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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
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Annual Report Pursuant to Section 13 or 15 (d) of the
Securities Exchange Act of 1934
For the fiscal year ended December 31, 2000
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 (I.R.S. Employer
of Identification Numbers)
incorporation or organization)
100 Crystal Run Road
Middletown, New York 10941
(Address of principal executive offices)
(845) 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
--- ---
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.
MEDIACOM LLC
2000 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
PART I
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Page
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Item 1. Business.............................................................................. 4
Item 2. Properties............................................................................ 28
Item 3. Legal Proceedings..................................................................... 28
Item 4. Submission of Matters to a Vote of Security Holders................................... 28
PART II
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Item 5. Market for Registrants' Common Equity and Related Stockholder Matters................. 29
Item 6. Selected Financial Data............................................................... 30
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations............................................................... 34
Item 7A. Quantitative and Qualitative Disclosures About Market Risk............................ 47
Item 8. Financial Statements and Supplementary Data........................................... 48
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure................................................................ 70
PART III
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Item 10. Directors and Executive Officers of the Registrants................................... 71
Item 11. Executive Compensation................................................................ 73
Item 12. Security Ownership of Certain Beneficial Owners and Management........................ 73
Item 13. Certain Relationships and Related Transactions........................................ 74
PART IV
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Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K....................... 75
2
Mediacom LLC was organized as a New York limited liability company in 1995
and is a wholly-owned subsidiary of Mediacom Communications Corporation.
Mediacom Capital Corporation was organized as a New York corporation in 1998 and
is a wholly-owned subsidiary of Mediacom LLC. Mediacom Capital was formed for
the sole purpose of acting as co-issuer with Mediacom LLC of public debt
securities and does not conduct operations of its own.
References in this Annual Report to "we," "us," or "our" are to Mediacom
LLC and its direct and indirect subsidiaries, unless the context specifies or
requires otherwise. References in this Annual Report to "MCC" are to Mediacom
Communications Corporation.
Cautionary Statement Regarding Forward-Looking Statements
You should carefully review the information contained in this Annual
Report and in other reports or documents that we file from time to time with the
Securities and Exchange Commission (the "SEC"). In this Annual Report, we state
our beliefs of future events and of our future financial performance. In some
cases, you can identify those so-called "forward-looking statements" by words
such as "may," "will," "should," "expects," "plans," "anticipates," "believes,"
"estimates," "predicts," "potential," or "continue" or the negative of those
words and other comparable words. You should be aware that those statements are
only our predictions. Actual events or results may differ materially. In
evaluating those statements, you should specifically consider various factors,
including the risks discussed in this Annual Report for the year ended December
31, 2000 and other reports or documents that we file from time to time with the
SEC. Those factors may cause our actual results to differ materially from any of
our forward-looking statements. All forward-looking statements attributable to
us or a person acting on our behalf are expressly qualified in their entirety by
this cautionary statement.
3
PART I
ITEM 1. BUSINESS
Introduction
We are currently the ninth largest cable television company in the United
States. We provide our customers with a wide array of broadband services,
including traditional video services, digital television and high-speed Internet
access. As of December 31, 2000, our cable systems passed approximately 1.2
million homes and served approximately 779,000 basic subscribers in 22 states.
We were founded in July 1995 by Rocco B. Commisso, our Chairman and Chief
Executive Officer, to acquire and operate cable television systems serving
principally non-metropolitan markets of the United States.
Since commencement of our operations in March 1996, we have experienced
significant growth by deploying a disciplined strategy of acquiring
underperforming cable systems primarily in markets with favorable demographic
profiles. Through December 1998, we completed nine acquisitions of cable systems
that served approximately 362,200 basic subscribers as of December 31, 2000, for
an aggregate purchase price of $432.4 million. In 1999, we completed two
acquisitions of cable systems that served approximately 363,800 basic
subscribers as of December 31, 2000, for an aggregate purchase price of $759.6
million. In 2000, we completed nine acquisitions of cable systems that served
approximately 53,000 basic subscribers as of December 31, 2000, for an aggregate
purchase price of $109.2 million.
We also have generated strong internal growth and improved the operating
and financial performance of our cable systems. These results have been achieved
primarily through the introduction of an expanded array of core cable television
products and services made possible by the rapid upgrade of our cable network.
Assuming all our cable systems were purchased on January 1, 1999, revenues
increased by 9.5%, EBITDA increased by 14.8% and the EBITDA margin improved from
44.7% to 46.9% for the year ended December 31, 2000 as compared to the year
ended December 31, 1999. Applying the same assumptions, our internal subscriber
growth was 1.1% for the 12 month period ended December 31, 2000. During these
periods, we also experienced significant increases in operating losses and net
losses. For purposes of this Annual Report, EBITDA is operating income (loss)
before depreciation and amortization and non-cash stock charges.
We believe that advancements in digital technologies, together with the
explosive growth of the Internet, have positioned the cable television
industry's high-speed, interactive broadband network as the primary platform for
the delivery of video, voice and data services to homes and businesses. To
capitalize on these opportunities, we are rapidly upgrading our cable network to
allow for the widespread launch of advanced broadband products and services to
our customers. Including the cable systems we acquired in 2000, approximately
74% of our cable network was upgraded with 550MHz to 750MHz bandwidth capacity
and 47% of our homes passed were activated with two-way communications
capability as of December 31, 2000. Our upgrade program already has enabled us
to offer these advanced broadband products and services to a significant number
of our customers. As of December 31, 2000, our digital cable service was
available to 400,000 basic subscribers, and our high-speed Internet access, or
cable modem service, was launched in cable systems with 486,000 homes passed.
Our principal executive offices are located at 100 Crystal Run Road,
Middletown, New York 10941 and our telephone number at that address is (845)
695-2600. Our website is located at www.mediacomcc.com. The information on our
website is not part of this Annual Report.
4
General Business Developments
2000 Events
In February 2000, MCC completed an initial public offering of its Class A
common stock for total net proceeds of approximately $354.1 million. Immediately
prior to the completion of MCC's initial public offering, MCC issued shares of
its Class A and Class B common stock in exchange for all of our outstanding
membership interests and became our sole member and manager. Upon completion of
MCC's initial public offering, MCC contributed such net proceeds to us in the
form of equity capital, and the management agreements between Mediacom
Management Corporation, a Delaware corporation, and our operating subsidiaries
were replaced with new agreements between MCC and our operating subsidiaries.
In 2000, we completed nine acquisitions of cable systems that served
approximately 53,000 basic subscribers as of December 31, 2000, for an aggregate
purchase price of $109.2 million. These cable systems serve communities in
Alabama, Illinois, Iowa, Kentucky, Minnesota and South Dakota, which are located
within our regional operating clusters.
In December 2000, MCC signed a binding commitment letter with At Home
Network Solutions, Inc., a partially-owned subsidiary of At Home Corporation,
for a new cable affiliate relationship. This new affiliation enables us to offer
the Excite@Home high-speed broadband Internet service to our customers and
replaces our previous third-party provider, ISP Channel, Inc., a wholly-owned
subsidiary of SoftNet Systems, Inc. We are currently transitioning our customers
to the Excite@Home service and MCC is completing the documentation of its
definitive agreement with At Home Solutions.
2001 Events
On January 24, 2001, we and Mediacom Capital completed an offering of
$500.0 million of 9 1/2% senior notes due January 2013. Approximately $467.5
million of the net proceeds were used to repay a substantial portion of the
indebtedness outstanding under our subsidiary credit facilities and related
accrued interest. The balance of the net proceeds is being used for general
corporate purposes.
On February 7, 2001, we and Mediacom Capital filed a registration
statement with the SEC under which we may sell debt securities for a maximum
amount of $1.0 billion. The SEC declared this registration statement effective
on February 13, 2001.
On February 26, 2001, MCC entered into agreements with AT&T Broadband, LLC
to acquire cable systems serving approximately 840,000 basic subscribers in
Georgia, Illinois, Iowa, and Missouri, for an aggregate purchase price of $2.215
billion in cash, subject to closing adjustments. Among the AT&T systems' largest
clusters are communities such as: Albany, Columbus, Tifton and Valdosta,
Georgia; Charleston, Carbondale, Effingham, Marion, Moline and Rock Island,
Illinois; Ames, Cedar Rapids, Clinton, Davenport, Des Moines, Dubuque, Fort
Dodge, Iowa City, Mason City and Waterloo, Iowa; and Columbia, Jefferson City
and Springfield, Missouri. MCC expects to fund these acquisitions through a
combination of new debt and equity financings and borrowings under our existing
subsidiary credit facilities. These pending transactions are expected to close
in the second or third quarter of 2001, subject to customary closing conditions
and the receipt of regulatory and other approvals.
Unless otherwise stated in this Annual Report, the operating and financial
data contained herein do not include the effect of the pending AT&T
transactions.
5
Business Strategy
Our objective is to become the leading cable operator focused on providing
entertainment, information and telecommunications services in non-metropolitan
markets of the United States. The key elements of our strategy are to:
Improve the Operating and Financial Performance of Our Acquired Cable
Systems
We seek to rapidly integrate our acquired cable systems and improve their
operating and financial performance. Prior to completion of an acquisition, we
formulate plans for customer care and billing improvements, network upgrades,
headend consolidation, new product and service launches, competitive positioning
and human resource requirements. After completing an acquisition, we implement
managerial, operating, purchasing, personnel and engineering changes designed to
effect these plans.
Develop Efficient Operating Clusters
Our systems currently are managed through six regional operating clusters
by local management teams that oversee system activities and operate
autonomously within financial and operating guidelines established by our
corporate office. To enhance these clusters, our acquisition strategy focuses,
in part, on acquiring or trading for systems in close proximity to our own
systems. By further concentrating the geographic clustering of our cable
systems, we expect additional operating efficiencies through the consolidation
of many managerial, customer service, marketing, administrative and technical
functions.
