets of Mediacom LLC
(a New York limited liability company) and subsidiaries as of December 31,
1997 and 1996, and the related consolidated statements of operations, changes
in members' equity and cash flows for the year ended December 31, 1997 and for
the period from commencement of operations (March 12, 1996) to December 31,
1996. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Mediacom LLC
and its subsidiaries as of December 31, 1997 and 1996, and the results of
their operations, members' equity and cash flows for the year ended December
31, 1997 and for the period from commencement of operations (March 12, 1996)
to December 31, 1996 in conformity with generally accepted accounting
principles.
Arthur Andersen LLP
Stamford, Connecticut
April 4, 1998
F-3
INDEPENDENT AUDITORS' REPORT
To the Partners
Benchmark Acquisition Fund II Limited Partnership
Sterling, Virginia
We have audited the accompanying statements of operations and cash flows of
Benchmark Acquisition Fund II Limited Partnership (the Partnership) for the
year ended December 31, 1995. These financial statements are the
responsibility of the Partnership's management. Our responsibility is to
express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the results of operations and cash flows of
Benchmark Acquisition Fund II Limited Partnership for the year ended December
31, 1995, in conformity with generally accepted accounting principles.
As discussed in Note 3 to the financial statements, in 1996 the Partnership
sold substantially all of its assets to an unrelated entity.
Keller Bruner & Company, L.L.C.
Bethesda, Maryland
February 28, 1996, except Note 3,
as to which the date is March 12, 1996
F-4
MEDIACOM LLC AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 1997 AND 1996
(ALL DOLLAR AMOUNTS IN 000'S)
1997 1996
-------- -------
ASSETS
Cash and cash equivalents.................................. $ 1,027 $ 396
Subscriber accounts receivable, net of allowance for
doubtful accounts of $56 in 1997 and $25 in 1996.......... 618 267
Prepaid expenses and other assets.......................... 1,358 1,323
Investment in cable television systems:
Inventory................................................ 1,032 327
Property, plant and equipment, at cost................... 51,735 18,993
Less- accumulated depreciation........................... (5,737) (1,056)
-------- -------
Property, plant and equipment, net..................... 45,998 17,937
Intangible assets, net of accumulated amortization of
$3,429 in 1997 and $923 in 1996......................... 47,859 24,307
-------- -------
Total investment in cable television systems........... 94,889 42,571
Other assets, net of accumulated amortization of $627 in
1997 and $178 in 1996................................... 4,899 2,003
-------- -------
Total assets........................................... $102,791 $46,560
======== =======
LIABILITIES AND MEMBERS' EQUITY
LIABILITIES
Senior bank debt........................................... $ 69,575 $37,600
Seller note................................................ 3,193 2,929
Accounts payable and accrued expenses...................... 4,874 1,354
Subscriber advances........................................ 603 105
Management fees payable.................................... 105 35
-------- -------
Total liabilities...................................... 78,350 42,023
MEMBERS' EQUITY
Capital contributions.................................... 30,990 6,490
Accumulated deficit...................................... (6,549) (1,953)
-------- -------
Total members' equity.................................. 24,441 4,537
-------- -------
Total liabilities and members' equity.................. $102,791 $46,560
======== =======
The accompanying notes to consolidated financial statements are an integral
part of these balance sheets.
F-5
MEDIACOM LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997,
FOR THE PERIOD FROM COMMENCEMENT OF OPERATIONS
(MARCH 12, 1996) TO DECEMBER 31, 1996, AND FOR THE YEAR ENDED DECEMBER 31, 1995
(ALL DOLLAR AMOUNTS IN 000'S)
THE COMPANY PREDECESSOR
--------------------------- ------------
MARCH 12, 1996
THROUGH
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1997 1996 1995
------------ -------------- ------------
Revenues.............................. $17,634 $ 5,411 $ 5,171
------- ------- -------
Costs and expenses:
Service costs....................... 5,547 1,511 1,536
Selling, general and administrative
expenses........................... 2,696 931 1,059
Management fee expense.............. 882 270 261
Depreciation and amortization....... 7,636 2,157 3,945
------- ------- -------
Operating income (loss)............... 873 542 (1,630)
Interest expense, net................. 4,829 1,528 935
Other expenses........................ 640 967 --
------- ------- -------
Net loss.............................. $(4,596) $(1,953) $(2,565)
======= ======= =======
The accompanying notes to consolidated financial statements
are an integral part of these statements.
F-6
MEDIACOM LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN MEMBERS' EQUITY
FOR THE YEAR ENDED DECEMBER 31, 1997 AND
FOR THE PERIOD FROM COMMENCEMENT OF OPERATIONS
(MARCH 12, 1996) TO DECEMBER 31, 1996
(ALL DOLLAR AMOUNTS IN 000'S)
Balance, Commencement of Operations (March 12, 1996)................... $ 5,490
Capital Contributions................................................ 1,000
Net Loss............................................................. (1,953)
-------
Balance, December 31, 1996............................................. 4,537
Capital Contributions................................................ 24,500
Net Loss............................................................. (4,596)
-------
Balance, December 31, 1997............................................. $24,441
=======
The accompanying notes to consolidated financial statements are an integral
part of these statements.
F-7
MEDIACOM LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1997,
FOR THE PERIOD FROM COMMENCEMENT
(MARCH 12, 1996) TO DECEMBER 31, 1996,
AND FOR THE YEAR ENDED DECEMBER 31, 1995
(ALL DOLLAR AMOUNTS IN 000'S)
THE COMPANY PREDECESSOR
--------------------------- ------------
MARCH 12, 1996
THROUGH
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1997 1996 1995
------------ -------------- ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss........................................................................... $ (4,596) $ (1,953) $(2,565)
Adjustments to reconcile net loss to net cash flows from operating activities:
Depreciation and amortization.................................................... 7,636 2,157 3,945
(Increase) decrease in subscriber accounts receivable............................ (351) (267) 31
(Increase) decrease in prepaid expenses and other assets......................... (34) (1,323) 31
Increase (decrease) in accounts payable and accrued expenses..................... 3,520 1,354 (2)
Increase (decrease) in subscriber advances....................................... 498 105 (23)
Increase in management fees payable.............................................. 70 35 --
Increase in due to related entities.............................................. -- -- 61
-------- -------- -------
Net cash flows from operating activities....................................... 6,743 108 1,478
-------- -------- -------
CASH FLOWS USED IN INVESTING ACTIVITIES:
Capital expenditures............................................................... (4,699) (671) (261)
Acquisitions of cable television systems........................................... (54,842) (44,539) --
Other, net......................................................................... (467) (47) --
-------- -------- -------
Net cash flows used in investing activities.................................... (60,008) (45,257) (261)
-------- -------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
New borrowings..................................................................... 72,225 39,200 --
Repayment of debt.................................................................. (40,250) (1,600) (1,077)
Increase in seller note............................................................ 264 2,929 --
Capital contributions.............................................................. 24,500 6,490 --
Financing costs.................................................................... (2,843) (1,474) --
-------- -------- -------
Net cash flows from financing activities....................................... 53,896 45,545 (1,077)
-------- -------- -------
Net increase in cash and cash equivalents...................................... 631 396 140
CASH AND CASH EQUIVALENTS, beginning of period....................................... 396 -- 126
-------- -------- -------
CASH AND CASH EQUIVALENTS, end of period............................................. $ 1,027 $ 396 $ 266
======== ======== =======
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid during the year for interest............................................. $ 4,485 $ 1,190 $ 935
- --------------------------------------------------
======== ======== =======
The accompanying notes to consolidated financial statements are an integral
part of these statements.
F-8
MEDIACOM LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
(ALL DOLLAR AMOUNTS IN 000'S)
(1) THE LIMITED LIABILITY COMPANY:
Organization
Mediacom LLC ("Mediacom" and collectively with its subsidiaries, the
"Company"), a New York limited liability company, was formed on July 17, 1995
and initially conducted its affairs pursuant to an operating agreement dated
March 12, 1996 (the "1996 Operating Agreement"). On March 31 and June 16,
1997, the 1996 Operating Agreement was amended and restated upon the admission
of new members to Mediacom (the "1997 Operating Agreement"). On January 20,
1998, the 1997 Operating Agreement was amended and restated upon the admission
of additional members to Mediacom (the "1998 Operating Agreement"). As of
December 31, 1997, the Company had acquired and was operating cable television
systems in California, Delaware and Arizona (see Note 3).
Capitalization
The Company was initially capitalized on March 12, 1996, with equity
contributions of $5,445 from Mediacom's members and $45 from Mediacom
Management Corporation ("Mediacom Management"). On June 28, 1996, Mediacom
received additional equity contributions of $1,000 from an existing member.
On June 22 and September 18, 1997, Mediacom received additional equity
contributions of $19,500 and $5,000, respectively, from its members. On
January 22, 1998, in connection with the acquisition of the Cablevision
Systems (see Note 13), Mediacom received additional equity contributions of
$94,000 from its members.
Allocation of Losses, Profits and Distributions
For 1996, net losses were allocated 98% to the Commisso Members as defined
in the operating agreements (the "Managing Member") and the balance to the
other members ratably in accordance with their respective membership units.
For 1997, pursuant to the 1997 Operating Agreement, net losses were allocated
99% to the Managing Member and the balance to the other members ratably in
accordance with their respective membership units.
Profits are allocated first to the members to the extent of their deficit
capital account; second, to the members to the extent of their preferred
capital; third, to the members (including the Managing Member) until they
receive an 8% preferred return on their preferred capital (the "Preferred
Return"); fourth, to the Managing Member until the Managing Member receives an
amount equal to 25% of the amount provided to deliver the Preferred Return to
all members; the balance, 80% to the members (including the Managing Member)
in proportion to their respective membership units and 20% to the Managing
Member. The 1997 Operating Agreement increased the Preferred Return from 8% to
12%.
Distributions are made first to the members (including the Managing Member)
in proportion to their respective membership units until they receive amounts
equal to their preferred capital; second, to the members (including the
Managing Member) in proportion to their percentage interests until all members
receive the Preferred Return; third, to the Managing Member until the Managing
Member receives 25% of the amount provided to deliver the Preferred Return;
the balance, 80% to the members (including the Managing Member) in proportion
to their percentage interests and 20% to the Managing Member.
F-9
MEDIACOM LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1997 AND 1996
(ALL DOLLAR AMOUNTS IN 000'S)
Redemption Rights
Except as set forth below, no member has the right to have its membership
interests redeemed or its capital contributions returned prior to dissolution
of Mediacom. Pursuant to the 1998 Operating Agreement, each member has the
right to require Mediacom to redeem its membership interests at any time if
the holding of such interests exceeds the amount permitted, or is otherwise
prohibited or becomes unduly burdensome, by any law to which such member is
subject, or, in the case of any member which is a Small Business Investment
Company as defined in and subject to regulation under the Small Business
Investment Act of 1958, as amended, upon a change in the Company's principal
business activities to an activity not eligible for investment by a Small
Business Investment Company or a change in the reported use of proceeds of a
member's investment in Mediacom. If Mediacom is unable to redeem for cash any
or all of such membership interests at such time, Mediacom will issue as
payment for such interests a junior subordinated promissory note with a five-
year maturity date and deferred interest which accrues and compounds at an
annual rate of 5% over prime.
In addition, in connection with the Company's acquisition of the Cablevision
Systems on January 23, 1998 (see Note 13), the Federal Communications
Commission (the "FCC") issued a transactional forbearance from its cross-
ownership restrictions, effective for a period of one year, permitting a
certain existing member (the "Transactional Member") to purchase additional
units of membership interest in Mediacom. If at the end of such one-year
period, the Transactional Member's membership interest in Mediacom remains
above the limitations imposed by the FCC's cross-ownership restrictions,
Mediacom will be required to repurchase such number of the Transactional
Member's units of membership interest which exceed the permissible ownership
level. If such repurchase were to occur on January 23, 1999 (i.e., upon
expiration of the transactional forbearance), and assuming no changes in the
number of outstanding membership units of Mediacom and no changes in such
cross-ownership rules, the repurchase price for such excess membership
interests would be approximately $7,500.
Duration and Dissolution
Mediacom will be dissolved upon the first to occur of the following: (i)
December 31, 2020; (ii) certain events of bankruptcy involving the Managing
Member or the occurrence of any other event terminating the continued
membership of the Managing Member, unless within one hundred eighty days after
such event the Company is continued by the vote or written consent of no less
than two-thirds of the remaining membership interests; or (iii) the entry of a
decree of judicial dissolution.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Basis of Preparation of Consolidated Financial Statements
The consolidated financial statements include the accounts of Mediacom and
its subsidiaries. All significant intercompany transactions and balances have
been eliminated. The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
The financial statements for the year ended December 31, 1995, reflecting
the results of operations and statement of cash flows, are referred to as the
"Predecessor" financial statements. The
F-10
MEDIACOM LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1997 AND 1996
(ALL DOLLAR AMOUNTS IN 000'S)
Predecessor is Benchmark Acquisition Fund II Limited Partnership which owned
the assets comprising the cable television system serving at the time of its
acquisition by the Company 10,300 subscribers in Ridgecrest, California (the
"Ridgecrest System"). See Note 3. Accordingly, the accompanying financial
statements of the Predecessor and the Company are not comparable in all
material respects since those financial statements report results of
operations and cash flows of these two separate entities.
Revenue Recognition
Revenues are recognized in the period in which the related services are
provided to the Company's subscribers.
Cash and Cash Equivalents
The Company considers all highly liquid investments with original maturities
of three months or less to be cash equivalents.
Concentration of Credit Risk
The Company's accounts receivable is comprised of amounts due from
subscribers in varying regions throughout the United States. Concentration of
credit risk with respect to these receivables are limited due to the large
number of customers comprising the Company's customer base and their
geographic dispersion.
Property, Plant and Equipment
Property, plant and equipment is recorded at purchased and capitalized cost.
Repairs and maintenance are charged to operations, and replacements, renewals
and additions are capitalized. The Company capitalized a portion of salaries
and overhead related to the installation of property, plant and equipment of
approximately $681 and $107 in 1997 and 1996, respectively.
Intangible Assets
Intangible assets include franchising costs, goodwill, subscriber lists and
covenants not to compete. Amortization of intangible assets is calculated on a
straight-line basis over the following lives:
Franchising costs.................................................. 15 years
Goodwill........................................................... 15 years
Subscriber lists................................................... 5 years
Covenants not to compete........................................... 3-7 years
Impairment of Long-Lived Assets
The Company follows the provisions of Statement of Financial Accounting
Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed of" ("SFAS 121"). SFAS 121 requires that
long-lived assets and certain identifiable intangibles to be held and used by
any entity, be reviewed for impairment whenever events or changes in
circumstances indicate the carrying amount of an asset may not be recoverable.
There has been no impairment of long-lived assets of the Company under SFAS
121.
Other Assets
Other assets include organizational and financing costs. Organizational
costs are being amortized on a straight-line basis over periods ranging from 5
to 8 years. Financing costs incurred to raise debt and equity capital are
deferred and amortized on a straight-line basis over the expected term of such
financings. Included in "Other assets" are financing costs of $3,963 and
$1,388 as of December 31, 1997 and 1996, respectively.
F-11
MEDIACOM LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1997 AND 1996
(ALL DOLLAR AMOUNTS IN 000'S)
Income Taxes
Since Mediacom is a limited liability company and the Predecessor is a
limited partnership, they are not subject to federal or state income taxes,
and no provision for income taxes relating to their statements of operations
have been reflected in the accompanying financial statements. The members of
Mediacom and the limited partners of the Predecessor are required to report
their share of income or loss in their respective income tax returns.
(3) ACQUISITIONS:
The undernoted acquisitions (the "Acquired Systems") were accounted for as
purchases with the acquired assets and liabilities recorded at their fair
values. Accordingly, the results of operations of the Acquired Systems have
been included with those of the Company since the date of acquisition.
1997
On June 24, 1997, Mediacom Delaware LLC ("Mediacom Delaware"), a directly
owned subsidiary of Mediacom, acquired the assets of a cable television system
serving approximately 29,300 subscribers in lower Delaware and southwestern
Maryland for a purchase price of $42,900. The purchase price, together with
$275 of direct acquisition costs, has been allocated as follows: $21,306 to
property, plant and equipment and $21,869 to intangible assets.
On September 19, 1997, Mediacom California LLC ("Mediacom California"), a
directly owned subsidiary of Mediacom, acquired the assets of a cable
television system serving approximately 9,600 subscribers in Sun City,
California for a purchase price of $11,500. The purchase price, together with
$167 of direct acquisition costs, has been allocated as follows: $7,150 to
property, plant and equipment and $4,517 to intangible assets.
1996
On March 12, 1996, Mediacom California acquired the assets of the Ridgecrest
System serving approximately 10,300 subscribers in Ridgecrest, California and
surrounding communities for a purchase price of $18,750. The purchase price,
together with $285 of direct acquisition costs, has been allocated as follows:
$5,303 to property, plant and equipment and $13,732 to intangible assets.
On June 28, 1996, Mediacom California acquired the assets of a cable
television system serving approximately 6,600 subscribers in Kern Valley,
California and surrounding communities (the "Kern Valley System") for a
purchase price of $8,250 in cash plus a senior subordinated note payable to
the seller of $2,800 (see Note 8). The purchase price, together with $17 of
direct acquisition costs, has been allocated as follows: $5,537 to property,
plant and equipment and $5,530 to intangible assets.
On December 27, 1996, Mediacom California acquired the assets of a cable
television system serving approximately 2,000 subscribers in Valley Center,
California and surrounding communities for a purchase price of $2,515. The
purchase price, together with $23 of direct acquisition costs, has been
allocated as follows: $2,030 to property, plant and equipment and $508 to
intangible assets.
