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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15 (d) of the
Securities Exchange Act of 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
COMMISSION FILE NUMBERS: 0-29227
333-57285-01
333-57285
MEDIACOM COMMUNICATIONS CORPORATION
MEDIACOM LLC*
MEDIACOM CAPITAL CORPORATION*
(EXACT NAMES OF REGISTRANTS AS SPECIFIED IN THEIR CHARTERS)
DELAWARE 06-1566067
NEW YORK 06-1433421
NEW YORK 06-1513997
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBERS)
100 CRYSTAL RUN ROAD
MIDDLETOWN, NEW YORK 10941
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(914) 695-2600
(REGISTRANTS' TELEPHONE NUMBER INCLUDING AREA CODE)
SECURITIES REGISTERED PURSUANT TO SECTION 12(B)OF THE EXCHANGE ACT:
None
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE EXCHANGE ACT:
Class A Common Stock, $0.01 par value per share
Indicate by check mark whether the Registrants (1) have filed all reports
required to be filed by Section 3 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrants were required to file such reports), and (2) have been subject to
such filing requirements for the past 90 days:
YES X NO
----
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrants' knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K: [X]
As of March 15, 2000, the aggregate market value of the Class A common
stock of Mediacom Communications Corporation held by non-affiliates of Mediacom
Communications Corporation was approximately $575.1 million.
As of March 15, 2000, there were outstanding 60,657,010 shares of Class A
common stock and 29,342,990 shares of Class B common stock.
*Mediacom LLC and Mediacom Capital Corporation meet the conditions set forth in
General Instruction I (1) (a) and (b) of Form 10-K and are therefore filing this
form with the reduced disclosure format.
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MEDIACOM COMMUNICATIONS CORPORATION
1999 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
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PART I
PAGE
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ITEM 1. BUSINESS.............................................................................. 1
ITEM 2. PROPERTIES............................................................................ 26
ITEM 3. LEGAL PROCEEDINGS..................................................................... 26
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS................................... 26
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS................. 27
ITEM 6. SELECTED FINANCIAL DATA............................................................... 28
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS............................................................... 32
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK............................ 39
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA........................................... 40
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE................................................................ 66
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANTS................................... 67
ITEM 11. EXECUTIVE COMPENSATION................................................................ 71
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT........................ 75
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS........................................ 77
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K....................... 80
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Mediacom Communications Corporation, a Delaware corporation organized on
November 8, 1999, completed an initial public offering on February 9, 2000.
Prior to such time, Mediacom Communications Corporation had no assets,
liabilities, contingent liabilities or operations. Immediately prior to the
completion of its initial public offering, Mediacom Communications Corporation
issued shares of its Class A and Class B common stock in exchange for all of the
outstanding membership interests in Mediacom LLC, a New York limited liability
company that, prior to the initial public offering, served as a holding company
for our operating subsidiaries. Upon completion of such exchange, Mediacom LLC
became a wholly-owned subsidiary of Mediacom Communications Corporation and
continues to serve as a holding company for our operating subsidiaries. Each
operating subsidiary is wholly-owned by Mediacom LLC, except for a 1.0%
ownership interest in a subsidiary, Mediacom California LLC, that is held by
Mediacom Management Corporation, a Delaware corporation that is wholly-owned by
the Chairman and Chief Executive Officer of Mediacom Communications Corporation.
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Mediacom Capital Corporation, a New York corporation that is wholly-owned
by Mediacom LLC, was formed in 1998 specifically to permit Mediacom LLC to issue
debt in the public market and does not conduct operations of its own.
References in this Annual Report to "we," "us," or "our" are to Mediacom
Communications Corporation and its direct and indirect subsidiaries since the
initial public offering and to Mediacom LLC and its direct and indirect
subsidiaries prior to the initial public offering, unless the context specifies
or requires otherwise.
This Annual Report on Form 10-K is for the year ended December 31, 1999.
The Securities and Exchange Commission allows us to "incorporate by reference"
information that we file with them, which means that we can disclose important
information to you by referring you directly to those documents. Information
incorporated by reference is considered to be part of this Annual Report.
You should carefully review the information contained in this Annual
Report, but should particularly consider any risk factors that we set forth in
this Annual Report and in other reports or documents that we file from time to
time with the Securities and Exchange Commission. In this Annual Report, we
state our beliefs of future events and of our future financial performance. In
some cases, you can identify those so-called "forward-looking statements" by
words such as "may," "will," "should," "expects," "plans," "anticipates,"
"believes," "estimates," "predicts," "potential," or "continue" or the negative
of those words and other comparable words. You should be aware that those
statements are only our predictions. Actual events or results may differ
materially. In evaluating those statements, you should specifically consider
various factors, including the risks outlined below. Those factors may cause our
actual results to differ materially from any of our forward-looking statements.
FACTORS AFFECTING FUTURE OPERATIONS
We commenced operations in 1996 and have grown rapidly since then,
principally through acquisitions. We acquired a substantial portion of our
operations in January 1998. In addition, our acquisitions in the fourth quarter
of 1999 nearly doubled the number of subscribers served by our systems. As a
result, you have limited information upon which to evaluate our performance in
managing our current systems, and our historical financial information may not
be indicative of the future results we can achieve with our systems. If we are
unable to successfully integrate our newly acquired cable systems, our growth
and profitability could be adversely affected.
In addition, the cable television industry may be affected by, among other
things:
o changes in laws and regulations,
o changes in the competitive environment;
o changes in the costs of programming we distribute;
o changes in technology;
o franchise related matters;
o market conditions that may adversely affect the availability of debt
and equity financing for working capital, capital expenditures or other
purposes; and
o general economic conditions.
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PART I
ITEM 1. BUSINESS
INTRODUCTION
We are the ninth largest cable operator in the United States, based on
customers served by wholly-owned systems after giving effect to our pending
acquisitions and recently announced industry transactions. As of December 31,
1999, our cable systems passed approximately 1.1 million homes and served
approximately 747,000 basic subscribers, including our pending acquisitions. We
were founded in July 1995 by Rocco B. Commisso, our Chairman and Chief Executive
Officer, to acquire and develop cable television systems serving principally
non-metropolitan markets of the United States.
Since commencement of our operations in March 1996, we have experienced
significant growth by deploying a disciplined strategy of acquiring
underperforming cable systems primarily in markets with favorable demographic
profiles. Through December 1998, we spent approximately $432.4 million to
complete nine acquisitions of cable systems that served 360,600 basic
subscribers as of December 31, 1999. In October and November 1999, we acquired
for approximately $759.6 million the cable systems of Triax and Zylstra that
served 358,400 basic subscribers as of December 31, 1999. On a pro forma basis,
in 1999 our revenues were $297.3 million, EBITDA was $133.7 million, operating
loss was $72.5 million and net loss was $165.6 million. For purposes of this
Annual Report, EBITDA is operating income (loss) before depreciation and
amortization and non-cash stock charges.
We also have generated strong internal growth and improved the operating
and financial performance of our systems. These results have been achieved
primarily through the introduction of an expanded array of core cable television
products and services made possible by the rapid upgrade of our cable network.
Assuming all our systems, excluding the Triax and Zylstra systems, were acquired
on January 1, 1998, in 1998 our revenues grew by 13.0%, EBITDA increased by
31.9%, the EBITDA margin improved from 35.1% to 41.0% and our internal
subscriber growth was 2.5%. Based on the same assumptions, in 1999 our revenues
grew by 12.3%, EBITDA increased by 21.6%, the EBITDA margin improved from 41.0%
to 44.4% and our internal subscriber growth was 1.9%. During these periods, we
also experienced significant increases in operating losses and net losses.
We believe that advancements in digital technologies, together with the
explosive growth of the Internet, have positioned the cable industry's
high-speed, interactive, broadband network as the primary platform for the
delivery of video, voice and data services to homes and businesses. We believe
that there is considerable demand in the communities we serve for these products
and services. To capitalize on these opportunities, we are rapidly upgrading our
cable network to provide our customers with an expanded array of broadband
products and services. These include digital cable television, two-way,
high-speed Internet access, interactive video and telephony.
Approximately 79% of our customers are currently served by systems which
have been upgraded to 550MHz to 750MHz bandwidth capacity, excluding those
customers served by the Triax and Zylstra systems. Our upgrade program already
has enabled us to begin introducing new broadband products and services. As of
December 1999, we offered digital cable services in systems passing 243,000
homes and serving 168,000 basic subscribers. In addition, through our strategic
relationship with SoftNet Systems, Inc.'s subsidiary, ISP Channel, which was
finalized in November 1999, we have deployed high-speed Internet access service
in systems passing more than 177,000 homes as of December 31, 1999, of which
120,000 homes were activated with two-way communications capability.
Mr. Commisso has over 21 years of experience with the cable television
industry. Our other senior managers have an average of 18 years of experience in
acquiring, financing and operating cable systems. Prior to founding Mediacom,
Mr. Commisso served as Executive Vice President, Chief Financial Officer and
Director of Cablevision Industries Corporation from August 1986 to March 1995.
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Our principal executive offices are located at 100 Crystal Run Road,
Middletown, New York 10941. Our telephone number is (914) 695-2600, and our
website is located at www.mediacomcc.com. The information on our website is not
part of this Annual Report.
RECENT EVENTS
INITIAL PUBLIC OFFERING
On February 9, 2000, we completed an initial public offering of 20,000,000
shares of Class A common stock at $19.00 per share. Our net proceeds, after
underwriting discounts of approximately $22.8 million and estimated expenses
related to the offering of approximately $2.8 million, were $354.4 million and
were used to repay bank indebtedness.
PENDING ACQUISITIONS
As of March 15, 2000, we entered into four separate asset purchase
agreements to acquire cable television systems serving approximately 19,000
basic subscribers for an aggregate purchase price of $29.4 million. We expect to
close these four acquisitions in the second and third quarters of 2000, subject
to the receipt of all necessary regulatory approvals. We also have signed one
letter of intent to acquire cable systems serving approximately 9,000 basic
subscribers for a purchase price of $16.0 million. We expect to complete the
acquisition of these systems in the third quarter of 2000, subject to the
negotiation of definitive documentation and the receipt of all necessary
regulatory approvals.
PRODUCTS AND SERVICES
We provide our customers with the ability to tailor their product selection
from a full array of core cable television services. In addition, we have begun
to offer our customers new and enhanced products and services such as digital
cable television services and two-way, high-speed Internet access. We also are
exploring opportunities in interactive video programming and telecommunications
services.
CORE CABLE TELEVISION SERVICES
We design both our basic channel line-up and our additional channel
offerings for each system according to demographics, programming preferences,
channel capacity, competition, price sensitivity and local regulation. Our core
cable television service offerings include the following:
LIMITED BASIC SERVICE. Our limited basic service includes, for a monthly
fee, local broadcast channels, network and independent stations, limited
satellite-delivered programming, and local public, government, home-shopping and
leased access channels.
EXPANDED BASIC SERVICE. Our expanded basic service includes, for an
additional monthly fee, various satellite-delivered channels such as CNN, MTV,
USA Network, ESPN, Lifetime, Nickelodeon and TNT.
PREMIUM SERVICE. Our premium 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. HBO, Cinemax, Showtime, The Movie Channel and
Starz are typical examples. 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 us to take advantage of
programming agreements offering cost incentives based on premium service unit
growth.
The significant expansion of bandwidth capacity resulting from our capital
improvement program will allow us to expand the use of tiered and multichannel
packaging strategies for marketing and promoting premium and niche programming
services. We believe that these packaging strategies will increase basic and
premium penetration as well as revenue per basic subscriber.
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PAY-PER-VIEW SERVICE. Our pay-per-view services allow customers to pay to
view a single showing of a feature film, live sporting event, concert and other
special event, on an unedited, commercial-free basis. Such pay-per-view services
are offered by us on a per-viewing basis, with subscribers only paying for
programs which they select for viewing.
DIGITAL CABLE SERVICES
Digital video technology is a computerized method of defining, transmitting
and storing information that makes up a television signal. Digital video
technology allows us to greatly increase our channel offerings through the use
of compression, which converts one analog channel into eight to 12 digital
channels. The digitally compressed signal is uplinked to a satellite, which
sends the signal back down to our cable system's headend to be distributed, via
optical fiber and coaxial cable, to our customer's home. A digital-capable
set-top box in the customer's home converts the digital signal back into an
analog format so that it can be viewed on a normal television screen. We believe
the implementation of digital technology has significantly enhanced and expanded
the video and service offerings we provide to our customers.
We provide our digital video customers with programming packages that
include:
o up to 42 multichannel premium services;
o up to 35 pay-per-view movie and sports channels;
o up to 45 channels of digital music; and
o an interactive on-screen program guide to help them navigate the new
digital choices.
We introduced digital cable services in June 1999. As of December 31, 1999,
we offered digital cable services in systems passing 243,000 homes and serving
168,000 basic subscribers. On such date, we served 5,300 digital customers and
the average incremental monthly revenue per digital customer was approximately
$19.77. We expect to rapidly introduce digital cable television in most of our
remaining systems as we upgrade our cable network and consolidate our headend
facilities.
HIGH-SPEED INTERNET ACCESS
We plan to introduce two-way, high-speed Internet access over our network
in substantially all of our systems. The broadband cable network enables data to
be transmitted up to 100 times faster than traditional telephone modem
technologies. This high-speed capability allows our cable modem customer to
download large files from the Internet in a fraction of the time required when
using the traditional telephone modem. It also allows much quicker response
times when surfing the Internet, providing a richer experience for the customer.
In addition, the two-way communications capability of the cable Internet
connection eliminates the need for a telephone line, is always on and does not
require the customer to dial into the Internet service provider and await
authorization.
To ensure that inter-operable, non-proprietary cable modems are made
available for purchase by customers on a retail basis, the cable industry has
developed general software operating standards, known as data over cable service
interface specifications. As of March 2000, fourteen cable industry vendors,
including equipment manufacturers such as Cisco, General Instrument, Phillips
Electronics, Samsung, Scientific-Atlanta, Sony, Thomson and Toshiba, received
official certification from Cable Television Laboratories, Inc. As a result,
standardized cable modems are currently available for purchase through various
distribution channels, including retail outlets, personal computer
manufacturers, and directly through the cable operator. Such availability will
allow customers to use these modems in different systems similar to the
traditional telephone modem, and should accelerate the deployment of high-speed
Internet access over cable networks.
We believe that the speed, ease of installation and availability of cable
modems will increase the use and impact of the Internet. Furthermore, we believe
that the cable television network combined with data over cable service
interface specifications is currently the best vehicle to deliver all Internet
protocol services, including Internet access, broadband content, streaming media
and Internet protocol telephony to our customers both on the computer and to the
television via a digital set-top box, even though other high-speed alternatives
are being developed.
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In November 1999, we completed an agreement with SoftNet to deploy its
two-way, high-speed Internet access services throughout our cable systems. The
service will be marketed under SoftNet's ISP Channel. ISP Channel is a service
mark of SoftNet. Through the agreement with SoftNet, we are required to upgrade
our cable network to provide two-way communications capability in systems
passing 900,000 homes and make available such homes to SoftNet by December 2002.
As consideration for giving SoftNet access to our customers, SoftNet issued to
us 3.5 million shares of its common stock, representing a market value of
approximately $87.9 million as of December 31, 1999. Of the issued shares, up to
90% are subject to forfeiture in the event we do not make available a specified
number of two-way capable homes by certain prescribed dates.
As of December 31, 1999, we had deployed ISP Channel's high-speed Internet
access service in systems passing over 177,000 homes, of which 120,000 homes
were activated with two-way communications capability. On such date, we offered
high-speed Internet access to approximately 500 cable modem customers. We also
provided dial-up telephone Internet access to approximately 4,600 customers. The
provision of this dial-up service creates a customer base that can be upgraded
to the high-speed cable modem service in the future.
INTERACTIVE SERVICES
Our upgraded cable network will have the capacity to deliver various
interactive television services. Interactive television can be divided among
three general service categories: enhanced television; Internet over the
television; and video-on-demand. These new services enable the customer to
interact over the television set, generally by using a conventional remote
television control or a computer keyboard, to either buy a product or service or
request information on a product or service.
Enhanced television includes such services as ancillary programming
information, interactive advertising and impulse sales and purchases. Companies
delivering enhanced television services include TV Guide Interactive, Wink
Communications and Source Media. TV Guide Interactive provides the most basic
enhanced television service, a navigator that permits customers to customize
television program listings, set reminders and parental controls and order
pay-per-view events. Wink offers viewers the opportunity to interact with the
television during programs or commercials by way of flashing icons, leading them
to program-related information, such as news, sports and weather, or the ability
to purchase merchandise, or request product samples, coupons or catalogues.
Source Media allows viewers to receive local programming and information
services using a local guide and navigator with an Internet style experience.
Companies providing Internet access over the television include WebTV and
WorldGate Communications. Internet access and e-mail are delivered using a
set-top box with the customer using a wireless keyboard. WebTV customers buy the
set-top device at retail outlets and are able to view enhanced web images on the
television screen. WorldGate Communications allows a viewer watching a
commercial or program on the television to link directly to a related web page
and requires no purchase by the customer of the set-top box. WorldGate
Communications uses the set-top boxes now being deployed by the cable industry.
Companies providing video-on-demand, such as DIVA Systems Corporation and
Intertainer Inc., use servers at the headend facility of a cable system to
provide hundreds of movies or special events on demand with video cassette
recorder functionality, or the ability to fast forward, pause and rewind a
program at will. Using a remote control, customers order programming through
their set-tops that signals the server, enabling hardware and software residing
at the headend facility.
While we have not entered into any agreements with any interactive service
providers, we are in discussions with several such providers and plan to
introduce interactive services to our customers in the second half of 2000.
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TELECOMMUNICATIONS SERVICES
During the last several years, the cable industry has been developing the
capability to provide telephony services. Several of the nation's largest cable
operators now offer residential and/or commercial phone service. We believe
recent developments, including AT&T's purchase of Tele-Communications, Inc., its
pending acquisition of MediaOne, Inc. and its proposed joint ventures with six
other cable operators, will likely accelerate the pace of development of the
voice telephony business for the cable industry. We are exploring technologies
using Internet protocol telephony as well as traditional switching technologies
that are currently available to transmit telephony signals over our cable
network.
Our upgrade plans include the installation of over 10,000 route miles of
fiber optic cable resulting in the creation of large, high-capacity regional
networks. We expect to construct our networks with excess fiber optic capacity,
thereby affording us the flexibility to pursue new data and telecommunications
opportunities such as:
o providing wide-area networks, which extends a local area network
outside one building to other local area networks in other buildings
and possibly in other cities;
o providing point-to-point data services, which is a secure circuit that
directly connects two points;
o offering virtual private networks, which use a shared data network to
transport private data reliably and securely;
o leasing dark fiber capacity to enable carriers to penetrate markets and
bypass incumbent providers; and
o entering into strategic relationships, similar to our relationship with
SoftNet, to leverage our network footprints.
BUSINESS STRATEGY
Our objective is to become the leading cable operator focused on providing
entertainment, information and telecommunications services in non-metropolitan
markets of the United States. The key elements of our strategy are to:
IMPROVE THE OPERATING AND FINANCIAL PERFORMANCE OF OUR ACQUIRED CABLE SYSTEMS
We seek to rapidly integrate our acquired cable systems and improve their
operating and financial performance. Prior to completion of an acquisition, we
formulate plans for customer care and billing improvements, network upgrades,
headend consolidation, new product and service launches, competitive positioning
and human resource requirements. After completing an acquisition, we implement
managerial, operating, purchasing, personnel and engineering changes designed to
effect these plans.
DEVELOP EFFICIENT OPERATING CLUSTERS
Our systems are managed through six operating clusters by local management
teams that oversee system activities and operate autonomously within financial
and operating guidelines established by our corporate office. To enhance these
clusters, our acquisition strategy focuses, in part, on acquiring or trading for
systems in close proximity to our own systems. By further concentrating the
geographic clustering of our cable systems, we expect additional operating
efficiencies through the consolidation of many managerial, customer service,
marketing, administrative and technical functions.
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The clustering of systems also enables us to consolidate headend
facilities, resulting in lower fixed capital costs on a per home basis as we
introduce new and enhanced products and services because of the larger number of
customers served by a single headend facility. This headend consolidation also
improves our ability to sell advertising on our cable systems. As a result of
our clustering and upgrade program, we expect to reduce the number of our
headend facilities from 449 as of December 31, 1999 to 90 by December 2002, so
that 92% of our customers will be served by 40 headend facilities.
RAPIDLY UPGRADE OUR CABLE NETWORK
We are rapidly upgrading our cable network to provide new broadband
products and services, improve our competitive position and increase overall
customer satisfaction. By December 2002, we anticipate that 91% of our basic
subscribers will be served by cable systems with 550MHz to 750MHz bandwidth
capacity and two-way communications capability. As part of our upgrade program,
we plan to deploy over 10,000 route miles of fiber optic cable to create large
regional fiber optic networks with the potential to provide advanced
telecommunications services. Our upgrade plans will allow us to:
o offer digital cable television, two-way, high-speed Internet access and
interactive video;
o increase channel capacity to a minimum of 82 channels, and
significantly more with digital video technology;
o activate the two-way communications capability of our systems, which
will give our customers the ability to send and receive signals over
our cable network;
o eliminate 359 headend facilities, lowering our fixed capital costs on a
per home basis as we introduce new products and services; and
o utilize our regional fiber optic networks to offer advanced
telecommunications services.
INTRODUCE NEW AND ENHANCED PRODUCTS AND SERVICES
We have acquired cable systems that, prior to our ownership, generally
underserved their customers. We believe that significant opportunities exist to
increase our revenues by expanding the array of products and services we offer.
We have used and will continue to use the expanded channel capacity of our
upgraded systems to introduce several new basic programming services, additional
premium services and numerous pay-per-view channels.
Utilizing digital video technology, we are offering multiple packages of
premium services, several pay-per-view channels on a near video-on-demand basis,
digital music services and interactive program guides. As of December 31, 1999,
we offered digital cable services in systems passing 243,000 homes and serving
168,000 basic subscribers. As a result of our strategic relationship with
SoftNet's ISP Channel, we expect to accelerate the deployment of two-way,
high-speed Internet access throughout our systems. As of December 31, 1999, we
had deployed ISP Channel's Internet access service in systems passing over
177,000 homes, of which 120,000 homes were activated with two-way communications
capability. In addition, we are currently exploring opportunities in interactive
video programming and telecommunications services.
MAXIMIZE CUSTOMER SATISFACTION TO BUILD CUSTOMER LOYALTY
As a result of our strong regional and local management presence, we are
more responsive to customer needs and preferences and better positioned to
strengthen relations with the local government authorities and the communities
we serve. We seek a high level of customer satisfaction by providing superior
customer service and attractively priced product and service offerings. We
believe our investments in the cable network are increasing customer
satisfaction as a result of a wide array of new product and service
introductions, greater technical reliability and improved quality of service. We
have implemented stringent internal customer service standards, which we believe
meet or exceed those established by the National Cable Television Association.
We have regional calling centers servicing 90% of our customers that are staffed
with dedicated personnel who provide service 24 hours a day, seven days a week.
We believe that our focus on customer service has enhanced our reputation in the
communities we serve, which has increased customer loyalty and the potential
demand for our new and enhanced products and services.
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ACQUIRE UNDERPERFORMING CABLE SYSTEMS PRINCIPALLY IN NON-METROPOLITAN MARKETS
Our disciplined acquisition strategy targets underperforming cable systems
serving primarily non-metropolitan markets with favorable demographic profiles.
These systems are typically within the top 50 to 100 television markets and
small and medium-sized communities where customers generally require cable to
clearly receive a full complement of off-air television signals. Our markets
have attractive demographic characteristics, including household growth rates
that on average are higher than the national average. According to National
Decision Systems, the projected household growth in areas served by our systems
is 5.4% for the period ending 2004, exceeding the projected U.S. household
growth of 5.2% for the same period. We believe that there are advantages in
acquiring and operating cable systems in non-metropolitan markets, including:
o less direct competition given the lower housing densities and the
resulting higher costs per customer of constructing a cable network;
o higher penetration levels of our services and lower customer turnover
as a result of fewer competing entertainment alternatives; and
o generally lower overhead and operating costs than those incurred by
cable operators serving larger markets.
In addition, we seek to acquire or trade for cable systems in close
proximity to our existing operations because it is more cost effective to
provide cable television and advanced telecommunications services over an
expanded subscriber base within a concentrated geographic area. We believe that
we may be able to purchase fill-in acquisitions at favorable prices in
geographic regions where we are the dominant provider of cable television
services. As of March 15, 2000, we signed four separate asset purchase
agreements and one letter of intent to acquire cable systems serving
approximately 28,000 basic subscribers located in close proximity to our
systems, thereby complementing our operating clusters.
IMPLEMENT A FLEXIBLE FINANCING STRUCTURE
To support our business strategy and enhance our financial flexibility, we
have developed a financing strategy utilizing a blend of equity and debt capital
to complement our acquisition and operating activities. We have diversified our
sources of debt capital by raising long-term debt at the holding company while
utilizing our subsidiaries to access debt, principally in the commercial bank
market, through separate borrowing groups.
We believe our financing strategy is beneficial because it broadens our
access to various equity and debt markets, enhances our flexibility in managing
our capital structure, reduces the overall cost of debt capital and permits us
to maintain a substantial liquidity position in the form of unused and available
subsidiary credit facilities. We used the net proceeds of our initial public
offering of approximately $354.4 million to repay outstanding indebtedness under
our subsidiary credit facilities. As of December 31, 1999, after giving pro
forma effect to our initial public offering, we reduced our financial leverage,
increased our unused credit commitments to approximately $640 million and
lowered our overall cost of debt capital to 7.7%.
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DEVELOPMENT OF OUR SYSTEMS
Since commencement of our operations in March 1996, we have completed 11
acquisitions of cable systems. The table below summarizes information related to
our completed acquisitions of cable systems in chronological order. The systems
were purchased from the named party identified in the Predecessor Owner column
or from one or more of its related parties or its controlling or managing
operator. The dollar amount set forth in the Purchase Price column represents
the final purchase price before closing costs and adjustments.
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BASIC
SUBSCRIBERS
AS OF
PURCHASE PRICE DECEMBER 31,
LOCATION OF SYSTEMS PREDECESSOR OWNER ACQUISITION DATE (IN MILLIONS) 1999
- ------------------- ----------------- ---------------- ------------- ----
<S> <C> <C> <C> <C>
Ridgecrest, CA Benchmark Communications March 1996 $ 18.8 9,300
Kern Valley, CA Booth American Company June 1996 11.0 5,950
Nogales, AZ Saguaro Cable TV Investors, L.P. December 1996 11.4 8,000
Valley Center, CA Valley Center Cable Systems, L.P. December 1996 2.5 1,950
Dagsboro, DE American Cable TV Investors 5, Ltd. June 1997 42.6 31,300
Sun City, CA Cox Communications, Inc. September 1997 11.5 10,100
Clearlake, CA Jones Intercable, Inc. January 1998 21.4 18,250
Various States Cablevision Systems Corporation January 1998 308.2 271,850
Caruthersville, MO Cablevision Systems Corporation October 1998 5.0 3,900
Various States Zylstra Communications Corporation October 1999 19.5 14,000
Various States Triax Midwest Associates, L.P. November 1999 740.1 344,400
--------- -------
$ 1,192.0 719,000
========= =======
</TABLE>
DESCRIPTION OF OUR OPERATING REGIONS
OVERVIEW
The table below and the discussion that follows provide an overview of
selected operating and technical statistics for our regions as of December 31,
1999, unless otherwise indicated. Substantially all of the cable systems in the
North Central and Midwest regions resulted from the Triax acquisition completed
in November 1999.
<TABLE>
<CAPTION>
NORTH
CENTRAL MIDWEST SOUTHERN MID-ATLANTIC CENTRAL WESTERN TOTAL
------- ------- -------- ------------ ------- ------- -----
OPERATING DATA:
<S> <C> <C> <C> <C> <C> <C> <C>
Homes passed............... 253,100 270,200 192,250 126,200 126,200 103,550 1,071,500
Basic subscribers.......... 176,700 173,700 138,300 87,400 81,350 61,550 719,000
Basic penetration.......... 69.8% 64.3% 71.9% 69.3% 64.5% 59.4% 67.1%
Premium service units...... 89,025 83,650 193,000 82,975 108,875 29,475 587,000
Premium penetration........ 50.4% 48.2% 139.6% 94.9% 133.8% 47.9% 81.6%
Average monthly revenues
per basic subscriber(1) $33.89 $34.46 $37.51 $35.71 $34.80 $39.37 $35.52
CABLE NETWORK DATA:
Miles of plant............. 4,500 5,243 4,900 3,005 3,029 1,767 22,444
Density(2)................. 57 52 39 42 42 59 48
Headend facilities......... 148 159 53 12 66 11 449
Headend facilities after
upgrades(3)............. 23 22 10 7 18 10 90
Percentage of basic subscribers
at 550MHz to 750MHz..... 36.6% 33.3% 73.8% 93.8% 81.8% 57.1% 56.8%
- ------------------
(1) Represents average monthly revenues for the three months ended December 31,
1999, divided by average basic subscribers for such period.
(2) Represents homes passed divided by miles of plant.
(3) Represents number of headend facilities by December 2002 based on our
current upgrade program.
</TABLE>
8
<PAGE>
NORTH CENTRAL REGION
The North Central region consists of systems in Iowa, Minnesota, South
Dakota and Wisconsin. The North Central region's larger systems serve the
communities of Esterville and Spencer Iowa; Lake Minnetonka, Savage and Prior
Lake, Minnesota; Yankton, South Dakota; and Praire du Chien, Mauston,
Platteville and Viroqua, Wisconsin.
By December 2002, we expect that 88% of the North Central region's basic
subscribers will be served by systems with 550MHz to 750MHz bandwidth capacity
and two-way communications capability. At that time, we expect the number of the
region's headend facilities will be reduced from 148 to 23 and that 62% of the
region's basic subscribers will be served by five headend facilities
MIDWEST REGION
The Midwest region consists of systems principally in Illinois and Indiana.
The Midwest region's larger systems serve the communities of Jacksonville,
Ottawa, Pontiac and Streater, Illinois; and Angola, Auburn, Bluffton, Bremen,
Kendallville and North Webster, Indiana.
By December 2002, we expect that 88% of the Midwest region's basic
subscribers will be served by systems with 550MHz to 750MHz bandwidth capacity
and two-way communications capability. At that time, we expect the number of the
region's headend facilities will be reduced from 159 to 22 and that 91% of the
region's basic subscribers will be served by five headend facilities.
SOUTHERN REGION
Over 83% of our basic subscribers in the Southern region are located in the
suburbs and outlying areas of Pensacola, Fort Walton Beach and Panama City,
Florida; Mobile and Huntsville, Alabama; and Biloxi, Mississippi. The internal
subscriber growth for this region was 3.1% for the period ending December 31,
1999. We measure internal subscriber growth as the percentage change in basic
subscribers over a 12-month period, excluding the effects of acquisitions.
By December 2002, we anticipate that 95% of the Southern region's basic
subscribers will be served by systems with 550MHz to 750MHz bandwidth capacity
and two-way communications capability and that the number of headend facilities
will be reduced from 53 to ten. At that time, we expect that 83% of the region's
basic subscribers will be served by five headend facilities.
MID-ATLANTIC REGION
The Mid-Atlantic region's systems serve communities in lower Delaware,
southeastern Maryland and the northeastern and western areas of North Carolina.
Our two largest systems in this region are Hendersonville, North Carolina, near
Asheville, North Carolina; and lower Delaware, outside of Ocean City, Maryland.
The internal subscriber growth for this region was 2.2% for the period ending
December 31, 1999.
By December 2002, we expect that 95% of the Mid-Atlantic region's basic
subscribers will be served by systems with 550MHz to 750MHz bandwidth capacity
and two-way communications capability and that the number of headend facilities
will be reduced from 12 to seven. At that time, we expect that 93% of the
region's basic subscribers will be served by three headend facilities.
CENTRAL REGION
The Central region's systems serve the suburbs and outlying areas of Kansas
City and Springfield, Missouri; Topeka, Kansas, and communities in the western
portion of Kentucky. The internal basic subscriber growth rate of this region
was 0.3% for the period ending December 31, 1999.
By December 2002, we expect that 90% of the Central region's basic
subscribers will be served by systems with 550MHz to 750MHz bandwidth capacity
and two-way communications capability and that the number of headend facilities
will be reduced from 66 to 18. At that time, we expect that 80% of the region's
basic subscribers will be served by five headend facilities.
9
<PAGE>
WESTERN REGION
The Western region's systems serve communities in the following areas:
Clearlake, California; the Indian Wells Valley in central California; portions
of Riverside County and San Diego County, California; and Apache Junction and
Nogales, Arizona and outlying areas. The region's internal basic subscriber
growth was 0.6% for the period ending December 31, 1999.
By December 2002, we expect that 90% of the Western region's basic
subscribers will be served by systems with at least 550MHz bandwidth capacity
and two-way communications capability. At that time, we expect that the region's
basic subscribers will be served by 10 headend facilities.
TECHNOLOGY OVERVIEW
As part of our commitment to maximize customer satisfaction, to improve our
competitive position and to introduce new and enhanced products and services to
our customers, we plan to make significant investments in our cable network over
the three-year period ending December 2002. During such period, we intend to
invest approximately $400 million, with approximately $240 million used to
upgrade our cable network. The remaining $160 million will be spent on plant
expansion, digital headend facilities and set-top boxes, cable modems and
maintenance. The objectives of our upgrade program are:
o to increase the bandwidth capacity to 750MHz or higher;
o to activate two-way communications capability;
o to consolidate our headend facilities, through the extensive deployment
of fiber optic networks; and
o to allow us to provide digital cable television, two-way, high-speed
Internet access, interactive video and other telecommunications
services.
The following table describes the technological state of our cable network
as of December 31, 1999 and through December 31, 2002, based on our current
upgrade plans:
<TABLE>
<CAPTION>
PERCENTAGE OF BASIC SUBSCRIBERS
-------------------------------
LESS THAN 400MHZ- 550MHZ- | TWO-WAY
400MHZ 450MHZ 750MHZ | CAPABLE
-------------------------------|---------
<S> <C> <C> <C> | <C>
December 31, 1999.......................................... 21% 22% 57% | 11%
December 31, 2000.......................................... 7% 21% 72% | 42%
December 31, 2001.......................................... 0% 19% 81% | 67%
December 31, 2002.......................................... 0% 9% 91% | 91%
</TABLE>
By December 2002, we expect that 91% of our basic subscribers will be
served by systems with two-way communications capability. This will permit our
customers to send and receive signals over the cable network so that interactive
services, such as video-on-demand, will be accessible and high-speed Internet
access will not require a separate telephone line. Two-way communications
capability will also position us to offer cable telephony, using either Internet
protocol telephony as it becomes commercially feasible, or the traditional
switching technologies that are currently available.
A central feature of our upgrade program is the deployment of high
capacity, hybrid fiber-optic coaxial architecture. The hybrid fiber optic
coaxial architecture combines the use of fiber optic cable, which can carry
hundreds of video, data and voice channels over extended distances, with coaxial
cable, which requires a more extensive signal amplification in order to obtain
the desired levels for delivering channels. In most of our systems, we connect
fiber optic cable to individual nodes serving an average of 350 homes or
commercial buildings. A node is a single connection to a system's main,
high-capacity fiber optic cable that is shared by a number of customers. Coaxial
cable is then connected from each node to the individual homes or buildings. We
believe hybrid fiber optic coaxial architecture provides higher capacity,
superior signal quality, greater network reliability and reduced operating costs
than traditional cable network design. Together with our plans for two-way
communications capability, we believe
10
<PAGE>
hybrid fiber optic coaxial architecture will enhance our cable network's
capability to provide advanced telecommunications services.
As of December 31, 1999, our systems were operated from 449 headend
facilities. We believe that fiber optics and advanced transmission technologies
make it cost effective to consolidate our headend facilities, allowing us to
realize operating efficiencies and resulting in lower fixed capital costs on a
per home basis as we introduce new products and services. By December 2002, we
plan to eliminate 359 headend facilities so that all of our customers will be
served by 90 headend facilities and 92% of our customers will be served by 40
headend facilities.
As part of this headend consolidation program, we plan to deploy over
10,000 route miles of fiber optic cable to create large regional fiber optic
networks with the potential to provide advanced telecommunications services. We
expect to construct our regional networks with excess fiber optic capacity in
order to accommodate new and expanded products and services in the future.
SALES AND MARKETING
We seek to be the premier provider of entertainment, information and
telecommunications services in the markets we serve. Our marketing programs and
campaigns offer a variety of cable services creatively packaged and tailored to
appeal to each of our local markets and to segments within each market. We
routinely survey our customers to ensure that we are meeting their demands and
our customer surveys keep us abreast of our competition so that we can counter
effectively competitors' service offerings and promotional campaigns. With our
strong local presence, we interact with our customers on a more individualized
basis allowing us to better service our customers and enhance customer loyalty
and trust.
We use 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.
We build awareness of our brand through a variety of promotional campaigns,
particularly in our newly acquired systems. As a result of our branding efforts,
our emphasis on customer service and our investments in the cable network, we
believe we have developed a reputation for quality, reliability and timely
introduction of new products and services.
We invest a significant amount of time, effort and financial resources in
the training and evaluation of our marketing professionals and customer sales
representatives. Our customer sales representatives customize their sales
presentation to fit each of our customers' specific needs by conducting focused
consumer research and are given the incentive to use their frequent contact with
our customers as opportunities to sell our new products and services. As a
result, we believe we can accelerate the introduction of new products and
services to our customers and achieve high success rates in attracting and
retaining customers.
PROGRAMMING SUPPLY
We have 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. Our 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 us. Our
successful marketing of multiple premium service packages emphasizing customer
value enables us to take advantage of such cost incentives. In addition, we are
a member of the National Cable Television Cooperative, Inc., a programming
consortium consisting of small to medium-sized multiple system operators
serving, in the aggregate, over ten million cable subscribers. The consortium
helps create efficiencies in the areas of obtaining and administering
programming contracts, as well as securing more favorable programming rates and
contract terms for small to medium-sized cable operators. We intend to negotiate
programming contract renewals both directly and through the consortium to obtain
the best available contract terms.
11
<PAGE>
Our programming costs are expected to increase in the future due to
additional programming being provided to our customers, increased costs to
purchase programming, inflationary increases and other factors affecting the
cable television industry. Although we will legally be able to pass through
expected increases in our programming costs to customers, there can be no
assurance that the marketplace will allow us to do so. We also have various
retransmission consent arrangements with commercial broadcast stations, which
generally expire in December 2002. None of these consents require payment of
fees for carriage. However, we have entered into agreements with certain
stations to carry satellite-delivered cable programming, which is affiliated
with the network carried by such stations.
Currently, there are over 150 cable networks seeking to be carried on our
systems. We leverage our analog and digital channel capacity resulting from our
capital improvement program to negotiate more favorable long-term contracts with
our programming suppliers and utilize other financial arrangements to offset
programming cost increases.
CUSTOMER RATES
Monthly customer rates for services vary from market to market, primarily
according to the amount of programming provided. As of December 31, 1999, our
monthly basic service rates for residential customers ranged from $4.93 to
$35.95; the combined monthly basic and expanded basic service rates for
residential customers ranged from $17.69 to $36.95; and per-channel premium
service rates, not including special promotions, ranged from $0.30 to $12.50 per
service for our systems. For the three months ended December 31, 1999, after
giving pro forma effect to the acquisitions of the Triax and Zylstra Systems for
this period, the weighted average monthly rate for our combined basic and
expanded basic services was approximately $27.17.
Prior to our acquisition of the Triax systems, we were an eligible small
cable company under FCC rules which enabled us to utilize a simplified rate
setting methodology for most of the systems in establishing maximum rates for
basic and expanded basic services. This methodology almost always results in
rates that exceed those produced by the benchmark and cost-of-service rules
applicable to larger cable operators. The benchmark and cost-of-service rules
refer to the rate setting methodologies prescribed by the FCC. Prior to our
acquisition of their systems, Triax also used the simplified rate setting
methodology, although in a small percentage of their systems. Although we are no
longer an eligible small cable company, in most cases, our systems which
utilized this methodology, including the recently acquired Triax systems, are
allowed to maintain the rates set thereby. We believe that our rate practices
are generally consistent with the current practices in the industry.
A one-time installation fee, which we may wholly or partially waive during
a promotional period, is usually charged to new customers. We charge monthly
fees for converters and remote control tuning devices and also charge
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
units, which include commercial customers as well as condominiums and apartment
complexes, may be offered a bulk rate in exchange for single-point billing and
basic service to all units.
In addition to customer fees, we derive modest amounts of revenues from the
sale of local spot advertising time on locally originated and
satellite-delivered programming and from affiliations with home shopping
services, which offer merchandise for sale to customers and compensate system
operators with a percentage of their sales receipts. We expect to increase the
sale of advertising time and the revenues derived from such sales as a result of
the consolidation of our headend facilities. This consolidation will
significantly increase the number of customers we serve from many of our headend
facilities which we expect will result in increased advertising revenues.
CUSTOMER SERVICE AND COMMUNITY RELATIONS
We are dedicated to providing superior customer service. Our emphasis on
system reliability and customer satisfaction is a cornerstone of our business
strategy. We expect that on-going investments in our cable network will
significantly strengthen customer service as it will enhance the reliability of
our cable network and allow us to introduce new programming and other services
to our customers. We have implemented stringent internal customer
12
<PAGE>
service standards, which we believe meet or exceed those established by the
National Cable Television Association. We maintain five regional calling
centers, which service 90% of our systems' customers. They are staffed with
dedicated personnel who provide service to our customers 24 hours a day, seven
days a week, on a toll-free basis. We believe our regional calling centers allow
us to coordinate more effectively installation appointments and reduce response
time to customer inquiries. We continue to invest in both personnel and
equipment of our regional calling centers to ensure that these operating units
are professionally managed and employ state-of-the-art technology.
In addition, we are dedicated to fostering strong community relations in
the communities served by our systems. We support local charities and community
causes in various ways, including staged events and promotional campaigns to
raise funds and supplies for persons in need and in-kind donations that include
production services and free airtime on cable networks. We participate in the
"Cable in the Classroom" program, which is a national effort by cable companies
to provide schools with free cable television service and, where available,
Internet access. We also install and provide free cable television service to
government buildings and not-for-profit hospitals in our franchise areas. We
believe that our relations with the communities in which our systems operate are
good.
FRANCHISES
Cable systems are generally operated under non-exclusive franchises granted
by local governmental authorities. These franchises typically contain many
conditions, such as: time limitations on commencement and completion of
construction; conditions of service, including number of channels, types of
programming and the provision of free service to schools and other public
institutions; and the granting of insurance and indemnity bonds by the cable
operator. Many of the provisions of local franchises are subject to federal
regulation under the Communications Act of 1934, as amended.
As of December 31, 1999, our systems were subject to 891 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 Communications Policy Act of 1984
prohibits franchising authorities from imposing franchise fees in excess of 5%
of gross revenues and also permits the cable television system operator to seek
renegotiation and modification of franchise requirements if warranted by changed
circumstances.
Substantially all of our systems' basic subscribers are in service areas
that require a franchise. The table below groups the franchises of our systems
by date of expiration and presents the approximate number and percentage of
basic subscribers for each group as of December 31, 1999.
<TABLE>
<CAPTION>
PERCENTAGE OF NUMBER OF PERCENTAGE OF
NUMBER OF TOTAL BASIC TOTAL BASIC
YEAR OF FRANCHISE EXPIRATION FRANCHISES FRANCHISES SUBSCRIBERS SUBSCRIBERS
----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
2000 through 2003.......................... 260 29.2% 232,555 32.3%
2004 and thereafter........................ 631 70.8% 486,445 67.7%
--- ---- ------- ----
Total.......................... 891 100.0% 719,000 100.0%
=== ===== ======= =====
</TABLE>
The 1984 Cable Act provides, among other things, for an orderly franchise
renewal process in which franchise renewal will not be unreasonably withheld or,
if renewal is denied and the franchising authority acquires ownership of the
system or effects a transfer of the system to another person, the operator
generally is entitled to the fair market value for the system covered by such
franchise. In addition, the 1984 Cable Act established comprehensive renewal
procedures, which require that an incumbent franchisee's renewal application be
assessed on its own merits and not as part of a comparative process with
competing applications.
We believe that we generally have good relationships with our franchising
communities. We have never had a franchise revoked or failed to have a franchise
renewed. In addition, substantially all of our franchises eligible for renewal
have been renewed or extended prior to their stated expirations, and no
franchise community has refused to consent to a franchise transfer to us.
13
<PAGE>
COMPETITION
PROVIDERS OF BROADCAST TELEVISION AND OTHER ENTERTAINMENT
Cable systems compete with other communications and entertainment media,
including over-the-air television broadcast signals that a viewer is able to
receive directly. The extent to which a cable system competes with over-the-air
broadcasting depends upon the quality and quantity of the broadcast signals
available by direct antenna reception compared to the quality and quantity of
such signals and alternative services offered by a cable system. Cable systems
also face competition from alternative methods of distributing and receiving
television signals and from other sources of entertainment such as live sporting
events, movie theaters and home video products, including videotape recorders
and videodisc players. In recent years, the FCC has adopted policies authorizing
new technologies and a more favorable operating environment for certain existing
technologies that provide, or may provide, substantial additional competition
for cable television systems. The extent to which a cable television service is
competitive depends in significant part upon the cable system's ability to
provide a greater variety of programming, superior technical performance and
superior customer service than are available over the air or through competitive
alternative delivery sources.
DIRECT BROADCAST SATELLITE PROVIDERS
Individuals can purchase home satellite dishes, which allow them to receive
satellite-delivered broadcast and non-broadcast program services, commonly known
as DBS, that formerly were available only to cable television subscribers.
According to recent government and industry reports, conventional, medium and
high-power satellites currently provide video programming services to 13.1
million individual households, condominiums, apartments and office complexes in
the United States.
DBS service can be received virtually anywhere in the continental United
States through the installation of a small roof top or side-mounted antenna, and
it is accessible in areas where a cable plant has not been constructed or where
it is not cost effective to construct cable television facilities. DBS systems
use video compression technology to increase channel capacity and digital
technology to improve the quality of the signals transmitted to their customers.
DBS service is being heavily marketed on a nationwide basis by several service
operators. We believe our digital cable service is competitive with the
programming, channel capacity and the digital quality of signals delivered to
customers by DBS systems. We have deployed and will continue to deploy digital
cable service in the markets we serve.
Two major companies, DirecTV and Echostar, are currently providing
nationwide high-power DBS services, which typically offer to their customers
more than 300 channels of programming, including programming similar to that
provided by cable systems. Until recently, DBS operators could not legally
deliver local broadcast signals. Legislation permitting DBS operators to
retransmit local broadcast signals was enacted on November 29, 1999. This
eliminates a significant competitive advantage which cable system operators have
had over DBS operators. DirecTV and Echostar have begun delivering local
broadcast signals in the largest markets and there are plans to expand such
coverage to many more markets over the next year. We are unable to predict the
effects this legislation and these competitive developments might have on our
business and operations.
MULTICHANNEL MULTIPOINT DISTRIBUTION SYSTEMS
Multichannel multipoint distribution systems deliver programming services
over microwave channels licensed by the FCC and received by subscribers with
special antennas. These wireless cable systems are less capital intensive, are
not required to obtain local franchises or pay franchise fees, and are subject
to fewer regulatory requirements than cable television systems. To date, the
ability of wireless cable services to compete with cable systems has been
limited by a channel capacity of up to 35-channels and the need for unobstructed
line-of-sight over-the-air transmission. Although relatively few wireless cable
systems in the United States are currently in operation or under construction,
virtually all markets have been licensed or tentatively licensed. The use of
digital compression technology, and the FCC's recent amendment to its rules to
permit reverse path or two-way transmission over wireless facilities, may enable
multichannel multipoint distribution systems to deliver more channels and
additional services, including Internet related services. Digital compression
technology refers to the conversion of the standard video signal into a digital
signal and the compression of that signal to facilitate multiple channel
transmissions through a single channel's signal.
14
<PAGE>
PRIVATE CABLE TELEVISION SYSTEMS
Private cable television systems compete with conventional cable television
systems for the right to service condominiums, apartment complexes and other
multiple unit residential developments. The operators of these private systems,
known as satellite master antenna television systems, often enter into exclusive
agreements with apartment building owners or homeowners' associations that
preclude franchised cable television operators from serving residents of such
private complexes. However, the 1984 Cable Act gives franchised cable operators
the right to use existing compatible easements within their franchise areas on
nondiscriminatory terms and conditions. Accordingly, where there are preexisting
compatible easements, cable operators may not be unfairly denied access or
discriminated against with respect to access to the premises served by those
easements. Conflicting judicial decisions have been issued interpreting the
scope of the access right granted by the 1984 Cable Act, particularly with
respect to easements located entirely on private property. Under the 1996
Telecom Act, satellite master antenna television systems can interconnect
non-commonly owned buildings without having to comply with local, state and
federal regulatory requirements that are imposed upon cable systems providing
similar services, as long as they do not use public rights of way. The FCC has
held that the latter provision is not violated so long as interconnection across
public rights of way is provided by a third party.
TRADITIONAL OVERBUILDS
Cable television systems are operated under non-exclusive franchises
granted by local authorities. More than one cable system may legally be built in
the same area. Franchising authorities have from time to time granted additional
franchises to other companies, including other cable operators or telephone
companies, and these additional franchises might contain terms and conditions
more favorable than those afforded to the incumbent cable operator. In addition,
entities willing to establish an open video system, under which they offer
unaffiliated programmers non-discriminatory access to a portion of the system's
cable system may be able to avoid significant local franchising requirements.
