| MEDIACOM COMMUNICATIONS CORP ITEM 1A RISK FACTORS Risks Related to our Business We have a history of net losses and we may continue to generate net losses in the future |
| Our history of net losses increases the likelihood that we will continue to report additional net losses in the future |
| Although we reported net income of dlra13dtta6 million for the year ended December 31, 2004, we reported net losses of dlra62dtta5 million and dlra222dtta2 million for the years ended December 31, 2003 and 2005, respectively |
| In prior years, the principal reasons for our net losses include the depreciation and amortization expenses associated with our acquisitions and the capital expenditures related to expanding and upgrading our cable systems, and interest costs on borrowed money |
| In 2005, in addition to these factors, the increase in our valuation allowance for deferred tax assets (discussed below) increased our provision for income taxes and our net loss by a corresponding amount |
| Changes to our valuation account for deferred tax assets can cause our net income or net loss to fluctuate significantly |
| As of December 31, 2005, we had pre-tax net operating loss carryforwards for federal and state purposes of approximately dlra1dtta7 billion; if not utilized, they will expire in the years 2020 through 2025 |
| Mostly due to these net operating loss carryforwards, as of the same date, we had deferred tax assets of dlra699dtta8 million |
| These assets have been reduced by a valuation allowance of dlra429dtta5 million to reflect our assessment of the likelihood of their recovery in future periods |
| We periodically assess the likelihood of realization of our deferred tax assets, considering all available evidence, both positive and negative, including our most recent performance, the scheduled reversal of deferred tax liabilities, our forecast of taxable income in future periods and the availability of prudent tax planning strategies |
| As a result of these assessments, in prior years we have established valuation allowances on a portion of our deferred tax assets due to the uncertainty surrounding the realization of these assets |
| During the fourth quarter of 2005, based on our assessment of the facts and circumstances, we concluded that an additional portion of our deferred tax assets from net operating loss carryforwards will not be realized under the more-likely-than-not standard required by SFAS Nodtta 109 |
| As a result, in the fourth quarter of 2005 we increased our valuation allowance by approximately dlra197dtta3 million and recorded a corresponding non-cash charge to income tax expense in our consolidated statement of operations |
| This amount represents the portion of deferred tax liabilities related to the basis difference of our indefinite-lived intangible assets |
| Our assessment of the facts and circumstances took into account our losses before income taxes in 2005, the reduced likelihood of future taxable near-term income and the limited availability of prudent tax planning strategies |
| We expect to add to our valuation allowance for any increase in the deferred tax liabilities relating to indefinite-lived intangible assets |
| We will also adjust our valuation allowance if we assess that there is sufficient change in our ability to recover our deferred tax assets |
| Our income tax expense in future periods will be reduced or increased to the extent of offsetting decreases or increases, respectively, in our valuation allowance |
| These changes could have a significant impact on our future earnings |
| If we are unsuccessful in implementing our growth strategy, our business and results of operations could be adversely affected |
| We currently expect that a substantial portion of our future growth in revenues will come from the expansion of relatively new services, the introduction of additional new services, and, possibly, acquisitions |
| Relatively new services include HSD, VOD, DVRs, HDTV and phone service |
| We may not be able to successfully expand existing services due to unpredictable technical, operational or regulatory challenges |
| It is also possible that these services will not generate significant revenue growth |
| 26 _________________________________________________________________ [79]Table of Contents Our programming costs are increasing, and our business and results of operations will be adversely affected if we cannot pass through a sufficient part of the additional costs to video subscribers |
| In recent years, the cable and satellite video industries have experienced a rapid increase in the cost of programming, particularly sports programming |
| Increases in programming costs, our largest single expense item, are expected to continue, and we may not be able to pass on all of these cost increases to our video subscribers |
| In addition, as we add programming, we may not be able to pass on all of the costs of this additional programming without the potential loss of video subscribers |
| To the extent that we may not be able to pass on increased programming costs, our business, financial condition and results of operations could be adversely affected |
| We also expect to be subject to increasing financial and other demands by broadcasters to obtain the required consents for the transmission of their programming to our subscribers |
| We cannot predict the impact of these negotiations on our business and results of operations or the effect on our subscribers should we be required to suspend the carriage of this programming |
| We operate in a highly competitive business environment, which affects our ability to attract and retain customers and can adversely affect our business and operations |
| We have lost a significant number of video subscribers to direct broadcast satellite competition, and further loss of video subscribers could have a material negative impact on our business |
