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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
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Annual Report Pursuant to Section 13 or 15 (d) of the
Securities Exchange Act of 1934
For the fiscal year ended December 31, 2001
Commission File Numbers: 333-72440
333-72440-01
Mediacom Broadband LLC
Mediacom Broadband Corporation*
(Exact names of Registrants as specified in their charters)
Delaware 06-1615412
Delaware 06-1630167
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Numbers)
100 Crystal Run Road
Middletown, New York 10941
(Address of principal executive offices)
(845) 695-2600
(Registrants' 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:
None
Indicate by check mark whether the Registrants (1) have filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrants were required to file such reports), and (2) have been subject to
such filing requirements for the past 90 days:
Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrants' knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K: Not Applicable
State the aggregate market value of the common equity held by
non-affiliates of the Registrants: Not Applicable
Indicate the number of shares outstanding of the Registrants' common stock:
Not Applicable
*Mediacom Broadband Corporation meets the conditions set forth in General
Instruction I (1) (a) and (b) of Form 10-K and is therefore filing this form
with the reduced disclosure format.
MEDIACOM BROADBAND LLC
2001 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
PART I
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Page
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Item 1. Business.................................................................... 4
Item 2. Properties.................................................................. 28
Item 3. Legal Proceedings........................................................... 28
Item 4. Submission of Matters to a Vote of Security Holders......................... 28
PART II
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Item 5. Market for Registrants' Common Equity and Related Stockholder Matters....... 29
Item 6. Selected Financial Data..................................................... 30
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations..................................................... 33
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.................. 50
Item 8. Financial Statements and Supplementary Data................................. 51
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure...................................................... 80
PART III
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Item 10. Directors and Executive Officers of the Registrants......................... 81
Item 11. Executive Compensation...................................................... 84
Item 12. Security Ownership of Certain Beneficial Owners and Management.............. 84
Item 13. Certain Relationships and Related Transactions.............................. 85
PART IV
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Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K............. 86
2
Mediacom Broadband LLC was organized as a Delaware limited liability
company in 2001 and is a wholly-owned subsidiary of Mediacom Communications
Corporation, a Delaware corporation. Mediacom Broadband Corporation was
organized as a Delaware corporation in 2001 and is a wholly-owned subsidiary of
Mediacom Broadband LLC. Mediacom Broadband Corporation was formed for the sole
purpose of acting as co-issuer with Mediacom Broadband LLC of debt securities
and does not conduct operations of its own.
References in this Annual Report to "we," "us," or "our" are to Mediacom
Broadband LLC and its direct and indirect subsidiaries, unless the context
specifies or requires otherwise. References in this Annual Report to "MCC" are
to Mediacom Communications Corporation.
Cautionary Statement Regarding Forward-Looking Statements
You should carefully review the information contained in this Annual Report
and in other reports or documents that we file from time to time with the
Securities and Exchange Commission (the "SEC"). In this Annual Report, we state
our beliefs of future events and of our future financial performance. In some
cases, you can identify those so-called "forward-looking statements" by words
such as "may," "will," "should," "expects," "plans," "anticipates," "believes,"
"estimates," "predicts," "potential," or "continue" or the negative of those
words and other comparable words. You should be aware that those statements are
only our predictions. Actual events or results may differ materially. In
evaluating those statements, you should specifically consider various factors,
including the risks discussed in this Annual Report for the year ended December
31, 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
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ITEM 1. BUSINESS
Our Manager
Mediacom Communications Corporation, our parent and manager, is 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. Mediacom Communications provides its 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
manager's cable systems, which are owned and operated through the operating
subsidiaries of Mediacom Broadband LLC and Mediacom LLC, 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. Our manager was founded in July 1995 by Rocco B.
Commisso, its Chairman and Chief Executive Officer, and its Class A common stock
is traded on The Nasdaq National Market under the symbol MCCC.
Mediacom Broadband LLC
We are a wholly-owned subsidiary of our manager. Prior to June 29, 2001, we
had no operations or significant assets. On June 29, 2001, we acquired from AT&T
Broadband, LLC cable systems serving approximately 94,000 basic subscribers in
the state of Missouri for a purchase price of approximately $300.0 million in
cash. 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 for an aggregate purchase price of approximately $1.77 billion in cash.