Well financed businesses from outside the cable industry, such as public
utilities which already possess or are developing fiber optic and other
transmission facilities in the areas they serve may over time become
competitors. We believe that various entities are currently offering cable
service to an estimated 20,000 homes passed in the service areas of our
franchises.
INTERNET ACCESS
We have begun to accelerate the offering by our cable systems of high-speed
Internet access to our basic subscribers. These cable systems will compete with
a number of other companies, many of which have substantial resources, such as
existing Internet service providers, commonly known as ISP's, and local and long
distance telephone companies.
Recently, a number of ISP's have asked local authorities and the FCC to
give them rights of access to cable systems' broadband infrastructure so that
they can deliver their services directly to cable systems' customers. Several
local franchising authorities have been examining the issue and a few have
required cable operators to provide such access. A U.S. District Court recently
ruled that localities are authorized to require such access. This decision is
being appealed. Some cable companies have initiated litigation challenging
municipal open access requirements. The FCC has thus far declined to take action
on ISP's access to broadband cable facilities. Congress and several state and
local jurisdictions are also reviewing this issue.
The deployment of digital subscriber line technology, known as DSL, allows
Internet access to subscribers at data transmission speeds equal to or greater
than that of modems over conventional telephone lines. Numerous companies,
including telephone companies, have introduced DSL service and certain telephone
companies are seeking to provide high-speed broadband services, including
interactive online services, without regard to present service boundaries and
other regulatory restrictions. We are unable to predict the likelihood of
success of competing online services offered by our competitors or what impact
these competitive ventures may have on our business operations.
15
<PAGE>
OTHER COMPETITION
The FCC has authorized a new interactive television service which permits
non-video transmission of information between an individual's home and
entertainment and information service providers. This service, which can be used
by direct broadcast satellite systems, television stations and other video
programming distributors, including cable television systems, is an alternative
technology for the delivery of interactive video services. It does not appear at
the present time that this service will have a material impact on the operations
of cable television systems.
The FCC has allocated spectrum in the 28GHz range for a new multichannel
wireless service that can be used to provide video and telecommunications
services. The FCC recently completed the process of awarding licenses to use
this spectrum via a market-by-market auction. We do not know whether such a
service would have a material impact on the operations of cable television
systems.
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 to incumbent television broadcast licensees. Digital television can
deliver high definition television pictures and multiple digital-quality program
streams, as well as CD-quality audio programming and advanced digital services,
such as data transfer or subscription video. The FCC also has authorized
television broadcast stations to transmit textual and graphic information that
may be useful to both consumers and businesses. The FCC also permits commercial
and noncommercial FM stations to use their subcarrier frequencies to provide
non-broadcast services, including data transmission.
Advances in communications technology, as well as changes in the
marketplace and the regulatory and legislative environment, are constantly
occurring. Thus, it is not possible to predict the competitive effect that
ongoing or future developments might have on the cable industry.
EMPLOYEES
As of December 31, 1999, we employed 1,242 full-time employees and 182
part-time employees. None of our employees are represented by a labor union. We
consider our relations with our employees to be good.
16
<PAGE>
LEGISLATION AND REGULATION
A federal law known as the Communications Act of 1934, (the "Communications
Act"), as amended, establishes a national policy to guide the regulation,
development and operation of cable communications systems. In 1996, a
comprehensive amendment to the Communications Act became effective and is
expected to promote competition and decrease governmental regulation of various
communications industries, including the cable television industry. However,
until the desired competition develops, various federal, state and local
governmental units will have broad regulatory authority and responsibilities
over telecommunications and cable television matters. The courts, especially the
federal courts, will continue to play an important oversight role as the
statutory and regulatory provisions are interpreted and enforced by the various
federal, state and local governmental units.
The Communications Act allocates principal responsibility for enforcing the
federal policies between the FCC, state and local governmental authorities. The
FCC and state regulatory agencies regularly conduct administrative proceedings
to adopt or amend regulations implementing the statutory mandate of the
Communications Act. At various times, interested parties to these administrative
proceedings challenge the new or amended regulations and policies in the courts
with varying levels of success. We expect that further court actions and
regulatory proceedings will occur and will refine the rights and obligations of
various parties, including the government, under the Communications Act. The
results of these judicial and administrative proceedings may materially affect
the cable industry and our business and operations. In the following paragraphs,
we summarize the federal laws and regulations materially affecting the growth
and operation of the cable industry. We also provide a brief description of
certain state and local laws.
FEDERAL REGULATION
The Communications Act and the regulations and policies of the FCC affect
significant aspects of our cable system operations, including:
o subscriber rates;
o the content of the programming we offer to subscribers, as well as the
way we sell our program packages to subscribers;
o the use of our cable systems by the local franchising authorities, the
public and other unrelated companies;
o our franchise agreements with local governmental authorities;
o cable system ownership limitations and prohibitions; and
o our use of utility poles and conduit.
SUBSCRIBER RATES
The Communications Act and the FCC's regulations and policies limit the
ability of cable systems to raise rates for basic services and equipment. No
other rates can be regulated. Federal law exempts cable systems from rate
regulation of cable services and customer equipment only in communities that are
subject to effective competition, as defined by federal law. Federal law also
prohibits the regulation of cable operators' rates where comparable video
programming services, other than direct broadcast satellites, are offered by
local telephone companies, or their related parties, or by third parties using
the local telephone company's facilities.
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Where there is no effective competition to the cable operator's services,
federal law gives local franchising authorities the responsibility to regulate
the rates charged by the operator for:
o the lowest level of programming service offered by cable operator,
typically called basic service, which includes the local broadcast
channels and any public access or governmental channels that are
required by the operator's franchise; and
o the installation, sale and lease of equipment used by subscribers to
receive basic service, such as converter boxes and remote control
units.
Local franchising authorities who wish to regulate basic service rates and
related equipment rates must first obtain FCC certification to regulate by
following a simplified FCC certification process and agreeing to follow
established FCC rules and policies when regulating the operator's rates.
Several years ago, the FCC adopted detailed rate regulations, guidelines
and rate forms that a cable system operator and the local franchising authority
must use in connection with the regulation of basic service and equipment rates.
The FCC adopted a benchmark methodology as the principal method of regulating
rates. However, if this methodology produces unacceptable rates, the operator
may also justify rates using a detailed cost-of-service methodology. The FCC's
rules also require franchising authorities to regulate equipment rates on the
basis of actual cost plus a reasonable profit, as defined by the FCC.
If the local franchising authority concludes that an operator's rates are
too high under the FCC's rate rules, the local franchising authority may require
the operator to reduce rates and to refund overcharges to subscribers, with
interest. The operator may appeal adverse local rate decisions to the FCC.
The FCC's regulations allow an operator to modify regulated rates on a
quarterly or annual basis to account for changes in:
o the number of regulated channels;
o inflation; and
o certain external costs, such as franchise and other governmental fees,
copyright and retransmission consent fees, taxes, programming fees and
franchise-related obligations.
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. A small cable system is defined as a cable television
system which serves 15,000 or fewer basic customers. A small cable company is
defined as an entity serving a total of 400,000 or fewer basic customers that is
not affiliated with a larger cable television company, i.e., a larger cable
television company does not own more that a 20 percent equity share or exercise
legal control. This small system rate-setting methodology almost always results
in rates which exceed those produced by the benchmark and cost-of-service rules
applicable to larger cable television operators. 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
customers, 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 systems that have more than 15,000 customers. When a small cable
company grows larger than 400,000 basic customers, 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. We were a small cable company, but with the completion of the Triax
acquisition, we no longer enjoy this status. However, as noted above, the
systems with less than 15,000 customers owned by us prior to the completion of
the Triax acquisition remain eligible for small cable system rate regulation.
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The Communications Act and the FCC's regulations also:
o require operators to charge uniform rates throughout each franchise
area that is not subject to effective competition;
o prohibit regulation of non-predatory bulk discount rates offered by
operators to subscribers in commercial and residential developments;
and
o permit regulated equipment rates to be computed by aggregating costs of
broad categories of equipment at the franchise, system, regional or
company level.
CONTENT REQUIREMENTS
The Communications Act and the FCC's regulations contain broadcast signal
carriage requirements that allow local commercial television broadcast stations:
o to elect once every three years to require a cable system to carry the
station, subject to certain exceptions; or
o to negotiate with us on the terms by which we carry the station on our
cable system, commonly called retransmission consent.
The Communications Act requires a cable operator to devote up to one-third
of its activated channel capacity for the mandatory carriage of local commercial
television stations. The Communications Act also gives local non-commercial
television stations mandatory carriage rights; however, such stations are not
given the option to negotiate retransmission consent for the carriage of their
signals by cable systems. Additionally, cable systems must obtain retransmission
consent for:
o all distant commercial television stations, except for commercial
satellite-delivered independent superstations such as WGN;
o commercial radio stations; and
o certain low-power television stations.
The FCC has also initiated an administrative proceeding to consider the
requirements, if any, for mandatory carriage of digital television signals
offered by local television broadcasters. We are unable to predict the ultimate
outcome of this proceeding or the impact of new carriage requirements on the
operations of our cable systems.
The Communications Act requires our cable systems to permit subscribers to
purchase video programming we offer on a per channel or a per program basis
without the necessity of subscribing to any tier of service, other than the
basic cable service tier. However, we are not required to comply with this
requirement until December 2002 for any of our cable systems that do not have
addressable converter boxes or that have other substantial technological
limitations. Many of our cable systems do not have the technological capability
to offer programming in the manner required by the statute and thus currently
are exempt from complying with the requirement. We anticipate having significant
capital expenditures over the next two to three years in order for us to meet
this requirement. We are unable to predict whether the full implementation of
this statutory provision in December 2002 will have a material impact on the
operation of our cable systems.
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To increase competition between cable operators and other video program
distributors, the Communications Act and the FCC's regulations:
o preclude any satellite video programmer affiliated with a cable
company, or with a common carrier providing video programming directly
to its subscribers, from favoring an affiliated company over
competitors;
o require such programmers to sell their programming to other
unaffiliated video program distributors; and
o limit the ability of such programmers to offer exclusive programming
arrangements to their related parties.
The Communications Act and the FCC's regulations contain restrictions on
the transmission by cable operators of obscene or indecent programming. It
requires cable operators to fully block both the video and audio portion of
sexually explicit or indecent programming on channels that are primarily
dedicated to sexually oriented programming or alternatively to carry such
programming only at safe harbor time periods, which are currently defined by the
FCC as the hours between 10 p.m. to 6 a.m. A three-judge federal district court
recently determined that this provision was unconstitutional. The federal
government appealed the lower court's decision to the United States Supreme
Court which recently agreed to review this case.
The FCC actively regulates other aspects of our programming, involving such
areas as:
o our use of syndicated and network programs and local sports broadcast
programming;
o advertising in children's programming;
o political advertising;
o origination cablecasting;
o sponsorship identification; and
o closed captioning of video programming.
USE OF OUR CABLE SYSTEMS BY THE GOVERNMENT AND UNRELATED THIRD PARTIES
The Communications Act allows local franchising authorities and unrelated
third parties to have access to our cable systems' channel capacity for their
own use. For example, it:
o permits franchising authorities to require cable operators to set aside
channels for public, educational and governmental access programming;
and
o requires a cable system with 36 or more activated channels to designate
a significant portion of its channel capacity for commercial leased
access by third parties to provide programming that may compete with
services offered by the cable operator.
The FCC regulates various aspects of third party commercial use of channel
capacity on our cable systems, including:
o the maximum reasonable rate a cable operator may charge for third party
commercial use of the designated channel capacity;
o the terms and conditions for commercial use of such channels; and
o the procedures for the expedited resolution of disputes concerning
rates or commercial use of the designated channel capacity.
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The FCC has from time to time received petitions from Internet service
providers to require access to our cable systems. We cannot predict if these or
other similar proposals will be adopted, or, if adopted, whether they will have
an adverse impact on our business and operations.
FRANCHISE MATTERS
We have non-exclusive franchises in virtually every community in which we
operate that authorize us to construct, operate and maintain our cable systems.
Although franchising matters are normally regulated at the local level through a
franchise agreement and/or a local ordinance, the Communications Act provides
oversight and guidelines to govern our relationship with local franchising
authorities. For example, the Communications Act:
o affirms the right of franchising authorities, which may be state or
local, depending on the practice in individual states, to award one or
more franchises within their jurisdictions;
o generally prohibits us from operating in communities without a
franchise;
o encourages competition with existing cable systems by:
-- allowing municipalities to operate their own cable systems without
franchises, and
-- preventing franchising authorities from granting exclusive
franchises or from unreasonably refusing to award additional
franchises covering an existing cable system's service area;
o permits local authorities, when granting or renewing our franchises, to
establish requirements for cable-related facilities and equipment, but
prohibits franchising authorities from establishing requirements for
specific video programming or information services other than in broad
categories;
o permits us to obtain modification of our franchise requirements from
the franchise authority or by judicial action if warranted by
commercial impracticability; and
o generally prohibits franchising authorities from:
-- imposing requirements during the initial cable franchising process
or during franchise renewal that require, prohibit or restrict us
from providing telecommunications services,
-- imposing franchise fees on revenues we derived from providing
telecommunications services over our cable systems,
-- restricting our use of any type of subscriber equipment or
transmission technology, and
-- limits our payment of franchise fees to the local franchising
authority to 5.0% of our gross revenues derived from providing cable
services over our cable system.
The Communications Act contains renewal procedures designed to protect us
against arbitrary denials of renewal of our franchises although, under certain
circumstances, the franchising authority could deny us a franchise renewal.
Moreover, even if our franchise is renewed, the franchising authority may seek
to impose upon us new and more onerous requirements, such as significant
upgrades in facilities and services or increased franchise fees as a condition
of renewal. Similarly, if a franchising authority's consent is required for the
purchase or sale of our cable system or franchise, the franchising authority may
attempt to impose more burdensome or onerous franchise requirements on us in
connection with a request for such consent. Historically, cable operators
providing satisfactory services to their subscribers and complying with the
terms of their franchises have almost always obtained franchise renewals. We
believe that we have generally met the terms of our franchises and have provided
quality levels of service. We anticipate that our future franchise renewal
prospects generally will be favorable.
Various courts have considered whether franchising authorities have the
legal right to limit the number of franchises awarded within a community and to
impose substantive franchise requirements. These decisions have been
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inconsistent and, until the U.S. Supreme Court rules definitively on the scope
of cable operators' First Amendment protections, the legality of the franchising
process generally and of various specific franchise requirements is likely to be
in a state of flux.
OWNERSHIP LIMITATIONS
The Communications Act generally prohibits us from owning or operating a
satellite master antenna television system or multichannel multipoint
distribution system in any area where we provide franchised cable service and do
not have effective competition, as defined by federal law. We may, however,
acquire and operate a satellite master antenna television system in our existing
franchise service areas if the programming and other services provided to the
satellite master antenna television system subscribers are offered according to
the terms and conditions of our local franchise agreement.
The Communications Act also authorizes the FCC to adopt nationwide limits
on the number of subscribers under the control of a cable operator. A federal
district court has concluded that this subscriber limitation is unconstitutional
and the FCC has stayed its enforcement; an appeal of this decision is pending in
a federal appellate court. Pending further action by the federal courts, the FCC
recently reconsidered its cable ownership regulations and:
o changed its subscriber ownership limit to 30% of subscribers to
multi-channel video programming distributors nationwide, but maintained
its voluntary stay on enforcement of that limitation pending further
action;
o reaffirmed its subscriber ownership information reporting rules that
require any person holding an attributable interest, as defined by FCC
rules, in cable systems reaching 20% or more of homes passed by cable
plant nationwide to notify the FCC of any incremental change in that
person's cable ownership interests;
o retained its 5% voting stock attribution benchmark;
o raised the passive investor voting stock benchmark from 10% to 20%; and
o adopted a new equity/debt rule that will attribute any interest of over
33% of the total assets, I.E., debt plus equity, voting or nonvoting,
of an entity.
The Communications Act and FCC regulations also impose limits on the number
of channels that can be occupied on a cable system by a video programmer in
which a cable operator has an interest. A federal district court has also
declared this statutory provision unconstitutional. An appeal of the district
court's decision has been consolidated with the appeal challenging the FCC's
subscriber ownership limitation regulations.
The 1996 amendments to the Communications Act eliminated the statutory
prohibition on the common ownership, operation or control of a cable system and
a television broadcast station in the same service area. The identical FCC
regulation remains in place pending re-examination, although the FCC has
eliminated its regulatory restriction on cross-ownership of cable systems and
national broadcasting networks.
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The 1996 amendments to the Communications Act also made far-reaching
changes in the relationship between local telephone companies and cable service
providers. These amendments:
o eliminated federal legal barriers to competition in the local telephone
and cable communications businesses, including allowing local telephone
companies to offer video services in their local telephone service
areas;
o preempted legal barriers to telecommunications competition that
previously existed in state and local laws and regulations;
o set basic standards for relationships between telecommunications
providers; and
o generally limited acquisitions and prohibited joint ventures between
local telephone companies and cable operators in the same market.
Local telephone companies may provide service as traditional cable
operators with local franchises or they may opt to provide their programming
over open video systems, subject to certain conditions, including, but not
limited to, setting aside a portion of their channel capacity for use by
unaffiliated program distributors on a non-discriminatory basis. A federal
appellate court recently overturned various parts of the FCC's open video rules,
including the FCC's preemption of local franchising requirements for open video
operators.
POLE ATTACHMENT REGULATION
The Communications Act requires the FCC to regulate the rates, terms and
conditions imposed by public utilities for cable systems' use of utility pole
and conduit space unless state authorities have demonstrated to the FCC that
they adequately regulate pole attachment rates, as is the case in certain states
in which we operate. In the absence of state regulation, the FCC administers
pole attachment rates on a formula basis. The FCC's current rate formula, which
is being reevaluated by the FCC, governs the maximum rate certain utilities may
charge for attachments to their poles and conduit by cable operators providing
only cable services and until 2001, by certain companies providing
telecommunications services. The FCC also adopted a new rate formula that will
be effective in 2001 and will govern the maximum rate certain utilities may
charge for attachments to their poles and conduit by companies providing
telecommunications services, including cable operators.
Any resulting increase in attachment rates due to the FCC's new rate
formula will be phased in over a five-year period in equal annual increments,
beginning in February 2001. Several parties have requested the FCC to reconsider
its new regulations and several parties have challenged the new rules in court.
A federal district court recently upheld the constitutionality of the new
statutory provision, which requires that utilities provide cable systems and
telecommunications carriers with nondiscriminatory access to any pole, conduit
or right-of-way controlled by the utility. The lower court's decision was upheld
on appeal. We are unable to predict the ultimate impact of any revised FCC rate
formula or of any new pole attachment rate regulations on our business and
operations.
OTHER REGULATORY REQUIREMENTS OF THE COMMUNICATIONS ACT AND THE FCC
The FCC has adopted cable inside wiring rules to provide a more specific
procedure for the disposition of residential home wiring and internal building
wiring that belongs to an incumbent cable operator that is forced by the
building owner to terminate its cable services in a building with multiple
dwelling units. The FCC is also considering additional rules relating to inside
wiring that, if adopted, may disadvantage incumbent cable operators.
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The Communications Act includes provisions, among others, regulating and
the FCC actively regulates other parts of our cable operations, involving such
areas as:
o equal employment opportunity;
o consumer protection and customer service;
o technical standards and testing of cable facilities;
o consumer electronics equipment compatibility;
o registration of cable systems;
o maintenance of various records and public inspection files;
o microwave frequency usage; and
o antenna structure notification, marking and lighting.
The FCC may enforce its regulations through the imposition of 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 transmission facilities often used in connection with cable operations.
The FCC has ongoing rulemaking proceedings that may change its existing rules or
lead to new regulations. We are unable to predict the impact that any further
FCC rule changes may have on our business and operations.
Other bills and administrative proposals pertaining to cable communications
have previously been introduced in Congress or considered by other governmental
bodies over the past several years. It is probable that Congress and other
governmental bodies will make further attempts relating to the regulation of
cable communications services.
COPYRIGHT
Our cable systems typically include in their channel line-ups local and
distant television and radio broadcast signals, which are protected by the
copyright laws. We generally do not obtain a license to use this programming
directly from the owners of the programming, but instead comply with an
alternative federal compulsory copyright licensing process. In exchange for
filing certain reports and contributing a percentage of our revenues to a
federal copyright royalty pool, we obtain blanket permission to retransmit the
copyrighted material carried on these broadcast signals. The nature and amount
of future copyright payments for broadcast signal carriage cannot be predicted
at this time.
In a report to Congress, the U.S. Copyright Office recommended that
Congress make major revisions to both the cable television and satellite
compulsory licenses. Congress recently modified the satellite compulsory license
in a manner that permits DBS providers to become more competitive with cable
operators like us. The possible simplification, modification or elimination of
the cable communications compulsory copyright license is the subject of
continuing legislative review. The elimination or substantial modification of
the cable compulsory license could adversely affect our ability to obtain
suitable programming and could substantially increase the cost of programming
that remains available for distribution to our subscribers. We are unable to
predict the outcome of this legislative activity.
Copyrighted music performed in programming supplied to cable television
systems by pay cable networks and basic cable networks is licensed by the
networks through private agreements with the American Society of Composers and
Publishers, commonly referred to as ASCAP, and BMI, Inc., the two major
performing rights organizations in the United States. Both the American Society
of Composers and Publishers and BMI 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.
Our cable systems also utilize music in other programming and advertising
that we provide to subscribers. The rights to use this music are controlled by
various music performing rights organizations which negotiate on behalf of their
copyright owners for license fees covering each performance. The cable industry
and the major music
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performing rights organizations are negotiating a standard licensing agreement
covering the performance of music contained in advertising and other information
inserted by operators into cable programming and on local access and origination
channels carried on cable systems. Rate courts established by a New York federal
court exist to determine appropriate copyright coverage and royalty fees in the
event the parties fail to reach a settlement or to negotiate renewals of
licensing agreements. Although we cannot predict the ultimate outcome of these
industry negotiations or the amount of any license fees we may be required to
pay for past and future use of music, we do not believe such license fees will
be significant to our financial position, results of operations or liquidity.
STATE AND LOCAL REGULATION
Our cable systems use local streets and rights-of-way. Consequently, we
must comply with state and local regulation, which is typically imposed through
the franchising process. Our cable systems generally are operated in accordance
with non-exclusive franchises, permits or licenses granted by a municipality or
other state or local government entity. Our franchises generally are granted for
fixed terms and in many cases are terminable if we fail to comply with material
provisions. The terms and conditions of our franchises vary materially from
jurisdiction to jurisdiction. Each franchise generally contains provisions
governing:
o franchise fees;
o franchise term;
o system construction and maintenance obligations;
o system channel capacity;
o design and technical performance;
o customer service standards;
o sale or transfer of the franchise;
o territory of the franchise;
o indemnification of the franchising authority;
o use and occupancy of public streets; and
o types of cable services provided.
A number of states subject cable systems to the jurisdiction of centralized
state governmental agencies, some of which impose regulation of a character
similar to that of a public utility. Attempts in other states to regulate cable
systems are continuing and can be expected to increase. To date, no state in
which we operate has enacted such state-level regulation. State and local
franchising jurisdiction is not unlimited; however, it must be exercised
consistently with federal law. The Communications Act immunizes franchising
authorities from monetary damage awards arising from regulation of cable systems
or decisions made on franchise grants, renewals, transfers and amendments.
The foregoing describes all material present and proposed federal, state
and local regulations and legislation affecting the cable industry. Other
existing federal regulations, copyright licensing, and, in many jurisdictions,
state and local franchise requirements, are currently the subject of judicial
proceedings, legislative hearings and administrative proposals which could
change, in varying degrees, the manner in which cable systems operate. Neither
the outcome of these proceedings nor their impact upon the cable industry or our
cable operations can be predicted at this time.
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ITEM 2. PROPERTIES
Our principal physical assets consist of cable television operating plant
and equipment, including signal receiving, encoding and decoding devices,
headend facilities and distribution systems and equipment at or near customers'
homes for each of the systems. The signal receiving apparatus typically includes
a tower, antenna, ancillary electronic equipment and earth stations for
reception of satellite signals. Headend facilities are located near the
receiving devices. Some basic subscribers of the systems utilize converters that
can be addressed by sending coded signals from the headend facility over the
cable network. Our distribution system consists primarily of coaxial and fiber
optic cables and related electronic equipment.
We own the real property housing our regional call centers in Gulf Breeze,
Florida; Chillicothe, Illinois; and Waseca, Minnesota as well as numerous
locations for business offices and warehouses throughout our operating regions.
We lease space for our other regional call centers in Benton, Kentucky; and
Hendersonville, North Carolina. We also lease additional locations for business
offices and warehouses throughout our operating regions. Our headend facilities,
signal reception sites and microwave facilities are located on owned and leased
parcels of land, and we generally own the towers on which certain of our
equipment is located. We own most of our service vehicles. We believe that our
properties both owned and leased, are in good condition and are suitable and
adequate for our operations.
Our cable television plant and related equipment generally are attached to
utility poles under pole rental agreements with local public utilities, although
in some areas the distribution cable is buried in underground ducts or trenches.
The physical components of the systems require maintenance and periodic
upgrading to improve system performance and capacity.
ITEM 3. LEGAL PROCEEDINGS
On January 19, 2000, Grey Advertising Inc. and Mediacom Inc., a
wholly-owned subsidiary of Grey, filed an action against us in the United States
District Court for the Southern District of New York asserting trademark
infringement, among other claims. The complaint alleges that Grey owns a
federally registered trademark for "Mediacom" and that our use of this name
constitutes trademark infringement. Grey is seeking a permanent injunction to
prohibit us from using the Mediacom name in the conduct of our business together
with unspecified monetary damages. We have denied the substantive allegations of
the complaint and are defending the action. If we are found to have infringed
the proprietary rights of Grey with respect to our use of the "Mediacom" mark or
variations thereof, we could be enjoined from using the "Mediacom" mark in
connection with our business and be required to pay material monetary damages.
There are no other material pending legal proceedings to which we are a
party or to which any of our properties are subject.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year ended December 31, 1999.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Our Class A common stock has been traded on the Nasdaq National Market
under the symbol "MCCC" since February 4, 2000, the date of our initial public
offering. Prior to that time, there was no public market for our common stock.
The following table sets forth, for the period indicated, the high and low
closing sales prices for our Class A common stock as reported by the Nasdaq
National Market:
<TABLE>
<CAPTION>
High Low
---- ---
<S> <C> <C>
First Quarter (from February 4, 2000 through March 15, 2000) $ 19 3/4 $ 13 15/16
</TABLE>
On March 15, 2000, the last reported sale price for our Class A common
stock on the Nasdaq National Market was $18.00 per share. As of March 15, 2000,
there were 26 holders of record of our Class A common stock, and there were 14
holders of record of our Class B common stock.
We have never declared or paid any dividends on our common stock. We
currently anticipate that we will retain all of our future earnings for use in
the expansion and operation of our business. Thus, we do not anticipate paying
any cash dividends on our common stock in the foreseeable future. Our future
dividend policy will be determined by our board of directors and will depend on
various factors, including our results of operations, financial condition,
capital requirements and investment opportunities. In addition, the indentures
relating to our outstanding indebtedness restrict our payment of dividends.
USE OF PROCEEDS FROM OUR INITIAL PUBLIC OFFERING
The effective date of our registration statement, which was filed on Form
S-1 under the Securities Act of 1933 (File Nos. 333-90879) and which relates to
the initial public offering of our Class A common stock, was February 3, 2000. A
total of 23,000,000 shares of our Class A common stock, including 3,000,000
shares to cover any over-allotment of shares, were registered at a proposed
maximum aggregate offering price of $460.0 million.
The offering commenced on February 4, 2000 and was completed on February 9,
2000. The managing underwriters for the offering were Credit Suisse First Boston
Corporation, Salomon Smith Barney Inc., Donaldson, Lufkin & Jenrette Securities
Corporation, Goldman, Sachs & Co., Merrill Lynch, Pierce, Fenner & Smith
Incorporated, Chase Securities Inc., CIBC World Markets Corp and First Union
Securities, Inc. A total of 20,000,000 shares of our Class A common stock were
sold in the offering for an aggregate offering price of $380.0 million. Our net
proceeds, after underwriting discounts of approximately $22.8 million and
estimated expenses related to the offering of approximately $2.8 million, were
$354.4 million and were used to repay bank indebtedness.
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ITEM 6. SELECTED FINANCIAL DATA
In the table below, we provide you with:
o selected historical financial data for the year ended December 31, 1995
and for the period from January 1, 1996 through March 11, 1996, and
balance sheet data as of December 31, 1995, which are derived from the
audited financial statements of Benchmark Acquisition Fund II Limited
Partnership, which is our predecessor company; and
o selected historical consolidated financial and operating data for the
period from the commencement of our operations on March 12, 1996
through December 31, 1996 and for the years ended December 31, 1997,
1998 and 1999, and balance sheet data as of December 31, 1996, 1997,
1998 and 1999, which are derived from and should be read in conjunction
with the audited consolidated financial statements of Mediacom LLC.
Mediacom LLC commenced operations on March 12, 1996 with the acquisition of
a cable system from Benchmark Acquisition Fund II Limited Partnership and has
since completed ten additional acquisitions as of December 31, 1999. The
historical results of operations of the systems acquired have been included from
their respective dates of acquisition to the end of the period presented.
Mediacom LLC was formed as a limited liability company in July 1995 and
since that time its taxable income or loss has been included in the federal and
certain state income tax returns of our members.
We are a Delaware corporation that was organized in November 1999. Upon
completion of our initial public offering, we became subject to the provisions
of Subchapter C of the Internal Revenue Code. As a C corporation, we will be
fully subject to federal, state and local income taxes.
See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
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<TABLE>
<CAPTION>
SELECTED FINANCIAL DATA
PREDECESSOR MEDIACOM LLC
--------------------- ----------------------------------------------------
YEAR JANUARY 1 MARCH 12 YEAR YEAR YEAR
ENDED THROUGH THROUGH ENDED ENDED ENDED
DECEMBER 31, MARCH 11, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1995 1996 1996 1997 1998 1999
---- ---- ---- ---- ---- ----
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AND PER SUBSCRIBER AMOUNT)
STATEMENT OF OPERATIONS DATA:
<S> <C> <C> <C> <C> <C> <C>
Revenues $ 5,171 $ 1,038 $ 5,411 $ 17,634 $ 129,297 $ 176,052
Costs and expenses:
Service costs 1,536 297 1,511 5,547 43,849 58,058
Selling, general and
administrative expenses 1,059 222 931 2,696 25,596 32,949
Management fee expense(1) 261 52 270 882 5,797 6,951
Depreciation and amortization 3,945 527 2,157 7,636 65,793 101,065
Non-cash stock charges(2) - - - - - 15,445
------- ------ ------- --------- ---------- ---------
Operating income (loss) (1,630) (60) 542 873 (11,738) (38,416)
Interest expense, net(3) 935 201 1,528 4,829 23,994 37,817
Other expenses - - 967 640 4,058 5,087
------- ------ ------- --------- ---------- ---------
Net loss $(2,565) $ (261) $ (1,953) (4,596) $ (39,790) $ (81,320)
======= ====== ======== ========= ========== ============
Basic and diluted net loss
per share(4) $ (4.45) $ (3.66) $ (5.28) $ (4.11)
Weighted average common
shares outstanding(4) 438,551 1,255,501 7,537,912 19,797,130
BALANCE SHEET DATA (END OF
PERIOD):
Total assets $ 8,149 $ 46,560 $ 102,791 $ 451,152 $ 1,265,926
Total debt 12,217 40,529 72,768 337,905 1,139,000
Total redeemable members'
equity (4,568) 4,537 24,441 78,651 54,615
SUPPLEMENTARY DATA:
System cash flow(5) $ 2,576 $ 519 $ 2,969 $ 9,391 $ 59,852 $ 85,045
System cash flow margin(6) 49.8% 50.0% 54.9% 53.3% 46.3% 48.3%
EBITDA(7) $ 2,315 467 $ 2,699 $ 8,509 $ 54,055 $ 78,094
EBITDA margin(8) 44.8% 45.0% 49.9% 48.3% 41.8% 44.4%
Net cash flows provided by
operating activities $ 1,478 $ 226 $ 237 $ 7,007 $ 53,556 $ 54,216
Net cash flows used in
investing activities (261) (86) (45,257) (60,008) (397,085) (851,548)
Net cash flows (used in)
provided by financing
activities (1,077) - 45,416 53,632 344,714 799,593
OPERATING DATA
(END OF PERIOD, EXCEPT AVERAGE):
Homes passed(9) 38,749 87,750 520,000 1,071,500
Basic subscribers(10) 27,153 64,350 354,000 719,000
Basic penetration(11) 70.1% 73.3% 68.1% 67.1%
Premium service units(12) 11,691 39,288 407,100 587,000
Premium penetration(13) 43.1% 61.1% 115.0% 81.6%
Average monthly revenues
per basic subscriber(14) $ 32.11 $ 32.88 $ 35.52
(NOTES ON FOLLOWING PAGE)
</TABLE>
29
<PAGE>
NOTES TO SELECTED FINANCIAL DATA
(1) Represents fees paid to Mediacom Management Corporation ("Mediacom
Management"), a Delaware corporation, for management services rendered to
our operating subsidiaries. Mediacom Management utilized these fees to
compensate its employees as well as to fund its corporate overhead. The
management agreements with Mediacom Management were amended effective
November 19, 1999 in connection with an amendment to Mediacom LLC's
operating agreement. The amended agreements provided for management fees
equal to 2% of annual gross revenues. Each of the management agreements was
terminated upon the completion of our initial public offering. At that
time, Mediacom Management's employees became our employees and its
corporate overhead became our corporate overhead. These expenses will be
reflected as our corporate expense, which we estimate will amount to
approximately 2% of our annual gross revenues.
(2) Represents a non-cash stock charge of approximately $628,000 associated
with amendments to our management agreements with Mediacom Management for
which additional equity interests were granted to a Mediacom LLC member and
an approximate $14.8 million non-cash stock charge associated with a grant
of equity interests to certain members of our management team in 1999. See
Notes 10 and 15 of Mediacom LLC's consolidated financial statements for
further discussion.
(3) Net of interest income. Interest income for the periods presented was not
material.
(4) Basic and diluted loss per share is calculated based on the weighted
average shares outstanding. The weighted average shares outstanding is
computed based on the conversion ratio used to exchange the Mediacom LLC's
membership units for shares of Mediacom Communications Corporation Class A
and Class B common stock immediately prior to Mediacom Communications
Corporation's initial public offering. See Note 3 of Mediacom LLC's
consolidated financial statements.
(5) Represents EBITDA, as defined in note 7 below, before management fee
expense. System cash flow:
o 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 the statement of cash flows as a measure
of liquidity;
o is not intended to represent funds available for debt service,
dividends, reinvestment or other discretionary uses; and
o should not be considered in isolation or as a substitute for measures
of performance prepared in accordance with generally accepted
accounting principles.
System cash flow is included in this report because our management believes
that system cash flow is a meaningful measure of performance commonly used
in the cable television industry and by the investment community to analyze
and compare cable television companies. Our definition of system cash flow
may not be identical to similarly titled measures reported by other
companies.
(6) Represents system cash flow as a percentage of revenues. This measurement
is used by us, and is commonly used in the cable television industry, to
analyze and compare cable television companies on the basis of operating
performance, for the reasons discussed in note 5 above.
30
<PAGE>
(7) Represents operating income (loss) before depreciation and amortization and
non-cash stock charges. EBITDA:
o 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 the statement of cash flows as a measure
of liquidity;
o is not intended to represent funds available for debt service,
dividends, reinvestment or other discretionary uses; and
o should not be considered in isolation or as a substitute for measures
of performance prepared in accordance with generally accepted
accounting principles.
EBITDA is included in this report because our management believes that
EBITDA is a meaningful measure of performance commonly used in the cable
television industry and by the investment community to analyze and compare
cable television companies. Our definition of EBITDA may not be identical
to similarly titled measures reported by other companies.
(8) Represents EBITDA as a percentage of revenues. This measurement is used by
us, and is commonly used in the cable television industry, to analyze and
compare cable television companies on the basis of operating performance,
for the reasons discussed in note 7 above.
(9) Represents the number of single residence homes, apartments and condominium
units passed by the cable distribution network in a cable system's service
area.
(10) Represents subscribers of a cable television system who receive a package
of over-the-air broadcast stations, local access channels and/or certain
satellite-delivered cable television services and who are usually charged
a flat monthly rate for a number of channels.
(11) Represents basic subscribers as a percentage of total number of homes
passed.
(12) Represents the number of subscriptions to premium services. A subscriber
may purchase more than one premium service, each of which is counted as a
separate premium service unit.
(13) Represents premium service units as a percentage of total number of basic
subscribers. This ratio may be greater than 100% if the average basic
subscriber subscribes to more than one premium service unit.
(14) Represents average monthly revenues for the last three months of the
period divided by average basic subscribers for such period. Average
monthly revenues per basic subscriber includes the revenues of
acquisitions of cable systems made during the last three months of the
period as if such acquisitions were completed at the beginning of the
three month period. This measurement is commonly used in the cable
television industry to analyze and compare cable television companies on
the basis of operating performance.
31
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
INTRODUCTION
We materially expanded our business in 1997, 1998 and 1999 through
acquisitions. The acquisitions of the Zylstra and Triax systems in October and
November 1999 doubled the number of our basic subscribers. All acquisitions have
been accounted for under the purchase method of accounting and, therefore, our
historical results of operations include the results of operations for each
acquired system subsequent to its respective acquisition date. As such, we do
not believe the discussion and analysis of our historical financial condition
and results of operations set forth below are indicative nor should they be
relied upon as an indicator of our future performance.
GENERAL
Our revenues are primarily attributable to monthly subscription fees
charged to basic subscribers for our basic and premium cable television
programming services.
o Basic revenues consist of monthly subscription fees for all services
other than premium programming and also include monthly charges for
customer equipment rental and installation fees.
o Premium revenues consist of monthly subscription fees for programming
provided on a per channel basis or as part of premium service packages.
o Other revenues represent pay-per-view charges, late payment fees,
advertising revenues and commissions related to the sale of goods by
home shopping services. Pay-per-view is programming offered on a
per-program basis, which a subscriber selects and pays a separate fee.
The following table sets forth for the periods indicated the percentage of
our total revenues attributable to the sources indicated:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Basic revenues 81.0% 80.0% 81.0%
Premium revenues................................................ 13.0 15.0 9.0
Other revenues 6.0 5.0 10.0
--- --- ----
Total revenues............................................. 100.0% 100.0% 100.0%
===== ===== =====
</TABLE>
For each year of the past three years, we generated significant increases
in revenues as a result of our acquisition activities, increases in monthly
revenues per basic subscriber and internal subscriber growth.
Our operating expenses consist of service costs and selling, general and
administrative expenses directly attributable to our cable 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 we have offered and
improvements in the quality of programming. We believe that under the Federal
Communication Commission's existing cable rate regulations, we will be able to
increase our rates for cable television services to more than cover any
increases in the costs of programming. However, competitive factors may limit
our ability to increase our rates. We benefit from our membership in a
cooperative of cable television companies which serve over twelve 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 our cable television systems
include wages and salaries for customer service and administrative personnel,
franchise fees and expenses related to billing, marketing, bad debt, advertising
sales and office administration.
Until our initial public offering on February 4, 2000, Mediacom Management
provided management services to the operating subsidiaries of Mediacom LLC and
received annual management fees. Mediacom Management utilized
32
<PAGE>
these fees to compensate its employees as well as to fund its corporate
overhead. Such management fees ranged from 4.0% to 5.0% of our annual gross
revenues until November 19, 1999. On such date, the management agreements with
Mediacom Management were amended in connection with an amendment to Mediacom
LLC's operating agreement to provide for annual management fees equal to 2.0% of
annual gross revenues. As part of this amendment, Mediacom Management waived all
management fees incurred from July 1, 1999 through November 19, 1999 by Mediacom
LLC's operating subsidiaries. Each of the management agreements was terminated
upon the date of our initial public offering. At that time, Mediacom
Management's employees became our employees and its corporate overhead became
our corporate overhead. These expenses will be reflected as our corporate
expense, which we estimate will amount to approximately 2% of our annual gross
revenues.
Mediacom Management received acquisition fees ranging from 0.5% to 1.0% of
the purchase price of acquisitions made by Mediacom LLC and such fees are
included in other expenses. In accordance with an amendment to Mediacom LLC's
operating agreement, Mediacom Management waived the acquisition fees related to
the acquisitions of the Triax and Zylstra systems and no further acquisition
fees will be payable.
The high level of depreciation and amortization associated with our
acquisition activities as well as the interest expense related to our financing
activities have caused us to report net losses in our limited operating history.
We believe that such net losses are common for cable television companies and
anticipate that we will continue to incur net losses for the foreseeable future.
EBITDA represents operating income (loss) before depreciation and
amortization and non-cash stock charges. EBITDA:
o 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 the statement of cash flows as a measure
of liquidity;
o is not intended to represent funds available for debt service,
dividends, reinvestment or other discretionary uses; and
o should not be considered in isolation or as a substitute for measures
of performance prepared in accordance with generally accepted
accounting principles.
EBITDA is included in this report because our management believes that EBITDA is
a meaningful measure commonly used in the cable television industry and by the
investment community to analyze and compare cable television companies. Our
definition of EBITDA may not be identical to similarly titled measures reported
by other companies.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998
The following historical information for the years ended December 31, 1999
and 1998 includes the results of operations of the Clearlake system, which was
acquired on January 9, 1998, the Cablevision systems, which were acquired on
January 23, 1998, the Caruthersville system, which was acquired on October 1,
1998, the Zylstra systems, which were acquired on October 15, 1999, and the
Triax systems, which were acquired on November 4, 1999, only for that portion of
the respective period that such cable television systems were owned by us.
33
<PAGE>
REVENUES. Revenues increased 36.2% to approximately $176.1 million for the
year ended December 31, 1999, as compared to approximately $129.3 million for
the prior year primarily as a result of:
o an increase of $3.26 in the average monthly basic service rate per
basic subscriber;
o the inclusion of the results of operations of the Triax and Zylstra
systems since the dates of their acquisition by us in 1999; and
o internal basic subscriber growth of 1.9%, excluding the acquisition of
the Triax and Zylstra systems.
SERVICE COSTS. Service costs increased 32.4% to approximately $58.1 million
for the year ended December 31, 1999, as compared to approximately $43.8 million
for the prior year. Our ownership of the Triax and Zylstra systems in 1999
accounted for 60.7% of this increase. The remaining 39.3% of this increase is
principally due to higher programming costs. As a percentage of revenues,
service costs were 33.0% for the year ended December 31, 1999, as compared to
33.9% for the prior year.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased 28.7% to approximately $32.9 million for the
year ended December 31, 1999, as compared to approximately $25.6 million for the
prior year. Our ownership of the Triax and Zylstra systems in 1999 accounted for
50.7% of this increase in selling, general and administrative expenses. The
remaining 49.3% of this increase is primarily due to increased marketing costs
associated with the promotion of new programming services and increased
personnel expenses. As a percentage of revenues, selling, general and
administrative expenses were 18.7% for the year ended December 31, 1999, as
compared to 19.8% for the prior year.
MANAGEMENT FEE EXPENSE. Management fee expense increased 19.9% to
approximately $7.0 million for the year ended December 31, 1999, as compared to
approximately $5.8 million for the prior year, due to the higher revenues
generated in the 1999 period. The management agreements were amended on November
19, 1999 in connection with an amendment to Mediacom LLC's operating agreement
to provide annual management fees equal to 2.0% of annual gross revenues, as
further discussed in Note 10 of Mediacom LLC's consolidated financial
statements.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization increased
53.6% to approximately $101.1 million for the year ended December 31, 1999, as
compared to approximately $65.8 million for the prior year. This increase was
substantially due to our purchase of the Triax and Zylstra systems in 1999 and
additional capital expenditures associated with the upgrade of our systems.
NON-CASH STOCK CHARGES. Non-cash stock charges were approximately $15.4
million for the year ended December 31, 1999. These non-cash charges resulted
from amendments to our management agreements with Mediacom Management and a
grant of equity interests to certain members of our management team, as further
discussed in Notes 10 and 15 of Mediacom LLC's consolidated financial
statements.
OPERATING INCOME (LOSS). Due to the factors described above, we generated
an operating loss of approximately $38.4 million for the year ended December 31,
1999, as compared to an operating loss of approximately $11.7 million for the
prior year.
INTEREST EXPENSE, NET. Interest expense, net, increased 57.6% to
approximately $37.8 million for the year ended December 31, 1999, as compared to
approximately $24.0 million for the prior year. This increase was substantially
due to higher average debt outstanding during the 1999 period as a result of the
debt incurred in connection with the purchase of the Triax and Zylstra systems.
OTHER EXPENSES. Other expenses increased 25.4% to approximately $5.1
million for the year ended December 31, 1999, as compared to approximately $4.1
million for the prior year. This increase was principally due to acquisition
fees payable to Mediacom Management in 1999 in connection with the acquisitions
of the Triax and Zylstra systems.
NET LOSS. Due to the factors described above, we generated a net loss of
approximately $81.3 million for the year ended December 31, 1999, as compared to
a net loss of approximately $39.8 million for the prior year.
34
<PAGE>
EBITDA. EBITDA increased 44.5% to approximately $78.1 million for the year
ended December 31, 1999, as compared to approximately $54.1 million for the
prior year. This increase was substantially due to the reasons noted above. As a
percentage of revenues, EBITDA increased to 44.4% for the year ended December
31, 1999, as compared to 41.8% for the prior year.
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
The following historical information for the years ended December 31, 1998
and 1997 includes the results of operations of the Lower Delaware system, which
was acquired on June 24, 1997, the Sun City system, which was acquired on
September 19, 1997, the Clearlake system, which was acquired on January 9, 1998,
the Cablevision systems, which were acquired on January 23, 1998, and the
Caruthersville system, which was acquired on October 1, 1998, only for that
portion of the respective period that such cable television systems were owned
by us.
REVENUES. Revenues increased to approximately $129.3 million for the year
ended December 31, 1998, as compared to approximately $17.6 million for the
prior year principally due to:
o the inclusion of the results of operations of the Lower Delaware and
Sun City systems for the full year ended December 31, 1998;
o the inclusion of the results of operations of the Clearlake,
Cablevision and Caruthersville systems from their respective
acquisition dates;
o an increase of $3.34 in the average monthly basic service rate per
basic subscriber; and
o internal basic subscriber growth of 2.5%.
SERVICE COSTS. Service costs increased to approximately $43.8 million for
the year ended December 31, 1998, as compared to approximately $5.5 million for
the prior year. Substantially all of this increase was due to the inclusion of
the results of operations of the Cablevision, Caruthersville, Clearlake, Lower
Delaware and Sun City systems. As a percentage of revenues, service costs were
33.9% in 1998, as compared to 31.5% in 1997.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased to approximately $25.6 million for the year
ended December 31, 1998, as compared to approximately $2.7 million for the prior
year. Substantially all of this increase was due to the inclusion of the results
of operations of the Cablevision, Caruthersville, Clearlake, Lower Delaware and
Sun City systems. As a percentage of revenues, selling, general and
administrative expenses were 19.8% in 1998, as compared to 15.3% in 1997.
MANAGEMENT FEE EXPENSE. Management fee expense increased to approximately
$5.8 million for the year ended December 31, 1998, as compared to approximately
$882,000 for the prior year due to the higher revenues generated in 1998.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization increased to
approximately $65.8 million for the year ended December 31, 1998, as compared to
approximately $7.6 million for the prior year. This increase was substantially
due to our acquisitions described above and additional capital expenditures
associated with the upgrade of our systems.
OPERATING INCOME (LOSS). Due to the factors described above, we generated
an operating loss of approximately $11.7 million for the year ended December 31,
1998, as compared to operating income of approximately $873,000 for the prior
year.
INTEREST EXPENSE, NET. Interest expense, net, increased to approximately
$24.0 million for the year ended December 31, 1998, as compared to approximately
$4.8 million for the prior year. This increase was substantially due to the
additional debt incurred in connection with the acquisitions described above.
OTHER EXPENSES. Other expenses increased to approximately $4.1 million for
the year ended December 31, 1998, as compared to approximately $640,000 for the
prior year. This increase was substantially due to acquisition fees paid to
Mediacom Management in connection with the acquisitions described above.
35
<PAGE>
NET LOSS. Due to the factors described above, we generated a net loss of
approximately $39.8 million for the year ended December 31, 1998, as compared to
a net loss of approximately $4.6 million for the prior year.
EBITDA. EBITDA increased to approximately $54.1 million for the year ended
December 31, 1998, as compared to approximately $8.5 million for the prior year.
This increase was substantially due to reasons noted above. As a percentage of
revenues, EBITDA decreased to 41.8% for the year ended December 31, 1998, as
compared to 48.3% for the prior year. This decrease was principally due to the
higher programming costs and selling, general and administrative expenses of the
Cablevision, Caruthersville, Clearlake, Lower Delaware and Sun City systems in
relation to the revenues generated by such cable television systems.
LIQUIDITY AND CAPITAL RESOURCES
Our business requires substantial capital for the upgrade, expansion and
maintenance of our cable network. In addition, we have pursued, and will
continue to pursue, a business strategy that includes selective acquisitions. We
have funded our working capital requirements, capital expenditures and
acquisitions through a combination of internally generated funds, long-term
borrowings and equity contributions. We intend to continue to finance such
expenditures through internally generated funds, long-term borrowings and equity
financings.
From the commencement of our operations in March 1996 through December
1998, we invested approximately $432.4 million, before closing costs and
adjustments, to acquire cable television systems serving 360,600 basic
subscribers as of December 31, 1999. In October and November 1999, we invested
approximately $759.6 million, before closing costs and adjustments, to acquire
the Triax and Zylstra systems serving 358,400 basic subscribers as of December
31, 1999.