The clustering of systems also enables us to consolidate headend
facilities, resulting in lower fixed capital costs on a per home basis as we
introduce new and enhanced products and services because of the larger number of
customers served by a single headend facility. This headend consolidation also
improves our ability to sell advertising on our cable systems. As a result of
our clustering and upgrade program, by December 2002 we plan to eliminate 309
headend facilities so that all of our customers will be served by 100 headend
facilities and 92% of our customers will be served by 40 headend facilities.
Rapidly Upgrade Our Cable Network
We are rapidly upgrading our cable network to provide new broadband
products and services, improve our competitive position and increase overall
customer satisfaction. By December 2002, we anticipate that 95% of our basic
subscribers will be served by cable systems with 550MHz to 870MHz bandwidth
capacity and two-way communications capability. As part of our upgrade program,
we plan to deploy over 10,000 route miles of fiber optic cable to create large
regional fiber optic networks with the potential to provide advanced
telecommunications services. Our upgrade plans will allow us to:
o offer digital cable television, high-speed Internet access
and interactive video services;
o increase channel capacity to a minimum of 82 channels, and
significantly more with digital video technology;
o activate the two-way communications capability of our systems, which
will give our customers the ability to send and receive signals over
our cable network;
o eliminate 309 headend facilities, lowering our fixed capital costs
on a per home basis as we introduce new products and services; and
o utilize our regional fiber optic networks to offer advanced
telecommunications services.
6
Introduce New and Enhanced Products and Services
We have acquired cable systems that we believe generally underserved their
customers prior to our ownership. We believe that significant opportunities
exist to increase our revenues by expanding the array of products and services
we offer. We have used and will continue to use the expanded channel capacity of
our upgraded systems to introduce several new basic programming services,
additional premium services and numerous pay-per-view channels.
Utilizing digital video technology, we are offering multiple packages of
premium services, several pay-per-view channels on a near video-on-demand basis,
digital music services and interactive program guides. As of December 31, 2000,
our digital cable service was available to 400,000 basic subscribers. We also
offer high-speed Internet access at speeds up to 100 times faster than a
conventional telephone modem. As of December 31, 2000, we launched cable modem
service in cable systems with 486,000 homes passed. In addition, we are
currently exploring opportunities in interactive video and telecommunications
services.
Maximize Customer Satisfaction to Build Customer Loyalty
As a result of our strong regional and local management presence, we are
responsive to customer needs and preferences and better positioned to strengthen
relations with the local government authorities and the communities we serve. We
seek a high level of customer satisfaction by providing superior customer
service and attractively priced product and service offerings. We believe our
investments in the cable network are increasing customer satisfaction as a
result of a wide array of new product and service introductions, greater
technical reliability and improved quality of service. We have implemented
stringent internal customer service standards, which we believe meet or exceed
those established by the National Cable Television Association. We have regional
calling centers servicing 84% of our customers that are staffed with dedicated
personnel who provide service 24 hours a day, seven days a week. We believe that
our focus on customer service has enhanced our reputation in the communities we
serve, which has increased customer loyalty and the potential demand for our new
and enhanced products and services.
Acquire Underperforming Cable Systems Principally in Non-Metropolitan Markets
Our disciplined acquisition strategy targets underperforming cable systems
serving primarily non-metropolitan markets. These systems are typically within
the top 50 to 100 television markets and small and medium-sized communities
where customers generally require cable to clearly receive a full complement of
off-air television signals. We believe that there are advantages in acquiring
and operating cable systems in non-metropolitan markets, including:
o less direct competition given the lower housing densities and the
resulting higher costs per customer of constructing a cable network;
o higher penetration levels of our services and lower customer
turnover as a result of fewer competing entertainment alternatives;
and
o generally lower overhead and operating costs than those incurred by
cable operators serving larger markets.
In addition, we seek to acquire or trade for cable systems in close
proximity to our existing operations because it is more cost effective to
provide cable television and advanced telecommunications services over an
expanded subscriber base within a concentrated geographic area. We have been
able to purchase fill-in acquisitions at favorable prices in geographic regions
where we are the dominant provider of cable television services. In 2000, we
completed nine acquisitions of cable systems serving approximately 53,000 basic
subscribers as of December 31, 2000 for an aggregate purchase price of $109.2
million. These cable systems serve communities in Alabama, Illinois, Iowa,
Kentucky, Minnesota and South Dakota, which are located within our regional
operating clusters.
7
Implement a Flexible Financing Structure
To support our business strategy and enhance our financial flexibility, we
have developed a financing strategy utilizing a blend of equity and debt capital
to complement our acquisition and operating activities. We have diversified our
sources of debt capital by raising long-term debt while utilizing our operating
subsidiaries to access debt, principally in the commercial bank market, through
separate borrowing groups.
We believe our financing strategy is beneficial because it broadens our
access to various equity and debt markets, enhances our flexibility in managing
our capital structure, reduces the overall cost of debt capital and permits us
to maintain a substantial liquidity position in the form of unused and available
subsidiary credit facilities. As of December 31, 2000, the unused credit
commitments under our subsidiary credit facilities were approximately $436.6
million and our overall cost of debt capital was 8.2%.
Products and Services
We provide our customers with the ability to tailor their product
selection from a full array of core cable television services. In addition, we
offer our customers advanced broadband products and services such as digital
cable television and high-speed Internet access. These products and services
have been introduced to a significant portion of our customer base. In 2001, we
plan to further introduce digital cable and high-speed Internet access across
our cable systems and to aggressively market these services to our customer
base. We also are exploring opportunities in interactive programming and
telecommunications services.
Core Cable Television Services
We design both our basic channel line-up and our additional channel
offerings for each system according to demographics, programming preferences,
channel capacity, competition, price sensitivity and local regulation. Our core
cable television service offerings include the following in most of our cable
systems:
Limited Basic Service. Our limited basic service includes, for a monthly
fee, local broadcast channels, network and independent stations, limited
satellite-delivered programming, and local public, government, home-shopping and
leased access channels.
Expanded Basic Service. Our expanded basic service includes, for an
additional monthly fee, various satellite-delivered channels such as CNN, MTV,
USA Network, ESPN, Lifetime, Nickelodeon and TNT.
Premium Service. Our premium services are satellite-delivered channels
consisting principally of feature films, original programming, live sports
events, concerts and other special entertainment features, usually presented
without commercial interruption. HBO, Cinemax, Showtime, The Movie Channel and
Starz are typical examples. Such premium programming services are offered by the
systems both on a per-channel basis and as part of premium service packages
designed to enhance customer value and to enable us to take advantage of
programming agreements offering cost incentives based on premium service unit
growth.
The significant expansion of bandwidth capacity resulting from our capital
improvement program will allow us to expand the use of tiered and multichannel
packaging strategies for marketing and promoting premium and niche programming
services. We believe that these packaging strategies will increase basic and
premium penetration as well as revenue per basic subscriber.
Pay-Per-View Service. Our pay-per-view services allow customers to pay to
view a single showing of a feature film, live sporting event, concert and other
special event, on an unedited, commercial-free basis. Such pay-per-view services
are offered by us on a per-viewing basis, with subscribers only paying for
programs which they select for viewing.
8
Digital Cable Services
Digital video technology offers significant advantages. Most importantly,
this technology allows us to greatly increase our channel offerings through the
use of compression, which converts one analog channel into eight to 12 digital
channels. The implementation of digital technology has significantly enhanced
and expanded the video and other service offerings we provide to our customers.
We currently offer our customers several digital cable programming
packages that include:
o up to 42 multichannel premium services;
o up to 34 pay-per-view movie and sports channels;
o up to 45 channels of digital music; and
o an interactive on-screen program guide to help them navigate the new
digital choices.
We first introduced digital cable services in our cable systems in June
1999. As of December 31, 2000, our digital service was available to 400,000
basic subscribers and we served 40,000 digital customers. By year-end 2001, we
expect our digital cable service to be available to 550,000 basic subscribers
and to serve between 90,000 and 100,000 digital customers.
High-Speed Internet Access
Our broadband cable network enables data to be transmitted up to 100 times
faster than traditional telephone modem technologies. This high-speed capability
allows our cable modem customer to receive and transmit large files from the
Internet in a fraction of the time required when using the traditional telephone
modem. It also allows much quicker response times when surfing the Internet,
providing a richer experience for the customer. In addition, the cable modem
service eliminates the need for a telephone line, is always activated and does
not require the customer to dial into the Internet service provider and await
authorization.
We first introduced two-way, high-speed Internet access service in our
cable systems in November 1999. As of December 31, 2000, we launched cable modem
service in cable systems with 486,000 homes passed and we served 12,000 cable
modem customers. We also provided dial-up telephone Internet access to 3,600
customers. By year-end 2001, we expect to launch cable modem service in cable
systems with 800,000 homes passed and to serve between 45,000 and 50,000 data
customers.
In December 2000, MCC signed a binding commitment letter with At Home
Network Solutions, Inc., a partially-owned subsidiary of At Home Corporation,
for a new cable affiliate relationship. This new affiliation enables us to offer
the Excite@Home high-speed broadband Internet service to our customers under the
name Mediacom@Home. Through January 2001, ISP Channel was the third party
provider of Internet access to our cable modem customers. As of January 31,
2001, our relationship with ISP Channel was terminated. We are currently
transitioning our customers to the Excite@Home service and MCC is completing the
documentation of its definitive agreement with At Home Solutions.
Future Services
Interactive Services. Our upgraded cable network will have the capacity to
deliver various interactive television services. Interactive television can be
divided among three general service categories: enhanced television; Internet
access over the television; and video-on-demand. These new services enable the
customer to interact over the television set, generally by using a conventional
remote television control or a computer keyboard, to either buy a product or
service or request information on a product or service.
