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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A-1
Annual Report Pursuant to Section 13 or 15 (d) of the
Securities Exchange Act of 1934
For the fiscal year ended December 31, 1998
Commission File Numbers: 333-57285-01
333-57285
Mediacom LLC
Mediacom Capital Corporation*
(Exact names of Registrants as specified in their charters)
New York 06-1433421
New York 06-1513997
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Numbers)
100 Crystal Run Road
Middletown, New York 10941
(Address of principal executive offices)
914-695-2600
(Registrants' telephone number including area code)
Securities registered pursuant to Section 12(b) of the Exchange Act: None
Securities registered pursuant to Section 12(g) of the Exchange Act: None
Indicate by check mark whether the Registrants (1) have filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrants were required to file such reports), and (2) have been subject to
such filing requirements for the past 90 days:
Yes X No
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrants' knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K: Not Applicable
State the aggregate market value of the common equity held by non-affiliates
of the Registrants: Not Applicable
Indicate the number of shares outstanding of the Registrants' common stock:
Not Applicable
*Mediacom Capital Corporation meets the conditions set forth in General
Instruction I (1) (a) and (b) of Form 10-K and is therefore filing this form
with the reduced disclosure format.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Introduction
Mediacom was founded in July 1995 principally to acquire, operate and
develop cable television systems in selected non-metropolitan markets of the
United States. The Company's business strategy is to: (i) acquire
underperforming and undervalued cable television systems primarily in non-
metropolitan markets, as well as related telecommunications businesses; (ii)
invest in the development of a state-of-the-art technological platform for
delivery of broadband video and other services to its customers; (iii) provide
superior customer service; and (iv) deploy a flexible financing strategy to
complement the Company's growth objectives and operating plans. The Company
commenced operations in March 1996 with the acquisition of its first cable
television system. As of December 31, 1998, the Company had completed nine
acquisitions of cable television systems that on such date passed approximately
520,000 homes and served approximately 354,000 basic subscribers. All
acquisitions have been accounted for under the purchase method of accounting
and, therefore, the Company's historical results of operations include the
results of operations for each acquired system subsequent to its respective
acquisition date.
General
The Company's revenues are primarily attributable to monthly
subscription fees charged to basic subscribers for the Company's basic and
premium cable television programming services. Basic revenues consist of monthly
subscription fees for all services (other than premium programming) as well as
monthly charges for customer equipment rental and installation fees. Premium
revenues consist of monthly subscription fees for programming provided in
packages on a per channel basis. Other revenues are derived from pay-per-view
charges, late payment fees, advertising revenues and commissions related to the
sale of goods by home shopping services. The Company generated significant
increases in revenues for each of the past two years and for the period ended
December 31, 1996, substantially due to acquisitions. The following table sets
forth for the periods indicated the percentage of the Company's total revenues
attributable to the sources indicated:
1998 1997 1996
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Basic revenues 80.0% 81.0% 80.0%
Premium revenues 15.0% 9.0% 8.0%
Other revenues 5.0% 10.0% 12.0%
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100.0% 100.0% 100.0%
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The Company's operating expenses consist of service costs and selling,
general, and administrative ("SGA") expenses directly attributable to the
Systems. Service costs include fees paid to programming suppliers, expenses
related to copyright fees, wages and salaries of technical personnel and plant
operating costs. Programming fees have historically increased at rates in excess
of inflation due to increases in the number of programming services offered by
the Company and improvements in the quality of programming. The Company believes
that under the FCC's existing cable rate regulations, it will be able to
increase its rates for cable television services to more than cover any
increases in the costs of programming. However, competitive factors may limit
the Company's ability to increase its rates. The Company benefits from its
membership in a cooperative with over twelve million basic subscribers which
provides its members with significant volume discounts from programming
suppliers and cable equipment vendors. SGA expenses directly attributable to the
Systems include wages and salaries for customer service and administrative
personnel, franchise fees and expenses related to billing, marketing, bad debt,
advertising sales and office administration.
The Company relies on Mediacom Management for all of its strategic,
managerial, financial and operational oversight and advice. In exchange for all
such services, Mediacom Management is entitled to receive annual management fees
from 4.0% to 5.0% of the annual gross revenues of the Company. Mediacom
Management is also entitled to receive a fee of 0.5% or 1.0% of the purchase
price of acquisitions made by the Company and such fees are included in other
expenses. See Item 13: Certain Relationships and Related Transactions.
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1
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The high level of depreciation and amortization associated with the
Company's acquisition activities as well as the interest expense related to its
financing activities have caused the Company to report net losses in its limited
operating history. The Company believes that such net losses are common for
cable television companies and anticipates that it will continue to incur net
losses for the foreseeable future.
EBITDA represents operating income (loss) before depreciation and
amortization. EBITDA is not intended to be a performance measure that should be
regarded as an alternative either to operating income or net income as an
indicator of operating performance, or an alternative to the statement of cash
flows as a measure of liquidity as determined in accordance with generally
accepted accounting principles. EBITDA is included herein because the Company
believes that EBITDA is a meaningful measure of performance as it is commonly
used by the cable television industry and by the investment community to analyze
and compare cable television companies on the basis of operating performance,
leverage and liquidity. In addition, the primary debt instruments of the Company
contain certain covenants, compliance with which is measured by computations
similar to determining EBITDA. The Company's definition of EBITDA may not be
identical to similarly titled measures reported by other companies.
Results of Operations
The following table sets forth the Company's historical percentage
relationship to revenues of items in the consolidated statements of operations:
Percentage of Revenues
Year Ended December 31,
1998 1997 1996
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Revenues
100.0% 100.0% 100.0%
Service costs
33.9 31.5 27.9
SGA expenses 19.8 15.3 17.2
Management fee expense 4.5 5.0 5.0
Depreciation and amortization 50.9 43.3 39.9
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Operating income (loss) (9.1%) 4.9% 10.0%
Interest expense 18.6 27.4 28.2
Other expenses 3.1 3.6 17.9
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Net loss (30.8%) (26.1%) (36.1%)
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Other Data:
EBITDA 41.8% 48.2% 49.9%
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Year Ended December 31, 1998 Compared to Year Ended December 31, 1997
The following historical information for the years ended December 31,
1998 and 1997 includes the results of operations of the Lower Delaware System
(acquired on June 24, 1997), the Sun City System (acquired on September 19,
1997), the Clearlake System (acquired on January 9, 1998), the Cablevision
Systems (acquired on January 23, 1998), and the Caruthersville System (acquired
on October 1, 1998) (collectively, the "Acquired Systems") only for that portion
of the respective period that such cable television systems were owned by the
Company. See Note 3 of the Company's audited consolidated financial statements.
The Acquired Systems comprise a substantial portion of the Company's
basic subscribers. At December 31, 1998, the Acquired Systems served
approximately 328,350 basic subscribers, representing 92.8% of the approximately
354,000 subscribers served by the Company as of such date. Accordingly, the
acquisitions of the Acquired Systems have had a significant impact on the
results of operations for the year ended December 31, 1998, compared to the
prior year. Consequently, the Company believes that any comparison of its
results of operations between the years ended December 31, 1998 and 1997 are not
indicative of the Company's results of operations in the future.
2
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Revenues increased to approximately $129.3 million for the year ended
December 31, 1998, from approximately $17.6 million for the prior fiscal year
principally due to: (i) the inclusion of the results of operations of the Lower
Delaware System and the Sun City System for the full year ended December 31,
1998; (ii) the inclusion of the results of operations of the Clearlake System,
the Cablevision Systems and the Caruthersville System from their respective
acquisition dates; (iii) the implementation of average monthly basic service
rate increases of approximately $3.34 per basic subscriber; and (iv) internal
basic subscriber growth of approximately 2.5%.
Service costs increased to approximately $43.8 million for the year
ended December 31, 1998, from approximately $5.5 million for the prior fiscal
year. Substantially all of this increase was due to the inclusion of the results
of operations of the Acquired Systems. Of the service costs for the year ended
December 31, 1998, approximately 72.0% were attributable to programming and
copyright costs, 11.0% to technical personnel costs, and 17.0% to plant
operating costs. Of the service costs for the prior fiscal year, approximately
70.0% were attributable to programming and copyright costs, 15.0% to technical
personnel costs, and 15.0% to plant operating costs.
SGA expenses increased to approximately $25.6 million for the year ended
December 31, 1998, from approximately $2.7 million for the prior fiscal year.
Substantially all of this increase was due to the inclusion of the results of
operations of the Acquired Systems. Of the SGA expenses for the year ended
December 31, 1998, 28.0% were attributable to customer service and
administrative personnel costs, 23.0% to franchise fees, other fees and taxes,
12.0% to customer billing expenses, and 37.0% to marketing, advertising sales
and office administration expenses. Of the SGA expenses for the prior fiscal
year, approximately 36.0% were attributable to customer service and
administrative personnel costs, 9.0% to franchise fees, other fees and taxes,
13.0% to customer billing expenses, and 42.0% to marketing, advertising sales
and office administration expenses.
Management fee expense increased to approximately $5.8 million for the
year ended December 31, 1998, from approximately $0.9 million for the prior
fiscal year due to the higher revenues generated in 1998.
Depreciation and amortization expense increased to approximately $65.8
million for the year ended December 31, 1998, from approximately $7.6 million
for the prior fiscal year.