On October 15, 1999, we purchased the outstanding stock of Zylstra for a
purchase price of $19.5 million, before closing costs and adjustments. As of
December 31, 1999, the Zylstra system served approximately 14,000 basic
subscribers in Iowa, Minnesota and South Dakota. The acquisition of the Zylstra
system and related closing costs and adjustments were financed with cash on hand
and borrowings under our subsidiary credit facilities. See Notes 4 and 9 to
Mediacom LLC's consolidated financial statements.
On November 5, 1999, we acquired the cable television systems owned by
Triax for a purchase price of $740.1 million, before closing costs and
adjustments. As of December 31, 1999, the Triax systems served approximately
344,400 basic subscribers in eight states, principally Illinois, Indiana, Iowa,
Minnesota and Wisconsin. The acquisition of the Triax systems and related
closing costs and adjustments were financed with borrowings under our subsidiary
credit facilities and $10.5 million of additional equity contributions from
members of Mediacom LLC. See Notes 4 and 9 to Mediacom LLC's consolidated
financial statements.
During the third quarter of 1998, we modified our previously disclosed
five-year system upgrade program by accelerating its planned completion date to
June 30, 2000. Upon completion, we anticipate that 85% of our customers,
excluding the Triax and Zylstra customers, will be served by systems with 550MHz
to 750MHz bandwidth capacity.
As a result of our accelerated capital improvement program, total capital
expenditures were $86.7 million and $53.7 million for the years ended December
31, 1999 and December 31, 1998, respectively. Our original plans called for
capital expenditures of $66.0 million during 1999. The amount spent over our
original plans was principally due to expenditures relating to the launch of
digital cable and two-way, high-speed Internet services, unplanned fiber
interconnection projects and expenditures in the recently acquired Triax and
Zylstra systems. For the years ended December 31, 1999 and 1998, net cash flows
provided by operating activities were $54.2 million and $53.6 million,
respectively, which together with borrowings under our subsidiary credit
facilities funded such capital expenditures.
As a result of our recent acquisitions of the Triax and Zylstra systems, we
have updated our capital improvement program and now expect to spend
approximately $400 million over the three-year period ending December 2002, of
which approximately $240 million will be invested to upgrade our cable network
and approximately $160 million will be used for plant expansion, digital
headends and set-top boxes, cable modems and maintenance. The Triax and Zylstra
systems represent 58% of total capital spending in this period, including
approximately $150 million of planned investments to upgrade the cable network
of these systems. We expect to fund these expenditures through net
36
<PAGE>
cash flows from operations and additional borrowings under our subsidiary credit
facilities. By December 2002, including the Triax and Zylstra systems, we
anticipate:
o 91% of our basic subscribers will be served by systems with 550MHz to
750MHz bandwidth capacity and two-way communications capability; and
o 359 headend facilities will be eliminated, resulting in 90 headend
facilities serving all of our basic subscribers and 40 headend
facilities serving 92% of our basic subscribers.
Our financing strategy is to issue long-term public debt at the holding
company while utilizing our subsidiaries to access debt capital, principally in
the commercial bank market, through stand-alone borrowing groups. We believe
that this financing strategy is beneficial because it broadens our access to
various debt markets, enhances our flexibility in managing our capital
structure, reduces overall cost of debt capital and permits us to maintain a
substantial liquidity position in the form of unused and available bank credit
commitments.
Financings of our 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 LLC, have no
cross-default provision relating directly to each other, have different
revolving credit and term periods and contain separately negotiated covenants
tailored for each borrowing group. These credit arrangements permit the
subsidiaries, subject to covenant restrictions, to make distributions to
Mediacom LLC. As of December 31, 1999, we were in compliance with all of the
financial and other covenants provided for in our bank credit agreements.
To finance our acquisitions, working capital requirements and capital
expenditures and to provide liquidity for future capital needs, we have
completed the following financing arrangements as of December 31, 1999:
o $200.0 million offering of our 8 1/2% senior notes due April 2008;
o $125.0 million offering of our 7 7/8% senior notes due February 2011;
o $550.0 million subsidiary credit facility expiring in September 2008;
o $550.0 million subsidiary credit facility expiring in December 2008;
and
o $135.4 million of equity capital contributed by the members of
Mediacom.
The final maturities of our subsidiary credit facilities are subject to
earlier repayment on dates ranging from June 2007 to December 2007 if we do not
refinance our 8 1/2% senior notes prior to March 31, 2007.
On February 26, 1999, Mediacom LLC and Mediacom Capital Corporation jointly
issued $125.0 million aggregate principal amount of 7 7/8% senior notes due
February 15, 2011. The net proceeds of approximately $121.9 million were used to
repay outstanding debt under the bank credit agreements.
As of December 31, 1999, we had entered into interest rate swap agreements,
which expire from 2000 through 2002, to hedge $50.0 million of floating rate
debt under our subsidiary credit facilities. As of such date, the weighted
average interest rate on all indebtedness outstanding under our subsidiary
credit facilities was 8.0%, before giving effect to these interest rate swap
agreements. As of December 31, 1999, we had approximately $285.6 million of
unused credit commitments under our subsidiary credit facilities.
In November 1999, we completed an agreement with SoftNet to deploy its
two-way, high-speed Internet access service throughout most of our cable
systems. Through the agreement with SoftNet, we are required to upgrade our
cable network to provide two-way communications capability in systems passing
900,000 homes, and make available such homes to SoftNet by December 2002. Our
capital spending plans include our investment in two-way communications
capability. As consideration for giving SoftNet access to our customers, SoftNet
issued to us 3.5 million shares of its common stock, representing a market value
of approximately $87.9 million as of December 31, 1999. Of the issued shares, up
to 90% are subject to forfeiture in the event we do not make available a
specified number of two-way capable homes by certain prescribed dates.
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<PAGE>
On February 9, 2000, we completed an initial public offering of 20,000,000
shares of our Class A common stock at $19.00 per share. Our net proceeds, after
underwriting discounts of approximately $22.8 million and estimated expenses
related to the offering of approximately $2.8 million, were $354.4 million and
were used to repay bank indebtedness. Giving pro forma effect to our initial
public offering and the application of the net proceeds therefrom, as of
December 31, 1999, we had approximately $640 million of unused credit
commitments under our subsidiary credit facilities.
We are regularly presented with opportunities to acquire cable systems that
are evaluated on the basis of our acquisition strategy. As of March 15, 2000, we
entered into four separate asset purchase agreements to acquire cable television
systems serving approximately 19,000 basic subscribers for an aggregate purchase
price of $29.4 million. We expect to close these four acquisitions in the second
and third quarters of 2000, subject to the receipt of all necessary regulatory
approvals. We also have signed one letter of intent to acquire cable systems
serving approximately 9,000 basic subscribers for a purchase price of $16.0
million. We expect to complete the acquisition of these systems in the third
quarter of 2000, subject to the negotiation of definitive documentation and the
receipt of all necessary regulatory approvals.
Although we have not generated earnings sufficient to cover fixed charges,
we have generated cash and obtained financing sufficient to meet our debt
service, working capital, capital expenditure and acquisition requirements. We
expect that we will continue to be able to generate funds and obtain financing
sufficient to service our obligations and complete our pending acquisitions.
There can be no assurance that we will be able to obtain sufficient financing,
or, if we were able to do so, that the terms would be favorable to us.
RECENT PRONOUNCEMENTS
In 1998, Statement of Financial Accounting Standards No. 133 ("SFAS 133"),
"Accounting for Derivative Instruments and Hedging Activities," was issued. SFAS
133 established accounting and reporting standards requiring that derivative
instruments be recorded in the balance sheet as either an asset or liability
measured at its fair value. We will adopt SFAS 133 in 2001, and has not yet
quantified the impact or not yet determined the timing or method of the
adoption.
INFLATION AND CHANGING PRICES
Our systems' costs and expenses are subject to inflation and price
fluctuations. Since changes in costs can be passed through to subscribers, such
changes are not expected to have a material effect on our results of operations.
YEAR 2000 COMPLIANCE
We have not experienced any problems with our computer systems or software
products failing or malfunctioning because they were unable to distinguish 21st
century dates from 20th century dates, which are generally known as Year 2000
problems. We are also not aware of any material Year 2000 problems with our
suppliers or vendors.
During 1999, we performed Year 2000 testing on our existing hardware and
software components and replaced all non-compliant components with new products
which were Year 2000 compliant. As of December 31, 1999, we have not incurred
material Year 2000 costs. Although no assurances can be given, we currently
expect that the total projected costs associated with our Year 2000 program will
be less than $350,000.
38
<PAGE>
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
In the normal course of business, we use interest rate swap agreements in
order to fix interest rates under debt contracts for the duration of the
contract as a hedge against interest rate volatility. As of December 31, 1999,
we had interest rate exchange agreements with various banks pursuant to which
the interest rate on $50.0 million is fixed at a weighted average swap rate of
approximately 6.2%, plus the average applicable margin over the Eurodollar Rate
option under our bank credit agreement. Under the terms of the interest rate
exchange agreements, which expire from 2000 through 2002, we are exposed to
credit loss in the event of nonperformance by the other parties to the interest
rate exchange agreements. However, we do not anticipate nonperformance by the
counterparties. We would have received approximately $504,000 at December 31,
1999 if the interest rate exchange agreements were terminated, inclusive of
accrued interest. The table below provides information for our long term debt.
See Note 9 to our consolidated financial statements.
<TABLE>
<CAPTION>
EXPECTED MATURITY
-----------------------------------------------------------------
(ALL DOLLAR AMOUNTS IN THOUSANDS)
2000 2001 2002 2003 2004 THEREAFTER TOTAL FAIR VALUE
---- ---- ---- ---- ---- ---------- ----- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Fixed rate $ - $ - $ - $ - $ - $ 200,000 $ 200,000 $ 186,000
Weighted average
interest rate 8.5% 8.5% 8.5% 8.5% 8.5% 8.5% 8.5%
Fixed rate $ - $ - $ - $ - $ - $ 125,000 $ 125,000 $ 110,000
Weighted average
interest rate 7.9% 7.9% 7.9% 7.9% 7.9% 7.9% 7.9%
Variable rate $ - $ - $ 750 $2,000 $2,000 $809,250 $ 814,000 $ 814,000
Weighted average
interest rate 8.0% 8.0% 8.0% 8.0% 8.0% 8.0% 8.0%
</TABLE>
39
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
<TABLE>
<CAPTION>
MEDIACOM LLC AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
CONTENTS PAGE
<S> <C>
Report of Independent Public Accountants.................................................................. 41
Consolidated Balance Sheets as of December 31, 1999 and 1998.............................................. 42
Consolidated Statements of Operations for the Years Ended December 31, 1999, 1998, and 1997............... 43
Consolidated Statements of Changes in Redeemable Members' Equity and Comprehensive Loss for the
Years Ended December 31, 1999, 1998 and 1997......................................................... 44
Consolidated Statements of Cash Flows for the Years Ended December 31, 1999, 1998 and 1997................ 45
Notes to Consolidated Financial Statements................................................................ 46
</TABLE>
<TABLE>
<CAPTION>
MEDIACOM CAPITAL CORPORATION
INDEX TO FINANCIAL STATEMENT
CONTENTS PAGE
<S> <C>
Report of Independent Public Accountants................................................................. 62
Balance Sheets as of December 31, 1999 and 1998.......................................................... 63
Note to Balance Sheets................................................................................... 64
</TABLE>
NOTE - An initial public offering by Mediacom Communications Corporation
("MCC"), a Delaware corporation, was completed on February 9, 2000. Immediately
prior to the initial public offering, the membership units in Mediacom LLC were
exchanged for shares of MCC's common stock. At that time, Mediacom LLC became
MCC's wholly-owned subsidiary. Prior to such time, MCC had no assets,
liabilities, contingent liabilities or operations. For further discussion, see
Note 16 to Mediacom LLC's consolidated financial statements.
40
<PAGE>
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, 1999 and
1998, and the related consolidated statements of operations, changes in
redeemable members' equity and comprehensive loss and cash flows for the three
years in the period ended December 31, 1999. 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 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 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, 1999 and 1998, and the results of their
operations and their cash flows for the three years in the period ended December
31, 1999 in conformity with generally accepted accounting principles.
Our audits were made for the purpose of forming an opinion on the basic
consolidated financial statements taken as a whole. Schedule II--Valuation and
Qualifying Accounts is presented for purposes of complying with the Securities
and Exchange Commissions rules and is not part of the basic consolidated
financial statements. This schedule has been subjected to the auditing
procedures applied in the audit of the basic consolidated financial statements
and, in our opinion, fairly states in all material respects the financial data
required to be set forth therein in relation to the basic consolidated financial
statements taken as a whole.
ARTHUR ANDERSEN LLP
Stamford, Connecticut
February 25, 2000
41
<PAGE>
<TABLE>
<CAPTION>
MEDIACOM LLC AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(ALL DOLLAR AMOUNTS IN 000'S)
DECEMBER 31,
------------
1999 1998
---- ----
ASSETS
<S> <C> <C>
Cash and cash equivalents......................................................... $ 4,473 $ 2,212
Subscriber accounts receivable, net of allowance for doubtful accounts of $772
and $298, respectively......................................................... 5,194 2,512
Prepaid expenses and other assets................................................. 4,376 1,712
Investments....................................................................... 8,794 -
Investment in cable television systems:
Inventory...................................................................... 12,384 8,240
Property, plant and equipment, at cost......................................... 700,696 314,627
Less--accumulated depreciation.................................................. (101,693) (45,423)
-------- -------
Property, plant and equipment, net........................................ 599,003 269,204
Intangible assets, net of accumulated amortization of $56,171 and $26,307,
respectively.............................................................. 588,103 150,928
------- -------
Total investment in cable television systems.............................. 1,199,490 428,372
Other assets, net of accumulated amortization of $6,343 and $3,854,
respectively................................................................... 43,599 16,344
------ ------
Total assets.............................................................. $ 1,265,926 $ 451,152
=========== =========
LIABILITIES AND REDEEMABLE MEMBERS' EQUITY
LIABILITIES
Debt........................................................................... $ 1,139,000 $ 337,905
Accounts payable and accrued expenses.......................................... 56,310 30,891
Subscriber advances............................................................ 3,188 1,510
Management fees payable........................................................ 873 962
Deferred revenue............................................................... 11,940 1,233
------ -----
Total liabilities......................................................... 1,211,311 372,501
COMMITMENTS AND CONTINGENCIES.....................................................
REDEEMABLE MEMBERS' EQUITY
Capital contributions.......................................................... 142,096 124,990
Other redeemable members' equity............................................... 39,917 -
Accumulated comprehensive income............................................... 261 -
Accumulated deficit............................................................ (127,659) (46,339)
-------- -------
Total redeemable members' equity.......................................... 54,615 78,651
------ ------
Total liabilities and redeemable members' equity.......................... $ 1,265,926 $ 451,152
=========== =========
</TABLE>
The accompanying notes to consolidated financial statements are
an integral part of these statements.
42
<PAGE>
<TABLE>
<CAPTION>
MEDIACOM LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(ALL AMOUNTS IN 000'S, EXCEPT PER SHARE AMOUNTS)
YEARS ENDED DECEMBER 31,
------------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Revenues.......................................................... $ 176,052 $ 129,297 $ 17,634
Costs and expenses:
Service costs................................................ 58,058 43,849 5,547
Selling, general and administrative expenses................. 32,949 25,596 2,696
Management fee expense....................................... 6,951 5,797 882
Depreciation and amortization................................ 101,065 65,793 7,636
Non-cash stock charges....................................... 15,445 - -
------ ------- ------
Operating income (loss)........................................... (38,416) (11,738) 873
------- ------- ---
Interest expense, net............................................. 37,817 23,994 4,829
Other expenses.................................................... 5,087 4,058 640
----- ----- ---
Net loss.......................................................... $ (81,320) $ (39,790) $ (4,596)
========= ========= ========
Basic and diluted loss per share.................................. $ (4.11) $ (5.28) $ (3.66)
Weighted average common shares outstanding ....................... 19,797 7,538 1,255
</TABLE>
The accompanying notes to consolidated financial statements are
an integral part of these statements.
43
<PAGE>
<TABLE>
<CAPTION>
MEDIACOM LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN
REDEEMABLE MEMBERS' EQUITY AND COMPREHENSIVE LOSS
(ALL DOLLAR AMOUNTS IN 000'S)
OTHER TOTAL
REDEEMABLE ACCUMULATED REDEEMABLE
CAPITAL MEMBERS' COMPREHENSIVE ACCUMULATED MEMBERS'
CONTRIBUTIONS EQUITY LOSS DEFICIT EQUITY
------------- ------ ---- ------- ------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1996 $ 6,490 $ - $ - $ (1,953) $ 4,537
Comprehensive loss:
Net loss - - - (4,596)
Comprehensive loss (4,596)
Members' contributions 24,500 - - - 24,500
------ -------- ------- ----------- ------
Balance, December 31, 1997 $ 30,990 - - $ (6,549) $ 24,441
Comprehensive loss:
Net loss - - - (39,790)
Comprehensive loss $ (39,790)
Members' contributions 94,000 - - - 94,000
------ -------- ------- ----------- ------
Balance, December 31, 1998 $ 124,990 - - $ (46,339) $ 78,651
Comprehensive loss:
Net loss - - - (81,320)
Unrealized gain on
investments - 261 -
Comprehensive loss $ (81,059)
Members' contributions 10,500 - - - 10,500
Non-cash contributions 6,606 6,606
Non-cash contribution for the
reduction of management fees - 25,100 - - 25,100
Equity issued to management - 27,016 - - 27,016
Non-vested portion of equity
granted to employees - (12,199) - - (12,199)
-------- -------- ------- ---------- -------
Balance, December 31, 1999 $ 142,096 $ 39,917 $ 261 $ (127,659) $ 54,615
========= ======== ======= =========== =========
</TABLE>
The accompanying notes to consolidated financial statements are
an integral part of these statements.
44
<PAGE>
<TABLE>
<CAPTION>
MEDIACOM LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(ALL DOLLAR AMOUNTS IN 000'S)
YEARS ENDED DECEMBER 31,
------------------------
1999 1998 1997
---- ---- ----
CASH FLOWS PROVIDED BY OPERATING ACTIVITIES:
<S> <C> <C> <C>
Net loss................................................................. $ (81,320) $ (39,790) $ (4,596)
Adjustments to reconcile net loss to net cash flows from operating
activities:
Accretion of interest on seller note................................... 225 287 264
Depreciation and amortization.......................................... 101,065 65,793 7,636
Other non-cash charges................................................. 21,909 - -
Changes in assets and liabilities, net of effects from acquisitions:
Subscriber accounts receivable....................................... 429 (1,437) (351)
Prepaid expenses and other assets.................................... (2,211) 329 (34)
Accounts payable and accrued expenses................................ 13,120 26,665 3,520
Subscriber advances.................................................. 480 852 498
Management fees payable.............................................. (89) 857 70
Deferred revenue..................................................... 608 - -
--- --- ---
Net cash flows provided by operating activities.................... 54,216 53,556 7,007
------ ------ -----
CASH FLOWS USED IN INVESTING ACTIVITIES:
Capital expenditures..................................................... (86,669) (53,721) (4,699)
Acquisitions of cable television systems................................. (764,253) (343,330) (54,842)
Other, net............................................................... (626) (34) (467)
---- --- ----
Net cash flows used in investing activities........................ (851,548) (397,085) (60,008)
-------- -------- -------
CASH FLOWS PROVIDED BY FINANCING ACTIVITIES:
New borrowings........................................................... 995,700 488,200 72,225
Repayment of debt........................................................ (194,830) (223,350) (40,250)
Capital contributions.................................................... 10,500 94,000 24,500
Financing costs.......................................................... (11,777) (14,136) (2,843)
------- ------- ------
Net cash flows provided by financing activities.................... 799,593 344,714 53,632
------- ------- ------
Net increase in cash and cash equivalents.......................... 2,261 1,185 631
CASH AND CASH EQUIVALENTS, beginning of year............................... 2,212 1,027 396
----- ----- ---
CASH AND CASH EQUIVALENTS, end of year..................................... $ 4,473 $ 2,212 $ 1,027
========= ======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for interest................................... $ 28,639 $ 21,127 $ 4,485
========= ======== ========
</TABLE>
The accompanying notes to consolidated financial statements are
an integral part of these statements.
45
<PAGE>
MEDIACOM LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) THE LIMITED LIABILITY COMPANY:
ORGANIZATION
Mediacom LLC ("Mediacom" and collectively with its subsidiaries, the
"Company"), a New York limited liability company, is involved in the acquisition
and development of cable television systems serving principally non-metropolitan
markets of the United States. Through these cable systems, the Company provides
entertainment, information and telecommunications services to its subscribers.
As of December 31, 1999, the Company had acquired and was operating cable
television systems in 21 states, principally Alabama, California, Florida,
Illinois, Indiana, Iowa, Kentucky, Minnesota, Missouri and North Carolina.
Mediacom 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 and the contribution of
equity 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"). On November 19,
1999, the 1998 Operating Agreement was amended and restated upon the
contribution of additional equity to Mediacom (the "1999 Operating Agreement").
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 $200.0 million aggregate principal amount
of 8 1/2% Senior Notes due 2008 (the "8 1/2% Senior Notes"), which were issued
on April 1, 1998. Mediacom Capital also acted as co-issuer with Mediacom of the
$125.0 million aggregate principal amount of the 7 7/8% Senior Notes due 2011
(the "7 7/8% Senior Notes" and collectively with the 8 1/2% Senior Notes, the
"Senior Notes"), which were issued on February 26, 1999. 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 Senior Notes.
CAPITALIZATION
Mediacom was initially capitalized on March 12, 1996, with equity
contributions of approximately $5.4 million from Mediacom's members and $45,000
from Mediacom Management Corporation ("Mediacom Management"), a Delaware
corporation. On June 28, 1996, Mediacom received additional equity contributions
of $1.0 million from an existing member.
On June 22 and September 18, 1997, Mediacom received additional equity
contributions of $19.5 million and $5.0 million respectively, from its members.
On January 22, 1998, Mediacom received additional equity contributions of $94.0
million from its members. On November 3, 1999, Mediacom received additional
equity contributions of $10.5 million from its members.
ALLOCATION OF LOSSES, PROFITS AND DISTRIBUTIONS
For 1997, pursuant to the 1997 Operating Agreement, net losses were
allocated first to the Commisso Members (the "Primary Members"), as defined
therein, including Rocco B. Commisso (the "Manager"), the current Chief
Executive Officer of the Company, and the balance to the other members ratably
in accordance with their respective membership units. For 1998, pursuant to the
1998 Operating Agreement, net losses were allocated first to the Primary
Members; second, to the member owning the largest number of membership units in
Mediacom; and third, to the members, other than the Primary Members, ratably in
accordance with their respective positive capital account balances and
membership units. For 1999, pursuant to the 1999 Operating Agreement, net losses
were allocated first to the Primary Members, and the balance to the other
members ratably in accordance with their respective membership units.
46
<PAGE>
MEDIACOM LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Pursuant to the 1997 Operating Agreement, profits were 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 Primary Members) until they received a 12% preferred return on
their preferred capital (the "Preferred Return"); fourth, to the Primary Members
until the Primary Members received an amount equal to 25% (the "Primary Member
Return") of the amount of the Preferred Return to all members; the balance, 80%
to the members (including the Primary Members) in proportion to their respective
membership units and 20% to the Primary Members. The 1999 Operating Agreement
provided that in the event of a carried interest conversion valuation (as
defined therein): (i) the Primary Member Return would be reduced to 11.111% and
(ii) profits in excess of the Preferred Return and the Primary Member Return
would be allocated 90% to the members (including the Primary Members) and 10% to
the Primary Members.
Distributions are made first to the members (including the Primary Members)
in proportion to their respective membership units until they receive amounts
equal to their preferred capital; second, to the members (including the Primary
Members) in proportion to their percentage interests until all members receive
the Preferred Return; third, to the Primary Members until the Primary Members
receives 25% of the amount of the Preferred Return; the balance, 80% to the
members (including the Primary Members) in proportion to their percentage
interests and 20% to the Primary Members. The 1999 Operating Agreement amended
the provisions governing distributions to members in a manner identical to the
above amendments to the allocation of profits in the event of a carried interest
conversion valuation.
REVALUATION
The 1999 Operating Agreement and previous operating agreements provided
that upon the occurrence of certain events such as the admission of new members,
new equity contributions or an initial public offering, the Executive Committee
of Mediacom would make a determination of the aggregate equity value of
Mediacom. Based on this determination, as required, Mediacom will issue
additional membership interests to its members, each having a value upon
issuance of $1,000.
The 1999 Operating Agreement and previous operating agreements also contain
provisions relating to a special allocation of membership interests to the
Primary Members at each revaluation event based on the formula for allocation of
profits. In accordance with these provisions, the Primary Members was issued
additional membership interests in Mediacom having a value upon issuance of
$57.9 million and $3.7 million in 1999 and 1998, respectively. These special
allocations are reflected as equity transactions among the members.
REDEMPTION RIGHTS
Except as set forth below, no member of Mediacom has the right to have its
membership interests redeemed or its capital contributions returned prior to
dissolution of Mediacom. Pursuant to the 1998 and 1999 Operating Agreements,
each member had the right to require Mediacom to redeem its membership interests
at any time if the holding of such interests exceeds the amount permitted, or
was otherwise prohibited or becomes unduly burdensome, by any law to which such
member was subject, or, in the case of any member which was 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 was unable to redeem for cash any
or all of such membership interests at such time, Mediacom was required to issue
as payment for such interests a junior subordinated promissory note with a
five-year maturity date and deferred interest which accrued and compounded at an
annual rate of 5% over the prime rate.
In addition, in connection with the Company's acquisition of the
Cablevision Systems in January 1998 (See Note 4), 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 interests in Mediacom. This temporary waiver was originally
set to expire in January 1999; in January 1999, the FCC granted an extension of
such waiver to July 1999 and further extended the
47
<PAGE>
MEDIACOM LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
waiver to January 23, 2000. As of December 1999, the Transactional Member was in
compliance with the cross-ownership restrictions.
DURATION AND DISSOLUTION
Mediacom will be dissolved upon the first to occur of the following: (i)
December 31, 2020; (ii) certain events of bankruptcy involving the Manager, as
defined in the 1999 Operating Agreement, or the occurrence of any other event
terminating the continued membership of the Manager, unless within one hundred
eighty days after such event the Company is continued by the vote or written
consent of no less than two-thirds of the remaining membership interests; or
(iii) the entry of a decree of judicial dissolution.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
BASIS OF PREPARATION OF CONSOLIDATED FINANCIAL STATEMENTS
The consolidated financial statements include the accounts of Mediacom and
its subsidiaries. All significant intercompany transactions and balances have
been eliminated. The preparation of the consolidated 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.
REVENUE RECOGNITION
Revenues include subscriber service revenues and charges for installations
and connections. Revenues are recognized in the period in which the related
services are provided to the Company's customers. Other revenues are recognized
as services are provided. Revenues obtained from the connection and installation
of customers are recognized as revenue to the extent of direct selling costs
incurred. The balance, if any, is deferred and amortized to income over the
estimated average period that customers are expected to remain connected to the
systems.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with original
maturities of three months or less to be cash equivalents.
CONCENTRATION OF CREDIT RISK
The Company's accounts receivable is comprised of amounts due from
subscribers in varying regions throughout the United States. Concentration of
credit risk with respect to these receivables is limited due to the large number
of customers comprising the Company's customer base and their geographic
dispersion.
INVESTMENTS
Investments consist of equity securities. Management classifies these
securities as available-for-sale securities under the provisions defined in the
Statement of Financial Accounting Standards No. 115, "Accounting for Certain
Investments in Debt and Equity Securities."
Management determines the appropriate classification of its investments at
the time of purchase and reevaluates such determination at each balance sheet
date. Available-for-sale securities are carried at market value, with the
unrealized gains and losses reported as a component of accumulated comprehensive
income. The cost of investments sold is determined on the first-in, first-out
method.
48
<PAGE>
MEDIACOM LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
INVENTORY
Inventory consists primarily of fiber-optic cable, coaxial cable,
electronics, hardware and miscellaneous tools and are stated at the lower of
cost or market. Cost is determined using the average cost method.
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 other direct costs related to the installation of property, plant
and equipment of approximately $11.0 million and $6.5 million in 1999 and 1998,
respectively.
The Company capitalizes interest on funds borrowed for projects under
construction. Such interest is charged to property, plant and equipment and
amortized over the approximate life of the related assets. Capitalized interest
was approximately $1.8 million and $1.0 million in 1999 and 1998, respectively.
Depreciation is calculated on a straight-line basis over the following
useful lives:
<TABLE>
<CAPTION>
<S> <C>
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
</TABLE>
INTANGIBLE ASSETS
Intangible assets include franchising costs, goodwill, subscriber lists and
covenants not to compete. Amortization of intangible assets is calculated on a
straight-line basis over the following lives:
Franchising costs................................. 15 years
Goodwill 15 years
Subscriber lists.................................. 5 years
Covenants not to compete.......................... 3 to 7 years
IMPAIRMENT OF LONG-LIVED ASSETS
The Company follows the provisions of Statement of Financial Accounting
Standards No. 121 ("SFAS 121"), "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed of ". SFAS 121 requires that
long-lived assets and certain identifiable intangibles to be held and used by
any entity be reviewed for impairment at each year end and 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 financing costs of approximately $18.7 million and
$16.3 million and non-cash stock expense of approximately $24.5 million and $0
as of December 31, 1999 and 1998, respectively. 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. Non-cash stock expense relating
to the reduction of management fees payable by the Company to Mediacom
Management is deferred and amortized over the expected term of the underlying
management agreements. (See Note 10).
49
<PAGE>
MEDIACOM LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
COMPREHENSIVE LOSS
For the year ended December 31, 1999, the Company adopted Statement of
Financial Accounting Standards No. 130 ("SFAS 130"), "Reporting Comprehensive
Income," which establishes standards for reporting and displaying comprehensive
income and its components in the consolidated financial statements. The accounts
for unrealized gains on investments are recorded as a component of accumulated
comprehensive income.
RECLASSIFICATIONS
Certain reclassifications have been made to prior year's amounts to conform
to the current year's presentation.
(3) LOSS PER SHARE
The Company calculates loss per share in accordance with Statement
Financial of Accounting Standards No. 128 ("SFAS 128"), "Earnings per Share."
SFAS 128 computes basic loss per share by dividing the net loss by the weighted
average number of shares of common stock outstanding during the period. Diluted
loss per share is computed by dividing the net loss by the weighted average
number of shares of common stock outstanding during the period plus the effects
of any potentially dilutive securities. The Company does not have any additional
securities outstanding that would have a dilutive effect on the weighted average
common shares outstanding.
The following table summarizes the Company's calculation of basic and
diluted loss per share for the years ended December 31, 1999, 1998 and 1997:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
(IN THOUSANDS, EXCEPT PER SHARE
AMOUNTS)
<S> <C> <C> <C>
Net loss........................................................ $(81,320) $(39,790) $(4,596)
Basic and diluted loss per share................................ $ (4.11) $ (5.28) $ (3.66)
Weighted average common shares outstanding...................... 19,797 7,538 1,255
</TABLE>
The weighted average shares outstanding is computed based on the conversion
ratio used to exchange Mediacom's membership units for shares of MCC's common
stock upon MCC's initial public offering (See Note 16).
(4) ACQUISITIONS:
The Company has completed the undernoted acquisitions (the "Acquired
Systems") in 1999 and 1998. These acquisitions were accounted for using the
purchase method of accounting, and accordingly, the purchase price of these
Acquired Systems have been allocated to the assets acquired and liabilities
assumed at their estimated fair values at their respective date of acquisition.
The results of operations of the Acquired Systems have been included with those
of the Company since the dates of acquisition.
50
<PAGE>
MEDIACOM LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1999
On October 15, 1999, the Company acquired the stock of Zylstra
Communications Corporation (the "Zylstra Systems"), for a purchase price of
approximately $19.5 million. Zylstra owned and operated cable television systems
serving approximately 14,000 subscribers in Iowa, Minnesota and South Dakota.
The purchase price has been preliminarily allocated as follows: $7.8 million to
property, plant and equipment, and $11.7 million to intangible assets. Such
allocations are subject to adjustments based upon the final appraisal
information received by the Company. The final allocations of the purchase price
are not expected to differ materially from the preliminary allocations.
Additionally, approximately $400,000 of direct acquisition costs has been
allocated to property, plant and equipment and intangible assets. In the fourth
quarter of 1999, the Company recorded acquisition reserves related to this
acquisition in the amount of approximately $200,000, which are included in
accrued expenses. The Zylstra acquisition was financed with borrowings under the
Mediacom USA Credit Agreement. (See Note 9).
On November 5, 1999, the Company acquired the assets of cable television
systems owned by Triax Midwest Associates, L.P. (the "Triax Systems"), for a
purchase price of approximately $740.1 million. The Triax systems served
approximately 344,000 subscribers primarily in Illinois, Indiana, and Minnesota.
The purchase price has been preliminarily allocated as follows: $296.0 million
to property, plant and equipment, and $444.1 million to intangible assets. Such
allocations are subject to adjustments based upon the final appraisal
information received by the Company. The final allocations of the purchase price
are not expected to differ materially from the preliminary allocations.
Additionally, approximately $10.5 million of direct acquisition costs has been
allocated to property, plant and equipment, intangible assets and other assets.
In the fourth quarter of 1999, the Company recorded acquisition reserves related
to this acquisition in the amount of approximately $5.5 million, which are
included in accrued expenses. The Triax acquisition was financed with $10.5
million of additional equity contributions from the Mediacom's members and
borrowings under the Mediacom Midwest Credit Agreement. (See Notes 1 and 9).
1998
On January 9, 1998, the Company acquired the assets of a cable television
system serving approximately 17,200 basic subscribers in Clearlake, California
and surrounding communities (the "Clearlake System"), for a purchase price of
$21.4 million. The purchase price has been allocated based on an independent
appraisal as follows: approximately $6.0 million to property, plant and
equipment, and approximately $15.4 million to intangible assets. Additionally,
approximately $200,000 of direct acquisition costs has been allocated to other
assets. The acquisition of the Clearlake System and related closing costs and
adjustments were financed with borrowings under the Company's bank credit
facilities. (See Note 9).
On January 23, 1998, the Company acquired the assets of cable television
systems serving approximately 260,100 basic subscribers in various regions of
the United States (the "Cablevision Systems"), for a purchase price of
approximately $308.2 million. The purchase price has been allocated based on an
independent appraisal as follows: approximately $205.5 million to property,
plant and equipment, and approximately $102.7 million to intangible assets.
Additionally, approximately $3.5 million of direct acquisition costs has been
allocated to other assets. The acquisition of the Cablevision Systems and
related closing costs and adjustments were financed with $94.0 million of equity
contributions and the remainder with borrowings under the Company's bank credit
facilities. (See Notes 1 and 9).
51
<PAGE>
MEDIACOM LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
On October 1, 1998, the Company acquired the assets of a cable television
system serving approximately 3,800 basic subscribers in Caruthersville, Missouri
(the "Caruthersville System") for a purchase price of $5.0 million. The purchase
price has been allocated as follows: approximately $2.3 million to property,
plant and equipment, and approximately $2.7 million to intangible assets. The
acquisition of the Caruthersville System and related closing costs and
adjustments were financed with borrowings under the Company's bank credit
facilities. (See Note 9).
(5) PRO FORMA RESULTS:
Summarized below are the pro forma unaudited results of operations for the
years ended December 31, 1999 and 1998, assuming the purchase of the Acquired
Systems had been consummated as of January 1, 1998. Adjustments have been made
to: (i) depreciation and amortization reflecting the fair value of the assets
acquired; and (ii) interest expense reflecting the debt incurred to finance the
acquisitions. The pro forma results may not be indicative of the results that
would have occurred if the acqusitions had been completed on the date indicated
or which may be obtained in the future.
<TABLE>
<CAPTION>
1999 1998
---- ----
(IN THOUSANDS, EXCEPT PER SHARE
AMOUNTS)
<S> <C> <C>
Revenues............................................................. $ 297,313 $ 272,258
Operating loss....................................................... (72,472) (55,406)
Net loss............................................................. (165,617) (148,523)
Basic and diluted loss per share .................................... $ (8.37) $ (19.70)
Weighted average common shares outstanding........................... 19,797 7,538
</TABLE>
(6) RECENT ACCOUNTING PRONOUNCEMENTS:
In 1998, Statement of Financial Accounting Standards No. 133 ("SFAS 133"),
"Accounting for Derivative Instruments and Hedging Activities", was issued. SFAS
133 established accounting and reporting standards requiring that derivative
instruments be recorded in the balance sheet as either an asset or liability
measured at its fair value. The Company will adopt SFAS 133 in fiscal 2001, and
has not yet quantified the impact or not yet determined the timing or method of
the adoption.
(7) PROPERTY, PLANT AND EQUIPMENT:
As of December 31, 1999 and 1998, property, plant and equipment consisted
of:
<TABLE>
<CAPTION>
1999 1998
---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Land and land improvements............................................. $ 414 $ 341
Buildings and leasehold improvements................................... 6,171 5,731
Cable systems, equipment and subscriber devices........................ 682,305 300,051
Vehicles............................................................... 7,211 5,051
Furniture, fixtures and office equipment............................... 4,595 3,453
----- -----
$ 700,696 $ 314,627
Accumulated depreciation............................................... (101,693) (45,423)
-------- -------
$ 599,003 $ 269,204
========= =========
</TABLE>
52
<PAGE>
MEDIACOM LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The property, plant and equipment allocations as of December 31, 1999
reflect the preliminary allocations for the Triax and Zylstra systems. Such
allocations are subject to adjustments based upon final appraisal information
received by the Company. Depreciation expense for the years ended December 31,
1999, 1998 and 1997 was approximately $59.2 million, $39.7 million and $4.7
million, respectively.
(8) INTANGIBLE ASSETS:
The following table summarizes the net asset value for each intangible
asset category as of December 31, 1999 and 1998 (dollars in thousands):
<TABLE>
<CAPTION>
GROSS ASSET ACCUMULATED NET ASSET
1999 VALUE AMORTIZATION VALUE
---- ----- ------------ -----
<S> <C> <C> <C>
Franchising costs....................................... $ 539,221 $ 18,174 $ 521,047
Goodwill 8,447 1,163 7,284
Subscriber lists........................................ 91,746 34,552 57,194
Covenants not to compete................................ 4,860 2,282 2,578
----- ----- -----
$ 644,274 $ 56,171 $ 588,103
========= ======== =========
GROSS ASSET ACCUMULATED NET ASSET
1998 VALUE AMORTIZATION VALUE
---- ----- ------------ -----
Franchising costs....................................... $ 87,509 $ 7,983 $ 79,526
Goodwill 8,400 1,313 7,087
Subscriber list......................................... 76,484 15,701 60,783
Covenants not to compete................................ 4,842 1,310 3,532
----- ----- -----
$ 177,235 $ 26,307 $ 150,928
========= ======== =========
</TABLE>
The intangible assets allocations as of December 31, 1999 reflect the
preliminary allocations for the Triax and Zylstra systems. Such allocations are
subject to adjustments based upon final appraisal information received by the
Company. Amortization expense for the years ended December 31, 1999, 1998 and
1997 was approximately $41.9 million, $26.1 million and $2.9 million,
respectively.
53
<PAGE>
MEDIACOM LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(9) DEBT:
As of December 31, 1999 and 1998, debt consisted of:
<TABLE>
<CAPTION>
1999 1998
---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Mediacom:
8 1/2% Senior Notes(a)................ $ 200,000 $ 200,000
7 7/8% Senior Notes(b)................ 125,000 -
Subsidiaries:
Bank Credit Facilities(c)............. 814,000 134,425
Seller Note(d)........................ - 3,480
--------- --------
$1,139,000 $ 337,905
========== ==========
</TABLE>
(a) On April 1, 1998, Mediacom and Mediacom Capital jointly issued $200.0
million aggregate principal amount of 8 1/2% Senior Notes due on April
15, 2008. The 8 1/2% Senior Notes are unsecured obligations of the
Company, and the indenture for the 8 1/2% Senior Notes stipulates,
among other things, restrictions on incurrence of indebtedness,
distributions, mergers and asset sales and has cross-default provisions
related to other debt of the Company. Interest accrues at 8 1/2% per
annum, beginning from the date of issuance and is payable semi-annually
on April 15 and October 15 of each year. The 8 1/2% Senior Notes may be
redeemed at the option of Mediacom, in whole or part, at any time after
April 15, 2003, at redemption prices decreasing from 104.25% of their
principal amount to 100% in 2006, plus accrued and unpaid interest.
(b) OnFebruary 26, 1999, Mediacom and Mediacom Capital jointly issued
$125.0 million aggregate principal amount of 7 7/8% Senior Notes due on
February 15, 2011. The 7 7/8% Senior Notes are unsecured obligations of
the Company, and the indenture for the 7 7/8% Senior Notes stipulates,
among other things, restrictions on incurrence of indebtedness,
distributions, mergers and asset sales and has cross-default provisions
related to other debt of the Company. Interest accrues at 7 7/8% per
annum, beginning from the date of issuance and is payable semi-annually
on February 15 and August 15 of each year, commencing on August 15,
1999. The 7 7/8% Senior Notes may be redeemed at the option of
Mediacom, in whole or part, at any time after February 15, 2006, at
redemption prices decreasing from 103.938% of their principal amount to
100% in 2008, plus accrued and unpaid interest.
(c) On June 24, 1997, the Company entered into an eight and one-half year
$100.0 million reducing revolver and term loan agreement (the "Western
Credit Agreement"). On January 23, 1998, the Company entered into a
separate eight and one-half year $225.0 million reducing revolver and
term loan agreement (the "Southeast Credit Agreement" and together with
the Western Credit Agreement, the "Former Bank Credit Agreements"). By
separate amendments dated as of January 26, 1999 to each of the Former
Bank Credit Agreements, the term loans were converted into additional
revolving credit loans.
On September 30, 1999, the Company replaced the Former Bank Credit
Agreements with $550.0 million of credit facilities, consisting of a
$450.0 million reducing revolving credit facility and a $100.0 million
term loan (the "Mediacom USA Credit Agreement"). The revolving credit
facility expires on March 31, 2008, subject to earlier expiration on
June 30, 2007 if Mediacom does not refinance the 8 1/2% Senior Notes by
March 31, 2007. The term loan is due and payable on September 30, 2008,
and is subject to repayment on September 30, 2007 if Mediacom does not
refinance the 8 1/2% Senior Notes by March 31, 2007. The reducing
revolving credit facility makes available a maximum commitment amount
for a period of up to eight and one-half years, which is subject to
quarterly reductions, beginning September 30, 2002, ranging from 1.25%
to 17.50% of the original commitment amount of the reducing revolver.
The Mediacom USA Credit Agreement requires mandatory reductions of the
reducing revolver facility from excess cash flow, as defined therein,
beginning December 31, 2002. The Mediacom USA Credit Agreement provides
for interest at
54
<PAGE>
MEDIACOM LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
varying rates based upon various borrowing options and the attainment
of certain financial ratios, and for commitment fees of 1/4% to 3/8%
per annum on the unused portion of available credit under the reducing
revolver credit facility.
On November 5, 1999, the Company entered into a separate credit
facility consisting of a $450.0 million reducing revolving credit
facility and a $100.0 million term loan (the "Mediacom Midwest Credit
Agreement", together with the Mediacom USA Credit Agreement, the "Bank
Credit Agreements"). The revolving credit facility expires on June 30,
2008, subject to earlier expiration on September 30, 2007 if Mediacom
does not refinance the 8 1/2% Senior Notes by March 31, 2007. The term
loan is due and payable on December 31, 2008, and is subject to
repayment on December 31, 2007 if Mediacom does not refinance the 8
1/2% Senior Notes by March 31, 2007. The reducing revolving credit
facility makes available a maximum commitment amount for a period of up
to eight and one-half years, which is subject to quarterly reductions,
beginning September 30, 2002, ranging from 1.25% to 8.75% of the
original commitment amount of the reducing revolver. The Mediacom
Midwest Credit Agreement requires mandatory reductions of the reducing
revolver facility from excess cash flow, as defined therein, beginning
December 31, 2002. The Midwest Credit Agreement provides for interest
at varying rates based upon various borrowing options and the
attainment of certain financial ratios, and for commitment fees of 1/4%
to 3/8% per annum on the unused portion of available credit under the
reducing revolver credit facility. The average interest rate on
outstanding debt under the Bank Credit Agreements was 8.0%, 6.9% and
8.3% for the three months ended December 31, 1999, 1998 and 1997,
respectively, before giving effect to the interest rate swap agreements
discussed below.
The Bank Credit Agreements require the Company to maintain compliance
with certain financial covenants including, but not limited to,
leverage, interest coverage and a pro forma debt service coverage
ratios, as defined therein. The Bank Credit Agreements also require the
Company to maintain compliance with other covenants including, but not
limited to, limitations on mergers and acquisitions, consolidations and
sales of certain assets, liens, the incurrence of additional
indebtedness, certain restrictive payments, and certain transactions
with affiliates. The Company was in compliance with all covenants of
the Bank Credit Agreements as of December 31, 1999.
The Bank Credit Agreements are secured by Mediacom's pledge of all its
ownership interests in its operating subsidiaries and is guaranteed by
Mediacom on a limited recourse basis to the extent of such ownership
interests. At December 31, 1999, the Company had approximately $285.6
million of unused bank commitments under the Bank Credit Agreements.
The Company uses interest rate swap agreements in order to fix the
interest rate for the duration of the contract as a hedge against
interest rate volatility. As of December 31, 1999, the Company had
entered into interest rate exchange agreements (the "Swaps") with
various banks pursuant to which the interest rate on $50.0 million is
fixed at a weighted average swap rate of approximately 6.2%, plus the
average applicable margin over the Eurodollar Rate option under the
Bank Credit Agreements. Under the terms of the Swaps, which expire from
2000 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) In connection with an acquisition completed in 1996, certain
subsidiaries of Mediacom issued to the seller an unsecured senior
subordinated note (the "Seller Note") in the amount of $2.8 million,
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. The Seller Note, together with accrued interest, was
repaid on September 24, 1999 with no penalties associated with
such prepayment.
55
<PAGE>
MEDIACOM LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 approximates the carrying value. The fair value at
December 31, 1999 of the 8 1/2% Senior Notes and the 7 7/8% Senior Notes was
approximately $186.0 million and $110.0 million, respectively.
The fair value of the Swaps is the estimated amount that the Company would
receive or pay to terminate the Swaps, taking into account current interest
rates and the current creditworthiness of the Swap counterparties. At December
31, 1999, the Company would have received approximately $504,000 if the Swaps
were terminated, inclusive of accrued interest.
The stated maturities of all debt outstanding as of December 31, 1999 are as
follows (dollars in thousands):
<TABLE>
<CAPTION>
<S> <C>
2000..................................................... $ -
2001..................................................... -
2002..................................................... 750
2003..................................................... 2,000
2004..................................................... 2,000
Thereafter .............................................. 1,134,250
---------
$ 1,139,000
===========
</TABLE>
(10) RELATED PARTY TRANSACTIONS:
Separate management agreements with each of Mediacom's operating
subsidiaries provided for Mediacom Management to be paid compensation for
management services performed for the Company. Until November 19, 1999, under
such agreements, Mediacom Management, which is wholly-owned by the Manager, was
entitled to receive annual management fees calculated as follows: (i) 5.0% of
the first $50.0 million of annual gross operating revenues of the Company; (ii)
4.5% of such revenues in excess thereof up to $75.0 million; and (iii) 4.0% of
such revenues in excess of $75.0 million. The management agreements with
Mediacom Management were amended effective November 19, 1999 in connection with
an amendment to Mediacom's operating agreement to provide annual management
fees equal to 2.0% of annual gross revenues. In connection with this amendment
to Mediacom's operating agreement, Mediacom Management also agreed to waive
all management fees incurred from July 1, 1999 through November 19, 1999 by
Mediacom's operating subsidiaries in the amount of approximately $2.8 million.
This waived amount is included in capital contributions in the consolidated
balance sheets. The Company incurred management fees of approximately $7.0
million, $5.8 million and $882,000 for the years ended December 31, 1999, 1998
and 1997, respectively. The management fees incurred in 1999 include the $2.8
million waived during such period.
During the fourth quarter of fiscal 1999, the Company recorded a deferred
non-cash stock expense of $25.1 million relating to amendments to the management
agreements with Mediacom Management for which additional membership units of
Mediacom were issued to the Manager. This deferred expense represents the future
benefit of reduced management fees. In the fourth quarter of fiscal 1999, the
Company recorded a non-cash stock charge of approximately $628,000 in its
consolidated statements of operations. The balance of approximately $24.5
million is included in other assets in the consolidated balance sheets and will
be amortized over the expected term of the original management agreements.
The operating agreement of Mediacom provides for Mediacom Management to be
paid a fee of 1.0% of the purchase price of acquisitions made by the Company
until the Company's pro forma consolidated annual operating revenues equal $75.0
million and 0.5% of such purchase price thereafter. In connection with an
amendment to Mediacom's operating agreement effective November 19, 1999,
Mediacom Management agreed to waive the acquisition fees of $3.8 million related
to the acquisitions of Triax and Zylstra systems and that no future acquisition
56
<PAGE>
MEDIACOM LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
fees are payable. The Company incurred acquisition fees of approximately $3.8
million, $3.3 million and $544,000 for the years ended December 31, 1999, 1998
and 1997, respectively. The acquisition fees incurred in 1999 represent the
amount waived during such period. The acquisition fees are included in other
expenses in the consolidated statement of operations.
The operating agreement of Mediacom also provides for the reimbursement
of reasonable out-of-pocket expenses of Mediacom Management incurred in
connection with the operation of the business of the Company and acting for or
on behalf of the Company in connection with any potential acquisitions. The
Company reimbursed Mediacom Management approximately $0, $53,000 and $59,000 for
the years ended December 31, 1999, 1998 and 1997, respectively.