Enhanced television includes such services as ancillary programming
information, interactive advertising and impulse sales and purchases. Companies
delivering enhanced television services include TV Guide Interactive, Wink
Communications, Liberate Technologies and OpenTV. Internet access and e-mail
over the television are delivered using a set-top box with the customer using a
wireless keyboard. Companies providing Internet access over the television
include WebTV and WorldGate Communications. The provision of video-on-demand
services requires the
9
use of servers at the headend facility of a cable system to provide hundreds of
movies or special events on demand with video cassette recorder functionality,
or the ability to fast forward, pause and rewind a program at will. Companies
providing video-on-demand services include Concurrent Computer Corporation, DIVA
Systems Corporation, Intertainer Inc., N-Cube, Sea Change International and
others. We are in discussions with several interactive service providers and
expect to initiate trial launches of interactive services in the second half of
2001.
Telecommunications Services. We are exploring technologies using Internet
protocol telephony as well as traditional switching technologies that are
currently available to transmit telephony signals over our cable network. Our
upgrade plans include the installation of over 10,000 route miles of fiber optic
cable resulting in the creation of large, high-capacity regional networks. We
are constructing our networks with excess fiber optic capacity, thereby
affording us the flexibility to pursue new data and telecommunications
opportunities. We are in discussions with several telecommunications service
providers and are developing plans for trial launches of such services.
10
Description of Our Cable Systems
Overview
The table below provides an overview of selected operating and technical
statistics for our cable systems for the years ended:
1996 1997 1998 1999 2000
---- ---- ---- ---- ----
Operating Data:
Homes passed(1)....................... 38,749 87,750 520,000 1,071,500 1,173,000
Basic subscribers(2).................. 27,153 64,350 354,000 719,000 779,000
Basic penetration(3).................. 70.1% 73.3% 68.1% 67.1% 66.4%
Premium service units(4).............. 11,691 39,288 407,100 587,000 597,000
Premium penetration(5)................ 43.1% 61.1% 115.0% 81.6% 76.6%
Average monthly revenues
per basic subscriber(6)............ $34.09 $32.11 $32.88 $35.52 $38.45
Digital Cable:
Digital-ready basic subscribers(7).... - - - 168,000 400,000
Digital customers..................... - - - 5,300 40,000
Digital penetration(8)................ - - - 3.2% 10.0%
Data:
Data-ready homes passed(9)............ - - - 120,000 550,000
Data-ready homes marketed(10)......... - - - 105,500 486,000
Dial-up customers(11).............. 2,225 2,518 4,729 4,600 3,600
Cable modem customers.............. - - - 500 12,000
------ ------ ------- --------- ---------
Total data customers.................. 2,225 2,518 4,729 5,100 15,600
Data penetration(12).................. - - - 4.8% 3.2%
Cable Network Data:
Miles of plant........................ 736 1,697 11,950 22,444 24,500
Density(13)........................... 53 52 44 48 48
Percentage of basic subscribers at
550MHz to 750MHz................... 0% 25% 45% 57% 74%
- ----------
(1) Represents the number of single residence homes, apartments and
condominium units passed by the cable distribution network in a cable
system's service area.
(2) Represents subscribers of a cable television system who receive a package
of over-the-air broadcast stations, local access channels or certain
satellite-delivered cable television services and who are usually charged
a flat monthly rate for a number of channels.
(3) Represents basic subscribers as a percentage of total number of homes
passed.
(4) Represents the number of subscriptions to premium services. A subscriber
may purchase more than one premium service, each of which is counted as a
separate premium service unit.
(5) Represents premium service units as a percentage of the total number of
basic subscribers. This ratio may be greater than 100% if the average
basic subscriber subscribes to more than one premium service unit.
(6) Represents average monthly revenues for the last three months of the
period divided by average basic subscribers for such period. Includes the
revenues from cable systems acquired during the last three months of the
period as if such acquisitions were completed at the beginning of the
three month period.
(7) A subscriber is digital-ready if the subscriber is in a system where
digital cable services have been launched.
(8) Represents digital customers as a percentage of digital-ready basic
subscribers.
(9) A home passed is data-ready if it is in a system with two-way
communications capability.
(10) Data-ready homes marketed represents data-ready homes passed where cable
modem service has been launched.
(11) A customer that accesses the Internet through a conventional modem and
telephone line connection.
(12) Represents the number of total data customers as a percentage of total
data-ready homes marketed.
(13) Represents homes passed divided by miles of plant.
11
Selected Operating Region Data
Our systems currently are managed through six operating regions by local
management teams that oversee system activities and operate autonomously within
financial and operating guidelines established by our corporate office. The
following table sets forth the six operating regions, the principal states
served by such regions, and their respective homes passed, basic subscribers and
basic penetration as of December 31, 2000:
Homes Basic Basic
Region States Passed Subscribers Penetration
------ ------ ------ ----------- -----------
Midwest................. Illinois, Indiana, Michigan, 302,500 194,150 64.2%
Ohio
North Central........... Iowa, Minnesota, South 283,000 193,400 68.3%
Dakota, Wisconsin
Southern................ Alabama, Florida, 214,300 153,200 71.5%
Mississippi, Tennessee
Mid-Atlantic............ Delaware, Maryland, 129,000 89,000 69.0%
North Carolina, Virginia
Central.................. Kansas, Kentucky, 139,600 87,650 62.8%
Missouri, Oklahoma
Western................. Arizona, California 104,600 61,600 58.9%
---------- --------- ------
Total 1,173,000 779,000 66.4%
========== ========= ======
Technology Overview
As part of our commitment to maximize customer satisfaction, to improve
our competitive position and to introduce new and enhanced products and services
to our customers, we continue to make significant investments to upgrade our
cable network. The current objectives of our upgrade program are to:
o increase the bandwidth capacity to 870MHz;
o activate two-way communications capability;
o consolidate our headend facilities, through the extensive deployment
of fiber optic networks; and
o allow us to provide digital cable television, high-speed
Internet access, interactive video and other telecommunications
services.
The following table describes the technological state of our cable network
as of December 31, 2000 and through December 31, 2002, based on our current
upgrade plans:
Percentage of Basic Subscribers
-------------------------------
Less than 550MHz- Two-Way
550MHz 870MHz Capable
--------- ------- -------
December 31, 2000............ 26% 74% 47%
December 31, 2001............ 10% 90% 80%
December 31, 2002............ 5% 95% 95%
12
By December 2002, we expect that 95% of our basic subscribers will be
served by cable systems that have been upgraded with 550MHz to 870MHz bandwidth
capacity and two-way communications capability. A central feature of our upgrade
program is the deployment of high capacity, hybrid fiber-optic coaxial
architecture. The hybrid fiber-optic coaxial architecture combines the use of
fiber optic cable, which can carry hundreds of video, data and voice channels
over extended distances, with coaxial cable, which requires a more extensive
signal amplification in order to obtain the desired levels for delivering
channels. In most of our cable systems, we connect fiber optic cable to
individual nodes serving an average of 350 homes or commercial buildings. A node
is a single connection to a cable system's main, high-capacity fiber optic cable
that is shared by a number of customers. Coaxial cable is then connected from
each node to the individual homes or buildings. Our network design generally
provides for six strands of fiber to each node, with two strands active and four
strands reserved for future services. We believe hybrid fiber-optic coaxial
architecture provides higher capacity, superior signal quality, greater network
reliability, reduced operating costs and more reserve capacity for the addition
of future services than traditional coaxial network design.
Two-way communications capability will permit our customers to send and
receive signals over the cable network so that interactive services, such as
video-on-demand, will be accessible and high-speed Internet access will not
require a separate telephone line. This capability will also position us to
offer cable telephony, using either Internet protocol telephony as it becomes
commercially feasible, or the traditional switching technologies that are
currently available. We believe our plans for two-way communications capability,
together with hybrid fiber-optic coaxial architecture, will enhance our cable
network's ability to provide advanced telecommunications services.
As of December 31, 2000, our cable systems were operated from 409 headend
facilities. We believe that fiber optics and advanced transmission technologies
make it cost effective to consolidate our headend facilities, allowing us to
realize operating efficiencies and resulting in lower fixed capital costs on a
per home basis as we introduce new products and services. By December 2002, we
plan to eliminate 309 headend facilities so that all of our customers will be
served by 100 headend facilities and 92% of our customers will be served by 40
headend facilities.
As part of this headend consolidation program, we plan to deploy over
10,000 route miles of fiber optic cable to create large regional fiber optic
networks with the potential to provide advanced telecommunications services. We
are constructing our regional networks with excess fiber optic capacity to
accommodate new and expanded products and services in the future.
Sales and Marketing
We seek to be the premier provider of entertainment, information and
telecommunications services in the markets we serve. Our marketing programs and
campaigns offer a variety of cable services creatively packaged and tailored to
appeal to each of our local markets and to segments within each market. We
routinely survey our customers to ensure that we are meeting their demands and
our customer surveys keep us abreast of our competition so that we can
effectively counter competitors' service offerings and promotional campaigns.
With our strong local presence, we interact with our customers on a more
individualized basis allowing us to better service our customers and enhance
customer loyalty and trust.
We use a coordinated array of marketing techniques to attract and retain
customers and to increase premium service penetration, including door-to-door
and direct mail solicitation, telemarketing, media advertising, local
promotional events, typically sponsored by programming services and
cross-channel promotion of new services and pay-per-view.
We build awareness of our brand through a variety of promotional
campaigns, particularly in our newly acquired systems. As a result of our
branding efforts, our emphasis on customer service and our investments in the
cable network, we believe we have developed a reputation for quality,
reliability and timely introduction of new products and services.
We invest a significant amount of time, effort and financial resources in
the training and evaluation of our marketing professionals and customer sales
representatives. Our customer sales representatives customize their sales
presentation to fit each of our customers' specific needs by conducting focused
consumer research and are given the incentive to use their frequent contact with
our customers as opportunities to sell our new products and services. As a
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result, we believe we can accelerate the introduction of new products and
services to our customers and achieve high success rates in attracting and
retaining customers.