On December 27, 1996, Mediacom Arizona LLC ("Mediacom Arizona"), a directly
owned subsidiary of Mediacom, acquired the assets of cable television systems
serving approximately 8,000 subscribers in Nogales and Ajo, Arizona and
surrounding communities for a purchase price of $11,420. The purchase price,
together with $137 of direct acquisition costs, has been allocated as follows:
$5,590 to property, plant and equipment and $5,967 to intangible assets.
F-12
MEDIACOM LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1997 AND 1996
(ALL DOLLAR AMOUNTS IN 000'S)
On December 10, 1996, Mediacom California acquired an Internet service
provider serving approximately 2,200 subscribers in Ridgecrest, California and
surrounding communities for an initial purchase price of $342, which has been
allocated as follows: $325 to property, plant and equipment and $17 to
intangible assets.
(4) PRO FORMA RESULTS:
Summarized below are the pro forma unaudited results of operations for the
years ended December 31, 1997 and 1996, assuming the purchase of the Acquired
Systems had been consummated as of January 1, 1996. Adjustments have been made
to: (i) operating expenses; (ii) depreciation and amortization reflecting the
fair value of the assets acquired; (iii) interest expense; (iv) management
fees; and (v) other expenses. The pro forma results may not be indicative of
the results that would have occurred if the combination had been in effect on
the dates indicated or which may be obtained in the future.
YEAR ENDED YEAR ENDED
DECEMBER 31, 1997 DECEMBER 31, 1996
----------------- -----------------
Revenue.................................. $24,074 $23,017
Operating income (loss).................. 231 (1,914)
Net loss................................. $(6,550) $(9,688)
(5) RECENT ACCOUNTING PRONOUNCEMENTS:
In June 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income" (SFAS 130). SFAS 130 establishes standards for reporting and display
of comprehensive income and its components in the financial statements. SFAS
130 is effective for fiscal years beginning after December 15, 1997.
Reclassification of financial statements for earlier periods provided for
comparative purposes is required. The adoption of this standard is not
expected to impact the Company's results of operations, financial position or
cash flows.
(6) PROPERTY, PLANT AND EQUIPMENT:
As of December 31, 1997 and 1996, property, plant and equipment consisted
of:
1997 1996
------- -------
Land........................................................ $ 108 $ 108
Buildings and leasehold improvements........................ 337 250
Cable systems, equipment and subscriber devices............. 49,071 17,614
Vehicles.................................................... 1,135 378
Furniture, fixtures and office equipment.................... 1,084 643
------- -------
$51,735 $18,993
======= =======
Depreciation is calculated on a straight-line basis over the following
useful lives:
Buildings........................................... 45 years
Leasehold improvements.............................. Life of respective lease
Cable systems and equipment......................... 5 to 10 years
Subscriber devices.................................. 5 years
Vehicles............................................ 5 years
Furniture, fixtures and office equipment............ 5 to 10 years
F-13
MEDIACOM LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1997 AND 1996
(ALL DOLLAR AMOUNTS IN 000'S)
(7) SENIOR BANK DEBT:
On December 27, 1996, Mediacom's subsidiaries entered into an amended and
restated credit agreement, providing for a $15,000 reducing revolving credit
and a $25,000 term loan. On June 24, 1997, Mediacom California, Mediacom
Delaware and Mediacom Arizona (collectively, the "Western Group") entered into
a second amended and restated credit agreement (the "Western Credit
Facility"), providing for a $40,000 reducing revolving credit and $60,000 in
term loans. On March 24, 1998, the Western Credit Facility was amended,
providing for a $70,000 reducing revolving credit (the "Revolver") and a
$30,000 term loan ("Term Loan"). Under the terms of the Western Credit
Facility, the Western Group may borrow up to $70,000 under the Revolver,
subject to certain limitations. Beginning on September 30, 1998, the Western
Credit Facility provides for quarterly reductions, ranging from 0.21% to 8.29%
of the Revolver, with a final reduction on September 30, 2005. Beginning on
September 30, 1998, the Term Loan will be repaid in 29 consecutive quarterly
installments, ranging from 0.42% to 11.67% of the Term Loan, with the final
installment on September 30, 2005. The Western Credit Facility also provides
mandatory reductions of the Revolver and mandatory prepayments of the Term
Loan from excess cash flow as defined, beginning December 31, 1999.
The Western Credit Facility provides for a commitment fee of 1/2% per annum
on the unused portion of the Revolver and such fees are reflected in "Other
expenses" in the accompanying consolidated statements of operations. Under the
Western Credit Facility, the Company has the option of paying interest at
either the Base Rate or the Eurodollar Rate, as defined below, plus a margin
which is based on the attainment of certain financial ratios. The effective
interest rate at December 31, 1997 was 8.33% before giving effect to the
interest rate exchange agreements described below. The applicable margins for
the respective borrowing rate options have the following ranges:
INTEREST RATE OPTION MARGIN RATE
-------------------- --------------
Base Rate.................................................... 0.375% to 1.75%
Eurodollar Rate.............................................. 1.375% to 2.75%
The Western Credit Facility contains covenants, including, but not limited
to, insurance requirements, limitations on mergers and acquisitions,
consolidations and sales of certain assets, restrictions on certain
transactions with affiliates, the maintenance of certain financial ratios,
such as, the leverage ratio, the interest coverage ratio and the fixed charge
coverage ratio, limitations on liens, the incurrence of additional
indebtedness and certain restricted payments, and restrictions on the ability
to engage in any business. The Western Group is in compliance with all
financial ratios as of December 31, 1997. The Western Credit Facility is
secured by Mediacom's pledge of all its ownership interests in the Western
Group and a first priority lien on all the tangible and intangible assets of
the Western Group, other than real property. The indebtedness under the
Western Credit Facility is guaranteed by Mediacom on a limited recourse basis
to the extent of its ownership interests in the Western Group.
The stated maturities of all debt outstanding under the Western Credit
Facility, as amended, as of December 31, 1997 are as follows:
1998................................................................. $ 250
1999................................................................. 2,000
2000................................................................. 2,300
2001................................................................. 3,600
2002................................................................. 4,000
Thereafter........................................................... 57,425
-------
$69,575
=======
F-14
MEDIACOM LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1997 AND 1996
(ALL DOLLAR AMOUNTS IN 000'S)
The Western Group has entered into interest rate exchange agreements (the
"Swaps") with various banks pursuant to which the interest rate on $62,000 is
fixed at a weighted average swap rate of 6.19%, plus the average applicable
margin over the Eurodollar Rate option under the Western Credit Facility.
Under the terms of the Swaps, which expire from 1998 through 2002, the Company
is exposed to credit loss in the event of nonperformance by the other parties
to the Swaps. However, the Company does not anticipate nonperformance by the
counterparties.
(8) SELLER NOTE:
In connection with the acquisition of the Kern Valley System, the Western
Group issued to the seller an unsecured senior subordinated note (the "Seller
Note") in the amount of $2,800, with a final maturity of June 28, 2006.
Interest is deferred throughout the term of the note and is payable at
maturity or upon prepayment. For the five-year period ending June 28, 2001,
the annual interest rate is 9.0%. After the initial five-year period, the
annual interest rate increases to 15.0%, with an interest clawback for the
first five years. After the initial seven-year period, the interest rate
increases to 18.0%, with an interest clawback for the first seven years. The
Company intends to prepay the Seller Note plus accrued interest on or before
June 28, 2001, subject to prior approval by the parties to the Western Credit
Facility, which the Company believes it will obtain. The Company expects to
repay the Seller Note with cash flow generated from operations and future
borrowings. There are no penalties associated with prepayment of this note.
The Seller Note agreement contains a debt incurrence covenant limiting the
ability of the Western Group to incur additional indebtedness. The Seller Note
is subordinated and junior in right of payment to all senior obligations, as
defined in Western Credit Facility.
(9) RELATED PARTY TRANSACTIONS:
In accordance with the operating agreements and separate management
agreements with each of Mediacom's subsidiaries, Mediacom Management is paid
compensation for management services performed for the Company. Under such
agreements, Mediacom Management, wholly-owned by the Managing Member, is
entitled to receive annual management fees calculated as follows: (i) 5.0% of
the first $50,000 of annual gross operating revenues of the Company; (ii) 4.5%
of such revenues in excess thereof up to $75,000; and (iii) 4.0% of such
revenues in excess of $75,000. The Company incurred management fees of
approximately $882 and $270 in 1997 and 1996, respectively.
For the year ended December 31, 1995, the Predecessor had an agreement with
a related party for the management and operation of the Ridgecrest System. The
Predecessor paid a monthly management fee of 5% of the Predecessor's gross
revenues, as defined in a certain management agreement. The Predecessor also
reimbursed this related party for various expenses including marketing,
engineering and accounting paid on its behalf. For the year ended December 31,
1995, the Predecessor incurred management fees of approximately $261 and
reimbursed expenses to this related party of approximately $41.
Pursuant to the operating agreements of Mediacom, Mediacom Management is
also entitled to receive a fee of 1.0% of the purchase price of acquisitions
made by the Company until the Company's pro forma consolidated annual
operating revenues equal $75,000 and 0.5% of such purchase price
F-15
MEDIACOM LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1997 AND 1996
(ALL DOLLAR AMOUNTS IN 000'S)
thereafter. The Company incurred acquisition fees of $544 in 1997 and $453 in
1996, respectively. The acquisition fees are included in "Other expenses" in
the statement of operations.
In addition, the operating agreements of the Company provide for the
reimbursement of reasonable out-of-pocket expenses of Mediacom Management
incurred in connection with the operation of the business of the Company and
acting for or on behalf of the Company in connection with any potential
acquisitions. In 1997 and 1996, the Company reimbursed Mediacom Management $59
and $29, respectively, for such services. Any such amounts incurred in
connection with completed acquisitions by the Company were capitalized and are
included in "Intangible assets" in the balance sheet.
(10) EMPLOYEE BENEFIT PLANS:
Substantially all employees of the Company are eligible to participate in a
deferred arrangement pursuant to IRC Section 401(k) (the "Plan"). Under such
arrangement, eligible employees may contribute up to 15% of their current pre-
tax compensation to the Plan. The Plan permits, but does not require, matching
contributions and non-matching (profit sharing) contributions to be made by
the Company up to a maximum dollar amount or maximum percentage of participant
contributions, as determined annually by the Company. The Company presently
matches 50% on the first 6% of employee contributions. The Company's
contributions under the Plan totaled approximately $14 and $10 during 1997 and
1996, respectively.
(11) COMMITMENTS AND CONTINGENCIES:
Under various lease and rental agreements for offices, warehouses and
computer terminals, the Company had rental expense of approximately $138 and
$22 for 1997 and 1996, respectively. Future minimum annual rental payments are
as follows:
1998.................................................................... $163
1999.................................................................... 143
2000.................................................................... 139
2001.................................................................... 140
2002.................................................................... 140
In addition, the Company rents utility poles in its operations generally
under short-term arrangements, but the Company expects these arrangements to
recur. Total rental expense for utility poles was approximately $102 and $24
in 1997 and 1996, respectively.
On August 29, 1997, a bank issued an irrevocable letter of credit on behalf
of Mediacom in favor of the sellers of the Cablevision Systems to secure
Mediacom's performance under the asset purchase agreement for the Cablevision
Systems. Such letter of credit was terminated upon the consummation of the
purchase of the Cablevision Systems on January 23, 1998 (see Note 13).
Legal Proceedings
Management is not aware of any legal proceedings currently that will have a
material adverse impact on the Company's financial statements.
F-16
MEDIACOM LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1997 AND 1996
(ALL DOLLAR AMOUNTS IN 000'S)
Regulation in the Cable Television Industry
The cable television industry is subject to extensive regulation by federal,
local and, in some instances, state governmental agencies. The Cable
Television Consumer Protection and Competition Act of 1992 and the Cable
Communication Policy Act of 1984 (collectively, the "Cable Acts"), both of
which amended the Communications Act of 1934 (as amended, the "Communications
Act"), established a national policy to guide the development and regulation
of cable television systems. The Communications Act was recently amended by
the Telecommunications Act of 1996 (the "1996 Telecom Act"). Principal
responsibility for implementing the policies of the Cable Acts and the 1996
Telecom Act has been allocated between the FCC and state or local regulatory
authorities.
Federal Law and Regulation
The Cable Acts and the FCC's rules implementing such acts generally have
increased the administrative and operational expenses of cable television
systems and have resulted in additional regulatory oversight by the FCC and
local or state franchise authorities. The Cable Acts and the corresponding FCC
regulations have established, among other things: (i) rate regulations; (ii)
mandatory carriage and retransmission consent requirements that require a
cable television system under certain circumstances to carry a local broadcast
station or to obtain consent to carry a local or distant broadcast station;
(iii) rules for franchise renewals and transfers; and (iv) other requirements
covering a variety of operational areas such as equal employment opportunity,
technical standards and customer service requirements.
The 1996 Telecom Act deregulates rates for cable programming services tiers
("CPST") commencing in March 1999 and, for certain small cable operators,
immediately eliminates rate regulation of CPST, and, in certain limited
circumstances, basic services. The FCC is currently developing permanent
regulations to implement the rate deregulation provisions of the 1996 Telecom
Act. The Company is currently unable to predict the ultimate effect of the
Cable Acts or the 1996 Telecom Act on its financial statements.
The FCC and Congress continue to be concerned that rates for regulated
programming services are rising at a rate exceeding inflation. It is therefore
possible that the FCC will further restrict the ability of cable television
operators to implement rate increases and/or Congress will enact legislation
which would, for example, delay or suspend the scheduled March 1999
termination of CPST rate regulation.
State and Local Regulation
Cable television systems generally operate pursuant to non-exclusive
franchises, permits or licenses granted by a municipality or other state or
local governmental entity. The terms and conditions of franchises vary
materially from jurisdiction to jurisdiction. A number of states subject cable
television systems to the jurisdiction of centralized state governmental
agencies. To date, other than Delaware, no state in which the Company
currently operates has enacted state level regulation. The Company cannot
predict whether any of the states in which it currently operates will engage
in such regulation in the future.
F-17
MEDIACOM LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1997 AND 1996
(ALL DOLLAR AMOUNTS IN 000'S)
(12) DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS:
Debt
The fair value of the Company's debt is estimated based on the current rates
offered to the Company for debt of the same remaining maturities. The fair
value of the senior bank debt and the Seller Note approximates the carrying
value.
Interest Rate Exchange Agreements
The fair value of the Swaps is the estimated amount that the Company would
receive or pay to terminate the Swaps, taking into account current interest
rates and the current creditworthiness of the Swap counterparties. The Company
would have paid $410 at December 31, 1997 to terminate the Swaps, inclusive of
accrued interest.
(13) SUBSEQUENT EVENTS:
On January 9, 1998, Mediacom California acquired the assets of a cable
television system serving approximately 17,200 subscribers in Clearlake,
California and surrounding communities (the "Clearlake System") for a purchase
price of $21,400. The acquisition of the Clearlake System and related closing
costs and adjustments were financed with cash on hand and related borrowings
under the Western Credit Facility.
On January 23, 1998, Mediacom Southeast LLC ("Mediacom Southeast"), a
directly owned subsidiary of Mediacom, entered into a $225,000 credit
agreement (the "Southeast Credit Facility"), providing for a $165,000 reducing
revolving credit expiring June 30, 2006 and a $60,000 term loan maturing June
30, 2006.
On January 23, 1998, Mediacom Southeast acquired the assets of cable
television systems serving approximately 260,100 subscribers in various
regions of the United States (the "Cablevision Systems") for a purchase price
of approximately $308,700. The acquisition of the Cablevision Systems and
related closing costs and adjustments were financed with: (i) $211,000 of
borrowings under the Southeast Credit Facility; (ii) the proceeds of $20,000
aggregate principal amount of term notes (the "Holding Company Notes") issued
by Mediacom; and (iii) $94,000 of equity capital contributed to Mediacom by
its members.
On April 1, 1998, Mediacom and Mediacom Capital Corporation, a New York
corporation wholly-owned by Mediacom, jointly issued $200,000 aggregate
principal amount of 8.5% Senior Notes due on April 15, 2008 (the "Offering").
The net proceeds of the Offering at closing were used to repay outstanding
bank debt under the Western Credit Facility and the Southeast Credit Facility
in the aggregate principal amount of $173,500 and to repay in full the
outstanding Holding Company Notes. Interest on the Senior Notes will be
payable semi-annually on April 15 and October 15 of each year, commencing on
October 15, 1998.
F-18
MEDIACOM LLC AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(ALL DOLLAR AMOUNTS IN 000'S)
MARCH 31,
1998
----------
(UNAUDITED)
ASSETS
Cash and cash equivalents......................................... $ 1,495
Subscriber accounts receivable, net of allowance for doubtful
accounts of $373 and $56......................................... 4,074
Prepaid expenses and other assets................................. 2,639
Investment in cable television systems:
Inventory....................................................... 1,293
Property, plant and equipment, at cost.......................... 190,519
Less-accumulated depreciation................................... (11,397)
--------
Property, plant and equipment, net............................ 179,122
Intangible assets, net.......................................... 242,482
--------
Total investment in cable television systems.................. 422,897
Other assets, net............................................... 13,858
--------
Total assets.................................................. $444,963
========
LIABILITIES AND MEMBERS' EQUITY
LIABILITIES
Debt.............................................................. $314,760
Accounts payable and accrued expenses............................. 20,598
Subscriber advances............................................... 614
Management fees payable........................................... 525
--------
Total liabilities............................................. 336,497
MEMBERS' EQUITY
Capital contributions........................................... 124,990
Accumulated deficit............................................. (16,524)
--------
Total members' equity......................................... 108,466
--------
Total liabilities and members' equity......................... $444,963
========
See accompanying notes to consolidated financial statements.