| The industry in which we operate is highly competitive and is often subject to rapid and significant changes and developments in the marketplace and in the regulatory and legislative environment |
| In some instances, we compete against companies with fewer regulatory burdens, easier access to financing, greater resources and operating capabilities, greater brand name recognition and long-standing relationships with regulatory authorities and customers |
| Our video business faces competition primarily from DBS providers |
| and EchoStar Communications, are each among the four largest providers of multichannel video programming services based on reported customers |
| In addition, DIRECTV’s affiliation with News Corporation could strengthen that company’s competitive positioning, as News Corporation also owns Fox Television Network and several cable programming services |
| DBS has grown rapidly over the past several years and continues to do so |
| We have lost a significant number of video subscribers to DBS competition, and will continue to face significant challenges from DBS providers |
| Local telephone companies are capable of offering video and other services in competition with us and they may increasingly do so in the future |
| Certain telephone companies have begun to deploy fiber more extensively in their networks, and some have begun to deploy broadband services, including video services, and in certain cases avoiding the regulatory burdens imposed on us |
| These deployments enable them to provide enhanced video, telephone and Internet access services to consumers |
| New laws or regulations at the federal or state level may clarify, modify or enhance the ability of the local telephone companies to provide their services either without obtaining state or local cable franchises or to obtain such franchises under terms and conditions more favorable than those imposed on us |
| If local telephone companies are not required to obtain comparable local franchises, our business, financial condition and results of operations could be adversely affected |
| Certain telephone companies, together with DBS providers, have launched bundled offerings of satellite delivered video service with phone, Internet and wireless service delivered by the telephone companies |
| We also face growing competition from municipal entities that construct facilities and provide cable television, HSD, telephony and/or other related services |
| In addition to hard-wired facilities, some municipal entities are exploring building wireless networks to deliver these services |
| In Iowa, our largest market, an organization named Opportunity Iowa began in early 2004 to actively encourage Iowa municipalities to construct facilities that could be used to provide services that compete with the services we offer |
| Referenda were on the November 2005 ballot in thirty-two municipalities to authorize the formation of a communications utility, a prerequisite to funding and construction of facilities that may compete with ours |
| Referenda were successfully passed in seventeen of those communities |
| In many of the communities that passed a referendum, proponents and officials publicly stated that a 27 _________________________________________________________________ [80]Table of Contents second vote would be taken prior to any actual construction or funding of a competitive system, and only after a preliminary cost benefit analysis is undertaken |
| Other Iowa communities may also hold elections to authorize the creation of a telecommunications utility in their communities |
| Proponents or officials in those communities may not take the same approach with regard to a second vote before construction or funding or a cost-benefit analysis |
| We also face competition from over-the-air television and radio broadcasters and from other communications and entertainment media such as movie theaters, live entertainment and sports events, newspapers and home video products |
| Further losses of customers to DBS or other alternative video and HSD services could also have a material adverse effect on our business, financial condition and results of operations |
| Competition in our HSD business primarily comes from telephone companies and other providers of “dial-up” and DSL which already have telephone lines into the household |
| DSL service is competitive with HSD service over cable systems |
| In addition, certain DBS providers are currently offering two-way broadband data access services, which compete with our ability to offer bundled services to our customers |
| Our HSD business may also face competition in the future from registered utility holding companies and subsidiaries |
| In 2004, the Federal Communications Commission (“FCC”) adopted rules: (i) that affirmed the ability of electric service providers to provide broadband Internet access services over their distribution systems; and (ii) that seek to avoid interference with existing services |
| Electric utilities could be formidable competitors to us |
| Some of our competitors, including franchised, wireless or private cable operators, DBS providers and local exchange carriers, may benefit from permanent or temporary business combinations such as mergers, joint ventures and alliances and the potential repeal of certain ownership rules, either through access to financing, resources or efficiencies of scale, or the ability to provide multiple services in direct competition with us |
| Some of our present or future competitors may have greater financial resources or, through their affiliates, greater access to programming or other services, than we do |
| If we are unable to keep pace with technological change, our business and results of operations could be adversely affected |
| Our industry is characterized by rapid technological change and the introduction of new products and services |