Programming Supply
We have various contracts to obtain basic and premium programming for the
systems from program suppliers whose compensation is typically based on a fixed
fee per customer. Our programming contracts are generally for a fixed period of
time and are subject to negotiated renewal. Some program suppliers provide
volume discount pricing structures or offer marketing support to us. Our
successful marketing of multiple premium service packages emphasizing customer
value enables us to take advantage of such cost incentives. In addition, we are
a member of the National Cable Television Cooperative, Inc., a programming
consortium consisting of small to medium-sized multiple system operators
serving, in the aggregate, over twelve million cable subscribers. The consortium
helps create efficiencies in the areas of obtaining and administering
programming contracts, as well as securing more favorable programming rates and
contract terms for small to medium-sized cable operators. We negotiate
programming contract renewals both directly and through the consortium to obtain
the best available contract terms.
Our programming costs are expected to increase in the future due to
additional programming being provided to our customers, increased costs to
purchase programming, inflationary increases and other factors affecting the
cable television industry. Although we will legally be able to pass through
expected increases in our programming costs to customers, there can be no
assurance that the marketplace will allow us to do so. We also have various
retransmission consent arrangements with commercial broadcast stations, which
generally expire in December 2002. None of these consents require payment of
fees for carriage. However, we have entered into agreements with certain
stations to carry satellite-delivered cable programming, which is affiliated
with the network carried by such stations.
Currently, there are over 200 cable programming networks carried or
seeking to be carried on our cable systems. We use the analog and digital
channel capacity resulting from our capital improvement program to negotiate
more favorable long-term contracts with our programming suppliers and utilize
other financial arrangements to offset programming cost increases.
Customer Rates
Monthly customer rates for services vary from market to market, primarily
according to the amount of programming provided. As of December 31, 2000, our
monthly basic service rates for residential customers ranged from $5.18 to
$36.55; the combined monthly basic and expanded basic service rates for
residential customers ranged from $19.95 to $38.95; and per-channel premium
service rates, not including special promotions, ranged from $0.30 to $13.00 per
service for our cable systems.
A one-time installation fee, which we may wholly or partially waive during
a promotional period, is usually charged to new customers. We charge monthly
fees for converters and remote control tuning devices and also charge
administrative fees for delinquent payments for service. Customers are free to
discontinue service at any time without additional charge in the majority of the
systems and may be charged a reconnection fee to resume service. Commercial
customers, such as hotels, motels and hospitals, are charged negotiated monthly
fees and a non-recurring fee for the installation of service. Multiple dwelling
units, which include commercial customers as well as condominiums and apartment
complexes, may be offered a bulk rate in exchange for single-point billing and
basic service to all units.
In addition to customer fees, we derive revenues from the sale of local
spot advertising time on locally originated and satellite-delivered programming
and from affiliations with home shopping services, which offer merchandise for
sale to customers and compensate system operators with a percentage of their
sales receipts. Our headend consolidation program will increase the
concentration of customers served by our headend facilities. We believe the
greater concentration of customers served by our remaining headend facilities
will enable us to increase our advertising revenues.
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Customer Service and Community Relations
We are dedicated to providing superior customer service. Our emphasis on
system reliability and customer satisfaction is a cornerstone of our business
strategy. We expect that on going investments in our cable network will
significantly strengthen customer service, enhancing the reliability of our
cable network and allowing us to introduce new products and services to our
customers. We have implemented stringent internal customer service standards,
which we believe meet or exceed those established by the National Cable
Television Association. We maintain five regional calling centers, which service
84% of our cable systems' customers. They are staffed with dedicated personnel
who provide service to our customers 24 hours a day, seven days a week, on a
toll-free basis. We believe our regional calling centers allow us to coordinate
more effectively installation appointments and reduce response time to customer
inquiries. We continue to invest in both personnel and equipment of our regional
calling centers to ensure that these operating units are professionally managed
and employ state-of-the-art technology.
In addition, we are dedicated to fostering strong community relations in
the communities served by our cable systems. We support local charities and
community causes in various ways, including staged events and promotional
campaigns to raise funds and supplies for persons in need and in-kind donations
that include production services and free airtime on cable networks. We
participate in the "Cable in the Classroom" program, which is a national effort
by cable companies to provide schools with free cable television service and,
where available, Internet access. We also install and provide free cable
television service to government buildings and not-for-profit hospitals in our
franchise areas. We believe that our relations with the communities in which our
cable systems operate are good.
Franchises
Cable systems are generally operated under non-exclusive franchises
granted by local governmental authorities. These franchises typically contain
many conditions, such as: time limitations on commencement and completion of
construction; conditions of service, including number of channels, types of
programming and the provision of free service to schools and other public
institutions; and the granting of insurance and indemnity bonds by the cable
operator. Many of the provisions of local franchises are subject to federal
regulation under the Communications Act of 1934, as amended.
As of December 31, 2000, our cable systems were subject to 1,018
franchises. These franchises, which are non-exclusive, provide for the payment
of fees to the issuing authority. In most of the cable systems, such franchise
fees are passed through directly to the customers. The Cable Communications
Policy Act of 1984 prohibits franchising authorities from imposing franchise
fees in excess of 5% of gross revenues and also permits the cable operator to
seek renegotiation and modification of franchise requirements if warranted by
changed circumstances.
Substantially all of our cable systems' basic subscribers are in service
areas that require a franchise. The table below groups the franchises of our
cable systems by date of expiration and presents the approximate number and
percentage of basic subscribers for each group as of December 31, 2000.
Percentage of Number of Percentage of
Number of Total Basic Total Basic
Year of Franchise Expiration Franchises Franchises Subscribers Subscribers
---------------------------- ---------- ---------- ----------- -----------
2001 through 2004.......................... 309 30.4% 264,439 33.9%
2005 and thereafter........................ 709 69.6% 514,561 66.1%
----- ------ ------- ------
Total................................. 1,018 100.0% 779,000 100.0%
===== ====== ======= ======
The 1984 Cable Act provides, among other things, for an orderly franchise
renewal process in which franchise renewal will not be unreasonably withheld or,
if renewal is denied and the franchising authority acquires ownership of the
cable system or effects a transfer of the cable system to another person, the
operator generally is entitled to the fair market value for the cable system
covered by such franchise. In addition, the 1984 Cable Act established
comprehensive renewal procedures, which require that an incumbent franchisee's
renewal application be assessed on its own merits and not as part of a
comparative process with competing applications.
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We believe that we generally have good relationships with our franchising
communities. We have never had a franchise revoked or failed to have a franchise
renewed. In addition, substantially all of our franchises eligible for renewal
have been renewed or extended prior to their stated expirations, and no
franchise community has refused to consent to a franchise transfer to us.
Competition
We, like most cable systems, compete on the basis of several factors,
including price and the quality and variety of services offered. We face
competition from various communications and entertainment providers, the number
and type of which we expect to increase as we expand the products and services
offered over our broadband network. We believe our ability to package multiple
services, such as digital television and high-speed Internet access, is an
advantage in our competitive business environment.
Providers of Broadcast Television and Other Entertainment
The extent to which a cable system competes with over-the-air
broadcasting, which provides signals that a viewer is able to receive directly,
depends upon the quality and quantity of the broadcast signals available by
direct antenna reception compared to the quality and quantity of such signals
and alternative services offered by a cable system. Cable systems also face
competition from alternative methods of distributing and receiving television
signals and from other sources of entertainment such as live sporting events,
movie theaters and home video products, including videotape recorders and
videodisc players. In recent years, the FCC has adopted policies authorizing new
technologies and a more favorable operating environment for certain existing
technologies that provide, or may provide, substantial additional competition
for cable systems. The extent to which a cable television service is
competitive depends in significant part upon the cable system's ability to
provide a greater variety of programming, superior technical performance and
superior customer service than are available over the air or through competitive
alternative delivery sources.
Direct Broadcast Satellite Providers
Individuals can purchase home satellite dishes, which allow them to
receive satellite-delivered broadcast and non-broadcast program services,
commonly known as DBS, that formerly were available only to cable television
subscribers. According to recent government and industry reports, conventional,
medium and high-power satellites currently provide video programming services to
approximately 15.0 million individual households, condominiums, apartments and
office complexes in the United States.
DBS service can be received virtually anywhere in the continental United
States through the installation of a small roof top or side-mounted antenna, and
it is accessible in areas where a cable plant has not been constructed or where
it is not cost effective to construct cable television facilities. DBS systems
use video compression technology to increase channel capacity and digital
technology to improve the quality of the signals transmitted to their customers.
DBS service is being heavily marketed on a nationwide basis by several service
operators. We believe our digital cable service is competitive with the
programming, channel capacity and the digital quality of signals delivered to
customers by DBS systems.
Two major companies, DirecTV and Echostar, are currently providing
nationwide high-power DBS services, which typically offer to their customers
more than 300 channels of programming, including programming similar to that
provided by cable systems. Pursuant to legislation enacted in November 1999, DBS
operators have begun to deliver local broadcast signals. This change in law
eliminated a significant competitive advantage which cable system operators had
over DBS operators, as previously DBS operators were not permitted to retransmit
local broadcast signals. DirecTV and Echostar now deliver local broadcast
signals in a number of the largest markets and they plan to expand such carriage
to many more markets. The FCC has adopted rules effective January 2002 which
place a must-carry requirement on DBS operators in any market where they
retransmit one or more local signal. The current capacity limitations of
satellite technology may limit the DBS operators' ability to comply with these
must-carry requirements. The DBS industry recently initiated a judicial
challenge to the January 2002 requirement on the grounds that it is
unconstitutional. These companies and others are also developing ways to bring
advanced communications services to their customers. They are currently offering
satellite-delivered high-speed Internet access services with a
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telephone return path and are beginning to provide true two-way interactivity.
We are unable to predict the effects these competitive developments might have
on our business and operations.