As of December 31, 2001, these cable systems passed approximately 1.4
million homes and served approximately 824,000 basic subscribers in Georgia,
Illinois, Iowa and Missouri. These cable systems are located in markets that are
contiguous with, or in close proximity to, cable systems owned and operated by
Mediacom LLC, a wholly-owned subsidiary of our manager. Except as separately
defined in historical combined financial statements appearing elsewhere in this
Annual Report as Mediacom Systems (Predecessor Company), these cable systems are
referred to in this report as our cable systems or the AT&T cable systems.
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. As of December 31, 2001, approximately 55% of our cable network
was upgraded with 550MHz to 870MHz bandwidth capacity and about 57% of our homes
passed were activated with two-way communications capability.
Our technologically advanced network has already enabled us to offer
advanced broadband products and services to a significant number of our
customers. As of December 31, 2001, our digital cable service was available to
about 800,000 basic subscribers, or 97% of our total basic subscribers, and our
high-speed Internet access, or cable modem service, was marketed to 810,000
homes passed by our cable systems, or 57% of our total homes passed. As we
continue to upgrade our cable systems, we expect to see significant increases in
our cable systems' network capacity, facilitating the introduction of additional
programming, digital video and high-speed Internet access in virtually all of
our cable systems, and providing the network capability for additional services
such as video-on-demand and telephony.
Our manager's principal executive offices are located at 100 Crystal Run
Road, Middletown, New York 10941, and our manager's telephone number at that
address is (845) 695-2600. Our manager's website is located at
www.mediacomcc.com. The information on our manager's 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 approximately $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 approximately
$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 June 29, 2001, 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 June 29, 2001, we received a $336.4 million equity contribution from our
manager. We received an additional $388.6 million equity contribution from our
manager on July 18, 2001. The proceeds 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 received a $150.0 million preferred equity investment
from Mediacom LLC. The preferred equity investment has a 12% annual dividend,
payable quarterly in cash. The proceeds from the preferred equity investment
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, our operating subsidiaries entered into a $1.4 billion
senior secured credit facility. 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 and our manager filed a registration statement with
the SEC under which we may sell debt securities unconditionally guaranteed by
our manager for a maximum 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 77,000, to our manager's 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 Cable Systems
We seek to rapidly integrate acquired cable systems and improve their
operating and financial performance by implementing our manager's operating
practices and capital investment program. Prior to the completion of an
acquisition, our manager formulates plans for customer care and billing
improvements, network upgrades, headend consolidation, new product and service
launches, competitive positioning and human resource requirements of our cable
systems. After completing an acquisition, our manager implements managerial,
operating, purchasing, personnel and engineering changes designed to affect
these plans. Our manager also expects to 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 manager's cable systems are currently organized in three operating
divisions based on their geographic location. Our cable systems are included in
these divisional clusters. By operating geographically clustered cable systems,
our manager expects to generate operating efficiencies through the consolidation
of many managerial, customer service, marketing, administrative and technical
functions. The clustering of cable systems also enables our manager 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. Our cable systems are located in markets
which are contiguous with, or in close proximity to, Mediacom LLC's cable
systems. We believe this will enable us to generate additional operating
efficiencies as our manager further consolidates its operations.
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 about 92% of our
cable network will be upgraded with 550MHz to 870MHz bandwidth capacity and
approximately 87% of our homes passed will have two-way communications
capability. In addition, we expect to eliminate up to 120 of our 137 headend
facilities by June 2003. As part of our headend consolidation program, we plan
to deploy approximately 2,500 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 800,000 basic subscribers.
We also offer high-speed Internet access at speeds up to 100 times faster
than a conventional telephone modem. As of December 31, 2001, our cable modem
service was marketed to about 810,000 homes passed by our cable systems. During
February 2002, we completed the transition of our cable modem customers, which
numbered over 77,000, to our manager's 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 83% 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. 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 while utilizing our operating
subsidiaries to access debt in the commercial bank market.
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 our 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 $599.6
billion, of which over $350.0 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 6.7%.
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 most of 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 are
also exploring 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 generally include the following:
Limited Basic Service. Our limited basic service generally 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 generally includes, for
an additional monthly fee, various satellite-delivered networks 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.