| We cannot assure you that we will be able to fund the capital expenditures necessary to keep pace with future technological developments |
| We also cannot assure you that we will successfully anticipate the demand of our customers for products and services requiring new technology |
| This type of rapid technological change could adversely affect our ability to maintain, expand or upgrade our systems and respond to competitive pressures |
| An inability to keep pace with technological change and provide advanced services in a timely manner, or to anticipate the demands of the market place, could adversely affect our ability to compete and business, financial condition and results of operations |
| Our phone service was launched in 2005, and consequently, we face new risks and uncertainties as we began to scale this business |
| In June 2005, we launched Mediacom Phone in one of our smaller markets, and by year-end 2005, our phone service was marketed to approximately 1dtta45 million of our total estimated 2dtta8 million homes |
| We have limited operating experience with our phone service, and managing its growth may present significant challenges for us |
| We may encounter difficulties introducing Mediacom Phone in new markets or increasing the scale of markets already launched |
| If our phone service is not sufficiently reliable or we otherwise fail to meet customer expectations, our business could be adversely affected |
| We face intense competition in offering phone service, primarily from local telephone companies |
| We also depend on third parties for interconnection, call switching, and other related services to operate Mediacom Phone |
| As a result, the quality of our service may suffer if these third parties are not capable of handling their responsibilities |
| We also expect to see changes in technology, competition, and the regulatory and legislative environment that may affect our phone business |
| Consequently, we are unable to predict the effect that current or future developments in these areas might have on our phone business |
| The loss of key personnel could have a material adverse effect on our business |
| If any of our manager’s key personnel ceases to participate in our business and operations, our profitability could suffer |
| Our success is substantially dependent upon the retention of, and the continued performance by, our manager’s key personnel, including Rocco B Commisso, the Chairman and Chief Executive Officer of our manager |
| Our manager has not entered into a long-term employment agreement with Mr |
| Neither our manager nor we currently maintain key man life insurance on Mr |
| We may not be able to obtain critical items at a reasonable cost or when required, which could adversely affect business, financial condition and results of operations |
| We depend on third-party suppliers for equipment, software, services and other items that are critical for the operation of our cable systems and the provision of advanced services, including digital set-top converter boxes, digital video recorders and routers, fiber-optic cable, telephone circuits, software, the “backbone” telecommunications network for our high-speed data service and construction services for expansion and upgrades of our cable systems |
| In certain cases, these items are available from a limited number of suppliers |
| Demand for 28 _________________________________________________________________ [81]Table of Contents these items has increased with the general growth in demand for Internet and telecommunications services |
| We typically do not carry significant inventories of equipment |
| Moreover, if there are no suppliers that are able to provide set-top converter boxes that comply with evolving Internet and telecommunications standards or that are compatible with other equipment and software that we use, our business, financial condition and results of operations could be materially adversely affected |
| If we are unable to obtain critical equipment, software, communications or other services on a timely basis and at an acceptable cost, our ability to offer our products and services and roll out advanced services may be impaired, and our business, financial condition and results of operations could be materially adversely affected |
| Some of our cable systems operate in the Gulf Coast region, which is likely to continue to experience severe hurricanes and tropical storms |
| Cable systems serving approximately 8prca of our subscribers are located on or near the Gulf Coast in Alabama, Florida and Mississippi |
| In 2004 and 2005, three hurricanes impacted these cable systems, to varying degrees, causing property damage, service interruption and loss of customers |
| Current predictions suggest that the Gulf Coast could experience severe hurricanes in the future |
| Severe weather could impact our operations in affected areas, causing us to experience higher than normal levels of expense and capital expenditures, as well as the potential loss of customers and revenues |
| Risks Related to Indebtedness of us and our Operating Subsidiaries We are a holding company with no operations and if our operating subsidiaries are unable to make funds available to us we may not be able to fund our obligations |
| As a holding company, we do not have any operations or hold any assets other than our investments in and our advances to our operating subsidiaries |
| Consequently, our subsidiaries conduct all of our consolidated operations and own substantially all of our consolidated assets |
| The only source of cash we have to pay interest on, and repay the principal of, our indebtedness and to meet our other obligations is the cash that our subsidiaries generate from their operations and their borrowings |
| Our subsidiaries are not obligated to make funds available to us |