Due to the factors described above, the Company generated an operating
loss of approximately $11.7 million for the year ended December 31, 1998,
compared to operating income of $0.9 million for the prior fiscal year.
Interest expense, net, increased to approximately $24.0 million for the
year ended December 31, 1998, from approximately $4.8 million for the prior
fiscal year. This increase was substantially due to the additional debt incurred
in connection with the purchase of the Acquired Systems. Other expenses
increased to approximately $4.1 million for the year ended December 31, 1998,
from approximately $0.6 million for the prior fiscal year. This increase was
substantially due to acquisition fees paid to Mediacom Management in connection
with the acquisitions of the Clearlake System and the Cablevision Systems.
Due to the factors described above, the net loss increased to
approximately $39.8 million for the year ended December 31, 1998, from
approximately $4.6 million for the prior fiscal year.
EBITDA increased to approximately $54.1 million for the year ended
December 31, 1998, from approximately $8.5 million for the prior fiscal year.
This increase was substantially due to the inclusion of the results of
operations of the Acquired Systems. EBITDA as a percentage of revenues decreased
to 41.8% for the year ended December 31, 1998, from 48.3% for the prior fiscal
year. This decrease was principally due to the higher programming costs and SGA
expenses of the Acquired Systems in relation to the revenues generated by such
cable television systems.
Year Ended December 31, 1997 Compared to the Period from March 12, 1996
(commencement of operations) to December 31, 1996
The following historical information includes the results of operations
of the Ridgecrest System (acquired on March 12, 1996, which is the date of
commencement of operations of the Company), the Kern Valley System (acquired on
June 28, 1996), the Valley Center and Nogales Systems (acquired on December 27,
1996), the Lower Delaware System (acquired on June 24, 1997) and the Sun City
System (acquired on September 19, 1997) only for that portion of the respective
period that such Systems were owned by the Company. See Item I: Business--
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Development of the Systems and Note 3 of the Company's audited consolidated
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financial statements.
3
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The results of operations of the Company for the year ended December 31,
1997, were impacted by the inclusion of: (i) the full year of results of
operations of the Ridgecrest System, the Kern Valley System, the Nogales System
and the Valley Center System (collectively, the "1996 Systems"); (ii) the
results of operations of the Lower Delaware System from the date of its
acquisition on June 24, 1997; and (iii) the results of operations of the Sun
City System from the date of its acquisition on September 19, 1997. Revenues
increased to approximately $17.6 million for the year ended December 31, 1997,
from approximately $5.4 million for the period ended December 31, 1996.
Service costs increased to approximately $5.5 million for the year ended
December 31, 1997, from approximately $1.5 million for the period ended December
31, 1996. Substantially all of this increase was due to the inclusion of the
results of operations of the aforementioned acquisitions in 1997 and the full
year of results of operations of the 1996 Systems. Of the service costs for the
year ended December 31, 1997, approximately 70.0% were attributable to
programming and copyright costs, 15.0% to technical personnel costs, and 15.0%
to plant operations. Of the service costs for the period ended December 31,
1996, approximately 72.0% were attributed to programming and copyright costs,
13.0% to technical personnel costs and 15.0% to plant operating costs.
SGA expenses increased to approximately $2.7 million for the year ended
December 31, 1997, from approximately $0.9 million for the period ended December
31, 1996. Substantially all of this increase was due to the inclusion of the
results of operations of the aforementioned acquisitions in 1997 and the full
year of results of operations of the 1996 Systems. Of the SGA expenses for the
year ended 1997, approximately 36.0% were attributed to customer service and
administrative personnel costs, 9.0% to franchise fees, other fees and taxes,
13.0% to customer billing expenses and 42.0% to marketing, advertising sales and
office administrative expenses. Of the SGA expenses for the period ended
December 31, 1996, approximately 28.0% were attributed to customer billing
service and administrative personnel costs, 8.0% to franchise fees and other
fees and taxes, 10.0% to customer billing expenses and 54.0% to marketing,
advertising sales and office administrative expenses.
Management fee expense increased to approximately $0.9 million for the
year ended December 31, 1997, from approximately $0.3 million for the period
ended December 31, 1996, due to the higher revenues generated in 1997.
Depreciation and amortization expense increased to approximately $7.6
million for the year ended December 31, 1997, from approximately $2.2 million
for the period ended December 31, 1996. This increase was substantially due to
the inclusion of the results of operations of the aforementioned acquisitions in
1997 and the 1996 Systems.
Due to the factors described above, the Company generated operating
income of approximately $0.9 million for the year ended December 31, 1997,
compared to approximately $0.5 million for the period ended December 31, 1996.
Interest expense increased to approximately $4.8 million for the year
ended December 31, 1997, from approximately $1.5 million for the period ended
December 31, 1996. This increase was principally due to the increased levels of
debt incurred in connection with the aforementioned acquisitions in 1997. Other
expenses decreased to approximately $0.6 million for the year ended December 31,
1997, from approximately $1.0 million for the period ended December 31, 1996.
This decrease was principally due to pre-acquisition expenses recorded in 1996.
Due to the factors described above, the net loss increased to
approximately $4.6 million for the year ended December 31, 1997, from
approximately $2.0 million for the period ended December 31, 1996.
EBITDA increased to approximately $8.5 million for the year ended
December 31, 1997, from approximately $2.7 million for the period ended December
31, 1996. This increase was substantially due to the inclusion of the results of
operations of the aforementioned acquisitions in 1997 and the results of
operations for the full year of the 1996 Systems. EBITDA as a percentage of
revenues decreased to 48.3% for the year ended December 31, 1997, from 49.9% for
the period ended December 31, 1996. This decrease was principally due to the
higher programming costs of the Systems acquired during 1997 in relation to the
revenues generated by such cable television systems.
4
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Selected Pro Forma Results
The Company has reported the results of operations of the Acquired
Systems from the date of their respective acquisition. The following financial
information for the three months and for the years ended December 31, 1998, and
1997, presents selected unaudited pro forma operating results assuming the
purchase of the Acquired Systems had been consummated on January 1, 1997. See
Note 3 to the Company's audited consolidated financial statements for a
description of the Company's acquisitions in 1997 and 1998.
Selected Pro Forma Results
<TABLE>
<CAPTION>
Year Ended
----------
December 31,
------------
1998 1997
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(dollars in thousands, except per subscriber data)
<S> <C> <C>
Revenues $ 136,148 $ 120,511
Costs and expenses:
Service costs 46,408 48,849
SGA expenses 26,501 27,845
Management fee expense 6,071 1,480
Depreciation and amortization 68,977 57,689
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Operating loss $ (11,809) $ (15,352)
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Other Data:
EBITDA $ 57,168 $ 42,337
EBITDA margin (1) 42.0% 35.1%
Basic subscribers (2) 354,000 345,525
Average monthly revenue
per basic subscriber (3) $ 32.88 $ 29.67
</TABLE>
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(1) Represents EBITDA as a percentage of revenues.
(2) As of the end of period
(3) Represents average monthly revenues for the three months ended
December 31, 1998 divided by the number of basic subscribers at
the end of the period.
Pro Forma Results for the Year Ended December 31, 1998 Compared to Pro
Forma Results for the Year Ended December 31, 1997
Revenues increased to approximately $136.1 million for the year ended
December 31, 1998, from approximately $120.5 million for the prior fiscal year.
This increase was attributable principally to internal subscriber growth of
approximately 2.5% and higher average monthly revenue per subscriber.
Service costs and SGA expenses in the aggregate decreased to
approximately $72.9 million for the year ended 1998 from approximately $76.7
million for the prior fiscal year. This decrease was principally due to the
allocation in 1997 of annual corporate overhead expenses and employee stock
expense of the previous owners of the Acquired Systems, offset by an increase in
management fee expense to approximately $6.1 million for the year ended 1998
from approximately $1.5 million for the prior fiscal year. This increase in
management fee expense was due to the higher revenues generated in 1998.
Depreciation and amortization expense increased to approximately $69.0
million for the year ended 1998 from approximately $57.7 million for the prior
fiscal year, principally due to capital expenditures during the year.
Due to the factors described above, the Company generated operating loss
of approximately $11.8 million for the year ended 1998, compared to
approximately $15.4 million for the year ended 1997.
5
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Liquidity and Capital Resources
The cable television business is a capital intensive business that
generally requires financing for the upgrade, expansion and maintenance of the
technical infrastructure. In addition, the Company has pursued, and continues to
pursue, a business strategy that includes selective acquisitions. The Company
has funded its working capital requirements, capital expenditures and
acquisitions through a combination of internally generated funds, long-term
borrowings and equity contributions. The Company intends to continue to finance
such expenditures through these same sources.
During 1997 and 1998, the Company upgraded certain Systems serving
approximately 129,800 basic subscribers as of December 31, 1998. During the
third quarter of 1998, the Company modified its previously announced five-year
capital improvement program by accelerating its planned completion date to June
30, 2000. Moreover, various projects that were originally scheduled to be
upgraded to 550MHz bandwidth capacity are being redesigned at 750MHz capacity,
with two-way capability, and greater utilization of fiber optic technology. This
accelerated program will enable the Company to deliver digital cable television
and high-speed cable modem service earlier and more widespread than previously
planned, beginning in 1999. Upon the program's anticipated completion in June
30, 2000, the Company expects that over 85% of its customer base will be served
by Systems with 550MHz to 750MHz bandwidth capacity.
