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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, 2002
Commission File Number: 0-29227
MEDIACOM COMMUNICATIONS CORPORATION
(Exact name of Registrant as specified in its charter)
DELAWARE 06-1566067
(State of incorporation) (I.R.S. Employer
Identification Number)
100 CRYSTAL RUN ROAD
Middletown, New York 10941
(Address of principal executive offices)
(845) 695-2600
(Registrant's telephone number)
Securities registered pursuant to Section 12(b) of the Exchange Act:
None
Securities registered pursuant to Section 12(g) of the Exchange Act:
Class A Common Stock, $0.01 par value per share
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No __
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K: [X]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes X No __
As of June 28, 2002, the aggregate market value of the Class A common
stock of the Registrant held by non-affiliates of the Registrant was
approximately $482.8 million.
As of March 25, 2003, there were outstanding 89,610,341 shares of Class A
common stock and 28,913,145 shares of Class B common stock.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement for the 2003 Annual Meeting of
Stockholders are incorporated by reference into Items 10, 11, 12 and 13 of Part
III.
MEDIACOM COMMUNICATIONS CORPORATION
2002 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
Page
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PART I
Item 1. Business.............................................................................. 4
Item 2. Properties............................................................................ 23
Item 3. Legal Proceedings..................................................................... 23
Item 4. Submission of Matters to a Vote of Security Holders................................... 24
Item 4A. Directors and Executive Officers of the Registrant.................................... 24
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters................. 27
Item 6. Selected Financial Data............................................................... 28
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations................................................................ 32
Item 7A. Quantitative and Qualitative Disclosures About Market Risk............................ 48
Item 8. Financial Statements and Supplementary Data........................................... 49
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.................................................................. 74
PART III
Item 10. Directors and Executive Officers of the Registrant.................................... 75
Item 11. Executive Compensation................................................................ 75
Item 12. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters.......................................................... 75
Item 13. Certain Relationships and Related Transactions........................................ 75
Item 14. Controls and Procedures............................................................... 75
PART IV
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K....................... 76
2
References in this Annual Report to "we," "us," or "our" are to Mediacom
Communications Corporation and its direct and indirect subsidiaries since its
initial public offering in February 2000 and to Mediacom LLC and its direct and
indirect subsidiaries prior to the initial public offering, unless the context
specifies or requires otherwise.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
You should carefully review the information contained in this Annual
Report and in other reports or documents that we file from time to time with the
Securities and Exchange Commission (the "SEC"). In this Annual Report, we state
our beliefs of future events and of our future financial performance. In some
cases, you can identify those so-called "forward-looking statements" by words
such as "may," "will," "should," "expects," "plans," "anticipates," "believes,"
"estimates," "predicts," "potential," or "continue" or the negative of those
words and other comparable words. You should be aware that those statements are
only our predictions. Actual events or results may differ materially. In
evaluating those statements, you should specifically consider various factors,
including the risks discussed in this Annual Report and other reports or
documents that we file from time to time with the SEC. Those factors may cause
our actual results to differ materially from any of our forward-looking
statements. All forward-looking statements attributable to us or a person acting
on our behalf are expressly qualified in their entirety by this cautionary
statement.
3
PART I
ITEM 1. BUSINESS
INTRODUCTION
We are currently the nation's eighth largest cable television company
based on customers served and the leading cable operator focused on serving the
smaller cities and towns in the United States. We provide our customers with a
wide array of broadband products and services, including traditional analog
video services, digital television, high-speed Internet access, video-on-demand
and high-definition television. As of December 31, 2002, our cable systems
passed approximately 2.7 million homes and served approximately 1.6 million
basic subscribers in 23 states. A basic subscriber is a customer that subscribes
to a package of basic cable television services. Approximately 60% of our
customers are located within the top 100 television markets in the United
States. We were founded in July 1995 by Rocco B. Commisso, our Chairman and
Chief Executive Officer.
Since commencement of our operations in March 1996, we have experienced
significant growth by executing a disciplined strategy of acquiring
underperforming cable systems and improving their operating and financial
performance. In 2001, we acquired cable systems from AT&T Broadband, LLC that
served approximately 800,000 basic subscribers, for an aggregate purchase price
of about $2.06 billion. Since inception, we have acquired cable systems for an
aggregate purchase price of $3.37 billion that served approximately 1.6 million
basic subscribers as of December 31, 2002.
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. Available service offerings
depend on the bandwidth capacity of the broadband network. Bandwidth, expressed
in megahertz (MHz), is a measure of information-carrying capacity that can be
used to distribute telecommunication services. The greater the bandwidth, the
greater the capacity of the system to deliver service offerings. We are now in
the final stages of an aggressive network upgrade program that we expect to
substantially complete by June 30, 2003. As of December 31, 2002, approximately
96% of our cable network was upgraded with 550MHz to 870MHz bandwidth capacity
and about 91% of our homes passed were activated with two-way communications
capability.
As a result of our upgrade program, we have seen a significant increase
in our cable systems' network capacity, quality and reliability, facilitating
the widespread introduction of additional programming and other services, such
as digital video and high-speed Internet access, and the recent deployment of
video-on-demand and a limited high-definition television offering. We also
believe our network has the capability for additional services such as
telephony. As of December 31, 2002, our digital cable service was available to
about 1.5 million basic subscribers, or 97% of our total basic subscribers, and
we served 371,000 digital customers. As of the same date, our high-speed
Internet access, or cable modem service, was marketed to approximately 2.3
million homes passed by our cable systems, or 85% of our total homes passed, and
we served 191,000 data customers.
Our principal executive offices are located at 100 Crystal Run Road,
Middletown, New York 10941 and our telephone number at that address is (845)
695-2600. Our website is located at www.mediacomcc.com. We have made available
free of charge through our website (follow the Corporate Info link to the
Investor Relations tab to "Annual Reports/SEC Filings") our annual report on
Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and
amendments to those reports filed or furnished pursuant to Section 13(a) or
15(d) of the Securities Exchange Act of 1934 as soon as reasonably practicable
after such material was electronically filed with, or furnished to, the
Securities and Exchange Commission. The information on our website is not part
of this Annual Report.
4
DESCRIPTION OF OUR BUSINESS
We offer our customers a full array of traditional analog video services,
also referred to as our core cable television services. In addition, we offer to
a significant portion of our customer base advanced broadband products and
services such as digital cable television and high-speed Internet access. We
launched video-on-demand service in certain cable systems in 2002 and recently
deployed a limited high-definition television service in certain cable systems.
We plan to expand the availability of these services during 2003. We are also
exploring other opportunities in interactive video, Internet protocol telephony,
or IP telephony, and other broadband services.
TRADITIONAL ANALOG VIDEO SERVICES
We receive the majority of our revenues from subscription services.
Subscribers typically pay us on a monthly basis and generally may discontinue
services at any time. Monthly subscription rates and related charges vary
according to the type of service selected and the type of equipment used by
subscribers.
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 are presented in an analog format and include
the following in most of our cable systems:
Limited Basic Service. Our limited basic service includes, for a monthly
fee, local broadcast channels, network and independent stations, limited
satellite-delivered programming, and local public, government, home-shopping and
leased access channels.
Expanded Basic Service. Our expanded basic service includes, for an
additional monthly fee, various satellite-delivered channels such as CNN, MTV,
USA Network, ESPN, Lifetime, Nickelodeon and TNT.