F-19
MEDIACOM LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(ALL DOLLAR AMOUNTS IN 000'S)
(UNAUDITED)
THREE MONTHS
ENDED MARCH 31,
----------------
1998 1997
------- -------
Revenues..................................................... $25,943 $ 2,894
------- -------
Costs and expenses:
Service costs.............................................. 9,822 890
Selling, general and administrative expenses............... 5,303 434
Management fee expense..................................... 1,207 145
Depreciation and amortization.............................. 11,229 1,607
------- -------
Operating income (loss)...................................... (1,618) (182)
Interest expense, net........................................ 5,017 889
Other expenses............................................... 3,340 3
------- -------
Net loss..................................................... $(9,975) $(1,074)
======= =======
See accompanying notes to consolidated financial statements.
F-20
MEDIACOM LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN MEMBERS' EQUITY
(ALL DOLLAR AMOUNTS IN 000'S)
Balance, commencement of operations (March 12, 1996).................. $ 5,490
Capital contributions............................................... 1,000
Net loss............................................................ (1,953)
--------
Balance, December 31, 1996............................................ 4,537
Capital contributions............................................... 24,500
Net loss............................................................ (4,596)
--------
Balance, December 31, 1997............................................ 24,441
Capital contributions............................................... 94,000
Net loss (unaudited)................................................ (9,975)
--------
Balance, March 31, 1998............................................... $108,466
========
See accompanying notes to consolidated financial statements.
F-21
MEDIACOM LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(ALL DOLLAR AMOUNTS IN 000'S)
(UNAUDITED)
THREE MONTHS
ENDED MARCH 31,
-----------------
1998 1997
-------- -------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................................. $ (9,975) $(1,074)
Adjustments to reconcile net loss to net cash flows from
operating activities:
Depreciation and amortization........................... 11,229 1,607
(Increase) decrease in subscriber accounts receivable... (3,778) 49
(Increase) decrease in prepaid expenses and other as-
sets................................................... (1,281) (5)
Increase (decrease) in accounts payable and accrued ex-
penses................................................. 11,921 (96)
Increase (decrease) in subscriber advances.............. 11 --
Increase (decrease) in management fees payable.......... 420 13
-------- -------
Net cash flows from operating activities.............. 8,547 494
-------- -------
CASH FLOWS USED IN INVESTING ACTIVITIES:
Capital expenditures...................................... (4,486) (276)
Acquisitions of cable television systems.................. (331,059) --
Other, net................................................ (54) (137)
-------- -------
Net cash flows used in investing activities........... (335,599) (413)
-------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
New borrowings............................................ 253,667 362
Repayment of debt......................................... (11,675) (200)
Capital contributions..................................... 94,000 --
Financing costs........................................... (8,472) --
-------- -------
Net cash flows from financing activities.............. 327,520 162
-------- -------
Net increase in cash and cash equivalents............. 468 243
CASH AND CASH EQUIVALENTS, beginning of period.............. 1,027 396
-------- -------
CASH AND CASH EQUIVALENTS, end of period.................... $ 1,495 $ 639
======== =======
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for interest................... $ 4,690 $ 800
======== =======
See accompanying notes to consolidated financial statements.
F-22
MEDIACOM LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1998
(ALL DOLLAR AMOUNTS IN 000'S)
(UNAUDITED)
(1) STATEMENT OF ACCOUNTING PRESENTATION AND OTHER INFORMATION
Mediacom LLC ("Mediacom" and collectively with its subsidiaries, the
"Company"), a New York limited liability company, was formed in July 1995
principally to acquire and operate cable television systems. As of March 31,
1998, the Company had acquired and was operating cable television systems in
fourteen states principally Alabama, California, Florida, Kentucky, Missouri
and North Carolina (see Note 2).
The Company was initially capitalized in March 1996, with equity
contributions of $5,445 from Mediacom's members and $45 from Mediacom
Management Corporation ("Mediacom Management"). In June 1996, Mediacom
received additional equity contributions of $1,000 from a member. In June and
September 1997, Mediacom received additional equity contributions of $19,500
and $5,000, respectively, from its members. In January 1998, in connection
with the acquisition of the Cablevision Systems (see Note 2), Mediacom
received additional equity contributions of $94,000 from its members.
Mediacom Capital Corporation ("Mediacom Capital"), a New York corporation
wholly-owned by Mediacom, was organized in March 1998 for the sole purpose of
acting as co-issuer with Mediacom of $200,000 aggregate principal amount of
8.5% Senior Notes due 2008 (the "Senior Notes"), which were issued on April 1,
1998 (see Note 3). Mediacom Capital has nominal assets and does not conduct
operations of its own. The Senior Notes are joint and several obligations of
Mediacom and Mediacom Capital, although Mediacom received all the net proceeds
of the offering of the Senior Notes.
The consolidated financial statements include the accounts of Mediacom and
its subsidiaries and have been prepared in accordance with the rules and
regulations of the Securities and Exchange Commission. Accordingly, certain
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted.
The consolidated financial statements as of March 31, 1998 and 1997 are
unaudited; however, in the opinion of management, such statements include all
adjustments necessary for a fair presentation of the results for the periods
presented. The interim financial statements should be read in conjunction with
the audited financial statements and notes thereto included in the Company's
Consolidated Financial Statements for the fiscal year ended December 31, 1997,
which are available upon request of Mediacom at its principal executive
office. The results of operations for the interim periods are not necessarily
indicative of the results that might be expected for future interim periods or
for the full year ended December 31, 1998.
(2) ACQUISITIONS
The Company has completed the undernoted acquisitions (the "Acquired
Systems") in 1998 and 1997. Such acquisitions were accounted for as purchases
with the acquired assets and liabilities recorded at their fair values.
Accordingly, the results of operations of the Acquired Systems have been
included with those of the Company since the date of acquisition.
1998
On January 9, 1998, Mediacom California LLC ("Mediacom California"), a
directly owned subsidiary of Mediacom, acquired the assets of a cable
television system serving approximately 17,200 subscribers in Clearlake,
California and surrounding communities (the "Clearlake System") for a
F-23
MEDIACOM LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(ALL DOLLAR AMOUNTS IN 000'S)
(UNAUDITED)
purchase price of $21,400. The purchase price, together with approximately
$100 of direct acquisition costs, has been preliminarily allocated as follows:
approximately $8,600 to property, plant and equipment and approximately
$12,900 to intangible assets. During the three months ended March 31, 1998,
the Company recorded acquisition reserves related to this acquisition in the
amount of approximately $370 and are included in intangible assets and accrued
expenses. The acquisition of the Clearlake System was financed with borrowings
under the Company's bank credit facilities (see Note 3).
On January 23, 1998, Mediacom Southeast LLC ("Mediacom Southeast"), a
directly owned subsidiary of Mediacom, acquired the assets of cable television
systems serving approximately 260,100 subscribers in various regions of the
United States (the "Cablevision Systems") for a purchase price of
approximately $308,700. The purchase price, together with approximately $800
of direct acquisition costs, has been preliminarily allocated as follows:
approximately $126,000 to property, plant and equipment and approximately
$183,500 to intangible assets. During the three months ended March 31, 1998,
the Company recorded acquisition reserves related to this acquisition in the
amount of approximately $3,750 and are included in intangible assets and
accrued expenses. The acquisition of the Cablevision Systems and related
closing costs and adjustments were financed with equity contributions,
borrowings under the Company's bank credit facilities, and other bank debt
(see Notes 1 and 3).
1997
On June 24, 1997, Mediacom Delaware LLC ("Mediacom Delaware"), a directly
owned subsidiary of Mediacom, acquired the assets of a cable television system
serving approximately 29,300 subscribers in lower Delaware and southwestern
Maryland (the "Lower Delaware System") for a purchase price of $42,900. The
purchase price, together with $275 of direct acquisition costs, has been
allocated as follows: $21,306 to property, plant and equipment and $21,869 to
intangible assets.
On September 19, 1997, Mediacom California acquired the assets of a cable
television system serving approximately 9,600 subscribers in Sun City,
California (the "Sun City System") for a purchase price of $11,500. The
purchase price, together with $167 of direct acquisition costs, has been
allocated as follows: $7,150 to property, plant and equipment and $4,517 to
intangible assets.
F-24
MEDIACOM LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(ALL DOLLAR AMOUNTS IN 000'S)
(UNAUDITED)
The Company has reported the operating results of the Acquired Systems from
the date of their respective acquisition. Unaudited pro forma operating
results of the Company assuming the acquisitions of the Acquired Systems had
been consummated on January 1, 1997 are as follows:
PRO FORMA RESULTS
FOR THE
THREE MONTHS
ENDED MARCH 31,
------------------
1998 1997
-------- --------
Revenues................................................... $ 31,679 $ 29,239
-------- --------
Operating expenses and costs:
Service costs............................................ 12,033 11,119
Selling, general and administrative expenses............. 5,988 5,266
Management fee expense................................... 1,465 1,352
Depreciation and amortization............................ 13,557 12,809
-------- --------
Operating loss............................................. (1,364) (1,307)
Interest expense, net...................................... 6,575 6,443
Other expenses............................................. 30 40
-------- --------
Net loss................................................... $ (7,969) $ (7,790)
======== ========
The pro forma financial information presented above has been prepared for
comparative purposes only and does not purport to be indicative of the
operating results which actually would have resulted had the acquisitions of
the Acquired Systems been consummated on January 1, 1997.
(3) DEBT
As of March 31, 1998, debt consisted of:
MARCH 31,
1998
---------
Mediacom:
Holding Company Notes (a)............................................ $ 20,000
8 1/2% Senior Notes (b).............................................. --
Subsidiaries:
Bank Credit Facilities (c)........................................... 291,500
Seller Note (d)...................................................... 3,260
--------
$314,760
========
(a) On January 23, 1998, Mediacom issued two notes (the "Holding Company
Notes") to a bank in the aggregate principal amount of $20,000 to finance in
part the acquisition of the Cablevision Systems. On April 1, 1998, the Holding
Company Notes were repaid in full from the net proceeds of the Offering (as
defined below). The Holding Company Notes had an average interest rate of 8.4%
at March 31, 1998.
(b) On April 1, 1998, Mediacom and Mediacom Capital jointly issued (the
"Offering") $200,000 aggregate principal amount of 8.5% Senior Notes due on
April 15, 2008. The Senior Notes are unsecured obligations of the Company, and
the indenture agreement for the Senior Notes stipulates,
F-25
MEDIACOM LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(ALL DOLLAR AMOUNTS IN 000'S)
(UNAUDITED)
among other things, restrictions on incurrence of indebtedness, distributions,
mergers and asset sales and has cross-default provisions related to other debt
of the Company. Interest accrues at 8.5% per annum, beginning from the date of
issuance and is payable semi-annually on April 15 and October 15 of each year,
commencing on October 15, 1998. The Senior Notes may be redeemed at the option
of Mediacom, in whole or part, at any time after April 15, 2003, at redemption
prices decreasing from 104.25% of their principal amount to 100% in 2006, plus
accrued and unpaid interest.
(c) On January 23, 1998, Mediacom Southeast entered into an eight and one
half year, $225,000 reducing revolver and term loan agreement (the "Southeast
Credit Facility"). On June 24, 1997, Mediacom California, Mediacom Delaware
and Mediacom Arizona LLC, a directly owned subsidiary of Mediacom,
(collectively, the "Western Group") entered into an eight and one half year,
$100,000 reducing revolver and term loan agreement (the "Western Credit
Facility" and, together with the Southeast Credit Facility, the "Bank Credit
Facilities"). At March 31, 1998, the aggregate bank commitments under the Bank
Credit Facilities were $324,950. The Bank Credit Facilities are non- recourse
to Mediacom and have no cross-default provisions relating directly to each
other. The reducing revolving credit lines under the Bank Credit Facilities
make available a maximum commitment amount for a period of up to eight and one
half years and is subject to quarterly reductions, beginning September 30,
1998, ranging from 0.21% to 12.42% of the original commitment amount of the
reducing revolver. The term loans under the Bank Credit Facilities are repaid
in consecutive installments beginning September 30, 1998, ranging from 0.42%
to 12.92% of the original term loan amount. The Bank Credit Facilities require
mandatory reductions of the reducing revolvers and mandatory prepayments of
the term loans from excess cash flow, as defined, beginning December 31, 1999.
The Bank Credit Facilities provide for interest at varying rates based upon
various borrowing options and the attainment of certain financial ratios and
for commitment fees of 3/8% to 1/2% per annum on the unused portion of
available credit under the reducing revolver credit lines. The effective
interest rate at March 31, 1998, for outstanding debt under the Bank Credit
Facilities was 8.0% after giving effect to the interest rate swap agreements
discussed below.
The Bank Credit Facilities contain covenants on the subsidiaries, including,
but not limited to, limitations on mergers and acquisitions, consolidations
and sales of certain assets, liens, the incurrence of additional indebtedness
and certain restrictive payments, and restrictions on certain transactions
with affiliates, and require the maintenance of certain financial ratios, such
as, the leverage ratio, the interest coverage ratio, the fixed charge coverage
ratio and the pro forma debt service coverage ratio. The Company is in
compliance with all financial ratios as of March 31, 1998.
The Bank Credit Facilities are secured by Mediacom's pledge of all its
ownership interests in the subsidiaries and a first priority lien on all the
tangible and intangible assets of the subsidiaries, other than real property.
The indebtedness under the Bank Credit Facilities is guaranteed by Mediacom on
a limited recourse basis to the extent of its ownership interests in the
subsidiaries. At March 31, 1998, the Company had $33,450 of unused commitments
under the Bank Credit Facilities, of which approximately $10,600 could have
been borrowed by the subsidiaries for purposes of distributing such borrowed
proceeds to Mediacom under the most restrictive covenants of the Bank Credit
Facilities. As of the same date, after giving pro forma effect to the Offering
and the use of net proceeds therefrom, the Company would have had $206,950 of
unused commitments under the Bank Credit Facilities, of which approximately
$184,000 could have been borrowed by the subsidiaries for purposes of
distributing such borrowed proceeds to Mediacom under the most restrictive
covenants of the Bank Credit Facilities.
F-26
MEDIACOM LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(ALL DOLLAR AMOUNTS IN 000'S)
(UNAUDITED)
The stated maturities of all debt outstanding under the Bank Credit
Facilities as of March 31, 1998 are as follows:
1998................................................................ $ 250
1999................................................................ 2,000
2000................................................................ 4,350
2001................................................................ 14,800
2002................................................................ 19,100
Thereafter.......................................................... 251,000
--------
$291,500
========
The Western Group has entered into interest rate exchange agreements (the
"Swaps") with various banks pursuant to which the interest rate on $62,000 is
fixed at a weighted average swap rate of 6.19%, plus the average applicable
margin over the Eurodollar Rate option under the Bank Credit Facilities. Under
the terms of the Swaps, which expire from 1998 through 2002, the Company is
exposed to credit loss in the event of nonperformance by the other parties to
the Swaps. However, the Company does not anticipate nonperformance by the
counterparties.
(d) Seller Note
In connection with the acquisition of a cable television system in 1996, the
Western Group issued to the seller an unsecured senior subordinated note (the
"Seller Note") in the amount of $2,800, with a final maturity of June 28,
2006. Interest is deferred throughout the term of the Seller Note and is
payable at maturity or upon prepayment. For the five-year period ending June
28, 2001, the annual interest rate is 9.0%. After the initial five-year
period, the annual interest rate increases to 15.0%, with an interest clawback
for the first five years. After the initial seven-year period, the interest
rate increases to 18.0%, with an interest clawback for the first seven years.
There are no penalties associated with prepayment of this note.
The Seller Note agreement contains a debt incurrence covenant limiting the
ability of the Western Group to incur additional indebtedness. The Seller Note
is subordinated and junior in right of payment to all senior obligations of
the Western Group, as defined in the Western Credit Facility.
(4) COMMITMENTS AND CONTINGENCIES
On August 29, 1997, a bank issued a $15,000 irrevocable letter of credit on
behalf of Mediacom in favor of the sellers of the Cablevision Systems to
secure Mediacom's performance under the asset purchase agreement for the
Cablevision Systems. Such letter of credit was terminated upon the
consummation of the purchase of the Cablevision Systems on January 23, 1998
(see Note 2).
Pursuant to the Cable Television Consumer and Competition Act of 1992, the
Federal Communications Commission ("FCC") has adopted comprehensive
regulations governing rates charged to subscribers for basic cable and cable
programming services. These rates must be set using a benchmark formula.
Alternatively, a cable operator can attempt to establish higher rates through
a cost-of-service showing. The FCC has also adopted regulations that permit
qualifying small cable operators to justify their regulated rates using a
simplified cost-of-service formula. The Company qualifies as a small cable
operator and approximately 82% of its basic subscribers are governed by
F-27
MEDIACOM LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(ALL DOLLAR AMOUNTS IN 000'S)
(UNAUDITED)
such rules. Once rates for basic cable and cable programming services have
been established pursuant to one of these methodologies, the rate level can
subsequently be adjusted only to reflect changes in the number of regulated
channels, inflation, and increases in certain external costs, such as
franchise and other governmental fees, copyright and retransmission consent
fees, taxes, programming costs and franchise- related obligations. FCC
regulations also govern the rates which can be charged for the lease of
customer premises equipment and for installation services.
