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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 Numbers: 333-57285-01
333-57285
MEDIACOM LLC
MEDIACOM CAPITAL CORPORATION*
(Exact names of Registrants as specified in their charters)
NEW YORK 06-1433421
NEW YORK 06-1513997
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Numbers)
100 Crystal Run Road
Middletown, New York 10941
(Address of principal executive offices)
(845) 695-2600
(Registrants' telephone number)
Securities registered pursuant to Section 12(b) of the Exchange Act:
None
Securities registered pursuant to Section 12(g) of the Exchange Act:
None
Indicate by check mark whether the Registrants (1) have filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrants were required to file such reports), and (2) have been subject to
such filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrants' knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K: Not Applicable.
Indicate by checkmark whether the registrants are accelerated filers (as
defined in Rule 12b-2 of the Act). Yes [ ] No [X]
State the aggregate market value of the common equity held by
non-affiliates of the Registrants: Not Applicable
Indicate the number of shares outstanding of the Registrants' common stock:
Not Applicable
*Mediacom Capital Corporation meets the conditions set forth in General
Instruction I (1) (a) and (b) of Form 10-K and is therefore filing this form
with the reduced disclosure format.
MEDIACOM LLC
2002 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
PART I
PAGE
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Item 1. Business................................................................. 4
Item 2. Properties............................................................... 22
Item 3. Legal Proceedings........................................................ 22
Item 4. Submission of Matters to a Vote of Security Holders...................... 22
PART II
Item 5. Market for Registrants' Common Equity and Related Stockholder Matters.... 23
Item 6. Selected Financial Data.................................................. 24
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.................................................. 28
Item 7A. Quantitative and Qualitative Disclosures About Market Risk............... 43
Item 8. Financial Statements and Supplementary Data.............................. 44
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure................................................... 63
PART III
Item 10. Directors and Executive Officers of the Registrants...................... 64
Item 11. Executive Compensation................................................... 67
Item 12. Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters........................................ 67
Item 13. Certain Relationships and Related Transactions........................... 67
Item 14. Controls and Procedures.................................................. 67
PART IV
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K.......... 69
2
Mediacom LLC was organized as a New York limited liability company in 1995
and is a wholly-owned subsidiary of Mediacom Communications Corporation, a
Delaware Corporation. Mediacom Capital Corporation was organized as a New York
corporation in 1998 and is a wholly-owned subsidiary of Mediacom LLC. Mediacom
Capital was formed for the sole purpose of acting as co-issuer with Mediacom LLC
of debt securities and does not conduct operations of its own.
References in this Annual Report to "we," "us," or "our" are to Mediacom
LLC and its direct and indirect subsidiaries, unless the context specifies or
requires otherwise. References in this Annual Report to "MCC" are to Mediacom
Communications Corporation.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
You should carefully review the information contained in this Annual Report
and in other reports or documents that we file from time to time with the
Securities and Exchange Commission (the "SEC"). In this Annual Report, we state
our beliefs of future events and of our future financial performance. In some
cases, you can identify those so-called "forward-looking statements" by words
such as "may," "will," "should," "expects," "plans," "anticipates," "believes,"
"estimates," "predicts," "potential," or "continue" or the negative of those
words and other comparable words. You should be aware that those statements are
only our predictions. Actual events or results may differ materially. In
evaluating those statements, you should specifically consider various factors,
including the risks discussed in this Annual Report 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
OUR MANAGER
Mediacom Communications Corporation, our parent and manager, is currently
the nation's eighth largest cable television company based on customers served
and the leading cable operator focused on serving the smaller cities and towns
in the United States. Mediacom Communications provides its customers with a wide
array of broadband products and services, including traditional analog video
services, digital television, high-speed Internet access, video-on-demand and
high-definition television. As of December 31, 2002, our manager's cable
systems, which are owned and operated through the operating subsidiaries of
Mediacom LLC and Mediacom Broadband LLC, 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. Our manager was founded in July 1995 by Rocco B. Commisso, its
Chairman and Chief Executive Officer, and its Class A common stock is traded on
The Nasdaq National Market under the symbol MCCC.