The Manager is sole owner of Mediacom Management and has substantial
control over the operations of the Company. The Manager has the authority to
appoint 3 of the 5 members of Mediacom's Executive Committee. As indicated
above, the Company incurs fees and expenses from Mediacom Management which is
controlled by the Manager.
Chase Manhattan Capital, LLC and CB Capital Investors, LLC were members of
Mediacom as of December 31, 1999 and are parties related to Chase Securities
Inc. and The Chase Manhattan Bank (collectively, "Chase"). Chase acted in
various capacities on behalf of the Company, such as the initial purchaser of
the Senior Notes, advisor in connection with the Company's acquisitions of the
Cablevision Systems and the Triax Systems, placement agent of Mediacom's
membership units, and administrative agent for the Company's bank credit
facilities. Chase received fees in the aggregate amount of approximately $7.1
million and $10.8 million in 1999 and 1998, respectively, in connection with
these activities.
(11) EMPLOYEE BENEFIT PLANS:
Substantially all employees of the Company are eligible to participate in a
deferred arrangement pursuant to the Internal Revenue Code 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 $302,000, $264,000 and
$14,000 for the years ended December 31, 1999, 1998 and 1997, respectively.
(12) COMMITMENTS AND CONTINGENCIES:
Under various lease and rental agreements for offices, warehouses and
computer terminals, the Company had rental expense of approximately $1.3
million, $588,000 and $22,000 for the years ended December 31, 1999, 1998 and
1997, respectively. Future minimum annual rental payments are as follows
(dollars in thousands):
<TABLE>
<CAPTION>
<S> <C>
2000......................................................... $ 1,220
2001......................................................... 813
2002......................................................... 638
2003......................................................... 403
2004......................................................... 309
</TABLE>
57
<PAGE>
MEDIACOM LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In addition, the Company rents utility poles in its operations generally
under short-term arrangements, but the Company expects these arrangements to
recur. Total rental expense for utility poles was approximately $1.8 million,
$1.7 million and $102,000 for the years ended December 31, 1999, 1998 and 1997,
respectively.
As of December 31, 1999, approximately $421,000 of letters of credit were
issued in favor of various parties to secure the Company's performance relating
to franchise requirements and pole rentals. As of March 15, 2000, additional
letters of credit totaling approximately $1.7 million were issued in favor of
various parties relating to insurance requirements, pending acquisitions and
other franchise requirements.
LEGAL PROCEEDINGS
On January 19, 2000, Grey Advertising Inc. and Mediacom Inc., a
wholly-owned subsidiary of Grey, filed an action against MCC in the United
States District Court for the Southern District of New York asserting trademark
infringement, among other claims. The complaint alleges that Grey owns a
federally registered trademark for "Mediacom" and that MCC's use of this name
constitutes trademark infringement. Grey is seeking a permanent injunction to
prohibit MCC from using the Mediacom name in the conduct of MCC's business
together with unspecified monetary damages. MCC has denied the substantive
allegations of the complaint and is defending the action. If Mediacom
Communications Corporation is found to have infringed the proprietary rights of
Grey with respect to its use of the "Mediacom" mark or variations thereof,
Mediacom Communications Corporation could be enjoined from using the "Mediacom"
mark in connection with its business and be required to pay material monetary
damages. The Company is subject to legal proceedings and claims which arise in
the ordinary course of its business. In the opinion of management, the amount of
ultimate liability with respect to these actions will not materially affect the
financial position, results of operations or liquidity of the Company.
There are no other material pending legal proceedings to which the Company
is a party or to which any of our properties are subject.
REGULATION IN THE CABLE TELEVISION INDUSTRY
The cable television industry is subject to extensive regulation by
federal, local and, in some instances, state government agencies. The Cable
Television Consumer Protection and Competition Act of 1992 and the Cable
Communication Policy Act of 1984 (collectively, the "Cable Acts"), both of which
amended the Communications Act of 1934 (as amended, the "Communications Act"),
established a national policy to guide the development and regulation of cable
television systems. The Communications Act was 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") on March 31, 1999 and, for certain small cable operators, immediately
eliminates rate regulation of CPST, and, in certain limited circumstances, basic
services. The FCC is currently developing permanent regulations to implement the
rate deregulation provisions of the 1996 Telecom Act. The Company is currently
unable to predict the ultimate effect of the Cable Acts or the 1996 Telecom Act
on its financial statements.
58
<PAGE>
MEDIACOM LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED 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 to
effect the same outcome.
STATE AND LOCAL REGULATION
Cable television systems generally operate pursuant to non-exclusive
franchises, permits or licenses granted by a municipality or other state or
local governmental entity. The terms and conditions of franchises vary
materially from jurisdiction to jurisdiction. A number of states subject cable
television systems to the jurisdiction of centralized state government agencies.
To date, other than Delaware, no state in which the Company currently operates
has enacted state level regulation. The Company cannot predict whether any of
the states in which currently operates will engage in such regulation in the
future.
(13) FASB 131--DISCLOSURE ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED
INFORMATION:
During the fourth quarter of fiscal year 1998, the Company adopted
Statement of Financial Accounting Standards ("SFAS 131"), "Disclosure about
Segments of an Enterprise and Related Information". This statement requires the
Company to report segment financial information consistent with the
presentations made to the Company's management for decision-making purposes. All
revenues of the Company are derived solely from cable television operations and
related activities. When allocating capital and operational resources to the
cable television systems, the Company's management evaluates such factors as the
bandwidth capacity and other cable plant characteristics, the offered
programming services, and the rate structure. The decision making of the
Company's management is based primarily on the impact of such resource
allocations on the Company's consolidated system cash flow (defined as operating
income before management fee expense, depreciation and amortization and non-cash
stock charges). For the years ended 1999, 1998 and 1997, the Company's
consolidated system cash flow was approximately $85.0 million, $59.9 million and
$9.4 million, respectively.
(14) INVESTMENTS
On November 4, 1999, the Company completed an agreement with SoftNet
Systems, Inc. ("SoftNet") a high-speed broadband Internet access and content
services company, to deploy SoftNet's high-speed Internet access services
throughout the Company's cable television systems. In addition to a revenue
sharing arrangement with SoftNet, the Company received 3.5 million shares of
SoftNet's common stock, representing a fair value of approximately $87.9 million
as of December 31, 1999, in exchange for SoftNet's long-term rights to deliver
high-speed Internet access services to the Company's customers. Under the terms
of this agreement, over a period of three years the Company is required to
upgrade its cable network to provide two-way communications capability in cable
systems passing 900,000 homes and make available such homes to SoftNet. Of the
issued shares, 90% are subject to forfeiture in the event the Company does not
perform subject to the schedule set forth in this agreement calling for the
delivery by the Company of two-way capable homes.
As of December 31, 1999, the Company received 3.5 million shares of
SoftNet's common stock of which ten percent or 350,000 shares were vested and
non-forfeitable upon the date of receipt. The Company will record the value of
these vested and non-forfeitable shares of approximately $8.5 million as
revenues over the term of the agreement. As the Company delivers the required
number of two-way capable homes pursuant to its agreement with SoftNet, an
increasing number of the shares of SoftNet's common stock will become vested and
non-forfeitable. The Company will recognize the remaining 3,150,000 shares of
SoftNet's common stock as revenues over the term of this agreement. During the
fourth quarter, the Company recorded approximately $142,000 as revenues relating
to the SoftNet common stock.
59
<PAGE>
MEDIACOM LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(15) EMPLOYMENT ARRANGEMENTS
During the fourth quarter of fiscal 1999, the Company recorded a deferred
non-cash stock expense of approximately $27.0 million relating to the grant of
membership units of Mediacom to certain members of management for past and
future services. These units will vest over five years and are subject to
forfeiture penalties during the three year period between the date the
membership units become vested and the date the employee leaves Mediacom.
Forfeited units will revert to the Manager. During the fourth quarter of fiscal
1999, Mediacom recorded a non-cash stock charge of approximately $14.8 million
in its consolidated statements of operations, relating to the vested and
non-forfeitable membership units. The balance of approximately $12.2 million,
relating to the non-vested and forfeitable membership units, was recorded as
other redeemable members' equity in the consolidated balance sheets and will be
amortized as a non-cash stock expense over a period of five to eight years.
(16) RECENT EVENTS
INITIAL PUBLIC OFFERING
On February 9, 2000, MCC, completed an initial public offering ("IPO") of
20,000,000 shares of Class A common stock at $19.00 per share. The net proceeds,
after underwriting discounts of approximately $22.8 million and estimated
expenses related to the offering of approximately $2.8 million, were $354.4
million and were used to repay bank indebtedness. Immediately prior to the
completion of the IPO, MCC issued 40,657,010 shares of Class A common stock and
29,342,990 shares of Class B common stock in exchange for all the outstanding
membership interests of Mediacom, which serves as the holding company for the
operating subsidiaries. As a result, MCC became the parent company of Mediacom,
which continues to serve as the holding company of its subsidiaries. On February
9, 2000, Mediacom's 1999 Operating Agreement was amended to reflect MCC as the
sole member and manager of Mediacom.
Immediately prior to the IPO, additional membership interests were issued
to all members of Mediacom in accordance with a formula set forth in Mediacom's
1999 Operating Agreement which was based upon a valuation of Mediacom
established at the time of the IPO. A provision in the 1999 Operating Agreement
eliminated a certain portion of the special allocation of membership interests
awarded to the Primary Members based upon valuations of Mediacom performed from
time to time. In connection with the removal of these specified special
allocation provisions and the amendments to Mediacom's management agreements
with Mediacom Management effective November 19, 1999, the Primary Members were
issued new membership interests at the time of the IPO representing 16.5% of the
equity in Mediacom in accordance with a formula based upon the valuation
established immediately prior to the IPO. These newly issued membership
interests were exchanged for shares of MCC's common stock in the IPO.
In addition, the Primary Members received options to purchase 7.2 million
shares of MCC's common stock in exchange for the elimination of the balance of
the provision providing for a special allocation of membership interests. These
options are for a term of five years and are exercisable, commencing six months
after the completion of the IPO, at a price equal to the initial public offering
price of $19.00. With the exception of such options held by the Manager to
purchase approximately 6,900,000 shares of common stock, such options: (i) vest
over five years which vesting period is deemed to have commenced for these
certain members on various dates prior to the IPO; and (ii) are subject to
forfeiture penalties during the three year period between the date the options
become vested and the date the employee leaves Mediacom.
The management agreements between Mediacom Management and each of the
operating subsidiaries were terminated upon completion of the IPO, and Mediacom
Management's employees became MCC's employees and its corporate overhead became
MCC's corporate overhead. These expenses will be reflected as a corporate
expense in the consolidated statement of operations. As a result of the
completion of the IPO and the termination of these management agreements,
the deferred non-cash stock expense of $24.5 million relating to
the future
60
<PAGE>
MEDIACOM LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
benefit of reduced management fees, will be recorded as a non-cash stock charge
in the consolidated statements of operations in the first quarter of fiscal
2000. (See Note 10).
As of December 20, 1999, the Board of Directors of MCC adopted a stock
option plan for officers, directors and key employees. On February 3, 2000,
options for an aggregate of 2.8 million shares of Class A and Class B common
stock were granted to employees at an exercise price equal to the initial public
offering price of $19.00. Such options have a term of ten years and vest in
equal annual installments over five years. Vesting is contingent on continuous
employment. Options that do not vest will be forfeited.
As of December 20, 1999, the Board of Directors of MCC adopted the 1999
employee stock purchase plan. The employee stock purchase plan is intended to
qualify under Section 423 of the Internal Revenue Code of 1986, as amended. MCC
reserved 1,000,000 shares of its Class A common stock for issuance under the
plan.
On February 4, 2000, MCC granted to each of Craig S. Mitchell and Robert L.
Winikoff options to purchase 30,000 shares of Class A common stock, and also
granted to each of William S. Morris III, Thomas V. Reifenheiser and Natale S.
Ricciardi options to purchase 20,000 shares of Class A common stock at an
exercise price equal to the public offering price of $19.00 per share. Such
options have a term of ten years and vest in three equal annual installments
beginning February 3, 2001.
Pursuant to an agreement with Mediacom Management, MCC purchased all of its
assets upon the completion of the initial public offering. MCC paid Mediacom
Management approximately $653,000 for the furniture, computers and other office
equipment that Mediacom Management purchased to conduct its operations. The
purchase price paid to Mediacom Management for such assets approximated their
carrying value.
Mediacom is a limited liability company and its members were required to
report their share of income or loss in their respective income tax returns.
After the completion of the IPO and the exchange of membership interests in
Mediacom for shares of MCC's common stock, the results of MCC will be included
in MCC's corporate tax returns. MCC will also record a one-time non recurring
charge to earnings to record a net deferred tax liability. If the Company had
been a C corporation as of December 31, 1999, this charge would have been
approximately $1.3 million.
(17) SUBSEQUENT EVENTS
PENDING ACQUISITIONS
As of March 15, 2000, the Company entered into four separate asset purchase
agreements to acquire cable television systems serving approximately 19,000
basic subscribers for an aggregate purchase price of $29.4 million. The Company
expects to close these four acquisitions in the second and third quarters of
2000, subject to the receipt of all necessary regulatory approvals. The Company
also signed one letter of intent to acquire cable systems serving approximately
9,000 basic subscribers for a purchase price of $16.0 million. The Company
expects to complete the acquisition of these systems in the third quarter of
2000, subject to the negotiation of definitive documentation and the receipt of
all necessary regulatory approvals.
61
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE II
MEDIACOM LLC AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
(ALL DOLLAR AMOUNTS IN 000'S)
BALANCE AT ADDITIONS
BEGINNING OF CHARGED TO COSTS BALANCE AT
PERIOD AND EXPENSES DEDUCTIONS END OF PERIOD
------ ------------ ---------- -------------
December 31, 1997
<S> <C> <C> <C> <C>
Allowance for doubtful accounts
Current receivables............... $ 25 $ 45 $ 14 $ 56
December 31, 1998
Allowance for doubtful accounts
Current receivables............... $ 56 $ 1,694 $ 1,452 $ 298
Acquisition reserves(1)
Accrued expenses.................. $ - $ 4,120 $ - $ 4,120
December 31, 1999
Allowance for doubtful accounts
Current receivables............... $ 298 $ 975 $ 501 $ 772
Acquisition reserves(1)
Accrued expenses.................. $ 4,120 $ 1,530 $ - $ 5,650
- ------------------
(1) Addition was charged to intangible assets
</TABLE>
62
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholder of Mediacom Capital Corporation:
We have audited the accompanying balance sheets of Mediacom Capital Corporation
as of December 31, 1999 and 1998. These balance sheets are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
balance sheets 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 balance sheet is free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the balance sheet. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the balance sheets referred to above present fairly, in all
material respects, the financial position of Mediacom Capital Corporation as of
December 31, 1999 and 1998, in conformity with generally accepted accounting
principles.
Arthur Andersen LLP
Stamford, Connecticut
February 25, 2000
63
<PAGE>
<TABLE>
<CAPTION>
MEDIACOM CAPITAL CORPORATION
BALANCE SHEETS
DECEMBER 31, DECEMBER 31,
1999 1998
---- ----
ASSETS
<S> <C> <C>
Note receivable - from affiliate for issuance of common stock $ 100 $ 100
----- -----
Total assets $ 100 $ 100
===== =====
STOCKHOLDER'S EQUITY
Common stock, par value $0.10; 200 shares authorized;
100 shares issued and outstanding $ 10 $ 10
Additional paid-in capital 90 90
-- --
Total stockholder's equity $ 100 $ 100
===== =====
</TABLE>
The accompanying note to the balance sheets
is an integral part of these financial statements.
64
<PAGE>
MEDIACOM CAPITAL CORPORATION
NOTE TO THE BALANCE SHEETS
(1) ORGANIZATION
Mediacom Capital Corporation ("Mediacom Capital"), a New York corporation,
wholly-owned by Mediacom LLC ("Mediacom"), was organized on March 9, 1998 for
the sole purpose of acting as co-issuer with Mediacom of $200.0 million
aggregate principal amount of the 8 1/2% senior notes due April 15, 2008.
Interest on the 8 1/2% senior notes is payable semi-annually on April 15 and
October 15 of each year. Mediacom Capital does not conduct operations of its
own.
On February 26, 1999, Mediacom and Mediacom Capital jointly issued $125.0
million aggregate principal amount of 7 7/8% senior notes due on February 15,
2011. The net proceeds from this offering of approximately $121.9 million were
used to repay a substantial portion of outstanding bank debt under the bank
credit facilities of Mediacom's operating subsidiaries. Interest on the 7 7/8%
senior notes is payable semi-annually on February 15 and August 15 of each year,
commencing on August 15, 1999.
65
<PAGE>
ITEM 9. CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
66
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
DIRECTORS AND EXECUTIVE OFFICERS
The table below sets forth our directors and executive officers:
<TABLE>
<CAPTION>
NAME AGE POSITION
<S> <C> <C>
Rocco B. Commisso...................................... 50 Chairman and Chief Executive Officer
Mark E. Stephan........................................ 43 Senior Vice President, Chief Financial
Officer, Treasurer and Director
James M. Carey......................................... 48 Senior Vice President, Operations
Joseph Van Loan........................................ 58 Senior Vice President, Technology
Italia Commisso Weinand................................ 46 Senior Vice President, Programming and
Human Resources and Secretary
William S. Morris III.................................. 65 Director
Craig S. Mitchell...................................... 41 Director
Thomas V. Reifenheiser................................. 64 Director
Natale S. Ricciardi.................................... 51 Director
Robert L. Winikoff..................................... 53 Director
</TABLE>
ROCCO B. COMMISSO has 22 years of experience with the cable television
industry and has served as our Chairman and Chief Executive Officer since
founding Mediacom LLC in July 1995. From 1986 to 1995, he served as Executive
Vice President, Chief Financial Officer and a director of Cablevision Industries
Corporation. Prior to that time, Mr. Commisso served as Senior Vice President of
Royal Bank of Canada's affiliate in the United States from 1981, where he
founded and directed a specialized lending group to media and communications
companies. Mr. Commisso began his association with the cable industry in 1978 at
The Chase Manhattan Bank, where he was assigned to manage the bank's lending
activities to communications firms including the cable industry. He serves on
the board of directors of SoftNet Systems, Inc., the National Cable Television
Association and Cable Television Laboratories, Inc. Mr. Commisso holds a
Bachelor of Science in Industrial Engineering and a Master of Business
Administration from Columbia University.
MARK E. STEPHAN has 13 years of experience with the cable television
industry and has served as our Senior Vice President, Chief Financial Officer
and Treasurer since the commencement of our operations in March 1996. Before
joining us, Mr. Stephan served as Vice President, Finance for Cablevision
Industries from July 1993. Prior to that time, Mr. Stephan served as Manager of
the telecommunications and media lending group of Royal Bank of Canada.
JAMES M. CAREY has 18 years of experience in the cable television industry.
Before joining us in September 1997, Mr. Carey was founder and President of
Infinet Results, a telecommunications consulting firm, from December 1996. Mr.
Carey served as Executive Vice President, Operations at MediaOne Group from
August 1995 to November 1996, where he was responsible for MediaOne's Atlanta
cable operations. Prior to that time, he served as Regional Vice President of
Cablevision Industries' Southern Region. Mr. Carey is a member of the board of
directors of the American Cable Association.
JOSEPH VAN LOAN has 27 years of experience in the cable television
industry. Before joining us in November 1996, Mr. Van Loan served as Senior Vice
President, Engineering for Cablevision Industries from 1990. Prior to that time,
he managed a private telecommunications consulting practice specializing in
domestic and international cable television and broadcasting and served as Vice
President, Engineering for Viacom Cable. Mr. Van Loan received the 1986 Vanguard
Award for Science and Technology from the National Cable Television Association.
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<PAGE>
ITALIA COMMISSO WEINAND has 23 years of experience in the cable tele-
vision industry. Before joining us in April 1996, Ms. Weinand served as Regional
Manager for Comcast Corporation from July 1985. Prior to that time, Ms. Weinand
held various management positions with Tele-Communications, Times Mirror Cable
and Time Warner. She serves on the board of directors of the National Cable
Television Cooperative, Inc., a programming consortium consisting of small to
medium-sized multiple system operators. Ms. Weinand is the sister of Mr.
Commisso.
WILLIAM S. MORRIS III is a member of our board of directors. Mr. Morris has
served as the Chairman and Chief Executive Officer of Morris Communications for
more than the past five years. He is the Chairman of the board of directors of
the Newspapers Association of America.
CRAIG S. MITCHELL is a member of our board of directors. Mr. Mitchell has
held various management positions with Morris Communications for more than the
past five years. He currently serves as its Vice President, Finance and
Treasurer and is also a member of its board of directors.
THOMAS V. REIFENHEISER is a member of our board of directors.
Mr. Reifenheiser has been a Managing Director and Group Executive for the Global
Media and Telecom Group of Chase Securities Inc. for more than the past five
years. He joined Chase in 1963 and has been the Global Media and Telecom Group
Executive since 1977.
NATALE S. RICCIARDI is a member of our board of directors. Mr. Ricciardi
has held various management positions with Pfizer Inc. for more than the past
five years. He joined Pfizer in 1972 and currently serves as Vice President of
Pfizer Global Manufacturing with responsibility for all of Pfizer's U.S.
manufacturing plants.
ROBERT L. WINIKOFF is a member of our board of directors. He is also
member of the executive committee of Mediacom LLC. Mr. Winikoff has been a
partner of the New York City law firm of Cooperman Levitt Winikoff Lester &
Newman, P.C. for more than the past five years, which has served as our general
outside counsel since 1995. He is a member of the board of directors of Young
Broadcasting Inc., an owner and operator of broadcast television stations.
KEY EMPLOYEES
The table below sets forth our key employees:
<TABLE>
<CAPTION>
NAME AGE POSITION
<S> <C> <C>
Calvin G. Craib....................................... 45 Vice President, Business Development
Bruce J. Gluckman..................................... 47 Vice President, Legal and Regulatory Affairs
Richard L. Hale....................................... 50 Vice President, Midwest Region
Dale E. Ordoyne....................................... 49 Vice President, Southern Region
John G. Pascarelli.................................... 38 Vice President, Marketing
Brian M. Walsh........................................ 34 Vice President and Controller
William D. Wegener.................................... 38 Vice President, Network Development
Arnold P. Cool........................................ 51 Regional Director, Central Region
Louis Gentile......................................... 40 Regional Director, Western Region
Richard P. Hanson..................................... 46 Regional Director, North Central Region
Donald E. Zagorski.................................... 40 Regional Director, Mid-Atlantic Region
</TABLE>
CALVIN G. CRAIB has 18 years experience in the cable television industry.
Before joining us in April 1999, Mr. Craib served as Vice President, Finance and
Administration for Interactive Marketing Group from June 1997 to December 1998.
Mr. Craib served as Senior Vice President, Operations, and Chief Financial
Officer for Douglas Communications from January 1990 to May 1997. Prior to that
time, Mr. Craib served in various financial management capacities at Warner Amex
Cable and Tribune Cable.
BRUCE J. GLUCKMAN has seven years of experience in the cable television
industry. Before joining us as Director of Legal Affairs in February 1998, Mr.
Gluckman was in private law practice from January 1996 to October 1997. From
June 1993 to January 1996, he served as a Staff Attorney for Cablevision
Industries. Mr. Gluckman has 20 years of experience in the practice of law.
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<PAGE>
RICHARD L. HALE has 16 years of experience in the cable television
industry. Before joining us as Regional Manager for the Central Region in
January 1998, Mr. Hale served as Regional Manager of Cablevision Systems'
Kentucky/Missouri region and as Sales and Marketing Director from 1988 to 1998.
Mr. Hale began his career in the cable television industry in 1984 as Regional
Sales and Marketing Director for Adams-Russell Cable.
DALE E. ORDOYNE has 18 years of experience in the cable television
industry. Before joining us in October 1999, Mr. Ordoyne served as Vice
President, Marketing for MediaOne Group from 1995, where he was responsible for
all marketing activities for the Atlanta cluster comprised of 500,000 basic
subscribers. Prior to that time, Mr. Ordoyne served in various marketing and
system management capacities for Cablevision Industries and Cox Communications.
JOHN G. PASCARELLI has 19 years of experience in the cable television
industry. Before joining us in March 1998, Mr. Pascarelli served as Vice
President, Marketing for Helicon from January 1996 to February 1998 and as
Corporate Director of Marketing for Cablevision Industries from 1988 to 1995.
Prior to that time, Mr. Pascarelli served in various marketing and system
management capacities for Continental Cablevision, Cablevision Systems and
Storer Communications.
BRIAN M. WALSH has 12 years of experience in the cable television industry.
Before joining us in April 1996 as Director of Accounting, Mr. Walsh served as
financial analyst for Helicon from January 1996 to March 1996. Prior to that
time, Mr. Walsh served in various financial management capacities for
Cablevision Industries, including Business Manager from January 1992 to December
1995. Mr. Walsh began his career in the cable television industry in 1988 when
he joined Cablevision Industries as a staff accountant.
WILLIAM D. WEGENER has 19 years of experience in the cable television
industry. Before joining us in February 1998, Mr. Wegener served as Senior Sales
Engineer for C-Cor Electronics from October 1995 to October 1997. Prior to that
time, Mr. Wegener served in various engineering capacities for Cablevision
Industries. He is a member of the Society of Cable Telecommunications Engineers.
ARNOLD P. COOL has 22 years of experience in the cable television industry.
Before joining us in January 1998, he served in various capacities for
Cablevision Systems' cable television systems in Kentucky and Missouri from
April 1993. Prior to that time, Mr. Cool held various technical and supervisory
responsibilities for Cablevision Systems and for smaller cable television
companies.
LOUIS GENTILE has 11 years of experience in the cable television industry.
Before joining us as Divisional Business Manager in January 1998, Mr. Gentile
served in various financial management capacities for Cablevision Systems from
January 1992. Mr. Gentile began his career in the cable television industry in
1989 when he joined MultiVision Cable as a financial analyst.
RICHARD P. HANSON has 22 years of experience in the cable television
industry. Mr. Hanson joined us upon the closing of the Triax acquisition on
November 5, 1999. Before joining us, Mr. Hanson served in various capacities for
Triax, most recently as Director of Operations, from March 1988 to October 1999.
Prior to joining Triax, he served as Manager for Combined Cable and for Star
Cablevision.
DONALD E. ZAGORSKI has 19 years of experience in the cable television
industry. Before joining us in June 1997, Mr. Zagorski served as System and
Regional Manager for Tele-Media Company from March 1990. Prior to that time, Mr.
Zagorski held various technical and supervisory positions with Outer Banks
Cablevision and Group W Cable.
All directors hold office until the next annual meeting of stockholders and
until their successors have been elected and qualify. All executive officers and
key employees serve at the discretion of the board of directors. Mr. Commisso
has agreed to cause the election of two directors designated by Morris
Communications so long as Morris Communications continues to own at least 20% of
our outstanding common stock, and one such director so long as it continues to
own at least 10% of our outstanding common stock. In accordance with this
agreement, Mr. Morris and Mr. Mitchell have been designated as directors by
Morris Communications.
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<PAGE>
COMMITTEES OF THE BOARD OF DIRECTORS
AUDIT COMMITTEE
The members of the audit committee are Craig S. Mitchell, Thomas V.
Reifenheiser and Natale S. Ricciardi. The responsibilities of the audit
committee include:
o recommending the appointment of independent accountants;
o reviewing the arrangements for and scope of the audit by independent
accountants;
o reviewing the independence of the independent accountants;
o considering the adequacy of the system of internal accounting controls
and review any proposed corrective actions;
o reviewing and monitoring our policies regarding business ethics and
conflicts of interest;
o discussing with management and the independent accountants our draft
annual financial statements and key accounting and reporting matters; and
o reviewing the activities and recommendations of our accounting department.
COMPENSATION COMMITTEE
The members of the compensation committee are Rocco B. Commisso, William
S. Morris III and Robert L. Winikoff. The compensation committee has authority
to review and make recommendations to our board of directors with respect to the
compensation of our executive officers.
STOCK OPTION COMMITTEE
The members of the stock option committee are Thomas V. Reifenheiser,
Natale S. Ricciardi and Robert L. Winikoff. The stock option committee
administers our 1999 stock option plan and determines, among other things, the
time or times at which options will be granted, the recipients of grants,
whether a grant will consist of incentive stock options, nonqualified stock
options or stock appreciation rights, which may be in tandem with an option or
free-standing, or a combination thereof, the option periods, whether an option
is exercisable for Class A common stock or Class B common stock, the limitations
on option exercise and the number of shares to be subject to such options,
taking into account the nature and value of services rendered and contributions
made to our success. The stock option committee also has authority to interpret
the plan and, subject to certain limitations, to amend provisions of the plan as
it deems advisable.
DIRECTOR COMPENSATION
Those directors who are not also our employees will not receive annual
compensation. On February 4, 2000, we granted to each of Craig S. Mitchell and
Robert L. Winikoff options to purchase 30,000 shares of Class A common stock,
and we granted to each of William S. Morris III, Thomas V. Reifenheiser and
Natale S. Ricciardi options to purchase 20,000 shares of Class A common stock at
an exercise price equal to the public offering price of $19.00 per share. Such
options become exercisable in three equal annual installments beginning February
3, 2001. Non-employee directors will also receive reimbursement of out-of-pocket
expenses incurred for each board meeting or committee meeting attended.
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<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
Prior to our initial public offering on February 4, 2000, except for James
M. Carey, we did not make any payment in respect of compensation to any of our
executive officers. These executive officers received compensation from Mediacom
Management, which was entitled to receive management fees from our subsidiaries.
Mr. Carey received his compensation from one of our operating subsidiaries,
Mediacom Southeast LLC. For more information regarding the management fees paid
by our subsidiaries to Mediacom Management, see "Certain Relationships and
Related Transactions--Management Agreements." Since the consummation of our
initial public offering, we have paid the compensation to our executive
officers.
Except where otherwise indicated, the following table summarizes the
compensation paid in 1999 and 1998 by Mediacom Management to our Chief Executive
Officer and our four other most highly compensated executive officers who
received total compensation in excess of $100,000:
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION
---------------------------------------------
OTHER ANNUAL
NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($) COMPENSATION($)
- --------------------------- ---- --------- -------- ---------------
<S> <C> <C> <C> <C>
Rocco B. Commisso................................... 1999 100,000 -- --
Chairman and Chief Executive Officer 1998 100,000 -- --
Mark E. Stephan..................................... 1999 200,000 -- --
Senior Vice President, Chief Financial Officer, 1998 190,769 132,034 --
Treasurer and Director
James M. Carey(1)................................... 1999 140,769 20,000 --
Senior Vice President, Operations 1998 106,154 15,000 35,500(2)
Joseph Van Loan..................................... 1999 200,000 -- --
Senior Vice President, Technology 1998 190,769 132,034 --
Italia Commisso Weinand............................. 1999 136,923 -- --
Senior Vice President, Programming and Human 1998 130,693 99,026 --
Resources and Secretary
- ---------------------------
(1) Mr. Carey's compensation was paid by one of our operating subsidiaries, Mediacom Southeast LLC.
(2) Represents consulting fees from January 1, 1998 to February 2, 1998.
</TABLE>
The amounts set forth in the above table do not include the receipt by Mark
E. Stephan, James M. Carey, Joseph Van Loan and Italia Commisso Weinand of
membership units in Mediacom LLC from Rocco B. Commisso as described in
"--Employment Arrangements" below.
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<PAGE>
EMPLOYMENT ARRANGEMENTS
Mark E. Stephan, James M. Carey, Joseph Van Loan, Italia Commisso Weinand
and several of our other employees have entered into employment arrangements
setting forth the terms of their at-will employment with us. Pursuant to the
employment arrangements, Rocco B. Commisso delivered to each of these employees
a specified number of membership units in Mediacom LLC, which were owned by Mr.
Commisso. Approximately 55% of the membership units were fully vested and
non-forfeitable on the date of grant. During the fourth quarter of 1999, we
recorded approximately $14.8 million in a non-cash stock charge relating to
these vested and non-forfeitable membership units, based on the initial public
offering price of $19.00. A deferred non-cash stock expense of approximately
$12.2 million, relating to the non-vested and forfeitable membership units, will
be amortized over a period of five to eight years.
In connection with our initial public offering, such membership units were
exchanged for an aggregate of 1,421,879 shares of our Class B common stock and
options to acquire an aggregate of 348,892 shares of our Class B common stock at
an exercise price equal to the initial public offering price of $19.00 per
share. Such shares and options initially are subject to vesting in five equal
annual installments, which vesting period is deemed to have commenced for each
officer on various dates prior to our initial public offering. All such shares
and options which vest initially are nonetheless subject to potential forfeiture
during the first three years after vesting under the circumstances described
below. If the employee desires to sell the vested shares and options, or if the
employee's employment with us is terminated for any reason, Mr. Commisso will
have the option to purchase such shares or options at their fair market value.
In the event that Mr. Commisso exercises this purchase option, a portion of the
shares or options vested for less than three years will nonetheless be forfeited
to Mr. Commisso if, during such three year period, such employee elects to sell
such shares or exercise such options or voluntarily terminates his employment
with us or if such employee's employment with us is terminated for cause. No
forfeiture of vested shares or options will occur if Mr. Commisso elects not to
exercise his purchase option, or if the employee is terminated by us without
cause or as a result of death or disability. Upon a change of control, all such
shares will vest and not be subject to forfeiture. Each of the employees has
granted to Mr. Commisso an irrevocable proxy with respect to all voting rights
relating to their shares of common stock following the exchange. At the request
of any of these employees, Mr. Commisso will make a loan to the employee in the
amount of any tax liability resulting from such employee's receipt of our
options in exchange for membership units in Mediacom LLC. Such loan would be
secured by such employee's shares of common stock and options. Each of the
employment arrangements also provides that if we terminate the employee's
employment without cause, the employee is entitled to a severance payment equal
to six months of base salary and precludes the employee from competing with us
for a period of three years following termination.
1999 STOCK OPTION PLAN
Our board of directors adopted our 1999 stock option plan which became
effective as of December 20, 1999. We have reserved 9,000,000 shares of common
stock with respect to which options and stock appreciation rights may be granted
under the plan. A maximum of 7,000,000 shares of our common stock reserved under
the plan may be granted as incentive stock options qualified for favorable tax
treatment to the holder under Internal Revenue Code Section 422. The purpose of
the plan is to promote our interests and the interests of our stockholders by
strengthening our ability to attract and retain competent employees, to make
service on our board of directors more attractive to present and prospective
non-employee directors and to provide a means to encourage stock ownership and
proprietary interest in us by our officers, non-employee directors and valued
employees and other individuals upon whose judgment, initiative and efforts our
financial success and growth largely depend.
The plan states that it may be administered by either the entire board of
directors or a committee consisting of two or more members of the board of
directors, each of whom is a non-employee director. Our board of directors has
determined that the plan will be administered by the stock option committee
which consists solely of non-employee directors.
Incentive stock options may be granted only to our officers and key
employees and the officers and key employees of our subsidiaries. Nonqualified
stock options and stock appreciation rights may be granted to our officers, key
employees, directors, agents and consultants and the officers and employees of
our subsidiaries. In determining the eligibility of an individual for grants
under the plan, as well as in determining the number of shares to be optioned to
any individual, the stock option committee takes into account the
recommendations of our Chairman of
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<PAGE>
the Board, Mr. Commisso, the position and responsibilities of the individual
being considered, the length of such individual's employment with us or our
subsidiaries, the nature and value to us or our subsidiaries of his or her
service or accomplishments, his or her present or potential contribution to the
success of us or our subsidiaries and such other factors as the stock option
committee may deem relevant. In making recommendations to the stock option
committee, Mr. Commisso expects to focus upon individuals who would be motivated
by a direct economic stake in us. Options may provide for their exercise into
shares of any class of our common stock.
The plan provides for the granting of incentive stock options to purchase
our common stock at not less than the fair market value on the date of the
option grant and the granting of nonqualified options with any exercise price.
Stock appreciation rights may be granted with an exercise price equal to the
fair market value of a share of our common stock on the date of grant of the
stock appreciation right. Stock appreciation rights granted in tandem with an
option have the same exercise price as the related option. Options for an
aggregate of 2,920,000 shares of our common stock, comprised of 1,971,108 shares
of Class A common stock and 948,892 shares of Class B common stock were granted
on February 4, 2000 under the plan to all of our full and part-time employees at
an exercise price equal to the initial public offering price of $19.00. Such
options will vest at various times over five years. Vesting is contingent on
continuous employment with us. Options that do not vest will be forfeited.
The plan also contains limitations applicable only to incentive stock
options granted thereunder. To the extent that the aggregate fair market value,
as of the date of grant, of the shares to which incentive stock options become
exercisable for the first time by an optionee during the calendar year exceeds
$100,000, the option will be treated as a nonqualified option. In addition, if
an optionee owns more than 10% of the total combined voting power of all classes
of our capital stock or that of our parent or any of our subsidiaries at the
time the individual is granted an incentive stock option, the option price per
share of the incentive stock option cannot be less than 110% of the fair market
value per share as of the date of grant and the term of the incentive stock
option cannot exceed five years. No option or stock appreciation right may be
granted under the plan after December 19, 2009, and no option or stock
appreciation right may have a term of more than ten years after the date of its
grant.
Upon the exercise of an option, the holder must make payment of the full
exercise price. Such payment may be made in cash, check or, under certain
circumstances, in shares of our common stock having a fair market value equal to
the exercise price of the options, or any combination thereof. Stock
appreciation rights, which give the holder the privilege of surrendering such
rights for the appreciation in the underlying common stock between the time of
the grant and the surrender, may be settled, in the discretion of the stock
option committee in cash, in shares of our common stock valued at their fair
market value on the date of exercise of the stock appreciation right, or in any
combination thereof. The exercise of a stock appreciation right granted in
tandem with an option cancels the option to which it relates with respect to the
same number of shares as to which the stock appreciation right was exercised.
The exercise of an option cancels any related stock appreciation right with
respect to the same number of shares as to which the option was exercised.
Generally, options and stock appreciation rights may be exercised while the
recipient is performing services for us and within three months after
termination of such services.
The plan may be terminated at any time by the board of directors, which may
also amend the plan, except that without stockholder approval, it may not
increase the number of shares subject to the plan or change the class of persons
eligible to receive options under the plan.
1999 EMPLOYEE STOCK PURCHASE PLAN
Our board of directors adopted our 1999 employee stock purchase plan which
became effective as of December 20, 1999. Our employee stock purchase plan is
intended to qualify under Section 423 of the Internal Revenue Code of 1986, as
amended. We have reserved 1,000,000 shares of our Class A common stock for
issuance under the plan. The plan states that it may be administered by either
the entire board of directors or a committee of the board of directors. Our
board of directors has determined that the plan will be administered by the
compensation committee.
All persons employed by us or any of our subsidiaries on the date of our
initial public offering are eligible to participate in the employee stock
purchase plan provided they customarily perform for us at least 20 hours of
services per week and for more than five months in any calendar year. The plan
covers four offering periods, each lasting six months. The offering periods
commence on February 1 and August 1 of each year covered by the plan, except
that the first offering period will start on February 4, 2000 and end on July
31, 2000. Eligible employees, on the date of our
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<PAGE>
initial public offering, automatically participated in the plan unless they fail
to enroll in payroll deductions within 30 days following the date of our initial
public offering, February 4, 2000.
Our employee stock purchase plan allows for each participating employee to
purchase common stock through payroll deductions. Each employee's payroll
deductions for any period may not exceed 15% of the employee's compensation for
such period up to a maximum aggregate deduction of $21,250 for each period.
Purchases of our common stock will occur on the final trading day of each
offering period. No employee may be granted an option under the plan if
immediately after the grant the employee would own our capital stock and/or
options to purchase our common stock possessing 5% or more of the total combined
voting power or value of all classes of capital stock of us or any of our
subsidiaries. In addition, the total value of the shares purchased by a
participant in any calendar year, measured as of the beginning of the offering
period, may not exceed $25,000.
The price of each share of common stock purchased under our employee stock
purchase plan will be 85% of the lower of:
o the fair market value per share of common stock on the date of our
initial public offering; or
o the fair market value per share of common stock on the final trading day
of each applicable offering period.
Employees may end their participation in the employee stock purchase plan
at any time. Participation ends automatically upon termination of employment
with us. Our board of directors may amend or terminate the employee stock
purchase plan at any time. If our board increases the number of shares of common
stock reserved for issuance under the plan, it must seek the approval of our
stockholders.
401(K) PLAN
We maintain a retirement plan established in conformity with Section 401(k)
of the Internal Revenue Code of 1986, covering all of our eligible employees. In
accordance with the 401(k) plan, employees may elect to defer up to 15% of their
current pre-tax compensation and have the amount of the deferral contributed to
the 401(k) plan. The maximum elective deferral contribution was $10,000 in each
of 1998 and 1999 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, us to make matching contributions and non-matching, profit sharing,
contributions up to a maximum dollar amount or maximum percentage of participant
or employee contributions. Our contributions under the plan totaled
approximately $14,000, $264,000 and $302,000 for the years ended December 31,
1997, 1998, and 1999, respectively.
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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth as of March 15, 2000 certain information
with respect to the beneficial ownership of our common stock by:
o each person known by us to beneficially own more than 5% of any class of
our common stock;
o each of our directors;
o our Chief Executive Officer and our four other most highly compensated
executive officers; and
o all of our directors, director nominees and executive officers as a
group.
The amounts and percentages of common stock beneficially owned are reported
on the basis of regulations of the Securities and Exchange Commission governing
the determination of beneficial ownership of securities. Under the rules of the
Securities and Exchange Commission, a person is deemed to be a beneficial owner
of a security if that person has or shares voting power, which includes the
power to vote or to direct the voting of such security, or investment power,
which includes the power to dispose of or to direct the disposition of such
security. Unless otherwise indicated below, each beneficial owner named in the
table below has sole voting and sole investment power with respect to all shares
beneficially owned, subject to community property laws where applicable. Holders
of Class A common stock are entitled to one vote per share, while holders of
Class B common stock are entitled to ten votes per share. Holders of both
classes of common stock will vote together as a single class on all matters
presented for a vote, except as otherwise required by law. Percentage of
beneficial ownership of Class A common stock is based on 60,657,010 shares of
Class A common stock outstanding and percentage of beneficial ownership of Class
B common stock is based on 29,342,990 shares of Class B common stock
outstanding. Unless otherwise indicated, the address of each beneficial owner of
more than 5% of Class A or Class B common stock is Mediacom Communications
Corporation, 100 Crystal Run Road, Middletown, New York 10941.
<TABLE>
<CAPTION>
CLASS A COMMON STOCK CLASS B COMMON STOCK PERCENT OF VOTE
----------------------- ----------------------- AS A SINGLE
NAME OF BENEFICIAL OWNER NUMBER PERCENT NUMBER PERCENT CLASS
- ------------------------ ------ ------- ------ ------- ---------------
<S> <C> <C> <C> <C> <C>
Rocco B. Commisso........................... 250,000 * % 29,342,990(7) 100.0% 82.9%
Morris Communications Corporation(1)........ 28,309,674 46.7 -- -- 8.0
CB Capital Investors, LLC(2)................ 4,223,534 7.0 -- -- 1.2
U.S. Investor, Inc.(3)...................... 3,051,170 5.0 -- -- *
Mark E. Stephan............................. -- -- 387,222(8)(9) 1.3 --
William S. Morris III(1)(4)................. 28,309,674 46.7 -- -- 8.0
Craig S. Mitchell(1)(5)..................... 28,399,674 46.8 -- -- 8.0
Thomas V. Reifenheiser...................... -- -- -- -- --
Natale S. Ricciardi......................... 10,000 * -- -- --
Robert L. Winikoff.......................... 45,000(6) * -- -- --
James M. Carey.............................. -- -- 216,844(9)(10) * --
Joseph Van Loan............................. 4,000 * 263,311(9)(11) * --
Italia Commisso Weinand..................... 500 * 263,311(9)(12) * --
All executive officers and directors
as a group (10 persons)................... 28,709,174 47.3 29,342,990 100.0 91.0
</TABLE>
- ------------------
* Represents beneficial ownership of less than 1%.
(1) The address of the beneficial owner is 725 Broad Street, Augusta, Georgia
30901.
(2) Includes approximately 856,200 shares of Class A common stock owned by its
affiliate, Chase Manhattan Capital, LLC. The address of the beneficial
owner is c/o Chase Capital Partners, 380 Madison Avenue, New York, New York
10017.
(3) A party related to Booth American Company. The address of the beneficial
owner is 333 West Fort Street, Detroit, Michigan 48226.
(4) Represents shares held by Morris Communications. Mr. Morris is the Chairman
and Chief Executive Officer of Morris Communi-cations and is deemed to be
in control of Morris Communications.
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<PAGE>
(5) Includes 28,309,674 shares held by Morris Communications. Mr. Mitchell is a
director and the Vice President, Finance and Treasurer of Morris
Communications. Mr. Mitchell disclaims any beneficial ownership of the
shares held by Morris Communications.
(6) Includes 30,000 shares held by a limited liability company for which Mr.
Winikoff serves as manager. Mr. Winikoff disclaims beneficial ownership of
the shares held by the limited liability company except to the extent of
his pecuniary interest therein.
(7) Includes 1,421,879 shares of Class B common stock owned of record by other
stockholders, for which Mr. Commisso holds an irrevocable proxy,
representing all remaining shares of Class B common stock outstanding.
(8) All of these shares are subject to vesting in five equal annual
installments, which vesting period is deemed to have commenced on March 18,
1997. 232,333 of these shares are currently vested.
(9) If such beneficial owner desires to sell vested shares, or if such
beneficial owner's employment with us is terminated for any reason, Mr.
Commisso will have the option to purchase such shares. In the event that
Mr. Commisso exercises this purchase option, a portion of the vested shares
vested for less than three years will nonetheless be forfeited to Mr.
Commisso if, during such three year period, such beneficial owner elects to
sell such shares or voluntarily terminates his employment with us or if
such beneficial owner's employment with us is terminated for cause. Such
forfeiture of vested shares will not occur if Mr. Commisso does not
exercise his purchase option or if the beneficial owner is terminated by us
without cause or as a result of death or disability. Upon a change of
control, all such shares will vest and not be subject to forfeiture. In
addition, such beneficial owner has granted Mr. Commisso an irrevocable
proxy which may be exercised by Mr. Commisso in connection with any action
to be taken by our stockholders.
(10) All of these shares are subject to vesting in five equal annual
installments, which vesting period is deemed to have commenced on
September 15, 1998. 86,737 of these shares are currently vested.
(11) All of these shares are subject to vesting in five equal annual
installments, which vesting period is deemed to have commenced on November
4, 1997. 157,986 of these shares are currently vested.
(12) All of these shares are subject to vesting in five equal annual
installments, which vesting period is deemed to have commenced on April
21, 1997. 157,986 of these shares are currently vested.
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<PAGE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The following discussion sets forth certain relationships and related
transactions of us and our subsidiary, Mediacom LLC, and its operating
subsidiaries.
MANAGEMENT AGREEMENTS
Each of our operating subsidiaries was a party to a management agreement
with Mediacom Management, which is owned by Mr. Commisso. Under these
agreements, Mediacom Management provided management services to our operating
subsidiaries and was paid annual management fees. Until November 19, 1999, the
management fee was 5.0% of the first $50.0 million of our annual gross operating
revenues, 4.5% of annual gross operating revenues in excess of $50.0 million, up
to $75.0 million, and 4.0% of annual gross operating revenues in excess of $75.0
million. The management agreements were amended effective November 19, 1999 in
connection with Mediacom LLC's 1999 Operating Agreement to provide for annual
management fees equal to 2% of annual gross operating revenues. In addition,
Mediacom Management agreed to waive all management fees accrued from July 1,
1999 through November 19, 1999. Each of the management agreements was terminated
upon completion of our initial public offering, and employees of Mediacom
Management became our employees. In 1999, the aggregate amount of management
fees paid to Mediacom Management was approximately $4.2 million.
TRANSACTION FEES AND EXPENSE REIMBURSEMENT
Prior to the amendment of Mediacom LLC's operating agreement on November
19, 1999, Mediacom Management was paid a fee based on a percentage of the
purchase price of acquisitions made by Mediacom LLC after January 1998. In
accordance with Mediacom LLC's operating agreement, the aggregate acquisition
fees of $3.8 million in connection with the Triax and Zylstra acquisitions have
been waived by Mediacom Management and no further acquisition fees were payable
after November 19, 1999.
The operating agreement also provided for reimbursement of reasonable
out-of-pocket expenses incurred by Mediacom Management in connection with the
operation of the business of Mediacom LLC and acting on behalf of Mediacom LLC
in connection with any potential acquisition of a cable system. In 1999, there
were no out-of-pocket expenses reimbursed to Mediacom Management.
PURCHASE OF ASSETS
Pursuant to an agreement with Mediacom Management, we purchased all of
Mediacom Management's assets upon the completion of our initial public offering.
We paid Mediacom Management approximately $653,000 for the furniture, computers
and other office equipment that Mediacom Management purchased to conduct its
operations. The purchase price paid to Mediacom Management for such assets
approximated their carrying value.
OTHER RELATIONSHIPS
Prior to the issuance of our common stock in exchange for all membership
interests in Mediacom LLC, Chase Manhattan Capital, LLC and CB Capital
Investors, LLC were members of Mediacom LLC. Chase Manhattan Capital, LLC and CB
Capital Investors, LLC are parties related to Chase Securities Inc. and The
Chase Manhattan Bank.
Chase Securities Inc. was one of the co-managers of our initial public
offering. In connection with our initial public offering, Chase Securities Inc.
received underwriting discounts and commissions in the amount of approximately
$350,000 on February 9, 2000.