For the year ended December 31, 1997, the Company's capital expenditures
(other than those related to acquisitions) were $4.7 million. As a result of the
Company's accelerated capital improvement program, total capital expenditures
(other than those related to acquisitions) were approximately $53.7 million for
1998. In addition, the Company plans to spend approximately $63.0 million in
1999. The Company intends to utilize cash generated from operations and its
available unused credit commitments under its bank credit facilities, as
described below, to fund the foregoing capital expenditures.
From the Company's commencement of operations in March 1996 through
December 31, 1997, the Company invested approximately $97.8 million (before
closing costs) to acquire cable television systems serving approximately 65,250
basic subscribers as of December 31, 1998. In 1998, the Company invested
approximately $334.6 million (before closing costs) to acquire cable television
systems serving approximately 288,750 basic subscribers as of December 31, 1998.
In the aggregate, the Company has invested approximately $432.4 million (before
closing costs) to acquire the Systems.
6
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On January 9, 1998, the Company completed the acquisition of the
Clearlake System, serving approximately 17,200 subscribers on such date, for a
purchase price of $21.4 million (before closing costs). The acquisition of the
Clearlake System and related closing costs and adjustments were financed with
cash on hand and borrowings under the Company's bank credit facilities. See
Notes 3 and 8 to the Company's audited consolidated financial statements.
On January 23, 1998, the Company completed the acquisition of the
Cablevision Systems, serving approximately 260,100 subscribers on such date, for
a purchase price of approximately $308.2 million (before closing costs). The
acquisition of the Cablevision Systems and related closing costs and adjustments
were financed with: (i) $211.0 million of borrowings under the Company's bank
credit facilities; (ii) the proceeds of $20.0 million aggregate principal amount
of the notes issued by the Company to a bank (the "Holding Company Notes"); and
(iii) $94.0 million of equity capital contributed to Mediacom by its members. On
April 1, 1998, the Holding Company Notes were repaid in full from the net
proceeds of the 8 1/2% Senior Notes offering (see below). See Notes 1, 3 and 8
to the Company's audited consolidated financial statements.
On October 1, 1998, the Company acquired the assets of a cable
television system serving approximately 3,800 subscribers in Caruthersville,
Missouri, for a purchase price of $5.0 million (before closing costs). The
acquisition of the Caruthersville System was financed with cash on hand and
borrowings under the Company's bank credit facilities. See Notes 3 and 8 to the
Company's audited consolidated financial statements.
Mediacom is a limited liability company that serves as the holding
company for its various subsidiaries, each of which is also a limited liability
company. The Company's financing strategy is to raise equity from its members
and issue public long-term debt at the holding company level, while utilizing
its subsidiaries to access debt capital, principally in the commercial bank
market, through two stand-alone borrowing groups. The Company believes that this
financing strategy is beneficial because it broadens the Company's access to
various debt markets, enhances its flexibility in managing the Company's capital
structure, reduces the overall cost of debt capital and permits the Company to
maintain a substantial liquidity position in the form of unused and available
bank credit commitments.
Financings of the subsidiaries are currently effected through two stand-
alone borrowing groups, each with separate lending groups. The credit
arrangements in these borrowing groups are non-recourse to Mediacom, have no
cross-default provisions relating directly to each other, have different
revolving credit and term periods and contain separately negotiated covenants
tailored for each borrowing group. These credit arrangements permit the
subsidiaries, subject to covenant restrictions, to make distributions to
Mediacom. As of December 31, 1998, the Company was in compliance with all of the
financial and other covenants provided for in its bank credit agreements.
As of December 31, 1998, in order to finance its working capital
requirements, capital expenditures and acquisitions and to provide liquidity for
future capital requirements, the Company had completed the following financing
arrangements: (i) a $100.0 million bank credit facility expiring in September
2005; (ii) a $225.0 million bank credit facility expiring in September 2006;
(iii) a seller note in the original principal amount of $2.8 million issued in
connection with the acquisition of a cable television system; (iv) $200.0
million offering of 8 1/2% Senior Notes (see below); and (v) $125.0 million of
equity capital invested in Mediacom by the members of Mediacom. See Notes 1 and
8 to the Company's audited consolidated financial statements.
On April 1, 1998, Mediacom and Mediacom Capital jointly issued $200.0
million aggregate principal amount of 8 1/2% Senior Notes (the "8 1/2% Senior
Notes") due on April 15, 2008. Mediacom used approximately $20.0 million of the
net proceeds of this offering to repay in full the principal amount of the
Holding Company Notes. The remaining net proceeds of approximately $173.5
million were used to repay a portion of outstanding indebtedness under the
Company's bank credit facilities.
As of December 31, 1998 the Company had entered into interest rate swap
agreements to hedge a notional amount of $60.0 million of borrowings under the
Company's bank credit facilities, which expire from 1999 through 2002. As a
result of the Company's interest rate swap agreements, and after giving pro
forma effect to the issuance of the 8 1/2% Senior Notes, approximately 78.0% of
the Company's indebtedness was at fixed interest rates or subject to interest
rate protection as of December 31, 1998.
7
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As a result of the financing transactions described above, as of
December 31, 1998, the Company had the ability to borrow up to approximately
$189.9 million under the Company's bank credit facilities, all of which could
have been borrowed and distributed to Mediacom under the most restrictive
covenants in the Company's bank credit agreements. For the three months ended
December 31, 1998, the weighted average interest rate on all indebtedness
outstanding under the Company's bank credit facilities was approximately 6.9%
before giving effect to the aforementioned interest rate swap agreements, and
7.2% after giving effect to said interest rate swap agreements.
On February 26, 1999, Mediacom and Mediacom Capital jointly issued $125
million aggregate principal amount of 7 7/8% Senior Notes (the "7 7/8% Senior
Notes") due February 2011. The net proceeds from this offering of approximately
$121.9 million were used to repay a substantial portion of outstanding
indebtedness under the Company's bank credit facilities. Interest on the 7 7/8%
Senior Notes will be payable semi-annually on February 15 and August 15 of each
year, commencing on August 15, 1999. After giving pro forma effect to the
offering of the 7 7/8% Senior Notes and use of net proceeds therefrom, as of
December 31, 1998, the Company would have had approximately $311.6 million of
unused credit commitments, all of which could have been borrowed and distributed
to Mediacom under the most restrictive covenants in the Company's bank credit
agreements.
The Company is regularly presented with opportunities to acquire cable
television systems that are evaluated on the basis of the Company's acquisition
strategy. Although the Company presently does not have any definitive agreements
to acquire or sell any of its cable television systems, it is negotiating with
prospective sellers to acquire additional cable television systems. If
definitive agreements for all such potential acquisitions are executed, and if
such acquisitions are then consummated, the Company's customer base would
approximately double in size. These acquisitions are subject to the negotiation
and completion of definitive documentation, which will include customary
representations and warranties and will be subject to a number of closing
conditions. Financing for these potential transactions has not been determined;
however, if such acquisitions are consummated, the Company believes its total
indebtedness would substantially increase. No assurance can be given that such
definitive documents will be entered into or that, if entered into, the
acquisitions will be consummated.
Although the Company has not generated earnings sufficient to cover
fixed charges, the Company has generated cash and obtained financing sufficient
to meet its debt service, working capital, capital expenditure and acquisition
requirements. The Company expects that it will continue to be able to generate
funds and obtain financing sufficient to service its obligations. There can be
no assurance that the Company will be able to refinance its indebtedness or
obtain new financing in the future or, if the Company were able to do so, that
the terms would be favorable to the Company.
Recent Accounting Pronouncements
In 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard No. 130, "Reporting Comprehensive
Income," Statement of Financial Accounting Standard No. 131, "Disclosure about
Segments of an Enterprise and Related Information" and Statement of Financial
Accounting Standard No. 132, "Employer's Disclosure about Pension and Other Post
Retirement Benefits" which are effective for the Company's fiscal 1998 financial
statements. During the years ended December 31, 1998 and 1997 and the period
ended December 31, 1996, the Company had no items of comprehensive income. Refer
to Note 13 of the Company's audited consolidated financial statements for
disclosure about segments and other related information. Additionally, the
Company does not have any defined benefit plans, therefore, additional
disclosures are not applicable to the notes of the financial statements.
In 1998, Statement of Financial Accounting Standards No. 133,
"Accounting for Derivative Instruments and Hedging Activities," ("SFAS 133") and
Statement of Position 98-5, "Reporting on the Costs of Start up Activities"
("SOP 98-5") were issued. SFAS 133 establishes accounting and reporting
standards requiring that every derivative instrument be recorded in the balance
sheet as either an asset or liability measured at its fair value. The Company
will adopt SFAS 133 in fiscal 2000 but has not quantified the impact or not yet
determined the timing or method of the adoption. SOP 98-5 provides guidance on
accounting for the costs of start-up activities, which include preopening costs,
preoperating costs, organization costs, and start-up costs. The Company will
adopt SOP 98-5 in fiscal 1999, but does not expect any impact on the financial
statements.
8
<PAGE>
Inflation and Changing Prices
The Company's costs and expenses are subject to inflation and price
fluctuations. However, because changes in costs are generally passed through to
subscribers, such changes are not expected to have a material effect on the
Company's results of operations.
Year 2000
The Company has formed a Year 2000 program management team responsible
for overseeing, coordinating and reporting on the Year 2000 remediation efforts.