| Our subsidiaries’ ability to make payments to us will depend upon their operating results and will be subject to applicable laws and contractual restrictions, including the agreements governing our subsidiary credit facilities and other indebtedness |
| Those agreements permit our subsidiaries to distribute cash to us under certain circumstances, but only so long as there is no default under any of such agreements |
| We have substantial existing debt and have significant interest payment requirements, which could adversely affect our ability to obtain financing in the future and require our operating subsidiaries to apply a substantial portion of their cash flow to debt service |
| Our total debt as of December 31, 2005 was approximately dlra3dtta06 billion |
| Our interest expense for the year ended December 31, 2005 was dlra208dtta3 million |
| We cannot assure you that our business will generate sufficient cash flows to permit us, or our subsidiaries, to repay indebtedness or that refinancing of that indebtedness will be possible on commercially reasonable terms or at all |
| This high level of debt and our debt service obligations could have material consequences, including that: • our ability to access new sources of financing for working capital, capital expenditures, acquisitions or other purposes may be limited; • we may need to use a large portion of our revenues to pay interest on borrowings under our subsidiary credit facilities and our senior notes, which will reduce the amount of money available to finance our operations, capital expenditures and other activities; • some of our debt has a variable rate of interest, which may expose us to the risk of increased interest rates; 29 _________________________________________________________________ [82]Table of Contents • we may be more vulnerable to economic downturns and adverse developments in our business; • we may be less flexible in responding to changing business and economic conditions, including increased competition and demand for new products and services; • we may be at a disadvantage when compared to those of our competitors that have less debt; and • we may not be able to fully implement our business strategy |
| A default under our indentures or our subsidiary credit facilities could result in an acceleration of our indebtedness and other material adverse effects |
| The agreements and instruments governing our own and our subsidiaries’ indebtedness contain numerous financial and operating covenants |
| The breach of any of these covenants could cause a default, which could result in the indebtedness becoming immediately due and payable |
| If this were to occur, we would be unable to adequately finance our operations |
| In addition, a default could result in a default or acceleration of our other indebtedness subject to cross-default provisions |
| If this occurs, we may not be able to pay our debts or borrow sufficient funds to refinance them |
| Even if new financing is available, it may not be on terms that are acceptable to us |
| The membership interests of our operating subsidiaries are pledged as collateral under our respective subsidiary credit facilities |
| A default under one of our subsidiary credit facilities could result in a foreclosure by the lenders on the membership interests pledged under that facility |
| Because we are dependent upon our operating subsidiaries for all of our revenues, a foreclosure would have a material adverse effect on our business, financial condition and results of operations |
| The terms of our indebtedness could materially limit our financial and operating flexibility |
| Several of the covenants contained in the agreements and instruments governing our own and our subsidiaries’ indebtedness could materially limit our financial and operating flexibility by restricting, among other things, our ability and the ability of our operating subsidiaries to: • incur additional indebtedness; • create liens and other encumbrances; • pay dividends and make other payments, investments, loans and guarantees; • enter into transactions with related parties; • sell or otherwise dispose of assets and merge or consolidate with another entity; • repurchase or redeem capital stock, other equity interests or debt; • pledge assets; and • issue capital stock or other equity interests |
| Complying with these covenants could cause us to take actions that we otherwise would not take or cause us not to take actions that we otherwise would take |
| We may not be able to obtain additional capital to continue the development of our business |
| We have invested substantial capital for the upgrade, expansion and maintenance of our cable systems and the launch and expansion of new or additional products and services |
| While we have completed our planned system upgrades, if there is accelerated growth in our video, HSD and voice products and services, or we decide to introduce other new advanced products and services, or the cost to provide these products and services increases, we 30 _________________________________________________________________ [83]Table of Contents may need to make unplanned additional capital expenditures |
| We may not be able to obtain the funds necessary to finance additional capital requirements through internally generated funds, additional borrowings or other sources |
| If we are unable to obtain these funds, we would not be able to implement our business strategy and our results of operations would be adversely affected |
| Risks Related to Legislative and Regulatory Matters Changes in cable television regulations could adversely impact our business |
| The cable television industry is subject to extensive legislation and regulation at the federal and local levels, and, in some instances, at the state level |
| Many aspects of such regulation are currently the subject of judicial and administrative proceedings and legislative and administrative proposals, and lobbying efforts by us and our competitors |