Chase Securities Inc. acted as an initial purchaser in connection with
the offering of our 7 7/8% senior notes in 1999. Chase Securities Inc. received
fees in the amount of approximately $3.1 million in 1999 in connection with the
offering.
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<PAGE>
Chase Securities Inc. acted as an advisor in connection with our acqui-
sition of the Triax systems. For these services, Chase Securities Inc. received
a fee in the amount of $3.0 million. One individual associated with Chase
Securities Inc., Thomas V. Reifenheiser, is a member of our board of directors.
Prior to the issuance of our common stock in exchange for all membership
interests in Mediacom LLC, Morris Communications was a member of Mediacom LLC.
Morris Communications received commitment fees of approximately $268,000 in 1999
in connection with its capital contributions to Mediacom LLC.
Prior to the issuance of our common stock in exchange for all membership
interests in Mediacom LLC, U.S. Investor, Inc. was a member of Mediacom LLC. In
connection with its purchase of a cable television system in Kern County,
California from Booth American Company, the parent of U.S. Investor, one of our
subsidiaries issued to Booth American Company an unsecured senior subordinated
note in the original amount of $2.8 million. Interest on the note was deferred
throughout the term and was payable on prepayment or at maturity on June 28,
2006. In 1999, the annual interest rate on the note was 9.0%. The note, together
with all accrued interest, was repaid on September 24, 1999.
Until November 3, 1999, Mediacom LLC's operating agreement obligated its
members to make capital contributions to Mediacom LLC. The following table sets
forth such capital contributions by those members of Mediacom LLC who owned more
than 5% of its membership interests. The capital contributions made by those
members on November 3, 1999 are part of the $10.5 million equity contribution
made by the members of Mediacom LLC in connection with the acquisition of the
Triax systems.
<TABLE>
<CAPTION>
NOVEMBER 3,
MEMBER 1999
------ -----------
(IN THOUSANDS)
<S> <C>
U.S. Investor, Inc. ................................................................ $ 256
Morris Communications Corporation................................................... 8,918
CB Capital Investors, LLC........................................................... 512
</TABLE>
Robert L. Winikoff, a member of our board of directors, is a partner at
the law firm of Cooperman Levitt Winikoff Lester & Newman, P.C., that has served
as our general outside counsel on various matters. Cooperman Levitt Winikoff
Lester & Newman, P.C. received fees from Mediacom LLC in the amount of $771,000
in 1999.
CHANGES TO ORGANIZATIONAL STRUCTURE
Immediately prior to our initial public offering, we issued 40,657,010
shares of our Class A common stock and 29,342,990 shares of our Class B common
stock in exchange for all of the outstanding membership interests of Mediacom
LLC, which served as the holding company for our operating subsidiaries. As a
result, we became the parent company of Mediacom LLC, which continues to serve
as the holding company of our subsidiaries.
Mediacom LLC's amended operating agreement provided that upon the
occurrence of certain events, including our initial public offering, the
executive committee of Mediacom LLC would make a determination of the aggregate
equity value of Mediacom LLC. Based on this determination, Mediacom LLC issued
additional membership interests to its members, each having a value upon
issuance of $1,000. As a consequence of our initial public offering at an
initial public offering price of $19.00 per share and a determination of the
aggregate equity value of Mediacom LLC of $1.3 billion, Mediacom LLC issued
additional membership interests to its members based upon such determination
immediately prior to our initial offering. These newly issued membership
interests were exchanged for our shares of common stock.
Mediacom LLC's amended operating agreement contained provisions relating to
a special allocation of membership interests to Mr. Commisso, our executive
officers and some of our non-executive officers under certain circumstances. In
accordance with these special allocation provisions under the operating
agreement, Mr. Commisso was issued additional membership interests in 1999 that
had a value upon issuance of $57.9 million. A provision in the amended operating
agreement removed a certain portion of the special allocation of membership
interests awarded to Mr. Commisso, our executive officers and some of our
non-executive officers, based upon valuations of Mediacom LLC performed from
time to time. In connection with the removal of these certain special allocation
provisions and
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<PAGE>
the amendments to Mediacom LLC's management agreements with Mediacom Management
effective November 19, 1999, Mr. Commisso and such executive and non-executive
officers were issued new membership interests representing 16.5% of the
aggregate equity value of Mediacom LLC, which amount was then adjusted to give
effect to the dilution of the equity interests of Mr. Commisso and related
parties resulting from the issuance of such new membership interests. These
newly issued membership interests, as adjusted for such dilution effect, were
exchanged for 7,295,025 shares of our Class B common stock, which had an
aggregate value of approximately $138.6 million on the date of the exchange.
In addition, in connection with the amendment and the removal of the
remainder of the special allocation provisions of the operating agreement, Rocco
Commisso, Mark Stephan, James Carey, Joseph Van Loan, Italia Commisso Weinand
and nine of our non-executive officers received options to purchase 6,851,107,
95,014, 53,208, 64,610, 64,610 and an aggregate of 71,451 shares of our Class B
common stock. These options have a term of five years and are exercisable,
commencing on August 3, 2000, at a price of $19.00 per share. Except for shares
of common stock and options held by Mr. Commisso, the shares and options
initially are subject to vesting in five equal annual installments, which
vesting period is deemed to have commenced for each officer on various dates
prior to our initial public offering. All such shares and options which vest
initially are nonetheless subject to potential forfeiture during the first three
years after vesting under the circumstances described below. If a beneficial
owner other than Mr. Commisso desires to sell such vested shares or exercise
such options, or if such beneficial owner's employment with us is terminated for
any reason, Mr. Commisso will have the option to purchase such shares or options
at their fair market value. In the event that Mr. Commisso exercises this
purchase option, a portion of the shares or options vested for less than three
years will nonetheless be forfeited to Mr. Commisso if, during such three year
period, such owner elects to sell such shares or exercise such options or
voluntarily terminates his employment with us, or if such owner's employment
with us is terminated for cause. No forfeiture of vested shares or options will
occur if Mr. Commisso elects not to exercise his purchase option, or if the
employee is terminated by us without cause or as a result of death or
disability. Upon a change of control, all such shares will vest and not be
subject to forfeiture.
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PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) FINANCIAL STATEMENTS
Our financial statements as set forth in the Index to Consolidated
Financial Statements under Part II, Item 8 of this Form 10-K are hereby
incorporated by reference.
(b) EXHIBITS
The following exhibits, which are numbered in accordance with Item 601 of
Regulation S-K, are filed herewith or, as noted, incorporated by reference
herein:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
------- -------------------
<S> <C>
2.1 Asset Purchase Agreement, dated April 29, 1999 between Mediacom LLC and Triax Midwest Associates, L.P.(1)
2.2 Stock Purchase Agreement, dated May 25, 1999 among Mediacom LLC, Charles D. Zylstra, Kara M. Zylstra, Kara M.
Zylstra and Trusts created under the Will dated June 3, 1982 of Roger E. Zylstra, deceased, for the
benefit of Charles D. Zylstra and Kara M. Zylstra(2)
3.1 Form of Restated Certificate of Incorporation of Mediacom Communication Corporation to be filed on
the effective date of this registration statement(3)
3.2 By-laws of Mediacom Communications Corporation (3)
3.3 Fourth Amended and Restated Operating Agreement of Mediacom LLC
3.4 Fifth Amended and Restated Operating Agreement of Mediacom LLC
4.1 Form of certificate evidencing share of Class A common stock(3)
10.1 Credit Agreement dated as of September 30, 1999 for the Mediacom USA Credit Facility (3)
10.2 Credit Agreement dated as of November 5, 1999 for the Mediacom Midwest Credit Facility (3)
10.3* 1999 Stock Option Plan (3)
10.4 Form of Amended and Restated Registration Rights Agreement by and among Mediacom
Communications Corporation, Rocco B. Commisso, BMO Financial, Inc., CB Capital Investors, L.P.,
Chase Manhattan Capital, L.P., Morris Communications Corporation, Private Market Fund, L.P. and
U.S. Investor, Inc.(3)
10.5* 1999 Employee Stock Purchase Plan (3)
10.6 Stock Purchase Agreement, dated as of November 4, 1999, between SoftNet Systems, Inc. and Mediacom
LLC (3)
10.7 Stockholder Agreement, dated as of November 4, 1999, between SoftNet Systems, Inc. and Mediacom LLC(4)
27.1 Financial Data Schedule of Mediacom LLC
</TABLE>
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(C) FINANCIAL STATEMENT SCHEDULE
None.
(D) REPORTS ON FORM 8-K
None.
- ------------------
* Compensatory plan
(1) Filed as an exhibit to the Quarterly Report on Form 10-Q for the quarterly
period ended March 31, 1999 of Mediacom LLC and Mediacom Capital
Corporation and incorporated herein by reference.
(2) Filed as an exhibit to the Quarterly Report on Form 10-Q for the quarterly
period ended June 30, 1999 of Mediacom LLC and Mediacom Capital Corporation
and incorporated herein by reference.
(3) Filed as an exhibit to the Registration Statement on Form S-1 (File No.
333-90879) of Mediacom Communications Corporation and incorporated herein
by reference.
(4) Filed as an exhibit to the Annual Report on Form 10-K for the fiscal year
ended September 30, 1999 of SoftNet Systems, Inc. and incorporated
herein by reference.
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SIGNATURES
Pursuant to the requirements of the Securities Act of 1934, the Registrant
has duly caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
MEDIACOM COMMUNICATIONS CORPORATION
March 29, 2000 BY: /S/ ROCCO B. COMMISSO
---------------------------------
ROCCO B. COMMISSO
Chairman and Chief
Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/S/ ROCCO B. COMMISSO Chairman and Chief Executive Officer March 29, 2000
- ----------------------------------- (principal executive officer)
ROCCO B. COMMISSO
/S/ MARK E. STEPHAN Senior Vice President, Chief Financial Officer, March 29, 2000
- ----------------------------------- Treasurer and Director (principal financial
MARK E. STEPHAN officer and principal accounting officer)
/S/ WILLIAM S. MORRIS III Director March 29, 2000
- -------------------------------------
WILLIAM S. MORRIS III
/S/ CRAIG S. MITCHELL Director March 29, 2000
- -------------------------------------
CRAIG S. MITCHELL
/S/ THOMAS V. REIFENHEISER Director March 29, 2000
- -------------------------------------
THOMAS V. REIFENHEISER
/S/ NATALE S. RICCIARDI Director March 29, 2000
- -------------------------------------
NATALE S. RICCIARDI
/S/ ROBERT L. WINIKOFF Director March 29, 2000
- -------------------------------------
ROBERT L. WINIKOFF
</TABLE>
82
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
MEDIACOM LLC
March 29, 2000 BY: /S/ ROCCO B. COMMISSO
-------------------------------
ROCCO B. COMMISSO
Manager, Chairman and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/S/ ROCCO B. COMMISSO Manager, Chairman and March 29, 2000
- ------------------------------------- Chief Executive Officer (principal
ROCCO B. COMMISSO executive officer)
/S/ MARK E. STEPHAN Senior Vice President, March 29, 2000
- ------------------------------------- Chief Financial Officer and Treasurer
MARK E. STEPHAN (principal financial officer and principal
accounting officer)
</TABLE>
83
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
MEDIACOM CAPITAL CORPORATION
March 29, 2000 By: /S/ ROCCO B. COMMISSO
-------------------------------
ROCCO B. COMMISSO
President, Chief Executive
Officer and Director
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/S/ ROCCO B. COMMISSO President, Chief Executive Officer March 29, 2000
- ------------------------------------- and Director (principal executive officer)
ROCCO B. COMMISSO
/S/ MARK E. STEPHAN Treasurer and Secretary March 29, 2000
- ------------------------------------- (principal financial officer
MARK E. STEPHAN and principal accounting officer)
</TABLE>
84
<PAGE>
EXHIBIT 3.3
- --------------------------------------------------------------------------------
FOURTH AMENDED AND RESTATED
OPERATING AGREEMENT
OF
MEDIACOM LLC
Dated as of November 19, 1999
- --------------------------------------------------------------------------------
<PAGE>
TABLE OF CONTENTS
-----------------
ARTICLE I DEFINITIONS................................................. -2-
-----------
1.1 Definitions................................................. -2-
ARTICLE II RELATIONSHIP OF THIS AGREEMENT TO THE DEFAULT
---------------------------------------------
RULES PROVIDED BY THE NEW YORK ACTAND TO
----------------------------------------
THE ARTICLES OF ORGANIZATION................................ -13-
----------------------------
2.1 Relationship of this Agreement to the Default
Rules Provided by the New York Act.......................... -13-
ARTICLE III ORGANIZATION................................................ -14-
------------
3.1 Formation................................................... -14-
3.2 Name........................................................ -14-
3.3 Principal Place of Business................................. -14-
3.4 Term........................................................ -14-
3.5 Purposes.................................................... -14-
ARTICLE IV MEMBERS..................................................... -14-
-------
4.1 Names and Addresses......................................... -14-
4.2 Additional Members.......................................... -14-
4.3 Books and Records........................................... -14-
4.4 Information................................................. -15-
4.5 Limitation of Liability..................................... -15-
4.6 Priority and Return of Capital.............................. -15-
4.7 Liability of a Member to the Company........................ -15-
4.8 Financial Adjustments....................................... -15-
ARTICLE V MANAGEMENT AND OPERATION.................................... -16-
OF THE COMPANY
--------------
5.1 Management.................................................. -16-
5.2 Number, Tenure and Qualifications of Manager................ -16-
5.3 Powers of Manager........................................... -16-
5.4 Binding Authority........................................... -17-
5.5 Manager and Executive Committee............................. -17-
5.6 Matters Requiring Executive Committee Report................ -19-
5.7 Actions Requiring Executive Committee Approval.............. -20-
5.8 Expansion of Executive Committee............................ -22-
5.9 Liability for Certain Acts.................................. -23-
5.10 No Exclusive Duty to Company................................ -23-
5.11 Resignation................................................. -24-
5.12 Removal..................................................... -24-
5.13 Compensation................................................ -24-
<PAGE>
5.14 Officers.................................................... -25-
5.15 Certain Covenants of the Manager and the Members............ -26-
5.16 Manager's Right of First Offer.............................. -26-
5.17 Actions of the Manager...................................... -28-
5.18 Organizational and Other Changes in Connection
with Initial Public Offering................................ -29-
ARTICLE VI MEETINGS OF MEMBERS......................................... -30-
-------------------
6.1 Meetings.................................................... -30-
6.2 Special Meetings............................................ -31-
6.3 Place of Meetings........................................... -31-
6.4 Notice of Meetings.......................................... -31-
6.5 Record Date................................................. -31-
6.6 Quorum...................................................... -31-
6.7 Manner of Acting............................................ -32-
6.8 Actions Requiring Approval of the Members................... -32-
6.9 Proxies..................................................... -32-
6.10 Action by Members Without a Meeting......................... -34-
6.11 Waiver of Notice............................................ -34-
6.12 Voting Agreements........................................... -34-
ARTICLE VII CAPITAL CONTRIBUTIONS....................................... -35-
---------------------
7.1 Capital Contributions....................................... -35-
7.2 Capital Contributions and Capital Calls; Allocations........ -35-
7.3 Capital Accounts............................................ -36-
7.4 Transfers................................................... -36-
7.5 Modifications............................................... -36-
7.6 Deficit Capital Account..................................... -36-
7.7 Withdrawal or Reduction of Capital Contributions............ -36-
7.8 No Rights of Redemption or Return of Contribution........... -37-
ARTICLE VIII PROFITS, LOSSES AND DISTRIBUTIONS;
ADJUSTMENTS FOR THE ISSUANCE
OF MEMBERSHIP UNITS......................................... -37-
-------------------
8.1 Allocation of Profits and Losses............................ -37-
8.2 Distributions............................................... -39-
8.3 No Right to Distributions Except Upon
Dissolution of the Company.................................. -40-
8.4 Distributions Upon Dissolution of the Company............... -40-
8.5 1998 Valuation of the Company............................... -41-
8.6 1999 Valuation of the Company............................... -42-
<PAGE>
8.7 Further Valuations of the Company........................... -42-
8.8 Conversion or Exchange of Membership Units
in Connection with IPO...................................... -45-
8.9. Operative Rules Regarding Additional
Membership Units Issued in Connection with
Company Valuations.......................................... -47-
ARTICLE IX TAX MATTERS................................................. -48-
-----------
9.1 Tax Characterization and Returns............................ -48-
9.2. Capital Accounts............................................ -49-
9.3 Special Tax Rules........................................... -50-
9.4 Accounting Decisions........................................ -53-
9.5 Tax Matters Partner......................................... -54-
9.6 Tax Returns................................................. -54-
9.7 Tax Withholdings............................................ -54-
ARTICLE X FINANCIAL REPORTS;.......................................... -55-
INSPECTION RIGHTS
---------------------------
10.1 Reports to Members.......................................... -55-
10.2 Inspection Rights........................................... -55-
Certain Additional Information.............................. -56-
10.4 Use of Proceeds............................................. -56-
ARTICLE XI PUT RIGHTS.................................................. -56-
---------------------------
10.1 Put Right at the Option of the Members...................... -56-
ARTICLE XII TRANSFERABILITY............................................. -58-
---------------------------
12.1 Transferee Not a Member..................................... -58-
12.2 Effective Date.............................................. -59-
12.3 Requirements for All Transfers of Membership Units.......... -59-
12.4 Transfers in a Registered Public Offering................... -60-
ARTICLE XIII PREEMPTIVE RIGHTS AND....................................... -61-
CERTAIN PROVISIONS APPLICABLE TO BMO AFFILIATES
-----------
13.1 Preemptive Rights........................................... -61-
13.2 Subject Membership Units are Nonvoting; Exceptions.......... -62-
13.3 Notice of Certain In Kind Distributions..................... -62-
ARTICLE XIV DISSOLUTION................................................. -63-
---------------------------
14.1 Dissolution................................................. -63-
14.2 Winding Up.................................................. -64-
<PAGE>
14.3 Articles of Dissolution..................................... -64-
14.4 Deficit Capital Account..................................... -64-
14.5 Nonrecourse to Other Members................................ -64-
14.6 Termination................................................. -65-
ARTICLE XV INDEMNIFICATION............................................. -65-
---------------------------
15.1 Exculpatory Provisions...................................... -65-
15.2 Indemnification of Members.................................. -65-
15.3 Advance of Expenses......................................... -66-
15.4 Control of Claim............................................ -66-
15.5 Non-Exclusivity............................................. -66-
15.6 Satisfaction from Company Assets............................ -66-
15.7 Notices of Claims........................................... -66-
ARTICLE XVI GENERAL PROVISIONS.......................................... -67-
---------------------------
16.1 Notices..................................................... -67-
16.2 Amendments.................................................. -67-
16.3 Construction................................................ -68-
16.4 Headings.................................................... -68-
16.5 Waiver...................................................... -68-
16.6 Severability................................................ -68-
16.7 Binding..................................................... -68-
16.8 Counterparts................................................ -69-
16.9 Governing Law............................................... -69-
SCHEDULES
---------
Schedule A - Capital Contributions Since Inception
Schedule B-1 - Membership Units and Percentage Interests Based on
1998 Valuation
Schedule B-2 - Membership Units and Percentage Interests Based on
1999 Valuation
Schedule C - Unfunded Capital Commitments
Schedule D - IPO Illustration
<PAGE>
FOURTH AMENDED AND RESTATED OPERATING AGREEMENT
OF
MEDIACOM LLC
THIS FOURTH AMENDED AND RESTATED OPERATING AGREEMENT, dated as of
November 19, 1999 (this "Agreement"), is made by the owners and holders of two-
thirds of the Membership Units of Mediacom LLC.
RECITALS
--------
WHEREAS, Mediacom LLC was established as a limited liability company
pursuant to an operating agreement dated as of July 17, 1995;
WHEREAS, the operating agreement was amended and restated in its
entirety as the Amended and Restated Operating Agreement of Mediacom LLC dated
as of March 12, 1996 (the "Initial Amended and Restated Operating Agreement");
WHEREAS, the Initial Amended and Restated Operating Agreement was
further amended and restated in its entirety as of March 31, 1997, and
thereafter amended as of June 16, 1997 (the "Second Amended and Restated
Operating Agreement");
WHEREAS, the Second Amended and Restated Operating Agreement was
further amended and restated in its entirety as of January 23, 1998 (the "Third
Amended and Restated Operating Agreement"),
WHEREAS, the Third Amended and Restated Operating Agreement provides
in relevant part that it may be amended pursuant to Section 16.2 thereof with
the consent of at least two-thirds of the Membership Units of Mediacom LLC; and
<PAGE>
WHEREAS, the parties hereto, constituting the owners and holders of
more than two-thirds of the Membership Units of Mediacom LLC, desire to amend
the Third Amended and Restated Operating Agreement as set forth herein.
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which are acknowledged, the parties executing this Agreement
below, intending to be legally bound, agree as follows:
ARTICLE I
DEFINITIONS
-----------
1.1 Definitions. In this Agreement, the following terms shall have
the meanings set forth below when used in this Agreement with initial capital
letters:
(a) "Accounting Period" shall mean, as the context may require, the
-----------------
period commencing on the date of this Agreement (as originally entered into) or
on the day following the last day of the immediately preceding Accounting
Period, and ending on the next succeeding of the following: (a) the last day of
each Fiscal Year; (b) the day prior to the day as of which a current or newly-
admitted Member makes a Capital Contribution to the Company, if the Percentage
Interests change as a result of such Capital Contribution; (c) the date upon
which the Company shall be dissolved; or (d) any day designated by the Manager
as the date upon which an Accounting Period shall end.
(b) "Additional Capital Contribution" shall have the meaning set
-------------------------------
forth in Section 7.2(a) hereof.
(c) "Adjusted Basis" shall mean, as of any date of determination, the
--------------
Company's adjusted basis in any asset as of such date, as determined for Federal
income tax purposes pursuant to Section 1011 of the Code.
(d) "Affiliate" shall mean, with respect to any Person, any other
---------
Person controlling, controlled by or under common control with such Person, with
"control" for such purpose meaning the possession, directly or indirectly, of
the power to direct or cause the direction of the management and policies of a
Person, whether through the ownership of voting securities or voting interests,
by contract or otherwise.
(e) "Agreement" shall mean this Fourth Amended and Restated
---------
Operating Agreement as amended from time to time.
-2-
<PAGE>
(f) "Articles of Organization" shall mean the Articles of Organization
------------------------
of the Company filed with the New York Secretary of State on July 17, 1995, as
they may from time to time be amended.
(g) "BHCA" shall mean the United States Bank Holding Company Act of
----
1956, as amended, and any later law, regulation or rule of similar effect.
(h) "BMO Affiliate" shall mean any Affiliate of Bank of Montreal, or
-------------
any successor, subject to the BHCA or similar provisions restricting investments
in non-banking organizations under the IBA.
(i) "Business Day" shall mean any day other than a Saturday, Sunday or
------------
any other day on which banks in the State of New York are required or permitted
by law to be closed.
(j) "Capital Account" as of any date shall mean the Capital
---------------
Contribution to the Company by a Member, adjusted as of such date pursuant to
the terms of this Agreement.
(k) "Capital Call" shall have the meaning set forth in Section
------------
7.2(a) hereof.
(l) "Capital Commitment" shall mean the obligation, with respect to
------------------
any Member, of such Member to make a Capital Contribution to the Company.
(m) "Capital Contribution" shall mean any contribution by a Member to
--------------------
the capital of the Company in cash, property or services rendered, as the same
may be reflected from time to time on Schedule A hereto.
----------
(n) "Carrying Value" shall mean (i) with respect to any asset (other
--------------
than cash) included in a Capital Contribution of a Member, the fair market value
of such contributed property on the date of contribution, (ii) with respect to
any property held by the Company at the time of any adjustment of Percentage
Interests pursuant to Section 8.5, Section 8.6, Section 8.7 and/or Section 8.8,
the fair market value of such property and (iii) with respect to any other
asset, the Adjusted Basis thereof; provided, that, in the case of the foregoing
--------
clauses (i) and (ii), the Carrying Value shall be reduced, but not below zero,
by all depreciation, amortization, and similar expense thereafter charged to the
Members' Capital Accounts with respect to such property.
-3-
<PAGE>
(o) "Claim" shall have the meaning set forth in Section 15.2
-----
hereof.
(p) "Code" shall mean the Internal Revenue Code of 1986, as
----
amended, and any successor to that Code.
(q) "Commisso Entity" shall mean, collectively, (i) Rocco B. Commisso,
---------------
(ii) any Person controlled by Rocco B. Commisso and owned by Rocco B. Commisso,
(iii) members of the immediate family of Rocco B. Commisso or (iv) any Person
51% of which is beneficially owned by Rocco B. Commisso and members of the
immediate family of Rocco B. Commisso.
(r) "Commisso Members" shall mean (i) Rocco B. Commisso,(ii) any
----------------
Person controlled by him and of which he, members of his immediate family or
trusts established for the benefit of any of the foregoing are 51% equity
holders; provided, that Rocco B. Commisso or such Person shall have at least a
--------
1% Percentage Interest, and (iii) any officer, director, manager or employee of
a Commisso Entity.
(s) "Commitment Period" shall mean, with respect to any Member that
-----------------
has a Capital Commitment, the period commencing on the date of acceptance by the
Company of such Capital Commitment and extending through the second anniversary
thereof, which period may, in the discretion of the Manager, be extended through
the third anniversary thereof.
(t) "Company" shall refer to MEDIACOM LLC, a New York limited
-------
liability company.
(u) "Company Valuation" shall mean (1) a valuation of the Company by
-----------------
the Executive Committee pursuant to Section 8.7, including a Dissolution
Valuation, or (2) an IPO Valuation as provided in Section 8.8(c).
(v) "Company Valuation Excess" shall have the meaning set forth
------------------------
in Section 8.7(b) hereof.
(w) "Credit Agreement" shall mean and include (i) that certain Second
----------------
Amended and Restated Credit Agreement, dated as of June 24, 1997, among Mediacom
Arizona, Mediacom Delaware, Mediacom California, the lenders party thereto and
The Chase Manhattan Bank, as administrative agent, as amended, restated,
modified or supplemented from time to time, including any increase, deferral,
renewal, extension or refinancing thereof, (ii) that certain Credit Agreement,
dated as of January 22, 1998, among Mediacom Southeast, the lenders party
thereto and The Chase
-4-
<PAGE>
Manhattan Bank, as Administrative Agent, as amended, restated, modified or
supplemented from time to time, including any increase, deferral, renewal,
extension or refinancing thereof, (iii) that certain Credit Agreement
contemplated by a commitment letter and summary of terms from The Chase
Manhattan Bank accepted by the Company in August 1999 contemplating a new
$550,000,000 credit agreement among Mediacom Illinois LLC, Mediacom Indiana LLC,
Mediacom Iowa LLC, Mediacom Minnesota LLC, Mediacom Wisconsin LLC and Zylstra
Communications Corp., the lending institutions to be named therein and The Chase
Manhattan Bank, as Administrative Agent, as such Credit Agreement may be
amended, restated, modified or supplemented from time to time, including any
increase, deferral, renewal, extension or refinancing thereof, and (iv) any
senior credit facility entered into hereafter by the Company or any Subsidiary.
(x) "Default Rule" shall mean a rule stated in the New York Act:
------------
(1) which structures, defines, or regulates the finances, governance,
operations, or other aspects of a limited liability company organized under the
New York Act, and
(2) which applies except to the extent it is negated or modified
through the provisions of a limited liability company's articles of organization
or operating agreement.
(y) "Dissolution Valuation" shall have the meaning set forth in
---------------------
Section 8.4(b) of this Agreement.
(z) "Distribution" means any cash and other property paid to a
------------
Member (in its capacity as such) by the Company.
(aa) "Excess Chase Units" shall mean, if the FCC does not, within one
------------------
year from the date of closing of the U.S. Cable Acquisition, raise from five
percent (5%) to ten percent (10%) the level of ownership interest required to
invoke FCC cross-ownership restrictions, those Membership Units held by Chase
Manhattan Capital, L.P. and CB Capital Investors, L.P. (the "Chase Entities")
which cause the total number of Membership Units held by the Chase Entities to
exceed four and 99/100 (4.99%) percent (or if then higher, the highest ownership
position possible without invoking FCC cross ownership restrictions) of the
outstanding Membership Units.
(bb) "Executive Committee" shall have the meaning set forth in Section
-------------------
5.1 hereof.
-5-
<PAGE>
(cc) "Executive Compensation" shall have the meaning set forth in
----------------------
Section 5.13(b) of this Agreement.
(dd) "FCC" shall mean the Federal Communications Commission or
---
any governmental authority substituted therefor.
(ee) "Fiscal Year" shall mean the fiscal year of the Company,
-----------
which shall be the year ending December 31.
(ff) "GAAP" shall mean generally accepted accounting principles
----
applied on a consistent basis.
(gg) "IBA" shall mean the United States International Banking Act of
---
1978, as amended, and any later law, regulation or rule of similar effect.
(hh) "Indemnified Persons" shall have the meaning set forth in
-------------------
Section 15.1 of this Agreement.
(ii) "IPO", "IPO Entity", "IPO Underwriters" and "IPO Valuation" shall
--- ---------- ------------------ -------------
have the meanings set forth in Section 5.18 of this agreement.
(jj) "IPO Member Common Shares," "IPO Member Options", "IPO Option
------------------------- ------------------ ----------
Share Quotient" and "IPO Public Common Shares" shall have the meanings set forth
- -------------- ------------------------
in Section 8.8 of this Agreement.
(kk) "Largest Member" shall have the meaning set forth in Section
--------------
5.5(b) of this Agreement.
(ll) "Loss" shall mean the taxable loss of the Company for any Fiscal
----
Year or portion thereof, as computed for Federal income tax purposes in
accordance with Section 703(a) of the Code. For this purpose, all items of
income, gain, loss or deduction required to be stated separately pursuant to
Section 703(a)(1) of the Code shall be aggregated, but there shall be excluded
from such computation any item of income, gain, loss, or deduction which is
specifically allocated.
(mm) "Management Agreement" shall mean each agreement entered into by
--------------------
a Subsidiary and Mediacom Management providing for certain supervisory services
to be performed by Mediacom Management with respect to the Systems.
(nn) "Manager" shall mean Rocco B. Commisso and any other Member who
-------
succeeds him as a manager pursuant to this
-6-
<PAGE>
Agreement; provided, that Rocco B. Commisso or such Person shall have at least a
1% Percentage Interest.
(oo) "Mediacom Arizona" shall mean Mediacom Arizona LLC, a Delaware
----------------
limited liability company in which the Company holds a 99% equity interest.
(pp) "Mediacom California" shall mean Mediacom California LLC, a
-------------------
Delaware limited liability company in which the Company holds a 99% equity
interest.
(qq) "Mediacom Delaware" shall mean Mediacom Delaware LLC, a Delaware
-----------------
limited liability company in which the Company holds a 100% equity interest.
(rr) "Mediacom Management" shall mean Mediacom Management Corporation,
-------------------
a Delaware corporation and Affiliate of the Manager which provides supervisory
services with respect to the Systems.
(ss) "Mediacom Southeast" shall mean Mediacom Southeast LLC, a
------------------
Delaware limited liability company in which the Company holds a 100% equity
interest.
(tt) "Member" shall mean each Person who or which executes a
------
counterpart of this Agreement as a Member and each Person who or which may
hereafter become a party to this Agreement.
(uu) "Membership Units" shall mean units of membership interest in the
----------------
Company, each such unit having a value upon issuance of $1,000, as the same may
be reflected from time to time on a Schedule annexed hereto.
(vv) "Minimum Gain" shall mean "partnership minimum gain" as
------------
defined in Treasury Regulation 1.704-2(d).
(ww) "Net Agreed Value" shall mean
----------------
(I) in the case of any Capital Contribution other than cash, the fair
market value of such property at the time of contribution reduced by any
indebtedness secured by such property and assumed or taken subject to by the
Company upon such contribution under Section 752 of the Code, and
(II) in the case of any property (other than cash) distributed to a
Member, the fair market value of such property at the time of such distribution
reduced by any indebtedness secured by such property and assumed or taken
subject
-7-
<PAGE>
to by such Member upon such distribution under Section 752 of the Code.
(xx) "New York Act" shall mean the New York Limited Liability Company
------------
Act.
(yy) "Nonfunding Member" shall have the meaning set forth in Section
-----------------
7.2(b) hereof.
(zz) "Partner Nonrecourse Debt Minimum Gain" has the meaning set forth
-------------------------------------
in Treasury Regulation 1.704-2(i)(3).
(aaa) "Percentage Interest" shall mean with respect to any Member the
-------------------
ratio of the Membership Units held by such Member to the aggregate number of
Membership Units held by all Members, as the same may be reflected from time to
time on a Schedule annexed hereto.
(bbb) "Person" shall mean any natural person, corporation,
------
governmental forth authority, limited liability company, partnership, trust,
unincorporated association or other commercial or legal entity.
(ccc) "Preferred Capital" shall mean with respect to any Member, the
-----------------
product of the number of Membership Units held by such Member times $1,000.00,
as adjusted pursuant to Section 8.5, Section 8.6,and/or Section 8.7.
(ddd) "Preferred Return" shall mean, with respect to the Preferred
----------------
Capital relating to each Membership Unit held by a Member, a cumulative return
of twelve (12%) percent per annum compounded annually, such compounding to be
initially in respect of (and pro rated for) the period commencing on the date of
the issuance of such Membership Unit (including by virtue of Section 8.5,
Section 8.6 and/or Section 8.7 of this Agreement, if applicable) and ending on
the last day of the then-current Fiscal Year, and thereafter annually.
(eee) "Profit" shall mean the taxable income of the Company for any
------
Fiscal Year or portion thereof as computed for Federal income tax purposes in
accordance with Section 703(a) of the Code. For this purpose, all items of
income, gain, loss, or deduction required to be stated separately pursuant to
Section 703(a)(1) of the Code shall be aggregated, but there shall be excluded
from such computation any item of income, gain, loss, or deduction which is
specifically allocated.
-8-
<PAGE>
(fff) "Purchase Note" shall have the meaning set forth in Section
-------------
11.1(c) of this Agreement.
(ggg)"Put" shall have the meaning set forth in Section 11.1(a) of
---
this Agreement.
(hhh)"Put Notice" shall have the meaning set forth in Section
----------
11.1(a) of this Agreement.
(iii)"Put Price" shall have the meaning set forth in Section
---------
11.1(b) of this Agreement.
(jjj)"Records" shall mean:
-------
(I) true and full information regarding the status of the
business and financial condition of the Company;
(II) copies of the Company's Federal, state, and local
income tax returns;
(3) a current list of the name and last known business, residence, or
mailing address of each Member and the Manager;
(4) a copy of this Agreement, the Articles of Organization, and all
amendments thereto, together with executed copies of any written powers of
attorney pursuant to which this Agreement and the Articles of Organization and
all amendments thereto have been executed;
(5) true and full information regarding the amount of cash and a
description and statement of the value of any other property or services
contributed by each Member and which each Member has agreed to contribute in the
future, and the date on which each became a Member;
(6) a copy of each material contract entered into by the Company;
(7) minutes of the meetings of the Members;
(8) a copy of each effective registration statement and report filed
with the SEC or any national securities exchange association; and
(9) other information regarding the affairs of the Company as required
by an act of the Members or as is prudent and desirable in the opinion of the
Manager.
-9-
<PAGE>
(kkk) "Regulatory Allocations" shall have the meaning set forth in
---------------------
Section 9.3(c)(6) of this Agreement.
(lll)"Regulatory Violation" shall mean (i) with respect to any Member
--------------------
that is a Small Business Investment Company, a diversion of the proceeds of the
investment by such Member hereunder from the reported use thereof on SBA Form
1031 delivered in connection with such Member's Capital Contribution, if such
diversion was effected without obtaining the prior written consent of such
Member (which may be withheld in its sole discretion) or (ii) a change in the
principal business activity of the Company and its Subsidiaries to an ineligible
business activity (within the meaning of the Small Business Investment Act of
1958 and the regulations issued thereunder as set forth in 13 CFR 107 and 121,
as amended) if such change occurs within one year after the date hereof.
(mmm) "Second Largest Member" shall have the meaning set forth in
---------------------
Section 5.5(b) of this Agreement.
(nnn) "SEC" shall mean the Securities and Exchange Commission or
---
any governmental authority substituted therefor.
(ooo) "Securities Act" shall mean the Securities Act of 1933, as
--------------
amended, and any successor thereto.
(ppp) "Specified Value" shall have the meaning set forth in
---------------
Section 8.5(e) of this Agreement.
(qqq) "Subject Membership Units" shall mean any Membership Units
------------------------
acquired by a BMO Affiliate (whether directly from the Company upon subscription
or otherwise), and any Membership Units or similar interests issued or
distributed with respect thereto, or in replacement thereof; provided, however,
-------- -------
that upon an irrevocable transfer to a Person other than a BMO Affiliate or
Subject Transferee, a Subject Membership Unit shall immediately cease to be a
Subject Membership Unit.
(rrr) "Subject Transferee" shall mean any transferee of Subject
------------------
Membership Units transferred by a BMO Affiliate or a Subject Transferee, but
shall not include a transferee (1) who must obtain the approval of the Manager
under Section 12.1(a) of the Agreement to become a Member with respect to such
Subject Membership Units; (2) of a transfer that requires approval of the
Executive Committee under Section 12.1(a) of this Agreement to be effective; or
(3) in a public offering registered under the Securities Act.
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<PAGE>
(sss) "Subsidiary" shall mean each entity that operates Systems of
----------
which the Company is, directly or indirectly, the holder of the majority of
equity interests.
(ttt) "System" shall mean (i) any cable distribution system that
------
receives broadcast signals by antennae, microwave transmission, satellite
transmission or any other form of transmission that amplifies such signals and
distributes them via cable, and (ii) any other business from which the Company
or its Subsidiaries derives revenue from telecommunications services.
(uuu) "System Cash Flow" shall mean, for any period, the sum, for the
----------------
Company and its Subsidiaries (determined on a consolidated basis), of the
following: (i) the gross operating revenues for such period minus (ii) all
-----
operating expenses for such period, including, without limitation, technical,
programming and selling, general and administrative expenses, but excluding (to
the extent included in operating expenses) income taxes, depreciation,
amortization, interest expense, and any payments described in Section 5.13 of
this Agreement; provided, however, that gross operating revenues and operating
-------- -------
expenses for any period shall exclude all extraordinary and unusual items and
all non-cash items.
(vvv) "Termination Event" shall mean the death, legal incapacity,
-----------------
resignation, removal, bankruptcy or dissolution of the Manager, unless the
holders of no less than two-thirds of Membership Units elect to continue the
Company.
(www) "Treasury Regulations" shall mean all proposed, temporary and
--------------------
final regulations promulgated under the Code as from time to time in effect.
(xxx) "Triax Acquisition" shall mean the acquisition by the Company or
-----------------
a Subsidiary of certain cable television systems and other assets acquired
pursuant to an Asset Purchase Agreement dated as of April 29, 1999 between the
Company and Triax Midwest Associates, L.P.
(yyy) "Triggering Event" is defined as the earlier to occur of:
----------------
(I) Any date upon which (a) any Member's investment in Membership
Units of the Company exceeds permitted amounts under any legal restriction to
which it is subject, or such Member is otherwise not permitted to hold such
Membership Units, under any law, rule or regulation applicable to such Member or
(b) legal restrictions are imposed on any Member which make the holding of such
Membership Units or a portion thereof illegal or unduly
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<PAGE>
burdensome (in which case such Member shall have a Put Option only with respect
to excess Membership Units held by such Member); or
(II) The occurrence of a Regulatory Violation, provided that no such
restriction or occurrence described above shall constitute a Triggering Event if
such restriction or occurrence is caused by the voluntary act of the Member with
the intention to create a Triggering Event to which such restriction or
occurrence applies.
(zzz)"Unfunded Capital Commitment" shall mean, for any Member at any
---------------------------
time, the amount of such Member's Capital Commitment in excess of such Member's
aggregate Capital Contributions, as the same may be reflected from time to time
on Schedule C hereto; provided, however, that a Member's Unfunded Capital
---------- -------- -------
Commitment shall at no time exceed any amount which would result in a Triggering
Event for such Member by reason of such Member making an Additional Capital
Contribution pursuant to a Capital Call.
(aaaa) "Unrealized Gain" shall mean, with respect to any asset and as
---------------
of any date of determination, the excess, if any, of the then current fair
market value of such asset over the Carrying Value thereof as of such date.
(bbbb) "Unrealized Loss" shall mean, with respect to any asset and as
---------------
of any date of determination, the excess, if any, of the then current Carrying
Value of such asset over the fair market value thereof as of such date.
(cccc) "Unreturned Preferred Capital" shall mean, for any Member at
----------------------------
any time, the excess (if any) of such Member's Preferred Capital over all
amounts previously distributed to such Member pursuant to Section 8.2(a) or
8.4(b)(1).
(dddd) "Unreturned Preferred Return" shall mean, for any Member at any
---------------------------
time, the excess (if any) of such Member's accrued Preferred Return at such time
over all amounts previously distributed to such Member pursuant to Section
8.2(b) or 8.4(b)(2).
(eeee) "U.S. Cable Acquisition" shall mean the acquisition by the
----------------------
Company or a Subsidiary of certain cable television systems and other assets
acquired pursuant to an Asset Purchase Agreement dated as of August 29, 1997
between the Company, Cablevision Systems Corporation, U.S. Cable Television
Group, L.P., ECC Holding Corporation and Missouri Cable Partners, L.P.
-12-
<PAGE>
(ffff) "Zylstra Acquisition" shall mean the acquisition by the Company
-------------------
or a Subsidiary of certain cable television systems and other properties
acquired pursuant to a Stock Purchase Agreement dated as of May 25, 1999 between
the Company, Charles Zylstra, Kara M. Zylstra and Trusts under the Will of Roger
E. Zylstra, deceased,
(gggg) "1998 Valuation" shall have the meaning set forth in Section
--------------
8.5 of this Agreement.
(hhhh) "1999 Valuation" shall have the meaning set forth in Section
--------------
8.6 of this Agreement.
ARTICLE II
RELATIONSHIP OF THIS AGREEMENT TO THE
DEFAULT RULES PROVIDED BY THE NEW YORK ACT
AND TO THE ARTICLES OF ORGANIZATION
-----------------------------------
2.1 Relationship of this Agreement to the Default Rules Provided by
the New York Act.
Regardless of whether this Agreement specifically refers to particular
Default Rules:
(a) if any provision of this Agreement conflicts with a Default Rule,
the provision of this Agreement controls and the Default Rule is modified or
negated accordingly, and
(b) if it is necessary to construe a Default Rule as modified or
negated in order to effectuate any provision of this Agreement, the Default Rule
is modified or negated accordingly.
2.2 Relationship Between this Agreement and the Articles of
Organization. If a provision of this Agreement differs from a provision of the
Articles of Organization, then to the extent allowed by law this Agreement shall
govern.
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<PAGE>
ARTICLE III
ORGANIZATION
------------
3.1 Formation. The Company was formed as a limited liability company
by the filing with the New York Secretary of State of its Articles of
Organization pursuant to the New York Act.
3.2 Name. The name of the Company is MEDIACOM LLC.
3.3 Principal Place of Business. The principal place of business of
the Company within the State of New York shall be 100 Crystal Run Road,
Middletown, New York 10941. The Company may establish any other places of
business as the Manager may from time to time deem advisable.
3.4 Term. The term of the Company shall be until December 31, 2020,
unless the Company is dissolved sooner pursuant to this Agreement or the New
York Act.
3.5 Purposes. The Company is formed for the purpose of acquiring,
directly or through Persons in which the Company invests equity or debt,
franchises to operate, and to own, invest in, design, construct, maintain,
manage and operate, exchange and dispose of, one or more Systems or entities
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
Systems or entities providing telecommunications services.
ARTICLE IV
MEMBERS
-------
4.1 Names and Addresses. The names and addresses of the Members are
as set forth in Schedule A to this Agreement.
----------
4.2 Additional Members. A Person may be admitted as a Member after
the date of this Agreement upon compliance with the terms of this Agreement and
any other conditions imposed by the Manager from time to time for the admission
of additional or substitute Members.
4.3 Books and Records. The Company shall keep the Records at its
principal place of business.
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<PAGE>
4.4 Information. Each Member and its agents may inspect the Records
during ordinary business hours and upon reasonable notice to the Manager at the
principal place of business of the Company.
4.5 Limitation of Liability. Each Member's liability shall be
limited as set forth in this Agreement, the New York Act and other applicable
law. No Member shall be personally liable for any indebtedness, liability or
obligation of the Company without entering into a written agreement assuming
such personal liability, except that such Member shall remain personally liable
for the payment of its Capital Commitment and as otherwise set forth in this
Agreement, the New York Act and any other applicable law.
4.6 Priority and Return of Capital. Except as expressly set forth
herein, no Member shall have priority over any other Member, whether for the
return of a Capital Contribution or for Profits, Losses or a Distribution;
provided, however, that this Section 4.6 shall not apply to loans or other
- -------- -------
obligations (as distinguished from a Capital Contribution) made by a Member or
its Affiliates to or on behalf of the Company.
4.7 Liability of a Member to the Company. A Member who or which
rightfully receives the return of any portion of a Capital Contribution is
liable to the Company only to the extent now or hereafter provided by the New
York Act. A Member who or which receives a Distribution made by the Company in
violation of this Agreement or made when the Company's liabilities exceed its
assets (after giving effect to such Distribution) shall be liable to the Company
for the amount of such Distribution.
4.8 Financial Adjustments. No Member admitted after the date of this
Agreement or making an additional Capital Contribution after the date of this
Agreement shall be entitled to any retroactive allocation of losses, income or
expense deductions incurred by the Company. The Manager may, in his discretion,
at the time a Member is admitted or makes additional Capital Contributions,
close the books and records of the Company (as though the Fiscal Year had ended)
or make pro rata allocations of loss, income and expense deductions to such
Member for that portion of the Fiscal Year in which such Member was admitted or
makes additional Capital Contributions in accordance with the Code.
-15-
<PAGE>
ARTICLE V
MANAGEMENT AND OPERATION OF THE COMPANY
---------------------------------------
5.1 Management. Except as otherwise provided herein, (i) the overall
management and control of the business and affairs of the Company shall be
vested in one Manager who shall report on certain matters to a committee of the
Company (the "Executive Committee"); provided, that nothing in this Article V
------------------- --------
shall derogate from the power of the Manager and the Members to agree jointly in
writing to cause the Company to act and (ii) the Manager shall exercise all
powers necessary and convenient for the purposes of the Company, including those
enumerated in Section 3.5 and Section 5.3, on behalf and in the name of the
Company.
5.2 Number, Tenure and Qualifications of Manager. Rocco B. Commisso
shall serve as the Manager, and shall hold office until his resignation or other
event that terminates his membership and the qualification of his successor.
Mr. Commisso or a Commisso Member then serving as Manager shall have the right
to designate a Commisso Member, the chief executive officer of which is Mr.
Commisso, as successor Manager without the vote or consent of the Members. Any
successor Manager not appointed as described above, shall be elected by the vote
or written consent of at least a majority of all Membership Units. Such
successor Manager need not be a resident of the State of New York. Any Manager
shall hold at least a 1% Percentage Interest in the Company.
5.3 Powers of Manager. Except as set forth in this Agreement, the
Manager shall have power and authority, on behalf of the Company itself and on
behalf of the Subsidiaries, to (a) purchase, lease or otherwise acquire from, or
sell, lease or otherwise dispose of, to any Person any property, (b) form
Subsidiaries, (c) open bank accounts and otherwise invest funds, (d) incur or
guarantee indebtedness, (e) authorize a Member to guarantee indebtedness of the
Company or any of the Subsidiaries in an amount or amounts in the aggregate not
to exceed $10,200,000 for any Member, (f) issue additional Membership Units, (g)
purchase insurance on the business and assets of the Company, (h) commence
lawsuits and other proceedings, (i) enter into any agreement, instrument or
other writing, (j) retain accountants, attorneys or other agents, and (k) take
any other lawful action that the Manager considers necessary, convenient or
advisable in connection with the business of the Company. The Manager shall
have the power to cause the Company to enter into contracts with Affiliates of
the Company or the Manager in respect of property, services, or credit in the
ordinary course of business, but only if the monetary or business consideration
arising therefrom would be comparable and
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<PAGE>
substantially as advantageous to the Company as in a comparable transaction with
a Person not an Affiliate.
5.4 Binding Authority. No Person shall have any power or authority
to bind the Company unless such Person has been authorized by the Manager to act
on behalf of the Company in accordance with this Agreement.
5.5 Manager and Executive Committee. (a) Except where expressly
provided to the contrary herein, all decisions with respect to the management
and control of the Company that are duly made by the Manager shall be binding on
the Company and each of the Members.
(b) The Manager has established the Executive Committee, which shall
meet periodically to exchange information with respect to Company affairs. The
approval of the Executive Committee shall be required to authorize certain acts
or transac tions as specified in this Agreement. The Executive Committee shall
have five members. The Manager shall be a member and Chairman of the Executive
Committee and shall designate two additional members of the Executive Committee,
one of whom may be an Affiliate of the Manager or an employee of Mediacom
Management or a Subsidiary. The Member (for this purpose, a Member and each
Affiliate shall be deemed one Member) having the largest number of Membership
Units (for this purpose, calculated on the assumption that all Capital
Commitments have been funded) (the "Largest Member") shall designate the
--------------
remaining two members of the Executive Committee; provided, however, that if the
-------- -------
Member having the second largest number of Membership Units (the "Second Largest
--------------
Member") has Membership Units in excess of 50 percent of the number of
- ------
Membership Units of the Largest Member, such two Members shall each designate
one member of the Executive Committee. If a Commisso Member or an Affiliate
thereof is then serving as Manager, in no event shall a Commisso Member be the
Largest Member or the Second Largest Member. In the event that, but for the
immediately preceding sentence, the Commisso Member would be either the Largest
Member or the Second Largest Member, the Member having the next largest number
of Membership Units will be the Largest Member or the Second Largest Member, as
the case may be. Except as provided above, each Member having the right to make
a designation of a representative to the Executive Committee shall have complete
discretion with respect to the designation of its representative and any change
in such representation shall become effective upon receipt of written notice
thereof by the Company.
