Back to GetFilings.com
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------
FORM 10-K
----------
Annual Report Pursuant to Section 13 or 15 (d) of the
Securities Exchange Act of 1934
For the fiscal year ended December 31, 2001
Commission File Number: 0-29227
Mediacom Communications Corporation
(Exact name of Registrant as specified in its charter)
Delaware 06-1566067
(State of incorporation) (I.R.S. Employer
Identification Number)
100 Crystal Run Road
Middletown, New York 10941
(Address of principal executive offices)
(845) 695-2600
(Registrant's telephone number)
Securities registered pursuant to Section 12(b) of the Exchange Act:
None
Securities registered pursuant to Section 12(g) of the Exchange Act:
Class A Common Stock, $0.01 par value per share
Indicate by check mark whether the Registrant (1) has 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
Registrant was required to file such reports), and (2) has 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 Registrant's 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: [ ]
As of March 19, 2002, the aggregate market value of the Class A common
stock of the Registrant held by non-affiliates of the Registrant was
approximately $963.7 million.
As of March 19, 2002, there were outstanding 90,613,616 shares of Class A
common stock and 29,282,990 shares of Class B common stock.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement for the 2002 Annual Meeting of
Stockholders are incorporated by reference into Part III.
MEDIACOM COMMUNICATIONS CORPORATION
2001 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
PART I
------
Page
----
Item 1. Business................................................................... 4
Item 2. Properties................................................................. 28
Item 3. Legal Proceedings.......................................................... 28
Item 4. Submission of Matters to a Vote of Security Holders........................ 29
Item 4A. Directors and Executive Officers of the Registrant......................... 29
PART II
-------
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters...... 32
Item 6. Selected Financial Data.................................................... 33
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.................................................... 37
Item 7A. Quantitative and Qualitative Disclosures About Market Risk................. 53
Item 8. Financial Statements and Supplementary Data................................ 54
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure..................................................... 78
PART III
--------
Item 10. Directors and Executive Officers of the Registrant......................... 79
Item 11. Executive Compensation..................................................... 79
Item 12. Security Ownership of Certain Beneficial Owners and Management............. 79
Item 13. Certain Relationships and Related Transactions............................. 79
PART IV
-------
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K............ 80
2
References in this Annual Report to "we," "us," or "our" are to Mediacom
Communications Corporation and its direct and indirect subsidiaries since its
initial public offering and to Mediacom LLC and its direct and indirect
subsidiaries prior to the initial public offering, unless the context specifies
or requires otherwise.
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, 2001 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 nation's eighth largest cable television company based
on customers served and the leading cable operator focused on serving the
smaller cities and towns in the United States. We provide our customers with a
wide array of broadband products and services, including traditional video
services, digital television and high-speed Internet access. As of December 31,
2001, our cable systems passed approximately 2.6 million homes and served
approximately 1.6 million basic subscribers in 23 states. A basic subscriber is
a customer that subscribes to a package of basic cable television services.
Approximately 60% of our customers are located within the top 100 television
markets in the United States. We were founded in July 1995 by Rocco B. Commisso,
our Chairman and Chief Executive Officer.
Since commencement of our operations in March 1996, we have experienced
significant growth by executing a disciplined strategy of acquiring
underperforming cable systems and improving their operating and financial
performance. In 2001, we acquired cable systems from AT&T Broadband, LLC that
served approximately 800,000 basic subscribers, for an aggregate purchase price
of about $2.07 billion. Since inception, we have acquired cable systems for an
aggregate purchase price of $3.37 billion that served approximately 1.6 million
basic subscribers as of December 31, 2001.
We believe that our high-speed, interactive broadband network is the
superior platform for the delivery of video, voice and data services to the
homes and businesses in the communities we serve. We now have underway an
aggressive network upgrade program that we expect to substantially complete by
June 30, 2003. Including the cable systems we acquired in 2001 from AT&T
Broadband, approximately 75% of our cable network was upgraded with 550MHz to
870MHz bandwidth capacity and about 68% of our homes passed were activated with
two-way communications capability as of December 31, 2001.
As a result of our network upgrade program, we have seen a significant
increase in our cable systems' network capacity, quality and reliability,
facilitating the widespread introduction of additional programming and other
services such as digital video and high-speed Internet access, and providing the
network capability for additional services such as video-on-demand and
telephony. As of December 31, 2001, our digital cable service was available to
about 1.4 million basic subscribers, or 88% of our total basic subscribers, and
our high-speed Internet access, or cable modem service, was marketed to
approximately 1.4 million homes passed by our cable systems, or 54% of our total
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
2001 Acquisitions
On June 29, 2001, we acquired from AT&T Broadband cable systems serving
approximately 94,000 basic subscribers in the state of Missouri. The purchase
price for these cable systems was about $300.0 million. This transaction
comprised cable systems serving Columbia, Jefferson City and Springfield,
Missouri.
On July 18, 2001, we acquired from AT&T Broadband cable systems serving
approximately 706,000 basic subscribers in the states of Georgia, Illinois and
Iowa. The aggregate purchase price for these cable systems was about $1.77
billion. These transactions comprised cable systems serving the cities and
surrounding communities of Albany, Columbus, Tifton and Valdosta, Georgia;
Carbondale, Charleston, Effingham, Marion, Moline and Rock Island, Illinois; and
Ames, Cedar Rapids, Clinton, Davenport, Des Moines, Dubuque, Fort Dodge, Iowa
City, Mason City and Waterloo, Iowa.
2001 Financings
On January 24, 2001, through our direct and indirect wholly-owned
subsidiaries, Mediacom LLC and Mediacom Capital Corporation, we 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 was
used for general corporate purposes.
On June 27, 2001, we completed a public offering of 29.9 million shares of
Class A common stock at $15.22 per share. The net proceeds from this offering
were used to pay a portion of the purchase price and related fees and expenses
for the acquisitions of the AT&T cable systems.
On June 27, 2001, we completed a public offering of $172.5 million of 5
1/4% convertible senior notes due July 2006. The net proceeds from this offering
were used to pay a portion of the purchase price and related fees and expenses
for the acquisitions of the AT&T cable systems.
On June 29, 2001, through our direct and indirect wholly-owned
subsidiaries, Mediacom Broadband LLC and Mediacom Broadband Corporation, we
completed an offering of $400.0 million in aggregate principal amount of 11%
senior notes due July 2013. The net proceeds from this offering were used to pay
a portion of the purchase price and related fees and expenses for the
acquisitions of the AT&T cable systems.