MEDIACOM LLC
We are a wholly-owned subsidiary of our manager. As of December 31, 2002,
our cable systems passed approximately 1.3 million homes and served
approximately 752,000 basic subscribers in 22 states. Since commencement of our
operations in March 1996, we have experienced significant growth by deploying a
disciplined strategy of acquiring underperforming cable systems and improving
their operating and financial performance. As of December 31, 2002, we had
completed 24 acquisitions of cable systems for an aggregate purchase price of
approximately $1.3 billion. Many of our cable systems are located in markets
that are contiguous with, or in close proximity to, cable systems owned and
operated by Mediacom Broadband LLC, a wholly-owned subsidiary of our manager.
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
98% of our cable network was upgraded with 550MHz to 870MHz bandwidth capacity
and about 95% 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 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 702,000
basic subscribers, or 93% of our total basic subscribers, and we served 133,000
digital customers. As of the same date, our high-speed Internet access, or cable
modem service, was marketed to approximately 1.1 million homes passed by our
cable systems, or 88% of our total homes passed, and we served 81,000 data
customers.
Our manager's principal executive offices are located at 100 Crystal Run
Road, Middletown, New York 10941, and our manager's telephone number at that
address is (845) 695-2600. Our manager's website is located at
www.mediacomcc.com. We have made available free of charge through our manager's
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 manager's 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 one of our cable systems in 2002 and
recently deployed a limited high-definition television service in another of our
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 anytime. 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 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 over 200 analog and
digital channels in many of our cable systems.
We currently offer our customers several digital cable programming packages
that include:
. up to 22 digital basic channels;
. up to 61 multichannel premium services;
. up to 38 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.
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.
5
We first introduced digital cable service in our cable systems in June 1999. As
of December 31, 2002, our digital service was available to 702,000 basic
subscribers, or approximately 93% of our total subscriber base, and we served
133,000 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.
We first introduced two-way, high-speed Internet access service in our
cable systems in November 1999. As of December 31, 2002, our cable modem service
was marketed to approximately 1.1 million homes passed by our cable systems, or
88% of our homes passed, and we served 81,000 data customers.
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 a cable systems. We currently offer
video-on-demand service to approximately 5% of our digital customers.
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 a cable system that
serves approximately 5% of our basic subscribers. During 2003, we expect to
expand the number of channels broadcast in high-definition in the cable system
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. Our manager is currently conducting in one of
its cable systems, 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 5,500 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.
6
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)/..................... 1,252,000 1,200,000 1,173,000 1,071,500 520,000
Basic subscribers/(2)/................ 752,000 771,000 779,000 719,000 354,000
Basic penetration/(3)/................ 60.1% 64.3% 66.4% 67.1% 68.1%
Average monthly revenues
per basic subscriber/(4)/.......... $ 46.95 $ 40.88 $ 38.34 $ 35.01 $ 32.88
DIGITAL CABLE:
Digital-ready basic subscribers/(5)/.. 702,000 600,000 400,000 168,000 -
Digital customers..................... 133,000 88,000 40,000 5,300 -
Digital penetration/(6)/.............. 18.9% 14.7% 10.0% 3.2% -
DATA:
Data-ready homes passed/(7)/.......... 1,190,000 965,000 550,000 120,000 -
Data-ready homes marketed/(8)/........ 1,100,000 610,000 486,000 105,500 -
Data customers........................ 81,000 38,000 15,600 5,100 4,729
Data penetration/(9)/................. 7.4% 6.2% 3.2% 4.8% -
Revenue Generating Units:/(10)/....... 966,000 897,000 834,600 729,400 358,729
Customer Relationships:/(11)/......... 760,000 774,000 N/A N/A N/A
CABLE NETWORK DATA:
Miles of plant........................ 25,500 25,000 24,500 22,444 11,950
Density/(12)/......................... 49 48 48 48 44
Percentage of cable network at
550MHz to 870MHz................... 98% 90% 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.
7
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
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LESS THAN 550MHZ- TWO-WAY
550MHZ 870MHZ CAPABLE
--------- ------- -------
December 31, 2001.......... 10% 90% 80%
December 31, 2002.......... 2% 98% 95%
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.
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 will 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 142 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 plan to eliminate up to 33
headend facilities by June 2003.
As part of our headend consolidation program, we have deployed over 5,500
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.
8
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
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. Our manager negotiates programming contract renewals both directly
and through the cooperative.
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 our
manager negotiates contract renewals.
9
We expect our programming costs 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 will legally be able to pass through
expected increases in our programming costs to customers, there can be no
assurance that competitive conditions or other factors in the marketplace will
allow us to do so.