(c) The presence of four members of the Executive Committee shall
constitute a quorum for the transaction of business
-17-
<PAGE>
or any specified item of business requiring a vote. If a quorum shall not be
present at any meeting of the Executive Committee requiring a vote, the meeting
may adjourn from time to time, without notice other than announcement at the
meeting, until a quorum shall be present. The Executive Committee shall act at
meetings thereof duly convened and held as provided in this Agreement. Each
representative shall have one vote, and, subject to Section 5.7(b), the vote of
a majority of the members of the Executive Committee shall be the act of the
Executive Committee.
(d) Any one or more members of the Executive Committee may participate
in a meeting thereof by means of conference telephone or similar communications
equipment allowing all Persons participating in the meeting to hear each other
at the same time. Participation by such means shall constitute presence in
person at a meeting. Any Person appointed by a Member to serve as a
representative on the Executive Committee may, by an instrument in writing,
authorize another member of the Executive Committee to act as such
representative's proxy at any meeting or meetings or by written consent and to
vote on behalf of such representative. Any action required or permitted by this
Agreement to be taken by the Executive Committee may be taken if all members of
such Committee consent in writing to the adoption of a resolution authorizing
the action. Such resolution and the written consents thereto shall be filed
with the minutes of the proceedings of the Executive Committee.
(e) Regular informational meetings of the Executive Committee may be
held upon at least 24 hours notice at such time and at such place, but no less
often than quarterly, as shall from time to time be determined by the Manager.
Additional informational meetings shall take place as and where needed.
(f) Special meetings of the Executive Committee may be called by any
member thereof on five days' notice to the other members either personally or by
facsimile at such address as shall be specified in writing by each
representative for purposes of notice, which notice shall specify the time,
place and purpose of such meeting. Notwithstanding the foregoing, in case of
exigency, special voting meetings may be called on such shorter notice, given as
aforesaid or by telephone, as the Executive Committee members may agree upon.
(g) Any action taken by an Executive Committee member shall be deemed
to have been duly authorized by the Member appointing such member. The
resignation or removal of a member of the Executive Committee shall not
invalidate any act of such member
-18-
<PAGE>
taken before the giving of written notice of the removal or resignation of such
member.
(h) Each Member designating a member of the Executive Committee, each
Executive Committee member, and their respective Affiliates may have other
business interests and may engage in other activities in addition to those
relating to the Company. Such Persons may make direct or indirect investments
in Systems or entities offering telecommunications services, provided that if
such investment is not a passive one and requires management by such Person (if
such Person is other than a commercial or investment bank or other financial
institution), such Person shall first offer to the Company the opportunity to
make the investment. The Company shall have thirty days in which to determine
whether to make such investment and if it so determines, the Company shall
proceed diligently to prepare a contract of purchase and sale customary for
transactions of the type contemplated and to consummate the transaction. In the
event such transaction is consummated, the Person, if other than the Manager or
an Affiliate of the Manager, making the offer shall be reimbursed for its
expenses incurred and, in addition, shall be paid one-half of the fee described
in Section 5.13(a) hereof, with the other one-half of said fee being paid as set
forth in Section 5.13(a). Each Member designating a member of the Executive
Committee and each Executive Committee member shall incur no liability to the
Company or any Member as a result of engaging in such other business interests
or activities. The provisions of the second, third and fourth sentences of this
Section 5.5(h) shall not apply to activities of Members subsequent to December
31, 2004.
5.6 Matters Requiring Executive Committee Report. The following
matters shall be reported upon or information delivered by the Manager at the
quarterly informational meetings of the Executive Committee:
(i) the general status of the business and the Systems;
(ii) copies of all projections delivered to the lenders of the
Company or its Subsidiaries in connection with proposed acquisitions or
refinancings by the Company or its Subsidiaries;
(iii) copies of all regular reports to management submitted by
the independent auditors for the Company;
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<PAGE>
(iv) the financial status of the Company, including amounts of
projected Capital Calls and the incurrence, renewal or refinancing of
indebtedness for borrowed money by the Company;
(v) the status of any Subsidiary;
(vi) the status of any proposed acquisition;
(vii) the status of any litigation or any other legal or
regulatory proceeding;
(viii) the engagement of counsel, independent accountants or
other professional advisors; and
(ix) any matter expressly stated in this Agreement to be
subject to approval of the Executive Committee.
5.7 Actions Requiring Executive Committee Approval. (a) Each member
of the Executive Committee shall have one vote. The following matters shall
require approval of a majority of the members of the Executive Committee and
such action shall not be taken by the Company on its own behalf or on behalf of
any Subsidiary, as the case may be, without such approval:
(i) individual acquisitions of Subsidiaries or Systems
requiring a Capital Call exceeding $10 million or having a purchase
price exceeding $40 million;
(ii) any Capital Call exceeding $8 million not involving an
acquisition;
(iii) financing transactions increasing the aggregate
indebtedness of the Company and its Subsidiaries by $40 million or
more;
(iv) dispositions of properties having a sale price exceeding
$40 million;
(v) a single transaction or proposed set of similar
transactions with Affiliates of the Manager or the Company exceeding $1
million other than as permitted in Section 5.13 of this Agreement.
(vi) offerings of Membership Units or other equity interests
in the Company, and any amendments to this Agreement necessary or
desirable to complete the offering;
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<PAGE>
(vii) the determination of the equity value of the Company upon
the occurrence of certain events as described in and pursuant to Section
8.5 of this Agreement;
(viii) except as set forth in Section 12.1(a) of this Agreement,
proposed transfers by Members of Membership Units exceeding 5,000;
(ix) the resolution of conflicts of interest between the Company
and any Affiliate of the Company, including the Manager;
(x) the merger or consolidation of the Company with or into any
other business entity;
(xi) (A) the voluntary commencement of any proceeding or the
voluntary filing of any petition seeking relief under any bankruptcy,
insolvency, receivership or similar law, (B) the consent to the institution
of, or causing the Company to fail to contest in a timely and appropriate
manner, any involuntary proceeding or any involuntary filing of any
petition of the type described in subclause (A) above, (C) the application
for or consent to the appointment of a receiver, trustee, custodian,
sequestrator, conservator or similar official for the Company or for a
substantial part of the property or assets of the Company, (D) the filing
of an answer admitting the material allegations of a petition filed against
the Company in any such proceeding, (E) the consent to any order for relief
issued with respect to any such proceeding, (F) the making of a general
assignment for the benefit of creditors, (G) the admission in writing the
inability of the Company or causing the Company to fail generally to pay
its debts as they become due or (H) the taking of any action for the
purpose of effecting any of the foregoing; or
(xii) any other matter expressly stated in this Agreement to be
subject to approval of the Executive Committee.
(b) An Executive Committee member shall not be obligated to abstain
from voting on any matter (or vote in any particular manner) because of any
interest (or conflict of interest) of such representative or the Member
designating such representative (or any Affiliate thereof) in such matter;
provided, however, that (i) the interest (or conflict of interest) of such
- -------- -------
representative, Member or Affiliate is disclosed to the other representatives
prior to any vote; and (ii) the monetary or
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<PAGE>
business consideration arising in connection with the proposed transaction would
be comparable and substantially as advantageous to the Company as in a
comparable transaction with a Person not an Affiliate. Such matter shall not be
approved by the Executive Committee without the affirmative vote of at least 50%
of the Executive Committee members not having any interest (or conflict of
interest) in such matter.
(c) Nothing contained in this Section 5.7 shall be construed as
limiting the authority of the Manager, acting alone in his sole discretion, to
take certain actions, and cause the company and/or the Members to take certain
actions, in connection with an IPO of the Company as provided by Section 5.18.
5.8 Expansion of Executive Committee. In the event:
(a) of the bankruptcy, death, dissolution, removal, legal incapacity
or resignation of the Manager or the occurrence of any other event that
terminates the membership of the Manager;
(b) that the Manager for any reason is no longer the chief executive
officer and controlling shareholder of Mediacom Management while any Management
Agreement is in effect;
(c) that the Company has not disposed of its assets and redeemed the
Membership Units of the non-Commisso Members within two years of the date on
which the Members have approved a disposition pursuant to Section 6.8 of this
Agreement; or
(d) that the System Cash Flow for any two consecutive fiscal quarters
is less than 80 percent of the projected System Cash Flow for such periods in
the projections most recently submitted by the Company to lenders of the Company
or its Subsidiaries in connection with proposed acquisitions or refinancings by
the Company or its Subsidiaries and reported to the Executive Committee under
clause (ii) of Section 5.6 of this Agreement;
then, the number of representatives on the Executive Committee shall be
increased to seven. The Commisso Members shall designate three members and the
non-Commisso Members shall have the right to designate four members of the
Executive Committee. The Largest Member shall designate the additional two
members of the Executive Committee; provided, however, that if the Second
-------- -------
Largest Member has Membership Units in excess of fifty percent (50%) of the
number of Membership Units of the Largest Member, such two Members shall each
designate one additional member of the Executive Committee. If any Member
having the right to designate a member of the Executive
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<PAGE>
Committee fails to do so, such right shall apply to the Member that has,
together with its Affiliates, the next largest number of Membership Units that
has not designated a member of the Executive Committee. The quorum for a meeting
of the expanded Executive Committee shall be four. The matters requiring
approval of the Executive Committee pursuant to Section 5.7 hereof based upon
dollar value shall be expanded to include all matters involving fifty (50%)
percent or more of the dollar values set forth in Section 5.7. The size and
approval rights of the Executive Committee shall continue as set forth in this
Section 5.8 for so long as the conditions described in clauses (a), (b) or (c)
above continue. The size and approval rights of the Executive Committee
resulting from a condition described in clause (d) above shall continue as set
forth in this Section 5.8 until the System Cash Flow for two consecutive fiscal
quarters exceeds 80 percent of the projected System Cash Flow provided by the
Company to lenders of the Company or its Subsidiaries in connection with
proposed acquisitions or refinancings by the Company and reported to the
Executive Committee under clause (ii) of Section 5.6 of this Agreement.
5.9 Liability for Certain Acts. The Manager shall perform his duties
in good faith, in a manner he reasonably believes to be in the best interests of
the Company and with such care as an ordinarily prudent person in a similar
position would use under similar circumstances. A Manager who so performs such
duties shall not have any liability by reason of being or having been a Manager.
The Manager shall not be liable to the Company or any Member for any loss or
damage sustained by the Company or any Member, unless the loss or damage shall
have been the result of the gross negligence or willful misconduct of such
Manager. Without limiting the generality of the preceding sentence, a Manager
does not in any way guaranty the return of any Capital Contribution to a Member,
or the distribution of the Preferred Return or any profit for the Members from
the operations of the Company.
5.10 No Exclusive Duty to Company. The Manager shall not be required
to manage the Company as his sole and exclusive function and may have other
business interests and may engage in other activities in addition to those
relating to the Company; provided, that the Manager shall be actively involved
--------
in, and shall devote substantially all of his business time to, the management
of the business and operations of the Company and its subsidiaries (it being
understood that if the Manager is a Commisso Entity of which Rocco B. Commisso
is the chief executive officer, the aforesaid undertaking as to devotion of
substantially all of his business time shall continue to apply to Mr. Commisso).
The Manager may make direct or indirect investments in Systems, or entities
-23-
<PAGE>
offering telecommunications services, provided that if such investment is not a
passive one and requires management by a Commisso Member, the Manager shall
first offer to the Company the opportunity to make the investment. The Manager
shall incur no liability to the Company or any Member as a result of engaging in
such other business interests or activities.
5.11 Resignation. The Manager may resign at any time by giving
written notice to the Company. The resignation of any Manager shall take effect
upon the qualification of a successor Manager pursuant to Section 5.2. Unless
otherwise specified in such notice, the acceptance of the resignation shall not
be necessary to make it effective. The resignation of a Manager who is also a
Member shall not affect the Manager's rights as a Member and shall not
constitute a withdrawal of a Member.
5.12 Removal. The Manager may be removed or replaced in the event of
his gross negligence or willful misconduct by the vote or written consent of the
holders of at least two thirds of the Membership Units. In determining the vote
of Membership Units outstanding for purposes of the first sentence of this
Section 5.12, Membership Units held by the Manager shall not be included. The
removal of a Manager who is also a Member shall not affect the Manager's rights
as a Member and shall not constitute a withdrawal of such Member.
5.13 Compensation. The Manager or an Affiliate thereof (including
Mediacom Management) performing services for the Company, any Subsidiary, or any
other Person in which the Company directly or indirectly invests shall be
compensated for such services as follows:
(a) reimbursement for reasonable out-of-pocket expenses incurred in
connection with (i) the operation of the business of the Company and its
Subsidiaries, including without limitation, travelling to and visiting the
Systems of the Company and its Subsidiaries, and (ii) investigating, analyzing,
negotiating or otherwise acting for or on behalf of the Company or its
subsidiaries in connection with any potential acquisition by the Company or its
Subsidiaries of a System; provided, however, that no such reimbursement shall be
-------- -------
made for (x) compensation, including salaries, withholding taxes, unemployment
insurance contributions, pension, health and other benefits of executive
management personnel (all such compensation being herein collectively called
"Executive Compensation") or (y) overhead allocated in respect of the executive
- -----------------------
management of the business or operations of the Company or any of its
subsidiaries, including
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rent, utilities, telephone and telecopy charges, furniture, fixtures
and the like; and
(b) an ongoing annual management fee (in the aggregate for the Manager
and all of his Affiliates) of two (2.0%) percent of the consolidated annual
gross operating revenues of the Company and its Subsidiaries, such fee to be
substantially on the terms set forth in the Management Agreement between each
Subsidiary and Mediacom Management, subject to any restrictions or limitations
of any loan agreements to which such Subsidiary is a party as a borrower, it
being understood that neither the Company nor any of its Subsidiaries shall pay
compensation to any executive management personnel (or pay any Person, other
than Mediacom Management, in respect of executive management personnel or
matters, for the Company or any of its Subsidiaries), it being the intention of
the parties hereto that the compensation of all executive management personnel
required in connection with the business or operations of the Company and its
Subsidiaries shall be paid by Mediacom Management (and that the Executive
Compensation for such employees shall be covered by the fees described in this
Section 5.13). Various portions of the fee described in this Section 5.13(c) may
be paid by the Company and the Subsidiaries, but the aggregate of such fees paid
by the Company and the Subsidiaries shall not exceed the amounts described
hereinabove.
For purposes hereof, "executive management personnel" shall not
include any individual (such as a system or regional employee) who, other than
for minimal duties, is employed principally in connection with the day-to-day
management and operations of one or more Systems or one or more geographic
regions of the Company or its Subsidiaries.
Except as described in this Section 5.13, neither the Company nor any
of its Subsidiaries shall pay, or reimburse any Person for paying, any fees or
expenses (including out-of-pocket expenses or allocated overhead), in respect of
the executive management of the business or operations of the Company or any of
its Subsidiaries. As of the date hereof, no compensation is due or payable to
the Manager or any Affiliate of the Manager with respect to any revenues or
transaction(s) occurring during any period ending on or before the closing of
the Triax Acquisition.
5.14 Officers. The Manager may designate one or more individuals as
officers of the Company and its Subsidiaries, who shall have such titles and
exercise and perform such powers and duties as shall be assigned to them from
time to time by the Manager. Any officer may be removed by the Manager at any
time, with or without cause. Each officer shall hold office until his or
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her successor is elected and qualified. Any number of offices may be held by the
same individual. The salaries and other compensation of the officers shall be
fixed by the Manager. Officers of the Company shall hold the same office in each
Subsidiary. Each Subsidiary may have additional officers as necessary or
desirable for the purpose of local management of Systems.
5.15 Certain Covenants of the Manager and the Members. Anything
herein to the contrary notwithstanding: (i) other than in connection with an
acquisition under the terms of which the seller shall retain an ownership
interest in the acquired System or entity providing telecommunications services,
at least 99% of the aggregate equity interests in Mediacom California, Mediacom
Arizona, Mediacom Delaware and Mediacom Southeast shall at all times be owned
directly by the Company; (ii) other than in connection with an acquisition under
the terms of which the seller shall retain an ownership interest in the acquired
System or entity providing telecommunications services, each Subsidiary other
than Mediacom California, Mediacom Arizona, Mediacom Delaware and Mediacom
Southeast shall be directly or indirectly wholly-owned by the Company; (iii)
other than in connection with an acquisition under the terms of which the seller
shall retain an ownership interest in the acquired System or entity providing
telecommunications services, each System or Subsidiary acquired directly or
indirectly by the Company after the date hereof shall be wholly-owned by the
Company and/or one or more of its Subsidiaries; (iv) the terms of each
Management Agreement currently in effect shall remain in full force and effect;
(v) each acquired System or new Subsidiary, as appropriate, shall enter into a
Management Agreement in the form of, and providing for the compensation set
forth in, Section 5.13 of this Agreement; (vi) the Manager shall cause the
Commisso Members to hold directly or indirectly at least 3,300 Membership Units
for so long as any Commisso Member is Manager; and (vii) the Company and its
Subsidiaries shall not enter into any loan or other agreement with respect to
indebtedness that would prohibit performance of its obligations under this
Agreement or that would cause performance of its obligations under this
Agreement to result in a default (or, except with respect to a refinancing, an
obligation to prepay any indebtedness) under any other agreement providing for
indebtedness of the Company.
5.16 Manager's Right of First Offer.
(a) In the event the Executive Committee or the Members determine to
sell one or more Systems or entities providing telecommunications services, one
or more Subsidiaries, or the
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Company's assets, the Company shall grant to the Manager and his Affiliates the
right of first offer with respect to such properties.
(b) Within 30 days of a determination to sell, the Manager shall have
the right to present to the Members an offer including the purchase price and
the other substantive terms and conditions of the offer.
(c) 30 days after delivery of the Manager's offer to the Members, the
Company shall hold a meeting at which a vote of the majority of the Membership
Units not held by the Commisso Members shall accept or reject the offer.
(d) If the Manager's offer is accepted, the Company (acting through
the Executive Committee) and the Manager (acting on behalf of the buyer) shall
proceed diligently to prepare a contract of purchase and sale customary for
transactions of the type contemplated and to consummate the transaction on the
terms and conditions of the accepted offer.
(e) If the Manager's offer is rejected, the members of the Executive
Committee that do not have conflicts of interest (or a committee designated by
such members of the Executive Committee) shall for a period of 120 days proceed
diligently to solicit in a commercially reasonable manner offers from
prospective buyers, which may include any Member or its Affiliates.
(f) If within such 120-day period the Company receives a bona fide
---- ----
offer from a qualified buyer on terms at least as favorable as the Manager's
offer and providing for a purchase price (net of brokerage commissions) of not
less than 105% of the Manager's offer for the offered properties, the members of
the Executive Committee who conducted the bidding process (or committee
appointed by such members) shall proceed diligently on behalf of the Company to
negotiate a contract of purchase and sale customary for transactions of the type
contemplated and to consummate the transaction on the terms and conditions of
the accepted offer. If no such offer is received or the Company is unable to
negotiate a contract of purchase and sale on terms acceptable to the Company,
the members of the Executive Committee that conducted the bidding process shall
either (i) accept the Manager's offer and proceed as set forth in Section
5.16(d) above, or (ii) reject the Manager's offer and the Company shall continue
to operate the System or entity unless the sale was being conducted as a result
of a vote of the Members under Section 6.8(b), in which event the Company and
the Manager shall proceed as set forth in Section 5.16(d) above.
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(g) If for any reason a sale to a third party is not completed, the
sale of such properties shall again be subject to the terms of this Section
5.16.
5.17 Actions of the Manager. The parties hereto and the Executive
Committee have ratified and approved the Asset Purchase Agreement dated June 24,
1998 among Mediacom Southeast LLC, Mediacom, Bootheel Video, Inc. and CSC
Holdings; the Asset Purchase Agreement dated April 29, 1999 between Mediacom and
Triax Midwest Associates, L.P.; the Stock Purchase Agreement dated May 25, 1999
among Mediacom, Charles D. Zylstra, Kara M. Zylstra and Trusts created under the
Will dated June 3, 1982 of Roger E. Zylstra, deceased, for the benefit of
Charles D. Zylstra and Kara M. Zylstra; the issuance and sale of $125,000,000
aggregate principal amount of 7-7/8% senior notes due February 15, 2011 in a
private offering pursuant to Rule 144A under the Securities Act on February 26,
1998, the subsequent exchange of such notes for senior notes registered under
the Securities Act pursuant to an exchange offer expiring October 12, 1999, the
making of such exchange offer and the filing of the related registration
statement; the entering into of a $550,000,000 Credit Agreement dated as of
September 30, 1999 by Mediacom Southeast LLC, Mediacom California LLC, Mediacom
Delaware LLC and Mediacom Arizona LLC with the lending institutions named
therein and The Chase Manhattan Bank, as Administrative Agent; the Certificate
of Formation and Operating Agreement of Mediacom Illinios LLC; the Certificate
of Formation and Operating Agreement of Mediacom Indiana LLC; the Certificate of
Formation and Operating Agreement of Mediacom Iowa LLC; the Certificate of
Formation and Operating Agreement of Mediacom Minnesota LLC; the Certificate of
Formation and Operating Agreement of Mediacom Wisconsin LLC; the Management
Agreements between Mediacom and each of Mediacom Iowa LLC, Mediacom Indiana LLC,
Mediacom Minnesota LLC, Mediacom Wisconsin LLC and Zylstra Communications Corp.;
and Mediacom's acceptance in August 1999 of a commitment letter and summary of
terms from The Chase Manhattan Bank contemplating a new $550,000,000 credit
agreement among Mediacom Illinois LLC, Mediacom Indiana LLC, Mediacom Iowa LLC,
Mediacom Minnesota LLC, Mediacom Wisconsin LLC and Zylstra Communications Corp.,
the lending institutions to be named therein and The Chase Manhattan Bank, as
Administrative Agent, and the entry into of the credit agreement contemplated by
such commitment letter and summary of terms.
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5.18 Organizational and Other Changes in Connection with Initial
Public Offering.
(a) In connection with a determination by the Manager to cause the
Company to effect an initial public offering of its equity securities (an
"IPO"), the Manager may (i) form a corporation or other entity under the laws of
any state that the Manager deems appropriate ("IPO Entity") and (ii) (A) cause
the Company to transfer to such IPO Entity assets of the Company, and have such
IPO Entity assume liabilities of the Company (whether effected through a merger
or otherwise) or (B) cause the Members to transfer their Membership Units to
such IPO Entity; it being understood that in the event of an IPO, no Member
shall have any further rights under this Agreement, except as expressly provided
herein, except that all Members shall continue to have registration rights under
the existing Registration Rights Agreement, including one demand per year for at
least $50 million and unlimited piggyback registration rights as provided
therein. Notwithstanding the foregoing, the Manager may not, without the
-----------------------------
approval of the Executive Committee and Members, including the Commisso Members,
owning at the time at least two-thirds of the Membership Interests, proceed with
an IPO unless the IPO Valuation is at least $700 million and the net proceeds
from the IPO Public Common Shares total not less than $150 million nor greater
than $450 million. Subject to the foregoing, each Member of the Company shall
take such steps to effect the IPO as may be requested by the Manager, including,
without limitation, consenting to and/or voting in favor of any necessary or
desirable recapitalization, reorganization or exchange and transferring such
Member's interests in the Company to such IPO Entity in connection with any such
recapitalization, reorganization or exchange involving equity interests of such
IPO entity; provided, however, that no Member shall be required to take any
-------- -------
action or omit to take any action to the extent such action or inaction would
violate applicable law or create a materially negative tax impact on the Member
(other than recognition of income or gain to the extent of a negative tax basis
capital account).
(b) In connection with the decision to effect an IPO, regardless of
whether the Company is continued as a limited liability company, the Manager's
right of first offer under Section 5.16 and the compensation of the Manager
under Section 5.13 (including, but not limited to, management fees under Section
5.13(b)) shall be terminated in connection with the closing of the IPO and
thereafter the management and operation of the Company shall be conducted by the
IPO Entity at its sole cost and expense,
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it being understood that the Manager shall not be entitled to any equity
interest in the IPO Entity for, or on account of, the relinquishment of such
rights under Section 5.13. In addition, the Manager shall retain valuation
experts, which may be one or more members of the underwriting group (the "IPO
Underwriters") or the lead IPO Underwriter engaged by the Company in connection
with the IPO, to value the Company (the "IPO Valuation") and, with the
assistance of such valuation experts, shall determine a uniform equity and
economic structure for the IPO Entity, including, but not limited to, a
structure which includes common equity interests in the IPO Entity and options
to acquire such common equity interests and/or a structure in which it may be
advisable for tax or business reasons for new or existing investors to acquire
or retain their equity interest in the Company as a limited liability company;
provided, however, that any such equity structure shall be consistent with the
structure set forth in Section 8.8 below, which, as contemplated by Section 5.18
of the Third Amended and Restated Operating Agreement, affords to the Commisso
Members (in their capacity as Members, but not in their capacity as Manager) the
then present value of the allocation, distribution and valuation provisions and
other economic benefits of this Agreement that apply only to the Commisso
Members and their Affiliates. The Manager shall also determine, with the
assistance of such valuation experts: a voting structure for shares of the IPO
Entity, including multiple classes of voting shares that are weighted to allow
the Manager to have and maintain voting control of the IPO Entity; a managerial
and executive control structure for the IPO entity which, at such time, affords
to the Executive Committee, as then in effect, and to the Manager and its
Affiliates the same managerial and executive rights, powers and duties in effect
under this Agreement at the time of the IPO; and appropriate by-laws and other
organizational documents for the IPO Entity which shall supercede the terms of
this Agreement regarding governance of the Company and other matters covered
thereby from and after the time the IPO Entity becomes a public company.
ARTICLE VI
MEETINGS OF MEMBERS
-------------------
6.1 Meetings. Commencing in 1998, an annual meeting of the Members
shall be held during the second quarter of each Fiscal Year of the Company and
at such other times as shall be determined by the Manager for the purpose of the
transaction of any business as may come before such meeting.
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6.2 Special Meetings. Special meetings of the Members, for any
purpose or purposes, may be called by the Manager, the Executive Committee or by
Members holding 25 percent or more of the Percentage Interests.
6.3 Place of Meetings. Meetings of the Members may be held at any
place, within or outside the State of New York, for any meeting of the Members
designated in any notice of such meeting. If no such designation is made, the
place of any such meeting shall be the principal office of the Company.
6.4 Notice of Meetings. Written or oral notice stating the place,
day and hour of the meeting indicating that it is being issued by or at the
direction of the Person or Persons calling the meeting, stating the purpose or
purposes for which the meeting is called shall be delivered no fewer than five
nor more than sixty days before the date of the meeting.
6.5 Record Date. For the purpose of determining the Members entitled
to notice of or to vote at any meeting of Members or any adjournment of such
meeting, or Members entitled to receive payment of any Distribution, or to make
a determination of Members for any other purpose, the date on which notice of
the meeting is mailed or the date on which the resolution declaring Distribution
is adopted, as the case may be, shall be the record date for making such a
determination. When a determination of Members entitled to vote at any meeting
of Members has been made pursuant to this Section, the determination shall apply
to any adjournment of the meeting.
6.6 Quorum. Members holding not less than a majority of all
Membership Units, represented in person or by proxy, shall constitute a quorum
at any meeting of Members. In the absence of a quorum at any meeting of
Members, a majority of the Membership Units so represented may adjourn the
meeting from time to time for a period not to exceed sixty days without further
notice. However, if the adjournment is for more than sixty days, or if after
the adjournment a new record date is fixed for the adjourned meeting, a notice
of the adjourned meeting shall be given to each Member of record entitled to
vote at such meeting. At an adjourned meeting at which a quorum shall be
present or represented, any business may be transacted that might have been
transacted at the meeting as originally noticed. The Members present at a
meeting may continue to transact business until adjournment, notwithstanding the
withdrawal during the meeting of Membership Units whose absence results in less
than a quorum being present.
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6.7 Manner of Acting. If a quorum is present at any meeting, the
vote or written consent of Members holding not less than a majority of
Membership Units shall be the act of the Members unless the vote of a greater or
lesser proportion or number is otherwise required by the New York Act, the
Articles of Organization or this Agreement.
6.8 Actions Requiring Approval of the Members. The following matters
shall require approval of Members holding no less than two-thirds of the
Membership Units entitled to vote and such action shall not be taken by the
Company on its own behalf or on behalf of any Subsidiary, as the case may be,
without such approval:
(a) the disposition of substantially all of the assets of the
Company on or prior to December 31, 2004 (for which the Manager's approval shall
also be necessary except when the Members have not elected to continue the
business of the Company following the bankruptcy, dissolution, death, legal
incapacity, removal or resignation of the Manager);
(b) the disposition of substantially all of the assets of the
Company after December 31, 2004;
(c) the amendment of this Agreement (other than as set forth in
Section 16.2 of this Agreement);
(d) a material change to the business purposes of the Company;
(e) offerings of Membership Units or other equity interests in
the Company pursuant to Section 5.18 of this Agreement, and any amendments to
this Agreement necessary or desirable to complete the offering; and
(f) the continuation of the business of the Company following the
bankruptcy, dissolution, death, legal incapacity, removal or resignation of the
Manager.
6.9 Proxies.
(a) A Member may vote in person or by proxy executed in writing
by the Member or by a duly authorized attorney-in-fact.
(b) Every proxy must be signed by the Member or its
attorney-in-fact. No proxy shall be valid after the expiration of eleven months
from the date thereof unless otherwise provided in
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the proxy. Every proxy shall be revocable at the pleasure of the Member
executing it, except as otherwise provided in this Section.
(c) Except when other provision shall have been made by written
agreement between the parties, the record holder of a Membership Unit which he,
she or it holds as pledgee or otherwise as security or which belongs to another,
shall issue to the pledgor or to such owner of such Membership Unit, upon demand
therefor and payment of necessary expenses thereof, a proxy to vote or take
other action thereon.
(d) A proxy which is entitled "irrevocable proxy" and which states
that it is irrevocable, is irrevocable when it is held by (i) a pledgee, (ii) a
Person who has purchased or agreed to purchase the Membership Units, (iii) a
creditor or creditors of the Company which extend or continue credit to the
Company in consideration of the proxy if the proxy states that it was given in
consideration of such extension or continuation of credit, the amount thereof,
and the name of the Person extending or continuing credit, (iv) a Person who has
contracted to perform services as an officer of the Company, if a proxy is
required by the contract of employment, if the proxy states that it was given in
consideration of such contract of employment, the name of the employee and the
period of employment contracted for, or (v) a nominee of any of the Persons
described in clauses (i)-(iv) of this sentence.
(e) Notwithstanding a provision in a proxy stating that it is
irrevocable, the proxy becomes revocable after the pledge is redeemed, or the
debt of the Company is paid, or the period of employment provided for in the
contract of employment has terminated and, in a case provided for in Section
6.9(d)(iii) or (iv) of this Agreement, becomes revocable three years after the
date of the proxy or at the end of the period, if any, specified therein,
whichever period is less, unless the period of irrevocability is renewed from
time to time by the execution of a new irrevocable proxy as provided in this
Section. This paragraph does not affect the duration of a proxy under paragraph
(b) of this Section.
(f) A proxy may be revoked, notwithstanding a provision making it
irrevocable, by a purchaser of a Membership Unit without knowledge of the
existence of such proxy.
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6.10 Action by Members Without a Meeting.
(a) Whenever the Members of the Company are required or permitted to
take any action by vote, such action may be taken without a vote following ten
days' prior written notice to all Members, if a consent or consents in writing,
setting forth the action so taken shall be signed by the Members who hold the
voting interests having not less than the minimum number of votes that would be
necessary to authorize or take such action at a meeting at which all of the
Members entitled to vote therein were present and voted and shall be delivered
to the office of the Company, its principal place of business or a Manager,
employee or agent of the Company having custody of the Records. Delivery made
to the office of the Company shall be by hand or by certified or registered
mail, return receipt requested.
(b) Every written consent shall bear the date of signature of each
Member who signs the consent, and no written consent shall be effective to take
the action referred to therein unless, within sixty days of the earliest dated
consent delivered in the manner required by this Section 6.10 to the Company,
written consents signed by a sufficient number of Members to take the action are
delivered to the Company at its principal place of business or directly to a
Manager, employee or agent of the Company having custody of the records of the
Company. Delivery made to such principal place of business of the Company or to
such Manager, employee or agent shall be by hand or by certified or registered
mail, return receipt requested.
(c) Prompt notice of the taking of the action without a meeting by
less than unanimous written consent shall be given to each Member who has not
consented in writing but which would have been entitled to vote thereon had such
action been taken at a meeting.
6.11 Waiver of Notice. Notice of a meeting need not be given to any
Member who submits a signed waiver of notice, in person or by proxy, whether
before or after the meeting. The attendance of any Member at a meeting, in
person or by proxy, without protesting prior to the conclusion of the meeting
the lack of notice of such meeting, shall constitute a waiver of notice by such
Member.
6.12 Voting Agreements. An agreement between two or more Members, if
in writing and signed by the parties thereto, may provide that in exercising any
voting rights, the Membership Units held by them shall be voted as therein
provided, or as they may
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agree, or as determined in accordance with a procedure agreed upon by them.
ARTICLE VII
CAPITAL CONTRIBUTIONS
---------------------
7.1 Capital Contributions. Each Member has contributed the amount
set forth in Schedule A to this Agreement as the Capital Contribution to be made
----------
by such Member.
7.2 Capital Contributions and Capital Calls; Allocations.
(a) At any time and from time to time during a Commitment Period with
respect to any Member while there is an Unfunded Capital Commitment with respect
to such Member, the Manager may make capital calls with respect to all or any
portion of not less than five (5%) percent of such Member's Unfunded Capital
Commitment (each, a "Capital Call"). All Capital Calls shall be issued pro rata
------------ --- ----
to all Members having Unfunded Capital Commitments in proportion to their
respective Unfunded Capital Commitments except as noted in the following
sentence. If legal or regulatory restrictions applicable to a Member result in
or, in the Manager's judgment, can reasonably be expected to result in a
Member's acquisition of additional Membership Units being or becoming illegal,
(i) the Manager may limit or otherwise condition or elect not to make a Capital
Call to such Member and (ii) the Manager, on behalf of the Company, and the
affected Member may elect to terminate such Member's Unfunded Capital
Commitment. A Capital Call shall specify the date (which shall be no earlier
than 10 business days following the Capital Call), place and amount of the
required contribution (each such contribution, an "Additional Capital
------------------
Contribution"). Each Member having Unfunded Capital Commitments agrees to
- ------------
comply with the terms of each Capital Call.
(b) In the event a Member fails to make an Additional Capital
Contribution as and when due (a "Nonfunding Member"), the Manager will send
-----------------
notice of such default to such Nonfunding Member demanding the payment of the
Additional Capital Contribution together with interest at the prime commercial
lending rate of interest of The Chase Manhattan Bank plus five (5%) percent. If
the Nonfunding Member fails to remit the Additional Capital Contribution and
interest thereon within 15 days of the date of the notice and demand, the
Manager may proceed at law for damages or at equity for specific performance of
such defaulting Member's obligations. Each Member agrees that it shall be
liable for consequential damages to the Company arising from the lack of timely
payment of an Additional Capital Contribution. In addition,
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the Nonfunding Member will be deemed to have forfeited its rights to vote, to
receive Distributions and to designate any representative to the Executive
Committee. Further, the Company shall have the option to acquire the Membership
Units of the Nonfunding Member for fifty (50%) percent of the equity value most
recently determined under Section 8.5 of this Agreement, less the interest
accrued on the Unfunded Capital Commitment, the costs of attempted collection,
and the costs in connection with acquiring the Membership Units. Upon exercise
of the option, the interest of the Member shall terminate.
7.3 Capital Accounts. A Capital Account shall be maintained for each
Member in accordance with Section 9.2.
7.4 Transfers. Upon a permitted sale or other transfer of Membership
Units in the Company, the Capital Account relating to such transferred
Membership Units shall become the Capital Account of the Person to which or whom
such Membership Units are sold or transferred in accordance with Section 9.2(e).
7.5 Modifications. The manner in which Capital Accounts are to be
maintained pursuant to this Agreement is intended to comply with the
requirements of Section 704(b) of the Code. If in the opinion of the Manager,
on the advice of the Company's accountants, the manner in which Capital Accounts
are to be maintained pursuant to this Agreement should be modified to comply
with Section 704(b) of the Code, then the method in which Capital Accounts are
maintained shall be so modified; provided, however, that any change in the
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manner of maintaining Capital Accounts shall not materially alter the economic
agreement between or among the Members as expressed in this Agreement without
the consent of each Member.
7.6 Deficit Capital Account. Except as otherwise required in the New
York Act or this Agreement, no Member shall have any liability to restore a
deficit balance in a Capital Account, in excess of the amount of any
indebtedness of the Company for which such Member is liable. Any Member liable
for indebtedness of the Company shall be liable to restore the lesser of its
deficit Capital Account or the amount of indebtedness of the Company for which
such Member is liable. Such restoration shall be made at the time of
dissolution of the Company.
7.7 Withdrawal or Reduction of Capital Contributions. A Member shall
not receive from the Company any portion of a Capital Contribution until all
indebtedness, liabilities of the Company, except any indebtedness, liabilities
and obligations to Members on account of their Capital Contributions, have been
paid
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or there remains property of the Company, in the sole discretion of the
Manager, sufficient to pay them. A Member, irrespective of the nature of the
Capital Contribution of such Member, has only the right to demand and receive
cash in return for such Capital Contribution.
7.8 No Rights of Redemption or Return of Contribution. Except as
provided in this Agreement, no Member has a right to have its Membership Units
redeemed or its Capital Contributions returned prior to the dissolution of the
Company.
ARTICLE VIII
PROFITS, LOSSES AND DISTRIBUTIONS;
ADJUSTMENTS FOR THE ISSUANCE OF MEMBERSHIP UNITS
------------------------------------------------
8.1 Allocation of Profits and Losses.
(a) Profits for each Accounting Period shall be allocated among the Members
as follows:
(1) First, to the Members with deficit Capital Account balances at the end
of such Accounting Period (but prior to any allocation of Profits pursuant to
this Section 8.1(a)), in proportion to such deficits, until such deficits are
reduced to zero;
(2) Second, the amount by which the Members' aggregate Unreturned Preferred
Capital exceeds the aggregate of their Capital Account balances at the end of
such Accounting Period (after the allocation of Profits provided for in Section
8.1(a)(1), but prior to any other allocations of Profits pursuant to this
Section 8.1(a)), shall be apportioned among the Members so as to first make
Members' Capital Accounts correspond to their Percentage Interests and
thereafter in proportion with their Percentage Interests;
(3) Third, the amount by which (i) the sum of the Members' aggregate
Unreturned Preferred Capital and their aggregate Preferred Return exceeds (ii)
the aggregate of their Capital Account balances at the end of such Accounting
Period (after the allocation of Profits provided for in Sections 8.1(a)(1) and
8.1(a)(2), but prior to any other allocations of Profits pursuant to this
Section 8.1(a)), shall be apportioned among the Members so as to first make
Members' Capital Accounts correspond to their Percentage Interests and
thereafter in proportion with their Percentage Interests;
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(4) Fourth, to the Commisso Members in proportion to their Percentage
Interests until amounts credited to the Capital Accounts of the Commisso Members
pursuant to this clause (4) for the current and all previous Accounting Periods
equals 25% of the amount credited to Capital Account balances of the Members,
including the Commisso Members, for the current and all previous Accounting
Periods pursuant to clause (3) above, provided, however, that following the
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Carried Interest Conversion Valuation described in Section 8.7(b)(2) below, the
amounts credited to the capital accounts of the Commisso Members under this
clause (3) shall be reduced to 11.111% of the amount credited to Capital Account
balances of the Members, including the Commisso Members, for all Accounting
Periods following such Valuation; and
(5) The balance, 80% to the Members (including the Commisso Members) in
proportion to their Percentage Interests and 20% to the Commisso Members in
proportion to their respective Membership Units, provided, however, that
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following the Carried Interest Conversion Valuation described in Section
8.7(b)(2) below, the balance shall be allocated 90% to the Members (including
the Commisso Members) in proportion to their Percentage Interests and 10% to the
Commisso Members in proportion to their respective Membership Units.
(b) Losses for each Accounting Period (other than as set forth in Section
8.1(c) below) shall be allocated among the Members as follows:
(1) First, ninety-nine (99%) percent to the Commisso Members with positive
Capital Account balances at the end of such Accounting Period (but prior to any
allocation of Losses pursuant to this Section 8.1(b)(1)), in the aggregate
amount (from the inception of the Company) of $3,245,000, and one (1%) percent
to the remaining Members with positive Capital Account balances at the end of
such Accounting Period (but prior to any allocation of Losses pursuant to this
Section 8.1(b)(1)) in proportion to such positive Capital Account balances;
(2) Second, to any Members that have guaranteed a liability for
indebtedness of the Company or any of its Subsidiaries, in the aggregate amount
(from the inception of the Company) of the indebtedness so guaranteed, in
proportion to the respective sums of each such Member's Capital Account balances
at the end of such Accounting Period (after the allocation of Losses provided
for in Section 8.1(b)(1) but prior to any other allocation of Losses pursuant to
this Section 8.1(b));
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(3) Third, to any Members with positive Capital Account balances at the end
of such Accounting Period (after the allocation of Losses provided for in
Section 8.1(b)(1) and 8.1(b)(2) but prior to any other allocation of Losses
pursuant to this Section 8.1(b)), in proportion to such positive balances, until
such positive balances are reduced to zero; and
(4) The balance, in proportion with the Members' Percentage Interests.
(c) With respect to the calendar year ending December 31, 1998, after the
allocations set forth in clauses (1) and (2) above, and prior to the allocations
set forth in clauses (3) and (4) above, up to $2,500,000 of Losses shall be
allocated to the Largest Member. With respect to the calendar year ending
December 31, 1998, all other allocations of Losses set forth in Section 8.1(b)
shall apply.
8.2 Distributions. All Distributions other than Distributions pursuant to
Section 8.4 hereof shall be made in the following order of priority:
(a) First, Distributions shall be made to the Members including the
Commisso Members in proportion to their respective Membership Units until each
has received amounts in the aggregate equal to the Preferred Capital;
(b) Second, Distributions shall be made to the Members including the
Commisso Members in proportion to their Unreturned Preferred Returns until each
has received amounts in the aggregate equal to their Unreturned Preferred Return
as of the date of such Distribution (applied first to any Preferred Return
accrued in respect of the year in which such Distribution occurs and second to
any other Preferred Return);
(c) Third, Distributions shall be made to the Commisso Members in
proportion to their respective Membership Units until the Commisso Members have
received amounts in the aggregate equal to 25% of all Distributions made to the
Members, including the Commisso Members, pursuant to Section 8.2(b), provided,
--------
however, that following the Carried Interest Conversion Valuation described in
- -------
Section 8.7(b)(2) below, Distributions to Commisso Members under this clause
(c) shall be reduced to 11.111% of all Distributions made to the Members,
including the Commisso Members, pursuant to Section 8.2(b); and
(d) Fourth, Distributions shall be made 80% to the Members, including
the Commisso Members, in proportion to their
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Percentage Interests and 20% to the Commisso Members in proportion to their
respective Membership Units, provided, however, that following the Carried
-------- -------
Interest Conversion Valuation described in Section 8.7(b)(2) below,
Distributions under this clause (d) shall be allocated 90% to the Members
(including the Commisso Members) in proportion to their Percentage Interests and
10% to the Commisso Members in proportion to their respective Membership Units.
Subject to the terms of the Credit Agreement and any other loan or other
agreement with respect to indebtedness to which the Company is obligated (as a
borrower, guarantor or otherwise), the Manager shall use reasonable commercial
efforts to make Distributions pursuant to this Section 8.2 in accordance with
the priority set forth in paragraphs (a) through (d) during the first three
months of each Accounting Period in an aggregate amount equal to at least 35% of
the aggregate Profit allocated to the Members for the immediately preceding
Accounting Period.
8.3 No Right to Distributions Except Upon Dissolution of the Company.
The occurrence of a Termination Event with respect to the Company does not
entitle any Member to any Distributions unless such event results in the
dissolution of the Company, in which case such Member shall be entitled to
receive the Distributions set forth in Section 8.4.
8.4 Distributions Upon Dissolution of the Company. Upon dissolution
of the Company:
(a) The Company shall first satisfy (or provide for the satisfaction
of) all the Company's debts and other obligations (including debts to Members,
former Members and their Affiliates).
(b) The Executive Committee shall determine a Company Valuation for the
Company's remaining assets pursuant to Section 8.6 of this Agreement (the
"Dissolution Valuation") and the Company shall distribute such assets to the
Members and any former Members whose interests have not been previously redeemed
as follows:
(1) First, to the Members in proportion to the amounts by which their
Preferred Capital exceeds previous Distributions until each has received amounts
in the aggregate equal to their Preferred Capital;
(2) Second, to the Members in proportion to their Percentage
Interests until each has received amounts in the aggregate equal to the
Unreturned Preferred Return as of the date
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of such Distribution (applied first to any Preferred Return accrued in respect
of the year in which such Distribution occurs and second to any previously
accrued Preferred Return);
(3) Third, to the Commisso Members in proportion to their respective
Membership Units, the amount by which 25% of all Distributions made to Members,
including the Commisso Members, with respect to the Preferred Return pursuant to
Section 8.2(b) and clause (2) of this Section 8.4(b) exceeds the amount of all
Distributions made to the Commisso Members pursuant to Section 8.2(c), provided,
--------
however, that following the Carried Interest Conversion Valuation described in
- -------
Section 8.7(b)(2) below, Distributions to Commisso Members under this clause
(3) shall be reduced to 11.111% of all Distributions made to Members, including
the Commisso Members, pursuant to Section 8.2(b)and clause (2) of this Section
8.4(b) exceeds the amount of all Distributions made to the Commisso Members
pursuant to Section 8.2(c);
(4) Fourth, 80% to the Members, including the Commisso Members, in
proportion to their Percentage Interests and 20% to the Commisso Members in
proportion to their respective Membership Units, provided, however, that
-------- -------
following the Carried Interest Conversion Valuation described in Section
8.7(b)(2) below, distributions under this clause (4) shall be allocated 90% to
the Members (including the Commisso Members) in proportion to their Percentage
Interests and 10% to the Commisso Members in proportion to their respective
Membership Units..
(c) Notwithstanding the foregoing provisions of Section 8.4(b), upon the
dissolution of the Company, all Distributions shall be made to the Members in
proportion to the positive balances of such Members' Capital Account (after such
Capital Accounts have been adjusted to take into account all events related to
such dissolution) and (after all Members have a zero balance in their Capital
Accounts) all Distributions shall be made as provided in Section 8.4(b).
8.5 1998 Valuation of the Company.
(a) The Executive Committee previously determined a Company Valuation
giving effect to the closing of the U.S. Cable Acquisition and the Capital
Contributions to finance such Acquisition (the "1998 Company Valuation"). As
set forth in Section 5.17 of the Third Amended and Restated Operating Agreement,
the Members have ratified and approved the 1998 Company Valuation and the
issuance of additional Membership Units and related Percentage Interests as a
result of such Company Valuation, as set forth on Schedule B-1 hereto.
------------
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(b) Schedule B-1 also reflects and takes into account the issuance of the
following Membership Units on the basis of the 1998 Company Valuation expressed
as the aggregate value of the outstanding Membership Units after giving effect
to the closing of the U.S. Cable Acquisition, as set forth on Schedule B-1
------------
hereto: (i) Membership Units, if any, issued in respect of Capital Contributions
made prior to June 30, 1998 to the extent of the first one-third (1/3) of the
Unfunded Capital Commitments as of January 23, 1998; and (ii) Membership Units,
if any, issued in respect of Capital Contributions made to fund the purchase of
any Excess Chase Units.
8.6 1999 Valuation of the Company. Pursuant to Section 8.5(d) of the
Third Amended and Restated Operating Agreement the Executive Committee has
determined a new Company Valuation in the amount of $450 million giving effect
to the closing of the Zylstra Acquisition, the Triax Acquisition and the Capital
Contributions to finance such Acquisitions (the "1999 Company Valuation").
Based on the 1999 Company Valuation, the Executive Committee has approved the
issuance of additional Membership Units and related Percentage Interests, as set
forth on Schedule B-2 hereto.
------------
8.7 Further Valuations of the Company.
(a) Upon the receipt by the Company after the later of (i) the effective
date of this Agreement and (ii) the date of the most recent Company Valuation
under this Section 8.7, of funds in respect of Capital Contributions in an
aggregate cumulative amount of at least $5,000,000, the Executive Committee
shall determine the aggregate equity value of the Company as of such date (the
"Valuation Effective Date"); provided, however, that the value so determined
-------- -------
shall not be greater than 10.5 times the annualized System Cash Flow for the
three month period most recently ended prior to the Valuation Effective Date
(giving pro forma effect to the acquisition of any System during such period as
if such acquisition had occurred on the first day of such period), less the
aggregate consolidated indebtedness for borrowed money of the Company and the
Subsidiaries as of the Valuation Effective Date; provided, further, that such
-------- -------
determinations shall not be made more frequently than once during each Fiscal
Year; and provided, further, that the Executive Committee, acting by unanimous
-------- -------
vote of its members, may determine a Company Valuation as it deems appropriate
and at any such other times and as frequently as it may otherwise deem
appropriate.