The Company has implemented a company-wide effort to assess and remediate its
computer systems, related software and equipment to ensure such systems,
software and equipment recognize, process and store information in the year 2000
and thereafter. Such Year 2000 remediation efforts include an assessment of the
most critical systems, such as customer service and billing systems, headend
facilities, business support operations, and other equipment and facilities. The
Company is also verifying the Year 2000 readiness of its significant suppliers
and vendors.
The program management team has defined a four-step approach to
determining the Year 2000 readiness of the Company's internal systems, software
and equipment. Such approach is intended to provide a detailed method for
tracking the evaluation, repair, and testing of systems, software, and
equipment, as follows:
Phase 1: Assessment -- involves the inventory of all systems, software and
equipment and the identification of any Year 2000 issues.
Phase 2: Remediation -- involves repairing, upgrading and/or replacing any non-
compliant equipment and systems.
Phase 3: Testing -- involves testing systems, software, and equipment for Year
2000 readiness, or in certain cases, relying on test results provided
to the Company.
Phase 4: Implementation -- involves placing compliant systems, software and
equipment into production or service.
The following is the status of the Year 2000 readiness project as of
December 31, 1998: Phase 1 was substantially complete, with final completion by
April 1999; Phase 2 was underway with final completion expected by June 1999;
and Phases 3 and 4 are in the early stages, with final completion expected by
September 1999.
The completion dates set forth above are based on current expectations.
However, due to the uncertainties inherent in Year 2000 remediation, no
assurances can be given as to whether such projects will be completed on such
dates.
Third Party Systems, Software and Equipment
The program management team is surveying the Company's significant
third-party vendors and suppliers whose systems, services or products are
important to its operations (e.g., suppliers of addressable controllers and set-
top boxes, and the provider of billing services). The Year 2000 readiness of
such providers is critical to the continued provision of cable television
service without interruptions. The project management team has received
information that the most critical systems, services or products supplied to its
cable television systems by third-parties are either Year 2000 ready or are
expected to be Year 2000 ready by mid-1999. The project management team is
currently developing contingency plans for systems provided by vendors who have
not responded to its surveys or systems that may not be Year 2000 ready in a
timely fashion.
In addition to the survey process described above, the project
management team has identified the Company's most critical supplier/vendor
relationships and has instituted a verification process to determine the
vendors' Year 2000 readiness. Such verification includes reviewing vendors' test
and other data and engaging in regular communications with vendors' Year 2000
teams. The Company is currently testing to validate the Year 2000 compliance of
certain critical products and services.
9
<PAGE>
Costs
As of December 31, 1998, Year 2000 costs incurred were not material.
Although no assurances can be given, the Company currently expects that the
total projected costs associated with the Year 2000 program will be less than
$350,000.
Contingency Plans
The failure to correct a material Year 2000 problem could result in an
interruption or failure of certain important business operations. The Company
believes that its Year 2000 program will significantly reduce risks associated
with the changeover to the Year 2000 and is currently developing certain
contingency plans to minimize the effect of any potential Year 2000 related
disruptions. The risks and the uncertainties discussed below and the associated
contingency plans relate to systems, software, equipment, and services that the
Company has deemed critical in regard to customer service, business operations,
financial impact or safety.
The failure of addressable controllers contained in the headend
facilities could disrupt the delivery of premium services to customers and could
necessitate crediting customers for failure to receive such premium services. In
this unlikely event, the Company expects that it will identify and transmit the
lowest cost programming tier. Unless other contingency plans are developed with
the program suppliers, premium and pay-per-view channels would not likely be
transmitted until the addressable controller share had been repaired.
A failure of the services provided by the Company's billing systems
service provider could result in a loss of customer records which could disrupt
the ability to bill customers for a protracted period. The Company plans to
prepare electronic backup records of its customer billing information prior to
the Year 2000 to allow for data recovery as its first step to remedy this
situation in the event of billing systems failure. The Company will continue to
monitor the Year 2000 readiness of its customer-billing supplier.
Advertising revenue could be adversely affected by the failure of
certain advertising insertion equipment which could impede or prevent the
insertion of advertising spots in cable television programming. The Company
anticipates that it can minimize such effect by manually resetting the dates
each day until the equipment is repaired.
The financial impact of any or all of the above worst-case scenarios has
not been and cannot be estimated by the Company due to the numerous
uncertainties and variables associated with such scenarios.
10
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Company's audited consolidated financial statements, and related
notes thereto, and the report of the Company's independent public accountants
follow.
MEDIACOM LLC AND SUBSIDIARIES
-----------------------------
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Public Accountants 36
Consolidated Balance Sheets as of December 31, 1998 and 1997 37
Consolidated Statements of Operations for the Years Ended December 31, 1998 and
1997, for the Period from Commencement of Operations (March 12, 1996) to
December 31, 1996, and for the Period from January 1, 1996 through March 11, 1996 38
Consolidated Statements of Changes in Members' Equity for the Years Ended December
31, 1998 and 1997, and for the Period from Commencement of Operations (March 12,
1996) to December 31, 1996 39
Consolidated Statements of Cash Flows for the Years Ended December 31, 1998 and
1997, for the Period from Commencement of Operations (March 12, 1996) to
December 31, 1996, and for the Period from January 1, 1996 through March 11, 1996 40
Notes to Consolidated Financial Statements 41
Valuation and Qualifying Accounts 52
MEDIACOM CAPITAL CORPORATION
----------------------------
INDEX TO FINANCIAL STATEMENT
----------------------------
Report of Independent Public Accountants 53
Balance Sheet as of December 31, 1998 54
Notes to Balance Sheet 55
</TABLE>
11
<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, 1998 and
1997, and the related consolidated statements of operations, changes in
members' equity and cash flows for the years ended December 31, 1998 and 1997,
and for the period from the commencement of operations (March 12, 1996) to
December 31, 1996 and the statements of operations and cash flows from the
period January 1, 1996 through March 11, 1996. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Mediacom LLC and
its subsidiaries as of December 31, 1998 and 1997, and the results of their
operations, members' equity and cash flows for the years ended December 31, 1998
and 1997, and for the period from commencement of operations (March 12, 1996) to
December 31, 1996 and the statements of operations and cash flows from the
period January 1, 1996 through March 11, 1996 in conformity with generally
accepted accounting principles.
Our audits were made for the purpose of forming an opinion on the basic
consolidated financial statements taken as a whole. Schedule II - Valuation and
Qualifying Accounts is presented for purposes of complying with the Securities
and Exchange Commissions rules and is not part of the basic consolidated
financial statements. This schedule has been subjected to the auditing
procedures applied in the audit of the basic consolidated financial statements
and, in our opinion, fairly states in all material respects the financial data
required to be set forth therein in relation to the basic consolidated financial
statements taken as a whole.
Arthur Andersen LLP
Stamford, Connecticut
March 5, 1999
12
<PAGE>
MEDIACOM LLC AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(All dollar amounts in 000's)
<TABLE>
<CAPTION>
December 31,
-----------------
1998 1997
---- ----
ASSETS
<S> <C> <C>
Cash and cash equivalents $ 2,212 $ 1,027
Subscriber accounts receivable, net of allowance for doubtful accounts of $298
in 1998 and $56 in 1997 2,512 618
Prepaid expenses and other assets 1,712 1,358
Investment in cable television systems:
Inventory 8,240 1,032
Property, plant and equipment, at cost 314,627 51,735
Less - accumulated depreciation (45,423) (5,737)
---------- --------
Property, plant and equipment, net 269,204 45,998
Intangible assets, net of accumulated amortization of $26,307 in 1998 and
$3,478 in 1997 150,928 48,966
---------- --------
Total investment in cable television systems 428,372 95,996
Other assets, net of accumulated amortization of $3,854 in 1998 and $526 in 1997 16,344 3,792
---------- --------
Total assets $ 451,152 $102,791
========== ========
LIABILITIES AND MEMBERS' EQUITY
LIABILITIES
Debt $337,905 $ 72,768
Accounts payable 2,678 853
Accrued expenses 29,446 4,021
Subscriber advances 1,510 603
Management fees payable 962 105
---------- --------
Total liabilities 372,501 78,350
---------- --------
MEMBERS' EQUITY
Capital contributions 124,990 30,990
Accumulated deficit (46,339) (6,549)
---------- --------
Total members' equity 78,651 24,441
---------- --------
Total liabilities and members' equity $451,152 $102,791
========== =========
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these statements.
13
<PAGE>
MEDIACOM LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(All dollar amounts in 000's)
<TABLE>
<CAPTION>
The Company Predecessor
============================================== ===============
March 12,
1996
through January 1, 1996
Year Ended December 31, December 31, through
1998 1997 1996 March 11, 1996
--------- ------- -------- ---------------
<S> <C> <C> <C> <C>
Revenues $129,297 $17,634 $ 5,411 $1,038
Costs and expenses:
Service costs 43,849 5,547 1,511 297
Selling, general, and
administrative expenses 25,596 2,696 931 222
Management fee expense 5,797 882 270 52
Depreciation and amortization 65,793 7,636 2,157 527
--------- ------- -------- ---------------
Operating income (loss) (11,738) 873 542 (60)
--------- ------- -------- ---------------
Interest expense, net 23,994 4,829 1,528 201
Other expenses 4,058 640 967 -
--------- ------- -------- ---------------
Net loss $(39,790) $(4,596) $(1,953) $ (261)
========= ======= ======== ===============
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these statements.