On July 18, 2001, we entered into a $1.4 billion senior secured credit
facility for the operating subsidiaries of Mediacom Broadband LLC. The credit
facility consists of a $600.0 million revolving credit facility, a $300.0
million tranche A term loan and a $500.0 million tranche B term loan. Borrowings
under this facility, in the amount of $855.0 million, were used to fund a
portion of the purchase price and related fees and expenses for the acquisitions
of the AT&T cable systems.
2002 Events
On February 4, 2002, we filed a registration statement with the SEC under
which we may sell any combination of common and preferred stock, debt
securities, warrants and subscription rights for a maximum aggregate amount of
$1.5 billion. The SEC declared this registration statement effective on February
13, 2002.
During February 2002, we completed the transition of our cable modem
customers, which totaled over 112,000, to our new, proprietary Mediacom
Online(SM) high-speed Internet service, from the third-party provider
Excite@Home.
5
Business Strategy
Our objective is to be the dominant provider of entertainment, information
and telecommunications services in the smaller cities and towns in the United
States we serve. The key elements of our business 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 by implementing our operating practices and
capital investment program. 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. We typically generate cost savings by eliminating
significant amounts of overhead expenses historically incurred by the owners of
the cable systems we acquire.
Develop Efficient Operating Clusters
Our cable systems currently are organized into three operating divisions
based on their geographic location. To enhance our divisional clusters, our
acquisition strategy focuses, in part, on acquiring or trading for cable systems
in close proximity to our own cable systems. By further concentrating the
geographic clustering of our cable systems, we expect to generate additional
operating efficiencies through the consolidation of many managerial, customer
service, marketing, administrative and technical functions. The clustering of
cable systems also enables us to consolidate signal processing and distribution
facilities, or headend facilities, which lowers the fixed capital costs required
on a per home basis to introduce new products and services.
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 94% of our cable
network will be upgraded with 550MHz to 870MHz bandwidth capacity and 88% of our
homes passed will have two-way communications capability. In addition, we expect
that by June 2003 substantially all of our subscribers will be served by 100
master headend facilities and approximately 90% of our subscribers will be
served by 40 master headend facilities. As part of our headend consolidation
program, we plan to deploy about 8,000 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:
. offer digital cable television, high-speed Internet access and
interactive video services;
. increase channel capacity to a minimum of 82 channels, and
significantly more with digital video technology;
. activate the two-way communications capability of our systems, which
gives our customers the ability to send and receive signals over our
cable network;
. increase the average number of customers served by our master headend
facilities, which lowers the fixed capital costs required on a per
home basis to introduce new products and services, increases the speed
and effectiveness of our deployment of these new products and services
and improves our ability to sell advertising on our cable systems; and
. utilize our regional fiber optic networks to offer advanced
telecommunications services.
6
Introduce New and Advanced Broadband Products and Services
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 offer 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, 2001, our
digital cable service was available to about 1.4 million basic subscribers. In
March 2002, we launched video-on-demand service in our Mobile, Alabama cable
system. We plan to launch this service in other cable systems during 2002.
We also offer high-speed Internet access at speeds up to 100 times faster
than a conventional telephone modem. As of December 31, 2001, our cable modem
service was marketed to about 1.4 million homes passed by our cable systems.
During February 2002, we completed the transition of our cable modem customers,
which numbered over 112,000, to our new, proprietary Mediacom Online(SM)
high-speed Internet service, from the third-party provider Excite@Home. In
addition, we are currently exploring other opportunities in interactive video
and telecommunications services. We currently offer Internet over the television
through a trial with WorldGate Service Inc. in our Waterloo, Iowa cable system.
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 higher level of customer satisfaction by providing effective customer
service and attractively priced product and service offerings. We believe our
investments in our 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 regional calling
centers that are staffed with dedicated personnel who provide service 24 hours a
day, seven days a week to approximately 88% of our customers. 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 Smaller Cities and
Towns
Our disciplined acquisition strategy targets underperforming cable systems
serving primarily smaller cities and towns. These cable systems are typically
located within the top 50 to 100 television markets 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 small and medium-sized markets, including:
. less direct wireline competition given the lower housing densities and
the resulting higher costs per customer of constructing a cable
network;
. higher penetration levels of our services and lower customer turnover
as a result of fewer competing entertainment alternatives; and
. 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. Our acquisition
strategy will continue to focus on cable systems that have a complementary
geographic fit with our existing operations, but we will also continue to
consider opportunities to enter new market territories if they are of sufficient
size to provide the clustering benefits noted above.
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 at Mediacom LLC and Mediacom
Broadband LLC, our wholly-owned intermediate holding companies, while utilizing
our operating subsidiaries to access debt 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, 2001, the unused credit
commitments under our subsidiary credit facilities were approximately $1.1
billion, of which over $800.0 million could be borrowed and used for general
corporate purposes under the most restrictive covenants in our debt
arrangements, and our annualized cost of debt capital was approximately 6.9%.
Products and Services
We provide our customers with the ability to select from a full array of
core cable television service packages. 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 2002, 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 launched
video-on-demand service in our Mobile, Alabama cable system in March 2002 and
plan to launch this service in other cable systems during 2002. We are also
exploring other opportunities in interactive video, Internet protocol telephony,
or IP telephony, and other 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.
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:
. up to 64 multichannel premium services;
. up to 39 pay-per-view movie and sports channels;
. up to 45 channels of digital music; and
. an interactive on-screen program guide to help them navigate the new
digital choices.
As of December 31, 2001, our digital service was available to about 1.4
million basic subscribers, or approximately 88% of our subscriber base, and we
served 321,000 digital customers. By year-end 2002, we expect our digital cable
service to be available to about 1.5 million basic subscribers, or approximately
95% of our subscriber base, and to serve between 390,000 and 400,000 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 customers 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, cable modem service
eliminates the need for using a telephone line to access the Internet. It is
also always activated, and as a result, the customer does not need to dial into
an Internet service provider and await authorization.