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(b) In connection with each Company Valuation effective after the closing
of the Zylstra Acquisition and the Triax Acquisition (including a Company
Valuation in connection with a Dissolution as provided by Section 8.4(b) or in
connection with an IPO as provided in Section 8.8(c)), the Company, except as
set forth in 8.9 below, shall issue to its Members, effective as of the
Valuation Effective Date, additional Membership Units based upon such Company
Valuation, to the extent such Company Valuation exceeds prior Company
Valuations, as follows:
(1) In the event the Company Valuation does not exceed 125% of the
1999 Company Valuation (a "Pre-Carried Interest Conversion Valuation"),
additional Membership units shall be issued as follows:
(A) First, additional Membership Units shall be issued to the Members
in proportion to their respective Percentage Interests until each has
received additional Membership Units representing a value equal to the
Unreturned Preferred Return;
(B) Second, additional Membership Units shall be issued to the
Commisso Members in proportion to their respective Membership Units until
the Commisso Members have been issued additional Membership Units in the
aggregate equal to 25% of all of the Membership Units issued to existing
Members, including the Commisso Members, pursuant to clause (2) above; and
(C ) Third, additional Membership Units shall be issued 80% to all
Members, including the Commisso Members, in proportion to their respective
Percentage Interests, and 20% to the Commisso Members in proportion to
their respective Membership Units.
(2) In the event a Company Valuation (referred to herein as the
"Carried Interest Conversion Valuation") equals or exceeds 125% of the 1999
Company Valuation preceding such Company Valuation, additional Membership Units
shall be issued as follows:
(A) First, the Company shall issue to the Commisso Members in respect
of a reduction (the "Commisso Carried Interest Conversion Reduction") of
their carried interest from 20% (the "Commisso Carried Interest Total") to
10% in connection with any and all Post-Carried Interest
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Conversion Valuations as set forth in Section 8.7(b)(3) below, additional
Membership Units equal to sixteen and one-half (16.5%) percent of the
amount of the Carried Interest Conversion Valuation; and
(B) Next, additional Membership Units shall be issued to all Members
with respect to the remaining balance of the Carried Interest Conversion
Valuation, as follows:
(i) First, additional Membership Units shall be issued to the
Members in proportion to their respective Percentage Interests until
each has received additional Membership Units representing a value
equal to the Unreturned Preferred Return;
(ii) Second, additional Membership Units shall be issued to the
Commisso Members in proportion to their respective Membership Units
until the Commisso Members have been issued additional Membership
Units in the aggregate equal to 25% of all of the Membership Units
issued to existing Members, including the Commisso Members, pursuant
to clause (2) above;
(iii) Third, additional Membership Units shall be issued 80% to
all Members, including the Commisso Members, in proportion to their
respective Percentage Interests, and 20% to the Commisso Members in
proportion to their respective Membership Units.
(3) In connection with each Company Valuation (a "Post-Carried
Interest Conversion Valuation") after the Carried Interest Conversion Valuation
set forth above in Section 8.7(b)(2), additional Membership Units shall be
issued as follows:
(A) First, additional Membership Units shall be issued to the Members
in proportion to their respective Percentage Interests until each has
received additional Membership Units representing a value equal to the
Unreturned Preferred Return;
(B) Second, additional Membership Units shall be issued to the
Commisso Members in proportion to their respective Membership Units until
the Commisso Members have been issued additional Membership Units in the
aggregate equal to 11.111% of all of the Membership Units issued to
existing
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Members,including the Commisso Members, pursuant to clause (2) above; and
(C) Third, additional Membership Units shall be issued 90% to all
Members, including the Commisso Members, in proportion to their respective
Percentage Interests, and 10% (the "Commisso Carried Interest Remainder")
to the Commisso Members in proportion to their respective Membership Units.
8.8 Conversion or Exchange of Membership Units in Connection with IPO.
(a) In connection with any IPO of the Company effective after the date of
this Agreement, the Membership Units of the Members and the Members' respective
interests in the Company shall be converted into and/or exchanged for common
equity shares of the IPO Entity (the "IPO Member Common Shares") and/or options
to acquire common equity shares of the IPO Entity (the "IPO Member Options")
exercisable at a per share price equal to the offering price of the common
equity shares of the IPO Entity offered to the public (the "IPO Public Common
Shares") on the initial offering date of such shares.
(b) The amount of IPO Member Common Shares shall be based on the IPO
Valuation in accordance with Section 8.8(c). The IPO Member Options shall cover
an amount of common equity shares of the IPO Entity equal to seven and two-
tenths (7.2%) percent of the IPO Option Share Quotient Amount as defined below.
The IPO Option Share Quotient Amount shall be an amount of shares determined by:
(A) adding the sum of (1) the total number of IPO Member Common Shares issued to
all Members, including the Commisso Members, pursuant to this Section 8.8 plus
(ii) the total number of all IPO Public Common Shares issued in connection with
the IPO; and (B) multiplying such sum by a fraction equal to ten-ninths (10/9)
(c) The IPO Member Common Shares and the IPO Member Options shall be
allocated to the Members as follows:
(1) First, IPO Member Common Shares having a value equal to the IPO
Valuation shall be issued by the Company to all Members, including the Commisso
Members, in proportion to their respective Percentage Interests; provided,
--------
however, that such Percentage Interests shall not be determined until after the
- -------
amount of the IPO Valuation is treated as a Company Valuation amount under
Section 8.7(a) and additional Membership Units are issued to
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Members with respect thereto in accordance with Section 8.7(b)(1), Section
8.7(b)(2) or Section 8.7(b)(3), as applicable; and
(2) Second, the Company shall issue to the Commisso Members in respect
of the Commisso Carried Interest Total or the Commisso Carried Interest
Remainder, as the case may be, in proportion to their respective Percentage
Interests,100% of the IPO Member Options; it being understood, however, that the
Manager, with the assistance of the IPO Underwriters, may determine, in his
discretion, to allocate and issue a portion of such IPO Member Options to
executives and other employees of the Company; and
(d) The provisions of Section 8.8 are illustrated by the following
example:
Assume that in connection with an IPO of the Company the IPO Valuation
is $800,000,000 and that the Company intends to issue 10,000,000 IPO Public
Common Shares at an offering price of $20 per share, totaling $200,000,000.
Assume further that the most recent Company Valuation prior to the IPO was the
1999 Company Valuation at $450 million. In such a case, Sections 8.8(a), 8.8(b)
and 8.8(c) would result in the Company issuing to Members 40,000,000 Member IPO
Common Shares, totaling $800,000,000 as set forth in Schedule D, plus Member IPO
Options covering 4,000,000 shares of common equity of the IPO Entity (i.e.,
50,000,000 total shares X 10/9 X 7.2%), in each case determined as follows:
(1) Since the IPO Valuation is treated as a Company Valuation pursuant
to Section 8.8(c)(i) and the IPO Valuation exceeds 125% of the 1999 Company
Valuation, and since there has not yet been a Carried Interest Conversion
Valuation and issuance of additional Membership Units under Section 8.7(b)(2),
then,
(A) First, the Company shall issue to the Commisso Members 6,600,000
IPO Member Common Shares, totaling $132,000,000 (or 16.5% of the amount of
the $800 million IPO Valuation) in respect of the additional Membership
Units issued to the Commisso Members under Section 8.7(b)(2)(A), with
respect to the Commisso Carried Interest Conversion Reduction, in
proportion to their respective Percentage Interests as of the date of the
IPO Valuation (after giving effect to the issuance of additional Membership
Units pursuant to Sections 8.7(b)(2)(B)(i), 8.7(b)(2)(B)(ii), and
8.7(b)(2)(B)(iii)); it being understood, however, that if prior to the IPO
Valuation there had been a Carried Interest
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Conversion Valuation and issuance of additional Membership Units to
Commisso Members under Section 8.7(b)(2)(A), no additional Membership Units
(or IPO Member Common Shares allocable thereto) would be issued in
connection with an IPO Valuation to the Commisso Members with respect to
the Commisso Carried Interest Conversion Reduction;
(B) Next, the Company shall issue to all Members, including the
Commisso Members, 33,400,000 IPO Member Common Shares, totaling
$668,000,000 (or 83.5% of the amount of the IPO Valuation) in proportion to
their respective Percentage Interests as of the IPO Valuation (after giving
effect to the issuance of additional Membership Units pursuant to Sections
8.7(b)(2)(B)(i), 8.7(b)(2)(B)(ii), and 8.7(b)(2)(B)(iii)); it being
understood, however, that if prior to the IPO Valuation there had been a
Carried Interest Conversion Valuation and issuance of additional Membership
Units to Commisso Members under Section 8.7(b)(2)(A), the amount of IPO
Member Common Shares allocable to Members hereunder, including Commisso
Members, would have been 40,000,000, in proportion to their respective
Percentage Interests as of the IPO Valuation after giving effect to the
issuance of additional Membership Units pursuant to Sections 8.7(b)(3)(A),
8.7(b)(3)(B) and 8.7(b)(3)(C );and
(2) the Company shall issue to the Commisso Members in respect of the
Commisso Carried Interest Remainder, in proportion to their respective
Percentage Interests as of the date of the IPO Valuation (after giving effect to
the issuance of additional Membership Units pursuant to Sections 8.7(b)(2)(i),
8.7(b)(2)(ii), 8.7(b)(2)(iii)), IPO Member Options exercisable at $20 per share
with respect to 4,000,000 shares of additional common equity of the IPO Entity.
8.9. Operative Rules Regarding Additional Membership Units Issued
in Connection with Company Valuations.
(a) Except as otherwise expressly provided in this Agreement,
following the issuance of additional Membership Units under 8.7(b) above:
(1) All calculations of Preferred Capital, Preferred Return, and
Percentage Interests shall be based upon the Membership Units outstanding on the
date of such issuance;
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(2) All calculations of the amount of the Preferred Return shall
be calculated from the date of such issuance; and
(3) Each Member's Capital Accounts shall be adjusted in accordance
with Treasury Regulation Section 1.704-1(b)(2)(iv)(g) so that the balance of
each Member's Capital Account shall equal the product of the number of
Membership Units held by such Member times $1,000.
(b) In the event that following a Company Valuation which results in the
issuance of additional Membership Units to the Commisso Members pursuant to
clauses (B) or (C) of Section 8.7(b)(1), clauses (ii) or (iii) of Section
8.7(b)(2)(B) or clauses (B) or (C) of Section 8.7(b)(3) (the "Specified Value"),
---------------
the aggregate equity value of the Company is later determined pursuant to
Section 5.18 or Section 8.7 (other than as a consequence of a Distribution to
Members) at an amount below the Specified Value, then, in such event(s), any
issuances of additional Membership Units to the Commisso Members under clauses
(B) or (C) of Section 8.7(b)(1), clauses (ii) or (iii) of Section 8.7(b)(2)(B)
or clauses (B) or (C) of Section 8.7(b)(3) in connection with such valuation or
any later valuation shall be made only after the existing Members shall have
received the full number of Membership Units issuable under clauses (A) of
Section 8.7(b)(1), clauses (i) of Section 8.7(b)(2)(B) or clauses (A) or of
Section 8.7(b)(3). Thereafter, issuances of additional Membership Units shall
be effected as set forth above in Section 8.7(b)(1),Section 8.7(b)(2) or Section
8.7(b)(3), as applicable.
ARTICLE IX
TAX MATTERS
-----------
9.1 Tax Characterization and Returns.
(a) The Members acknowledge that the Company will be treated as a
"partnership" for Federal and state tax purposes. All provisions of this
Agreement and the Articles of Organization
are to be construed so as to preserve that tax status.
(b) Within 135 days after the end of each Fiscal Year, the Manager
will cause to be delivered to each Person who was a Member at any time during
such Fiscal Year a Form K-1 and such other information, if any, with respect to
the Company as may be necessary for the preparation of each Member's Federal or
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state income tax (or information) returns, including a statement showing each
Member's share of income, gain or loss, and credits for the Fiscal Year.
9.2. Capital Accounts.
(a) The Capital Account of each Member shall be increased by
---------
(i) the amount of all Capital Contributions made by such Member (which
amount, in the case of contributed property other than cash, shall be the Net
Agreed Value thereof) and
(ii) all Profit and each item of income and gain which is allocated to
the Member pursuant to Section 8.1, 9.3(b), and 9.3(c) hereof (computed in each
instance with the adjustments detailed in Section 9.2(b) below)
and decreased by
---------
(x) all Loss and each item of loss and deduction which is allocated to
the Member pursuant to Section 8.1, 9.3(b), and 9.3(c) (computed in each
instance with the adjustments detailed in Section 9.2(b) below) and
(y) all cash and the Net Agreed Value of any property distributed by
the Company to such Member pursuant to this Agreement.
(b) Solely for the purposes of maintaining the Members' Capital
Accounts, the Profit or Loss of the Company and each item of income, gain, loss,
or deduction which is specially allocated pursuant to Section 9.3(b) and 9.3(c)
shall be adjusted as follows:
(1) Any income of the Company that is exempt from Federal
income tax shall be added to such Profit or Loss;
(2) all deductions for depreciation, cost recovery, amortization, or
similar items attributable to any property (other than cash) contributed by a
Member to the Company shall be determined as if the Adjusted Basis of such
property on the date of contribution was equal to the Carrying Value of such
property on such date, in accordance with Treasury Regulation Section 1.704-
1(b)(2)(iv)(g);
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(3) Any income, gain or loss attributable to the taxable disposition
of any asset shall be determined by the Company as if the Adjusted Basis of such
asset as of the date of disposition were equal to the Carrying Value of such
asset as of such date;
(4) All fees and other expenses incurred by the Company to promote the
sale of (or to sell) an interest that can neither be deducted nor amortized
under Section 709 of the Code shall be treated as an item of deduction.
(c) The computation of all items of income, gain, loss, and deduction
shall be made without regard to any adjustment in the basis of Company asset as
a result of an election under Section 754 of the Code which may be made by the
Company (except to the extent required by Treasury Regulation Section 1.704-
1(b)(2)(iv)(m)) and, as to those items described in Section 705(a)(2)(B) of the
Code, without regard to the fact that such items are neither currently
deductible nor capitalizable for Federal income tax purposes; and
(d) In the event that any Distribution is made to a Member other than
in cash (including liquidating Distributions), the Capital Accounts of the
Members, immediately prior to such Distribution, shall be appropriately adjusted
upward or downward to reflect any Unrealized Gain or Unrealized Loss
attributable to the distributed property (determined on the basis of the fair
market value of the property at the time of Distribution).
(e) A transferee will succeed to the Capital Account (or such portion
thereof) relating to the interest transferred, and there shall be no adjustment
to the Capital Accounts as a result of such transfer except as otherwise
required under Treasury Regulation Section 1.704-1. If, however, the transfer
causes a termination of the Company under Section 708(b)(1)(B) of the Code, the
Company shall be deemed to have continued as prescribed by Treasury Regulation
Sections 1.704-1 and 1.708(b)(1)(iv), and the Capital Accounts of the Members
shall at such time be determined, and shall thereafter be maintained, in
accordance with the rules set forth in this Agreement.
9.3 Special Tax Rules.
(a) Special Rules Relating to Contributed Property. Solely for tax
----------------------------------------------
purposes (and not for Capital Account purposes), in the case of any property
(other than cash) included
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in a Capital Contribution, or that is held by the Company on the date any
adjustment of Percentage Interest is made pursuant to Section 8.5, items of
income, gain, loss, deduction, and credit attributable to such contributed
property shall be allocated as follows:
(1) first, among the Members in a manner that takes into account the
-----
variation between the fair market value of such property and its Adjusted Basis
at the time of contribution or adjustment of Percentage Interests (in accordance
with Section 704(c) of the Code and applicable Treasury Regulations), and
(2) thereafter, in accordance with Section 8.1 and the other
----------
provisions of this Article.
(b) Guaranteed Payments. Notwithstanding the foregoing, in the event
-------------------
that any fees, interest, or other amounts paid or payable to any Member are
deducted by the Company in reliance on Sections 707(a) or 707(c) of the Code,
and such fees, interest, or other amounts are disallowed as deductions to the
Company and are recharacterized as Company distributions, there shall be
allocated to such Member, prior to the allocations provided in Section 8.1, an
amount of Company gross income for the year in which such fees, interest, or
other amounts are treated as Company distributions equal to such fees, interest,
or other amounts so treated as distributions.
(c) Special Overrides. (1) Solely for purposes of determining a
-----------------
Member's Capital Account in applying the provisions of this clause (c), the
anticipated adjustments, allocations, and distributions described in Treasury
Regulation Section 1.704-1(b)(2)(ii)(d)(4)-(6) shall be taken into account, and
each Member shall be deemed obligated to restore any deficit in its Capital
Account to the extent of the sum of its share of the Minimum Gain, as determined
pursuant to Treasury Regulation Section 1.704-2(g)(i), and its share of the
Partner Nonrecourse Debt Minimum Gain, as determined pursuant to Treasury
Regulation Section 1.704-2(i)(5).
(2) Notwithstanding any other provision of this Agreement, no
allocation of Loss, or other allocation of loss or deduction, shall be made to
any Member if such allocation would result in such Member having a negative
balance in its Capital Account at the close of any Fiscal Year in excess of the
amount it would be required to restore on a liquidation of the Company at the
close of such Fiscal Year (or a liquidation of such Member's interest in the
Company).
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(3) Notwithstanding any other provision of this Agreement, in the
event any Member unexpectedly receives an adjustment, allocation, or
distribution described in clause (4), (5), or (6) of Treasury Regulation Section
1.704-1(b)(2)(ii)(d) that results in such Member having a negative balance in
its Capital Account at the close of any Fiscal Year in excess of the amount that
it is required to restore on a liquidation of the Company at the close of such
Fiscal Year (or of the Member's interest in the Company), or for any other
reason has a deficit Capital Account balance in excess of such amount, such
Member shall, prior to the allocations otherwise provided in this Section, be
allocated Profit (and other income and gain) in an amount and manner sufficient
to eliminate such excess as promptly as possible.
(4) In accordance with and pursuant to Treasury Regulation 1.704-
2(i)(1), all partner nonrecourse deductions (as defined in that Regulation)
shall be allocated to the Member that bears the economic risk of loss on the
debt giving rise to such deductions as determined under that Regulation.
Further, in accordance with and pursuant to Treasury Regulation 1.704-2(f) and -
2(i)(4) (and subject to the exceptions set forth therein), if there is a net
decrease in either the Company's Minimum Gain or Partner Nonrecourse Debt
Minimum Gain or both during any Fiscal Year, all Members shall be allocated,
before any other allocation is made of Profit (and other income and gain) or
Loss (or other loss or deduction) for such Fiscal Year, items of income and gain
for such Fiscal Year (and, if necessary, subsequent years) in an amount equal to
the Member's share in the decrease in Minimum Gain or Partner Nonrecourse Debt
Minimum Gain, as determined pursuant to Treasury Regulation Sections 1.704-
2(g)(2) and 1.704-2(i)(4).
(5) It is the intent of the parties to this Agreement that the
chargeback provisions and the limitation on loss allocations provided in this
Section satisfy the "allocation of nonrecourse liability" rules provided in
Treasury Regulation 1.704-2 and the requirements of Treasury Regulation 1.704-
1(b)(2)(ii)(d) (relating to the alternate test for economic effect and
"qualified income offset"). It is further intended that the allocations under
this Section shall effect an allocation for Federal income tax purposes in a
manner consistent with Section 704(b) and (c) of the Code and comply with any
limitations or restrictions therein. If for any reason the allocations
contained in this Agreement shall conflict with the Treasury Regulations
promulgated under Section 704 of the Code, the Members acknowledge that such
Regulations shall control.
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(6) The allocations set forth in this Section (the "Regulatory
----------
Allocations") are intended to comply with certain requirements of Treasury
- -----------
Regulation Section 1.704-1(b). The Regulatory Allocations may not be consistent
with the manner in which the Members intend to divide Company Distributions.
Accordingly, the Manager, as the "tax matters partner" (or any successor
thereto) is hereby authorized, with the advice of the Company's accountants, to
devise other allocations of income, gains and losses and other items among the
Members as may be necessary so as to prevent the Regulatory Allocations from
distorting the manner in which Company Distributions will be divided among the
Members; provided, however, that any change in the manner of maintaining Capital
-------- -------
Accounts shall not materially alter the economic agreement between or among the
Members as expressed in this Agreement without the consent of each Member. In
general, the Members anticipate that this will be accomplished by specially
allocating items of income, gain, loss and deduction among the Members so that
the net amount of the Regulatory Allocations and such special allocations to
such Member is zero. However, the Tax Matters Partner shall have discretion to
accomplish this result in any reasonable manner.
9.4 Accounting Decisions.
(a) Subject to the provisions of this Agreement, the Manager will make
all decisions as to accounting matters. The Manager shall cause the Company at
all times to retain an independent nationally-recognized accounting firm as its
auditors.
(b) Subject to the provisions of this Agreement, the Manager may cause
the Company to make whatever elections the Company may make under the Code,
including the election referred to in Section 754 of the Code to adjust the
basis of Company assets.
(c) The Company shall make the following elections on the
appropriate tax returns:
(1) To adopt the calendar year as the Fiscal Year;
(2) To adopt the accrual method of accounting for income tax purposes
and keep the Company's books and records in accordance with GAAP;
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(3) If a Distribution as described in Section 734 of the Code occurs
or if a transfer of a Membership Unit described in Section 743 of the Code
occurs, upon the written request of any Member, to elect to adjust the basis of
the property of the Company pursuant to Section 754 of the Code;
(4) To elect to amortize the organizational expenses of the Company
and the start up expenditures of the Company under Section 195 of the Code
ratably over a period of sixty months as permitted by Section 709(b) of the
Code; and
(5) Any other election that the Manager may deem appropriate and in
the best interests of the Members. Neither the Company nor any Member may make
an election for the Company to be excluded from the application of Subchapter K
of Chapter I of Subtitle A of the Code or any similar provisions of applicable
state law, and no provisions of this Agreement shall be interpreted to authorize
any such election.
9.5 Tax Matters Partner. The Manager shall be the "tax matters
partner" of the Company pursuant to Section 6231(a)(7) of the Code. The Manager
shall not extend the statute of limitations, compromise any tax controversy or
take any other material action as "tax matters partner" except after
consultation with the Executive Committee.
9.6 Tax Returns. The Manager shall cause to be prepared and filed
all necessary Federal and state income tax returns for the Company. Each Member
shall furnish to the Manager all pertinent information in its possession
relating to Company operations that is necessary to enable the Company's income
tax returns to be prepared and filed.
9.7 Tax Withholdings. The Company shall at all time be entitled to
make payments with respect to any Member in amounts required to discharge any
legal obligation of the Company pursuant to any provision of the Code or any
other tax provision or any provision enacted in the future imposing a similar
obligation on the Company to withhold or make payments to any governmental
authority with respect to any United States federal, state or local tax
liability of such Member arising as a result of such Member's interest in the
Company. Each such payment made to any governmental authority shall be deemed
to be a loan by the Company to such Member and shall not be deemed to be a
Distribution. The amount of such payments made with respect to any Member, plus
interest at an annual rate equal to two percent plus the Company's highest
borrowing rate on each such amount from the date of each such payment until such
amount is repaid to
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the Company, shall be repaid to the Company by (i) deduction from the current or
next succeeding Distribution or Distributions otherwise payable to such Member
pursuant to this Agreement or (ii) earlier payment of such amounts and interest
by such Member to the Company.
ARTICLE X
FINANCIAL REPORTS; INSPECTION RIGHTS
------------------------------------
10.1 Reports to Members. Within 135 days after the end of each
Fiscal Year and 75 days after the end of each quarter other than the last
quarter thereof, the Company shall cause to be prepared and mailed to each
Member a financial report (audited by an accounting firm of recognized national
standing in the case of a report sent as of the end of a Fiscal Year and
unaudited in the case of a report sent as of the end of a quarter) setting forth
as of the end of such Fiscal Year or quarter:
(a) a consolidated balance sheet of the Company and its Subsidiaries
as of the end of such Fiscal Year or quarter prepared in accordance with GAAP;
and
(b) consolidated statements of income, retained earnings and cash
flows of the Company and its Subsidiaries for such Fiscal Year or quarter (and
for the period from the beginning of the Fiscal Year to the end of such quarter)
prepared in accordance with GAAP.
In addition, the Company will deliver to the Members promptly upon their
becoming available, (i) copies of all registration statements and regular
periodic reports, if any, that the Company shall have filed with the SEC or any
national securities exchange, (ii) copies of all projections delivered to the
lenders of the Company or its subsidiaries in connection with proposed
acquisitions or refinancings by the Company or its subsidiaries and (iii) copies
of all regular reports to management submitted by the independent auditors for
the Company.
10.2 Inspection Rights. The Company shall, upon reasonable
notice during normal business hours, permit any Member and its agents, including
counsel, to inspect its properties, examine its books and records and to discuss
with management the business and affairs of the Company and its subsidiaries,
and to examine, copy and make extracts from its books and records.
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10.3 Certain Additional Information. Concurrently with the
delivery by the Company to each Member of its annual financial statements
pursuant to Section 10.1 above, the Company will deliver to each Member that is
a Small Business Investment Company a written assessment of the economic impact
of the investment by such Member in the Company, specifying the full-time
equivalent jobs created or retained in connection with such investment, the
impact of such investment on the business of the Company in terms of expanded
revenue and taxes, and other economic benefits resulting from such investment,
including but not limited to, technology development or commercialization,
minority business development, urban or rural business development, expansion of
exports and assistance to manufacturing firms, all as contemplated by 13 C.F.R.
(S) 107.304(c).
10.4 Use of Proceeds. Within 75 days after the date of a Capital
Contribution to the Company by a Member that is a Small Business Investment
Company, the Company shall deliver to such Member a written statement certified
by the Manager describing in reasonable detail the use of the proceeds of the
investment hereunder by the Company and its Subsidiaries. In addition to any
other rights granted hereunder, the Company shall grant any Member that is a
Small Business Investment Company and the United States Small Business
Administration access to the Company's records for the purpose of verifying the
use of such proceeds.
ARTICLE XI
PUT RIGHTS
----------
10.1 Put Right at the Option of the Members. Under the
circumstances and on the terms described below, Members shall have the following
rights:
(a) Members shall have the right to require the Company to redeem all
or any part of the Membership Units held by them at any time on or after a
Triggering Event (the "Put"). A Member may exercise the Put by giving the
---
Company notice of such intent setting forth the Triggering Event (such notice
hereinafter a "Put Notice").
----------
(b) The consideration to be paid in connection with the Put shall be
payable in cash in an amount equal to the value of the Membership Units subject
to the Put, based upon the fair market value of the Company as a going concern
with no discount attributed to the restrictions of transferability of the
Membership Units and the minority Percentage Interests (the "Put
---
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Price"). If the Company and the Members delivering a Put Notice agree in writing
- -----
as to the amount of the Put Price for the Membership Units that are the subject
of such Put Notices, such amount shall bind them. If the Company and the Members
exercising the Put do not agree in writing, then the fair market value shall be
the average of the valuations determined by two independent valuation experts,
one selected by the Company and one by the Members exercising the Put. If the
valuations of such experts differ by more than 10 percent, the two experts shall
select a third independent valuation expert, the opinion of which shall be
binding, to determine a value no higher than the higher valuation nor lower than
the lower valuation. The costs of each such expert shall be borne equally by the
Company and the Members exercising such Put.
(c) The redemption of the Membership Units subject to the Put shall
occur no later than the 30th day after final determination of the Put Price,
unless the Company and the Members exercising the Put agree to a different date.
If, prior to the closing date for the Put, the Company is unable to purchase for
cash all of the Membership Units required to be purchased pursuant to the Put
Option, the Company shall promptly (but in any event within three business days
of such determination) give notice to each of the Members exercising the Put of
the aggregate amount of Membership Units it is unable to purchase for cash (a
"Put Cash Postponement"). In the case of any Put Cash Postponement, the Company
- --------- ------------
shall use its best commercial efforts to increase its ability to pay cash for
the Membership Units subject to the Put. If on the Put Closing Date, the
Company does not purchase all of the Membership Units subject to the Put for
cash, the Company shall issue to any Member subjected to a Put Cash Postponement
a junior subordinated promissory note of the Company (a "Purchase Note") having
-------------
a principal amount equal to the aggregate Put Price for the Membership Units
subject to the Put Cash Postponement plus deferred interest accruing and
compounding annually at an annual rate equal to five percent (5%) over the
interest rate publicly announced by The Chase Manhattan Bank from time to time
as its prime commercial lending rate of interest. The maturity date of a
Purchase Note shall be five years from the date of issuance, but a Purchase Note
may be prepaid without penalty. At the time of payment, the Company shall pay
principal and accrued deferred interest on the Purchase Note.
(d) In the event a Triggering Event described in clause (2) of Section
1.1(zzz), only such number of Membership Units held by a Member as shall be
necessary to cure the legal
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restriction therein referred to shall be entitled to the benefits of a Put under
this Section 11.1.
ARTICLE XII
TRANSFERABILITY
---------------
12.1 Transferee Not a Member. (a) Subject to the terms of Section
12.3 hereof, a Member may transfer Membership Units to an Affiliate and have
such Affiliate become a Member. No Person acquiring a Membership Unit other than
an existing Member or an Affiliate of an existing Member shall become a Member
unless such Person is approved by the Manager. No transfer of more than 5,000
Membership Units (other than by a Member to an Affiliate in accordance with
Section 12.3) shall be effective unless approved by the Manager and the
Executive Committee. No Person shall become a Member until, in addition to the
required vote or consent: (i) Such Person by written agreement shall have
accepted the terms of, and agreed to be bound by, this Agreement; (ii) any
required certificate evidencing the admission of such Person as a Member, if
required, shall have been prepared for filing or recordation; (iii) such Person
complies with any other condition imposed by the Manager. If no such approval is
obtained, such Person's Membership Unit shall only entitle such Person to
receive the Distributions and allocations of profits and losses to which the
Member from whom or which such Person received such Membership Unit would be
entitled and shall not entitle such Person to any rights with respect to
management and ownership. Any such approval may be subject to any terms and
conditions imposed by the Manager in his sole and complete discretion.
(b) If it shall become unlawful for any Member to continue to hold
some or all of the Membership Units held by such Member, or by reason of legal
or regulatory restrictions the cost to such member to continue to hold such
Membership Units (in relation to the value of such Membership Units to such
Member) has, in the reasonable judgment of such Member, significantly increased,
then such Member may, at any time following the date three business days after
the delivery of such Member to each other Member of notice of the existence of
any such restriction, transfer all or any portion of the Membership Units held
by such Member free of any restrictions imposed under this Agreement (other than
those restrictions required by federal or state laws, including securities, FCC
and tax laws, and subject to the respective transferee meeting the requirements
of Section 12.3, and provided that the transferee Member shall hold its
Membership Units subject to all of the terms of this Agreement). In connection
therewith, the Company shall assist such Member in
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disposing of the Membership Units held by it in a prompt and orderly manner, and
(at the request of such Member) make available (and authorize such Member to
make available through the Company) financial and other information concerning
the Company and its Subsidiaries (including, without limitation, the information
described in Rule 144A(d)(4)) to any prospective purchaser of such prospective
purchaser of such Membership Units (it being agreed that such prospective
purchaser shall be either an "accredited investor" within the meaning of Rule
501 (a) under the Securities Act or a "qualified institutional buyer" within the
meaning of Rule 144A(d)(1) under such Act to the extent that such Membership
Units are "restricted securities" as such term is defined in Rule 144). The
Company may require that each such prospective purchaser keep confidential,
pursuant to customary confidentiality requirements, any information received by
it pursuant to this provision.
12.2 Effective Date. Any sale of a Membership Unit or admission
of a Member shall be deemed effective immediately upon consummation of such sale
and the satisfaction by the transferee of all requirements of this Article XII.
12.3 Requirements for All Transfers of Membership Units. Any
transfer pursuant to this Article XII is subject to the following conditions:
(a) the proposed transferee must execute and deliver to the
Company an executed counterpart of this Agreement;
(b) the proposed transferee shall be lawfully entitled to hold the
Membership Units being transferred under the Communications Act of 1934, as
amended, and the rules and regulations of the Federal Communications Commission,
or any successor thereto;
(c) unless such transfer is being made pursuant to an effective
registration statement under the Securities Act or pursuant to Rule 144 or Rule
144A thereunder, the transferring Member shall deliver to the Company a notice
with respect to the proposed transfer, together with an opinion of counsel in
form and substance satisfactory to the Company prepared by counsel reasonably
satisfactory to the Company (which shall include, without limitation, counsel to
each of the Members as of the date hereof), to the effect that an exemption from
registration and qualification under such Securities Act is available;
(d) the transferring Member and its transferee shall each provide a
certificate to the Company, in form and
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substance satisfactory to the Manager, to the effect that (A) the proposed
transfer will not be effected on or through (1) a United States national,
regional or local securities exchange, (2) a foreign securities exchange or (3)
an interdealer quotation system that regularly disseminates firm buy or sell
quotations by identified brokers or dealers (including, without limitation, the
National Association of Securities Dealers Automated Quotation System) by
electronic means or otherwise, and (B) it is not, and the proposed transfer will
not be made by, through or on behalf of, (1) a Person who regularly quotes
equity interests in the Company, such as a broker or dealer making a market in
equity interests in the Company or (2) a Person who regularly makes available to
the public (including customers or subscribers) bid or offer quotes with respect
to equity interests in the Company and stands ready to effect buy or sell
transactions at the quoted prices for itself or on behalf of others; provided,
--------
however, that such certificate shall not be required for any transfer in
- -------
connection with a registered public offering;
(e) the transferee must be a "U.S. Person" for federal income tax
purposes;
(f) such transfer must not cause the Company to terminate for tax
purposes; and
(g) such transfer must not cause the Company to lose its status
as a partnership for tax purposes.
Any transfer made in violation of this Section 12.3 shall be null and void and
of no force and effect.
12.4 Transfers in a Registered Public Offering. The parties
hereto have entered into Registration Rights Agreements with the Company. Each
party hereto acknowledges that any Holder (as defined in its respective
Registration Rights Agreement) shall have the right to register and transfer
Membership Units in accordance with the provisions of such Registration Rights
Agreement and that the Company shall comply with its obligations thereunder. No
such transfer shall be subject to the restrictions on transfers set forth in
this Article or any other provision of this Agreement.
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ARTICLE XIII
PREEMPTIVE RIGHTS AND CERTAIN
PROVISIONS APPLICABLE TO BMO AFFILIATES
---------------------------------------
13.1 Preemptive Rights. (a) If, other than in connection with an
acquisition or other business combination, in contemplation of an initial public
offering of equity securities of the Company or in respect of issuances of
Membership Units pursuant to Section 8.5 of this Agreement, the Company proposes
to issue, grant or sell Membership Units or any securities exchangeable or
convertible into Membership Units in accordance with the provisions of this
Agreement, the Company shall first give to the Members a notice setting forth in
reasonable detail the price and other terms on which such Membership Units are
proposed to be issued or sold, the terms of such Membership Units and the amount
thereof proposed to be issued, granted or sold (without limiting the consent
rights of any Member in connection therewith). The Members shall thereafter
have the preemptive right, exercisable by notice to the Company no later than
twenty (20) days after the Company's notice is given, to purchase the amount of
such Membership Units set forth in such Member's notice (but in no event more
than such Member's pro rata share thereof, as of the date of the Company's
--- ----
notice, based upon the ratio of the Membership Units held by such Member to the
aggregate of the Membership Units of the Company), for the price and other terms
set forth in the Company's notice. Any notice by a Member exercising the right
to purchase Membership Units pursuant to this Article XIII shall constitute an
irrevocable commitment to purchase from the Company the Membership Units
specified in such notice, subject to the maximum set forth in the preceding
sentence. If the Members fail to exercise their preemptive right to the full
extent of their pro rata share, the Company shall provide notice thereof to the
--- ----
exercising Members and an additional ten (10) days to subscribe for the
remaining Membership Units subject to preemptive rights. If the Members
exercise their preemptive right set forth in this Section 13.1 to the full
extent of their pro rata share or for any other reason the Company shall not
--- ----
issue, grant or sell Membership Units to Persons other than the Members then the
closing of the purchase shall take place on such date, no less than ten (10) and
no more than thirty (30) days after the expiration of the 20-day period referred
to above, as the Company may select and notify the Members at least seven (7)
days prior thereto. If the Members do not exercise their preemptive rights to
the full extent of their pro rata shares, and, as contemplated by Section
--- ----
13.1(b), the Company shall issue, grant or sell Membership Units to Persons
other than the Members, then the closing of the issuance of
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Membership Units to Members shall take place at the same time as the closing of
such issuance, grant or sale to non-Members.
(b) If the Members do not exercise their preemptive rights to the full
extent of their pro rata shares, the Company shall use its good faith and
--- ----
commercially reasonable efforts to issue, grant or sell the remaining Membership
Units on the terms set forth in its notice to the Members unless the Company is
advised by its financial advisors that the remaining number or amount is too
small to be reasonably sold. From the expiration of the 20-day period first
referred to in Section 13.1(a) and for a period of 90 days thereafter, the
Company may offer, issue, grant and sell to any Person, other than a Member
thereof, Membership Units having the terms set forth in the Company's notice
relating to such Membership Units for a price and other terms no less favorable
to the Company, and including no less cash, than those set forth in such notice
(without deduction for reasonable underwriting, sales agency and similar fees
payable in connection therewith); provided, however, that the Company may not
-------- -------
issue, grant or sell Membership Units in an amount greater than the amount set
forth in such notice minus the amount purchased or committed to be purchased by
the Members upon exercise of their preemptive rights.
(c) The preemptive rights set forth above in this Section 13.1 shall
terminate upon consummation of an initial public offering of equity securities
of the Company.
13.2 Subject Membership Units are Nonvoting; Exceptions.
Notwithstanding anything in this Agreement to the contrary (including Section
12.1(b)), no BMO Affiliate and no Subject Transferee shall at any time have the
right to vote, to give any consent or proxy with respect to, or otherwise
exercise the rights as a holder of, Subject Membership Units to agree to,
approve or otherwise authorize any action or inaction, or remove the Manager,
under any of Sections 5.1, 5.2, 5.5(b), 5.8, 5.12 and 6.8(e) of this Agreement
(in all such instances, Subject Membership Units shall be treated as not
outstanding for purposes of whether any action or inaction or removal has been
approved by the requisite vote of Members). This Section is not intended to
derogate from or diminish any right such holder may have to vote, consent to,
approve or otherwise authorize or give proxies with respect to actions under
Section 6.8 of this Agreement (excluding Section 6.8(e)) or to take any action
with respect to Membership Units other than Subject Membership Units.
13.3 Notice of Certain In Kind Distributions. Before any
distribution in kind of assets of the Company to any BMO
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Affiliate who is a Member, the Manager or the liquidating trustee, as
applicable, shall give notice in writing to such BMO Affiliate not fewer than 10
Business days before such distribution identifying each asset proposed to be
distributed and the date of distribution. Notwithstanding anything in this
Agreement to the contrary, such BMO Affiliate may elect, by notice in writing to
the Manager or the liquidating trustee not fewer than three Business Days before
the date of distribution specified in the notice given to such BMO Affiliate, to
decline the distribution of some or all of such assets to the extent that the
acquisition of such assets would, in the reasonable judgment of such BMO
Affiliate, result in a violation of the BHCA or IBA. In the event that the BMO
Affiliate has so elected, the Manager or liquidating trustee shall cause such
assets, which would otherwise have been distributed to such BMO Affiliate, to be
disposed of immediately regardless of the economic consequences of such a
liquidation and the proceeds of such disposition to be distributed to such BMO
Affiliate, net of any expense or other costs incurred or imposed on the Seller
in connection with disposition. In connection with any such election, the BMO
Affiliate shall execute such indemnification and similar agreements in favor of
the Manager or the liquidating trustee as shall reasonably be requested.
ARTICLE XIV
DISSOLUTION
-----------
14.1 Dissolution. The Company shall be dissolved and its affairs
shall be wound up upon the first to occur of the following:
(a) The latest date on which the Company is to dissolve, if any,
as set forth in the Articles of Organization;
(b) The vote or written consent of the Manager provided that less than
$13 million in Capital Contributions and Additional Capital Contributions have
been made to the Company following December 31, 1996;
(c) The bankruptcy, death, dissolution, removal, legal incapacity or
resignation of the Manager or the occurrence of any other event that terminates
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 Percentage Interests of all of the remaining
Members; or
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(d) the entry of a decree of judicial dissolution under Section
702 of the New York Act.
14.2 Winding Up. Upon the dissolution of the Company the Manager
may, in the name of and for and on behalf of the Company, prosecute and defend
suits, whether civil, criminal or administrative, sell and close the Company's
business, dispose of and convey the Company's property, discharge the Company's
liabilities and distribute to the Members any remaining assets of the Company,
all without affecting the liability of Members. Upon winding up of the Company,
the assets shall be distributed as follows:
(a) To creditors, including any Member who is a creditor (including
with respect to any amounts owing in respect of a Put pursuant to Section 11.1
hereof), to the extent permitted by law, in satisfaction of liabilities of the
Company, whether by payment or by establishment of adequate reserves, other than
liabilities for Distributions to Members under Section 507 or Section 509 of the
New York Act;
(b) To Members and former Members in satisfaction of liabilities for
Distributions under Section 507 or Section 509 of the New York Act; and
(c) To the Members in the amounts and proportions set forth in
Section 8.4(b) of this Agreement.
14.3 Articles of Dissolution. Within ninety days following the
dissolution and the commencement of winding up of the Company, or at any other
time there are no Members, articles of dissolution shall be filed with the New
York Secretary of State pursuant to the New York Act.
14.4 Deficit Capital Account. Upon a liquidation of the Company
within the meaning of Section 1.704-1(b)(2)(ii)(g) of the Treasury Regulations,
if any Member is liable for indebtedness of the Company and has a deficit
Capital Account (after giving effect to all contributions, Distributions,
allocations and other adjustments for all Fiscal Years, including the Fiscal
Year in which such liquidation occurs), such Member shall be liable to make a
Capital Contribution in the amount of the lesser of the negative balance of such
Member's Capital Account or the amount of indebtedness of the Company for which
such Member is liable.
14.5 Nonrecourse to Other Members. Except as provided by
applicable law or as expressly provided in this Agreement,
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upon dissolution, each Member shall receive a return of such Member's Capital
Contribution solely from the assets of the Company. If the assets of the Company
remaining after the payment or discharge of the debts and liabilities of the
Company is insufficient to return any Capital Contribution of any Member, such
Member shall have no recourse against any other Member.
14.6 Termination. Upon completion of the dissolution, winding
up, liquidation, and distribution of the assets of the Company, the Company
shall be deemed terminated.
ARTICLE XV
INDEMNIFICATION
---------------
15.1 Exculpatory Provisions. None of the Members nor 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 none of the members of the Executive Committee (collectively, the
"Indemnified Persons") shall be liable directly or indirectly, to the Company or
- --------------------
to any Member for any act or omission (in relation to the Company or this
Agreement) taken or omitted by such Indemnified Person in good faith, provided
--------
that such act or omission did not constitute gross negligence, fraud or willful
violation of the law or this Agreement.
15.2 Indemnification of Members. The Company shall, to the
fullest extent permitted by the New York Act, indemnify and hold harmless each
Indemnified Person against all claims, liabilities and expenses of whatever
nature ("Claims") 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 this Agreement or with respect to any
matter as to which such
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Indemnified Person shall have been adjudicated not to have acted in good faith.
15.3 Advance of Expenses. Expenses incurred by an Indemnified
Person in defense or settlement of any Claim that may be subject to a right of
indemnification hereunder may be advanced by the Company prior to the final
disposition thereof upon receipt of an undertaking by or on behalf of the
Indemnified Person to repay such amount if it shall ultimately be determined
that the Indemnified Person is not entitled to be indemnified by the Company.
15.4 Control of Claim. The Company shall have the right to
select counsel (provided such counsel is reasonably satisfactory to the
Indemnified Person) and to control the defense of any action giving rise to a
Claim, provided that an Indemnified Person may nevertheless employ counsel to
--------
represent and defend it, but the Company will not be required to pay the fees
and disbursements of more than one counsel in any jurisdiction in any proceeding
(unless by reason of potential conflicts of interest, representation by more
than one counsel is necessary). The right to control the defense of any action
shall not include the right to enter into a settlement with respect to such
action, unless such settlement is for money damages only (and the Company first
places such funds in escrow or posts a bond or other security reasonably
satisfactory to the Indemnified Person sufficient, without regard to the
provisions of Section 15.6, to cover the full amount of the proposed
settlement).
15.5 Non-Exclusivity. The right of any Indemnified Person to the
indemnification provided herein shall be cumulative of, and in addition to, any
and all rights to which such Indemnified Person may otherwise be entitled by
contract or as a matter of law or equity and shall extend to such Indemnified
Person's successors, assigns and legal representatives.
15.6 Satisfaction from Company Assets. All judgments against the
Company or an Indemnified Person, in respect of which such Indemnified Person is
entitled to indemnification, shall first be satisfied from Company assets before
the Indemnified Person is responsible therefor.
15.7 Notices of Claims. Promptly after receipt by an Indemnified
Person of notice of the commencement of any action or proceeding or threatened
action or proceeding involving a Claim, such Indemnified Person will, if a claim
for indemnification in respect thereof is to be made against the Company, give
written notice to the Company of the commencement of such action;
-66-
<PAGE>
provided, however, that the failure of any Indemnified Person to give notice as
- -------- -------
provided herein shall not relieve the Company of its obligations under this
Article XV, except to the extent that the Company is actually prejudiced by such
failure to give notice. Each such Indemnified Person shall keep the Manager
apprised of the progress of any such proceeding.
ARTICLE XVI
GENERAL PROVISIONS
------------------
16.1 Notices. Any notice, demand or other communication required
or permitted to be given pursuant to this Agreement shall have been sufficiently
given for all purposes if (a) delivered personally to the party or to an
executive officer of the party to whom such notice, demand or other
communication is directed, (b) sent by registered or certified mail, postage
prepaid, addressed to the Member or the Company at his, her or its address set
forth in this Agreement, or (c) transmitted by facsimile, with hard copy sent by
mail as set forth in clause (b) of this Section 16.1. Except as otherwise
provided in this Agreement, any such notice shall be deemed to be given on the
date of personal delivery or facsimile transmission, and three business days
after the date on which it was deposited in a regularly maintained receptacle
for the deposit of United States mail, addressed and sent as set forth in this
Section 16.1.
16.2 Amendments. No course of performance or other conduct
subsequently pursued or acquiesced in, and no oral agreement or representation
subsequently made, by the Members, whether or not relied or acted upon, and no
usage of trade, whether or not relied or acted upon, shall amend this Agreement
or impair or otherwise affect any Member's obligations pursuant to this
Agreement or any rights and remedies of a Member pursuant to this Agreement. No
amendment to this Agreement shall be effective unless made with the consent of
no less than two-thirds of the Membership Units; provided, however, that the
-------- -------
Manager acting alone shall have the power to amend Schedules A, B and C hereto
----------- - -
to reflect transfers or issuances of Membership Units, to reflect changes in the
Unfunded Capital Commitments, to make adjustments pursuant to Section 8.5
hereof, to make any accounting and other amendments deemed necessary by the
Manager as Tax Matters Partner (with the advice of the Company's independent
accountants), and as approved by the Executive Committee under Section
5.7(a)(vii). Notwithstanding the foregoing, no amendment shall be effective:
(i) which has a disproportionate adverse economic effect upon the rights of any
Member vis-a-vis the other Members holding Membership Units
-67-
<PAGE>
having the same rights, without the consent of such adversely affected Member;
(ii) which has an adverse economic effect upon the rights of a group of Members,
without the consent of a majority of such group of Members; or (iii) which
alters the rights, powers and duties of the Manager (in his capacity as Manager)
(or an Affiliate thereof) under this Agreement, or otherwise adversely affects
the Manager (in his capacity as Manager), without the consent of the Manager. In
addition to the foregoing, the Company shall not (in its capacity as a member of
any Subsidiary) consent to any amendment to the Operating Agreement of such
Subsidiary which would have an adverse effect upon the Company's economic rights
in such Subsidiary without the consent of a majority of the Membership Units.
16.3 Construction. Whenever the singular number is used in this
Agreement and when required by the context, the same shall include the plural
and vice versa, and the masculine gender shall include the feminine and neuter
genders and vice versa.
16.4 Headings. The headings in this Agreement are for
convenience only and shall not be used to interpret or construe any provision of
this Agreement.
16.5 Waiver. No failure of a Member to exercise, and no delay by
a Member in exercising, any right or remedy under this Agreement shall
constitute a waiver of such right or remedy. No waiver by a Member of any such
right or remedy under this Agreement shall be effective unless made in a writing
duly executed by all Members and specifically referring to each such right or
remedy being waived.
16.6 Severability. Whenever possible, each provision of this
Agreement shall be interpreted in such a manner as to be effective and valid
under applicable law. However, if any provision of this Agreement shall be
prohibited by or invalid under such law, it shall be deemed modified to conform
to the minimum requirements of such law or, if for any reason it is not deemed
so modified, it shall be prohibited or invalid only to the extent of such
prohibition or invalidity without the remainder thereof or any other such
provision being prohibited or invalid.
16.7 Binding. This Agreement shall be binding upon and inure to
the benefit of all Members, and each of the successors and assignees or the
Members, except that no right or obligation of a Member under this Agreement may
be assigned by such Member to another Person without first obtaining the written
consent of the Manager.
-68-
<PAGE>
16.8 Counterparts. This Agreement may be executed in
counterparts, each of which shall be deemed an original and all of which shall
constitute one and the same instrument.
16.9 Governing Law. This Agreement shall be governed by, and
interpreted and construed in accordance with, the laws of the State of New York,
without regard to principles of conflict of laws.
IN WITNESS WHEREOF, the individuals and entities signing this
Agreement below conclusively evidence their agreement to the terms and
conditions of this Agreement by so signing this Agreement.