14
<PAGE>
MEDIACOM LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN MEMBERS' EQUITY
(All dollar amounts in 000's)
<TABLE>
<S> <C>
Balance, Commencement of Operations (March 12, 1996) $ 5,490
Capital Contributions 1,000
Net Loss (1,953)
--------
Balance, December 31, 1996 4,537
Capital Contributions 24,500
Net Loss (4,596)
--------
Balance, December 31, 1997 24,441
Capital Contributions 94,000
Net Loss (39,790)
--------
Balance, December 31, 1998 $78,651
========
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these statements.
15
<PAGE>
MEDIACOM LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(All dollar amounts in 000's)
<TABLE>
<CAPTION>
The Company Predecessor
========================================= ===========
March 12, January 1,
1996 1996
through through
Year Ended December 31, December 31, March 11,
1998 1997 1996 1996
-------- ------- -------- ----------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss $(39,790) $(4,596) $(1,953) $ (261)
Adjustments to reconcile net loss to net cash
flows from operating
activities:
Accretion of interest on seller note 287 264 129 -
Depreciation and amortization 65,793 7,636 2,157 527
Changes in assets and liabilities, net of effects
from acquisitions:
Increase in subscriber
accounts receivable (1,437) (351) (267) (40)
Decrease (increase) in prepaid
expenses and other assets 329 (34) (1,323) -
Increase (decrease) in accounts payable 1,822 (242) 514 -
Increase in accrued expenses 24,843 3,762 840 -
Increase in subscriber advances 852 498 105 -
Increase in management fees payable 857 70 35 -
-------- ------- ------- -------
Net cash flows from operating activities 53,556 7,007 237 226
-------- ------- ------- -------
CASH FLOWS USED IN INVESTING ACTIVITIES:
Capital expenditures (53,721) (4,699) (671) (86)
Acquisitions of cable television systems (343,330) (54,842) (44,539) -
Other, net (34) (467) (47) -
-------- ------- ------- -------
Net cash flows used in investing activities (397,085) (60,008) (45,257) (86)
-------- ------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
New borrowings 488,200 72,225 39,200 -
Repayment of debt (223,350) (40,250) (1,600) -
Increase in seller note - - 2,800 -
Capital contributions 94,000 24,500 6,490 -
Financing costs (14,136) (2,843) (1,474) -
-------- ------- ------- -------
Net cash flows from financing activities 344,714 53,632 45,416 -
-------- ------- ------- -------
Net increase in cash and cash equivalents 1,185 631 396 140
CASH AND CASH EQUIVALENTS, beginning of period 1,027 396 - 266
-------- ------- ------- -------
CASH AND CASH EQUIVALENTS, end of period $ 2,212 $ 1,027 $ 396 $ 406
======== ======= ======= =======
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid during the year for interest $ 21,127 $ 4,485 $ 1,190 $ 201
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these statements.
16
<PAGE>
MEDIACOM LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All dollar amounts in 000's)
(1) The Limited Liability Company:
Organization
Mediacom LLC ("Mediacom" and collectively with its subsidiaries,
the "Company"), a New York limited liability company, was formed on July 17,
1995 and initially conducted its affairs pursuant to an operating agreement
dated March 12, 1996 (the "1996 Operating Agreement"). On March 31 and June 16,
1997, the 1996 Operating Agreement was amended and restated upon the admission
of new members to Mediacom (the "1997 Operating Agreement"). On January 20,
1998, the 1997 Operating Agreement was amended and restated upon the admission
of additional members to Mediacom (the "1998 Operating Agreement"). As of
December 31, 1998, the Company had acquired and was operating cable television
systems in fourteen states, principally Alabama, California, Florida, Kentucky,
Missouri and North Carolina. (See Note 3).
Mediacom Capital Corporation ("Mediacom Capital"), a New York
corporation wholly owned by Mediacom, was organized in March 1998 for the sole
purpose of acting as co-issuer with Mediacom of $200,000 aggregate principal
amount of 8 1/2% Senior Notes due 2008 (the "8 1/2% Senior Notes"), which were
issued on April 1, 1998. Mediacom Capital has nominal assets and does not
conduct operations of its own. The 8 1/2% Senior Notes are joint and several
obligations of Mediacom and Mediacom Capital, although Mediacom received all the
net proceeds of the 8 1/2% Senior Notes.
Capitalization
The Company was initially capitalized on March 12, 1996, with
equity contributions of $5,445 from Mediacom's members and $45 from Mediacom
Management Corporation ("Mediacom Management"), a Delaware corporation. On June
28, 1996, Mediacom received additional equity contributions of $1,000 from an
existing member.
On June 22 and September 18, 1997, Mediacom received additional
equity contributions of $19,500 and $5,000, respectively, from its members. On
January 22, 1998, Mediacom received additional equity contributions of $94,000
from its members.
Allocation of Losses, Profits and Distributions
For 1996, pursuant to the 1996 Operating Agreement, net losses
were allocated 98% to the manager as defined in the operating agreements (the
"Manager") and the balance to the other members ratably in accordance with their
respective membership units. For 1997, pursuant to the 1997 Operating Agreement,
net losses were allocated first to the Manager and the balance to the other
members ratably in accordance with their respective membership units. For 1998,
pursuant to the 1998 Operating Agreement, net losses are to be allocated first
to the Manager; second, to the member owning the largest number of membership
units in Mediacom; and third, to the members, other than the Manager, ratably in
accordance with their respective positive capital account balances and
membership units.
Profits are allocated first to the members to the extent of
their deficit capital account; second, to the members to the extent of their
preferred capital; third, to the members (including the Manager) until they
receive an 8% preferred return on their preferred capital (the "Preferred
Return"); fourth, to the Manager until the Manager receives an amount equal to
25% of the amount provided to deliver the Preferred Return to all members; the
balance, 80% to the members (including the Manager) in proportion to their
respective membership units and 20% to the Manager. The 1997 Operating Agreement
increased the Preferred Return from 8% to 12%.
Distributions are made first to the members (including the
Manager) in proportion to their respective membership units until they receive
amounts equal to their preferred capital; second, to the members (including the
Manager) in proportion to their percentage interests until all members receive
the Preferred Return; third, to the Manager until the Manager receives 25% of
the amount provided to deliver the Preferred Return; the balance, 80% to the
members (including the Manager) in proportion to their percentage interests and
20% to the Manager.
17
<PAGE>
MEDIACOM LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All dollar amounts in 000's)
Redemption Rights
Except as set forth below, no member has the right to have its
membership interests redeemed or its capital contributions returned prior to
dissolution of Mediacom. Pursuant to the 1998 Operating Agreement, each member
has the right to require Mediacom to redeem its membership interests at any time
if the holding of such interests exceeds the amount permitted, or is otherwise
prohibited or becomes unduly burdensome, by any law to which such member is
subject, or, in the case of any member which is a Small Business Investment
Company as defined in and subject to regulation under the Small Business
Investment Act of 1958, as amended, upon a change in the Company's principal
business activities to an activity not eligible for investment by a Small
Business Investment Company or a change in the reported use of proceeds of a
member's investment in Mediacom. If Mediacom is unable to redeem for cash any or
all of such membership interests at such time, Mediacom will issue as payment
for such interests a junior subordinated promissory note with a five-year
maturity date and deferred interest which accrues and compounds at an annual
rate of 5% over the prime rate.
In addition, in connection with the Company's acquisition of the
Cablevision Systems on January 23, 1998 (See Note 3), the Federal Communications
Commission (the "FCC") issued a transactional forbearance from its cross-
ownership restrictions, effective for a period of one year, permitting a certain
existing member (the "Transactional Member") to purchase additional units of
membership interest in Mediacom. This temporary waiver was originally set to
expire on January 23, 1999. However, on January 15, 1999, the FCC granted an
extension of such waiver to July 23, 1999. If at the end of this extension, the
Transactional Member's membership interest in Mediacom remains above the
limitations imposed by the FCC's cross-ownership restrictions, Mediacom will be
required to repurchase such number of the Transactional Member's units of
membership interest which exceed the permissible ownership level. If such
repurchase were to occur on July 23, 1999 (i.e., upon expiration of the
transactional forbearance), and assuming no changes in the number of outstanding
membership units of Mediacom and no changes in such cross-ownership rules, the
repurchase price for such excess membership interests would be approximately
$7,500 plus accrued interest.
Duration and Dissolution
Mediacom will be dissolved upon the first to occur of the
following: (i) December 31, 2020; (ii) certain events of bankruptcy involving
the Manager or the occurrence of any other event terminating the continued
membership of the Manager, unless within one hundred eighty days after such
event the Company is continued by the vote or written consent of no less than
two-thirds of the remaining membership interests; or (iii) the entry of a decree
of judicial dissolution.
(2) Summary of Significant Accounting Policies:
Basis of Preparation of Consolidated Financial Statements
The consolidated financial statements include the accounts of
Mediacom and its subsidiaries. All significant intercompany transactions and
balances have been eliminated. The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
The financial statements for the period from January 1, 1996,
through March 11, 1996, and reflecting the results of operations and statement
of cash flows, are referred to as the "Predecessor" financial statements. The
Predecessor is Benchmark Acquisition Fund II Limited Partnership which owned the
assets comprising the cable television system serving at the time of its
acquisition by the Company 10,300 subscribers in Ridgecrest, California.