| We expect that court actions and regulatory proceedings will continue to refine our rights and obligations under applicable federal, state and local laws |
| The results of these judicial and administrative proceedings and legislative activities may materially affect our business operations |
| Local authorities grant us non-exclusive franchises that permit us to operate our cable systems |
| We renew or renegotiate these franchises from time to time |
| Local franchising authorities may demand concessions, or other commitments, as a condition to renewal, and these concessions or other commitments could be costly |
| The Cable Communications Policy Act of 1984 (“Communications Act”) contains renewal procedures and criteria designed to protect incumbent franchisees against arbitrary denials of renewal, and although such Act requires the local franchising authorities to take into account the costs of meeting such concessions or commitments, there is no assurance that we will not be compelled to meet their demands in order to obtain renewals |
| We cannot predict whether any of the markets in which we operate will expand the regulation of our cable systems in the future or the impact that any such expanded regulation may have upon our business |
| Similarly, due to the increasing popularity and use of commercial online services and the Internet, certain aspects have become subject to regulation at the federal and state level such as collection of information online from children, disclosure of certain subscriber information to governmental agencies, commercial emails or “spam,” privacy, security and distribution of material in violation of copyrights |
| In addition to the possibility that additional federal laws and regulations may be adopted with respect to commercial online services and the Internet, several individual states have imposed such restrictions and others may also impose similar restrictions, potentially creating an intricate patchwork of laws and regulations |
| Future federal and/or state laws may cover such issues as privacy, access to some types of content by minors, pricing, encryption standards, consumer protection, electronic commerce, taxation of e-commerce, copyright infringement and other intellectual property matters |
| Recently, many states in which we operate have enacted laws requiring us to notify customers in the event that certain customer information is accessed or believed to have been accessed without authorization |
| The adoption of such laws or regulations in the future may decrease the growth of such services and the Internet, which could in turn decrease the demand for our cable modem service, increase our costs of providing such service or have other adverse effects on our business, financial condition and results of operations |
| Such laws or regulations may also require disclosure of failures of our procedures or breaches to our system by third parties, which can increase the likelihood of claims against us by affected subscribers |
| Changes in channel carriage regulations could impose significant additional costs on us |
| Cable operators face significant regulation of their channel carriage |
| Currently, they can be required to devote substantial capacity to the carriage of programming that they might not carry voluntarily, including certain local broadcast signals, local public, educational and government access programming, and unaffiliated commercial leased access programming |
| If the FCC or Congress were to require cable systems to carry both the analog and digital versions of local broadcast signals or to carry multiple program streams included with a single digital broadcast transmission, this carriage burden would increase substantially |
| Recently, the FCC reaffirmed that cable operators need only carry one programming service of each television broadcaster to fulfill its must-carry obligation, however, changes in the composition of the FCC as well as proposals currently under consideration could result in an obligation to carry both the analog and digital version of local broadcast stations and/or to carry multiple digital program streams |
| Further, this decision has been appealed to the DC Circuit Court of Appeals |
| 31 _________________________________________________________________ [84]Table of Contents Reversing the findings of a November 2004 report, the FCC released a report in February 2006, finding that consumers could benefit under certain a la carte models for delivery of video programming |
| The report did not specifically recommend or propose the adoption of any specific rules by the FCC and it did not endorse a pure a la carte model where subscribers could purchase specific channels without restriction |
| Instead, it favored tiers plus individual channels or smaller theme-based tiers |
| Shortly after release of the report, the FCC voted to seek additional information as to whether cable systems with at least 36 channels are available to at least 70 percent of US Homes and whether 70 percent of households served by those systems subscribe |
| If so, the FCC may have discretion under the Cable Act to promulgate additional rules necessary to promote diversity of information sources |
| The FCC did not specify what rules it would seek to promulgate, however, the Chairman of the FCC has expressed support for family-friendly tiers of programming and availability of programming on an a la carte basis |
| Certain cable operators have responded by creating “family-friendly” programming tiers |
| It is not certain whether those efforts will ultimately be regarded as a sufficient response |
| Congress may also consider legislation regarding programming packaging, bundling or a-la-carte delivery of programming |