Premium Service. Our premium services are satellite-delivered channels
consisting principally of feature films, original programming, live sports
events, concerts and other special entertainment features, usually presented
without commercial interruption. These services include HBO, Cinemax, Showtime,
The Movie Channel and Starz/Encore. Such premium programming services are
offered by our 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.
DIGITAL CABLE SERVICES
Digital video technology has significantly enhanced and expanded the
video and other service offerings we provide to our customers. This technology
has enabled us to improve picture quality and reliability, and to greatly
increase our channel offerings through the use of compression, which converts
one analog channel into eight to 12 digital channels. We now offer up to 250
analog and digital channels in many of our cable systems.
We currently offer our customers several digital cable programming
packages that include:
. up to 41 digital basic channels;
. up to 61 multichannel premium services;
. up to 60 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
their viewing choices.
5
Subscribers typically pay us on a monthly basis for digital cable
services and generally may discontinue services at any time. Monthly rates vary
generally according to the level of service and the number of digital converters
selected by the subscriber.
As of December 31, 2002, our digital service was available to about 1.5
million basic subscribers, or approximately 97% of our subscriber base, and we
served 371,000 digital customers. By year-end 2003, we expect our digital cable
service to be available to about 98% of our subscriber base, and to serve
between 425,000 and 435,000 digital customers.
HIGH-SPEED INTERNET ACCESS
Our broadband cable network enables our high-speed Internet customers,
also referred to as cable modem customers, to transmit data up to 100 times
faster than traditional telephone modem technologies. Our cable modem customers
can receive and transmit large files over the Internet in a fraction of the time
required when using the traditional telephone modem. Our high-speed Internet
access service also allows much quicker response times when surfing the
Internet, providing a richer experience for the customer that capitalizes on the
significant capacity of our broadband cable network. In addition, cable modem
service eliminates the need to use a telephone line to access the Internet. It
is also always activated, and as a result, the customer does not need to dial
into an Internet service provider and await authorization.
Monthly subscription rates and related charges vary according to whether
the customer leases or owns the cable modem and whether the customer subscribes
to our video services.
We recently began providing commercial high-speed Internet access
services to small and medium-sized businesses. Our commercial data service
offerings allow businesses with multiple users to select faster data
transmission speeds than our residential service.
As of December 31, 2002, our cable modem service was marketed to about
2.3 million homes passed by our cable systems, or 85% of our homes passed, and
we served 191,000 data customers. By year-end 2003, we expect our cable modem
service to be marketed to about 97% of our homes passed, and to serve between
265,000 and 275,000 data customers.
ADVERTISING
Our cable systems receive revenue from the sale of local advertising on
satellite-delivered channels such as CNN, MTV, USA Network, ESPN, Lifetime,
Nickelodeon and TNT. As part of the acquisitions of the AT&T cable systems in
2001, we purchased an advertising sales infrastructure that includes in-house
production facilities, production and administrative employees and a sales
workforce. We are expanding the use of this advertising infrastructure to
generate additional advertising revenues in the cable systems we owned prior to
the acquisitions of the AT&T cable systems, as the third-party advertising
agreements covering those cable systems expire beginning in 2003. We also expect
that the increasing concentration of customers served by our master headend
facilities as a result of our headend consolidation program will enable us to
increase our advertising revenues.
VIDEO-ON-DEMAND
Video-on-demand is an interactive television service that provides access
to movies or special events on demand with the ability to fast forward, pause
and rewind selected programming. Customers can watch their 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 currently offer
video-on-demand service to approximately 18% of our digital customers. By
year-end 2003, we expect video-on-demand service to be available to
approximately 50% of our digital customers.
6
HIGH-DEFINITION TELEVISION
High-definition television provides picture quality at a higher
resolution than standard television. A television set capable of receiving and
displaying high-definition signals is required to utilize this service. We are
currently offering limited high-definition television service in markets serving
approximately 23% of our basic subscribers. During 2003, we expect to expand the
number of channels broadcast in high-definition in the markets where we already
provide this service.
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. We are currently conducting a technical trial of
hybrid IP telephony service which combines the technology of IP telephony with
traditional phone technology. As part of our headend consolidation plans, we
have deployed over 8,000 route miles of fiber optic cable resulting in the
creation of large, high-capacity regional networks. We have constructed our
networks with excess fiber optic capacity, thereby affording us the flexibility
to pursue new data and telecommunications opportunities.
7
DESCRIPTION OF OUR CABLE SYSTEMS
OVERVIEW
The following table provides an overview of selected operating and
technical statistics for our cable systems for the years ended:
2002 2001 2000 1999 1998
------------ ------------ ------------ ------------ ------------
OPERATING DATA:
Homes passed/(1)/ ................................ 2,715,000 2,630,000 1,173,000 1,071,500 520,000
Basic subscribers/(2)/ ........................... 1,592,000 1,595,000 779,000 719,000 354,000
Basic penetration/(3)/ ........................... 58.6% 60.6% 66.4% 67.1% 68.1%
Average monthly revenues
per basic subscriber/(4)/........................ $ 50.10 $ 44.54 $ 38.34 $ 35.01 $ 32.88
DIGITAL CABLE:
Digital-ready basic subscribers/(5)/.............. 1,540,000 1,400,000 400,000 168,000 --
Digital customers ................................ 371,000 321,000 40,000 5,300 --
Digital penetration/(6)/ ......................... 24.1% 22.9% 10.0% 3.2% --
DATA:
Data-ready homes passed/(7)/...................... 2,460,000 1,780,000 550,000 120,000 --
Data-ready homes marketed/(8)/ ................... 2,320,000 1,420,000 486,000 105,500 --
Data customers ................................... 191,000 115,000 15,600 5,100 4,729
Data penetration/(9)/ ............................ 8.2% 8.1% 3.2% 4.8% --
Revenue Generating Units:/(10)/ .................. 2,154,000 2,031,000 834,600 729,400 358,729
Customer Relationships:/(11)/ .................... 1,611,000 1,607,000 N/A N/A N/A
CABLE NETWORK DATA:
Miles of plant ................................... 45,000 44,100 24,500 22,444 11,950
Density/(12)/ .................................... 60 60 48 48 44
Percentage of cable network at
550MHz to 870MHz ................................ 96% 75% 74% 57% 45%
- ----------
/(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 a dwelling with one or more television sets that receives a
package of over-the-air broadcast stations, local access channels or
certain satellite-delivered cable television services. Accounts that are
billed on a bulk basis, which typically receive discounted rates, are
converted into full-price equivalent basic subscribers by dividing total
bulk billed basic revenues of a particular system by the applicable
combined limited and expanded cable rate charged to basic subscribers in
that system. Basic subscribers include connections to schools, libraries,
local government offices and employee households that may not be charged
for limited and expanded cable services, but may be charged for premium
units, pay-per-view events or high-speed Internet service. Customers who
exclusively purchase high-speed Internet service are not counted as basic
subscribers. Our methodology of calculating the number of basic
subscribers may not be identical to those used by other cable companies.
/(3)/ Represents basic subscribers as a percentage of homes passed.
/(4)/ Represents average monthly revenues for the last three months of the
period divided by average basic subscribers for such period. Includes the
revenues from cable systems acquired during the last three months of the
period as if such acquisitions were completed at the beginning of the
three month period.
/(5)/ A subscriber is digital-ready if the subscriber is in a cable system
where digital cable services are available.
/(6)/ Represents digital customers as a percentage of digital-ready basic
subscribers.
/(7)/ A home passed is data-ready if it is in a cable system with two-way
communications capability.