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, digital cable service was available to about
800,000 basic subscribers, or approximately 97% of our total subscriber base,
and we served approximately 233,000 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 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 also
is 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
approximately 810,000 homes passed by our cable systems, or 57% of our total
homes passed, and we served about 77,000 cable modem customers. During February
2002, we completed the transition of our cable modem customers to our manager's
new, proprietary Mediacom Online(SM) high-speed Internet service, from the
third-party provider Excite@Home. As part of the launch of Mediacom Online, our
manager 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 manager's new service. Also, our regional calling centers now
provide technical customer support for our cable modem 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. Our cable systems' advertising sales infrastructure
comprises several-in-house production facilities, production and administrative
employees and a sales workforce. Advertising sales accounted for 6.1% of our
combined revenue for the year ended December 31, 2001. We 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.
Video-On-Demand
Video-on-demand is an interactive television service that provides access
to hundreds of movies or special events on demand with video cassette recorder
functionality, or the ability to fast forward, pause and rewind a program at
will. 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 plan to launch video-on-demand service in at
least one cable system during 2002.
9
Future Services
Interactive Services. Our upgraded cable network has the capacity to
deliver various additional interactive television services. These services can
be divided between 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 approximately 2,500 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.
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 year ended December 31, 2001.
Operating Data:
Homes passed/(1)/................................................. 1,430,000
Basic subscribers/(2)/............................................ 824,000
Basic penetration/(3)/............................................ 57.6%
Average monthly revenues
per basic subscriber/(4)/...................................... $ 47.98
Digital Cable:
Digital-ready basic subscribers/(5)/.............................. 800,000
Digital customers................................................. 233,000
Digital penetration/(6)/.......................................... 29.1%
Data:
Data-ready homes passed/(7)/...................................... 815,000
Data-ready homes marketed/(8)/.................................... 810,000
Cable modem customers............................................. 77,000
Data penetration/(9)/............................................. 9.5%
Cable Network Data:
Miles of plant.................................................... 19,100
Density/(10)/..................................................... 75
Percentage of cable network at
550MHz to 870MHz............................................... 55%
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/(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.
/(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)/ Represents the number of cable modem customers as a percentage of
data-ready homes marketed.
/(10)/ Represents homes passed divided by miles of plant.
11
Selected Operating Region Data
Our manager currently organizes its cable systems into three operating
divisions. Our cable systems are included in this organizational structure. 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 Iowa, Illinois, Missouri 284,300 82,100 31,100
North Central Iowa 390,700 109,900 42,900
Southern Georgia 149,000 41,000 3,000
------- ------- ------
Total 824,000 233,000 77,000
======= ======= ======
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.................... 45% 55% 57%
December 31, 2002.................... 8% 92% 87%
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, enhances our cable network's ability to provide advanced
telecommunications services.
As of December 31, 2001, our cable systems were operated from 137 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 plan to eliminate
up to 120 headend facilities, by June 2003.
As part of our headend consolidation program, we plan to deploy over 2,500
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.
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 and achieve higher success rates in attracting and
retaining customers.
Programming Supply
We obtain basic and premium programming for our cable systems from program
suppliers whose compensation is typically based on a fixed fee per customer.
Programming contracts are generally for fixed periods and are subject to
negotiated renewal. Some program suppliers provide volume discount pricing
structures or offer marketing support. Substantially all of the cable
programming services carried on our cable systems are provided to customers
without written contracts with the respective program suppliers. Our manager is
currently negotiating the terms of these programming services with the
respective program suppliers. Our manager, through a wholly-owned subsidiary, is
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 may join this cooperative to secure certain programming for our cable
systems, and we may secure other programming on a direct basis with programming
suppliers or indirectly through our manager.
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We expect our programming costs 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 expect to use the analog and digital
channel capacity resulting from our capital improvement program to negotiate
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,
that service approximately 83% of our cable systems' customers. They are staffed
with dedicated personnel who provide service to our customers 24 hours a day,
seven days a week, on a toll-free basis. We believe our regional calling centers
allow us to coordinate more effectively installation appointments and reduce
response time to customer inquiries. We continue to invest in both personnel and
equipment of our regional calling centers to ensure that these operating units
are professionally managed and employ state-of-the-art technology.