| Any such requirements could fundamentally change the way in which we package and price our services |
| We cannot predict the outcome of any current or future FCC proceedings or legislation in this area, or the impact of such proceedings on our business at this time |
| Recently, the FCC imposed “reciprocal” good faith retransmission consent negotiation obligations on cable operators and broadcasters |
| These rules identify seven types of conduct that would constitute “per se” violations of the new requirements |
| Thus, even though we may have no interest in carrying a particular broadcaster’s programming, we may be required under the new rules to engage in negotiations within the parameters of the FCC’s rules |
| While noting that the parties in retransmission consent negotiations were now subject to a “heightened duty of negotiation,” the FCC emphasized that failure to ultimately reach an agreement is not a violation of the rules |
| Our franchises are non-exclusive and local franchising authorities may grant competing franchises in our markets, which could adversely affect our business |
| Our cable systems are operated under non-exclusive franchises granted by local franchising authorities |
| As a result, competing operators of cable systems and other potential competitors, such as municipal utility providers, may be granted franchises and may build cable systems in markets where we hold franchises |
| Some may not require local franchises at all, such as certain municipal utility providers |
| Any such competition could adversely affect our business |
| The existence of multiple cable systems in the same geographic area is generally referred to as an “overbuild |
| ” As of December 31, 2005, approximately 12dtta6prca of the estimated homes passed by our cable systems were overbuilt by other cable operators |
| We cannot assure you that competition from overbuilders will not develop in other markets that we now serve or will serve after any future acquisitions |
| Legislation was recently passed in three states (including one in which we currently operate cable systems) and similar legislation is pending, or has been proposed in certain other states and in Congress, to allow local telephone companies to deliver services in competition with our cable service without obtaining equivalent local franchises |
| Such a legislatively granted advantage to our competitors could adversely affect our business |
| The effect of such initiatives, if any, on our obligation to obtain local franchises in the future or on any of our existing franchises, many of which have years remaining in their terms, cannot be predicted |
| The FCC recently issued a Notice of Proposed Rulemaking seeking comment on whether the current local franchising process constitutes an impediment to widespread issuance of franchises to competitive cable providers in terms of the sheer number of franchising authorities, the impact of state-level franchising authorities, the burdens some local franchising authorities seek to impose as conditions of granting franchises and whether state “level-playing field” statutes also create barriers to entry |
| We cannot determine the outcome of any potential new rules on our business; however, any change that would lessen the local franchising burdens and requirements imposed on our competitors relative to those that are or have been imposed on us could harm our business |
| 32 _________________________________________________________________ [85]Table of Contents Pending FCC and court proceedings could adversely affect our HSD service |
| The legal and regulatory status of providing high-speed Internet access service by cable television companies is uncertain |
| Although the United States Supreme Court recently held that cable modem service was properly classified by the FCC as an “information service,” freeing it from regulation as a “telecommunications service,” it recognized that the FCC has jurisdiction to impose regulatory obligations on facilities based Internet Service Providers |
| The FCC has an ongoing rulemaking to determine whether to impose regulatory obligations on such providers, including us |
| The FCC has issued a declaratory ruling that cable modem service, as it is currently offered, is properly classified as an interstate information service that is not subject to common carrier regulation |
| However, the FCC is still considering the following: whether to require cable companies to provide capacity on their systems to other entities to deliver high-speed Internet directly to customers, also known as open access; whether certain other regulatory requirements do or should apply to cable modem service; and whether and to what extent cable modem service should be subject to local franchise authorities’ regulatory requirements or franchise fees |
| The adoption of new rules by the FCC could place additional costs and regulatory burdens on us, reduce our anticipated revenues or increase our anticipated costs for this service, complicate the franchise renewal process, result in greater competition or otherwise adversely affect our business |
| While we cannot predict the outcome of this proceeding, we do note that the FCC recently removed the requirement that telecommunications carriers provide access to competitors to resell their DSL Internet access service citing the need for competitive parity with cable modem service which has no similar access requirement |
| We may be subject to legal liability because of the acts of our HSD customers or because of our own negligence |
| Our HSD service enables individuals to access the Internet and to exchange information, generate content, conduct business and engage in various online activities on an international basis |
| The law relating to the liability of providers of these online services for activities of their users is currently unsettled both within the United States and abroad |