Accordingly, the accompanying financial statements of the Predecessor and the
Company are not comparable in all material respects since those financial
statements report results of operations and cash flows of these two separate
entities.
18
<PAGE>
MEDIACOM LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All dollar amounts in 000's)
Revenue Recognition
Revenues are recognized in the period in which the related services are
provided to the Company's subscribers.
Cash and Cash Equivalents
The Company considers all highly liquid investments with original
maturities of three months or less to be cash equivalents.
Concentration of Credit Risk
The Company's accounts receivable is comprised of amounts due
from subscribers in varying regions throughout the United States. Concentration
of credit risk with respect to these receivables is limited due to the large
number of customers comprising the Company's customer base and their geographic
dispersion.
Property, Plant and Equipment
Property, plant and equipment is recorded at purchased and
capitalized cost. Repairs and maintenance are charged to operations, and
replacements, renewals and additions are capitalized. The Company capitalized a
portion of salaries and overhead related to the installation of property, plant
and equipment of approximately $6,548 and $681 in 1998 and 1997, respectively.
The Company capitalizes interest on funds borrowed for projects
under construction. Such interest is charged to property, plant and equipment
and amortized over the approximate life of the related assets. Capitalized
interest was approximately $1,014 in 1998.
Depreciation is calculated on a straight-line basis over the
following useful lives:
Buildings 45 years
Leasehold improvements Life of respective lease
Cable systems and equipment 5 to 10 years
Subscriber devices 5 years
Vehicles 5 years
Furniture, fixtures and office equipment 5 to 10 years
Intangible Assets
Intangible assets include franchising costs, goodwill, subscriber lists
and covenants not to compete. Amortization of intangible assets is calculated on
a straight-line basis over the following lives:
Franchising costs 15 years
Goodwill 15 years
Subscriber lists 5 years
Covenants not to compete 3 to 7 years
Impairment of Long-Lived Assets
The Company follows the provisions of Statement of Financial
Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed of" ("SFAS 121"). SFAS 121
requires that long-lived assets and certain identifiable intangibles to be held
and used by any entity, be reviewed for impairment whenever events or changes in
circumstances indicate the carrying amount of an asset may not be recoverable.
There has been no impairment of long-lived assets of the Company under SFAS 121.
19
<PAGE>
MEDIACOM LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All dollar amounts in 000's)
Other Assets
Other assets include financing costs of approximately $8,492 and $3,963
as of December 31, 1998 and 1997, 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.
Income Taxes
Since Mediacom is a limited liability company and the Predecessor is a
limited partnership, they are not subject to federal or state income taxes, and
no provision for income taxes relating to their statements of operations have
been reflected in the accompanying financial statements. The members of Mediacom
and the limited partners of the Predecessor are required to report their share
of income or loss in their respective income tax returns.
Reclassifications
Certain reclassifications have been made to prior year's amounts to
conform to the current year's presentation.
(3) Acquisitions:
The Company has completed the undernoted acquisitions (the "Acquired
Systems") in 1998 and 1997. These acquisitions were accounted for using the
purchase method of accounting, and accordingly, the purchase price of these
Acquired Systems have been allocated to the assets acquired and liabilities
assumed at their estimated fair values at their respective date of acquisition.
The results of operations of the Acquired Systems have been included with those
of the Company since the dates of acquisition.
1998
On January 9, 1998, Mediacom California LLC ("Mediacom California"), a
subsidiary of Mediacom, acquired the assets of a cable television system serving
approximately 17,200 subscribers in Clearlake, California and surrounding
communities (the "Clearlake System") for a purchase price of $21,400. The
purchase price has been preliminarily allocated as follows: $8,560 to property,
plant and equipment, and $12,840 to intangible assets. Such allocations are
subject to adjustments based upon the final appraisal information received by
the Company. The final allocations of the purchase price are not expected to
differ materially from the preliminary allocations. Additionally, approximately
$226 of direct acquisition costs has been allocated to other assets. In the
first quarter of 1998, the Company recorded acquisition reserves related to this
acquisition in the amount of approximately $370, which are included in accrued
expenses. The acquisition of the Clearlake System and related closing costs and
adjustments were financed with borrowings under the Company's bank credit
facilities. See Note 8.
On January 23, 1998, Mediacom Southeast LLC, ("Mediacom Southeast"), a
wholly-owned subsidiary of Mediacom, acquired the assets of cable television
systems serving approximately 260,100 subscribers in various regions of the
United States (the "Cablevision Systems") for a purchase price of $308,200. The
purchase price has been allocated based on independent appraisal as follows:
$205,500 to property, plant and equipment, and $102,700 to intangible assets.
Additionally, approximately $3,500 of direct acquisition costs has been
allocated to other assets. In the first quarter of 1998, the Company recorded
acquisition reserves related to this acquisition in the amount of $3,750, which
are included in accrued expenses. The acquisition of the Cablevision Systems and
related closing costs and adjustments were financed with equity contributions,
borrowings under the Company's bank credit facilities, and other bank debt. See
Notes 1 and 8.
On October 1, 1998, Mediacom Southeast acquired the assets of a cable
television system serving approximately 3,800 subscribers in Caruthersville,
Missouri (the "Caruthersville System") for a purchase price of $5,000. The
purchase price has been preliminarily allocated as follows: $2,000 to property,
plant and equipment, and $3,000 to intangible assets. Such allocations are
subject to adjustments based upon the final appraisal information received by
the Company. The final allocations of the purchase price are not expected to
differ materially from the preliminary allocations. The acquisition of the
Caruthersville System and related closing costs and adjustments were financed
with borrowings under the Company's bank credit facilities. See Note 8.
20
<PAGE>
MEDIACOM LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All dollar amounts in 000's)
1997
On June 24, 1997, Mediacom Delaware LLC ("Mediacom Delaware"), a wholly-
owned subsidiary of Mediacom, acquired the assets of cable television systems
serving approximately 29,300 subscribers in lower Delaware and southwestern
Maryland (the "Lower Delaware System") for a purchase price of $42,600. The
purchase price has been allocated as follows: $21,300 to property, plant and
equipment, and $21,300 to intangible assets. Additionally, $409 of direct
acquisition costs has been allocated to other assets.
On September 19, 1997, Mediacom California acquired the assets of a
cable television system serving approximately 9,600 subscribers in Sun City,
California (the "Sun City System") for a purchase price of $11,500. The purchase
price has been allocated as follows: $7,150 to property, plant and equipment,
and $4,350 to intangible assets. Additionally, $52 of direct acquisition costs
has been allocated to other assets.
(4) Pro Forma Results:
Summarized below are the pro forma unaudited results of operations for
the years ended December 31, 1998 and 1997, assuming the purchase of the
Acquired Systems had been consummated as of January 1, 1997. Adjustments have
been made to: (i) depreciation and amortization reflecting the fair value of the
assets acquired; and (ii) interest expense. The pro forma results may not be
indicative of the results that would have occurred if the combination had been
in effect on the dates indicated or which may be obtained in the future.
1998 1997
Revenue $ 136,148 $ 120,511
Operating loss (11,809) (15,352)
Net loss $ (41,340) $ (42,921)
(5) Recent Accounting Pronouncements:
In 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard No. 130, "Reporting Comprehensive
Income," Statement of Financial Accounting Standard No. 131, "Disclosure about
Segments of an Enterprise and Related Information" and Statement of Financial
Accounting Standard No. 132, "Employer's Disclosure about Pension and Other Post
Retirement Benefits" which are effective for the Company's fiscal 1998 financial
statements. During the years ended December 31, 1998 and 1997 and the period
ended December 31, 1996, the Company had no items of comprehensive income. Refer
to Note 13 of the consolidated financial statements for disclosure about
segments and other related information. Additionally, the Company does not have
any defined benefit plans, therefore, additional disclosures are not applicable
to the notes of the financial statements.
In 1998, Statement of Financial Accounting Standards No. 133,
"Accounting for Derivative Instruments and Hedging Activities," ("SFAS 133") and
Statement of Position 98-5, "Reporting on the Costs of Start up Activities"
("SOP 98-5") were issued. SFAS 133 establishes accounting and reporting
standards requiring that every derivative instrument be recorded in the balance
sheet as either an asset or liability measured at its fair value. The Company
will adopt SFAS 133 in fiscal 2000, but has not quantified the impact or not yet
determined the timing or method of the adoption. SOP 98-5 provides guidance on
accounting for the costs of start-up activities, which include preopening costs,
preoperating costs, organization costs, and start-up costs. The Company will
adopt SOP 98-5 in fiscal 1999, but does not expect any impact on the financial
statements.