/(8)/ Represents data-ready homes passed where cable modem service is
available.
/(9)/ Represents the number of total data customers as a percentage of
data-ready homes marketed.
/(10)/ Represents the sum of basic subscribers, digital customers and data
customers.
/(11)/ Represents the total number of customers that receive at least one level
of service, encompassing video and data services, without regard to which
service(s) customers purchase. This information is not available for
periods prior to 2001.
/(12)/ Represents homes passed divided by miles of plant.
8
SELECTED OPERATING DATA
Our systems currently are organized into three operating divisions. The
following table sets forth the principal states served by such divisions, and
their respective basic subscribers, digital customers and data customers as of
December 31, 2002:
BASIC DIGITAL DATA
DIVISION STATES SUBSCRIBERS CUSTOMERS CUSTOMERS
- -------- ------ ----------- --------- ---------
Midwest Illinois, Indiana, Iowa, Kentucky,
Missouri 558,000 113,000 66,600
North Central Iowa, Minnesota, South Dakota 580,000 144,000 77,800
Southern Alabama, California, Delaware, Florida,
Georgia, North Carolina 454,000 114,000 46,600
----------- --------- ---------
Total 1,592,000 371,000 191,000
=========== ========= =========
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 primary 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 2002 and the projected state of our
cable network as of June 30, 2003, based on our current upgrade plans:
PERCENTAGE OF CABLE NETWORK
---------------------------------
LESS THAN 550MHZ- TWO-WAY
550MHZ 870MHZ CAPABLE
--------- ------- -------
December 31, 2001.......................................... 25% 75% 68%
December 31, 2002.......................................... 4% 96% 91%
June 30, 2003.............................................. 2% 98% 98%
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.
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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. 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, 2002, our cable systems were operated from 176 headend
facilities. Fiber optics and advanced transmission technologies make it cost
effective to consolidate our headend facilities, allowing us to realize
operating efficiencies and resulting in lower fixed capital costs on a per home
basis as we introduce new products and services. We expect that by June 2003,
about 95% of our customers will be served by 50 master headend facilities.
As part of our headend consolidation program, we have deployed over 8,000
route miles of fiber optic cable, creating 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.
PROGRAMMING SUPPLY
Except as noted below, we have various contracts to obtain basic and
premium programming for our cable systems from program suppliers whose
compensation is typically based on a fixed monthly fee per customer. Our
programming contracts are generally for a fixed period of time.
We are a member of the National Cable Television Cooperative, Inc., a
programming cooperative consisting of small to medium-sized multiple system
operators serving, in the aggregate, over 12 million cable subscribers. The
cooperative may help create efficiencies in the areas of obtaining and
administering programming contracts, as well as securing, in some cases, more
favorable programming rates and contract terms for small to medium-sized cable
operators. We negotiate programming contract renewals both directly and through
the cooperative.
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Following our acquisitions of the AT&T cable systems, substantially all
programming services carried on those cable systems were without written
contracts with the respective program suppliers. We have completed agreements
for several of those services and are continuing to negotiate terms for the
remainder of the services. From time to time, the contracts covering the
programming services carried on our cable systems expire, and we generally
provide such services to our customers without written contracts with the
respective program suppliers as we negotiate contract renewals.
Our programming costs are expected to rise in the future due to increased
costs to purchase programming, particularly sports programming, additional
programming being provided to our customers, and other factors affecting the
cable television industry. Although we are 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 2005. 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.
CUSTOMER SERVICE AND COMMUNITY RELATIONS
System reliability and customer satisfaction represent a cornerstone of
our business strategy. We expect that ongoing investments in our cable network
and our regional calling centers will significantly strengthen customer service,
enhancing the reliability of our cable network and allowing us to introduce new
products and services to our customers. We maintain regional calling centers
which service virtually all of our customers. They are staffed with dedicated
personnel who provide service to our customers 24 hours a day, seven days a
week, on a toll-free basis. We believe our regional calling centers allow us to
coordinate more effectively installation appointments and reduce response time
to customer inquiries. We continue to invest in both personnel and equipment of
our regional calling centers to ensure that these operating units are
professionally managed and employ state-of-the-art technology.
In addition, we are dedicated to fostering strong community relations in
the communities served by our cable systems. We support local charities and
community causes in various ways, including staged events and promotional
campaigns to raise funds and supplies for persons in need and in-kind donations
that include production services and free airtime on cable networks. We
participate in the "Cable in the Classroom" program, which is a national effort
by cable companies to provide schools with free cable television service and,
where available, Internet access. We also install and provide free cable
television service to government buildings and not-for-profit hospitals in our
franchise areas. We believe that our relations with the communities in which our
cable systems operate are generally good.
FRANCHISES
Cable systems are generally operated under non-exclusive franchises
granted by local governmental authorities. These franchises typically contain
many conditions, such as: time limitations on commencement and completion of
construction; conditions of service, including number of channels, types of
programming and the provision of free service to schools and other public
institutions; and the maintenance or posting of insurance or indemnity bonds by
the cable operator. Many of the provisions of local franchises are subject to
federal regulation under the Communications Act of 1934, as amended.
As of December 31, 2002, our cable systems were subject to 1,502
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.
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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, 2002.
PERCENTAGE OF NUMBER OF PERCENTAGE OF
NUMBER OF TOTAL BASIC TOTAL BASIC
YEAR OF FRANCHISE EXPIRATION FRANCHISES FRANCHISES SUBSCRIBERS SUBSCRIBERS
---------------------------- ---------- ------------- ----------- -------------
2003 through 2006.......................... 371 24.7% 443,800 27.9%
2007 and thereafter........................ 1,131 75.3 1,148,200 72.1
---------- ------------- ----------- -------------
Total................................. 1,502 100.0% 1,592,000 100.0%
========== ============= =========== =============
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, Congress has
passed legislation and 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, two-way, high-speed
Internet access and video-on-demand 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 industry reports, DBS providers currently sell
video programming services to over 20 million individual households,
condominiums, apartments and office complexes in the United States. Two
companies, DIRECTV and EchoStar, provide service to substantially all of these
DBS customers.
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DBS service can be received virtually anywhere in the continental United
States through the installation of a small rooftop or side-mounted antenna. DBS
providers use video compression technology to increase channel capacity and
digital technology to improve the quality of the signals transmitted to their
customers, and typically offer more than 300 channels of programming. In
addition to the non-broadcast programming services we offer in our cable
systems, under legislation enacted in 1999, DBS providers also deliver local
broadcast signals in certain markets that we serve. This change in law
eliminated a significant competitive advantage which cable system operators had
over DBS providers, as previously DBS providers were not permitted to retransmit
local broadcast signals. We believe our digital cable service is competitive
with the services delivered to customers by DBS systems.
DBS providers are also developing ways to bring advanced communications
services to their customers. They are currently offering two alternatives of
satellite-delivered high-speed Internet access service. One alternative is a
one-way service that utilizes a telephone return path, in contrast to our
two-way, high-speed service, which does not require a telephone line. The other
alternative is a two-way, high-speed service, which requires additional
equipment purchases by the customer and is offered at higher prices than our own
equivalent service.
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 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.
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 by another cable operator, a municipal-owned utility or another
service provider. Some of these competitors may be granted franchises on more
favorable terms or conditions or enjoy other advantages such as exemptions from
taxes or regulatory requirements to which we are subject. 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 9.4% of
the homes passed in the service areas of our franchises.