As a result of such legislation and FCC regulations, the Company's basic
service and cable programming service rates and its equipment and installation
charges (the "Regulated Services") are subject to the jurisdiction of local
franchising authorities and the FCC. The Company believes that it has complied
in all material respects with the rate regulation provisions of the federal
law. However, the Company's rates for Regulated Services are subject to review
by the FCC if a complaint has been filed, or by the appropriate franchise
authority if it is certified by the FCC to regulate basic rates. If, as a
result of the review process, the Company cannot substantiate the rates
charged by its cable television systems for Regulated Services, the Company
could be required to reduce its rates for Regulated Services to the
appropriate level and refund the excess portion of rates received for up to
one year prior to the implementation.
The Company's agreements with franchise authorities require the payment of
fees of up to 5% of annual system revenues. Such franchises are generally
nonexclusive and are granted by local governmental authorities for a specified
term of years, generally for periods of up to fifteen years.
(5) SUBSEQUENT EVENT
On April 1, 1998, Mediacom and Mediacom Capital jointly issued $200,000
aggregate principal amount of 8.5% Senior Notes due on April 15, 2008 (see
Note 3). The net proceeds of the Offering were used at closing to repay
outstanding bank debt under the reducing revolvers of the Bank Credit
Facilities in the aggregate principal amount of $173,500 and to repay in full
the outstanding Holding Company Notes. Interest on the Senior Notes will be
payable semi-annually on April 15 and October 15 of each year, commencing on
October 15, 1998.
F-28
INDEPENDENT AUDITORS' REPORT
The Board of Directors U.S. Cable Television Group, L.P.
We have audited the accompanying consolidated balance sheets of U.S. Cable
Television Group, L.P. and subsidiaries (a wholly-owned subsidiary of
Cablevision Systems Corporation) as of December 31, 1997 and 1996, and the
related consolidated statements of operations and partners' capital
(deficiency) and cash flows for the year ended December 31, 1997, and for the
periods from January 1, 1996 to August 12, 1996, and August 13, 1996 to
December 31, 1996. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of U.S. Cable
Television Group, L.P. and subsidiaries as of December 31, 1997 and 1996, and
the results of their operations and their cash flows for the year ended
December 31, 1997, and the periods from January 1, 1996 to August 12, 1996,
and August 13, 1996 to December 31, 1996, in conformity with generally
accepted accounting principles.
As discussed in note 1 to the consolidated financial statements, effective
August 13, 1996, U.S. Cable Television Group L.P. redeemed certain limited and
general partnership interests in a business combination accounted for as a
purchase. As a result of the redemption, the consolidated financial
information for the period after the redemption is presented on a different
cost basis than that for the period before the redemption and therefore, is
not comparable.
KPMG Peat Marwick LLP
March 20, 1998
Jericho, New York
F-29
U.S. CABLE TELEVISION GROUP, L.P.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
(DOLLARS IN THOUSANDS)
1997 1996
-------- --------
ASSETS
Cash and cash equivalents................................... $ 281 $ 49
Accounts receivable-subscribers (less allowance for doubtful
accounts of $218 and $122)................................. 1,082 995
Other receivables........................................... 502 383
Prepaid expenses and other assets........................... 632 477
Property, plant and equipment, net.......................... 84,363 93,543
Excess costs over fair value of net assets acquired (less
accumulated amortization of $29,158 and $7,952)............ 119,363 140,487
Deferred financing costs (less accumulated amortization of
$1,062 and $292)........................................... 1,771 1,997
-------- --------
$207,994 $237,931
======== ========
LIABILITIES AND PARTNER'S CAPITAL
Accounts payable............................................ $ 11,605 $ 10,246
Accrued expenses:
Franchise fees............................................ 1,087 1,089
Payroll and related benefits.............................. 4,463 4,728
Interest.................................................. 879 947
Other..................................................... 7,174 3,688
Accounts payable-affiliates................................. 1,367 500
Bank debt................................................... 154,960 159,460
-------- --------
Total liabilities....................................... 181,535 180,658
Partners' capital........................................... 26,459 57,273
-------- --------
$207,994 $237,931
======== ========
See accompanying notes to consolidated financial statements.
F-30
U.S. CABLE TELEVISION GROUP, L.P.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND
PARTNERS' CAPITAL/(DEFICIENCY)
(DOLLARS IN THOUSANDS)
PERIOD FROM PERIOD FROM
YEAR ENDED AUGUST 13, 1996 TO JANUARY 1, 1996 TO
DECEMBER 31, 1997 DECEMBER 31, 1996 AUGUST 12, 1996
----------------- ------------------ ------------------
Revenues.............................................................. $ 89,016 $ 32,144 $ 49,685
Operating expenses:
Technical expenses.................................................. 38,513 15,111 23,467
Selling, general and administrative expenses........................ 22,099 6,677 11,021
Depreciation and amortization....................................... 46,116 17,842 21,034
-------- -------- ---------
Operating loss.................................................... (17,712) (7,486) (5,837)
Other (expense) income:
Interest expense.................................................... (12,727) (5,136) (10,922)
Interest income..................................................... 25 14 33
Other, net.......................................................... (400) (119) (69)
-------- -------- ---------
Net loss.............................................................. (30,814) (12,727) (16,795)
Partners' capital (deficiency):
Beginning of period................................................. 57,273 -- (92,795)
Capital contribution................................................ -- 70,000 --
-------- -------- ---------
End of period....................................................... $ 26,459 $ 57,273 $(109,590)
- --------------------------------------------------
======== ======== =========
See accompanying notes to consolidated financial statements.
F-31
U.S. CABLE TELEVISION GROUP, L.P.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
PERIOD FROM PERIOD FROM
YEAR ENDED AUGUST 13, 1996 TO JANUARY 1, 1996 TO
DECEMBER 31, 1997 DECEMBER 31, 1996 AUGUST 12, 1996
----------------- ------------------ ------------------
Cash flows from operating activities
Net loss............................................................ $ (30,814) $ (12,727) $ (16,795)
Adjustments to reconcile net loss to net cash provided by operating
activities:
Depreciation and amortization..................................... 46,116 17,842 21,034
Amortization of deferred financing costs.......................... 770 292 477
(Gain) loss on disposal of equipment.............................. (116) 43 39
Changes in assets and liabilities, net of effects of acquisition:
Accounts receivable, net.......................................... (87) 634 (625)
Other receivables................................................. (119) 94 (129)
Prepaid expenses and other assets................................. (155) 131 (204)
Accounts payable and accrued expenses............................. 4,510 265 (2,318)
Accounts payable to affiliates.................................... 867 (576) 1,029
--------- --------- ---------
Net cash provided by operating activities............................. 20,972 5,998 2,508
--------- --------- ---------
Cash flows from investing activities:
Capital expenditures................................................ (15,769) (5,317) (11,995)
Proceeds from sale of equipment..................................... 155 53 48
--------- --------- ---------
Net cash used in investing activities............................... (15,614) (5,264) (11,947)
--------- --------- ---------
Cash flows from financing activities:
Advance from V Cable................................................ -- -- 70,000
Cash paid for redemption of partners' interests..................... -- (4,010) --
Additions to excess costs........................................... (82) (98) --
Additions to deferred financing costs............................... (544) (2,289)
Proceeds from bank debt............................................. 10,300 159,810 --
Repayment of bank debt.............................................. (14,800) (350) --
Repayment of senior debt............................................ -- (153,538) (60,807)
--------- --------- ---------
Net cash (used in) provided by financing activities................. (5,126) (475) 9,193
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents.................. 232 259 (246)
Cash and cash equivalents at beginning of period...................... 49 (210) 36
--------- --------- ---------
Cash and cash equivalents at end of period............................ $ 281 $ 49 $ (210)
- --------------------------------------------------
========= ========= =========
See accompanying notes to consolidated financial statements.
F-32
U.S. CABLE TELEVISION GROUP, L.P.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
NOTE 1. THE COMPANY
U.S. Cable Television Group, L.P. (the "Company") was formed for the purpose
of acquiring, owning and operating cable television systems, which are
generally operated pursuant to non-exclusive franchises awarded by states or
local government authorities for specified periods of time. The Company
currently operates cable television systems serving portions of the
southeastern and midwestern United States. The Company's revenues are derived
principally from the provision of cable television services, which include
recurring monthly fees paid by subscribers.
Prior to the Redemption discussed in the next paragraph, the partnership
consisted of V Cable, Inc. ("V Cable"), a wholly-owned subsidiary of
Cablevision Systems Corporation ("CSC"), with an indirect 1% general
partnership interest and a 19% limited partnership interest, General Electric
Capital Corporation ("GECC"), with a 72% limited partnership interest and
various individuals and entities owning the remaining 8% partnership interest,
as general and/or limited partners (the "Predecessor Company"). Profits and
losses were allocated in accordance with the Amended and Restated Agreement of
Limited Partnership.
On March 18, 1996, V Cable advanced $70 million to the Company which was
considered a capital contribution coincident with the Redemption. On August
13, 1996, the Company redeemed the partnership interests not already owned by
V Cable ("the Redemption") for a payment of approximately $4 million to the
holders of 8% of the partnership interests and the repayment of the balance of
the debt owed to General Electric Capital Corporation ("GECC") of
approximately $154 million. The payment of $4 million and repayment of the
GECC debt was financed under a new $175 million credit facility (Note 4) . As
a result of the Redemption, which was accounted for as a purchase, the
consolidated financial information for the periods after the Redemption is
presented on a different cost basis than that for the period before the
Redemption and, therefore, is not comparable due to the change in ownership.
Subsequent to the Redemption, V Cable, through wholly-owned subsidiaries,
holds an indirect 1% general partnership interest and a direct 99% limited
partnership interest (the "Successor Company"). The partnership will terminate
December 1, 2030, unless earlier termination occurs as provided in the Amended
and Restated Agreement of Limited Partnership.
As a result of the capital contribution of $70,000 (discussed above), the
$4,010 Redemption price and $98 of miscellaneous transaction costs, the
Successor Company effectively paid $74,108 to acquire net liabilities of
$74,331, which resulted in excess costs over fair value of $148,439, as
follows:
Purchase price and transaction costs.............................. $ 74,108
---------
Net liabilities acquired:
Cash, receivables and prepaids.................................. 2,504
Property, plant and equipment................................... 98,212
Accounts payables and accrued expenses.......................... (20,433)
Accounts payable-affiliate...................................... (1,076)
Senior debt..................................................... (153,538)
---------
(74,331)
---------
Excess costs over fair value of net liabilities acquired........ $ 148,439
=========
F-33
U.S. CABLE TELEVISION GROUP, L.P.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS)
For purposes of the consolidated financial statements for the year ended
December 31, 1997, and for the period from August 13, 1996 to December 31,
1996, this excess cost is being amortized over a 7 year period.
On August 29, 1997, the Company and CSC entered into an agreement with
Mediacom LLC ("Mediacom") to sell to Mediacom substantially all of the assets
and cable systems owned by the Company. The transaction was consummated on
January 23, 1998, for a sales price of approximately $311 million (the
"Mediacom Sale").
NOTE 2. SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries. All significant intercompany transactions
and balances have been eliminated in consolidation.
Revenue Recognition
The Company recognizes revenues as cable television services are provided to
subscribers.
Long-Lived Assets
Property, plant and equipment, including construction materials, are
recorded at cost, which includes all direct costs and certain indirect costs
associated with the construction of cable television transmission and
distribution systems and the costs of new subscriber installations. Property,
plant and equipment are being depreciated over their estimated useful lives
using the straight-line method. Leasehold improvements are amortized over the
shorter of their useful lives or the terms of the related leases.
With respect to the Predecessor Company, franchise costs were amortized on
the straight-line basis over the average term of the franchises (approximately
4-12 years) and excess costs over fair value of net assets acquired were
amortized over a 15 year period on the straight-line basis. As mentioned in
note 1, the Successor Company is amortizing excess costs over fair value of
net assets acquired over 7 years.
The Company implemented the provisions of Statement of Financial Accounting
Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of," effective January 1, 1996. The Company
reviews its long-lived assets (property, plant and equipment, and related
intangible assets that arose from business combinations accounted for under
the purchase method) for impairment whenever events or circumstances indicate
that the carrying amount of an asset may not be recoverable. If the sum of the
expected cash flows, undiscounted and without interest, is less than the
carrying amount of the asset, an impairment loss is recognized as the amount
by which the carrying amount of the asset exceeds its fair value. The adoption
of Statement No. 121 had no impact on the Company's financial position or
results of operations.
Deferred Financing Costs
Costs incurred to obtain debt are deferred and amortized on the straight-
line basis over the term of the related debt.
F-34
U.S. CABLE TELEVISION GROUP, L.P.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS)
Income Taxes
The Company operates as a limited partnership; accordingly, its taxable
income or loss is includable in the tax returns of the partners, and
therefore, no provision for income taxes has been made on the books of the
Company. ECC Holding Corporation ("ECC"), one of the Company's subsidiaries,
is a corporate entity and as such is subject to federal and state income
taxes. Income tax amounts in these consolidated financial statements pertain
to ECC.
ECC accounts for income taxes under the provisions of Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes", which requires
the liability method of accounting for deferred income taxes and permits the
recognition of deferred tax assets, subject to an ongoing assessment of
realizability.
Cash Flows
For purposes of the statement of cash flows, the Company considers short-
term investments with a maturity at date of purchase of three months or less
to be cash equivalents. The Company paid cash interest of approximately
$12,026 for the year ended December 31, 1997, $13,610 for the period from
January 1, 1996 to August 12, 1996, and $4,189 for the period from August 13,
1996 to December 31, 1996, respectively.
Use of Estimates in Preparation of Financial Statements
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amount of assets and liabilities and
disclosure of contingent liabilities at the date of the financial statements
and the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
NOTE 3. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment and estimated useful lives at December 31,
1997 and 1996, are as follows:
ESTIMATED
1997 1996 USEFUL LIVES
-------- -------- -------------
Cable television transmission and
distribution systems:
Customer equipment......................... $ 5,175 $ 6,810 5 years
Headends................................... 7,539 6,338 9 years
Infrastructure............................. 94,920 81,502 10 years
Program, service and test equipment........ 2,824 2,141 4--7 years
Microwave equipment........................ 95 78 4--7 years
Construction in progress (including
materials and supplies)................... 699 521
-------- --------
111,252 97,390
Furniture and fixtures....................... 722 591 5 years
Transportation............................... 3,782 2,886 4 years
Land and land improvements................... 863 1,074 30 years
Leasehold improvements....................... 1,612 1,305 Term of Lease
-------- --------
118,231 103,246
Less accumulated depreciation................ (33,868) (9,703)
-------- --------
$ 84,363 $ 93,543
======== ========
F-35
U.S. CABLE TELEVISION GROUP, L.P.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS)
NOTE 4. DEBT
Bank Debt
In August 1996, the Successor Company repaid the balance of the debt owed to
GECC of approximately $154,000. The repayment of the GECC debt was financed
under a new $175,000 credit facility. The credit facility is with a group of
banks led by the Bank of New York, as agent, and consists of a three year
$175,000 revolving credit facility maturing on August 13, 1999. The revolving
credit facility is payable in full upon maturity. As of December 31, 1997 and
1996, the Company had outstanding borrowings under its revolving credit
facility of $154,960 and $159,460, inclusive of overdraft amounts of $1,900
and $0, respectively, leaving unrestricted and undrawn funds available
amounting to $21,940 and $15,540. Amounts outstanding under the facility bear
interest at varying rates based upon the bank's LIBOR rate, as defined in the
loan agreement. The weighted average interest rate was 7.1% and 7.6% on
December 31, 1997 and 1996, respectively. The Company is also obligated to pay
fees of .375% per annum on the unused loan commitment. Substantially all of
the general and limited partnership interests in the Company have been pledged
in support of the borrowings under the credit agreement. The credit facility
contains various restrictive covenants, with which the Company was in
compliance at December 31, 1997.
In January 1998, all amounts outstanding under the bank debt were repaid
from the proceeds from the Mediacom Sale.
Junior Subordinated Note
In August 1996, the Predecessor Company's Junior Term Loan and related
accrued interest was forgiven by GECC in the amount of $35,560.
NOTE 5. INCOME TAXES
ECC has a net operating loss carryforward for federal income tax purposes of
approximately $65,500 expiring in varying amounts through 2012.
The tax effects of temporary differences which give rise to significant
deferred tax assets or liabilities and the corresponding valuation allowance
at December 31, 1997 and 1996, are as follows:
DEFERRED ASSETS 1997 1996
--------------- ------- -------
Depreciation and amortization.............................. $ 7,132 $ 7,132
Allowance for doubtful accounts............................ 51 51
Benefits of tax loss carry forward......................... 27,510 26,166
------- -------
Net deferred tax assets.................................... 34,693 33,349
Valuation allowance........................................ (34,693) (33,349)
------- -------
-- --
======= =======
ECC has provided a valuation allowance for the total amount of the net
deferred tax assets since realization of these assets is not assured.
NOTE 6. OPERATING LEASES
The Company leases certain office and transmission facilities under terms of
operating leases expiring at various dates through 2008. The leases generally
provide for fixed annual rental payments
F-36
U.S. CABLE TELEVISION GROUP, L.P.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS)
plus real estate taxes and certain other costs. Rent expense for the year
ended December 31, 1997, and the periods from January 1, 1996 to August 12,
1996, and from August 13, 1996 to December 31, 1996, amounted to approximately
$778, $505, and $303, respectively.
The Company rents space on utility poles for its operations. Pole rental
expense for the year ended December 31, 1997, and for the periods from January
1, 1996 to August 12, 1996, and from August 13, 1996 to December 31, 1996,
amounted to approximately $1,440, $912, and $547, respectively.
In connection with the Mediacom sale, the Company was relieved of all of its
future obligations under its operating leases.