As of December 31, 2001, our cable modem service was marketed to about 1.4
million homes passed by our cable systems, or 54% of our homes passed, and we
served 112,300 cable modem customers. We also provided dial-up telephone
Internet access to 2,700 customers. During February 2002, we completed the
transition of our cable modem customers, to our new, proprietary Mediacom
Online(SM) high-speed Internet service, from the third-party provider
Excite@Home. As part of the launch of Mediacom Online, we signed a multi-year
agreement with AT&T Corp. under which AT&T provides the Internet protocol
network backbone and certain core Internet support functions for our new
service. Also, our regional calling centers now provide technical customer
support for our cable modem customers. By year-end 2002, we expect our cable
modem service to be marketed to about 2.1 million homes passed by our cable
systems, or about 80% of our homes passed, and to serve between 180,000 and
190,000 total data customers.
Advertising
Our cable systems receive revenue from the sale of local advertising on
satellite-delivered channels such as CNN, MTV, USA Network, ESPN, Lifetime,
Nickelodeon and TNT. Prior to our acquisitions of cable systems from AT&T
Broadband during 2001, all of our advertising sales efforts were outsourced
through third parties. As part of the acquisitions of the AT&T cable systems, we
purchased an advertising sales infrastructure that includes in-house production
facilities, production and administrative employees and a sales workforce. We
expect to utilize this advertising infrastructure to generate additional
advertising revenues in the cable systems we owned prior to the acquisitions of
the AT&T cable systems, as the third-party advertising agreements covering those
cable systems expire beginning in 2003. We also expect that the increasing
concentration of customers served by our master headend facilities as a result
of our headend consolidation program will enable us to increase our advertising
revenues.
9
Video-On-Demand
Video-on-demand is an interactive television service that provides access
to hundreds of movies or special events on demand with full video cassette
recorder functionality, or the ability to fast forward, pause and rewind a
program at will. Customers can also watch a selected feature repeatedly during
the viewing window, which typically runs up to 24 hours, or stop the selection
before it is completed and return to it at a later time during the viewing
window. Fees are typically charged on a per-selection basis, although certain
individual categories of programming are also available for a flat monthly fee.
The provision of video-on-demand services requires the use of servers at the
headend facility of our cable systems. We introduced video-on-demand service in
our Mobile, Alabama cable system in March 2002 and expect to launch
video-on-demand service in additional cable systems during 2002.
Future Services
Interactive Services. Our upgraded cable network has the capacity to
deliver various additional interactive television services. These services can
be divided among two general service categories: enhanced television and
Internet access over the television. These 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. Internet
access and e-mail over the television are delivered using a set-top box with the
customer using a wireless keyboard. We currently offer Internet over the
television on a trial basis with WorldGate in our Waterloo, Iowa cable system.
We continue to evaluate opportunities to trial and/or launch additional
interactive products and services in our cable systems.
Telecommunications Services. We are exploring technologies using IP
telephony as well as traditional switching technologies that are currently
available to transmit telephony signals over our cable network. Our headend
consolidation plans include the installation of about 8,000 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 expect to perform a trial of IP telephony in late 2002 or early
2003.
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:
1997 1998 1999 2000 2001
------ -------- ---------- ---------- ----------
Operating Data:
Homes passed/(1)/..................... 87,750 520,000 1,071,500 1,173,000 2,630,000
Basic subscribers/(2)/................ 64,350 354,000 719,000 779,000 1,595,000
Basic penetration/(3)/................ 73.3% 68.1% 67.1% 66.4% 60.6%
Average monthly revenues
per basic subscriber/(4)/.......... $32.11 $ 32.88 $ 35.52 $ 38.45 $ 44.79
Digital Cable:
Digital-ready basic subscribers/(5)/.. -- -- 168,000 400,000 1,400,000
Digital customers..................... -- -- 5,300 40,000 321,000
Digital penetration/(6)/.............. -- -- 3.2% 10.0% 22.9%
Data:
Data-ready homes passed/(7)/.......... -- -- 120,000 550,000 1,780,000
Data-ready homes marketed/(8)/........ -- -- 105,500 486,000 1,420,000
Dial-up customers/(9)/............. 2,518 4,729 4,600 3,600 2,700
Cable modem customers.............. -- -- 500 12,000 112,300
------ -------- ---------- ---------- ----------
Total data customers.................. 2,518 4,729 5,100 15,600 115,000
Data penetration/(10)/................ -- -- 4.8% 3.2% 8.1%
Cable Network Data:
Miles of plant........................ 1,697 11,950 22,444 24,500 44,100
Density/(11)/......................... 52 44 48 48 60
Percentage of cable network at
550MHz to 870MHz................... 25% 45% 57% 74% 75%
- ----------
/(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 system who receive a package of
over-the-air broadcast stations, local access channels or certain
satellite-delivered cable television services.
/(3)/ Represents basic subscribers as a percentage of homes passed.
/(4)/ 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.
/(5)/ A subscriber is digital-ready if the subscriber is in a cable system
where digital cable services are available.
/(6)/ Represents digital customers as a percentage of digital-ready basic
subscribers.
/(7)/ A home passed is data-ready if it is in a cable system with two-way
communications capability.
/(8)/ Represents data-ready homes passed where cable modem service is
available.
/(9)/ A customer that accesses the Internet through a conventional modem and
telephone line connection.
/(10)/ Represents the number of total data customers as a percentage of
data-ready homes marketed.
/(11)/ Represents homes passed divided by miles of plant.
11
Selected Operating Region Data
Our systems currently are organized into three divisions. The following
table sets forth the principal states served by such divisions, and their
respective basic subscribers, digital customers and data customers as of
December 31, 2001:
Basic Digital Data
Division States Subscribers Customers Customers
- -------- ------ ----------- --------- ---------
Midwest Illinois, Indiana, Iowa, Kentucky,
Missouri 562,000 104,000 38,500
North Central Iowa, Minnesota, South Dakota 586,000 129,000 51,100
Southern Alabama, California, Delaware, Florida,
Georgia, North Carolina 447,000 88,000 25,400
--------- ------- -------
Total 1,595,000 321,000 115,000
========= ======= =======
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:
. increase the bandwidth capacity to 870MHz;
. activate two-way communications capability;
. consolidate our headend facilities, through the extensive deployment
of fiber optic networks; and
. allow us to provide digital cable television, high-speed Internet
access, interactive video and other telecommunications services.