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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 standard telephone line modems, 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. DBS providers currently offer satellite-delivered
high-speed Internet access with a telephone return path through a one-way
service or a two-way interactive high-speed service.
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 examined
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. The FCC is presently considering this issue. 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.
The 1996 Telecom Act directed the FCC to establish, and the FCC has
adopted, regulations and policies for the issuance of licenses for digital
television to incumbent television broadcast licensees. Digital television can
deliver high-definition television pictures and multiple digital-quality program
streams, as well as CD-quality audio programming and advanced digital services,
such as data transfer or subscription video. The FCC also has authorized
television broadcast stations to transmit text and graphic information that may
be useful to both consumers and businesses. The FCC also permits commercial and
non-commercial FM stations to use their subcarrier frequencies to provide
non-broadcast services, including data transmission.
EMPLOYEES
As of December 31, 2002, we employed 3,407 full-time employees and 175
part-time employees. Approximately 1.8% of our employees were represented by a
labor union at that time. Such employees have since voted to decertify this
labor union. As of the filing date of this report, none of our employees were
represented by a labor union. 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 only in communities that are
subject to effective competition, as defined by federal law.
Where there is no effective competition to the cable operator's services,
federal law gives local franchising authorities the responsibility to regulate
the rates charged by the operator for:
. the lowest level of programming service offered by cable
operator, typically called basic service, which includes the
local broadcast channels and any public access or governmental
channels that are required by the operator's franchise;
. the installation of cable service and related service calls; and
. the installation, sale and lease of equipment used by subscribers
to receive basic service, such as converter boxes and remote
control units.
Local franchising authorities who wish to regulate basic service rates
and related equipment rates must first obtain FCC certification to regulate by
following a simplified FCC certification process and agreeing to follow
established FCC rules and policies when regulating the cable operator's rates.
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Several years ago, the FCC adopted detailed rate regulations, guidelines
and rate forms that a cable operator and the local franchising authority must
use in connection with the regulation of basic service and equipment rates. The
FCC adopted a benchmark methodology as the principal method of regulating rates.
However, if this methodology produces unacceptable rates, the operator may also
justify rates using a detailed cost-of-service methodology. The FCC's rules also
require franchising authorities to regulate equipment rates on the basis of
actual cost plus a reasonable profit, as defined by the FCC.
If the local franchising authority concludes that a cable operator's
rates are too high under the FCC's rate rules, the local franchising authority
may require the cable operator to reduce rates and to refund overcharges to
subscribers, with interest. The cable operator may appeal adverse local rate
decisions to the FCC.
The FCC's regulations allow a cable operator to modify regulated rates on
a quarterly or annual basis to account for changes in:
. the number of regulated channels;
. inflation; and
. certain external costs, such as franchise and other governmental
fees, copyright and retransmission consent fees, taxes,
programming fees and franchise-related obligations.
The Communications Act and the FCC's regulations also:
. require cable operators to charge uniform rates throughout each
franchise area that is not subject to effective competition;
. prohibit regulation of non-predatory bulk discount rates offered
by cable operators to subscribers in commercial and residential
developments; and
. permit regulated equipment rates to be computed by aggregating
costs of broad categories of equipment at the franchise, system,
regional or company level.
CONTENT REQUIREMENTS
The Communications Act and the FCC's regulations contain broadcast signal
carriage requirements that allow local commercial television broadcast stations:
. to elect once every three years to require a cable system to
carry the station, subject to certain exceptions; or
. to negotiate with us on the terms by which we carry the station
on our cable systems, commonly called retransmission consent.
The Communications Act requires a cable operator to devote up to
one-third of its activated channel capacity for the mandatory carriage of local
commercial television stations. The Communications Act also gives local
non-commercial television stations mandatory carriage rights; however, such
stations are not given the option to negotiate retransmission consent for the
carriage of their signals by cable systems. Additionally, cable systems must
obtain retransmission consent for:
. all distant commercial television stations, except for commercial
satellite-delivered independent superstations such as WGN;
. commercial radio stations; and
. certain low-power television stations.
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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.
To increase competition between cable operators and other video program
distributors, the Communications Act and the FCC's regulations:
. preclude any satellite video programmer affiliated with a cable
company, or with a common carrier providing video programming
directly to its subscribers, from favoring an affiliated company
over competitors;
. require such programmers to sell their programming to other
unaffiliated video program distributors; and
. limit the ability of such programmers to offer exclusive
programming arrangements to their related parties.
The FCC actively regulates other aspects of our programming, involving
such areas as:
. our use of syndicated and network programs and local sports
broadcast programming;
. advertising in children's programming;
. political advertising;
. origination cablecasting;
. adult programming;
. sponsorship identification; and
. closed captioning of video programming.
USE OF OUR CABLE SYSTEMS BY THE GOVERNMENT AND UNRELATED THIRD PARTIES
The Communications Act allows local franchising authorities and unrelated
third parties to have access to our cable systems' channel capacity for their
own use. For example, it:
. permits franchising authorities to require cable operators to set
aside channels for public, educational and governmental access
programming; and
. requires a cable system with 36 or more activated channels to
designate a significant portion of its channel capacity for
commercial leased access by third parties to provide programming
that may compete with services offered by the cable operator.
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The FCC regulates various aspects of third party commercial use of
channel capacity on our cable systems, including:
. the maximum reasonable rate a cable operator may charge for third
party commercial use of the designated channel capacity;
. the terms and conditions for commercial use of such channels; and
. the procedures for the expedited resolution of disputes
concerning rates or commercial use of the designated channel
capacity.
FRANCHISE MATTERS
We have non-exclusive franchises in virtually every community in which we
operate that authorize us to construct, operate and maintain our cable systems.
Although franchising matters are normally regulated at the local level through a
franchise agreement or a local ordinance, the Communications Act provides
oversight and guidelines to govern our relationship with local franchising
authorities.
For example, the Communications Act:
. affirms the right of franchising authorities, which may be state
or local, depending on the practice in individual states, to
award one or more franchises within their jurisdictions;
. generally prohibits us from operating in communities without a
franchise;
. encourages competition with existing cable systems by:
. allowing municipalities to operate their own cable
systems without franchises, and
. preventing franchising authorities from granting
exclusive franchises or from unreasonably refusing to
award additional franchises covering an existing cable
system's service area;
. permits local authorities, when granting or renewing our
franchises, to establish requirements for cable-related
facilities and equipment, but prohibits franchising authorities
from establishing requirements for specific video programming or
information services other than in broad categories;
. permits us to obtain modification of our franchise requirements
from the franchise authority or by judicial action if warranted
by commercial impracticability; and
. generally prohibits franchising authorities from:
. imposing requirements during the initial cable franchising
process or during franchise renewal that require, prohibit
or restrict us from providing telecommunications services,
. imposing franchise fees on revenues we derive from
providing telecommunications services over our cable
systems,
. restricting our use of any type of subscriber equipment or
transmission technology, and
. limits our payment of franchise fees to the local franchising
authority to 5.0% of our gross revenues derived from providing
cable services over our cable system.
The Communications Act contains renewal procedures designed to protect us
against arbitrary denials of renewal of our franchises although, under certain
circumstances, the franchising authority could deny us a franchise renewal.