NOTE 7. RELATED PARTY TRANSACTIONS
CSC has interests in several entities engaged in providing cable television
programming and other services to the cable television industry. During the
year ended December 31, 1997 and for the periods from January 1, 1996 to
August 12, 1996, and from August 13, 1996 to December 31, 1996, the Company
was charged approximately $742, $510 and $268, respectively, by these entities
for such services. At December 31, 1997 and 1996, the Company owed
approximately $65 and $60, respectively, to these companies for such
programming services which is included in accounts payable-affiliates in the
accompanying consolidated balance sheet.
CSC provides the Company with general and administrative services. For the
year ended December 31, 1997 and for the periods from January 1, 1996 to
August 12, 1996, and from August 13, 1996 to December 31, 1996, these charges
totaled approximately $3,059, $2,274 and $1,712, respectively. Amounts owed to
CSC at December 31, 1997 and 1996, for such expenses were approximately $1,109
and $408, respectively, and is included in accounts payable-affiliates in the
accompanying consolidated balance sheet.
NOTE 8. BENEFIT PLAN
During 1989, the Company adopted a 401 (k) savings plan (the "Plan").
Employee participation is voluntary. Under the provisions of the Plan,
employees may defer up to 15% of their annual compensation (as defined). The
Company currently contributes 50% of the contributions made by participating
employees subject to a limit of 6% of the employee's compensation. The Company
may make additional contributions at its discretion. For the year ended
December 31, 1997, and for the periods from January 1, 1996 to August 12,
1996, and from August 13, 1996 to December 31, 1996, expense relating to this
Plan amounted to $165, $189 and $138, respectively.
The Company does not provide postretirement benefits for any of its
employees.
NOTE 9. DISCLOSURES ABOUT THE FAIR VALUE OF FINANCIAL INSTRUMENTS
Cash and Cash Equivalents, Accounts Receivable-Subscribers, Other
Receivables, Accounts Payable, Accrued Expenses, and Accounts Payable-
Affiliates
Carrying amounts approximate fair value due to the short maturity of these
instruments.
Bank Debt
The carrying amounts of the Company's long term debt instruments approximate
fair value as the underlying variable interest rates are adjusted for market
rate fluctuations.
F-37
INDEPENDENT AUDITORS' REPORT
The Board of Directors
U.S. Cable Television Group, L.P.
We have audited the accompanying consolidated balance sheets of U.S. Cable
Television Group, L.P. and subsidiaries as of December 31, 1996 and 1995, and
the related consolidated statements of operations and partners' capital
(deficiency) and cash flows for the periods from January 1, 1996 to August 12,
1996 and August 13, 1996 to December 31, 1996, and for each of the years in
the two year period ended December 31, 1995. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of U.S. Cable Television
Group, L.P. and subsidiaries as of December 31, 1996 and 1995, and the results
of their operations and their cash flows for the periods from January 1, 1996
to August 12, 1996 and August 13, 1996 to December 31, 1996, and for each of
the years in the two year period ended December 31, 1995 in conformity with
generally accepted accounting principles.
As discussed in note 1 to the consolidated financial statements, effective
August 13, 1996, U.S. Cable Television Group L.P. redeemed certain limited and
general partnership interests in a business combination accounted for as a
purchase. As a result of the redemption, the consolidated financial
information for the period after the redemption is presented on a different
cost basis than that for the period before the redemption, and therefore, is
not comparable.
KPMG Peat Marwick LLP
April 1, 1997, except as to Note 11,
which is as of January 23, 1998
F-38
U.S. CABLE TELEVISION GROUP, L.P.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1996 AND 1995
(DOLLARS IN THOUSANDS)
1996 1995
-------- --------
ASSETS
------
Cash and cash equivalents................................... $ 49 $ 36
Accounts receivable--subscribers (less allowance for doubt-
ful accounts
of $122 and $202).......................................... 995 1,004
Other receivables........................................... 383 348
Accounts receivable from affiliates......................... -- 75
Prepaid expenses and other assets........................... 477 404
Property, plant and equipment, net.......................... 93,543 101,439
Deferred franchise costs (less accumulated amortization of
$92,787)................................................... -- 13,738
Excess cost over fair value of net assets acquired (less ac-
cumulated
amortization of $7,952 and $22,272)........................ 140,487 61,197
Deferred financing and other costs (less accumulated amorti-
zation
of $292 and $4,452)........................................ 1,997 1,620
-------- --------
$237,931 $179,861
======== ========
LIABILITIES AND PARTNERS' CAPITAL (DEFICIENCY)
----------------------------------------------
Accounts payable............................................ $ 10,246 $ 4,170
Accrued expenses:
Franchise fees............................................ 1,089 995
Payroll and related benefits.............................. 4,728 3,796
Programming costs......................................... -- 7,216
Interest.................................................. 947 --
Other..................................................... 3,688 7,442
Accounts payable to affiliates.............................. 500 --
Bank debt................................................... 159,460 --
Senior debt................................................. -- 214,392
Junior subordinated note.................................... -- 34,645
-------- --------
Total liabilities....................................... 180,658 272,656
Partners' capital (deficiency).............................. 57,273 (92,795)
-------- --------
$237,931 $179,861
======== ========
See accompanying notes to consolidated financial statements.
F-39
U.S. CABLE TELEVISION GROUP, L.P.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND
PARTNERS' CAPITAL (DEFICIENCY)
(SEE NOTE 1)
(DOLLARS IN THOUSANDS)
PERIOD FROM PERIOD FROM
AUGUST 13, JANUARY 1,
1996 TO 1996 TO YEAR ENDED DECEMBER 31,
DECEMBER 31, AUGUST 12, ------------------------
1996 1996 1995 1994
------------ ----------- ----------- -----------
Revenue..................... $ 32,144 $ 49,685 $ 76,568 $ 71,960
Operating expenses:
Technical expenses........ 15,111 23,467 34,895 29,674
Selling, general and
administrative expenses.. 6,677 11,021 19,875 20,776
Depreciation and amortiza-
tion..................... 17,842 21,034 36,329 41,861
-------- --------- ----------- -----------
Operating loss............ (7,486) (5,837) (14,531) (20,351)
Other (expense) income:
Interest expense.......... (5,136) (10,922) (26,157) (24,195)
Interest income........... 14 33 70 236
Other, net................ (119) (69) (241) (1,280)
-------- --------- ----------- -----------
Net loss.................... (12,727) (16,795) (40,859) (45,590)
Partners' capital (deficien-
cy):
Beginning of period....... -- (92,795) (51,936) (6,346)
Capital contribution...... 70,000 -- -- --
-------- --------- ----------- -----------
End of year................. $ 57,273 $(109,590) $ (92,795) $ (51,936)
======== ========= =========== ===========
See accompanying notes to consolidated financial statements.
F-40
U.S. CABLE TELEVISION GROUP, L.P.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(SEE NOTE 1)
(DOLLARS IN THOUSANDS)
PERIOD FROM PERIOD FROM
AUGUST 13, JANUARY 1,
1996 TO 1996 TO YEAR ENDED DECEMBER 31,
DECEMBER 31, AUGUST 12, -------------------------
1996 1996 1995 1994
------------ ----------- -------------------------
Cash flows from operating
activities:
Net loss................. $ (12,727) $(16,795) $ (40,859) $ (45,590)
Adjustments to reconcile
net loss to net cash
provided by operating
activities:
Depreciation and
amortization.......... 17,842 21,034 36,329 41,861
Amortization of
deferred financing
costs................. 292 477 746 752
Loss on disposal of
equipment............. 43 39 104 192
Interest on senior
subordinated
debentures............ -- -- 10,022 9,038
Interest on junior
subordinated
debentures............ -- -- 3,970 3,516
Changes in assets and li-
abilities, net of ef-
fects of acquisition:
Accounts receivables,
net................... 634 (625) (546) (47)
Other receivables...... 94 (129) (225) (54)
Prepaid expenses and
other assets.......... 131 (204) (3) 80
Accounts payable and
accrued expenses...... 265 (2,318) 3,193 2,995
Accounts payable to
affiliates............ (576) 1,029 (744) 575
--------- -------- ----------- -----------
Net cash provided by
operating activities.... 5,998 2,508 11,987 13,318
--------- -------- ----------- -----------
Cash flows used in
investing activities:
Capital expenditures..... (5,317) (11,995) (20,502) (21,359)
Proceeds from sale of
equipment............... 53 48 430 --
--------- -------- ----------- -----------
Net cash used in
investing activities.... (5,264) (11,947) (20,072) (21,359)
--------- -------- ----------- -----------
Cash flows from financing
activities:
Advance from V Cable..... -- 70,000 -- --
Cash paid for redemption
of partners' interests.. (4,010) -- -- --
Additions to excess
costs................... (98) -- -- --
Additions to deferred
financing costs......... (2,289) -- -- --
Proceeds from bank debt.. 159,810 -- 8,000 --
Repayment of bank debt... (350) -- -- --
Repayment of senior
debt.................... (153,538) (60,807) -- --
Repayment of note
payable................. -- -- -- (35)
--------- -------- ----------- -----------
Net cash used in
financing activities.... (475) 9,193 8,000 (35)
Net increase in cash and
cash equivalents.......... 259 (246) (85) (8,076)
Cash and cash equivalents
at beginning of period.... (210) 36 121 8,197
--------- -------- ----------- -----------
Cash and cash equivalents
at end of period.......... $ 49 $ (210) $ 36 $ 121
========= ======== =========== ===========
See accompanying notes to consolidated financial statements.
F-41
U.S. CABLE TELEVISION GROUP, L.P.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
NOTE 1. THE COMPANY
U.S. Cable Television Group, L.P. (the "Company") was formed for the purpose
of acquiring, owning and operating cable television systems, which are
generally operated pursuant to non-exclusive franchises awarded by states or
local government authorities for specified periods of time. The Company
currently operates cable television systems serving portions of the
southeastern and midwestern United States. The Company's revenues are derived
principally from the provision of cable television services, which include
recurring monthly fees paid by subscribers.
Prior to the Redemption discussed in the next paragraph, the partnership
consisted of V Cable, Inc. ("V Cable"), a wholly-owned subsidiary of
Cablevision Systems Corporation ("CSC"), with an indirect 1% general
partnership interest and a 19% limited partnership interest, General Electric
Capital Corporation ("GECC"), with a 72% limited partnership interest and
various individuals and entities owning the remaining 8% partnership interest,
as general and/or limited partners (the "Predecessor Company"). Profits and
losses were allocated in accordance with the Amended and Restated Agreement of
Limited Partnership.
On March 18, 1996, V Cable advanced $70 million to the Company which was
considered a capital contribution coincident with the Redemption. On August
13, 1996, the Company redeemed the partnership interests not already owned by
V Cable ("the Redemption") for a payment of approximately $4 million to the
holders of 8% of the partnership interests and the repayment of the balance of
the debt owed to General Electric Capital Corporation ("GECC") of
approximately $154 million. The payment of $4 million and repayment of the
GECC debt was financed under a new $175 million credit facility (Note 4). As a
result of the Redemption, which was accounted for as a purchase, the
consolidated financial information for the periods after the Redemption is
presented on a different cost basis than that for the period before the
Redemption and, therefore, is not comparable due to the change in ownership.
Subsequent to the Redemption, V Cable, through wholly-owned subsidiaries,
holds an indirect 1% general partnership interest and a direct 99% limited
partnership interest (the "Successor Company"). The partnership will terminate
December 1, 2030, unless earlier termination occurs as provided in the Amended
and Restated Agreement of Limited Partnership.
As a result of the capital contribution of $70,000 (discussed above), the
$4,010 Redemption price and $98 of miscellaneous transaction costs, the
Successor Company effectively paid $74,108 to acquire net liabilities of
$74,331, which resulted in excess costs over fair value of $148,439, as
follows:
Purchase price and transaction costs........................... $ 74,108
--------
Net liabilities acquired:
Cash, receivables and prepaids............................... 2,504
Property, plant and equipment................................ 98,212
Accounts payables and accrued expenses....................... (20,433)
Accounts payable--affiliate.................................. (1,076)
Senior debt.................................................. (153,538)
--------
(74,331)
--------
Excess costs over fair value of net liabilities acquired....... $148,439
========
For purposes of the consolidated financial statements for the period from
August 13, 1996 to December 31, 1996, this excess cost amount is being
amortized over a 7 year period.
F-42
U.S. CABLE TELEVISION GROUP, L.P.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS)
NOTE 2. SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries. All significant intercompany transactions
and balances have been eliminated in consolidation.
Revenue Recognition
The Company recognizes revenues as cable television services are provided to
subscribers.
Long-Lived Assets
Property, plant and equipment, including construction materials, are
recorded at cost, which includes all direct costs and certain indirect costs
associated with the construction of cable television transmission and
distribution systems and the costs of new subscriber installations. Property,
plant and equipment are being depreciated over their estimated useful lives
using the straight-line method. Leasehold improvements are amortized over the
shorter of their useful lives or the terms of the related leases.
With respect to the Predecessor Company, franchise costs were amortized on
the straight-line basis over the average term of the franchises (approximately
4-12 years) and excess costs over fair value of net assets acquired were
amortized over a 15 year period on the straight-line basis. As mentioned in
note 1, the Successor Company is amortizing excess costs over fair value of
net assets acquired over 7 years.
The Company implemented the provisions of Statement of Financial Accounting
Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of," effective January 1, 1996. The Company
reviews its long-lived assets (property, plant and equipment, and related
intangible assets that arose from business combinations accounted for under
the purchase method) for impairment whenever events or circumstances indicate
that the carrying amount of an asset may not be recoverable. If the sum of the
expected cash flows, undiscounted and without interest, is less than the
carrying amount of the asset, an impairment loss is recognized as the amount
by which the carrying amount of the asset exceeds its fair value. The adoption
of Statement No. 121 had no impact on the Company's financial position or
results of operations.
Deferred Financing and Other Costs
Costs incurred to obtain debt are deferred and amortized on the straight-
line basis over the term of the related debt. Other costs consist of
organization costs in 1995 which were amortized over a five year period on the
straight line basis.
Income Taxes
The Company operates as a limited partnership; accordingly, its taxable
income or loss is includable in the tax returns of the partners, and
therefore, no provision for income taxes has been made on the books of the
Company. ECC Holdings Corporation ("ECC"), one of the Company's subsidiaries,
is a corporate entity and as such is subject to federal and state income
taxes. Income tax amounts in these consolidated financial statements pertain
to ECC.
F-43
U.S. CABLE TELEVISION GROUP, L.P.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS)
NOTE 2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
ECC accounts for income taxes under the provisions of Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes", which requires
the liability method of accounting for deferred income taxes and permits the
recognition of deferred tax assets, subject to an ongoing assessment of
realizability.
Cash Flows
For purposes of the statement of cash flows, the Company considers short-
term investments with a maturity at date of purchase of three months or less
to be cash equivalents. The Company paid cash interest of approximately
$13,610 for the period from January 1, 1996 to August 12, 1996, $4,189 for the
period from August 13, 1996 to December 31, 1996 and $8,761 and $12,900 for
the years ended December 31, 1995 and 1994, respectively.
Use of Estimates in Preparation of Financial Statements
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amount of assets and liabilities and
disclosure of contingent liabilities at the date of the financial statements
and the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
NOTE 3. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment and estimated useful lives at December 31,
1996 and 1995 are as follows:
ESTIMATED
1996 1995 USEFUL LIVES
-------- -------- -------------
Cable television transmission and distribu-
tion systems:
Converters................................ $ 6,810 $ 18,609 5 years
Headends.................................. 6,338 27,363 9 years
Distribution systems...................... 81,502 171,570 10 years
Program, service, microwave and test equip-
ment....................................... 2,219 4,396 4-7 years
Construction in progress (including materi-
als and
supplies).................................. 521 675
-------- --------
97,390 222,613
Furniture and fixtures...................... 591 4,429 5 years
Vehicles.................................... 2,886 7,411 4 years
Building and improvements................... 1,074 2,895 30 years
Leasehold improvements...................... 1,305 -- Term of Lease
Land........................................ -- 852
-------- --------
103,246 238,200
Less accumulated depreciation............... (9,703) (136,761)
-------- --------
$ 93,543 $101,439
======== ========
F-44
U.S. CABLE TELEVISION GROUP, L.P.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS)
NOTE 4. DEBT
Bank Debt
As discussed in Note 1, on August 13, 1996, the Successor Company paid GECC
approximately $154,000 in exchange for GECC's limited partnership interests in
the Company and in satisfaction of the outstanding balance of all indebtedness
due GECC. The repayment of the GECC debt was financed under a new $175,000
credit facility. The credit facility is with a group of banks led by the Bank
of New York, as agent, and consists of a three year $175,000 revolving credit
facility maturing on August 13, 1999. The revolving credit facility is payable
in full upon maturity. As of December 31, 1996, the Company has outstanding
borrowings under its revolving credit facility of $159,460, leaving
unrestricted and undrawn funds available amounting to $15,540. Amounts
outstanding under the facility bear interest at varying rates based upon the
bank's LIBOR rate, as defined in the loan agreement. The weighted average
interest rate was 7.6% on December 31, 1996. The Company is also obligated to
pay fees of .375% per annum on the unused loan commitment.
Substantially all of the general and limited partnership interests in the
Company have been pledged in support of the borrowings under the credit
agreement. The credit facility contains various restrictive covenants, with
which the Company was in compliance at December 31, 1996.