Multichannel Multipoint Distribution Systems
Multichannel multipoint distribution systems deliver programming services
over microwave channels licensed by the FCC and received by subscribers with
special antennas. These wireless cable systems are less capital intensive and
subject to fewer regulatory requirements than cable television systems, and are
not required to obtain local franchises or pay franchise fees. To date, the
ability of wireless cable services to compete with cable systems has been
limited by a channel capacity of up to 35 channels and the need for unobstructed
line-of-sight over-the-air transmission. Although relatively few wireless cable
systems in the United States are currently in operation or under construction,
virtually all markets have been licensed or tentatively licensed. The use of
digital compression technology, and the FCC's recent amendment to its rules to
permit reverse path or two-way transmission over wireless facilities, may enable
multichannel multipoint distribution systems to deliver more channels and
additional services, including Internet related services. Digital compression
technology refers to the conversion of the standard video signal into a digital
signal and the compression of that signal to facilitate multiple channel
transmissions through a single channel's signal.
Private Cable Television Systems
Private cable television systems compete with conventional cable
television systems for the right to service condominiums, apartment complexes
and other multiple unit residential developments. The operators of these private
systems, known as satellite master antenna television (SMATV) systems, provide
improved reception of local television stations and several of the same
satellite-delivered programming services offered by franchised cable systems.
SMATV system operators often enter into exclusive agreements with apartment
building owners or homeowners' associations that preclude franchised cable
television operators from serving residents of such private complexes and
typically are not subject to regulation like local franchised cable operators.
However, the 1984 Cable Act gives franchised cable operators the right to use
existing compatible easements within their franchise areas on nondiscriminatory
terms and conditions. Accordingly, where there are preexisting compatible
easements, cable operators may not be unfairly denied access or discriminated
against with respect to access to the premises served by those easements.
Conflicting judicial decisions have been issued interpreting the scope of the
access right granted by the 1984 Cable Act, particularly with respect to
easements located entirely on private property. Under the 1996 Telecom Act,
satellite master antenna television systems can interconnect non-commonly owned
buildings without having to comply with local, state and federal regulatory
requirements that are imposed upon cable systems providing similar services, as
long as they do not use public rights of way. The FCC has held that the latter
provision is not violated so long as interconnection across public rights of way
is provided by a third party.
Traditional Overbuilds
Cable television systems are operated under non-exclusive franchises
granted by local authorities. More than one cable system may legally be built in
the same area. Franchising authorities have from time to time granted additional
franchises to other companies, including other cable operators or telephone
companies, and these additional franchises might contain terms and conditions
more favorable than those afforded to the incumbent cable operator. In addition,
entities willing to establish an open video system, under which they offer
unaffiliated programmers non-discriminatory access to a portion of the system's
cable system, may be able to avoid significant local franchising requirements.
Well financed businesses from outside the cable industry, such as public
utilities which already possess or are developing fiber optic and other
transmission facilities in the areas they serve, may over time become
competitors. We believe that various entities are currently offering cable
service to an estimated 55,000 homes passed in the service areas of our
franchises.
Internet Access
We offer high-speed Internet access in many of our cable systems. These
cable systems will compete with a number of other companies, many of which have
substantial resources, such as existing Internet service providers, commonly
known as ISP's, and local and long distance telephone companies.
17
Recently, a number of ISP's have asked local authorities and the FCC to
give them rights of access to cable systems' broadband infrastructure so that
they can deliver their services directly to cable systems' customers. Many local
franchising authorities have been examining the issue and a few have required
cable operators to provide such access. Several Federal courts have ruled that
localities are not authorized to require such access. The FCC initiated an
inquiry into the appropriate regulatory treatment of Internet offered on cable
systems.
The deployment of digital subscriber line technology, known as DSL, allows
Internet access to subscribers at data transmission speeds equal to or greater
than that of modems over conventional telephone lines, putting it in direct
competition with cable modem service. Numerous companies, including telephone
companies, have introduced DSL service and certain telephone companies are
seeking to provide high-speed broadband services, including interactive online
services, without regard to present service boundaries and other regulatory
restrictions. We are unable to predict the likelihood of success of competing
online services or what impact these competitive ventures may have on our
business operations.
Other Competition
The FCC has authorized a new interactive television service which permits
non-video transmission of information between an individual's home and
entertainment and information service providers. This service, which can be used
by direct broadcast satellite systems, television stations and other video
programming distributors, including cable television systems, is an alternative
technology for the delivery of interactive video services. It does not appear at
the present time that this service will have a material impact on the operations
of cable television systems.
The FCC has allocated spectrum in the 28GHz range for a new multichannel
wireless service that can be used to provide video and telecommunications
services. The FCC completed the process of awarding licenses to use this
spectrum via a market-by-market auction. We do not know whether such a service
would have a material impact on the operations of cable television systems.
The 1996 Telecom Act directed the FCC to establish, and the FCC has
adopted, regulations and policies for the issuance of licenses for digital
television to incumbent television broadcast licensees. Digital television can
deliver high definition television pictures and multiple digital-quality program
streams, as well as CD-quality audio programming and advanced digital services,
such as data transfer or subscription video. The FCC also has authorized
television broadcast stations to transmit textual and graphic information that
may be useful to both consumers and businesses. The FCC also permits commercial
and noncommercial FM stations to use their subcarrier frequencies to provide
non-broadcast services, including data transmission.
Advances in communications technology, as well as changes in the
marketplace and the regulatory and legislative environment, are constantly
occurring. Thus, it is not possible to predict the competitive effect that
ongoing or future developments might have on the cable industry.
Employees
As of December 31, 2000, we employed 1,406 full-time employees and 165
part-time employees. None of our employees are represented by a labor union. We
consider our relations with our employees to be good.
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Legislation and Regulation
A federal law known as the Communications Act of 1934 (the "Communications
Act"), as amended, establishes a national policy to guide the regulation,
development and operation of cable communications systems. In 1996, a
comprehensive amendment to the Communications Act became effective and is
expected to promote competition and decrease governmental regulation of various
communications industries, including the cable television industry. However,
until the desired competition develops, various federal, state and local
governmental units will have broad regulatory authority and responsibilities
over telecommunications and cable television matters. The courts, especially the
federal courts, will continue to play an important oversight role as the
statutory and regulatory provisions are interpreted and enforced by the various
federal, state and local governmental units.
The Communications Act allocates principal responsibility for enforcing
the federal policies between the FCC, state and local governmental authorities.
The FCC and state regulatory agencies regularly conduct administrative
proceedings to adopt or amend regulations implementing the statutory mandate of
the Communications Act. At various times, interested parties to these
administrative proceedings challenge the new or amended regulations and policies
in the courts with varying levels of success. We expect that further court
actions and regulatory proceedings will occur and will refine the rights and
obligations of various parties, including the government, under the
Communications Act. The results of these judicial and administrative proceedings
may materially affect the cable industry and our business and operations. In the
following paragraphs, we summarize the federal laws and regulations materially
affecting the growth and operation of the cable industry. We also provide a
brief description of certain state and local laws.
Federal Regulation
The Communications Act and the regulations and policies of the FCC affect
significant aspects of our cable system operations, including:
o subscriber rates;
o the content of the programming we offer to subscribers, as well as
the way we sell our program packages to subscribers;
o the use of our cable systems by the local franchising authorities,
the public and other unrelated companies;
o our franchise agreements with local governmental authorities;
o cable system ownership limitations and prohibitions; and
o our use of utility poles and conduit.
Subscriber Rates
The Communications Act and the FCC's regulations and policies limit the
ability of cable systems to raise rates for basic services and equipment. No
other rates can be regulated. Federal law exempts cable systems from rate
regulation of cable services and customer equipment only in communities that are
subject to effective competition, as defined by federal law. Federal law also
prohibits the regulation of cable operators' rates where comparable video
programming services, other than direct broadcast satellites, are offered by
local telephone companies, or their related parties, or by third parties using
the local telephone company's facilities.
Where there is no effective competition to the cable operator's services,
federal law gives local franchising authorities the responsibility to regulate
the rates charged by the operator for:
o the lowest level of programming service offered by cable operator,
typically called basic service, which includes the local broadcast
channels and any public access or governmental channels that are
required by the operator's franchise; and
o the installation, sale and lease of equipment used by subscribers to
receive basic service, such as converter boxes and remote control
units.
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Local franchising authorities who wish to regulate basic service rates and
related equipment rates must first obtain FCC certification to regulate by
following a simplified FCC certification process and agreeing to follow
established FCC rules and policies when regulating the operator's rates.
Several years ago, the FCC adopted detailed rate regulations, guidelines
and rate forms that a cable system operator and the local franchising authority
must use in connection with the regulation of basic service and equipment rates.
The FCC adopted a benchmark methodology as the principal method of regulating
rates. However, if this methodology produces unacceptable rates, the operator
may also justify rates using a detailed cost-of-service methodology. The FCC's
rules also require franchising authorities to regulate equipment rates on the
basis of actual cost plus a reasonable profit, as defined by the FCC.
If the local franchising authority concludes that an operator's rates are
too high under the FCC's rate rules, the local franchising authority may require
the operator to reduce rates and to refund overcharges to subscribers, with
interest. The operator may appeal adverse local rate decisions to the FCC.
The FCC's regulations allow an operator to modify regulated rates on a
quarterly or annual basis to account for changes in:
o the number of regulated channels;
o inflation; and
o certain external costs, such as franchise and other governmental
fees, copyright and retransmission consent fees, taxes, programming
fees and franchise-related obligations.