Moreover, even if our franchise is renewed, the franchising authority may seek
to impose upon us new and more onerous requirements, such as significant
upgrades in facilities and services or increased franchise fees as a condition
of renewal to the extent permitted by law. Similarly, if a franchising
authority's consent is required for the purchase or sale of our cable system or
franchise, the franchising authority may attempt to impose more burdensome or
onerous franchise requirements on the purchaser in connection with a request for
such consent. Historically, cable operators providing satisfactory services to
their subscribers and complying with the terms of their franchises have almost
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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 and to impose
limits on the number of channels which can be occupied on a cable system by a
video programmer in which a cable operator has an interest. The U.S. Court of
Appeals for the District of Columbia Circuit overturned the FCC's rules
implementing these statutory provisions and remended the case to the FCC for
further proceedings.
The 1996 amendments to the Communications Act eliminated the statutory
prohibition on the common ownership, operation or control of a cable system and
a television broadcast station in the same service area. The identical FCC
regulation has been invalidated by a federal appellate court. The FCC has
eliminated its regulatory restriction on cross-ownership of cable systems and
national broadcasting networks.
The 1996 amendments to the Communications Act also made far-reaching
changes in the relationship between local telephone companies and cable service
providers. These amendments:
. eliminated federal legal barriers to competition in the local
telephone and cable communications businesses, including allowing
local telephone companies to offer video services in their local
telephone service areas;
. preempted legal barriers to telecommunications competition that
previously existed in state and local laws and regulations;
. set basic standards for relationships between telecommunications
providers; and
. generally limited acquisitions and prohibited joint ventures
between local telephone companies and cable operators in the same
market.
Local telephone companies may provide service as traditional cable
operators with local franchises or they may opt to provide their programming
over open video systems, subject to certain conditions, including, but not
limited to, setting aside a portion of their channel capacity for use by
unaffiliated program distributors on a non-discriminatory basis. The decision as
to whether an operator of an open video system must obtain a local franchise is
left to each community.
POLE ATTACHMENT REGULATION
The Communications Act requires the FCC to regulate the rates, terms and
conditions imposed by public utilities, other than municipally or
cooperatively-owned utilities, for cable systems' use of utility pole and
conduit space unless state authorities have demonstrated to the FCC that they
adequately regulate pole attachment rates, as is the case in certain states in
which we operate. In the absence of state regulation, the FCC administers pole
attachment rates on a formula basis. The FCC adopted a new rate formula that
became effective in 2001 which governs the maximum rate certain utilities may
charge for attachments to their poles and conduit by companies providing
telecommunications services, including cable operators.
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Increases in attachment rates due to the FCC's new rate formula are
phased in over a five-year period in equal annual increments, beginning in
February 2001. A federal appellate court found that the provision of Internet
access by a cable system was neither a cable service or a telecommunications
service, thus the FCC lacked authority to regulate pole attachment rates for
cable systems which offer Internet access. The Supreme Court recently reversed
the federal appellate court decision and upheld the FCC's authority to regulate
pole attachment rates. We are unable to predict the ultimate impact of any
revised FCC rate formula or of any new pole attachment rate regulations on our
business and operations.
OTHER REGULATORY REQUIREMENTS OF THE COMMUNICATIONS ACT AND THE FCC
The FCC has adopted cable inside wiring rules to provide a more specific
procedure for the disposition of residential home wiring and internal building
wiring that belongs to an incumbent cable operator that is forced by the
building owner to terminate its cable services in a building with multiple
dwelling units.
The Communications Act includes provisions, among others, regulating and
the FCC actively regulates other parts of our cable operations, involving such
areas as:
. equal employment opportunity;
. consumer protection and customer service;
. technical standards and testing of cable facilities;
. consumer electronics equipment compatibility;
. registration of cable systems;
. maintenance of various records and public inspection files;
. microwave frequency usage; and
. antenna structure notification, marking and lighting.
The FCC may enforce its regulations through the imposition of fines, the
issuance of cease and desist orders or the imposition of other administrative
sanctions, such as the revocation of FCC licenses needed to operate transmission
facilities often used in connection with cable operations. The FCC has ongoing
rulemaking proceedings that may change its existing rules or lead to new
regulations. We are unable to predict the impact that any further FCC rule
changes may have on our business and operations.
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 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 material 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 copyright owners. These entities 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.
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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 three largest music performing rights organizations
covering locally originated programming, including advertising inserted by the
cable operator in programming produced by other parties. These standard
agreements require the payment of music license fees for earlier time periods,
but such license fees have not had a significant impact on our business and
operations.
CABLE MODEM SERVICE
There are currently few laws or regulations which specifically regulate
communications or commerce over the Internet. Section 230 of the Communications
Act declares it to be the policy of the United States to promote the continued
development of the Internet and other interactive computer services and
interactive media, and to preserve the vibrant and competitive free market that
presently exists for the Internet and other interactive computer services,
unfettered by federal or state regulation. One area in which Congress did
attempt to regulate content over the Internet involved the dissemination of
obscene or indecent materials.
The Digital Millennium Copyright Act is intended to reduce the liability
of online service providers for listing or linking to third-party Websites that
include materials that infringe copyrights or other rights or if customers use
the service to publish or disseminate infringing materials. The Children's
Online Protection Act and the Children's Online Privacy Protection Act are
intended to restrict the distribution of certain materials deemed harmful to
children and impose additional restrictions on the ability of online services to
collect user information from minors. In addition, the Protection of Children
From Sexual Predators Act of 1998 requires online service providers to report
evidence of violations of federal child pornography laws under certain
circumstances.
A number of ISP's have asked local authorities and the FCC to give them
rights of access to cable systems' broadband infrastructure so that they can
deliver their services directly to cable systems' customers. This kind of access
is often called "open access." Many local franchising authorities have examined
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 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 on 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.
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Challenges to the FCC's classification of cable Internet access service
have been filed in federal courts. In previous actions over the regulatory
classification of cable modem service, the courts issued conflicting decisions.
These conflicting rulings and the new court proceedings increase the possibility
that the classification of cable Internet service could be decided by the
Supreme Court.
STATE AND LOCAL REGULATION
Our cable systems use local streets and rights-of-way. Consequently, we
must comply with state and local regulation, which is typically imposed through
the franchising process. Our cable systems generally are operated in accordance
with non-exclusive franchises, permits or licenses granted by a municipality or
other state or local government entity. Our franchises generally are granted for
fixed terms and in many cases are terminable if we fail to comply with material
provisions. The terms and conditions of our franchises vary materially from
jurisdiction to jurisdiction. Each franchise generally contains provisions
governing:
. franchise fees;
. franchise term;
. system construction and maintenance obligations;
. system channel capacity;
. design and technical performance;
. 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; 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.
22
ITEM 2. PROPERTIES
Our principal physical assets consist of cable television operating plant
and equipment, including signal receiving, encoding and decoding devices,
headend facilities and distribution systems and equipment at or near customers'
homes for each of the systems. The signal receiving apparatus typically includes
a tower, antenna, ancillary electronic equipment and earth stations for
reception of satellite signals. Headend facilities are located near the
receiving devices. Our distribution system consists primarily of coaxial and
fiber optic cables and related electronic equipment. Customer premise equipment
consists of decoding converters and cable modems.
Our cable television plant and related equipment generally are attached
to utility poles under pole rental agreements with local public utilities,
although in some areas the distribution cable is buried in underground ducts or
trenches. The physical components of the cable systems require maintenance and
periodic upgrading to improve system performance and capacity.
We own and lease the real property housing our regional call centers,
business offices and warehouses throughout our operating regions. Our headend
facilities, signal reception sites and microwave facilities are located on owned
and leased parcels of land, and we generally own the towers on which certain of
our equipment is located. We own most of our service vehicles. We believe that
our properties, both owned and leased, are in good condition and are suitable
and adequate for our operations.