Senior Debt and Junior Subordinated Note
At December 31, 1995, the credit agreement between the Predecessor Company
and GECC (the "Credit Agreement") was composed of a Senior Loan Agreement and
a Junior Loan Agreement. Under the Senior Loan Agreement, GECC had provided a
$30,000 revolving line of credit (the "Revolving Line"), a $104,443 term loan
(the "Series A Term Loan") with interest payable currently and, a $92,302 term
loan (the "Series B Term Loan") with payment of interest deferred until
December 31, 2001. Under the Junior Loan Agreement, GECC had provided a
$24,039 term loan (the "Junior Term Loan") with payment of interest deferred
until December 31, 2001. The senior loan agreement and junior loan agreement
are collectively referred to as the "Loan Agreements".
At December 31, 1995, the Predecessor Company's outstanding debt to GECC,
which was all due on December 31, 2001, was comprised of the following:
Senior Debt
Revolving line of credit, with interest at varying rates...... $ 8,000
Series A Term Loan, with interest at 10.12%................... 104,443
Series B Term Loan, with interest at 10.62%................... 101,949
--------
Total Senior Debt........................................... 214,392
Junior Subordinated Note, with interest at 12.55%............... 34,645
--------
Total debt.................................................. $249,037
========
F-45
U.S. CABLE TELEVISION GROUP, L.P.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS)
NOTE 5. INCOME TAXES
ECC has a net operating loss carryforward for federal income tax purposes of
approximately $21,708 expiring in varying amounts through 2011.
The tax effects of temporary differences which give rise to significant
deferred tax assets or liabilities and the corresponding valuation allowance
at December 31, 1996 and 1995 are as follows:
Deferred Assets
1996 1995
-------- --------
Depreciation and amortization........................ $ 7,132 $ (9,572)
Allowance for doubtful accounts...................... 51 85
Benefits of tax loss carry forwards.................. 9,117 24,783
-------- --------
Net deferred tax assets.............................. 16,300 15,296
Valuation allowance.................................. (16,300) (15,296)
-------- --------
$ -- $ --
======== ========
ECC has provided a valuation allowance for the total amount of the net
deferred tax assets since realization of these assets is not assured due
principally to a history of operating losses. The amount of the valuation
allowance increased by $1,004 during the year ended December 31, 1996.
NOTE 6. OPERATING LEASES
The Company leases certain office and transmission facilities under terms of
operating leases expiring at various dates through 2008. The leases generally
provide for fixed annual rental payments plus real estate taxes and certain
other costs. Rent expense for the periods from January 1, 1996 to August 12,
1996 and from August 13, 1996 to December 31, 1996 amounted to approximately
$505 and $303, respectively, and for the years ended December 31, 1995 and
1994 amounted to $705 and $635, respectively.
The Company rents space on utility poles for its operations. The Company's
pole rental agreements are for varying terms, and management anticipates
renewals as they expire. Pole rental expense for the periods from January 1,
1996 to August 12, 1996 and from August 13, 1996 to December 31, 1996 amounted
to approximately $912 and $547, respectively, and for the years ended December
31, 1995 and 1994 amounted to $1,312 and $1,199, respectively.
The minimum future annual rental payments for all operating leases,
including pole rentals from January 1, 1997 through December 31, 2008, at
rates presently in force at December 31, 1996, are approximately: 1997,
$1,902; 1998, $1,764; 1999, $1,735; 2000, $1,657; 2001, $1,599; and thereafter
$2,945.
NOTE 7. RELATED PARTY TRANSACTIONS
CSC has interests in several entities engaged in providing cable television
programming and other services to the cable television industry. For the
periods from January 1, 1996 to August 12, 1996 and
F-46
U.S. CABLE TELEVISION GROUP, L.P.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS)
NOTE 7. RELATED PARTY TRANSACTIONS (CONTINUED)
from August 13, 1996 to December 31, 1996, the Company was charged
approximately $510 and $268, respectively, and for the years ended December
31, 1995 and 1994 the Company was charged approximately $568 and $407,
respectively, by these entities for such services. At December 31, 1996 and
1995, the Company owed approximately $60 and $107 to these companies for such
programming services which is included in accounts payable-affiliates in the
accompanying consolidated balance sheets.
CSC provides the Company with general and administrative services. For the
periods from January 1, 1996 to August 12, 1996 and from August 13, 1996 to
December 31, 1996, the Company was charged $2,274 and $1,712, respectively,
and for the years ended December 31, 1995 and 1994 these charges totaled
approximately $3,530 and $3,300. Amounts owed to CSC at December 31, 1996 and
1995 for such expenses were approximately $408 and $365 and is included in
accounts payable-affiliates in the accompanying consolidated balance sheet.
NOTE 8. BENEFIT PLAN
During 1989, the Company adopted a 401K savings plan (the "Plan"). Employee
participation is voluntary. Under the provisions of the Plan, employees may
defer up to 15% of their annual compensation (as defined). The Company
currently contributes 50% of the contributions made by participating employees
subject to a contribution cap of 6% of the employee's compensation. The
Company may make additional contributions at its discretion. Expense relating
to this Plan amounted to $327, $321 and $295 in 1996, 1995 and 1994,
respectively.
The Company does not provide postretirement benefits for any of its
employees.
NOTE 9. DISCLOSURES ABOUT THE FAIR VALUE OF FINANCIAL INSTRUMENTS
Cash and Cash Equivalents, Accounts Receivable--Subscribers, Other
Receivables, Prepaid Expenses and Other Assets, Accounts Payable, Accrued
Expenses, and Accounts Payable to Affiliates
The carrying amount approximates fair value due to the short maturity of
these instruments.
Bank Debt
The fair value of the company's long term debt instruments approximates its
book value since the interest rate is LIBOR-based and accordingly is adjusted
for market rate fluctuations.
Senior and Junior Debt
At December 31, 1995, the carrying amount of the Senior and Junior Debt
approximated fair value.
F-47
U.S. CABLE TELEVISION GROUP, L.P.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS)
NOTE 10. COMMITMENTS
CSC and its cable television affiliates (including the Company) have an
affiliation agreement with a program supplier whereby CSC and its cable
television affiliates are obligated to make Base Rate Annual Payments, as
defined and subject to certain adjustments pursuant to the agreement, through
2004. The Company would be contingently liable for its proportionate share of
Base Rate Annual Payments, based on subscriber usage, of approximately; $1,276
in 1997; $1,320 in 1998 and $1,366 in 1999. For the years 2000 through 2004,
such payments would increase by percentage increases in the Consumer Price
Index, or five percent, whichever is less, over the prior year's Base Annual
Payment.
NOTE 11. SUBSEQUENT EVENT
On August 29, 1997, CSC and certain of its wholly-owned subsidiaries entered
into an agreement with Mediacom LLC ("Mediacom") to sell to Mediacom cable
systems owned by the Company. The transaction was consummated on January 23,
1998 for a sales price of approximately $311 million.
F-48
INDEPENDENT AUDITORS' REPORT
The Partners
American Cable TV Investors 5, Ltd.:
We have audited the accompanying combined statements of operations and
partnership's investment and cash flows of the Lower Delaware System (as
defined in Note 1 to the combined statements of operations and partnership's
investment and cash flows) for the period from January 1, 1997 to June 23,
1997 and for the year ended December 31, 1996. These combined financial
statements are the responsibility of the Lower Delaware System's management.
Our responsibility is to express an opinion on these combined financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the results of operations and the cash flows
of the Lower Delaware System for the period from January 1, 1997 to June 23,
1997 and for the year ended December 31, 1996, in conformity with generally
accepted accounting principles.
KPMG Peat Marwick LLP
Denver, Colorado
April 30, 1998
F-49
LOWER DELAWARE SYSTEM
(DEFINED IN NOTE 1)
COMBINED STATEMENTS OF OPERATIONS AND PARTNERSHIP'S INVESTMENT
PERIOD FROM
JANUARY 1, 1997 TO YEAR ENDED
JUNE 23, 1997 DECEMBER 31, 1996
------------------ -----------------
AMOUNTS IN THOUSANDS
Revenue................................... $ 4,303 8,742
Operating costs and expenses:
Operating (note 4)...................... 1,425 2,712
Selling, general and administrative
(note 4)............................... 1,090 2,091
Depreciation............................ 984 2,109
Amortization............................ 1,609 3,328
------- ------
5,108 10,240
------- ------
Operating loss........................ (805) (1,498)
Other income (expense), net............... 17 (6)
------- ------
Net loss.............................. (788) (1,504)
Partnership's Investment:
Beginning of period..................... 21,766 24,855
Change in Partnership's investment...... (1,296) (1,585)
------- ------
End of period........................... $19,682 21,766
======= ======
See accompanying notes to the combined financial statements.
F-50
LOWER DELAWARE SYSTEM
(DEFINED IN NOTE 1)
COMBINED STATEMENTS OF CASH FLOWS
PERIOD FROM
JANUARY 1, 1997 TO YEAR ENDED
JUNE 23, 1997 DECEMBER 31, 1996
------------------ -----------------
AMOUNTS IN THOUSANDS
Cash flows from operating activities:
Net loss................................ $ (788) (1,504)
Adjustments to reconcile net loss to net
cash provided by operating activities:
Depreciation and amortization......... 2,593 5,437
Other non-cash credits................ -- 6
Changes in operating assets and
liabilities:
Change in receivables............... 305 (422)
Change in other assets.............. 37 (24)
Change in accounts payable and other
accrued liabilities................ 175 187
------ ------
Net cash provided by operating
activities....................... 2,322 3,680
------ ------
Cash flows from investing activities:
Capital expended for property and
equipment.............................. (525) (2,865)
Other investing activities, net......... -- 7
------ ------
Net cash used in investing
activities....................... (525) (2,858)
------ ------
Cash flows from financing activities:
Change in partnership's investment...... (1,296) (1,585)
------ ------
Net cash used in financing
activities....................... (1,296) (1,585)
------ ------
Net change in cash................ 501 (763)
Cash at beginning of period....... 538 1,301
------ ------
Cash at end of period............. $1,039 538
====== ======
See accompanying notes to combined financial statements.
F-51
LOWER DELAWARE SYSTEM
(DEFINED IN NOTE 1)
NOTES TO COMBINED STATEMENTS OF OPERATIONS AND PARTNERSHIP'S INVESTMENT AND
CASH FLOWS
FOR THE PERIOD FROM JANUARY 1, 1997 TO JUNE 23, 1997
AND THE YEAR ENDED DECEMBER 31, 1996
(1) BASIS OF PRESENTATION
The combined statements of operations and partnership's investment and cash
flows include the accounts of two cable television systems wholly-owned by
American Cable TV Investors 5, Ltd. (the "Partnership" or "ACT 5") serving
subscribers in Maryland and Delaware. Such systems are collectively referred
to herein as the "Lower Delaware System." ACT 5's managing agent is TCI
Cablevision Associates, Inc., an indirect subsidiary of Tele-Communications,
Inc. ("TCI"). All significant inter-entity accounts and transactions have been
eliminated in combination.
As described in note 4, certain costs of TCI are charged to the Lower
Delaware System. Although such allocations are not necessarily indicative of
the costs that would have been incurred by the Lower Delaware System on a
stand alone basis, management believes that the resulting allocated amounts
are reasonable. In addition, depreciation and amortization expenses are based
on historical costs which may not be indicative of future periods.
Sale of Systems
Effective June 24, 1997, ACT 5 sold the Lower Delaware System to Mediacom
LLC, an unaffiliated third party for an adjusted cash sales price of
$42,191,000.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Property and Equipment
Property and equipment is stated at cost, including acquisition costs
allocated to tangible assets acquired. Construction costs, including interest
during construction and applicable overhead, are capitalized. During 1997 and
1996, interest capitalized was not significant.
Depreciation is computed on a straight-line basis using estimated useful
lives of 3 to 15 years for cable distribution systems and 3 to 40 years for
support equipment and buildings.
Repairs and maintenance are charged to operations, and renewals and
additions are capitalized. At the time of ordinary retirements, sales or other
dispositions of property, the original cost and cost of removal of such
property are charged to accumulated depreciation, and salvage, if any, is
credited thereto.
Franchise Costs
Franchise costs include the difference between the cost of acquiring cable
television systems and amounts assigned to their tangible assets. Such amounts
are amortized using the straight-line method over the remaining terms of
franchise agreements at the time of acquisition, which terms did not exceed 15
years.
Impairment of Long-Lived Assets
The Lower Delaware System periodically reviews the carrying amounts of
property and equipment and its identifiable intangible assets to determine
whether current events or circumstances warrant adjustments to such carrying
amounts. If an impairment adjustment is deemed necessary, such loss is
F-52
LOWER DELAWARE SYSTEM
(DEFINED IN NOTE 1)
NOTES TO COMBINED STATEMENTS OF OPERATIONS AND
PARTNERSHIP'S INVESTMENT AND CASH FLOWS--(CONTINUED)
FOR THE PERIOD FROM JANUARY 1, 1997 TO JUNE 23, 1997
AND THE YEAR ENDED DECEMBER 31, 1996
measured by the amount that the carrying value of such assets exceeds their
fair value. Considerable management judgment is necessary to estimate the fair
value of assets, accordingly, actual results could vary significantly from
such estimates. Assets to be disposed of are carried at the lower of their
carrying amount or fair value less costs to sell.
Statements of Cash Flows
Transactions effected through the Partnership's Investment account have been
considered constructive cash receipts and payments for purposes of the
combined statements of cash flows.
Revenue Recognition
Revenue for customer fees, equipment rental, advertising, pay-per-view
programming and revenue sharing agreements is recognized in the period that
services are delivered. Installation revenue is recognized in the period the
installation services are provided to the extent of direct selling costs. Any
remaining amount is deferred and recognized over the estimated average period
that subscribers are expected to remain connected to the system.
Estimates
The preparation of the combined financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the
reporting period. Actual results could differ from those estimates.
(3) INCOME TAXES
No provision has been made for income tax expense or benefit in the
accompanying combined financial statements as the earnings or losses of ACT 5
are reported in the respective income tax returns of the individual partners.
(4) TRANSACTIONS WITH RELATED PARTIES
The Lower Delaware System incurs amounts due to related parties, which
represent non-interest-bearing payables to ACT 5, consisting of the net effect
of cash advances and certain intercompany expense allocations.
The Lower Delaware System purchases substantially all of its programming
services from affiliates of TCI. The charges, which generally approximate such
TCI affiliates' cost and are based upon the number of subscribers served by
the system, aggregated $913,000 and $1,701,000 for the period from January 1,
1997 to June 23, 1997 and for the year ended December 31, 1996, respectively,
and are included in operating expenses in the accompanying combined statements
of operations and Partnership's investment.
Certain subsidiaries of TCI provide administrative services to the Lower
Delaware System and have assumed managerial responsibility of the Lower
Delaware System's cable television system
F-53
LOWER DELAWARE SYSTEM
(DEFINED IN NOTE 1)
NOTES TO COMBINED STATEMENTS OF OPERATIONS AND
PARTNERSHIP'S INVESTMENT AND CASH FLOWS--(CONTINUED)
FOR THE PERIOD FROM JANUARY 1, 1997 TO JUNE 23, 1997
AND THE YEAR ENDED DECEMBER 31, 1996
operations and construction. As compensation for these services, the Lower
Delaware System pays a monthly management fee based on total revenue. The
Lower Delaware System also reimburses for direct out-of-pocket and indirect
expenses allocable to the Lower Delaware System and for certain personnel
employed on a full or part-time basis to perform accounting, marketing,
technical or other services. Charges for such services were approximately
$388,000 and $669,000 for the period from January 1, 1997 to June 23, 1997 and
for the year ended December 31, 1996, respectively, and are included in
selling, general and administrative expenses in the accompanying combined
statements of operations and Partnership's investment.
(5) COMMITMENTS AND CONTINGENCIES
On October 5, 1992, Congress enacted the Cable Television Consumer
Protection and Competition Act of 1992 (the "1992 Cable Act"). In 1993 and
1994, the Federal Communications Commission ("FCC") adopted certain rate
regulations required by the 1992 Cable Act and imposed a moratorium on certain
rate increases. As a result of such actions, the Lower Delaware System's basic
and tier service rates and its equipment and installation charges (the
"Regulated Services") are subject to the jurisdiction of local franchising
authorities and the FCC. Basic and tier service rates are evaluated against
competitive benchmark rates as published by the FCC, and equipment and
installation charges are based on actual costs. Any rates for Regulated
Services that exceeded the benchmarks were reduced as required by the 1993 and
1994 rate regulations. The rate regulations do not apply to the relatively few
systems which are subject to "effective competition" or to services offered on
an individual service basis, such as premium movie and pay-per-view services.
The Lower Delaware System believes that they have complied in all material
respects with the provisions of the 1992 Cable Act, including its rate setting
provisions. However, the Lower Delaware System's rates for Regulated Services
are subject to review by the FCC, if a complaint has been filed, or by the
appropriate franchise authority, if such authority has been certified by the
FCC to regulate rates. If, as a result of the review process, a system cannot
substantiate its rates, it could be required to retroactively reduce its rates
to the appropriate benchmark and refund the excess portion of rates received.
Any refunds of the excess portion of tier service rates would be retroactive
to the date of complaint. Any refunds of the excess portion of all other
Regulated Service rates would be retroactive to one year prior to the
implementation of the rate reductions.
The Lower Delaware System leases business offices, has entered into pole
rental agreements and uses certain equipment under lease arrangements. Rental
expense under these arrangements was $55,000 and $87,000 for the period from
January 1, 1997 to June 23, 1997 and the year ended December 31, 1996,
respectively.
It is expected that in the normal course of business, leases that expire
will be renewed or replaced by leases on other properties; thus, it is
anticipated that future minimum lease commitments will not be less than the
amount shown in 1997, on an annualized basis.