In addition, we are dedicated to fostering strong community relations in
the communities served by our cable systems. We support local charities and
community causes in various ways, including staged events and promotional
campaigns to raise funds and supplies for persons in need and in-kind donations
that include production services and free airtime on cable networks. We
participate in the "Cable in the Classroom" program, which is a national effort
by cable companies to provide schools with free cable television service and,
where available, Internet access. We also install and provide free cable
television service to government buildings and not-for-profit hospitals in our
franchise areas. We believe that our relations with the communities in which our
cable systems operate are 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
469 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.
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.
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Percentage of Number of Percentage of
Number of Total Basic Total Basic
Year of Franchise Expiration Franchises Franchises Subscribers Subscribers
- -------------------------------- ---------- ------------- ----------- -------------
2002 through 2005............... 146 31.1% 257,215 31.2%
2006 and thereafter............. 323 68.9 566,785 68.8
--- ----- ------- -----
Total...................... 469 100.0% 824,000 100.0%
=== ===== ======= =====
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 roof top 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. DBS providers offer the non-broadcast programming services we offer
in our cable systems, and although under legislation enacted in 1999 they are
now able to deliver local broadcast signals, they currently deliver virtually no
local broadcast signals in the markets 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.
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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
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.
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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 10.2% of the homes passed in the service areas of our
cable systems' 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
noncommercial FM stations to use their subcarrier frequencies to provide
non-broadcast services, including data transmission.
Employees
As of December 31, 2001, we employed 1,787 full-time employees and 30
part-time employees. Approximately 6.3% of our cable systems' employees are
represented by unions but are not covered by any collective bargaining
agreements. We consider our relations with our employees to be generally good.
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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 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 right 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 installation, sale and lease of equipment used by subscribers to
receive basic service, such as converter boxes and remote control
units.
19
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.
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 pursuant to which we carry the
station on our cable operators, 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:
20
. all distant commercial television stations, except for commercial
satellite-delivered independent superstations such as WGN;
. commercial radio stations; and
. certain low-power television stations.
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.
21
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.
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,
22
. 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
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 fewer subscribers than that
limit 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 appellate court affirmed the
statutory ownership restrictions, but 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.
23
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.
Pole Attachment Regulation
The Communications Act requires the FCC to regulate the rates, terms and
conditions imposed by public utilities, for cable systems' use of utility pole
and conduit space unless state authorities have demonstrated to the FCC that
they adequately regulate pole attachment rates, as is the case in certain states
in which we operate. In the absence of state regulation, the FCC administers
pole attachment rates on a formula basis. The FCC 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 ruling 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;
24
. 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 the regulation of cable
communications services.
Copyright
Our cable systems typically include in their channel line-ups local and
distant television and radio broadcast signals, which are protected by the
copyright laws. We generally do not obtain a license to use this programming
directly from the owners of the programming, but instead comply with an
alternative federal compulsory copyright licensing process. In exchange for
filing certain reports and contributing a percentage of our revenues to a
federal copyright royalty pool, we obtain blanket permission to retransmit the
copyrighted material carried on these broadcast signals. The nature and amount
of future copyright payments for broadcast signal carriage cannot be predicted
at this time.
In a report to Congress, the U.S. Copyright Office recommended that
Congress make major revisions to both the cable television and satellite
compulsory licenses. Congress recently modified the satellite compulsory license
in a manner that permits DBS providers to become more competitive with cable
operators. 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,
25
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.
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 revenues. 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.
26
State and Local Regulation
Our cable systems use local streets and rights-of-way. Consequently, we
must comply with state and local regulation, which is typically imposed through
the franchising process. Our cable systems generally are operated in accordance
with non-exclusive franchises, permits or licenses granted by a municipality or
other state or local government entity. Our franchises generally are granted for
fixed terms and in many cases are terminable if we fail to comply with material
provisions. The terms and conditions of our franchises vary materially from
jurisdiction to jurisdiction. Each franchise generally contains provisions
governing:
. franchise fees;
. franchise term;
. system construction and maintenance obligations;
. system channel capacity;
. design and technical performance;
. 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 headends,
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.
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.
28
PART II
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ITEM 5. MARKET FOR REGISTRANTS' COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
There is no public trading market for our equity, all of which is held by
MCC.