21
<PAGE>
MEDIACOM LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All dollar amounts in 000's)
(6) Property, Plant and Equipment:
As of December 31, 1998 and 1997, property, plant and equipment
consisted of:
1998 1997
--------- --------
Land and land improvements $ 341 $ 108
Buildings and leasehold improvements 5,731 337
Cable systems, equipment and subscriber devices 300,051 49,071
Vehicles 5,051 1,135
Furniture, fixtures and office equipment 3,453 1,084
--------- --------
$ 314,627 $ 51,735
Accumulated depreciation (45,423) (5,737)
--------- --------
$ 269,204 $ 45,998
========= ========
(7) Intangible Assets:
The following table summarizes the net asset value for each intangible
asset category as of December 31, 1998 and 1997:
<TABLE>
<CAPTION>
Gross Asset Net Asset
----------- ---------
1998 Value Amortization Value
---- ----- ------------ -----
<S> <C> <C> <C>
Franchising costs $ 87,509 $ 7,983 $ 79,526
Goodwill 8,400 1,313 7,087
Subscriber lists 76,484 15,701 60,783
Covenants not to compete 4,842 1,310 3,532
---------- ---------- ----------
$ 177,235 $ 26,307 $ 150,928
========== ========== ==========
<CAPTION>
Gross Asset Net Asset
----------- ---------
1997 Value Amortization Value
---- ----- ------------ -----
<S> <C> <C> <C>
Franchising costs $ 22,181 $ 1,732 $ 20,449
Goodwill 6,848 333 6,515
Subscriber list 18,573 1,085 17,488
Covenants not to compete 4,842 328 4,514
---------- ---------- ----------
$ 52,444 $ 3,478 $ 48,966
========== ========== ==========
</TABLE>
(8) Debt:
As of December 31, 1998 and 1997, debt consisted of:
1998 1997
--------- ---------
Mediacom:
8-1/2% Senior Notes (a) $ 200,000 $ -
Subsidiaries:
Bank Credit Facilities (b) 134,425 69,575
Seller Note (c) 3,480 3,193
--------- ---------
$ 337,905 $ 72,768
========= =========
(a) On April 1, 1998, Mediacom and Mediacom Capital jointly issued
$200,000 aggregate principal amount of 8 1/2% Senior Notes due on
April 15, 2008. The 8 1/2% Senior Notes are unsecured obligations of
the Company, and the indenture for the 8 1/2% Senior Notes
stipulates, among other things, restrictions on incurrence of
indebtedness, distributions, mergers and asset sales and has cross-
default provisions related to other debt of the Company. Interest
accrues at 8 1/2% per annum, beginning from the date of issuance
22
<PAGE>
MEDIACOM LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All dollar amounts in 000's)
and is payable semi-annually on April 15 and October 15 of each year,
commencing on October 15, 1998. The 8 1/2% Senior Notes may be redeemed
at the option of Mediacom, in whole or part, at any time after April 15,
2003, at redemption prices decreasing from 104.25% of their principal
amount to 100% in 2006, plus accrued and unpaid interest.
(b) On January 23, 1998, Mediacom Southeast entered into an eight and one-
half year, $225,000 reducing revolver and term loan agreement (the
"Southeast Credit Facility"). On June 24, 1997, Mediacom California,
Mediacom Delaware and Mediacom Arizona LLC, a wholly-owned subsidiary of
Mediacom (collectively, the "Western Group"), entered into an eight and
one-half year, $100,000 reducing revolver and term loan agreement (the
"Western Credit Facility" and, together with the Southeast Credit
Facility, the "Bank Credit Facilities"). At December 31, 1998, the
aggregate commitments under the Bank Credit Facilities were $324,400. The
Bank Credit Facilities are non-recourse to Mediacom and have no cross-
default provisions relating directly to each other. The reducing
revolving credit lines under the Bank Credit Facilities make available a
maximum commitment amount for a period of up to eight and one-half years,
which is subject to quarterly reductions, beginning September 30, 1998,
ranging from 0.21% to 12.42% of the original commitment amount of the
reducing revolver. The term loans under the Bank Credit Facilities are
repaid in consecutive installments beginning September 30, 1998, ranging
from 0.42% to 12.92% of the original term loan amount. The Bank Credit
Facilities require mandatory reductions of the reducing revolvers and
mandatory prepayments of the term loans from excess cash flow, as
defined, beginning December 31, 1999. The Bank Credit Facilities provide
for interest at varying rates based upon various borrowing options and
the attainment of certain financial rations and for commitment fees of
3/8% to 1/2% per annum on the unused portion of available credit under
the reducing revolver credit lines. The effective interest rates on
outstanding debt under the Bank Credit Facilities were 7.2% and 8.8% for
the three months ending December 31, 1998 and December 31, 1997,
respectively, after giving effect to the interest rate swap agreements
discussed below.
The applicable margins for the respective borrowing rate options have
the following ranges:
Interest Rate Option Margin Rate
-------------------- ----------------
Base Rate 0.250% to 1.625%
Eurodollar Rate 1.250% to 2.625%
The Bank Credit Facilities require Mediacom's subsidiaries to maintain
compliance with certain financial covenants including, but not limited
to, the leverage ratio, the interest coverage ratio, the fixed charge
coverage ratio and the pro forma debt service coverage ratio, as defined
in the respective credit agreements. The Bank Credit Facilities also
require Mediacom's subsidiaries to maintain compliance with other
covenants including, but not limited to, limitations on mergers and
acquisitions, consolidations and sales of certain assets, liens, the
incurrence of additional indebtedness, certain restrictive payments, and
certain transactions with affiliates. The Company was in compliance with
all covenants as of December 31, 1998.
The Bank Credit Facilities are secured by Mediacom's pledge of all its
ownership interests in the subsidiaries and a first priority lien on all
the tangible and intangible assets of the operating subsidiaries, other
than real property in the case of the Southeast Credit Facility. The
indebtedness under the Bank Credit Facilities is guaranteed by Mediacom
on a limited recourse basis to the extent of its ownership interests in
the operating subsidiaries. At December 31, 1998, the Company had
approximately $189,900 of unused commitments under the Bank Credit
Facilities, all of which could have been borrowed by the operating
subsidiaries for purposes of distributing such borrowed proceeds to
Mediacom under the most restrictive covenants in the Company's bank
credit agreements.
As of December 31, 1998, the Company had entered into interest rate
exchange agreements (the "Swaps") with various banks pursuant to which
the interest rate on $60,000 is fixed at a weighted average swap rate of
approximately 6.2%, plus the average applicable margin over the
Eurodollar Rate option under the Bank Credit Facilities. Any amounts paid
or received due to swap arrangements are recorded as an
23
<PAGE>
MEDIACOM LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All dollar amounts in 000's)
adjustment to interest expense. Under the terms of the Swaps, which
expire from 1999 through 2002, the Company is exposed to credit loss in
the event of nonperformance by the other parties to the Swaps. However,
the Company does not anticipate nonperformance by the counterparties.
(c) In connection with the acquisition of the Kern Valley System, the Western
Group issued to the seller an unsecured senior subordinated note (the
"Seller Note") in the amount of $2,800, with a final maturity of June 28,
2006. Interest is deferred throughout the term of the note and is payable
at maturity or upon prepayment. For the five-year period ending June 28,
2001, the annual interest rate is 9.0%. After the initial five-year
period, the annual interest rate increases to 15.0%, with an interest
clawback for the first five years. After the initial seven-year period,
the interest rate increases to 18.0%, with an interest clawback for the
first seven years. The Company intends to prepay the Seller Note plus
accrued interest on or before June 28, 2001, subject to prior approval by
the parties to the Western Credit Facilities, which the Company believes
it will obtain. The Company expects to repay the Seller Note with cash
flow generated from operations and future borrowings. There are no
penalties associated with prepayment of this note.
The Seller Note agreement contains a debt incurrence covenant limiting
the ability of the Western Group to incur additional indebtedness. The
Seller Note is subordinated and junior in right of payment to all senior
obligations, as defined in the Western Credit Facility.
The stated maturities of all debt outstanding as of December 31, 1998, are as
follows:
1999 $ 2,000
2000 2,300
2001 6,600
2002 9,500
2003 13,600
Thereafter 303,905
--------
$337,905
========
(9) Related Party Transactions:
Separate management agreements with each of Mediacom's subsidiaries
provide for Mediacom Management to be paid compensation for management services
performed for the Company. Under such agreements, Mediacom Management, which is
wholly-owned by the Manager, is entitled to receive annual management fees
calculated as follows: (i) 5.0% of the first $50,000 of annual gross operating
revenues of the Company; (ii) 4.5% of such revenues in excess thereof up to
$75,000; and (iii) 4.0% of such revenues in excess of $75,000. The Company
incurred management fees of approximately $5,797, $882, and $270 for the years
ended 1998 and 1997, and for the period ended December 31, 1996, respectively.
The operating agreement of Mediacom provides for Mediacom Management to
be paid a fee of 1.0% of the purchase price of acquisitions made by the Company
until the Company's pro forma consolidated annual operating revenues equal
$75,000 and 0.5% of such purchase price thereafter. The Company incurred
acquisition fees of approximately $3,327, $544, and $441 for the years ended
1998 and 1997, and for the period ended December 31, 1996, respectively. The
acquisition fees are included in other expenses in the statement of operations.
In addition, the operating agreements of the Company provide for the
reimbursement of reasonable out-of-pocket expenses of Mediacom Management
incurred in connection with the operation of the business of the Company and
acting for or on behalf of the Company in connection with any potential
acquisitions. The Company reimbursed Mediacom Management approximately $53, $59,
and $29 for the years ended 1998 and 1997, and for the period ended December 31,
1996, respectively.