We expect to substantially complete our cable network upgrade program by
June 30, 2003. The following table describes the technological state of our
cable network as of December 31, 2001 and the projected state of our cable
network through June 30, 2003, based on our current upgrade plans:
Percentage of Cable Network
-----------------------------
Less than 550MHz- Two-Way
550MHz 870MHz Capable
--------- ------- -------
December 31, 2001..................... 25% 75% 68%
December 31, 2002..................... 6% 94% 88%
June 30, 2003......................... 2% 98% 95%
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. We design our network to 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.
12
Two-way communications capability permits our customers to send and receive
signals over the cable network so that interactive services, such as
video-on-demand, are accessible and high-speed Internet access does not require
a separate telephone line. This capability also positions us to offer cable
telephony, using either IP 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, enhance our cable network's ability to provide advanced
telecommunications services.
As of December 31, 2001, our cable systems were operated from 410 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. We expect that by June
2003, substantially all of our customers will be served by 100 master headend
facilities and about 90% of our customers will be served by 40 master headend
facilities.
As part of our headend consolidation program, we plan to deploy about 8,000
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.
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 recently acquired systems. As a result of our branding
efforts, our emphasis on customer service and our investments in the cable
network, we believe we have developed a reputation for quality, reliability and
timely introduction of new products and services.
We invest a significant amount of time, effort and financial resources in
the training and evaluation of our marketing professionals and customer sales
representatives. Our customer sales representatives customize their sales
presentation to fit each of our customers' specific needs by conducting focused
consumer research and are given the incentive to use their frequent contact with
our customers as opportunities to sell our new products and services. As a
result, as we accelerate the introduction of new products and services to our
customers, we believe we can achieve higher success rates in attracting and
retaining customers.
Programming Supply
Except as noted below, we have various contracts to obtain basic and
premium programming for our 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.
We are a member of the National Cable Television Cooperative, Inc., a
programming cooperative consisting of small to medium-sized multiple system
operators serving, in the aggregate, over 12 million cable subscribers. The
cooperative may help create efficiencies in the areas of obtaining and
administering programming contracts, as well as securing, in some cases, more
favorable programming rates and contract terms for small to medium-sized cable
operators. We negotiate programming contract renewals both directly and through
the cooperative.
13
Substantially all of the cable television programming services carried on
the cable systems we acquired from AT&T Broadband are provided to customers
without written contracts with the respective program suppliers. We are
currently negotiating the terms of these programming services with the
respective program suppliers.
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 competitive conditions or other factors in 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, in some cases
retransmission consents have been contingent upon our carriage of
satellite-delivered cable programming offered by companies affiliated with the
stations' owners or the broadcast 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.
Customer Service and Community Relations
System reliability and customer satisfaction represent a cornerstone of our
business strategy. We expect that ongoing investments in our cable network and
our regional calling centers 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 maintain regional calling centers
which service approximately 88% of our 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 generally 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 maintenance or posting of insurance or 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, 2001, our cable systems were subject to approximately
1,487 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, or the 1984 Cable Act, prohibits franchising
authorities from imposing franchise fees in excess of 5% of gross revenues from
cable services and also permits the cable operator to seek renegotiation and
modification of franchise requirements if warranted by changed circumstances.
14
Substantially all of the basic subscribers of our cable systems are in
service areas that require a franchise. The table below groups the franchises of
our cable systems by year of expiration and presents the approximate number and
percentage of basic subscribers for each group as of December 31, 2001.
Percentage of Number of Percentage of
Number of Total Basic Total Basic
Year of Franchise Expiration Franchises Franchises Subscribers Subscribers
- ---------------------------- ---------- ------------- ----------- -------------
2002 through 2005...................... 444 29.9% 534,422 33.5%
2006 and thereafter.................... 1,043 70.1 1,060,578 66.5
----- ----- --------- -----
Total............................. 1,487 100.0% 1,595,000 100.0%
===== ===== ========= =====
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
cable 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.
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 products and 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. In recent years, the Federal
Communications Commission (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. We believe our ability to package multiple services, such as
digital television and two-way, 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
other sources of entertainment such as live sporting events, movie theaters and
home video products, including videotape recorders and videodisc players.
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, DBS providers currently
sell video programming services to approximately 17.5 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 rooftop or side-mounted antenna. DBS
providers use video compression technology to increase channel capacity and
digital technology to improve the quality of the signals transmitted to their
customers. In addition to the non-broadcast programming services we offer in our
cable systems, under legislation enacted in 1999, DBS providers also deliver
15
local broadcast signals in certain markets that we serve. This change in law
eliminated a significant competitive advantage which cable system operators had
over DBS providers, as previously DBS providers were not permitted to retransmit
local broadcast signals. DBS service is being heavily marketed on a nationwide
basis by several service operators. We believe our digital cable service is
competitive with the services delivered to customers by DBS systems.
DBS providers 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 telephone return path and are
beginning to provide true two-way interactivity. We believe that our Internet
access service is superior to the service currently offered by DBS providers
because our service does not rely on a telephone line. In order for DBS
providers to offer true two-way high-speed Internet access services, additional
equipment is required and their service is typically offered at higher prices
for equivalent services.
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. A proposed merger between these two entities is
presently undergoing regulatory scrutiny. If the merger is consummated, the
combined entity would serve over 16.0 million subscribers. DirecTV and Echostar
now deliver local broadcast signals in a number of the largest markets and we
believe 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
providers in any market where they retransmit one or more local signals. The
current capacity limitations of satellite technology may limit the DBS
providers' ability to comply with these must-carry requirements. A judicial
challenge to the January 2002 requirement on the grounds that it is
unconstitutional is pending. These developments could result in greater
competitive challenges for us and other cable system operators.
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 Telecommunications Act
of 1996, 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.
16
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 8.1% of the homes passed in the service areas of our
franchises.
Internet Access
We offer high-speed Internet access in many of our cable systems. This kind
of service is sometimes called "cable modem service." Our cable systems compete
with a number of other companies, many of which have substantial resources, such
as existing Internet service providers, commonly known as ISPs, DBS providers,
and local and long distance telephone companies.
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 telecommunications companies
are seeking to provide high-speed broadband services, including interactive
online services, without regard to present service boundaries and other
regulatory restrictions. Congress is currently considering legislation that, if
enacted into law, will eliminate or reduce significantly many of the regulatory
restrictions on the offering of high-speed broadband services by local telephone
companies. DBS providers currently offer satellite-delivered high-speed Internet
access services with a telephone return path and are beginning to provide true
two-way interactivity.