As of June 23, 1997, management of the Lower Delaware System had not yet
assessed the cost associated with its year 2000 readiness efforts to ensure
that its computer systems and related
F-54
LOWER DELAWARE SYSTEM
(DEFINED IN NOTE 1)
NOTES TO COMBINED STATEMENTS OF OPERATIONS AND
PARTNERSHIP'S INVESTMENT AND CASH FLOWS--(CONTINUED)
FOR THE PERIOD FROM JANUARY 1, 1997 TO JUNE 23, 1997
AND THE YEAR ENDED DECEMBER 31, 1996
software properly recognize the year 2000 and continue to process business
information, and the related potential impact on the Lower Delaware System's
results of operations. Amounts expended through June 23, 1997 were not
material, although there can be no assurance that costs ultimately required to
be paid to ensure the Lower Delaware System's year 2000 readiness will not
have an adverse effect on the Lower Delaware System's financial position.
Additionally, there can be no assurance that the systems of the Lower Delaware
System's suppliers will be converted in time or that any such failure to
convert by such third parties will not have an adverse effect on the Lower
Delaware System's financial position.
F-55
INDEPENDENT AUDITOR'S REPORT
February 10, 1997
To the Partners
Saguaro Cable TV Investors Limited Partnership
(A Limited Partnership)
Castle Rock, Colorado
We have audited the accompanying Balance Sheet of Saguaro Cable TV Investors
Limited Partnership (A Limited Partnership) as of December 26, 1996, and the
related Statements of Operations and Partners' Capital and Cash Flows for the
period from January 1, 1996 to December 26, 1996. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Saguaro Cable TV Investors
Limited Partnership (A Limited Partnership) as of December 26, 1996, and the
results of its operations and its cash flows for the period ended December 26,
1996 in conformity with generally accepted accounting principles.
Gustafson, Crandall & Christensen,
Inc.
Certified Public Accountants
F-56
SAGUARO CABLE TV INVESTORS LIMITED PARTNERSHIP
(A LIMITED PARTNERSHIP)
BALANCE SHEET
DECEMBER 26, 1996
ASSETS
Cash............................................................... $ 684,743
Accounts receivable, net of allowance for doubtful account of
$3,710 (Note E)................................................... 81,092
Inventory.......................................................... 62,636
Prepaid expenses................................................... 15,569
Property and equipment (Notes B and E)............................. 1,728,642
Other assets (Notes C and E)....................................... 3,968,407
----------
Total Assets................................................... $6,541,089
==========
LIABILITIES AND PARTNERS' CAPITAL
Liabilities:
Accounts payable................................................. $ 76,647
Accrued expenses................................................. 394,679
Due to management firm (Note D).................................. 23,154
Subscriber deposits.............................................. 82,551
Notes payable (Note E)........................................... 5,312,500
----------
Total Liabilities.............................................. 5,889,531
Partners' capital (Note F)......................................... 651,558
----------
Total Liabilities and Partners' Capital........................ $6,541,089
==========
See notes to financial statements.
F-57
SAGUARO CABLE TV INVESTORS LIMITED PARTNERSHIP
(A LIMITED PARTNERSHIP)
STATEMENT OF OPERATIONS
AND PARTNERS' CAPITAL
PERIOD FROM JANUARY 1, 1996 TO DECEMBER 26, 1996
Operating revenues.................................................. $2,935,512
Cost of services sold............................................... 704,250
----------
Gross profit...................................................... 2,231,262
General and administrative expenses................................. 740,605
----------
Net operating profit.............................................. 1,490,657
Other expenses:
Depreciation and amortization..................................... 951,968
Interest.......................................................... 525,105
Other expenses (Note D)........................................... 149,764
----------
1,626,837
----------
Net [loss].......................................................... [136,180]
Partners' capital -- Beginning of period............................ 787,738
----------
Partners' capital -- End of period.................................. $ 651,558
==========
See noted to financial statements.
F-58
SAGUARO CABLE TV INVESTORS LIMITED PARTNERSHIP
(A LIMITED PARTNERSHIP)
STATEMENT OF CASH FLOWS
PERIOD FROM JANUARY 1, 1996 TO DECEMBER 26, 1996
CASH FLOWS FROM OPERATING ACTIVITIES:
Cash received from customers..................................... $ 2,906,666
Cash paid to suppliers and employees............................. [1,568,362]
Interest received................................................ 14,105
Interest paid.................................................... [440,544]
-----------
Net cash provided by operating activities...................... 911,865
CASH FLOWS FROM INVESTING ACTIVITIES:
Maturity of investments.......................................... 650,000
Purchase of investments.......................................... [500,000]
Purchase of property and equipment............................... [301,105]
-----------
Net cash [used by] investing activities........................ [151,105]
CASH FLOWS FROM FINANCING ACTIVITIES--
Payment of notes payable......................................... [450,000]
-----------
NET INCREASE IN CASH............................................... 310,760
CASH -- Beginning of period........................................ 373,983
-----------
CASH -- End of period.............................................. $ 684,743
===========
See notes to financial statements.
F-59
SAGUARO CABLE TV INVESTORS LIMITED PARTNERSHIP
(A LIMITED PARTNERSHIP)
STATEMENT OF CASH FLOWS
PERIOD FROM JANUARY 1, 1996 TO DECEMBER 26, 1996
RECONCILIATION OF NET [LOSS] TO NET CASH PROVIDED BY OPERATING
ACTIVITIES:
Net [loss]....................................................... $ [136,180]
Adjustments to reconcile net [loss] to net cash provided by
operating activities:
Depreciation................................................... 607,920
Amortization................................................... 344,048
Increase in accrued expenses................................... 134,891
Decrease in prepaid expenses................................... 30,022
Increase in accounts payable................................... 28,774
[Decrease] in due to management firm........................... [1,339]
[Decrease] in subscriber deposits.............................. [2,081]
[Increase] in accounts receivable.............................. [3,881]
[Increase] in other assets..................................... [90,309]
----------
Total adjustments............................................ 1,048,045
----------
NET CASH PROVIDED BY OPERATING ACTIVITIES.......................... $ 911,865
==========
See notes to financial statements.
F-60
SAGUARO CABLE TV INVESTORS LIMITED PARTNERSHIP
(A LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS
PERIOD FROM JANUARY 1, 1996 TO DECEMBER 26, 1996
A. SUMMARY OF SIGNIFICANT ACCOUNTING AND REPORTING POLICIES:
(1) Organization:
Saguaro Cable TV Investors Limited Partnership (A Limited Partnership) (the
Company) was formed in the State of Colorado on May 26, 1989. The purpose of
the Company is to own and operate cable television systems. The Company
currently operates cable television systems in Ajo, Nogales and Rio Rico,
Arizona. The Company sold its asset on December 27, 1996 for $11,535,000.
(2) Revenue Recognition:
Subscriber service fees are recognized as service is provided. Credit risk
is managed by disconnecting service to cable customers who are delinquent.
(3) Property and Equipment:
Property and equipment is recorded at cost plus related acquisition costs.
Depreciation is recorded using the straight-line method over the estimated
useful lives as follows:
Cable plant.................................................... 7 years
Headend........................................................ 7-10 years
Drops.......................................................... 7 years
Tools, vehicles and equipment.................................. 5-7 years
Buildings...................................................... 7-40 years
Converters..................................................... 5 years
Expenditures for maintenance and repairs are charged to expense as incurred,
whereas, expenditures which appreciably extend the useful life of the asset
are added to the cost of the asset.
(4) Amortization:
The franchise rights include the difference between the cost of acquiring
cable television systems and amounts allocated to their tangible assets. Such
amounts are amortized on a straight-line basis over 40 years.
The covenant not to compete is amortized by the straight-line method over
its contractual life of five years.
Acquisition costs and loan fees and related costs are amortized by the
straight-line method over 5 to 40 years.
The cost of the subscriber lists and records is being amortized by the
straight-line method over the estimated useful life of five years.
Organizational expenses are stated at cost and are being amortized by the
straight-line method over five years.
F-61
SAGUARO CABLE TV INVESTORS LIMITED PARTNERSHIP
(A LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
PERIOD FROM JANUARY 1, 1996 TO DECEMBER 26, 1996
(5) The Company periodically reviews the carrying amount of its long-lived
assets to determine whether current events or circumstances warrant
adjustment to such carrying amounts. Measurement of any impairment would
include a comparison of estimated future operating cash flow anticipated
to be generated during the remaining life of the assets with their
carrying value. An impairment loss would be recognized as the amount by
which the carrying value of the assets exceed their fair value.
(6) Interest:
The Company incurred interest costs of $525,105 in 1996. None of the
interest costs were capitalized as a part of property and equipment.
(7) Income Taxes:
No provision has been made for Federal and state income taxes on the
earnings or losses of the partnership because these taxes are the personal
responsibility of the partners.
(8) Consideration of Credit Risk:
The Company maintains its cash in bank deposit accounts at high credit
quality financial institutions. The balances, at times, may exceed federally
insured limits. At December 26, 1996 the Company exceeded the insured limit by
approximately $553,071.
(9) Use of Estimates:
The preparation of financial statements in accordance with generally
accepted account principles requires management to make estimates and
assumptions that affect the reporting amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amount of revenues and expenses during the
reporting period. Actual results could differ from these estimates.
B. PROPERTY AND EQUIPMENT:
The property and equipment consist of the following:
Cable plant.................................................... $ 2,834,535
Headend........................................................ 796,373
Drops.......................................................... 637,969
Tools, vehicles and equipment.................................. 314,392
Land and buildings............................................. 238,376
Converters..................................................... 175,607
------------
4,997,252
[Less] accumulated depreciation................................ [3,268,610]
------------
$ 1,728,642
============
F-62
SAGUARO CABLE TV INVESTORS LIMITED PARTNERSHIP
(A LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
PERIOD FROM JANUARY 1, 1996 TO DECEMBER 26, 1996
C. OTHER ASSETS:
The other assets consist of the following:
Franchise rights................................................ $ 4,317,144
Covenant not to compete......................................... 1,000,000
Acquisition costs and loan fees................................. 579,910
Subscriber lists and records.................................... 517,000
Deferred costs.................................................. 55,309
Organizational expenses......................................... 7,534
-----------
6,476,897
[Less] accumulated amortization................................. [2,508,490]
-----------
$ 3,968,407
===========
D RELATED PARTY TRANSACTIONS:
The Company has entered into a management agreement with Arizona and
Southwest Cable, Inc., the Company's general partner. The agreement calls for
the overall general management of the cable operations. A management fee of 5%
of the gross operating revenues, plus reasonable out-of-pocket expenses, is to
be paid to the management firm.
A total of $146,520 in 1996 of management fees is included in the Statements
of Operations and Partners' Capital.
The amount due the management firm at December 26, 1996 represents unpaid
management fees, costs and advances.
E. NOTES PAYABLE:
The Company has drawn $3,812,500 at December 26, 1996 against a $6,400,000
line of credit from a bank.
Principal and interest payments are due in varying amounts from through
December 27, 1996 when the remaining balance was paid. Interest on the note is
at a variable rate based on the prime rate (9.75% at December 26, 1996) and
the Company's ability to meet various operating ratios.
The note was collateralized by the accounts receivable and all personal
property and assets (tangible and intangible) of the Company.
The Company also has a $1,500,000 note due to the previous owner of the
Nogales system. The interest rate on the note is 10.0%. The interest is
payable quarterly with the outstanding principal balance paid on December 27,
1996. This note was collateralized by the Nogales system subject to a
subordination agreement with the bank on the line of credit.
G. SUBSEQUENT EVENTS:
On December 27, 1996, the system was sold for $11,535,000. The sale results
in a gain of $4,902,599. With the sale of the system, the notes payable were
paid in full.
Distributions to the partners of $5,300,000 have been paid subsequent to the
end of the period.
F-63
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS IN CONNECTION WITH THE OFFER CONTAINED HEREIN OTHER THAN THOSE
CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER
TO BUY ANY SECURITIES OTHER THAN THOSE TO WHICH IT RELATES, NOR DOES IT
CONSTITUTE AN OFFER TO SELL, OR THE SOLICITATION OF AN OFFER TO BUY, TO ANY
PERSON IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT
AUTHORIZED, OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT
QUALIFIED TO DO SO, OR TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER
OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE
HAS BEEN NO CHANGE IN THE AFFAIRS OF THE ISSUERS SINCE THE DATE HEREOF OR THAT
THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE
DATE HEREOF.
- -------------------------------------------------------------------------------
TABLE OF CONTENTS
Prospectus Summary........................................................ 1
Risk Factors.............................................................. 17
Use of Proceeds........................................................... 25
Capitalization............................................................ 25
Selected Historical and Pro Forma Consolidated Financial and Operating
Data..................................................................... 26
Unaudited Pro Forma Consolidated
Financial Data........................................................... 29
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 37
Business.................................................................. 45
Legislation and Regulation................................................ 65
Management................................................................ 74
Certain Relationships and Related Transactions............................ 78
Membership Interests of Certain Beneficial Owners and Management.......... 80
Description of the Operating Agreement.................................... 81
Description of the Notes.................................................. 84
Description of Other Indebtedness......................................... 111
Certain Federal Income Tax Consequences................................... 113
The Exchange Offer........................................................ 113
Book-Entry; Delivery and Form............................................. 122
Plan of Distribution...................................................... 125
Legal Matters............................................................. 125
Experts................................................................... 126
Additional Available Information.......................................... 127
Glossary.................................................................. 128
Index to Financial Statements............................................. F-1
- -------------------------------------------------------------------------------
UNTIL , 1998 ALL DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED
SECURITIES, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED
TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO
DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR
UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
PROSPECTUS
$200,000,000
MEDIACOM LLC
MEDIACOM CAPITAL CORPORATION
OFFER TO EXCHANGE SERIES B 8 1/2% SENIOR
NOTES DUE 2008 FOR ALL OUTSTANDING
8 1/2% SENIOR NOTES DUE 2008
, 1998
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 420 of the New York Limited Liability Company Law (the "New York
Act") empowers a limited liability company to indemnify and hold harmless, and
advance expenses to, any member, manager or other person, or any testator or
intestate of such member, manager or other person, from and against any and
all claims and demands whatsoever; provided, however, that no indemnification
may be made to or on behalf of any member, manager or other person if a
judgment or other final adjudication adverse to such member, manager or other
person establishes (a) that his or her acts were committed in bad faith or
were the result of active and deliberate dishonesty and were material to the
cause of action so adjudicated or (b) that he or she personally gained in fact
a financial profit or other advantage to which he or she was not legally
entitled.
Section 15.2 of Mediacom's Third Amended and Restated Operating Agreement
(the "Operating Agreement") provides as follows:
The Company shall, to the fullest extent permitted by the New York Act,
indemnify and hold harmless each Member or any of their respective
shareholders, members, partners, officers, directors, employees or control
persons (as such term is defined in the Securities Act) of such Members and
any of the members of the Executive Committee (collectively, the
"Indemnified Persons") against all claims, liabilities and expenses of
whatever nature relating to activities undertaken in connection with the
Company, including but not limited to amounts paid in satisfaction of
judgments, in compromise or as fines and penalties, and counsel,
accountants' and experts' and other fees, costs and expenses reasonably
incurred in connection with the investigation, defense or disposition
(including by settlement) of any action, suit or other proceeding, whether
civil or criminal, before any court or administrative body in which such
Indemnified Person may be or may have been involved, as a party or
otherwise, or with which such Indemnified Person may be or may have been
threatened, while acting as such Indemnified Person, provided that no
indemnity shall be payable hereunder against any liability incurred by such
Indemnified Person by reason of such Indemnified Person's gross negligence,
fraud or willful violation of the law or the Operating Agreement or with
respect to any matter as to which such Indemnified Person shall have been
adjudicated not to have acted in good faith.
Article 7, Section 722 of the New York Business Corporation Law (the
"Business Corporation Law") empowers a corporation to indemnify any person,
made, or threatened to be made, a party to an action or proceeding (other than
one by or in the right of the corporation to procure a judgment in its favor),
whether civil or criminal, including an action by or in the right of any other
corporation of any type or kind, domestic or foreign, or any partnership,
joint venture, trust, employee benefit plan or other enterprise, which any
director or officer of the corporation served in any capacity at the request
of the corporation, by reason of the fact that he, his testator or intestate,
was a director or officer of the corporation, or served such other
corporation, partnership, joint venture, trust, employee benefit plan or other
enterprise in any capacity, against judgments, fines, amounts paid in
settlement and reasonable expenses, including attorneys' fees actually and
necessarily incurred as a result of such action or proceeding, or any appeal
therein, if such director or officer acted, in good faith, for a purpose which
he reasonably believed to be in, or, in the case of service for any other
corporation or any partnership, joint venture, trust, employee benefit plan or
other enterprise, not opposed to, the best interests of the corporation and,
in criminal actions or proceedings, in addition, had no reasonable cause to
believe that his conduct was unlawful.
Section 722 also empowers a corporation to indemnify any person made, or
threatened to be made, a party to an action by or in the right of the
corporation to procure a judgment in its favor by reason of the fact that he,
his testator or intestate, is or was a director or officer of the corporation,
or
II-1
is or was serving at the request of the corporation as a director or officer
of any other corporation of any type or kind, domestic or foreign, of any
partnership, joint venture, trust, employee benefit plan or other enterprise,
against amounts paid in settlement and reasonable expenses, including
attorneys' fees, actually and necessarily incurred by him in connection with
the defense or settlement of such action, or in connection with an appeal
therein, if such director or officer acted, in good faith, for a purpose which
he reasonably believed to be in, or, in the case of service for any other
corporation or any partnership, joint venture, trust, employee benefit plan or
other enterprise, not opposed to, the best interests of the corporation,
except that no indemnification under this paragraph shall be made in respect
of (1) a threatened action, or a pending action which is settled or otherwise
disposed of, or (2) any claim, issue or matter as to which such person shall
have been adjudged to be liable to the corporation, unless and only to the
extent that the court in which the action was brought, or, if no action was
brought, any court of competent jurisdiction, determines upon application
that, in view of all the circumstances of the case, the person is fairly and
reasonably entitled to indemnity for such portion of the settlement amount and
expenses as the court deems proper.