24
<PAGE>
MEDIACOM LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All dollar amounts in 000's)
(10) Employee Benefit Plans:
Substantially all employees of the Company are eligible to participate
in a deferred arrangement pursuant to IRC Section 401(k) (the "Plan"). Under
such arrangement, eligible employees may contribute up to 15% of their current
pre-tax compensation to the Plan. The Plan permits, but does not require,
matching contributions and non-matching (profit sharing) contributions to be
made by the Company up to a maximum dollar amount or maximum percentage of
participant contributions, as determined annually by the Company. The Company
presently matches 50% on the first 6% of employee contributions. The Company's
contributions under the Plan totaled approximately $264, $14, and $10 for the
years ended 1998 and 1997, and for the period ended December 31, 1996,
respectively.
(11) Commitments and Contingencies:
Under various lease and rental agreements for offices, warehouses and
computer terminals, the Company had rental expense of approximately $588, $138,
and $22 for the years ended 1998 and 1997, and for the period ended December 31,
1996, respectively. Future minimum annual rental payments are as follows:
1999 $1,815
2000 1,190
2001 768
2002 379
2003 267
In addition, the Company rents utility poles in its operations generally
under short-term arrangements, but the Company expects these arrangements to
recur. Total rental expense for utility poles was approximately $1,709, $102,
and $24 for the years ended 1998 and 1997, and for the period ended December 31,
1996, respectively.
Legal Proceedings
Management is not aware of any legal proceedings currently that will
have a material adverse impact on the Company's financial statements.
Regulation in the Cable Television Industry
The cable television industry is subject to extensive regulation by
federal, local and, in some instances, state government agencies. The Cable
Television Consumer Protection and Competition Act of 1992 and the Cable
Communication Policy Act of 1984 (collectively, the "Cable Acts"), both of which
amended the Communications Act of 1934 (as amended, the "Communications Act"),
established a national policy to guide the development and regulation of cable
television systems. The Communications Act was recently amended by the
Telecommunications Act of 1996 (the "1996 Telecom Act"). Principal
responsibility for implementing the policies of the Cable Acts and the 1996
Telecom Act has been allocated between the FCC and state or local regulatory
authorities.
Federal Law and Regulation
The Cable Acts and the FCC's rules implementing such acts generally have
increased the administrative and operational expenses of cable television
systems and have resulted in additional regulatory oversight by the FCC and
local or state franchise authorities. The Cable Acts and the corresponding FCC
regulations have established, among other things: (i) rate regulations; (ii)
mandatory carriage and retransmission consent requirements that require a cable
television system under certain circumstances to carry a local broadcast station
or to obtain consent to carry a local or distant broadcast station; (iii) rules
for franchise renewals and transfers; and (iv) other requirements covering a
variety of operational areas such as equal employment opportunity, technical
standards and customer service requirements.
25
<PAGE>
MEDIACOM LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All dollar amounts in 000's)
The 1996 Telecom Act deregulates rates for cable programming services
tiers ("CPST") on March 31, 1999 and, for certain small cable operators,
immediately eliminates rate regulation of CPST, and, in certain limited
circumstances, basic services. The FCC is currently developing permanent
regulations to implement the rate deregulation provisions of the 1996 Telecom
Act. The Company is currently unable to predict the ultimate effect of the Cable
Acts or the 1996 Telecom Act on its financial statements.
The FCC and Congress continue to be concerned that rates for regulated
programming services are rising at a rate exceeding inflation. It is therefore
possible that the FCC will further restrict the ability of cable television
operators to implement rate increases and/or Congress will enact legislation
which would, for example, delay or suspend the scheduled March 1999 termination
of CPST rate regulation.
State and Local Regulation
Cable television systems generally operate pursuant to non-exclusive
franchises, permits or licenses granted by a municipality or other state or
local governmental entity. The terms and conditions of franchises vary
materially from jurisdiction to jurisdiction. A number of states subject cable
television systems to the jurisdiction of centralized state government agencies.
To date, other than Delaware, no state in which the Company currently operates
has enacted state level regulation. The Company cannot predict whether any of
the states in which currently operates will engage in such regulation in the
future.
(12) Disclosures about Fair Value of Financial Instruments:
Debt
The fair value of the Company's debt is estimated based on the current
rates offered to the Company for debt of the same remaining maturities. The fair
value of the senior bank debt and the Seller Note approximates the carrying
value. The fair value at December 31, 1998 of the 8 1/2% Senior Notes was
approximately $204,500.
Interest Rate Exchange Agreements
The fair value of the Swaps is the estimated amount that the Company
would receive or pay to terminate the Swaps, taking into account current
interest rates and the current creditworthiness of the Swap counterparties. At
December 31, 1998, the Company would have paid approximately $1,464 to terminate
the Swaps, inclusive of accrued interest.
(13) FASB 131 - Disclosure about Segments of an Enterprise and Related
Information:
During the fourth quarter of fiscal year 1998, the Company adopted
Statement of Financial Accounting Standards (SFAS) No. 131, "Disclosure about
Segments of an Enterprise and Related Information". This statement requires the
Company to report segment financial information consistent with the
presentations made to the Company's management for decision-making purposes. All
revenues of the Company are derived solely from cable television operations and
related activities. 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, and depreciation and amortization). For
the years ended 1998 and 1997, and for the period ended December 31, 1996, the
Company's consolidated system cash flow was approximately $59,850, $9,390, and
$2,960, respectively.
(14) Subsequent Events:
On February 26, 1999, Mediacom and Mediacom Capital, a New York
corporation wholly-owned by Mediacom, jointly issued $125,000 aggregate
principal amount of 7 7/8% Senior Notes due on February 15, 2011. The net
proceeds from this offering of approximately $121,900 were used to repay a
substantial portion of outstanding indebtedness under the Company's bank credit
facilities. Interest on the 7 7/8% Senior Notes will be payable semi-annually on
February 15 and August 15 of each year, commencing on August 15, 1999.
26
<PAGE>
MEDIACOM LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All dollar amounts in 000's)
The Company is regularly presented with opportunities to acquire cable
television systems that are evaluated on the basis of the Company's acquisition
strategy. Although the Company presently does not have any definitive agreements
to acquire or sell any of its cable television systems, it is negotiating with
prospective sellers to acquire additional cable television systems. If
definitive agreements for all such potential acquisitions are executed, and if
such acquisitions are then consummated, the Company's customer base would
approximately double in size. These acquisitions are subject to the negotiation
and completion of definitive documentation, which will include customary
representations and warranties and will be subject to a number of closing
conditions. Financing for these potential transactions has not been determined;
however, if such acquisitions are consummated, the Company believes its total
indebtedness would substantially increase. No assurance can be given that such
definitive documents will be entered into or that, if entered into, the
acquisitions will be consummated.
27
<PAGE>
MEDIACOM LLC AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
(All dollar amounts in 000's)
Schedule II
<TABLE>
<CAPTION>
Balance at Additions
beginning of charged to costs Balance at
period and expenses Deductions end of period
------------ ---------------- ---------- -------------
<S> <C> <C> <C> <C>
December 31, 1996
Allowance for doubtful accounts
Current receivables $ - $ 91 $ 66 $ 25
Acquisition reserves
Accrued expenses $ - $ - $ - $ -
December 31, 1997
Allowance for doubtful accounts
Current receivables $ 25 $ 45 $ 14 $ 56
Acquisition reserves
Accrued expenses $ - $ - $ - $ -
December 31, 1998
Allowance for doubtful accounts
Current receivables $ 56 $ 1,694 $ 1,452 $ 298
Acquisition reserves(1)
Accrued expenses $ - $ 4,120 $ - $ 4,120
</TABLE>
- ----------
(1) Addition was charged to intangible asset
28
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholder of Mediacom Capital Corporation:
We have audited the accompanying balance sheet of Mediacom Capital Corporation
as of December 31, 1998. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the balance sheet is free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the balance sheet. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statement referred to above present fairly, in all
material respects, the consolidated financial position of Mediacom Capital
Corporation as of December 31, 1998, in conformity with generally accepted
accounting principles.
Arthur Andersen LLP
Stamford, Connecticut
March 5, 1999
29
<PAGE>
MEDIACOM CAPITAL CORPORATION
BALANCE SHEET
December 31, 1998
ASSETS
------
Note receivable - from affiliate for issuance of common stock $ 100
------
Total assets $ 100
======
LIABILITIES AND OWNER'S EQUITY
------------------------------
Owner's equity
Common stock, par value $0.10; 200 shares authorized;
100 shares issued and outstanding $ 10
Additional paid-in capital 90
------
Total owner's equity $ 100
------
Total liabilities and owner's equity $ 100
======
The accompanying notes to the balance sheet
are an integral part of this statement.
30
<PAGE>
MEDIACOM CAPITAL CORPORATION
NOTES TO THE BALANCE SHEET
(All dollar amounts in 000's)
(1) Organization:
Mediacom Capital Corporation ("Mediacom Capital"), a New York
corporation wholly-owned by Mediacom LLC, was organized on March 9, 1998 for the
sole purpose of acting as co-issuer with Mediacom LLC of $200,000 aggregate
principal amount of the 8 1/2% Senior Notes due April 15, 2008. Mediacom Capital
has no operations.
(2) Subsequent Events:
On February 26, 1999, Mediacom LLC and Mediacom Capital jointly issued
$125,000 aggregate principal amount of 7 7/8% Senior Notes due on February 15,
2011. The net proceeds from this offering of approximately $121,900 were used to
repay a substantial portion of outstanding bank debt under the Company's bank
credit facilities. Interest on the 7 7/8% Senior Notes will be payable semi-
annually on February 15 and August 15 of each year, commencing on August 15,
1999.
31