| Potentially, third parties could seek to hold us liable for the actions and omissions of our cable modem service customers, such as defamation, negligence, copyright or trademark infringement, fraud or other theories based on the nature and content of information that our customers use our service to post, download or distribute |
| We also could be subject to similar claims based on the content of other Websites to which we provide links or third-party products, services or content that we may offer through our Internet service |
| Due to the global nature of the Web, it is possible that the governments of other states and foreign countries might attempt to regulate its transmissions or prosecute us for violations of their laws |
| It is also possible that information provided directly by us will contain errors or otherwise be negligently provided to users, resulting in third parties making claims against us |
| For example, we offer Web-based email services, which expose us to potential risks, such as liabilities or claims resulting from unsolicited email, lost or misdirected messages, illegal or fraudulent use of email, or interruptions or delays in email service |
| Additionally, we host website “portal pages” designed for use as a home page by, but not limited to, our HSD customers |
| These portal pages offer a wide variety of content from us and third parties which could contain errors or other material that could give rise to liability |
| To date, we have not been served notice that such a claim has been filed against us |
| However, in the future someone may serve such a claim on us in either a domestic or international jurisdiction and may succeed in imposing liability on us |
| Our defense of any such actions could be costly and involve significant distraction of our management and other resources |
| If we are held or threatened with significant liability, we may decide to take actions to reduce our exposure to this type of liability |
| This may require us to spend significant amounts of money for new equipment and may also require us to discontinue offering some features or our cable modem service |
| Since we launched our proprietary Mediacom Online service in February 2002, from time to time, we receive notices of claimed infringements by our cable modem service users |
| The owners of copyrights and trademarks have been increasingly active in seeking to prevent use of the Internet to violate their rights |
| In many cases, their claims of infringement are based on the acts of customers of an Internet service provider—for example, a customer’s use of an Internet service or the resources it provides to post, download or disseminate copyrighted music, movies, software or other content without the consent of the copyright owner or to seek to profit from the use of the goodwill associated with another person’s trademark |
| In some cases, copyright and trademark owners have sought to recover 33 _________________________________________________________________ [86]Table of Contents damages from the Internet service provider, as well as or instead of the customer |
| The law relating to the potential liability of Internet service providers in these circumstances is unsettled |
| In 1996, Congress adopted the Digital Millennium Copyright Act, which is intended to grant ISPs protection against certain claims of copyright infringement resulting from the actions of customers, provided that the ISP complies with certain requirements |
| So far, Congress has not adopted similar protections for trademark infringement claims |
| We may be required to provide access to our networks to other Internet service providers, which could significantly increase our competition and adversely affect our ability to provide new products and services |
| Local authorities and the FCC have been asked to require cable operators to provide nondiscriminatory access over their cable systems to other Internet service providers |
| The recent decision by the United State Supreme Court upholding the FCC’s classification of cable modem service as an “information service” may effectively forestall efforts by competitors to obtain access to the networks of cable operators to provide Internet access services |
| As noted above, however, the FCC continues to have jurisdiction over this issue and a rulemaking initiated prior to the Supreme Court’s decision remains ongoing |
| While we cannot predict the outcome of this proceeding, we do note that the FCC recently removed the requirement that telecommunications carriers provide access to competitors to resell their DSL internet access service citing the need for competitive parity with cable modem service which has no similar access requirement |
| If we are required to provide access in this manner, it could have a significant adverse impact on our business, financial condition and results of operations, including by: (i) increasing competition; (ii) increasing the expenses we incur to maintain our systems; and/or (iii) increasing the expense of upgrading and/or expanding our systems |
| We may become subject to additional regulatory burdens when we offer cable telephony service |
| The regulatory treatment of VoIP services like those we and others offer remains uncertain |
| The FCC, Congress, the courts and the states continue to look at issues surrounding the provision of VoIP, including whether this service is properly classified as a telecommunications service or an information service |
| The FCC’s decision to classify VoIP as an information service should eliminate much if not all local regulation of the service and should limit federal regulation to consumer protection, as opposed to economic issues |
| For example, on the federal level, the FCC recently required providers of “interconnected” VoIP services, such as ours, to file a letter with the FCC certifying compliance with certain E-911 functionality |