ITEM 3. LEGAL PROCEEDINGS
There are no material pending legal proceedings to which we are a party
or to which any of our properties are subject.
23
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, 2002.
ITEM 4A. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Name Age Position
---- --- ------------------------------------------
Rocco B. Commisso...................................... 53 Chairman and Chief Executive Officer
Mark E. Stephan........................................ 46 Senior Vice President, Chief Financial
Officer, Treasurer and Director
James M. Carey......................................... 51 Senior Vice President, Operations
John G. Pascarelli..................................... 41 Senior Vice President, Marketing and
Consumer Services
Joseph Van Loan........................................ 61 Senior Vice President, Technology
Italia Commisso Weinand................................ 49 Senior Vice President, Programming and
Human Resources
Charles J. Bartolotta.................................. 48 Senior Vice President, Customer Operations
Calvin G. Craib........................................ 48 Senior Vice President, Business Development
William I. Lees, Jr.................................... 44 Senior Vice President, Corporate Controller
Joseph E. Young........................................ 54 Senior Vice President, General Counsel and
Secretary
Craig S. Mitchell...................................... 44 Director
William S. Morris III.................................. 68 Director
Thomas V. Reifenheiser................................. 67 Director
Natale S. Ricciardi.................................... 54 Director
Robert L. Winikoff..................................... 56 Director
Rocco B. Commisso has 25 years of experience with the cable television
industry and has served as our Chairman and Chief Executive Officer since
founding our predecessor company in July 1995. From 1986 to 1995, he served as
Executive Vice President, Chief Financial Officer and a director of Cablevision
Industries Corporation. Prior to that time, Mr. Commisso served as Senior Vice
President of Royal Bank of Canada's affiliate in the United States from 1981,
where he founded and directed a specialized lending group to media and
communications companies. Mr. Commisso began his association with the cable
industry in 1978 at The Chase Manhattan Bank, where he managed the bank's
lending activities to communications firms including the cable industry. He
serves on the board of directors of the National Cable Television Association,
Cable Television Laboratories, Inc and C-SPAN. Mr. Commisso holds a Bachelor of
Science in Industrial Engineering and a Master of Business Administration from
Columbia University.
Mark E. Stephan has 16 years of experience with the cable television
industry and has served as our Senior Vice President, Chief Financial Officer
and Treasurer since the commencement of our operations in March 1996. Before
joining us, Mr. Stephan served as Vice President, Finance for Cablevision
Industries from July 1993. Prior to that time, Mr. Stephan served as Manager of
the telecommunications and media lending group of Royal Bank of Canada.
James M. Carey has 21 years of experience in the cable television
industry. Before joining us in September 1997, Mr. Carey was founder and
President of Infinet Results, a telecommunications consulting firm, from
December 1996. Mr. Carey served as Executive Vice President, Operations at
MediaOne Group from August 1995 to November 1996, where he was responsible for
MediaOne's Atlanta cable operations. Prior to that time, he served as Regional
Vice President of Cablevision Industries' Southern region. Mr. Carey is a member
of the board of directors of the American Cable Association and the Cable
Television Association of Georgia.
24
John G. Pascarelli has 22 years of experience in the cable television
industry. Before joining us in March 1998, Mr. Pascarelli served as Vice
President, Marketing for Helicon Communications Corporation from January 1996 to
February 1998 and as Corporate Director of Marketing for Cablevision Industries
from 1988 to 1995. Prior to that time, Mr. Pascarelli served in various
marketing and system management capacities for Continental Cablevision, Inc.,
Cablevision Systems and Storer Communications. Mr. Pascarelli is a member of the
board of directors of the Cable and Telecommunications Association for
Marketing.
Joseph Van Loan has 30 years of experience in the cable television
industry. Before joining us in November 1996, Mr. Van Loan served as Senior Vice
President, Engineering for Cablevision Industries from 1990. Prior to that time,
he managed a private telecommunications consulting practice specializing in
domestic and international cable television and broadcasting and served as Vice
President, Engineering for Viacom Cable. Mr. Van Loan received the 1986 Vanguard
Award for Science and Technology from the National Cable Television Association.
Italia Commisso Weinand has 26 years of experience in the cable
television industry. Before joining us in April 1996, Ms. Weinand served as
Regional Manager for Comcast Corporation from July 1985. Prior to that time, Ms.
Weinand held various management positions with Tele-Communications, Times Mirror
Cable and Time Warner. Ms. Weinand is the sister of Mr. Commisso.
Charles J. Bartolotta has 20 years of experience in the cable television
industry. Before joining us in October 2000, Mr. Bartolotta served as Division
President for AT&T Broadband, LLC from July 1998, where he was responsible for
managing an operating division serving nearly three million customers. Prior to
that time, he served as Regional Vice President of Telecommunications, Inc. from
January 1997 and as Vice President and General Manager for TKR Cable Company
from 1989. Prior to that time, Mr. Bartolotta held various management positions
with Cablevision Systems Corporation.
Calvin G. Craib has 21 years of experience in the cable television
industry. Before joining us in April 1999 as Vice President, Business
Development, Mr. Craib served as Vice President, Finance and Administration for
Interactive Marketing Group from June 1997 to December 1998 and as Senior Vice
President, Operations, and Chief Financial Officer for Douglas Communications
from January 1990 to May 1997. Prior to that time, Mr. Craib served in various
financial management capacities at Warner Amex Cable and Tribune Cable.
William I. Lees, Jr. joined us in October 2001 as Senior Vice President,
Corporate Controller. Previously, Mr. Lees served as Executive Vice President
and Chief Financial Officer for Regus Business Centre Corp., a multinational
real estate services company, from July 1999 to September 2001. Prior to that
time, he served as Corporate Controller and Director for Formica Corporation
from September 1998 to July 1999, and as Chief Financial Officer for Imperial
Schrade Corporation from September 1993 to September 1998. He was previously
employed for 13 years by Ernst & Young.
Joseph E. Young has 18 years of experience with the cable television
industry. Before joining us in November 2001 as Senior Vice President, General
Counsel, Mr. Young served as Executive Vice President, Legal and Business
Affairs, for LinkShare Corporation, an Internet-based provider of marketing
services, from September 1999 to October 2001. Prior to that time, he practiced
corporate law with Baker & Botts, LLP from January 1995 to September 1999.
Previously, Mr. Young was a partner with the Law Offices of Jerome H. Kern and a
partner with Shea & Gould.
Craig S. Mitchell has held various management positions with Morris
Communications Company LLC for more than the past five years. He currently
serves as its Vice President of Finance and Treasurer and is also a member of
its board of directors.
William S. Morris III has served as the Chairman and Chief Executive
Officer of Morris Communications for more than the past five years. He was the
Chairman of the board of directors of the Newspapers Association of America for
1999-2000.
25
Thomas V. Reifenheiser served for more than five years as a Managing
Director and Group Executive of the Global Media and Telecom Group of Chase
Securities Inc. until his retirement in September 2000. He joined Chase in 1963
and had been the Global Media and Telecom Group Executive since 1977. He also
had been a director of the Management Committee of The Chase Manhattan Bank. Mr.
Reifenheiser is a member of the board of directors of Cablevision Systems
Corporation and Lamar Advertising Company, a leading owner and operator of
outdoor advertising and logo sign displays.