We also have various retransmission consent arrangements with commercial
broadcast stations, which generally expire in December 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 1,033
franchises. These franchises, which are non-exclusive, provide for the payment
of fees to the issuing authority. In most of the cable systems, such franchise
fees are passed through directly to the customers. The Cable Communications
Policy Act of 1984, or the 1984 Cable Act, prohibits franchising authorities
from imposing franchise fees in excess of 5% of gross revenues from cable
services and also permits the cable operator to seek renegotiation and
modification of franchise requirements if warranted by changed circumstances.
Substantially all of the basic subscribers of our cable systems are in
service areas that require a franchise. The table below groups the franchises of
our cable systems by year of expiration and presents the approximate number and
percentage of basic subscribers for each group as of December 31, 2002.
PERCENTAGE OF NUMBER OF PERCENTAGE OF
NUMBER OF TOTAL BASIC TOTAL BASIC
YEAR OF FRANCHISE EXPIRATION FRANCHISES FRANCHISES SUBSCRIBERS SUBSCRIBERS
------------------------------------------- ---------- ------------- ----------- -------------
2003 through 2006.......................... 232 22.5% 199,000 26.5%
2007 and thereafter........................ 801 77.5 553,000 73.5
---------- ------------- ----------- -------------
Total................................. 1,033 100.0% 752,000 100.0%
========== ============= =========== =============
10
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.
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 consumer and is offered at higher prices than our own
equivalent service.
11
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 7.0% of
the homes passed in the service areas of our franchises.
Internet Access
We offer high-speed Internet access in many of our cable systems. This kind
of service is sometimes called "cable modem service." Our cable systems compete
with a number of other companies, many of which have substantial resources, such
as existing Internet service providers, commonly known as ISPs, DBS providers,
and local and long distance telephone companies.
The deployment of digital subscriber line technology, known as DSL, allows
Internet access to subscribers at data transmission speeds equal to or greater
than that of 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.
12
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 ISP's 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 1,403 full-time employees and 126
part-time employees. None of our employees are represented by a labor union. We
consider our relations with our employees to be generally good.
13
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.
14
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 operators 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.
15
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.
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.
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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
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.
17
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
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.
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.
18
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.
Our cable television 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.
19
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 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.
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.
20
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.
21
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.
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.
22
PART II
ITEM 5. MARKET FOR REGISTRANTS' COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
There is no public trading market for our equity, all of which is held by
MCC.
23
ITEM 6. SELECTED FINANCIAL DATA
Mediacom LLC was formed as a New York limited liability company in July
1995 and since that time our taxable income or loss has been included in the
federal and certain state income tax returns of our members.
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 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 subscriber data)
(unaudited)
STATEMENT OF OPERATIONS DATA:
Revenues $ 410,241 $ 369,275 $ 328,258 $ 174,961 $ 129,297
Costs and expenses:
Service costs(1) 152,684 130,473 110,442 56,967 43,849
Selling, general and
administrative expenses 68,563 63,846 55,820 32,949 25,596
Management fee expense(2) 5,785 5,830 6,029 6,951 5,797
Depreciation and amortization 194,862 221,645 177,928 101,065 65,793
Non-cash stock charges relating to
management fee expense(3) 5,323 2,904 28,254 15,445 -
------------- ------------- -------------- ------------ -----------
Operating loss (16,976) (55,423) (50,215) (38,416) (11,738)
Interest expense, net(4) 102,458 93,823 68,973 37,817 23,994
(Gain) loss on derivative instruments,
net(5) (1,172) 8,441 - - -