| Disputes have also arisen with respect to the rights of VoIP providers and their telecommunications provider partners to obtain interconnection and other rights under the Act from incumbent telephone companies |
| We cannot predict how these issues will be resolved, but uncertainties in the existing law as it applies to VoIP or any determination that results in greater or different regulatory obligations than competing services would result in increased costs, reduce anticipated revenues and impede our ability to effectively compete or otherwise adversely affect our ability to successfully roll-out and conduct our telephony business |
| Actions by pole owners might subject us to significantly increased pole attachment costs |
| Our cable facilities are often attached to or use public utility poles, ducts or conduits |
| Historically, cable system attachments to public utility poles have been regulated at the federal or state level |
| Generally this regulation resulted in favorable pole attachment rates for cable operators |
| The FCC clarified that the provision of Internet access does not endanger a cable operator’s favorable pole rates; this approach ultimately was upheld by the Supreme Court of the United States |
| That ruling, coupled with the recent Supreme Court decision upholding the FCC’s classification of cable modem service as an information service, should strengthen our ability to resist such rate increases based solely on the delivery of cable modem services over our cable systems |
| As we continue our deployment of cable telephony and certain other advanced services, utilities may continue to invoke higher rates |
| A formal hearing is currently before the FCC in which Alabama Power is attempting to demonstrate that pole attachment rates above its marginal costs meet the just compensation test approved by the United States Court of Appeals for the 11^th Circuit which would allow it to ask for and receive rates from cable operators over and above the rates set by FCC regulation |
| If successful, Alabama Power and perhaps all utilities in areas served by us may have a similar claim thereby increasing their ability to raise rates |
| Our business, financial condition and results of operations could suffer a material adverse impact from any significant increased costs, and such increased pole attachment costs could discourage system upgrades and the introduction of new products and services |
| 34 _________________________________________________________________ [87]Table of Contents Changes in compulsory copyright regulations might significantly increase our license fees |
| Filed petitions for rulemaking with the United States Copyright Office propose revisions to certain compulsory copyright license reporting requirements and seek clarification of certain issues relating to the application of the compulsory license to the carriage of digital broadcast stations |
| The petitions seek, among other things: (i) clarification of the inclusion in gross revenues of digital converter fees, additional set fees for digital service and revenue from required “buy throughs” to obtain digital service; (ii) reporting of “dual carriage” and multicast signals; (iii) revisions to the Copyright Office’s rules and Statement of Account forms, including increased detail regarding services, rates and subscribers, additional information regarding non-broadcast tiers of service, cable headend location information, community definition clarification and identification of the county in which the cable community is located and the effect of interest payments on potential liability for late filing; and (iv) payment for certain distant signals in communicates where the signal is not carried, dubbed “phantom signals |
| ” The Copyright Office may open one or more rulemakings in response to these petitions |
| We cannot predict the outcome of any such rulemakings; however, it is possible that certain changes in the rules or copyright compulsory license fee computations could have an adverse affect on our business, financial condition and results of operations by increasing our copyright compulsory license fee costs or by causing us to reduce or discontinue carriage of certain broadcast signals that we currently carry on a discretionary basis |
| Risks related to our Chairman and Chief Executive Officer’s Controlling Position Our Chairman and Chief Executive Officer has the ability to control all major corporate decisions, and a sale of his stock could result in a change of control that would have unpredictable effects |
| Rocco B Commisso, our Chairman and Chief Executive Officer, beneficially owned our common stock representing approximately 76dtta4prca of the combined voting power as of December 31, 2005 |
| Commisso will generally have the ability to control the outcome of all matters requiring stockholder approval, including the election of our entire board of directors, the approval of any merger or consolidation and the sale of all or substantially all of our assets |
| Commisso’s voting power may have the effect of discouraging offers to acquire Mediacom because any such acquisition would require his consent |
| We cannot assure you that Mr |
| Commisso will maintain all or any portion of his ownership or that he would continue as an officer or director if he sold a significant part of his stock |
| The disposition by Mr |
| Commisso of a sufficient number of shares could result in a change in control of our company, and we cannot assure you that a change of control would not adversely affect our business, financial condition or results of operations |
| As noted above, it could also result in a default under our subsidiary credit agreements, could trigger a variety of federal, state and local regulatory consent requirements and potentially limit our utilization of net operating losses for income tax purposes |