As a further alternative, in 1995 the FCC adopted a simplified
cost-of-service methodology which can be used by small cable systems owned by
small cable companies. A small cable system is defined as a cable television
system which serves 15,000 or fewer basic customers. A small cable company is
defined as an entity serving a total of 400,000 or fewer basic customers that is
not affiliated with a larger cable television company, i.e., a larger cable
television company does not own more than a 20 percent equity share or exercise
legal control. This small system rate-setting methodology almost always results
in rates which exceed those produced by the benchmark and cost-of-service rules
applicable to larger cable television operators. Once the initial rates are set
they can be adjusted periodically for inflation and external cost changes as
described above. When an eligible small system grows larger than 15,000 basic
customers, it can maintain its then current rates, but it cannot increase its
rates in the normal course until an increase would be warranted under the rules
applicable to systems that have more than 15,000 customers. When a small cable
company grows larger than 400,000 basic customers, the qualified systems it then
owns will not lose their small system eligibility. If a small cable company
sells a qualified system, or if the company itself is sold, the qualified
systems retain that status even if the acquiring company is not a small cable
company. We were a small cable company, but with the completion of our
acquisitions in 1999, we no longer enjoy this status. However, as noted above,
the systems with less than 15,000 customers owned by us prior to the completion
of our acquisitions in 1999 remain eligible for small cable system rate
regulation.
The Communications Act and the FCC's regulations also:
o require operators to charge uniform rates throughout each franchise
area that is not subject to effective competition;
o prohibit regulation of non-predatory bulk discount rates offered by
operators to subscribers in commercial and residential developments;
and
o permit regulated equipment rates to be computed by aggregating costs
of broad categories of equipment at the franchise, system, regional
or company level.
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Content Requirements
The Communications Act and the FCC's regulations contain broadcast signal
carriage requirements that allow local commercial television broadcast stations:
o to elect once every three years to require a cable system to carry
the station, subject to certain exceptions; or
o to negotiate with us on the terms by which we carry the station on
our cable system, commonly called retransmission consent.
The Communications Act requires a cable operator to devote up to one-third
of its activated channel capacity for the mandatory carriage of local commercial
television stations. The Communications Act also gives local non-commercial
television stations mandatory carriage rights; however, such stations are not
given the option to negotiate retransmission consent for the carriage of their
signals by cable systems. Additionally, cable systems must obtain retransmission
consent for:
o all distant commercial television stations, except for commercial
satellite-delivered independent superstations such as WGN;
o commercial radio stations; and
o certain low-power television stations.
The FCC has recently completed an administrative proceeding to consider
the requirements, for mandatory carriage of digital television signals offered
by local television broadcasters. Under the new regulations, local television
broadcast stations transmitting solely in a digital format are entitled to
request carriage in their choice of digital or converted analog format. Stations
transmitting in both digital and analog formats, which is permitted during the
current several-year transition period, have no carriage rights for the digital
format during the transition unless and until they turn in their analog channel.
We are unable to predict the impact of these new carriage requirements on the
operations of our cable systems.
The Communications Act requires our cable systems to permit subscribers to
purchase video programming we offer on a per channel or a per program basis
without the necessity of subscribing to any tier of service, other than the
basic cable service tier. However, we are not required to comply with this
requirement until December 2002 for any of our cable systems that do not have
addressable converter boxes or that have other substantial technological
limitations. Many of our cable systems do not have the technological capability
to offer programming in the manner required by the statute and thus currently
are exempt from complying with the requirement. We anticipate having significant
capital expenditures over the next two to three years in order for us to meet
this requirement. We are unable to predict whether the full implementation of
this statutory provision in December 2002 will have a material impact on the
operation of our cable systems.
To increase competition between cable operators and other video program
distributors, the Communications Act and the FCC's regulations:
o preclude any satellite video programmer affiliated with a cable
company, or with a common carrier providing video programming
directly to its subscribers, from favoring an affiliated company
over competitors;
o require such programmers to sell their programming to other
unaffiliated video program distributors; and
o limit the ability of such programmers to offer exclusive programming
arrangements to their related parties.
21
The Communications Act and the FCC's regulations contain restrictions on
the transmission by cable operators of obscene or indecent programming. It
requires cable operators to fully block both the video and audio portion of
sexually explicit or indecent programming on channels that are primarily
dedicated to sexually oriented programming or alternatively to carry such
programming only at safe harbor time periods, which are currently defined by the
FCC as the hours between 10 p.m. to 6 a.m. A three-judge federal district court
recently determined that this provision was unconstitutional. The federal
government appealed the lower court's decision to the United States Supreme
Court which recently agreed to review this case.
The FCC actively regulates other aspects of our programming, involving
such areas as:
o our use of syndicated and network programs and local sports
broadcast programming;
o advertising in children's programming;
o political advertising;
o origination cablecasting;
o sponsorship identification; and
o closed captioning of video programming.
Use of Our Cable Systems by the Government and Unrelated Third Parties
The Communications Act allows local franchising authorities and unrelated
third parties to have access to our cable systems' channel capacity for their
own use. For example, it:
o permits franchising authorities to require cable operators to set
aside channels for public, educational and governmental access
programming; and
o requires a cable system with 36 or more activated channels to
designate a significant portion of its channel capacity for
commercial leased access by third parties to provide programming
that may compete with services offered by the cable operator.
The FCC regulates various aspects of third party commercial use of channel
capacity on our cable systems, including:
o the maximum reasonable rate a cable operator may charge for third
party commercial use of the designated channel capacity;
o the terms and conditions for commercial use of such channels; and
o the procedures for the expedited resolution of disputes concerning
rates or commercial use of the designated channel capacity.
The FCC has from time to time received petitions from Internet service
providers to require access to our cable systems. We cannot predict if these or
other similar proposals will be adopted, or, if adopted, whether they will have
an adverse impact on our business and operations.
22
Franchise Matters
We have non-exclusive franchises in virtually every community in which we
operate that authorize us to construct, operate and maintain our cable systems.
Although franchising matters are normally regulated at the local level through a
franchise agreement or a local ordinance, the Communications Act provides
oversight and guidelines to govern our relationship with local franchising
authorities.
For example, the Communications Act:
o affirms the right of franchising authorities, which may be state or
local, depending on the practice in individual states, to award one
or more franchises within their jurisdictions;
o generally prohibits us from operating in communities without a
franchise;
o encourages competition with existing cable systems by:
-- allowing municipalities to operate their own cable systems
without franchises, and
-- preventing franchising authorities from granting exclusive
franchises or from unreasonably refusing to award additional
franchises covering an existing cable system's service area;
o permits local authorities, when granting or renewing our franchises,
to establish requirements for cable-related facilities and
equipment, but prohibits franchising authorities from establishing
requirements for specific video programming or information services
other than in broad categories;
o permits us to obtain modification of our franchise requirements from
the franchise authority or by judicial action if warranted by
commercial impracticability; and
o generally prohibits franchising authorities from:
-- imposing requirements during the initial cable franchising
process or during franchise renewal that require, prohibit or
restrict us from providing telecommunications services,
-- imposing franchise fees on revenues we derived from providing
telecommunications services over our cable systems,
-- restricting our use of any type of subscriber equipment or
transmission technology, and
-- limits our payment of franchise fees to the local franchising
authority to 5.0% of our gross revenues derived from providing
cable services over our cable system.
The Communications Act contains renewal procedures designed to protect us
against arbitrary denials of renewal of our franchises although, under certain
circumstances, the franchising authority could deny us a franchise renewal.
Moreover, even if our franchise is renewed, the franchising authority may seek
to impose upon us new and more onerous requirements, such as significant
upgrades in facilities and services or increased franchise fees as a condition
of renewal. Similarly, if a franchising authority's consent is required for the
purchase or sale of our cable system or franchise, the franchising authority may
attempt to impose more burdensome or onerous franchise requirements on us in
connection with a request for such consent. Historically, cable operators
providing satisfactory services to their subscribers and complying with the
terms of their franchises have almost always obtained franchise renewals. We
believe that we have generally met the terms of our franchises and have provided
quality levels of service. We anticipate that our future franchise renewal
prospects generally will be favorable.
23
Various courts have considered whether franchising authorities have the
legal right to limit the number of franchises awarded within a community and to
impose substantive franchise requirements. These decisions have been
inconsistent and, until the U.S. Supreme Court rules definitively on the scope
of cable operators' First Amendment protections, the legality of the franchising
process generally and of various specific franchise requirements is likely to be
in a state of flux.
Ownership Limitations
The Communications Act generally prohibits us from owning or operating a
satellite master antenna television system or multichannel multipoint
distribution system in any area where we provide franchised cable service and do
not have effective competition, as defined by federal law. We may, however,
acquire and operate a satellite master antenna television system in our existing
franchise service areas if the programming and other services provided to the
satellite master antenna television system subscribers are offered according to
the terms and conditions of our local franchise agreement.
The Communications Act also authorizes the FCC to adopt nationwide limits
on the number of subscribers under the control of a cable operator. The FCC
recently reconsidered its cable ownership regulations and:
o changed its subscriber ownership limit to 30% of subscribers to
multi-channel video programming distributors nationwide, but
maintained its voluntary stay on enforcement of that limitation
pending further action;
o reaffirmed its subscriber ownership information reporting rules that
require any person holding an attributable interest, as defined by
FCC rules, in cable systems reaching 20% or more of homes passed by
cable plant nationwide to notify the FCC of any incremental change
in that person's cable ownership interests;
o retained its 5% voting stock attribution benchmark;
o raised the passive investor voting stock benchmark from 10% to 20%;
and
o adopted a new equity/debt rule that will attribute any interest of
over 33% of the total assets, i.e., debt plus equity, voting or
nonvoting, of an entity.
The Communications Act and FCC regulations also impose limits on the
number of channels that can be occupied on a cable system by a video programmer
in which a cable operator has an interest. A federal district court declared
this provision unconstitutional. An appeal of the district court's decision was
consolidated with an appeal challenging the FCC's subscriber ownership
limitation regulations. The appellate court just recently overturned the FCC's
revised 30% subscriber ownership limitation and the rule regarding the number of
channels on a cable system which can be occupied by programming affiliated with
the cable operator on the basis that they do not pass constitutional muster.
These matters have been sent back to the FCC for further proceedings.