Investment income from affiliate(6) (18,000) (8,120) - - -
Other expenses (income)(7) 4,845 (23,885) 30,036 5,087 4,058
------------ ------------ ------------- ------------ -----------
Net loss before cumulative effect of
accounting change (105,107) (125,682) (149,224) (81,320) (39,790)
Cumulative effect of accounting change(8) - (1,642) - - -
------------- ------------- -------------- ------------ -----------
Net loss $ (105,107) $ (127,324) $ (149,224) $ (81,320) $ (39,790)
============= ============= ============== ============ ===========
Balance Sheet Data (end of period):
Total assets $ 1,567,240 $ 1,566,045 $ 1,375,772 $ 1,272,881 $ 451,152
Total debt 1,548,500 1,425,500 987,000 1,139,000 337,905
Total member's equity (85,793) 13,991 262,997 54,615 78,651
(continued on next page)
24
YEARS ENDED DECEMBER 31,
-------------------------------------------------------------------------------
2002 2001 2000 1999 1998
------------ ------------ ------------- ------------ -----------
(dollars in thousands, except per subscriber data)
(unaudited)
OTHER DATA:
System cash flow(9) $ 190,289 $ 177,868 $ 161,996 $ 85,045 $ 59,852
System cash flow margin(10) 46.4% 48.2% 49.4% 48.6% 46.3%
Operating cash flow(9) $ 184,504 $ 172,038 $ 155,967 $ 78,094 $ 54,055
Operating cash flow margin(11) 45.0% 46.6% 47.5% 44.6% 41.8%
Net cash flows provided by(used in):
Operating activities $ 67,433 $ 102,191 $ 93,218 $ 54,216 $ 53,556
Investing activities (176,599) (398,946) (295,613) (851,548) (397,085)
Financing activities 122,678 300,040 202,015 799,593 344,714
OPERATING DATA
(END OF PERIOD, EXCEPT AVERAGE):
Homes passed(12) 1,252,000 1,200,000 1,173,000 1,071,500 520,000
Basic subscribers(13) 752,000 771,000 779,000 719,000 354,000
Basic penetration(14) 60.1% 64.3% 66.4% 67.1% 68.1%
Digital customers(15) 133,000 88,000 40,000 5,300 -
Data customers(16) 81,000 38,000 15,600 5,100 4,729
Average monthly revenues per
basic subscriber(17) $ 46.95 $ 40.88 $ 38.34 $ 35.01 $ 32.88
- ---------------------
(1) Service costs for the year ended December 31, 2002 and 2001 include $1.3
million and $2.9 million, respectively, of non-recurring incremental
expenses related to the transition from Excite@Home to Mediacom Online(SM).
(2) Represents fees paid to MCC subsequent to its initial public offering and
to Mediacom Management Corporation, a Delaware corporation, prior to MCC's
initial public offering, for management services rendered to our operating
subsidiaries. The management agreements with Mediacom Management were
terminated upon the completion of MCC's initial public offering and were
replaced with new agreements between MCC and our operating subsidiaries.
See Note 7 of our consolidated financial statements.
(3) Non-cash stock charges relating to management fee expense:
. for the years ended December 31, 2002 and 2001 resulting 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 MCC's initial
public offering in February 2000 and a $3.8 million charge related to
the vesting of equity grants made during 1999 to certain members of
our management team;
. for the year ended December 31, 1999 consist of a $0.6 million charge
relating to amendments to our management agreements with Mediacom
Management and a $14.8 million charge related to the vesting of equity
grants to certain members of our management team
See Notes 7 and 13 of our consolidated financial statements.
(4) Net of interest income. Interest income for the periods presented was not
material.
(5) Loss on derivative instruments, net, represents the change in fair value of
our interest rate derivatives as a result of the decrease in market
interest rates.
(6) Investment income from affiliate represents the investment income on our
$150.0 million preferred equity investment in Mediacom Broadband. See Note
12 of our consolidated financial statements.
(7) 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
25
Systems common stock that was deemed other than temporary. See Note 10 of
our consolidated financial statements.
(8) Relates to our adoption of Statements of Financial Accounting Standards No.
133, "Accounting for Derivative Instruments and Hedging Activities."
(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 loss to operating
cash flow and system cash flow:
YEARS ENDED DECEMBER 31,
-------------------------------------------------------------------------------
2002 2001 2000 1999 1998
------------ ------------ ------------- ------------ -----------
(dollars in thousands)
(unaudited)
Operating loss $ (16,976) $ (55,423) $ (50,215) $ (38,416) $ (11,738)
Adjustments:
Depreciation and amortization 194,862 221,645 177,928 101,065 65,793
Non-cash stock charges relating to
management fee expense 5,323 2,904 28,254 15,445 -
Non-recurring incremental expenses 1,295 2,912 - - -
------------ ------------ ------------- ------------ -----------
Operating cash flow 184,504 172,038 155,967 78,094 54,055
Management fee expense 5,785 5,830 6,029 6,951 5,797
------------ ------------ ------------- ------------ -----------
System cash flow $ 190,289 $ 177,868 $ 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 loss or net 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.