S/
----------------------------------
ROCCO B. COMMISSO
MORRIS COMMUNICATIONS CORPORATION
By: S/
------------------------------
Name: William S. Morris IV
Title: President
-69-
<PAGE>
<TABLE>
<CAPTION>
MEDIACOM LLC SCHEDULE A
Capital Calls Since Inception
Members 3/12/96 6/28/96 6/22/97 9/18/97 1/15/98 11/3/99
- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Chase Manhattan Capital, L.P. $ 1,100,000 $ 0 $ 0 $ 0 $ 0 $ 0
c/o Chase Manhattan
Capital Corporation
380 Madison Avenue
New York, NY 10017-2951
U.S. Investor, Inc. $ 1,100,000 $ 1,000,000 $ 1,950,000 $ 500,000 $ 2,293,780 $ 256,220
333 West Fort Street
Detroit, MI 48226
Morris Communications $ 0 $ 0 $ 9,750,000 $ 2,500,000 $ 79,832,536 $ 8,917,464
Corporation
725 Broad Street
Augusta, GA 30901
CB Capital Investors, L.P. $ 0 $ 0 $ 3,900,000 $ 1,000,000 $ 4,587,560 $ 512,440
c/o Chase Manhattan
Capital Corporation
380 Madison Avenue
New York, NY 10017-2951
Private Market Fund, L.P. $ 0 $ 0 $ 1,950,000 $ 500,000 $ 4,542,584 $ 507,416
c/o Pacific Corporate Group
1200 Prospect Street
Suite 200
La Jolla, CA 92037
BMO Financial, Inc. $ 0 $ 0 $ 1,950,000 $ 500,000 $ 2,293,780 $ 256,220
c/o Bank of Montreal
430 Park Avenue
New York, NY 10022
Mr. Scott Seaton $ 0 $ 0 $ 0 $ 0 $ 224,880 $ 25,120
61 Londonderry Drive
Greenwich, CT 06830
Mr. Thomas Keaveney $ 224,880 $ 25,120
10 Wagon Way
Holmdel, NJ 07733
Commisso Members $ 3,245,000 $ 0 $ 0 $ 0 $ 0 $ 0
100 Crystal Run Road
Middletown, NY 10941
------------ ------------ ------------ ------------ ------------ ------------
Subtotal $ 5,445,000 $ 1,000,000 $ 19,500,000 $ 5,000,000 $ 94,000,000 $ 10,500,000
Cumulative Total $ 5,445,000 $ 6,445,000 $ 25,945,000 $ 30,945,000 $124,945,000 $135,445,000
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
MEDIACOM LLC SCHEDULE B-1
Membership Units and Percentage Interests
3/12/96 6/28/96 3/31/97 6/22/97
------- ------- ------- -------
<S> <C> <C> <C> <C>
Total Membership Units Issued
- -----------------------------
Chase Manhattan Capital, L.P. 1,100.0000 1,674.5455 2,076.4364 2,076.4364
U.S. Investor, Inc. 1,100.0000 2,674.5455 3,316.4364 5,266.4364
Morris Communications Corporation 0.0000 0.0000 0.0000 9,750.0000
CB Capital Investors, L.P. 0.0000 0.0000 0.0000 3,900.0000
Private Market Fund, L.P. 0.0000 0.0000 0.0000 1,950.0000
BMO Financial, Inc. 0.0000 0.0000 0.0000 1,950.0000
Scott W. Seaton 0.0000 0.0000 0.0000 0.0000
Thomas W. Keaveney 0.0000 0.0000 0.0000 0.0000
Commisso Members 3,245.0000 5,650.9090 7,607.1272 7,607.1272
---------------- ------------------ ------------------ ------------------
Total 5,445.0000 10,000.0000 13,000.0000 32,500.0000
Percentage Interests
- --------------------
Chase Manhattan Capital, L.P. 20.2020% 16.7455% 15.9726% 6.3890%
U.S. Investor, Inc. 20.2020% 26.7455% 25.5110% 16.2044%
Morris Communications Corporation 0.0000% 0.0000% 0.0000% 30.0000%
CB Capital Investors, L.P. 0.0000% 0.0000% 0.0000% 12.0000%
Private Market Fund, L.P. 0.0000% 0.0000% 0.0000% 6.0000%
BMO Financial, Inc. 0.0000% 0.0000% 0.0000% 6.0000%
Scott W. Seaton 0.0000% 0.0000% 0.0000% 0.0000%
Thomas W. Keaveney 0.0000% 0.0000% 0.0000% 0.0000%
Commisso Members 59.5960% 56.5091% 58.5164% 23.4065%
---------------- ------------------ ------------------ ------------------
Total 100.0000% 100.0000% 100.0000% 100.0000%
<CAPTION>
Prior To After
U.S.Cable U.S.Cable
Acquisition Acquisition
9/19/97 1/15/98 1/15/98
------- ------- -------
<S> <C> <C> <C>
Total Membership Units Issued
- -----------------------------
Chase Manhattan Capital, L.P. 2,076.4364 2,940.9652 2,940.9652
U.S. Investor, Inc. 5,766.4364 8,085.9840 10,379.7640
Morris Communications Corporation 12,250.0000 16,943.7111 96,776.2471
CB Capital Investors, L.P. 4,900.0000 6,777.4844 11,365.0444
Private Market Fund, L.P. 2,450.0000 3,388.7422 7,931.3262
BMO Financial, Inc. 2,450.0000 3,388.7422 5,682.5222
Scott W. Seaton 0.0000 0.0000 224.8800
Thomas W. Keaveney 0.0000 0.0000 224.8800
Commisso Members 7,607.1272 14,474.3709 14,474.3709
------------------ ------------------- -------------------
Total 37,500.0000 56,000.0000 150,000.0000
Percentage Interests
- --------------------
Chase Manhattan Capital, L.P. 5.5372% 5.2517% 1.9606%
U.S. Investor, Inc. 15.3772% 14.4393% 6.9198%
Morris Communications Corporation 32.6667% 30.2566% 64.5175%
CB Capital Investors, L.P. 13.0667% 12.1027% 7.5767%
Private Market Fund, L.P. 6.5333% 6.0513% 5.2876%
BMO Financial, Inc. 6.5333% 6.0513% 3.7883%
Scott W. Seaton 0.0000% 0.0000% 0.1499%
Thomas W. Keaveney 0.0000% 0.0000% 0.1499%
Commisso Members 20.2857% 25.8471% 9.6496%
------------------ ------------------- -------------------
Total 100.0000% 100.0000% 100.0000%
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
MEDIACOM LLC SCHEDULE B-2
Revaluation and Capital Contributions
(in units)
Commisso Morris
Chase Capital U.S Investor Investors Communications
-----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Beginning Membership Units 2,940.9652 10,379.7640 14,474.3709 96,776.2471
Beginning Percent Ownership 1.9606% 6.9198% 9.6496% 64.5175%
12% Annual Preferred Return 648.7850 2,289.8044 3,193.0859 21,349.1052
25% to Commisso Members 8,272.6027
80% of remaining to Members 3,892.0653 13,736.5512 19,155.3428 128,073.4203
20% of remaining to Commisso 49,627.3973
-----------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------
Total After Revaluation 7,481.8155 26,406.1196 94,722.7996 246,198.7726
- -----------------------------------------------------------------------------------------------------------------------------
Capital Contributions on 11/03/99 - 256.2200 - 8,917.4640
-----------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------
Total After Capital Contributions 7,481.8155 26,662.3396 94,722.7996 255,116.2366
Ending Percent Ownership 1.6626% 5.9250% 21.0495% 56.6925%
- -----------------------------------------------------------------------------------------------------------------------------
<CAPTION>
Private Scott
CB Capital Market Fund BMO Financial Seaton
-------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Beginning Membership Units 11,365.0444 7,931.3262 5,682.5222 224.8800
Beginning Percent Ownership 7.5767% 5.2876% 3.7883% 0.1499%
12% Annual Preferred Return 2,507.1599 1,749.6723 1,253.5800 49.6091
25% to Commisso Members
80% of remaining to Members 15,040.4686 10,496.2954 7,520.2343 297.6056
20% of remaining to Commisso
-------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------
Total After Revaluation 28,912.6729 20,177.2939 14,456.3365 572.0947
- -----------------------------------------------------------------------------------------------------------------------------
Capital Contributions on 11/03/99 512.4400 507.4160 256.2200 25.1200
-------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------
Total After Capital Contributions 29,425.1129 20,684.7099 14,712.5565 597.2147
Ending Percent Ownership 6.5389% 4.5966% 3.2695% 0.1327%
- -----------------------------------------------------------------------------------------------------------------------------
<CAPTION>
Thomas
Keaveney Total
-----------------------------------
<S> <C> <C>
Beginning Membership Units 224.8800 150,000.0000
Beginning Percent Ownership 0.1499% 100.0000%
12% Annual Preferred Return 49.6091 33,090.4109
25% to Commisso Members 8,272.6027
80% of remaining to Members 297.6056 198,509.5891
20% of remaining to Commisso 49,627.3973
-----------------------------------
- ----------------------------------------------------------------------------------
Total After Revaluation 572.0947 439,500.0000
- ----------------------------------------------------------------------------------
Capital Contributions on 11/03/99 25.1200 10,500.0000
-----------------------------------
- ----------------------------------------------------------------------------------
Total After Capital Contributions 597.2147 450,000.0000
Ending Percent Ownership 0.1327% 100.0000%
- ----------------------------------------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
MEDIACOM LLC Schedule C
Capital Commitments
($000)
Existing
Unfunded Capital Total Unfunded Capital Calls for
Commitments New Capital Capital U.S. Cable Funding
Before U. S. Cable Commitments Commitments 1/15/98
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Chase Manhattan Capital, L.P. $0 $0 $0 $0
U.S. Investor, Inc. $2,550 $0 $2,550 $2,294
Morris Communications Corporation $12,750 $76,000 $88,750 $79,833
CB Capital Investors, L.P. $5,100 $0 $5,100 $4,588
Private Market Fund, L.P. $2,550 $2,500 $5,050 $4,543
BMO Financial, Inc. $2,550 $0 $2,550 $2,294
Scott W. Seaton $0 $250 $250 $225
Thomas W. Keaveney $0 $250 $250 $225
Commisso Members $0 $0 $0 $0
- --------------------------------------------------------------------------------------------------------------------------------
Total $25,500 $79,000 $104,500 $94,000
<CAPTION>
Unfunded Capital Capital Calls for Unfunded Capital New Acquisition
Commitments Triax Funding Commitments Funding (1)
After U.S. Cable 11/3/99 After Triax Jul-98
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Chase Manhattan Capital, L.P. $0 $0 $0 $0
U.S. Investor, Inc. $256 $256 $0 $830
Morris Communications Corporation $8,917 $8,917 $0 $28,876
CB Capital Investors, L.P. $512 $512 $0
Private Market Fund, L.P. $507 $507 $0 $1,643
BMO Financial, Inc. $256 $256 $0 $830
Scott W. Seaton $25 $25 $0
Thomas W. Keaveney $25 $25 $0 $81
Commisso Members $0 $0 $0
- ------------------------------------------------------------------------------------------------------------------------------
Total $10,500 $10,500 $0 $32,260
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
MEDIACOM LLC SCHEDULE D
IPO ILLUSTRATION
(in units)
Commisso Morris
Chase Capital U.S. Investor Investors Communications
------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Beginning Membership Units 2,940.9652 10,379.7640 14,474.3709 96,776.2471
Beginning Percent Ownership 1.9606% 6.9198% 9.6496% 64.5175%
12% Annual Preferred Return 648.7850 2,289.8044 3,193.0859 21,349.1052
25% to Commisso Members 8,272.6027
80% of remaining to Members 3,892.0653 13,736.5512 19,155.3428 128,073.4203
20% of remaining to Commisso 49,627.3973
------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------------
Total After Revaluation 7,481.8155 26,406.1196 94,722.7996 246,198.7726
- ---------------------------------------------------------------------------------------------------------------------------------
Equity Contributions on 10/31/99 - 256.2200 - 8,917.4640
------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------------
Total After Equity Contribution 7,481.8155 26,662.3396 94,722.7996 255,116.2366
Ending Percent Ownership 1.6626% 5.9250% 21.0495% 56.6925%
- ---------------------------------------------------------------------------------------------------------------------------------
$800 million Valuation per 8.8(d)
IPO Carried Interest Valauation 132,000.0000
80% Distribution to Members 2,899.6192 10,333.1379 36,710.3472 98,871.7148
20% Distribution to Members 43,600.0000
------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------------
Total 10,381.4346 36,995.4775 307,033.1468 353,987.9514
Ending Percent Ownership 1.2977% 4.6244% 38.3791% 44.2485%
- ---------------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------------
Calculations per 8.8(d) Totals Commisso
Prior Revaluation 450,000.0000 94,722.7996
Manager Units - -
-- -
Adjusted Revaluation 450,000.0000 94,722.7996 21.0495%
New Revaluation 800,000.0000
IPO Carried Interest Valuation 132,000.0000 132,000.0000
-------------
668,000.0000
Adjusted Revaluation 450,000.0000
------------
218,000.0000
Member Common Shares (80%) 174,400.0000 36,710.3472 21.0495%
Carry (20%) 43,600.0000 43,600.0000
------------ -----------
- 307,033.1468
94,722.80
450,000.0000 7,481.8155 26,662.3396 94,722.80 255,116.2366
1.6626% 5.9250% 21.0495% 56.6925%
------------------------------------------------------------------------------------
<CAPTION>
Private Scott
CB Capital Market Fund BMO Financial Seaton
--------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Beginning Membership Units 11,365.0444 7,931.3262 5,682.5222 224.8800
Beginning Percent Ownership 7.5767% 5.2876% 3.7883% 0.1499%
12% Annual Preferred Return 2,507.1599 1,749.6723 1,253.5800 49.6091
25% to Commisso Members
80% of remaining to Members 15,040.4686 10,496.2954 7,520.2343 297.6056
20% of remaining to Commisso
--------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
Total After Revaluation 28,912.6729 20,177.2939 14,456.3365 572.0947
- -----------------------------------------------------------------------------------------------------------------------------------
Equity Contributions on 10/31/99 512.4400 507.4160 256.2200 25.1200
--------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
Total After Equity Contribution 29,425.1129 20,684.7099 14,712.5565 597.2147
Ending Percent Ownership 6.5389% 4.5966% 3.2695% 0.1327%
- -----------------------------------------------------------------------------------------------------------------------------------
$800 million Valuation per 8.8(d)
IPO Carried Interest Valauation
80% Distribution to Members 11,403.8660 8,016.4742 5,701.9330 231.4539
20% Distribution to Members
--------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
Total 40,828.9789 28,701.1841 20,414.4895 828.6685
Ending Percent Ownership 5.1036% 3.5876% 2.5518% 0.1036%
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
Calculations per 8.8(d)
Prior Revaluation
Manager Units
Adjusted Revaluation
New Revaluation
IPO Carried Interest Valuation
Adjusted Revaluation
Member Common Shares (80%)
Carry (20%)
450,000.0000 29,425.1129 20,684.7099 14,712.5565 597.2147
6.5389% 4.5966% 3.2695% 0.1327%
-------------------------------------------------------------------------------------
<CAPTION>
Thomas
Keaveney Total
-----------------------------------
<S> <C> <C>
Beginning Membership Units 224.8800 150,000.0000
Beginning Percent Ownership 0.1499% 100.0000%
12% Annual Preferred Return 49.6091 33,090.4109
25% to Commisso Members 8,272.6027
80% of remaining to Members 297.6056 198,509.5891
20% of remaining to Commisso 49,627.3973
----------------------------------------
- -------------------------------------------------------------------------------------
Total After Revaluation 572.0947 439,500.0000
- -------------------------------------------------------------------------------------
Equity Contributions on 10/31/99 25.1200 10,500.0000
----------------------------------------
- -------------------------------------------------------------------------------------
Total After Equity Contribution 597.2147 450,000.0000
Ending Percent Ownership 0.1327% 100.0000%
- -------------------------------------------------------------------------------------
$800 million Valuation per 8.8(d)
IPO Carried Interest Valauation 132,000.0000
-
80% Distribution to Members 231.4539 174,400.0000
-
20% Distribution to Members 43,600.0000
----------------------------------------
- -------------------------------------------------------------------------------------
Total 828.6685 800,000.0000
Ending Percent Ownership 0.1036% 100.0000%
- -------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------
Calculations per 8.8(d)
Prior Revaluation
Manager Units
Adjusted Revaluation
New Revaluation
IPO Carried Interest Valuation
Adjusted Revaluation
Member Common Shares (80%)
Carry (20%)
450,000.0000 597.2147 450,000.0000
0.1327% 100.0000%
----------------------------------------
</TABLE>
<PAGE>
EXHIBIT 3.4
FIFTH AMENDED AND RESTATED
OPERATING AGREEMENT
OF
MEDIACOM LLC
EFFECTIVE AS OF FEBRUARY 9, 2000
<PAGE>
FIFTH AMENDED AND RESTATED
OPERATING AGREEMENT
OF
MEDIACOM LLC
THIS FIFTH AMENDED AND RESTATED OPERATING AGREEMENT (this "Agreement"),
effective as of February 9, 2000 (the "Effective Date"), is made by the owner of
100% of the Membership Interests of Mediacom LLC, a New York limited liability
company (the "Company").
RECITALS
--------
WHEREAS, the Company was established as a limited liability company
pursuant to an operating agreement dated as of July 17, 1995 (the "Original
Operating Agreement"). Thereafter, the Original Operating Agreement was: amended
and restated in its entirety as the Amended and Restated Operating Agreement of
Mediacom LLC dated as of March 12, 1996 (the "Initial Amended and Restated
Operating Agreement"); further amended and restated in its entirety as of March
31, 1997, and thereafter amended as of June 16, 1997 (the "Second Amended and
Restated Operating Agreement"); further amended and restated in its entirety as
of January 23, 1998 (the "Third Amended and Restated Operating Agreement"); and
further amended and restated in its entirety as of November 19, 1999 (the
"Fourth Amended and Restated Operating Agreement"); and
WHEREAS, following the Fourth Amended and Restated Operating Agreement,
certain transactions (the "Mediacom IPO Transactions") were entered into
pursuant to which: (i) the Company caused to be formed Mediacom Communications
Corporation, a Delaware corporation (the "Corporation"); (ii) the Corporation
engaged in an initial public offering of its Class A common stock ("Class A
Shares"); and (iii) contemporaneously therewith, the Corporation became the sole
Member of the Company by acquiring all of the Membership Interests of the
Company from each of the Company's Members in exchange for Class A Shares,
shares of Class B common stock of the Corporation ("Class B Shares") and
warrants to acquire Class B Shares ("IPO Warrants"); and
WHEREAS, as a result of the Mediacom IPO Transactions, the sole member of
the Company desires to amend and restate in its entirety the Fourth Amended and
Restated Operating Agreement.
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, it is hereby agreed as follows:
-1-
<PAGE>
ARTICLE I
DEFINITIONS; DEFAULT RULE
-------------------------
SECTION 1.1 DEFINED TERMS. The following terms shall have the meanings set
forth below when used in this Agreement with initial capital letters:
"ACT" or "THE NEW YORK LIMITED LIABILITY COMPANY ACT" shall mean the New
York Limited Liability Company Act, as the same may be amended from time to
time.
"AFFILIATE" shall mean, with respect to any Person, any other Person that
controls, is controlled by or is under common control with such Person.
"AGREEMENT" shall mean this Agreement as it may be amended in writing from
time to time; and the terms "HEREOF," "HERETO," "HEREBY" and "HEREUNDER," when
used with reference to this Agreement, refer to this Agreement as a whole,
unless the context otherwise requires,
"AVAILABLE CASH" shall mean the cash funds of the Company on hand from time
to time (other than cash funds obtained as Capital Contributions or cash funds
obtained from loans to the Company) after (i) payment of all operating expenses
of the Company as of such time, (ii) provision for payment of all outstanding
and unpaid current obligations of the Company as of such time, (iii) provision
for a reasonable working capital reserve (including payment of anticipated
capital expenditures) and (iv) provision for a reasonable reserve for claims
against and debts and other obligations of the Company, the amounts of all of
which shall be determined by the Managing Member.
"BUSINESS" shall mean the activities of acquiring, owning, selling,
investing in, developing, designing, constructing, managing, operating,
servicing, administering and/or maintaining, directly or indirectly, by or
through one or more Subsidiaries, one or more CATV Systems and/or related
businesses ancillary thereto (including, but not limited to, high-speed data
service, Internet access, telephony services, and other telecommunications and
telephony-related investments or businesses, and video wireless services and
wireless communication services and other wireless-related investments or
business) and/or one or more other businesses of the type and character now or
hereafter conducted or engaged in by cable television operators generally.
"CAPITAL ACCOUNT" shall mean the individual accounts established and
maintained for Members pursuant to Section 3.3 hereof.
"CAPITAL CONTRIBUTION" shall mean the total value of cash and property (net
of liabilities assumed by the Company or to which the property is subject)
contributed to the Company by or on behalf of any Member.
"CATV SYSTEM" shall mean any cable distribution system that receives
broadcast signals by antennae, microwave transmission, satellite transmission or
other device and amplifies and distributes such signals via cable.
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"CERTIFICATE OF FORMATION" shall mean the Certificate of Formation of the
Company filed with the Secretary of State, as the same may be amended from time
to time.
"CLAIMS" shall have the meaning set forth in Section 8.2 of this Agreement.
"CODE" shall mean the Internal Revenue Code of 1986, as amended. All
references herein to sections of the Code shall include any corresponding
provision or provisions of succeeding law.
"COMPANY" shall mean "Mediacom LLC," a New York limited liability company.
"CONSENT" shall mean the consent, approval, ratification or adoption by a
Person of any action, determination or decision. The Consent of the Members
shall mean and require the Consent of Members owning all of the Membership
Interests.
"CONTRACT" shall mean any contract, lease, license, easement, servitude,
right-of-way, mortgage, security interest, bond, note or other agreement or
instrument which creates legally enforceable rights or obligations.
"CONTROL" shall mean the possession, directly or indirectly, of the power
to direct or cause the direction of the management and policies of a Person,
whether through the ownership of voting securities or voting interests, by
contract or otherwise.
"DEBT COVENANT" shall mean any provision of any Contract to which the
Company is a party, or by which its assets are bound, which imposes one or more
restrictions on the financial activities or transactions of the Company,
including, but not limited to, the disbursement or other transfer of money or
property to Members.
"DEFAULT RULE" shall mean a rule stated in the Act that (a) structures,
defines, or regulates the finances, governance, operations, or other aspects of
a limited liability company organized under the Act and (b) applies except to
the extent it is negated or modified through the provisions of a limited
liability company's certificate of formation or operating agreement.
"DISSOLUTION EVENT" shall have the meaning set forth in section 7.1 hereof.
"EFFECTIVE DATE" shall mean February 9, 2000.
"ENTITY" shall mean any association, corporation, general partnership,
limited partnership, limited liability partnership, limited liability company,
joint stock association, joint venture, firm, trust, employee benefit plan,
syndicate, business trust or cooperative, or any other enterprise of any nature,
foreign or domestic, through which associates join together for the conduct of
business or investment.
"INDEMNIFIED PERSONS" shall mean the Members, the Managing Member and the
Tax Matters Partner, and their respective officers, directors, employees,
agents, stockholders,
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members and Affiliates, and any person who serves at the request of the Managing
Member on behalf of the Company as a partner, member, officer, director,
employee or agent of any other Person; PROVIDED that for purposes of this
definition, an "agent" who or which is an independent agent shall be an
Indemnified Person only to the extent that the Company or the Managing Member
has a legal or contractual obligation to indemnify such agent, it being
understood that this Agreement is not intended to create any such obligation,
and that any indemnification of an independent agent shall be subject to and
limited by the terms of such legal or contractual obligation.
"LIQUIDATOR" shall have the meaning set forth in Section 7.4 hereof.
"MANAGING MEMBER" shall mean the Person who, with respect to the affairs
and activities of the Company, shall have and possess, except as otherwise
expressly provided in this Agreement, all rights, powers, obligations and
authority of a managing member of a limited liability company under the Act,
subject to any restrictions and limitations imposed thereon by the Act or this
Agreement. Without limiting the generality of the foregoing, the Managing Member
shall have all rights, powers and authority to act for and legally bind the
Company as provided by Article IV of this Agreement and under applicable
provisions of the Act. The sole Managing Member shall be Mediacom Communications
Corporation.
"MEDIACOM COMMUNICATIONS CORPORATION" shall mean Mediacom Communications
Corporation, a Delaware corporation.
"MEDIACOM LLC" shall mean Mediacom LLC, a New York limited liability
company.
"MEMBER" means any individual or Entity owning and holding a Membership
Interest. All owners and holders of Membership Interests are collectively
referred to as "MEMBERS."
"MEMBERSHIP INTEREST" shall mean the entire ownership interest of a Member
in the Company at any particular time, expressed as a percentage, including the
right of such Member to any and all benefits to which a Member may be entitled
as provided in this Agreement and under the Act, together with the obligations
of such Member to comply with all of the terms and provisions of this Agreement
and the Act.
"NET PROFITS" or "NET LOSSES" means the income or loss of the Company for
"book" or "capital account" purposes under Treasury Regulations Section
1.704-1(b)(2)(iv).
"NON-MANAGING MEMBER" shall mean any Member other than the Managing Member.
"PERSON" shall mean any individual or Entity.
"PRINCIPAL OFFICE" shall mean the principal place of business of the
Company as may be established pursuant to Section 2.5 hereof.
"SECRETARY OF STATE" shall mean the Secretary of State of the State of New
York.
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"SUBSIDIARY" shall mean any Entity Controlled by the Company.
"TAXABLE INCOME" shall mean, with respect to each fiscal year of the
Company, the sum of (i) the amount by which the ordinary income of the Company
exceeds its ordinary loss, and (ii) the amount by which the capital gain of the
Company exceeds the sum of (A) its capital loss and (B) the excess of its
ordinary loss over its ordinary income.
"TRANSFER" or "TRANSFERRED" shall mean to give, sell, assign, pledge,
hypothecate, devise, bequeath, or otherwise dispose of, encumber, or transfer,
or permit to be disposed of, encumbered, or transferred.
"TREASURY REGULATIONS" shall mean the regulations promulgated by the
Internal Revenue Service under the Code, as the same from time to time may be
amended.
SECTION 1.2 RELATIONSHIP OF AGREEMENT TO DEFAULT RULES. Regardless whether
this Agreement specifically refers to a particular Default Rule: (a) if any
provision of this Agreement conflicts with a Default Rule, the provision of this
Agreement controls and the Default Rule is modified or negated accordingly; and
(b) if it is necessary to construe a Default Rule as modified or negated in
order to effectuate any provision of this Agreement, the Default Rule shall be
modified or negated accordingly.
SECTION 1.3 RELATIONSHIP OF AGREEMENT OF CERTIFICATE OF FORMATION. If a
provision of this Agreement differs from a provision of the Certificate of
Formation, this Agreement shall govern to the extent allowed by law.
ARTICLE II
ORGANIZATION
------------
SECTION 2.1 FORMATION. One or more Persons has acted as an organizer to
form a limited liability company under the Act by filing with the Secretary of
State a Certificate of Formation for the Company. The filing of the Certificate
of Formation of the Company and the terms thereof are hereby ratified, adopted,
approved and Consented to by the Members.
SECTION 2.2 NAME. The Company's business, activities and affairs shall be
conducted and administered under the name of the Company as set forth in the
definition of the Company in Section 1.1 until such time as the Managing Member
shall hereafter determine a different name and file an amendment to the
Certificate of Formation in accordance with the Act designating such different
name as the name of the Company.
SECTION 2.3 PURPOSE. The Company has been formed for any lawful purpose or
purposes under the Act. The initial purpose of the Company shall be to engage in
and conduct the Business and to do all things incidental thereto. The Company
shall possess and shall be empowered to do all lawful acts and things that the
Managing Member may deem necessary,
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advisable, convenient, incidental to or otherwise proper and appropriate for the
furtherance and accomplishment of the purposes of the Company.
SECTION 2.4 TERM. The term of the Company commenced on the date of the
filing of the Certificate of Formation with the Secretary of State and shall
continue until the expiration date, if any, set forth in such Certificate unless
sooner terminated in accordance with the provisions of this Agreement or by
operation of law.
SECTION 2.5 PRINCIPAL OFFICE. The principal office of the Company shall be
100 Crystal Run Road, Middletown, New York 10941. The Company may establish such
other place(s) of business as the Managing Member may, from time to time, deem
necessary, convenient, advisable or otherwise appropriate.
SECTION 2.5 REGISTERED AGENT AND REGISTERED OFFICE. The registered agent
and registered office of the Company shall be as designated in the Certificate
of Formation. The registered office and registered agent may be changed from
time to time by the Managing Member filing the address of the new registered
office and/or the name of the new registered agent with the Secretary of State
as provided in the Act.
SECTION 2.6 FOREIGN QUALIFICATION. Prior to the Company conducting business
in any jurisdiction other than the State of New York, the Managing Member shall
cause the Company to comply, to the extent procedures are available, with all
requirements necessary to qualify the Company as a foreign limited liability
company in such jurisdiction. Each Member shall execute, acknowledge, swear to
and deliver all certificates and other instruments conforming to this Agreement
that are necessary or appropriate to qualify, or, as appropriate, to continue or
terminate such qualification of the Company as a foreign limited liability
company in all such jurisdictions in which the Company may conduct business.
ARTICLE III
MEMBERS
-------
SECTION 3.1 MEMBERSHIP INTERESTS. As of the Effective Date, the Membership
Interests in the Company are owned and held as follows:
<TABLE>
<CAPTION>
Membership Interest
Member Membership Units Percentage Ownership
------ ---------------- --------------------
<S> <C> <C>
Mediacom Communications
Corporation 1,225,000 100%
</TABLE>
SECTION 3.2 CAPITAL CONTRIBUTIONS. No Member shall be obligated to make any
contributions to the capital of the Company.
SECTION 3.3 CAPITAL AND CAPITAL ACCOUNTS.
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(a) An individual capital account (the "Capital Account") shall be
established and maintained on behalf of each Member in accordance with federal
income tax accounting principles and Treasury Regulation Section 1.704-1(b).
(b) Except as may be determined by the Managing Member and approved by
the Consent of the Members, no Member shall be required to make any Capital
Contributions to the Company. The Capital Account of any Member who makes a
Capital Contribution shall be credited for the amount of such Capital
Contribution, but no such Member shall receive an increased Membership Interest
in the Company for making any Capital Contribution unless Consented to by the
Managing Member.
(c) No interest shall be paid on any Capital Contribution or on a
Member's balance in its Capital Account.
(d) Loans or services by any Member to the Company shall not be
considered contributions to the capital of the Company.
(e) No Member shall have the right to withdraw its Capital
Contribution or to demand and receive property of the Company or any
distribution in return for its Capital Contribution, except as may be
specifically provided in this Agreement or required by law.
(f) Except as may be required by the Act, no Member shall have any
liability or obligation to the Company or to another Member to restore a
negative or deficit balance in such Member's Capital Account.
(g) The Company shall increase or decrease the Capital Accounts of all
Members to reflect a revaluation of Company assets in accordance with, and upon
the happening of such events as described in, Treasury Regulations Section
1.704-1(b)(2)(iv)(f).
SECTION 3.4 LIMITATION ON LIABILITY. No Member shall be liable under a
judgment, decree, or order of a court, or in any other manner, for a debt,
obligation or liability of the Company, except as provided by law. No Member
shall make or be required to make a loan of funds to the Company, except that a
Member may make a loan to the Company with the written Consent of, and on such
terms as are determined by, the Managing Member.
SECTION 3.5 NO INDIVIDUAL AUTHORITY. No Member shall have any authority to
act for, or to undertake or assume any obligation, debt, duty or responsibility
on behalf of, any other Member or the Company.
SECTION 3.6 NO MEMBER RESPONSIBLE FOR OTHER MEMBER'S COMMITMENT. In the
event any Member has incurred any indebtedness or obligation prior to the date
of formation of the Company that relates to or otherwise affects the Company,
neither the Company nor any other Member shall have any liability or
responsibility for or with respect to such indebtedness or obligation unless
such indebtedness or obligation is expressly assumed in writing by the Company
and Consented to by the Managing Member. Furthermore, neither the Company nor
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any Member shall be responsible or liable for any indebtedness or obligation
that is hereafter incurred by any other Member except as expressly provided in
this Agreement. In the event that a Member, whether prior to or after the
effective date of this Agreement, incurs (or has incurred) any debt or
obligation for which neither the Company nor any other Member has any
responsibility or liability, the liable Member shall indemnify and hold harmless
the Company and the other Members from and against any liability or obligation
they may incur in respect thereof.
SECTION 3.7 TRANSFER OF MEMBERSHIP INTERESTS. No Member may Transfer all or
any part of its Membership Interest except upon the Consent of the Managing
Member.
ARTICLE IV
MANAGEMENT
----------
SECTION 4.1 MANAGEMENT. The overall management, operation and control of
the business, activities and affairs of the Company shall be vested exclusively
in the Managing Member, Mediacom Communications Corporation. In the event the
Managing Member is unable or unwilling to serve in such capacity, a replacement
and successor shall be chosen and appointed by Consent of the Members.
SECTION 4.2 POWERS. The Managing Member shall have all of the rights,
powers and authority of a managing member of a limited liability company under
the Act and otherwise as provided by law. Except as otherwise expressly provided
in this Agreement, the Managing Member is hereby vested with the full, exclusive
and complete right, power, authority and discretion to manage, operate and
control the activities and affairs of the Company and to make all decisions
affecting the Company, as deemed necessary, advisable, convenient or otherwise
appropriate by the Managing Member to carry on the Business and purposes of the
Company. Without limiting the generality of the foregoing, the Members hereby
expressly agree and Consent that the Managing Member may, on behalf of the
Company, at any time, and without further notice to or Consent from any
Non-Managing Member (except to the extent otherwise expressly provided in this
Agreement), do or cause the company to do each of the following:
(a) own, sell, assign, mortgage, license or lease, any real or
personal property, tangible or intangible;
(b) acquire by purchase, license, lease, or otherwise, any real or
personal property, tangible or intangible;
(c) sell, trade, exchange or otherwise dispose of Company assets in
the ordinary course of the Company's business;
(d) supervise the management of the Company and provide or arrange for
managerial services or assistance to be provided to the Company;
(e) appoint, employ and dismiss from employment any and all officers,
employees, attorneys, accountants, consultants and other agents of the Company;
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(f) incur expenditures for, and pay all expenses, debts and
obligations of, the Company;
(g) open, maintain and close bank accounts of the Company and draw
checks or other orders for the payment of money thereon;
(h) borrow money, and extend or obtain credit, for and on behalf of
the Company;
(i) except as otherwise expressly provided in this Agreement, enter
into, execute, amend, supplement, acknowledge and deliver any and all Contracts
or other instruments or documents as that the Managing Member shall determine to
be necessary, advisable, convenient or otherwise appropriate in furtherance of
the Business or purposes of the Company;
(j) purchase at the expense of the Company liability and other
insurance to protect the Company's properties, business and employees and to
protect the Managing Member, Members, and any Affiliate, officer, director or
employee of any of the foregoing;
(k) sue, prosecute, settle or compromise all claims against third
parties and compromise, settle or accept judgment in respect of claims against
the Company and execute all documents and make all representations, admissions
and waivers in connection therewith;
(l) act as the Tax Matters Partner of the Company and exercise any
authority permitted the Tax Matters Partner under the Code and Treasury
Regulations, and take whatever steps such Tax Matters Partner, in its reasonable
discretion, deems necessary or desirable to perfect such designation, including
filing any forms and documents with the Internal Revenue Service and taking such
other action as may from time to time be required under Treasury Regulations;
(m) execute any and all other instruments and documents which may be
necessary or, in the opinion of the Managing Member, desirable or convenient to
carry out the intent and purpose of this Agreement, including, but not limited
to, documents whose operation and effect extend beyond the term of the Company;
(n) form one or more Subsidiaries of the Company to acquire
properties, operate and conduct all or any portion of the Business and engage in
any and all activities authorized hereunder; and
(o) take any other lawful action that the Managing Member, in its sole
discretion, considers necessary, convenient or advisable in connection with the
Business, purposes and activities of the Company.
SECTION 4.3 COMPENSATION. The Managing Member shall serve in such capacity
without compensation; it being understood, however, that the Managing Member
shall be entitled
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to reimbursement from the Company for all costs and expenses incurred by the
Managing Member in performing its duties hereunder.
SECTION 4.4 RELIANCE BY THIRD PARTIES. Third parties dealing with the
Company may rely conclusively upon any certificate of the Managing Member to the
effect that it is acting on behalf of the Company. The signature of the Managing
Member shall be sufficient to bind the Company in every manner to any and all
Contracts, instruments and other documents drawn or entered into in connection
with the Business or purposes of the Company.
SECTION 4.5 DELEGATION OF DUTIES. The Managing Member may delegate to any
Person any of the duties, powers and authority vested in it hereunder on such
terms and conditions as the Managing Member may consider appropriate. Any Person
so appointed shall be subject to removal at any time at the discretion of the
Managing Member, and shall report to and consult with the Managing Member at
such times and in such manner as the Managing Member may direct.
SECTION 4.6 EXISTING MANAGEMENT AGREEMENTS. Any and all Contracts (the
"Prior Management Agreements") between Mediacom Management Corporation, a
Delaware corporation, and the Company or any of its Subsidiaries providing for
Mediacom Management Corporation to render managerial services to the Company
and/or any of its Subsidiaries are terminated and cancelled as of the Effecti"e
Date.
SECTION 4.6 CONTRACTS WITH AFFILIATES. The Managing Member is authorized to
cause the Company and any of its Subsidiaries to enter into Contracts with
Affiliates of the Company or the Managing Member in respect of property,
services, or credit in the ordinary course of business, but only if the terms
thereof are economically comparable to, and no less advantageous to the Company
than, terms available from a Person not an Affiliate with respect to a
comparable transaction. Without limiting the generality of the foregoing, the
Managing Member is authorized to cause the Company and any of its Subsidiaries
to enter into one or more Contracts with the Managing Member pursuant to which
the Managing Member will render management services to the Company or any of its
Subsidiaries, as the case may be, upon terms that are comparable to the terms
contained in the Prior Management Agreements between Mediacom Management
Corporation and Affiliates of the Company concerning such services.
ARTICLE V
ALLOCATIONS AND DISTRIBUTIONS
-----------------------------
SECTION 5.1 ALLOCATION OF NET PROFITS OR NET LOSSES.
(a) Except as otherwise expressly provided in this Article V, and subject
to the provisions of Section 704(c) of the Code, Net Profits or Net Losses of
the Company shall be allocated to the Members pro rata in accordance with their
respective Membership Interests.
(b) No allocation of Net Losses or other item of loss or deduction shall be
made to a Member if it is determined that such allocation will cause the
Member's Capital Account to have
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a deficit balance in excess of any amount such Member is obligated to restore
within the meaning of Treasury Regulations Sections 1.704-l(b) and 1.704-2,
after taking into account the adjustments described in Treasury Regulations
Sections 1.704-1(b)(2)(ii)(d)(4), (5) and (6).
SECTION 5.2 DISTRIBUTIONS. Subject to any Debt Covenant(s) to which the
Company at the time may be bound, the Company shall distribute to all of the
Members, in proportion to their respective Membership Interests, all or any
portion of its Available Cash at such times and in such amounts as shall be
determined by the Managing Member.
ARTICLE VI
ACCOUNTING AND RECORDS
----------------------
SECTION 6.1 RECORDS AND ACCOUNTING; FISCAL YEAR. The books and records of
the Company shall be kept, and the financial position and the results of its
operations recorded, in accordance with Generally Accepted Accounting
Principles, consistently applied. The books and records of the Company shall
reflect all Company transactions and shall be appropriate and adequate for the
Company's business. The fiscal year of the Company for financial reporting and
for federal income tax purposes shall be the calendar year.
SECTION 6.2 ACCESS TO RECORDS. All books and records of the Company shall
be maintained at the Principal Office of the Company and each Member, and its
duly authorized representative, shall have access to such records at such office
and the right to inspect and copy them at reasonable times.
SECTION 6.3 ACCOUNTING DECISIONS. Except as otherwise specifically set
forth herein, all decisions concerning accounting matters relating to the
Company shall be made by the Managing Member. The Managing Member may rely upon
the advice of the Company's accountants in making such decisions.
SECTION 6.4 TAX DECISIONS. Except as otherwise specifically set forth
herein, all decisions concerning tax elections and other tax matters relating to
the Company shall be made by the Managing Member. The Managing Member may rely
upon the advice of the Company's accountants and other tax advisors in making
such decisions.
ARTICLE VII
DISSOLUTION
-----------
SECTION 7.1 DISSOLUTION. The Company shall be dissolved upon the happening
of any of the following events (each, a "Dissolution Event"):
(a) the expiration of the period fixed for the duration of the Company
in its Certificate of Formation;
(b) the Consent of the Members;
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(c) the occurrence of an event described in the Act regarding
bankruptcy or insolvency of any Member; or
(d) the entry of a decree of judicial dissolution under the Act.
SECTION 7.2 VOLUNTARY WITHDRAWAL. Except as expressly permitted in this
Agreement, no Member shall voluntarily withdraw or take any other voluntary
action which, directly or indirectly, would cause a Dissolution Event.
SECTION 7.3 EFFECT OF DISSOLUTION. Except as permitted by the Act, upon
dissolution the Company shall cease to carry on its business, shall wind-up its
affairs and shall terminate its existence as provided in this Agreement and the
Act.
SECTION 7.4 WINDING UP; LIQUIDATION. Upon dissolution, an accounting shall
be made by the Company's independent accountants of the accounts of the Company
and of the Company's assets, liabilities and operations, from the date of the
previous accounting until the date of the Dissolution Event, and the Managing
Member shall appoint a liquidator (the "Liquidator") to liquidate and wind up
the affairs of the Company. The Liquidator shall sell or otherwise liquidate all
of the Company's assets as promptly as practicable and allocate any profit or
loss resulting from sales of Company assets to the Members in accordance with
this Agreement.
SECTION 7.5 DISTRIBUTION OF ASSETS. The Liquidator shall distribute all
proceeds from liquidation in the following order of priority:
(a) first, to the payment of all expenses of liquidation and all
debts and liabilities of the Company (including liabilities to Members who are
creditors of the Company to the extent permitted by law);
(b) second, to the setting up of such reserves as the Liquidator
may deem reasonably necessary for any contingent liabilities of the Company; and
(c) third, PRO RATA to the Members in accordance with the
positive balances in their Capital Accounts (as determined after taking into
account adjustments required under Treasury Regulation Section 1.704-1
(b)(2)(ii)(b)(2)).
SECTION 7.6 DEFICIT CAPITAL ACCOUNTS. Notwithstanding anything to the
contrary in this Agreement, upon a liquidation within the meaning of Treasury
Regulation Section 1.704-1(b)(2)(ii)(g), if any Member has a deficit Capital
Account (after giving effect to all contributions, distributions, allocations
and other Capital Account adjustments for all Fiscal Years, including the year
in which the liquidation occurs), such Member shall have no obligation to make
any contribution to the capital of the Company, and the negative balance of such
Member's Capital Account shall not be considered a debt owed by such Member to
the Company or to any other Person for any purpose whatsoever.
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SECTION 7.7 TERMINATION. Upon completion of the winding up, liquidation and
distribution of assets, the Company shall be deemed terminated and the
Liquidator shall file a Certificate of Cancellation with the Secretary of State
and take such other actions as may be necessary to terminate the Company.
ARTICLE VIII
INDEMNIFICATION
---------------
SECTION 8.1 EXCULPATORY PROVISIONS. No Indemnified Person shall be liable,
directly or indirectly, to the Company or to any other Member for any act or
omission in relation to the Company or this Agreement taken or omitted by such
Indemnified Person in good faith, PROVIDED that such act or omission does not
constitute gross negligence, fraud or willful violation of the law or this
Agreement.
SECTION 8.2 INDEMNIFICATION OF MEMBERS. The Company shall, to the fullest
extent permitted by the Act, indemnify and hold harmless each Indemnified Person
against all claims, liabilities and expenses of whatsoever nature ("CLAIMS")
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 law or this Agreement or with respect to any matter as to which
such Indemnified Person shall have been adjudicated not to have acted in good
faith.
SECTION 8.3 ADVANCE OF EXPENSES. Expenses incurred by an Indemnified Person
in defense or settlement of any Claim that may be subject to a right of
indemnification hereunder may be advanced by the Company prior to the final
disposition thereof upon receipt of an undertaking by or on behalf of the
Indemnified Person to repay such amount if it shall ultimately be determined
that the Indemnified Person is not entitled to be indemnified by the Company.
SECTION 8.4 CONTROL OF CLAIM. The Company shall have the right to select
counsel (provided such counsel is reasonably satisfactory to the Indemnified
Person) and to control the defense of any action giving rise to a Claim,
PROVIDED that an Indemnified Person may nevertheless employ counsel to represent
and defend it, but the Company will not be required to pay the fees and
disbursements of more than one counsel in any jurisdiction in any proceeding
(unless by reason of potential conflicts of interest, representation by more
than one counsel is necessary). The right of the Company to control the defense
of any action shall not include the right to enter into a settlement with
respect to such action, unless such settlement is for money damages only (and
the Company first posts a bond or other security satisfactory to the Indemnified
Person sufficient to cover the full amount of the proposed settlement).
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SECTION 8.5 NON-EXCLUSIVITY. The right of any Indemnified Person to the
indemnification provided herein shall be cumulative of, and in addition to, any
and all rights to which such Indemnified Person may otherwise be entitled by
contract or as a matter of law or equity and shall extend to such Indemnified
Person's successors, assigns and legal representatives.
SECTION 8.6 SATISFACTION FROM COMPANY ASSETS. All judgments against the
Company or an Indemnified Person, in respect of which such Indemnified Person is
entitled to indemnification, shall first be satisfied from Company assets before
the Indemnified Person is responsible therefor.
SECTION 8.7 NOTICES OF CLAIMS. Promptly after receipt by an Indemnified
Person of notice of the commencement of any action or proceeding or threatened
action or proceeding involving a Claim, such Indemnified Person shall, if a
claim for indemnification in respect thereof is to be made against the Company,
give written notice to the Company and each other Member of the commencement of
such action, PROVIDED that the failure of any Indemnified Person to give notice
as provided herein shall not relieve the Company of its obligations under this
Article except to the extent that the Company is actually prejudiced by such
failure to give notice. Each such Indemnified Person shall keep the Company and
each other Member apprised of the progress of any such proceeding.
ARTICLE IX
MISCELLANEOUS
-------------
SECTION 9.1 NOTICES. Any notice to be given or to be served upon the
Company or any Member in connection with this Agreement must be in writing and
will be deemed to have been given and received when delivered to the Principal
Office, in the case of notice to the Company, or to the last known address of
the Member as reflected in the records of the Company. Any Member or the Company
may, at any time by giving five (5) days' prior written notice to the other
Members and the Company, designate any other address in substitution of the
foregoing address to which such notice will be given.
SECTION 9.2 COMPLETE AGREEMENT. This Agreement, the Certificate of
Formation and the Act constitute the complete and exclusive statement of
agreement among the Members with respect to the subject matter hereof. This
Agreement and the Certificate of Formation supersede any and all prior written
and oral statements, agreements and understandings between the Members
concerning the subject matter of this agreement, including, without limitation,
all of the terms contained in the Fourth Amended and Restated Operating
Agreement, and no term, statement, agreement or understanding not contained in
this Agreement shall be binding on any Member or the Company or have any force
or effect whatsoever.
SECTION 9.3 AMENDMENTS. This Agreement may be amended only by written
Consent of the Members.
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SECTION 9.4 BINDING EFFECT. This Agreement will be binding upon and inure
to the benefit of the Members and the Company, and their respective successors
and assigns.
SECTION 9.5 NO THIRD PARTY BENEFICIARY. This Agreement is made solely and
specifically among and for the benefit of the Members and the Managing Member
and their respective successors and assigns, and no other person will have any
right, interest, or claim hereunder or be entitled to any benefits under or on
account of this Agreement as a third party beneficiary or otherwise.
SECTION 9.6 SEVERABILITY. If any provision of this Agreement is held to be
illegal, invalid, or unenforceable under the present or future laws effective
during the term of this Agreement, such provision shall be fully severable, this
Agreement will be construed and enforced as if such illegal, invalid, or
unenforceable provision had never comprised a part of this Agreement, and the
remaining provisions of this Agreement shall remain in full force and effect and
will not be affected by the illegal, invalid, or unenforceable provision or by
its severance from this Agreement.
SECTION 9.7 MULTIPLE COUNTERPARTS. This Agreement may be executed in
several counterparts, each of which will be deemed an original but all of which
will constitute one and the same instrument.
SECTION 9.8 ADDITIONAL DOCUMENTS AND ACTS. Each Member agrees to execute
and deliver such additional documents and instruments and to perform such
additional acts as may be necessary or appropriate to effectuate, carry out and
perform all of the terms, provisions. and conditions of this Agreement and the
transactions contemplated hereby.
SECTION 9.9 HEADINGS. All headings herein are inserted only for convenience
and ease of reference and are not to be considered in the construction or
interpretation of any provision of this Agreement.
SECTION 9.10 GOVERNING LAW. This Agreement and the rights and obligations
of the parties hereunder shall be governed by, interpreted, and enforced in
accordance with the laws of the State of New York without giving effect to
principles of conflicts of laws.
IN WITNESS WHEREOF, the sole Member and Manager Member of Mediacom LLC has
execute this Agreement effective as of the date set forth above.
SOLE MEMBER AND MANAGING MEMBER
MEDIACOM COMMUNICATIONS CORPORATION
(a Delaware corporation)
-15-
<PAGE>
By: /s/_______________________________
Name: Rocco B. Commisso
Title: Chairman and Chief Executive Officer
-16-
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<NAME> MEDIACOM LLC
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<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
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0
0
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