The 1996 amendments to the Communications Act eliminated the statutory
prohibition on the common ownership, operation or control of a cable system and
a television broadcast station in the same service area. The identical FCC
regulation remains in place pending re-examination, although the FCC has
eliminated its regulatory restriction on cross-ownership of cable systems and
national broadcasting networks.
The 1996 amendments to the Communications Act also made far-reaching
changes in the relationship between local telephone companies and cable service
providers. These amendments:
o eliminated federal legal barriers to competition in the local
telephone and cable communications businesses, including allowing
local telephone companies to offer video services in their local
telephone service areas;
o preempted legal barriers to telecommunications competition that
previously existed in state and local laws and regulations;
24
o set basic standards for relationships between telecommunications
providers; and
o generally limited acquisitions and prohibited joint ventures between
local telephone companies and cable operators in the same market.
Local telephone companies may provide service as traditional cable
operators with local franchises or they may opt to provide their programming
over open video systems, subject to certain conditions, including, but not
limited to, setting aside a portion of their channel capacity for use by
unaffiliated program distributors on a non-discriminatory basis. The decision as
whether an operator of an open video system must obtain a local franchise is
left to each community.
Pole Attachment Regulation
The Communications Act requires the FCC to regulate the rates, terms and
conditions imposed by public utilities for cable systems' use of utility pole
and conduit space unless state authorities have demonstrated to the FCC that
they adequately regulate pole attachment rates, as is the case in certain states
in which we operate. In the absence of state regulation, the FCC administers
pole attachment rates on a formula basis. The FCC's current rate formula, which
is being reevaluated by the FCC, governs the maximum rate certain utilities may
charge for attachments to their poles and conduit by cable operators providing
only cable services and until 2001, by certain companies providing
telecommunications services. The FCC also adopted a new rate formula that will
be effective in 2001 and will govern the maximum rate certain utilities may
charge for attachments to their poles and conduit by companies providing
telecommunications services, including cable operators.
Any resulting increase in attachment rates due to the FCC's new rate
formula will be phased in over a five-year period in equal annual increments,
beginning in February 2001. A federal appellate court generally rejected
challenges to these new rules. However, there was one significant exception,
i.e., the court found that the provision of Internet access by a cable system
was neither a cable service or a telecommunications service, thus the FCC lacked
authority to regulate pole attachment rates for cable systems which offer
Internet access. The Supreme Court has agreed to hear an appeal from this
decision. We are unable to predict the ultimate impact of any revised FCC rate
formula or of any new pole attachment rate regulations on our business and
operations.
Other Regulatory Requirements of the Communications Act and the FCC
The FCC has adopted cable inside wiring rules to provide a more specific
procedure for the disposition of residential home wiring and internal building
wiring that belongs to an incumbent cable operator that is forced by the
building owner to terminate its cable services in a building with multiple
dwelling units. The FCC is also considering additional rules relating to inside
wiring that, if adopted, may disadvantage incumbent cable operators.
The Communications Act includes provisions, among others, regulating and
the FCC actively regulates other parts of our cable operations, involving such
areas as:
o equal employment opportunity;
o consumer protection and customer service;
o technical standards and testing of cable facilities;
o consumer electronics equipment compatibility;
o registration of cable systems;
25
o maintenance of various records and public inspection files;
o microwave frequency usage; and
o antenna structure notification, marking and lighting.
The FCC may enforce its regulations through the imposition of fines, the
issuance of cease and desist orders or the imposition of other administrative
sanctions, such as the revocation of FCC licenses needed to operate transmission
facilities often used in connection with cable operations. The FCC has ongoing
rulemaking proceedings that may change its existing rules or lead to new
regulations. We are unable to predict the impact that any further FCC rule
changes may have on our business and operations.
Other bills and administrative proposals pertaining to cable
communications have previously been introduced in Congress or considered by
other governmental bodies over the past several years. It is probable that
Congress and other governmental bodies will make further attempts relating to
the regulation of cable communications services.
Copyright
Our cable systems typically include in their channel line-ups local and
distant television and radio broadcast signals, which are protected by the
copyright laws. We generally do not obtain a license to use this programming
directly from the owners of the programming, but instead comply with an
alternative federal compulsory copyright licensing process. In exchange for
filing certain reports and contributing a percentage of our revenues to a
federal copyright royalty pool, we obtain blanket permission to retransmit the
copyrighted material carried on these broadcast signals. The nature and amount
of future copyright payments for broadcast signal carriage cannot be predicted
at this time.
In a report to Congress, the U.S. Copyright Office recommended that
Congress make major revisions to both the cable television and satellite
compulsory licenses. Congress recently modified the satellite compulsory license
in a manner that permits DBS providers to become more competitive with cable
operators like us. The possible simplification, modification or elimination of
the cable communications compulsory copyright license is the subject of
continuing legislative review. The elimination or substantial modification of
the cable compulsory license could adversely affect our ability to obtain
suitable programming and could substantially increase the cost of programming
that remains available for distribution to our subscribers. We are unable to
predict the outcome of this legislative activity.
Copyrighted music performed in programming supplied to cable television
systems by pay cable networks and basic cable networks is licensed by the
networks through private agreements with the American Society of Composers and
Publishers, commonly referred to as ASCAP, and BMI, Inc., the two major
performing rights organizations in the United States. Both the American Society
of Composers and Publishers and BMI offer through to the viewer licenses to the
cable networks which cover the retransmission of the cable networks' programming
by cable television systems to their customers.
Our cable systems also utilize music in other programming and advertising
that we provide to subscribers. The rights to use this music are controlled by
various music performing rights organizations from which performance licenses
must be obtained. Although we cannot predict the amount of any license fees we
may be required to pay for future use of music, we do not believe such license
fees will be significant to our financial position, results of operations or
liquidity.
26
State and Local Regulation
Our cable systems use local streets and rights-of-way. Consequently, we
must comply with state and local regulation, which is typically imposed through
the franchising process. Our cable systems generally are operated in accordance
with non-exclusive franchises, permits or licenses granted by a municipality or
other state or local government entity. Our franchises generally are granted for
fixed terms and in many cases are terminable if we fail to comply with material
provisions. The terms and conditions of our franchises vary materially from
jurisdiction to jurisdiction. Each franchise generally contains provisions
governing:
o franchise fees;
o franchise term;
o system construction and maintenance obligations;
o system channel capacity;
o design and technical performance;
o customer service standards;
o sale or transfer of the franchise;
o territory of the franchise;
o indemnification of the franchising authority;
o use and occupancy of public streets; and
o types of cable services provided.
A number of states subject cable systems to the jurisdiction of
centralized state governmental agencies, some of which impose regulation of a
character similar to that of a public utility. Attempts in other states to
regulate cable systems are continuing and can be expected to increase. To date,
other than Delaware, no state in which we operate has enacted such state-level
regulation. State and local franchising jurisdiction is not unlimited; however,
it must be exercised consistently with federal law. The Communications Act
immunizes franchising authorities from monetary damage awards arising from
regulation of cable systems or decisions made on franchise grants, renewals,
transfers and amendments.
The foregoing describes all material present and proposed federal, state
and local regulations and legislation affecting the cable industry. Other
existing federal regulations, copyright licensing, and, in many jurisdictions,
state and local franchise requirements, are currently the subject of judicial
proceedings, legislative hearings and administrative proposals which could
change, in varying degrees, the manner in which cable systems operate. Neither
the outcome of these proceedings nor their impact upon the cable industry or our
cable operations can be predicted at this time.
27
ITEM 2. PROPERTIES
Our principal physical assets consist of cable television operating plant
and equipment, including signal receiving, encoding and decoding devices,
headend facilities and distribution systems and equipment at or near customers'
homes for each of the systems. The signal receiving apparatus typically includes
a tower, antenna, ancillary electronic equipment and earth stations for
reception of satellite signals. Headend facilities are located near the
receiving devices. Some basic subscribers of the systems utilize converters that
can be addressed by sending coded signals from the headend facility over the
cable network. Our distribution system consists primarily of coaxial and fiber
optic cables and related electronic equipment.
We own the real property housing our regional call centers in Gulf Breeze,
Florida; Chillicothe, Illinois; and Waseca, Minnesota as well as numerous
locations for business offices and warehouses throughout our operating regions.
We lease space for our other regional call centers in Benton, Kentucky; and
Hendersonville, North Carolina. We also lease additional locations for business
offices and warehouses throughout our operating regions. Our headend facilities,
signal reception sites and microwave facilities are located on owned and leased
parcels of land, and we generally own the towers on which certain of our
equipment is located. We own most of our service vehicles. We believe that our
properties both owned and leased, are in good condition and are suitable and
adequate for our operations.
Our cable television plant and related equipment generally are attached to
utility poles under pole rental agreements with local public utilities, although
in some areas the distribution cable is buried in underground ducts or trenches.
The physical components of the systems require maintenance and periodic
upgrading to improve system performance and capacity.
ITEM 3. LEGAL PROCEEDINGS
On November 3, 2000, MCC resolved litigation brought against it by Grey
Advertising, Inc. ("Grey") in January 2000. MCC and Grey entered into a final
settlement agreement that involves no monetary payments by either party and that
permits MCC and its subsidiaries to continue to use the name "Mediacom" in
accordance with the terms of their confidential agreement.
There are no other material pending legal proceedings to which we are a
party or to which any of our properties are subject.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year ended December 31, 2000.
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PART II
ITEM 5. MARKET FOR REGISTRANTS' COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
There is no public trading market for our equity, all of which is held by
MCC.
29
ITEM 6. SELECTED FINANCIAL DATA
In the table below, we provide you with:
o selected historical financial data for the period from January 1,
1996 through March 11, 1996, which are derived from the audited
financial statements of Benchmark Acquisition Fund II Limited
Partnership, which is our predecessor company; and
o selected historical consolidated financial and operating data for
the period from the commencement of our operations on March 12, 1996
through December 31, 1996 and for the years ended December 31, 1997,
1998, 1999 and 2000 and balance sheet data as of December 31, 1996,
1997, 1998, 1999 and 2000 which are derived from our audited
consolidated financial statements.