29
ITEM 6. SELECTED FINANCIAL DATA
In the table below, we provide you with:
. selected historical financial data for the period from January 1, 1997
through February 28, 1999 ("Old Mediacom") and for the period March 1,
1999 through July 18, 2001 ("New Mediacom"), and balance sheet data as
of December 31, 1997 through 2000 and July 18, 2001, which are derived
from the audited financial statements of Mediacom Systems (Predecessor
Company). (See Note 1 to the Mediacom Systems (Predecessor Company)
combined financial statements); and
. selected historical consolidated financial and operating data for the
period from our inception on April 5, 2001 through December 31, 2001
and balance sheet data as of December 31, 2001, which are derived from
our audited consolidated financial statements.
See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
Mediacom
Mediacom Systems (Predecessor Company) Broadband LLC
------------------------------------------------------------------------------------ ---------------
Period from Period from Inception
January 1 from March 1 January 1 (April 5, 2001)
Year Ended Year Ended Through Through Year Ended Through Through
December 31, December 31, February 28, December 31, December 31, July 18, December 31,
1997 1998 1999 1999 2000 2001 2001
------------ ------------ ------------ ------------ ------------ ---------- ---------------
(unaudited) (dollars in thousands, except per share amounts)
Statement of Operations
Data:
Revenues $382,613 $368,290 $ 63,335 $ 336,571 $ 439,541 $ 249,238 $ 215,900
Costs and expenses:
Service costs (1) 175,615 165,519 31,500 168,582 223,530 117,205 89,006
Selling, general and
administrative expenses 30,991 29,953 5,586 35,466 39,892 42,449 42,442
Management fee expense(2) 11,261 12,778 1,927 13,440 22,267 18,625 2,875
Depreciation and
amortization 62,159 63,786 10,831 90,166 137,182 83,610 88,463
Restructuring charge(3) -- -- -- -- -- 570 --
-------- -------- -------- ---------- ---------- ---------- ----------
Operating income (loss) 102,587 96,254 13,491 28,917 16,670 (13,221) (6,886)
Interest expense, net(4) -- -- -- -- -- -- 41,430
Other expenses -- -- -- -- -- -- 2,270
Gain on disposition of
assets(5) -- -- -- -- -- 5,183 --
-------- -------- -------- ---------- ---------- ---------- ----------
Net income (loss) before
income taxes 102,587 96,254 13,491 28,917 16,670 (8,038) (50,586)
Provision (benefit) for
income taxes (6) 41,035 38,905 5,440 11,620 6,646 (3,546) --
-------- -------- -------- ---------- ---------- ---------- ----------
Net income (loss) $ 61,552 $ 57,349 $ 8,051 $ 17,297 $ 10,024 $ (4,492) $ 50,586
======== ======== ======== ========== ========== ========== ==========
Balance Sheet Data
(end of period):
Total assets $840,055 $933,530 $937,792 $2,306,050 $2,307,354 $1,941,047 $2,282,667
Total debt -- -- -- -- -- -- 1,200,000
Total member's equity -- -- -- -- -- -- 666,294
(continued on next page)
30
Mediacom
Mediacom Systems (Predecessor Company) Broadband LLC
------------------------------------------------------------------------------------ ---------------
Period from Period from Inception
January 1 from March 1 January 1 (April 5, 2001)
Year Ended Year Ended Through Through Year Ended Through Through
December 31, December 31, February 28, December 31, December 31, July 18, December 31,
1997 1998 1999 1999 2000 2001 2001
------------ ------------ ------------ ------------ ------------ ---------- ---------------
(unaudited) (dollars in thousands, except per share amounts)
Other Data:
System cash flow(7) $176,007 $172,818 $ 26,249 $ 132,523 $ 176,119 $ 89,584 $ 84,473
System cash flow margin(8) 46.0% 46.9% 41.4% 39.4% 40.1% 35.9% 39.1%
Operating cash flow(9) $164,746 $160,040 $ 24,322 $ 119,083 $ 153,852 $ 70,959 $ 81,598
Operating cash flow margin(10) 43.1% 43.5% 38.4% 35.4% 35.0% 28.5% 37.8%
Net cash flows provided by
(used in):
Operating activities $ 98,608 $ 10,607 $ 89,707 $ 119,756 $(34,278) $ 161,651
Investing activities (84,076) (16,028) (159,052) (131,177) (34,682) (2,199,583)
Financing activities (11,158) (74) 77,695 14,493 47,806 (2,045,510)
Operating Data:
(end of period, except
average):
Homes passed(11) 1,430,000
Basic subscribers(12) 824,000
Basic penetration(13) 57.6%
Digital customers (14) 233,000
Cable modem customers(15) 77,000
Average monthly revenues per
basic subscriber(16) $ 47.98
- ----------
(1) Service costs for the period from our inception on April 5, 2001 through
December 31, 2001 include $2.9 million of incremental expenses incurred
during the fourth quarter related to the transition from Excite@Home to
Mediacom Online(SM).