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. This kind of access
is often called "open access." Many local franchising authorities have been
examining the issue of open access and a few have required cable operators to
provide such access. Several Federal courts have ruled that localities are not
authorized to require open access. On March 14, 2002, the FCC announced that
there is no current legal requirement for cable operators to grant open access
now that cable modem service is classified as an information service. The FCC,
however, stated that it is considering whether it has the authority to impose
open access requirements and, if so, whether it should do so. If we were
required to provide open access to ISPs as a result of FCC action or court
decisions, other companies could use our cable system infrastructure to offer
Internet services competitive with our own.
Other Competition
Advances in communications technology, as well as changes in the
marketplace and the regulatory and legislative environment, are constantly
occurring. 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.
17
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 text and graphic information that may
be useful to both consumers and businesses. The FCC also permits commercial and
non-commercial FM stations to use their subcarrier frequencies to provide
non-broadcast services, including data transmission.
Employees
As of December 31, 2001, we employed 3,345 full-time employees and 174
part-time employees. Approximately 3.2% of our employees are represented by a
labor union but are not covered by any collective bargaining agreements. We
consider our relations with our employees to be generally good.
18
Legislation and Regulation
General
A federal law known as the Communications Act of 1934, as amended (the
"Communications Act"), establishes a national policy to guide the regulation,
development and operation of cable communications systems.
The Communications Act allocates principal responsibility for enforcing the
federal policies among the FCC and 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:
. subscriber rates;
. the content of the programming we offer to subscribers, as well as the
way we sell our program packages to subscribers;
. the use of our cable systems by the local franchising authorities, the
public and other unrelated companies;
. our franchise agreements with local governmental authorities;
. cable system ownership limitations and prohibitions; and
. 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.
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:
. 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;
. the installation of cable service and related service calls; and
. the sale and lease of equipment used by subscribers to receive basic
service, such as converter boxes and remote control units.
Local franchising authorities who wish to regulate basic service rates and
related equipment rates must first obtain FCC certification to regulate by
following a simplified FCC certification process and agreeing to follow
established FCC rules and policies when regulating the cable operator's rates.
19
Several years ago, the FCC adopted detailed rate regulations, guidelines
and rate forms that a cable 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 a cable operator's rates
are too high under the FCC's rate rules, the local franchising authority may
require the cable operator to reduce rates and to refund overcharges to
subscribers, with interest. The cable operator may appeal adverse local rate
decisions to the FCC.
The FCC's regulations allow a cable operator to modify regulated rates on a
quarterly or annual basis to account for changes in:
. the number of regulated channels;
. inflation; and
. certain external costs, such as franchise and other governmental fees,
copyright and retransmission consent fees, taxes, programming fees and
franchise-related obligations.
The Communications Act and the FCC's regulations also:
. require cable operators to charge uniform rates throughout each
franchise area that is not subject to effective competition;
. prohibit regulation of non-predatory bulk discount rates offered by
cable operators to subscribers in commercial and residential
developments; and
. permit regulated equipment rates to be computed by aggregating costs
of broad categories of equipment at the franchise, system, regional or
company level.
Content Requirements
The Communications Act and the FCC's regulations contain broadcast signal
carriage requirements that allow local commercial television broadcast stations:
. to elect once every three years to require a cable system to carry the
station, subject to certain exceptions; or
. 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:
. all distant commercial television stations, except for commercial
satellite-delivered independent superstations such as WGN;
. commercial radio stations; and
. certain low-power television stations.
20
The FCC has recently adopted regulations for mandatory carriage of digital
television signals offered by local television broadcasters. Under these
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, other than those systems
which are subject to effective competition, 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
October 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 are unable to predict whether the full implementation
of this statutory provision 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:
. 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;
. require such programmers to sell their programming to other
unaffiliated video program distributors; and
. limit the ability of such programmers to offer exclusive programming
arrangements to their related parties.
The FCC actively regulates other aspects of our programming, involving such
areas as:
. our use of syndicated and network programs and local sports broadcast
programming;
. advertising in children's programming;
. political advertising;
. origination cablecasting;
. adult programming;
. sponsorship identification; and
. 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:
. permits franchising authorities to require cable operators to set
aside channels for public, educational and governmental access
programming; and
. 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.
21
The FCC regulates various aspects of third party commercial use of channel
capacity on our cable systems, including:
. the maximum reasonable rate a cable operator may charge for third
party commercial use of the designated channel capacity;
. the terms and conditions for commercial use of such channels; and
. the procedures for the expedited resolution of disputes concerning
rates or commercial use of the designated channel capacity.
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:
. 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;
. generally prohibits us from operating in communities without a
franchise;
. 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;
. 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;
. permits us to obtain modification of our franchise requirements from
the franchise authority or by judicial action if warranted by
commercial impracticability; and
. 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 derive 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 to the extent permitted by law. 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 the purchaser 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
22
always obtained franchise renewals. We believe that we have generally met the
terms of our franchises and have provided quality levels of service. We
anticipate that our future franchise renewal prospects generally will be
favorable.
Various courts have considered whether franchising authorities have the
legal right to limit the number of franchises awarded within a community and to
impose substantive franchise requirements. These decisions have been
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 U.S.
Court of Appeals for the District of Columbia Circuit recently vacated the FCC's
current limit of 30% of subscribers to all multi-channel video programming
distributors nationwide. We currently account for significantly fewer
subscribers than that limit or any revised limit now under consideration and,
therefore, the limit does not currently affect us and we do not expect it to
affect any future acquisitions we may undertake in the foreseeable future.
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 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
were 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 has been invalidated by a federal appellate court. 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:
. 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;
. preempted legal barriers to telecommunications competition that
previously existed in state and local laws and regulations;
. set basic standards for relationships between telecommunications
providers; and
. 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
to whether an operator of an open video system must obtain a local franchise is
left to each community.
23
Pole Attachment Regulation
The Communications Act requires the FCC to regulate the rates, terms and
conditions imposed by public utilities, other than municipally- or
cooperatively-owned 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 adopted a new rate formula that
became effective in 2001 which governs the maximum rate certain utilities may
charge for attachments to their poles and conduit by companies providing
telecommunications services, including cable operators. A federal appellate
court is currently evaluating whether the FCC's rate formulas, as applied in a
specific case, provide "just compensation" under Federal Constitution.