Natale S. Ricciardi has held various management positions with Pfizer
Inc. for more than the past five years. Mr. Ricciardi joined Pfizer in 1972 and
currently serves as its Vice President, U.S. Manufacturing, with responsibility
for all of Pfizer's U.S. manufacturing facilities.
Robert L. Winikoff has been a partner of the law firm of Sonnenschein
Nath & Rosenthal since August 2000. Prior thereto, he was a partner of the law
firm of Cooperman Levitt Winikoff Lester & Newman, P.C. for more than five
years. Sonnenschein Nath & Rosenthal currently serves as our outside general
counsel and prior to such representation Cooperman Levitt Winikoff Lester &
Newman, P.C. served as our outside general counsel since 1995.
26
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our Class A common stock has been traded on the Nasdaq National Market
under the symbol "MCCC" since February 4, 2000, the date of our initial public
offering. Prior to that time, there was no public market for our common stock.
The following table sets forth, for the periods indicated, the high and low
closing sales prices for our Class A common stock as reported by the Nasdaq
National Market:
2002 2001
-------------------- -------------------
High Low High Low
--------- -------- -------- --------
First Quarter $ 18.22 $ 13.68 $ 22.06 $ 16.56
Second Quarter $ 13.78 $ 7.45 $ 21.99 $ 15.22
Third Quarter $ 7.25 $ 3.98 $ 18.96 $ 12.91
Fourth Quarter $ 10.36 $ 3.63 $ 18.26 $ 12.14
As of March 25, 2003, there were approximately 131 holders of record of
our Class A common stock and 6 holders of record of our Class B common stock.
The number of Class A stockholders does not include beneficial owners holding
shares through nominee names.
We have never declared or paid any dividends on our common stock. We
currently anticipate that we will retain all of our future earnings for use in
the expansion and operation of our business. Thus, we do not anticipate paying
any cash dividends on our common stock in the foreseeable future. Our future
dividend policy will be determined by our board of directors and will depend on
various factors, including our results of operations, financial condition,
capital requirements and investment opportunities.
During the year ended December 31, 2002, we granted stock options to
certain of our employees to purchase an aggregate of 604,735 shares of Class A
common stock at an exercise price ranging from $11.96 to $12.49 per share.
The grant of stock options to the employees and non-employee directors of
MCC was not registered under the Securities Act of 1933 because the stock
options either did not involve an offer or sale for purposes of Section 2(a)(3)
of the Securities Act of 1933, in reliance on the fact that the stock options
were granted for no consideration, or were offered and sold in transactions not
involving a public offering, exempt from registration under the Securities Act
of 1933 pursuant to Section 4(2).
27
ITEM 6. SELECTED FINANCIAL DATA
Mediacom Communications Corporation was organized as a Delaware
corporation in November 1999 and completed an initial public offering in
February 2000. Mediacom LLC was formed as a New York limited liability company
in July 1995 and since that time its taxable income or loss has been included in
the federal and certain state income tax returns of its members. Upon completion
of our initial public offering, we became subject to the provisions of
Subchapter C of the Internal Revenue Code. As a C corporation, we are subject to
federal, state and local income taxes.
In the table below, we provide you with selected historical consolidated
financial and operating data for the years ended December 31, 1998 through 2002
and balance sheet data as of December 31, 1998 through 2002, which are derived
from our audited consolidated financial statements. We have significantly
expanded our business through acquisitions. In 2001, we acquired from AT&T
Broadband, LLC cable systems serving approximately 800,000 basic subscribers for
an aggregate purchase price of $2.06 billion. In 2000, we acquired cable systems
serving approximately 53,000 basic subscribers for an aggregate purchase price
of $109.2 million. In 1999, we acquired cable systems serving approximately
358,000 basic subscribers for an aggregate purchase price of $759.6 million.
See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
YEARS ENDED DECEMBER 31,
------------------------------------------------------------------------
2002 2001 2000 1999 1998
------------ ------------ ------------ ------------ ------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
STATEMENT OF OPERATIONS DATA:
Revenues $ 923,033 $ 585,175 $ 328,258 $ 174,961 $ 129,297
Costs and expenses:
Service costs(1) 359,737 219,479 110,442 56,967 43,849
Selling, general and administrative
expenses 173,970 105,794 55,820 32,949 25,596
Corporate expenses(2) 12,752 8,705 6,029 6,951 5,797
Depreciation and amortization 319,435 310,785 178,331 101,065 65,793
Non-cash stock charges relating to
corporate expenses(3) 5,323 2,904 28,254 15,445 -
------------ ------------ ------------ ------------ ------------
Operating income (loss) 51,816 (62,492) (50,618) (38,416) (11,738)
Interest expense, net(4) 188,304 139,867 68,955 37,817 23,994
Loss on derivative instruments, net(5) 13,877 8,441 - - -
Other expense (income)(6) 11,093 (21,653) 30,024 5,087 4,058
------------ ------------ ------------ ------------ ------------
Net loss before income taxes (161,458) (189,147) (149,597) (81,320) (39,790)
Provision for income taxes 200 87 250 - -
------------ ------------ ------------ ------------ ------------
Net loss before cumulative effect of
accounting change (161,658) (189,234) (149,847) (81,320) (39,790)
Cumulative effect of accounting
change(7) - (1,642) - - -
------------ ------------ ------------ ------------ ------------
Net loss $ (161,658) $ (190,876) $ (149,847) $ (81,320) $ (39,790)
============ ============ ============ ============ ============
Basic and diluted loss per share:(8)
Before cumulative effect of
accounting change $ (1.35) $ (1.78) $ (1.79) $ (7.82) $ (5.28)
Cumulative effect of accounting
change - (0.02) - - -
------------ ------------ ------------ ------------ ------------
Loss per share $ (1.35) $ (1.80) $ (1.79) $ (7.82) $ (5.28)
============ ============ ============ ============ ============
Weighted average common shares
outstanding(8) 119,607,605 105,779,737 83,803,032 10,403,749 7,537,912
BALANCE SHEET DATA (END OF PERIOD):
Total assets $ 3,703,974 $ 3,664,848 $ 1,379,972 $ 1,272,881 $ 451,152
Total debt 3,019,000 2,798,000 987,000 1,139,000 337,905
Total stockholders' equity 346,541 507,576 261,621 54,615 78,651
(continued on next page)
28
YEARS ENDED DECEMBER 31,
------------------------------------------------------------------------
2002 2001 2000 1999 1998
------------ ------------ ------------ ------------ ------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
OTHER DATA:
System cash flow(9) $ 393,642 $ 265,725 $ 161,996 $ 85,045 $ 59,852
System cash flow margin(10) 42.6% 45.4% 49.4% 48.6% 46.3%
Operating cash flow(9) . $ 380,890 $ 257,020 $ 155,967 $ 78,094 $ 54,055
Operating cash flow margin(11) 41.2% 43.9% 47.5% 44.6% 41.8%
Net cash flows provided by (used in):
Operating activities $ 174,203 $ 258,625 $ 95,527 $ 54,216 $ 53,556
Investing activities (421,602) (2,402,947) (297,110) (851,548) (397,085)
Financing activities 215,316 2,203,477 201,262 799,593 344,714
OPERATING DATA
(END OF PERIOD, EXCEPT AVERAGE):
Homes passed(12) 2,715,000 2,630,000 1,173,000 1,071,500 520,000
Basic subscribers(13) 1,592,000 1,595,000 779,000 719,000 354,000
Basic penetration(14) 58.6% 60.6% 66.4% 67.1% 68.1%
Digital customers(15) 371,000 321,000 40,000 5,300 -
Data customers(16) 191,000 115,000 15,600 5,100 4,729
Average monthly revenues per basic
subscriber(17) $ 50.10 $ 44.54 $ 38.34 $ 35.01 $ 32.88
- ----------
(1) Service costs for the years ended December 31, 2002 and 2001 include $4.3
million and $5.8 million, respectively, of non-recurring incremental
expenses related to the transition from Excite@Home to Mediacom
Online(SM).