(2) For all periods presented prior to our inception on April 5, 2001,
management fees were paid to AT&T Broadband, LLC. Upon our acquisition of
our cable systems, Mediacom Communications Corporation replaced AT&T
Broadband as manager and AT&T Broadband was no longer entitled to receive
management fees from our cable systems.
(3) As part of a cost reduction plan undertaken by our predecessor company in
2001, approximately 63 employees were terminated, resulting in a
restructuring charge of approximately $570,000. The entire charge was paid
in cash by our predecessor company.
(4) For all periods presented prior to our inception on April 5, 2001, our
cable systems operated as fully integrated businesses of AT&T Broadband and
no debt or interest expense was allocated to these operations.
(5) Represents the gain on disposition from the sale of the Missouri systems to
Mediacom Broadband LLC on June 29, 2001 for cash proceeds of approximately
$308.1 million, before final closing adjustments.
(6) Provision (benefit) for income taxes in Mediacom Systems (Predecessor
Company) combined financial statements were based upon the AT&T cable
systems' contribution to the overall tax liability or benefit of AT&T Corp.
and its affiliates. Under our ownership, these cable systems are organized
as limited liability companies and are subject to minimum income taxes.
(7) Represents operating cash flow, as defined in note 9 below, before
management fee expense. System cash flow:
. is not intended to be a performance measure that should be regarded as
an alternative either to operating income (loss) or net income (loss)
as an indicator of operating performance or to the statement of cash
flows as a measure of liquidity;
. is not intended to represent funds available for debt service,
dividends, reinvestment or other discretionary uses; and
. should not be considered in isolation or as a substitute for measures
of performance prepared in accordance with generally accepted
accounting principles.
31
System cash flow is included in this report because our management
believes that system cash flow is a meaningful measure of performance
commonly used in the cable television industry and by the investment
community to analyze and compare cable television companies. Our
definition of system cash flow may not be identical to similarly
titled measures reported by other companies.
(8) Represents system cash flow as a percentage of revenue. This measurement is
used by us, and is commonly used in the cable television industry, to
analyze and compare cable television companies on the basis of operating
performance, for the reasons discussed in note 7 above.
(9) Represents operating income (loss) before depreciation and amortization and
restructuring charge. Operating cash flow:
. is not intended to be a performance measure that should be regarded as
an alternative either to operating income (loss) or net income (loss)
as an indicator of operating performance or to the statement of cash
flows as a measure of liquidity;
. is not intended to represent funds available for debt service,
dividends, reinvestment or other discretionary uses; and
. should not be considered in isolation or as a substitute for measures
of performance prepared in accordance with generally accepted
accounting principles.
Operating cash flow is included in this report because our management
believes that operating cash flow is a meaningful measure of performance
commonly used in the cable television industry and by the investment
community to analyze and compare cable television companies. Our definition
of operating cash flow may not be identical to similarly titled measures
reported by other companies.
(10) Represents operating cash flow as a percentage of revenue. This measurement
is used by us, and is commonly used in the cable television industry, to
analyze and compare cable television companies on the basis of operating
performance, for the reasons discussed in note 9 above.
(11) Represents the number of single residence homes, apartments and condominium
units passed by the cable distribution network in a cable system's service
area.
(12) Represents subscribers of a cable television system who receive a package
of over-the-air broadcast stations, local access channels or certain
satellite-delivered cable television services.
(13) Represents basic subscribers as a percentage of homes passed.
(14) Represents customers that receive digital cable services.
(15) Represents customers that access the Internet through cable modem service.
(16) Represents average monthly revenues for the last three months of the period
divided by average basic subscribers for such period. This measurement is
commonly used in the cable television industry to analyze and compare cable
television companies on the basis of operating performance.