We commenced operations on March 12, 1996 with the acquisition of a cable
system from Benchmark Acquisition Fund II Limited Partnership and have since
completed 19 additional acquisitions as of December 31, 2000. The historical
results of operations of the systems acquired have been included from their
respective dates of acquisition to the end of the period presented.
Mediacom LLC was formed as a New York limited liability company in July
1995 and since that time our taxable income or loss has been included in the
federal and certain state income tax returns of our members.
See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
30
SELECTED FINANCIAL DATA
Predecessor Mediacom LLC
--------- ---------------------------------------------------------------------
January 1 March 12 Year Year Year Year
Through Through Ended Ended Ended Ended
March 11, December 31, December 31, December 31, December 31, December 31,
1996 1996 1997 1998 1999 2000
--------- --------- ---------- ---------- ----------- --------
(dollars in thousands)
Statement of Operations Data:
Revenues $ 1,038 $ 5,411 $ 17,634 $ 129,297 $ 176,052 $ 332,050
Costs and expenses:
Service costs 297 1,511 5,547 43,849 58,058 114,234
Selling, general and
administrative expenses 222 931 2,696 25,596 32,949 55,820
Management fee expense(1) 52 270 882 5,797 6,951 6,029
Depreciation and
amortization 527 2,157 7,636 65,793 101,065 177,928
Non-cash stock charges(2) - - - - 15,445 28,254
--------- --------- ---------- ---------- ----------- --------
Operating income (loss) (60) 542 873 (11,738) (38,416) (50,215)
Interest expense, net(3) 201 1,528 4,829 23,994 37,817 68,973
Other expenses(4) - 967 640 4,058 5,087 30,036
--------- --------- ---------- ---------- ----------- --------
Net loss $ (261) $ (1,953) $ (4,596) $ (39,790) $ (81,320) $ (149,224)
========= ========= ========== ========== =========== ========
Balance Sheet Data
(end of period):
Total assets $ 46,560 $ 102,791 $ 451,152 $ 1,272,881 $ 1,375,772
Total debt 40,529 72,768 337,905 1,139,000 987,000
Total members' equity 4,537 24,441 78,651 54,615 262,997
Supplementary Data:
System cash flow(5) $ 519 $ 2,969 $ 9,391 $ 59,852 $ 85,045 $ 161,996
System cash flow margin(6) 50.0% 54.9% 53.3% 46.3% 48.3% 48.8%
EBITDA(7) $ 467 $ 2,699 $ 8,509 $ 54,055 $ 78,094 $ 155,967
EBITDA margin(8) 45.0% 49.9% 48.3% 41.8% 44.4% 47.0%
Net cash flows provided by
operating activities $ 226 $ 237 $ 7,007 $ 53,556 $ 54,216 $ 93,218
Net cash flows used in
investing activities (86) (45,257) (60,008) (397,085) (851,548) (295,613)
Net cash flows provided by
financing activities - 45,416 53,632 344,714 799,593 202,015
Operating Data
(end of period, except
average):
Homes passed(9) 38,749 87,750 520,000 1,071,500 1,173,000
Basic subscribers(10) 27,153 64,350 354,000 719,000 779,000
Basic penetration(11) 70.1% 73.3% 68.1% 67.1% 66.4%
Premium service units(12) 11,691 39,288 407,100 587,000 597,000
Premium penetration(13) 43.1% 61.1% 115.0% 81.6% 76.6%
Average monthly revenues per
basic subscriber(14) $ 32.11 $ 32.88 $ 35.52 $ 38.45
(notes on following page)
31
Notes to Selected Financial Data
(1) Represents fees paid to Mediacom Management Corporation, a Delaware
corporation, for management services rendered to our operating
subsidiaries. Mediacom Management utilized these fees to compensate its
employees as well as to fund its corporate overhead. The management
agreements with Mediacom Management were amended effective November 19,
1999 in connection with an amendment to our operating agreement. The
amended agreements provided for management fees equal to 2% of annual
gross revenues. The management agreements were terminated upon the
completion of MCC's initial public offering in February 2000 and were
replaced with new agreements between MCC and our operating subsidiaries.
See Notes 7 and 12 of our consolidated financial statements.
(2) The non-cash stock charges for the year ended December 31, 2000 consist of
a one-time $24.5 million charge resulting from the termination of the
management agreements with Mediacom Management upon completion of MCC's
initial public offering in February 2000 and a $3.8 million charge related
to the vesting of equity grants made during 1999 to certain members of our
management team. Non-cash stock charges for the year ended December 31,
1999 consist of a $628,000 charge resulting from amendments to our
management agreements with Mediacom Management and a $14.8 million charge
related to the vesting of equity grants to certain members of our
management team. See Notes 7 and 11 of our consolidated financial
statements.
(3) Net of interest income. Interest income for the periods presented was not
material.
(4) Includes a $28.5 million non-cash charge recorded during the year ended
December 31, 2000, relating to the decline in value of our investment in
shares of SoftNet Systems, Inc. common stock that was considered other
than temporary. See Note 10 of our consolidated financial statements.
(5) Represents EBITDA, as defined in note 7 below, before management fee
expense. System cash flow:
o is not intended to be a performance measure that should be regarded
as an alternative either to operating income or net income as an
indicator of operating performance or to the statement of cash flows
as a measure of liquidity;
o is not intended to represent funds available for debt service,
dividends, reinvestment or other discretionary uses; and
o should not be considered in isolation or as a substitute for
measures of performance prepared in accordance with generally
accepted accounting principles.
System cash flow is included in this report because our management
believes that system cash flow is a meaningful measure of performance
commonly used in the cable television industry and by the investment
community to analyze and compare cable television companies. Our
definition of system cash flow may not be identical to similarly titled
measures reported by other companies.
(6) Represents system cash flow as a percentage of revenues. This measurement
is used by us, and is commonly used in the cable television industry, to
analyze and compare cable television companies on the basis of operating
performance, for the reasons discussed in note 5 above.
(7) Represents operating income (loss) before depreciation and amortization
and non-cash stock charges. EBITDA:
o is not intended to be a performance measure that should be regarded
as an alternative either to operating income or net income as an
indicator of operating performance or to the statement of cash flows
as a measure of liquidity;
o is not intended to represent funds available for debt service,
dividends, reinvestment or other discretionary uses; and
o should not be considered in isolation or as a substitute for
measures of performance prepared in accordance with generally
accepted accounting principles.
32
EBITDA is included in this report because our management believes that
EBITDA is a meaningful measure of performance commonly used in the cable
television industry and by the investment community to analyze and compare
cable television companies. Our definition of EBITDA may not be identical
to similarly titled measures reported by other companies.
(8) Represents EBITDA as a percentage of revenues. This measurement is used by
us, and is commonly used in the cable television industry, to analyze and
compare cable television companies on the basis of operating performance,
for the reasons discussed in note 7 above.
(9) Represents the number of single residence homes, apartments and
condominium units passed by the cable distribution network in a cable
system's service area.
(10) Represents subscribers of a cable television system who receive a package
of over-the-air broadcast stations, local access channels or certain
satellite-delivered cable television services and who are usually charged
a flat monthly rate for a number of channels.
(11) Represents basic subscribers as a percentage of total number of homes
passed.
(12) Represents the number of subscriptions to premium services. A subscriber
may purchase more than one premium service, each of which is counted as a
separate premium service unit.
(13) Represents premium service units as a percentage of total number of basic
subscribers. This ratio may be greater than 100% if the average basic
subscriber subscribes to more than one premium service unit.
(14) Represents average monthly revenues for the last three months of the
period divided by average basic subscribers for such period. Average
monthly revenues per basic subscriber includes the revenues of
acquisitions of cable systems made during the last three months of the
period as if such acquisitions were completed at the beginning of the
three month period. This measurement is commonly used in the cable
television industry to analyze and compare cable television companies on
the basis of operating performance.
33
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Reference is made to the "Risk Factors" below for a discussion of
important factors that could cause actual results to differ from expectations
and any of our forward-looking statements contained herein. In some cases, you
can identify those so-called "forward-looking statements" by words such as
"may," "will," "should," "expects," "plans," "anticipates," "believes,"
"estimates," "predicts," "potential," or "continue" or the negative of those
words and other comparable words. In addition, the following discussion should
be read in conjunction with our audited consolidated financial statements as of
and for the years ended December 31, 2000, 1999 and 1998.
Introduction
We do not believe the discussion and analysis of our historical financial
condition and results of operations set forth below are indicative nor should
they be relied upon as an indicator of our future performance because of certain
significant past events. Those events include numerous acquisitions and several
financing transactions.
Organization
We were organized as a New York limited liability company in July 1995 and
serve as a holding company for our operating subsidiaries. Mediacom Capital
Corporation, our wholly-owned subsidiary, was organized as a New York
corporation in March 1998 for the sole purpose of acting as our co-issuer of
public debt securities and does not conduct operations of its own. Mediacom
Communications Corporation ("MCC") was organized as a Delaware corporation in
November 1999 and completed an initial public offering in February 2000.
Immediately prior to the completion of MCC's initial public offering, MCC issued
shares of its common stock in exchange for all of our outstanding membership
interests and became our sole member and manager.
Until MCC's initial public offering in February 2000, Mediacom Management
Corporation, a Delaware corporation, provided management services to our
operating subsidiaries and received annual management fees. Mediacom Management
utilized these fees to compensate its employees as well as to fund its corporate
overhead. Such management fees ranged from 4.0% to 5.0% of our annual gross
revenues until November 19, 1999. On such date, the management agreements with
Mediacom Management were amended in connection with an amendment to our
operating agreement to provide for annual management fees equal to 2.0% of
annual gross revenues. As part of this amendment, Mediacom Management waived