Increases in attachment rates due to the FCC's new rate formula are phased
in over a five-year period in equal annual increments, beginning in February
2001. A federal appellate 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 recently reversed the federal
appellate court decision and upheld the FCC's authority to regulate pole
attachment rates. 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:
. equal employment opportunity;
. consumer protection and customer service;
. technical standards and testing of cable facilities;
. consumer electronics equipment compatibility;
. registration of cable systems;
. maintenance of various records and public inspection files;
. microwave frequency usage; and
. 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 continue to analyze to the regulation of cable
communications services.
24
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. 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 major performing rights
organizations in the United States. These organizations offer through
to-the-viewer licenses to the cable networks that 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. Cable industry representatives recently negotiated standard
license agreements with the two remaining sizable music performing rights
organizations covering locally originated programming, including advertising
inserted by the cable operator in programming produced by other parties. We
expect that these organizations will now seek to execute these standard
agreements with most cable operators, including us. Although each of these
agreements will require the payment of music license fees for earlier time
periods, we do not believe such license fees will have a significant impact on
our business and operations.
Cable Modem Service
There are currently few laws or regulations which specifically regulate
communications or commerce over the Internet. Section 230 of the Communications
Act declares it to be the policy of the United States to promote the continued
development of the Internet and other interactive computer services and
interactive media, and to preserve the vibrant and competitive free market that
presently exists for the Internet and other interactive computer services,
unfettered by federal or state regulation. One area in which Congress did
attempt to regulate content over the Internet involved the dissemination of
obscene or indecent materials.
The Digital Millennium Copyright Act is intended to reduce the liability of
online service providers for listing or linking to third-party Websites that
include materials that infringe copyrights or other rights or if customers use
the service to publish or disseminate infringing materials. The Children's
Online Protection Act and the Children's Online Privacy Protection Act are
intended to restrict the distribution of certain materials deemed harmful to
children and impose additional restrictions on the ability of online services to
collect user information from minors. In addition, the Protection of Children
From Sexual Predators Act of 1998 requires online service providers to report
evidence of violations of federal child pornography laws under certain
circumstances.
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. This kind of access
is often called "open access." Many local franchising authorities have been
examining the issue of open access and a few have required cable operators to
provide such access. Several Federal courts have ruled that localities are not
authorized to require open access. On March 14, 2002, the FCC announced that
there is no current legal requirement for cable operators to grant open access.
On the same date, however, the FCC announced that it is considering whether it
has the authority to impose open access requirements and, if so, whether it
should do so.
25
There is uncertainty about whether Internet access service provided by
cable operators should be classified as an information service,
telecommunications service, or cable service under the Communications Act of
1934. The decision about the proper classification will affect our business and
operations, including, but not limited to, whether we will be required to pay
local government franchise fees on cable Internet services. On March 14, 2002,
the FCC announced that it was classifying Internet access service provided
through cable modems as an interstate information service. At the same time, the
FCC initiated a rulemaking proceeding designed to address a number of issues
resulting from this regulatory classification, including the following:
. The FCC confirmed that there is no current legal requirement for cable
operators to grant open access now that cable modem service is
classified as an information service. The FCC is considering, however,
whether it has the authority to impose open access requirements and,
if so, whether it should do so, or whether to permit local authorities
to impose such a requirement.
. The FCC confirmed that because cable modem service is an information
service, not a cable service, local franchise authorities may not
collect franchise fees on cable modem service revenues under existing
law and regulations.
. The FCC concluded that federal law does not permit local franchise
authorities to impose additional franchise requirements on cable modem
service. It is considering, however, whether local franchise
authorities nonetheless have the authority to impose restrictions,
requirements or fees because cable modem service is delivered over
cable using public rights of way.
. The FCC is considering whether cable operators providing cable modem
service should be required to contribute to a "universal service fund"
designed to support making service available to all consumers,
including those in low income, rural and high-cost areas at rates that
are reasonably comparable to those charged in urban areas.
. The FCC is considering whether it should take steps to ensure that the
regulatory burdens that cable systems providing cable modem service
are comparable to those of other providers of Internet access service,
such as telephone companies. One method of achieving comparability
would be to make cable operators subject to some of the regulations
that do not now apply to them, but are applicable to telephone
companies.
Challenges to the FCC's classification of cable Internet access service
have been filed in federal courts. In previous actions over the regulatory
classification of cable modem service, the courts issued conflicting decisions.
These conflicting rulings and the new court proceedings increase the possibility
that the classification of cable Internet service could be decided by the
Supreme Court.
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:
. franchise fees;
. franchise term;
. system construction and maintenance obligations;
. system channel capacity;
. design and technical performance;
26
. customer service standards;
. sale or transfer of the franchise;
. territory of the franchise;
. indemnification of the franchising authority;
. use and occupancy of public streets; and
. types of cable services provided.
In the process of renewing franchises, a franchising authority may seek to
impose new and more onerous requirements, such as upgraded facilities, increased
channel capacity or enhanced services, although protections available under the
Communications Act require the municipality to take into account the cost of
meeting such requirements. The Communications Act also contains renewal
procedures and criteria designed to protect incumbent franchisees against
arbitrary denials of renewal.
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.
Other Regulation
Existing federal, state and local laws and regulations and 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 business or
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. Our distribution system consists primarily of coaxial and
fiber optic cables and related electronic equipment. Customer premise equipment
consists of decoding converters and cable modems.
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 cable systems require maintenance and periodic
upgrading to improve system performance and capacity.
We own and lease the real property housing our regional call centers,
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.
ITEM 3. LEGAL PROCEEDINGS
There are no material pending legal proceedings to which we are a party or
to which any of our properties are subject.
28
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, 2001.