32
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Reference is made to the "Risk Factors" below for a discussion of important
factors that could cause actual results to differ from expectations and any of
our forward-looking statements contained herein. The following discussion should
be read in conjunction with our audited consolidated financial statements as of
December 31, 2001 and for the period from our inception (April 5, 2001) through
December 31, 2001.
Organization
We were organized as a Delaware limited liability company in April 2001 and
serve as a holding company for our operating subsidiaries. Mediacom Broadband
Corporation, our wholly-owned subsidiary, was organized as a Delaware
corporation in May 2001 for the sole purpose of acting as a co-issuer with us of
our 11% senior notes due 2013 and does not conduct operations of its own. Our
parent and manager, Mediacom Communications Corporation ("MCC"), was organized
as a Delaware corporation in November 1999. See Note 1 of our consolidated
financial statements.
Introduction
We commenced operations on June 29, 2001 with the acquisition from AT&T
Broadband, LLC of cable systems serving approximately 94,000 basic subscribers
in the state of Missouri. The purchase price for these cable systems was
approximately $300.0 million. This transaction comprised of 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 approximately
$1.77 billion. These transactions comprised of 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. The acquisitions of the AT&T cable systems
have been accounted for under the purchase method of accounting and, therefore,
our results of operations include the results of operations for each acquired
system subsequent to its respective acquisition date.
The following discussion and analysis is based on our financial condition
and results of operations from the dates of acquisition discussed above and the
historical combined financial statements of the AT&T cable systems (referred to
herein as the Mediacom Systems (Predecessor Company) Combined Financial
Statements) prior to the acquisitions. We believe the historical combined
financial statements of the AT&T cable systems do not reflect changes that have
occurred as a result of our acquisitions of these cable systems. Furthermore, we
believe these changes affect the comparability of the historical results of
operations based upon the following factors:
. Management Fees - Upon completion of our acquisitions, under
management agreements between MCC and our subsidiaries, MCC replaced
AT&T Broadband as the manager of the AT&T cable systems. As a result,
AT&T Broadband was no longer entitled to receive management fees from
the AT&T cable systems. For the period from January 1, 2001 through
July 18, 2001 and the year ended December 31, 2000, combined
management fees represented 7.5% and 5.1%, respectively, of the AT&T
cable systems' combined revenue. By comparison, for the period from
inception (April 5, 2001) through December 31, 2001, management fees
represented 1.3% of our revenues.
. Interest Expense - Historically, the AT&T cable systems had no
material indebtedness and were not otherwise allocated any interest
expense by AT&T Broadband. As a result of our acquisitions of the AT&T
cable systems and the financings related to such acquisitions, we have
a substantial amount of indebtedness and expect to incur significant
interest expense.
33
. Provision (benefit) for Income Taxes - The AT&T cable systems were not
separate taxable entities for federal and state income tax purposes
and their results of operations were included in the consolidated
federal and state income tax returns of AT&T Corp. ("AT&T") and its
affiliates. The provision for income taxes in the historical combined
financial statements of the AT&T cable systems was based upon the AT&T
cable systems' contribution to the overall income tax liability or
benefit of AT&T and its affiliates. Our cable systems are organized
as limited liability companies and are subject to minimum income
taxes.
General
Approximately 88.8% of our revenues for the year ended December 31, 2001
are attributable to monthly subscription fees charged to customers for our core
cable television services, including basic, expanded basic and premium
programming, digital cable television programming services, cable modem service,
wire maintenance, equipment rental and services to commercial establishments
provided by our cable systems. The remaining 11.2% of revenue represents
pay-per-view charges, installation and reconnection fees, late payment fees,
advertising revenues and other ancillary revenues. Franchise fees charged to
customers are included in their corresponding revenue category.
Our operating expenses consist of service costs and selling, general and
administrative expenses directly attributable to our cable systems. Service
costs include fees paid to programming suppliers, expenses related to copyright
fees, wages and salaries of technical personnel and plant operating costs.
Programming costs have historically increased at rates in excess of inflation
due to increases in the number of programming services we have offered and
significant increases in the rates charges for the programming services already
carried on our cable systems. Under the Federal Communication Commission's
existing cable rate regulations, we will be able to increase our rates for cable
television services to more than cover any increases in the programming costs.
However, competitive conditions and other factors in the ma