(2) Represents actual corporate expenses subsequent to our initial public
offering in February 2000 and fees paid to Mediacom Management
Corporation, a Delaware corporation, for management services rendered to
our operating subsidiaries under management agreements prior to our
initial public offering. Such management agreements were terminated upon
the completion of our initial public offering. At that time, Mediacom
Management's employees became our employees and its corporate overhead
became our corporate overhead. See Note 10 of our consolidated financial
statements.
(3) Non-cash stock charges relating to corporate expenses:
. for the years ended December 31, 2002 and 2001 resulted from the
vesting of equity grants made during 1999 to certain members of our
management team.
. for the year ended December 31, 2000 consist of a one-time $24.5
million charge resulting from the termination of the management
agreements with Mediacom Management upon completion of our initial
public offering in February 2000 and a $3.8 million charge relating
to the vesting of equity grants made during 1999 to certain members
of our management team.
. for the year ended December 31, 1999 consist of a $0.6 million
charge resulting from amendments to our management agreements with
Mediacom Management and a $14.8 million charge relating to the
vesting of equity grants to certain members of our management team.
See Notes 10 and 14 of our consolidated financial statements.
(4) Net of interest income. Interest income for the periods presented was
not material.
(5) Loss on derivatives, net, represents the change in the fair value of our
interest rate derivatives as a result of the decrease in market interest
rates. See Note 7 of our consolidated financial statements.
(6) Includes $30.0 million of deferred revenue recognized during the year
ended December 31, 2001 resulting from the termination of our
relationship with SoftNet Systems, Inc. During the year ended December
31, 2000, a $28.5 million non-cash charge was recorded relating to the
decline in value of our investment in shares of SoftNet Systems common
stock that was deemed other than temporary. See Note 13 of our
consolidated financial statements.
29
(7) Relates to our adoption of Statements of Financial Accounting Standards
No. 133, "Accounting for Derivative Instruments and Hedging
Activities."
(8) Basic and diluted loss per share is calculated based on the weighted
average shares outstanding. Since our initial public offering in February
2000, the weighted average shares outstanding was based on the actual
number of shares outstanding. Prior to our initial public offering, the
weighted average shares outstanding was computed based on the conversion
ratio used to exchange the Mediacom LLC's membership units for shares of
Mediacom Communications Corporation Class A and Class B common stock
immediately prior to our initial public offering. See Note 3 of our
consolidated financial statements.
(9) Operating cash flow and system cash flow represent non-GAAP measures and
are included in this report because our management believes that
operating cash flow and system cash flow are meaningful measures of
performance commonly used in the cable television industry and by the
investment community to analyze and compare cable television companies.
Our definitions of operating cash flow and system cash flow may not be
identical to similarly titled measures reported by other companies.
The following represents a reconciliation of operating income (loss) to
operating cash flow and system cash flow:
YEARS ENDED DECEMBER 31,
-----------------------------------------------------------------
2002 2001 2000 1999 1998
---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
(UNAUDITED)
Operating income (loss) $ 51,816 $ (62,492) $ (50,618) $ (38,416) $ (11,738)
Adjustments:
Depreciation and amortization 319,435 310,785 178,331 101,065 65,793
Non-cash stock charges relating to
corporate expenses 5,323 2,904 28,254 15,445 -
Non-recurring incremental expenses 4,316 5,823 - - -
---------- ---------- ---------- ---------- ----------
Operating cash flow 380,890 257,020 155,967 78,094 54,055
Corporate expenses 12,752 8,705 6,029 6,951 5,797
---------- ---------- ---------- ---------- ----------
System cash flow $ 393,642 $ 265,725 $ 161,996 $ 85,045 $ 59,852
========== ========== ========== ========== ==========
These measurements of operating cash flow and system cash flow are:
. 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;
. 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.
(10) Represents system cash flow as a percentage of revenues. This measurement
is used by us, and is commonly used in the cable television industry, to
analyze and compare cable television companies on the basis of operating
performance, for the reasons discussed in note 9 above.
(11) Represents operating cash flow as a percentage of revenues. This
measurement is used by us, and is commonly used in the cable television
industry, to analyze and compare cable television companies on the basis
of operating performance, for the reasons discussed in note 9 above.
30
(12) Represents the number of single residence homes, apartments and
condominium units passed by the cable distribution network in a cable
system's service area.
(13) Represents a dwelling with one or more television sets that receives a
package of over-the-air broadcast stations, local access channels or
certain satellite-delivered cable television services. Accounts that are
billed on a bulk basis, which typically receive discounted rates, are
converted into full-price equivalent basic subscribers by dividing total
bulk billed basic revenues of a particular system by the applicable
combined limited and expanded cable rate charged to basic subscribers in
that system. Basic subscribers include connections to schools, libraries,
local government offices and employee households that may not be charged
for limited and expanded cable services, but may be charged for premium
units, pay-per-view events or high-speed Internet service. Customers who
exclusively purchase high-speed Internet service are not counted as basic
subscribers. Our methodology of calculating the number of basic
subscribers may not be identical to those used by other cable companies.
(14) Represents basic subscribers as a percentage of homes passed.
(15) Represents customers that receive digital cable services.
(16) Represents customers that access the Internet through cable modem service
or a conventional modem and telephone line connection.
(17) Represents average monthly revenues for the last three months of the
period divided by average basic subscribers for such period. Average
monthly revenues per basic subscriber includes the revenues of
acquisitions of cable systems made during the last three months of the
period as if such acquisitions were completed at the beginning of the
three month period. This measurement is commonly used in the cable
television industry to analyze and compare cable television companies on
the basis of operating performance.
31
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 and for the years ended December 31, 2002, 2001 and 2000.
ORGANIZATION
Mediacom Communications Corporation was organized as a Delaware
corporation in November 1999 and completed an initial public offering in
February 2000. Immediately prior to the completion of our initial public
offering, we issued shares of common stock in exchange for all of the
outstanding membership interests in Mediacom LLC, a New York limited liability
company, upon which Mediacom LLC became our wholly-owned subsidiary. Mediacom
LLC commenced operations in March 1996 and until June 2001 served as the holding
company for all of our operating subsidiaries.
Mediacom Broadband LLC, our wholly-owned subsidiary, was organized as a
Delaware limited company in April 2001 for the purpose of acquiring cable
systems from AT&T Broadband, LLC. Mediacom Broadband LLC's operating
subsidiaries completed the acquisitions of the AT&T cable systems in June and
July 2001.
Until our initial public offering in February 2000, Mediacom Management
Corporation, a Delaware corporation, provided management services to the
operating subsidiaries of Mediacom LLC under management agreements and received
annual management fees. Such management agreements were terminated upon the date
of our initial public offering. At that time, Mediacom Management's employees
became our employees and its corporate overhead became our corporate overhead.
These employee expenses and corporate overhead are reflected as our corporate
expenses. See Note 10 of our consolidated financial statements.
ACQUISITIONS
We significantly expanded our business in the last three years through
ac