Section 7 of the Mediacom Capital's Certificate of Incorporation provides as
follows:
The corporation shall, to the fullest extent permitted by Article 7 of
the Business Corporation Law, as the same may be amended and supplemented,
indemnify any and all persons whom it shall have power to indemnify under
said Article from and against any and all of the expenses, liabilities, or
other matters referred to in or covered by said Article, and the
indemnification provided for herein shall not be deemed exclusive of any
other rights to which any person may be entitled under any By-Law,
resolution of shareholders, resolution of directors, agreement, or
otherwise, as permitted by said Article, as to action in any capacity in
which he served at the request of the corporation.
Article VII of Mediacom Capital's By-Laws provides as follows:
The Corporation shall indemnify any person to the full extent permitted,
and in the manner provided, by the New York Business Corporation Law, as
the same now exists or may hereafter be amended.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits
The following exhibits are filed as part of this Registration Statement:
EXHIBIT
NUMBER EXHIBIT DESCRIPTIONS
------- --------------------
3.1(a) Articles of Organization of Mediacom filed July 17, 1995
3.1(b) Certificate of Amendment of the Articles of Organization of Mediacom
filed December 8, 1995
3.2 Third Amended and Restated Operating Agreement of Mediacom
3.3 Certificate of Incorporation of Mediacom Capital filed March 9, 1998
3.4 By-Laws of Mediacom Capital
3.5 Certificate of Formation of Mediacom Arizona LLC filed September 5,
1996
3.6 Operating Agreement of Mediacom Arizona LLC
3.7 Certificate of Formation of Mediacom California LLC filed November 22,
1995
3.8 Operating Agreement of Mediacom California LLC
3.9 Certificate of Formation of Mediacom Delaware LLC filed December 27,
1996
II-2
EXHIBIT
NUMBER EXHIBIT DESCRIPTIONS
------- --------------------
3.10 Operating Agreement of Mediacom Delaware LLC
3.11 Certificate of Formation of Mediacom Southeast LLC filed August 21,
1997
3.12 Operating Agreement of Mediacom Southeast LLC
4.1(a) Indenture, dated as of April 1, 1998, between Mediacom, Mediacom
Capital and Bank of Montreal Trust Company, as Trustee
4.1(b) Exchange and Registration Rights Agreement dated April 1, 1998 between
Mediacom, Mediacom Capital and the Initial Purchaser
4.1(c) Purchase Agreement dated March 27, 1998 between Mediacom, Mediacom
Capital and the Initial Purchaser
5.1 Opinion of Cooperman Levitt Winikoff Lester & Newman, P.C. regarding
the validity of the Series B Notes, including consent
8.1 Opinion of Cooperman Levitt Winikoff Lester & Newman, P.C. regarding
certain federal income tax matters, including consent
10.1 Management Agreement dated as of December 27, 1996 by and between
Mediacom Arizona LLC and Mediacom Management
10.2 First Amended and Restated Management Agreement dated December 27,
1996 by and between Mediacom California LLC and Mediacom Management
10.3 Management Agreement dated June 24, 1997 by and between Mediacom
Delaware LLC and Mediacom Management
10.4 Management Agreement dated January 23, 1998 by and between Mediacom
Southeast LLC and Mediacom Management
10.5(a) Second Amended and Restated Credit Agreement dated as of June 24, 1997
for the Western Credit Facility (schedules omitted; Registrants agree
to furnish supplementally a copy of any schedule to the Commission
upon request)
10.5(b) Amendment No. 1 to the Western Credit Facility dated as of January 13,
1998
10.5(c) Amendment No. 2 to the Western Credit Facility dated as of March 24,
1998
10.6(a) Credit Agreement dated as of January 23, 1998 for the Southeast Credit
Facility (schedules omitted; Registrants agree to furnish
supplementally a copy of any schedule to the Commission upon request)
10.6(b) Amendment No. 1 to the Southeast Credit Facility dated as of March 24,
1998
10.7 Asset Purchase and Sale Agreement, dated as of May 23, 1996, by and
between Mediacom California LLC and Booth American Company (schedules
omitted; Registrants agree to furnish supplementally a copy of any
schedule to the Commission upon request)
10.8 Asset Purchase Agreement, dated as of August 29, 1996, between
Mediacom and Saguaro Cable TV Investors, L.P. (schedules omitted;
Registrants agree to furnish supplementally a copy of any schedule to
the Commission upon request)
10.9 Asset Purchase Agreement, dated as of August 29, 1996, between
Mediacom California LLC and Valley Center Cablesystems, L.P.
(schedules omitted; Registrants agree to furnish supplementally a copy
of any schedule to the Commission upon request)
10.10 Asset Purchase Agreement, dated as of December 24, 1996, by and
between Mediacom and American Cable TV Investors 5, Ltd.(schedules
omitted; Registrants agree to furnish supplementally a copy of any
schedule to the Commission upon request)
10.11 Asset Purchase Agreement, dated May 22, 1997, between Mediacom
California LLC and CoxCom, Inc. (schedules omitted; Registrants agree
to furnish supplementally a copy of any schedule to the Commission
upon request)
II-3
EXHIBIT
NUMBER EXHIBIT DESCRIPTIONS
------- --------------------
10.12 Asset Purchase Agreement, dated September 17, 1997, between Mediacom
California LLC and Jones Cable Income Fund 1-B/C Venture (schedules
omitted; Registrants agree to furnish supplementally a copy of any
schedule to the Commission upon request)
10.13 Asset Purchase Agreement, dated August 29, 1997, among Mediacom, U.S.
Cable Television Group, L.P., ECC Holding Corporation, Missouri Cable
Partners, L.P. and Cablevision Systems Corporation (schedules omitted;
Registrants agree to furnish supplementally a copy of any schedule to
the Commission upon request)
12.1 Schedule of Earnings to Fixed Charges
21.1 Subsidiaries of Mediacom
23.1 Consent of Arthur Andersen LLP
23.2 Consent of Keller Bruner & Company, L.L.C.
23.3 Consent of KPMG Peat Marwick LLP
23.4 Consent of KPMG Peat Marwick LLP
23.5 Consent of Gustafson, Crandall & Christensen, Inc.
23.6 Consents of Cooperman Levitt Winikoff Lester & Newman, P.C. (included
in Exhibits 5.1 and 8.1)
24.1 Powers of Attorney (included as part of signature pages)
25.1 Statement of Eligibility on Form T-1 of Trustee
27.1 Financial Data Schedule
99.1 Form of Letter of Transmittal with respect to the Exchange Offer
(b) Financial Statement Schedules
None.
ITEM 22. UNDERTAKINGS.
Mediacom LLC and Mediacom Capital Corporation (the "Registrants") hereby
undertake:
(1) To file, during any period in which offers or sales are being made, a
post- effective amendment to this Registration Statement: (i) to include
any prospectus required by Section 10(a)(3) of the Securities Act of 1933;
(ii) to reflect in the prospectus any facts or events arising after the
effective date of the Registration Statement (or the most recent post-
effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the
Registration Statement. Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any
deviation from the low or high end of the estimated maximum offering range
may be reflected in the form of prospectus filed with the Commission
pursuant to Rule 424(b) if, in the aggregate, the changes in volume and
price represent no more than a 20% change in the maximum aggregate offering
price set forth in the "Calculation of Registration Fee" table in the
effective registration statement; (iii) to include any material information
with respect to the plan of distribution not previously disclosed in the
Registration Statement or any material change to such information in the
Registration Statement;
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof; and
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
II-4
The undersigned Registrants hereby undertake to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Item 4, 10(b), 11, or 13 of Form S-4, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the Registration Statement through
the date of responding to the request.
The undersigned Registrants hereby undertake to supply by means of a post-
effective amendment all information concerning a transaction, and the company
being acquired involved therein, that was not the subject of and included in
the Registration Statement when it became effective.
The undersigned Registrants hereby undertake as follows: that prior to any
public reoffering of the securities registered hereunder through use of a
prospectus which is a part of this Registration Statement, by any person or
party who is deemed to be an underwriter within the meaning of Rule 145(c),
the Registrants undertake that such reoffering prospectus will contain the
information called for by the applicable registration form with respect to
reofferings by persons who may be deemed underwriters, in addition to the
information called for by the other Items of the applicable form.
The Registrants undertake that every prospectus (i) that is filed pursuant
to the immediately preceding paragraph, or (ii) that purports to meet the
requirements of Section 10(a)(3) of the Securities Act of 1933 and is used in
connection with an offering of securities subject to Rule 415, will be filed
as a part of an amendment to the Registration Statement and will not be used
until such amendment is effective, and that, for purposes of determining any
liability under the Securities Act of 1933, each such post-effective amendment
shall be deemed to be a new Registration Statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Registrants pursuant to the foregoing provisions, or otherwise, the
Registrants have been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrants of expenses incurred or paid by a director, officer or controlling
person of the Registrants in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrants will, unless
in the opinion of their counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by them is against public policy as expressed in the Act
and will be governed by the final adjudication of such issue.
The undersigned Registrants hereby undertake that:
(1) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part of
this Registration Statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the Registrants pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act
of 1933, each post-effective amendment that contains a form of prospectus
shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
II-5
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has duly
caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the city of Middletown, State of
New York, on June 19, 1998.
MEDIACOM LLC
/s/ Rocco B. Commisso
By: _________________________________
ROCCO B. COMMISSO MANAGER
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS that each person whose signature appears
below constitutes and appoints Rocco B. Commisso and Mark E. Stephan as such
person's true and lawful attorney-in-fact and agent, acting alone, with full
powers of substitution and revocation, for such person and in such person's
name, place and stead, in any and all capacities, to sign any and all
amendments (including post-effective amendments) to this registration
statement and to file the same with all exhibits thereto, and other documents
in connection therewith, with the Securities and Exchange Commission, granting
unto said attorney-in-fact and agent, acting alone, full power and authority
to do and perform each and every act and thing requisite and necessary to be
done, as fully to all intents and purposes as such person might or could do in
person, hereby ratifying and confirming all that said attorney-in-fact and
agent, acting alone, or his substitute or substitutes, may lawfully do or
cause to be done by virtue hereof.
SIGNATURE TITLE DATE
/s/ Rocco B. Commisso Manager, Chairman June 19, 1998
- ------------------------------------- and Chief Executive
ROCCO B. COMMISSO Officer (principal
executive officer)
/s/ Mark E. Stephan Senior Vice June 19, 1998
- ------------------------------------- President, Chief
MARK E. STEPHAN Financial Officer
and Treasurer
(principal
financial officer
and principal
accounting officer)
II-6
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has duly
caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the city of Middletown, State of
New York, on June 19, 1998.
MEDIACOM CAPITAL CORPORATION
/s/ Rocco B. Commisso
By: _________________________________
ROCCO B. COMMISSO PRESIDENT
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS that each person whose signature appears
below constitutes and appoints Rocco B. Commisso and Mark E. Stephan as such
person's true and lawful attorney-in-fact and agent, acting alone, with full
powers of substitution and revocation, for such person and in such person's
name, place and stead, in any and all capacities, to sign any and all
amendments (including post-effective amendments) to this registration
statement and to file the same with all exhibits thereto, and other documents
in connection therewith, with the Securities and Exchange Commission, granting
unto said attorney-in-fact and agent, acting alone, full power and authority
to do and perform each and every act and thing requisite and necessary to be
done, as fully to all intents and purposes as such person might or could do in
person, hereby ratifying and confirming all that said attorney-in-fact and
agent, acting alone, or his substitute or substitutes, may lawfully do or
cause to be done by virtue hereof.
SIGNATURE TITLE DATE
/s/ Rocco B. Commisso Chief Executive June 19, 1998
- ------------------------------------- Officer, President
ROCCO B. COMMISSO and Director
(principal
executive officer)
/s/ Mark E. Stephan Chief Financial June 19, 1998
- ------------------------------------- Officer, Treasurer
MARK E. STEPHAN and Secretary
(principal
financial officer
and principal
accounting officer)
II-7
EXHIBIT INDEX
EXHIBIT
NUMBER EXHIBIT DESCRIPTIONS
------- --------------------
3.1(a) Articles of Organization of Mediacom filed July 17, 1995
3.1(b) Certificate of Amendment of the Articles of Organization of Mediacom
filed December 8, 1995
3.2 Third Amended and Restated Operating Agreement of Mediacom
3.3 Certificate of Incorporation of Mediacom Capital filed March 9, 1998
3.4 By-Laws of Mediacom Capital
3.5 Certificate of Formation of Mediacom Arizona LLC filed September 5,
1996
3.6 Operating Agreement of Mediacom Arizona LLC
3.7 Certificate of Formation of Mediacom California LLC filed November 22,
1995
3.8 Operating Agreement of Mediacom California LLC
3.9 Certificate of Formation of Mediacom Delaware LLC filed December 27,
1996
3.10 Operating Agreement of Mediacom Delaware LLC
3.11 Certificate of Formation of Mediacom Southeast LLC filed August 21,
1997
3.12 Operating Agreement of Mediacom Southeast LLC
4.1(a) Indenture, dated as of April 1, 1998, between Mediacom, Mediacom
Capital and Bank of Montreal Trust Company, as Trustee
4.1(b) Exchange and Registration Rights Agreement dated April 1, 1998 between
Mediacom, Mediacom Capital and the Initial Purchaser
4.1(c) Purchase Agreement dated March 27, 1998 between Mediacom, Mediacom
Capital and the Initial Purchaser
5.1 Opinion of Cooperman Levitt Winikoff Lester & Newman, P.C. regarding
the validity of the Series B Notes, including consent
8.1 Opinion of Cooperman Levitt Winikoff Lester & Newman, P.C. regarding
certain federal income tax matters, including consent
10.1 Management Agreement dated as of December 27, 1996 by and between
Mediacom Arizona LLC and Mediacom Management
10.2 First Amended and Restated Management Agreement dated December 27,
1996 by and between Mediacom California LLC and Mediacom Management
10.3 Management Agreement dated June 24, 1997 by and between Mediacom
Delaware LLC and Mediacom Management
10.4 Management Agreement dated January 23, 1998 by and between Mediacom
Southeast LLC and Mediacom Management
10.5(a) Second Amended and Restated Credit Agreement dated as of June 24, 1997
for the Western Credit Facility (schedules omitted; Registrants agree
to furnish supplementally a copy of any schedule to the Commission
upon request)
10.5(b) Amendment No. 1 to the Western Credit Facility dated as of January 13,
1998
10.5(c) Amendment No. 2 to the Western Credit Facility dated as of March 24,
1998
10.6(a) Credit Agreement dated as of January 23, 1998 for the Southeast Credit
Facility (schedules omitted; Registrants agree to furnish
supplementally a copy of any schedule to the Commission upon request)
1
EXHIBIT
NUMBER EXHIBIT DESCRIPTIONS
------- --------------------
10.6(b) Amendment No. 1 to the Southeast Credit Facility dated as of March 24,
1998
10.7 Asset Purchase and Sale Agreement, dated as of May 23, 1996, by and
between Mediacom California LLC and Booth American Company (schedules
omitted; Registrants agree to furnish supplementally a copy of any
schedule to the Commission upon request)
10.8 Asset Purchase Agreement, dated as of August 29, 1996, between
Mediacom and Saguaro Cable TV Investors, L.P. (schedules omitted;
Registrants agree to furnish supplementally a copy of any schedule to
the Commission upon request)
10.9 Asset Purchase Agreement, dated as of August 29, 1996, between
Mediacom California LLC and Valley Center Cablesystems, L.P.
(schedules omitted; Registrants agree to furnish supplementally a copy
of any schedule to the Commission upon request)
10.10 Asset Purchase Agreement, dated as of December 24, 1996, by and
between Mediacom and American Cable TV Investors 5, Ltd.(schedules
omitted; Registrants agree to furnish supplementally a copy of any
schedule to the Commission upon request)
10.11 Asset Purchase Agreement, dated May 22, 1997, between Mediacom
California LLC and CoxCom, Inc. (schedules omitted; Registrants agree
to furnish supplementally a copy of any schedule to the Commission
upon request)
10.12 Asset Purchase Agreement, dated September 17, 1997, between Mediacom
California LLC and Jones Cable Income Fund 1-B/C Venture (schedules
omitted; Registrants agree to furnish supplementally a copy of any
schedule to the Commission upon request)
10.13 Asset Purchase Agreement, dated August 29, 1997, among Mediacom, U.S.
Cable Television Group, L.P., ECC Holding Corporation, Missouri Cable
Partners, L.P. and Cablevision Systems Corporation (schedules omitted;
Registrants agree to furnish supplementally a copy of any schedule to
the Commission upon request)
12.1 Schedule of Earnings to Fixed Charges
21.1 Subsidiaries of Mediacom
23.1 Consent of Arthur Andersen LLP
23.2 Consent of Keller Bruner & Company, L.L.C.
23.3 Consent of KPMG Peat Marwick LLP
23.4 Consent of KPMG Peat Marwick LLP
23.5 Consent of Gustafson, Crandall & Christensen, Inc.
23.6 Consents of Cooperman Levitt Winikoff Lester & Newman, P.C. (included
in Exhibits 5.1 and 8.1)
24.1 Powers of Attorney (included as part of signature pages)
25.1 Statement of Eligibility on Form T-1 of Trustee
27.1 Financial Data Schedule
99.1 Form of Letter of Transmittal with respect to the Exchange Offer
2