ITEM 4A. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Name Age Position
- ---- --- --------
Rocco B. Commisso......... 52 Chairman and Chief Executive Officer
Mark E. Stephan........... 45 Senior Vice President, Chief Financial
Officer, Treasurer and Director
James M. Carey............ 50 Senior Vice President, Operations
John G. Pascarelli........ 40 Senior Vice President, Marketing and
Consumer Services
Joseph Van Loan........... 60 Senior Vice President, Technology
Italia Commisso Weinand... 48 Senior Vice President, Programming and
Human Resources and Secretary
Charles J. Bartolotta..... 47 Senior Vice President, Customer Operations
Calvin G. Craib........... 47 Senior Vice President, Business Development
William I. Lees, Jr....... 43 Senior Vice President, Corporate Controller
Joseph E. Young........... 53 Senior Vice President, General Counsel
Craig S. Mitchell......... 43 Director
William S. Morris III..... 67 Director
Thomas V. Reifenheiser.... 66 Director
Natale S. Ricciardi....... 53 Director
Robert L. Winikoff........ 55 Director
Rocco B. Commisso has 24 years of experience with the cable television
industry and has served as our Chairman and Chief Executive Officer since
founding our predecessor company in July 1995. From 1986 to 1995, he served as
Executive Vice President, Chief Financial Officer and a director of Cablevision
Industries Corporation. Prior to that time, Mr. Commisso served as Senior Vice
President of Royal Bank of Canada's affiliate in the United States from 1981,
where he founded and directed a specialized lending group to media and
communications companies. Mr. Commisso began his association with the cable
industry in 1978 at The Chase Manhattan Bank, where he managed the bank's
lending activities to communications firms including the cable industry. He
serves on the board of directors of the National Cable Television Association,
Cable Television Laboratories, Inc and C-SPAN. Mr. Commisso holds a Bachelor of
Science in Industrial Engineering and a Master of Business Administration from
Columbia University.
Mark E. Stephan has 15 years of experience with the cable television
industry and has served as our Senior Vice President, Chief Financial Officer
and Treasurer since the commencement of our operations in March 1996. Before
joining us, Mr. Stephan served as Vice President, Finance for Cablevision
Industries from July 1993. Prior to that time, Mr. Stephan served as Manager of
the telecommunications and media lending group of Royal Bank of Canada.
James M. Carey has 20 years of experience in the cable television industry.
Before joining us in September 1997, Mr. Carey was founder and President of
Infinet Results, a telecommunications consulting firm, from December 1996. Mr.
Carey served as Executive Vice President, Operations at MediaOne Group from
August 1995 to November 1996, where he was responsible for MediaOne's Atlanta
cable operations. Prior to that time, he served as Regional Vice President of
Cablevision Industries' Southern region. Mr. Carey is a member of the board of
directors of the American Cable Association.
29
John G. Pascarelli has 21 years of experience in the cable television
industry. Before joining us in March 1998, Mr. Pascarelli served as Vice
President, Marketing for Helicon Communications Corporation from January 1996 to
February 1998 and as Corporate Director of Marketing for Cablevision Industries
from 1988 to 1995. Prior to that time, Mr. Pascarelli served in various
marketing and system management capacities for Continental Cablevision, Inc.,
Cablevision Systems and Storer Communications. Mr. Pascarelli is a member of the
board of directors of the Cable Television Administration and Marketing
Association.
Joseph Van Loan has 29 years of experience in the cable television
industry. Before joining us in November 1996, Mr. Van Loan served as Senior Vice
President, Engineering for Cablevision Industries from 1990. Prior to that time,
he managed a private telecommunications consulting practice specializing in
domestic and international cable television and broadcasting and served as Vice
President, Engineering for Viacom Cable. Mr. Van Loan received the 1986 Vanguard
Award for Science and Technology from the National Cable Television Association.
Italia Commisso Weinand has 25 years of experience in the cable television
industry. Before joining us in April 1996, Ms. Weinand served as Regional
Manager for Comcast Corporation from July 1985. Prior to that time, Ms. Weinand
held various management positions with Tele-Communications, Times Mirror Cable
and Time Warner. She serves on the board of directors of the National Cable
Television Cooperative, Inc., a programming cooperative consisting of small to
medium-sized multiple system operators. Ms. Weinand is the sister of Mr.
Commisso.
Charles J. Bartolotta has 19 years of experience in the cable television
industry. Before joining us in October 2000, Mr. Bartolotta served as Division
President for AT&T Broadband, LLC from July 1998, where he was responsible for
managing an operating division serving nearly three million customers. Prior to
that time, he served as Regional Vice President of Telecommunications, Inc. from
January 1997 and as Vice President and General Manager for TKR Cable Company
from 1989. Prior to that time, Mr. Bartolotta held various management positions
with Cablevision Systems Corporation.
Calvin G. Craib has 20 years of experience in the cable television
industry. Before joining us in April 1999 as Vice President, Business
Development, Mr. Craib served as Vice President, Finance and Administration for
Interactive Marketing Group from June 1997 to December 1998 and as Senior Vice
President, Operations, and Chief Financial Officer for Douglas Communications
from January 1990 to May 1997. Prior to that time, Mr. Craib served in various
financial management capacities at Warner Amex Cable and Tribune Cable.
William I. Lees, Jr. joined us in October 2001 as Senior Vice President,
Corporate Controller. Previously, Mr. Lees served as Executive Vice President
and Chief Financial Officer for Regus Business Centre Corp., a multinational
real estate services company, from July 1999 to September 2001. Prior to that
time, he served as Corporate Controller and Director for Formica Corporation
from September 1998 to July 1999, and as Chief Financial Officer for Imperial
Schrade Corporation from September 1993 to September 1998. He was previously
employed for 13 years by Ernst & Young.
Joseph E. Young has 17 years of experience with the cable television
industry. Before joining us in November 2001 as Senior Vice President, General
Counsel, Mr. Young served as Executive Vice President, Legal and Business
Affairs, for LinkShare Corporation, an Internet-based provider of marketing
services, from September 1999 to October 2001. Prior to that time, he practiced
corporate law with Baker & Botts, LLP from January 1995 to September 1999.
Previously, Mr. Young was a partner with the Law Offices of Jerome H. Kern and a
partner with Shea & Gould.
Craig S. Mitchell has held various management positions with Morris
Communications Corporation for more than the past five years. He currently
serves as its Vice President of Finance and Treasurer and is also a member of
its board of directors.
William S. Morris III has served as the Chairman and Chief Executive
Officer of Morris Communications for more than the past five years. He was the
Chairman of the board of directors of the Newspapers Association of America for
1999-2000.
30
Thomas V. Reifenheiser served for more than five years as a Managing
Director and Group Executive of the Global Media and Telecom Group of Chase
Securities Inc. until his retirement in September 2000. He joined Chase in 1963
and had been the Global Media and Telecom Group Executive since 1977. He also
had been a director of the Management Committee of The Chase Manhattan Bank. Mr.
Reifenheiser is a member of the board of directors of Lamar Advertising Company,
a leading owner and operator of outdoor advertising and logo sign displays.
Natale S. Ricciardi has held various management positions with Pfizer Inc.
for more than the past five years. Mr. Ricciardi joined Pfizer in 1972 and
currently serves as its Vice President, U.S. Manufacturing, with responsibility
for all of Pfizer's U.S. manufacturing facilities.
Robert L. Winikoff has been a partner of the law firm of Sonnenschein Nath
& Rosenthal since August 2000. Prior thereto, he was a partner of the law firm
of Cooperman Levitt Winikoff Lester & Newman, P.C. for more than five years.
Sonnenschein Nath & Rosenthal currently serves as our outside general counsel
and prior to such representation Cooperman Levitt Winikoff Lester & Newman, P.C.
served as our outside general counsel since 1995.
31
PART II
-------
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our Class A common stock has been traded on the Nasdaq National Market
under the symbol "MCCC" since February 4, 2000, the date of our initial public
offering. Prior to that time, there was no public market for our common stock.
The following table sets forth, for the periods indicated, the high and low
closing sales prices for our Class A common stock as reported by the Nasdaq
National Market:
2001 2000
--------------- ---------------
High Low High Low
------ ------ ------ ------
First Quarter $22.06 $16.56 $19.75 $13.81
Second Quarter $21.99 $15.22 $15.38 $ 7.38
Third Quarter $18.96 $12.91 $17.75 $12.13
Fourth Quarter $18.26 $12.14 $18.00 $12.25
As of March 19, 2002, there were approximately 89 holders of record of our
Class A common stock (representing an aggregate of approximately 19,500
beneficial holders) and 12 holders of record of our Class B common stock.
We have never declared or paid any dividends on our common stock. We
currently anticipate that we will retain all of our future earnings for use in
the expansion and operation of our business. Thus, we do not anticipate paying
any cash dividends on our common stock in the foreseeable future. Our future
dividend policy will be determined by our board of directors and will depend on
various factors, including our results of operations, financial condition,
capital requirements and investment opportunities.
During the year ended December 31, 2001, we granted stock options to
certain of our employees to purchase an aggregate of 778,120 shares of Class A
common stock at an exercise price ranging from $12.92 to $20.11 per share.
The grant of stock options to the employees and non-employee directors of
MCC was not registered under the Securities Act of 1933 because the stock
options either did not involve an offer or sale for purposes of Section 2(a)(3)
of the Securities Act of 1933, in reliance on the fact that the stock options
were granted for no consideration, or were offered and sold in transactions not
involving a public offering, exempt from registration under the Securities Act
of 1933 pursuant to Section 4(2).
32
ITEM 6. SELECTED FINANCIAL DATA
In the table below, we provide you with selected historical consolidated
financial and operating data for the years ended December 31, 1997, 1998, 1999,
2000 and 2001 and balance sheet data as of December 31, 1997, 1998, 1999, 2000
and 2001, which are derived from our audited consolidated financial statements.
Mediacom Communications Corporation was organized as a Delaware corporation
in November 1999 and completed an initial public offering in February 2000.
Mediacom LLC was formed as a New York limited liability company in July 1995 and
since that time its taxable income or loss has been included in the federal and
certain state income tax returns of its members. Upon completion of our initial
public offering, we became subject to the provisions of Subchapter C of the
Internal Revenue Code. As a C corporation, we are subject to federal, state and
local income taxes.
See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
Year Ended December 31,
----------------------------------------------------------------------
1997 1998 1999 2000 2001
---------- ---------- ----------- ----------- ------------
(dollars in thousands, except per share amounts)
Statement of Operations Data:
Revenues $ 17,634 $ 129,297 $ 176,052 $ 332,050 $ 589,987
Costs and expenses:
Service costs(1) 5,547 43,849 58,058 114,234 224,291
Selling, general and administrative
expenses 2,696 25,596 32,949 55,820 105,794
Corporate expenses(2) 882 5,797 6,951 6,029 8,705
Depreciation and amortization 7,636 65,793 101,065 178,331 310,785
Non-cash stock charges relating to
corporate expenses(3) -- -- 15,445 28,254 2,904
---------- ---------- ----------- ----------- ------------
Operating income (loss) 873 (11,738) (38,416) (50,618) (62,492)
Interest expense, net(4) 4,829 23,994 37,817 68,955 139,867
Loss on derivative instruments, net(5) -- -- -- -- 8,441
Other expense (income)(6) 640 4,058 5,087 30,024 (21,653)
---------- ---------- ----------- ----------- ------------
Net loss before income taxes (4,596) (39,790) (81,320) (149,597) (189,147)
Provision for income taxes -- -- -- 250 87
---------- ---------- ----------- ----------- ------------
Net loss before cumulative effect of
accounting change (4,596) (39,790) (81,320) (149,847) (189,234)
Cumulative effect of accounting change(7) -- -- -- -- (1,642)
---------- ---------- ----------- ----------- ------------
Net loss $ (4,596) $ (39,790) $ (81,320) $ (149,847) $ (190,876)
========== ========== =========== =========== ============
Basic and diluted loss per share:(8)
Before cumulative effect of
accounting change $ (3.66) $ (5.28) $ (7.82) $ (1.79) $ (1.78)
Cumulative effect of accounting change -- -- -- -- (0.02)
---------- ---------- ----------- ----------- ------------
Loss per share $ (3.66) $ (5.28) $ (7.82) $ (1.79) $ (1.80)
========== ========== =========== =========== ============
Weighted average common shares
outstanding(8) 1,255,501 7,537,912 10,403,749 83,803,032 105,779,737
Balance Sheet Data (end of period):
Total assets $ 102,791 $ 451,152 $ 1,272,881 $ 1,379,972 $ 3,649,047
Total debt 72,768 337,905 1,139,000 987,000 2,798,000
Total stockholders' equity 24,441 78,651 54,615 261,621 507,576
(continued on next page)
33
Year Ended December 31,
------------------------------------------------------------
1997 1998 1999 2000 2001
-------- --------- ---------- ---------- -----------
(dollars in thousands, except per subscriber amounts)
Other Data:
System cash flow(9) $ 9,391 $ 59,852 $ 85,045 $ 161,996 $ 259,902
System cash flow margin(10) 53.3% 46.3% 48.3% 48.8% 44.1%
Operating cash flow(11) $ 8,509 $ 54,055 $ 78,094 $ 155,967 $ 251,197
Operating cash flow margin(12) 48.3% 41.8%