(12) 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.
(13) Represents the number of single residence homes, apartments and condominium
units passed by the cable distribution network in a cable system's service
area.
(14) 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
26
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.
(15) Represents basic subscribers as a percentage of homes passed.
(16) Represents customers that receive digital cable services.
(17) Represents customers that access the Internet through cable modem service
or a conventional modem and telephone line connection.
(18) 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.
27
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
We were organized as a New York limited liability company in July 1995 and
serve as a holding company for our operating subsidiaries. Mediacom Capital
Corporation, our wholly-owned subsidiary, was organized as a New York
corporation in March 1998 for the sole purpose of acting as our co-issuer of
public debt securities and does not conduct operations of its own. Mediacom
Communications Corporation ("MCC") was organized as a Delaware corporation in
November 1999 and completed an initial public offering in February 2000.
Immediately prior to the completion of MCC's initial public offering, MCC issued
shares of its common stock in exchange for all of our outstanding membership
interests and became our sole member and manager.
Until MCC's initial public offering in February 2000, Mediacom Management
Corporation, a Delaware corporation, provided management services to our
operating subsidiaries and received annual management fees. Such management
agreements were terminated upon the date of MCC's initial public offering and
were replaced with new agreements between MCC and our operating subsidiaries. At
that time, Mediacom Management's employees became MCC's employees. See Note 7 of
our consolidated financial statements.
ACQUISITIONS
We have expanded our business through acquisitions. All acquisitions have
been accounted for under the purchase method of accounting and, therefore, our
historical results of operations include the results of operations for each
acquired system subsequent to its respective acquisition date. In 2000, we
acquired cable systems serving a total of 53,000 basic subscribers as of their
respective dates of acquisition, for an aggregate purchase price of $109.2
million (the "2000 Acquisitions"). These acquisitions affect the comparability
of our historical results of operations.
GENERAL
We have generated significant increases in revenues principally as a result
of our acquisition activities and increases in monthly revenues per basic
subscriber. Approximately 92.6% of our revenues for the year ended December 31,
2002 are attributable to video revenues from monthly subscription fees charged
to customers for our core cable television services, including basic, expanded
basic and premium programming, digital cable television programming services,
wire maintenance, equipment rental and services to commercial establishments,
pay-per-view charges, installation and reconnection fees, late payment fees and
other ancillary revenues. Data revenues from cable modem service and advertising
revenues represent 6.3% and 1.1% of our revenues, respectively. Franchise fees
charged to customers are included in their corresponding revenue category.
Our operating expenses consist of service costs and selling, general and
administrative expenses directly attributable to our cable systems. Service
costs include fees paid to programming suppliers, expenses related to copyright
fees, wages and salaries of technical personnel, high-speed Internet costs and
plant operating costs. Programming costs have historically increased at rates in
excess of inflation due to the introduction of new programming services to our
basic subscribers and to increases in the rates charged for existing programming
services. Under the Federal Communication Commission's existing cable rate
regulations, we are allowed to increase our rates for cable television services
to more than cover any increases in the programming and copyright costs.
However, competitive conditions or other factors in the marketplace may limit
our ability to increase our rates. Selling, general and administrative expenses
include wages and salaries for customer service and administrative personnel,
franchise fees and expenses related to billing, marketing, bad debt, advertising
and office administration. Management fee expense reflects charges incurred
under our management agreements with MCC.
28
The high level of depreciation and amortization associated with our
acquisition activities and capital investment program, as well as the interest
expense related to our financing activities, have caused us to report net
losses. We believe that such net losses are common for cable television
companies and anticipate that we will continue to incur net losses for the
foreseeable future.
ACTUAL RESULTS OF OPERATIONS
Year Ended December 31, 2002 Compared to Year Ended December 31, 2001
Basic subscribers were 752,000 at December 31, 2002, as compared to 771,000
at December 31, 2001. We acquired 3,000 basic subscribers during the first
quarter of 2002.
Digital customers were 133,000 at December 31, 2002, as compared to 88,000
at December 31, 2001.
Data customers were 81,000 at December 31, 2002, as compared to 38,000 at
December 31, 2001.
Revenues. Revenues increased 11.1% to $410.2 million for the year ended
December 31, 2002 as compared to $369.3 million for the year ended December 31,
2001. Revenues by service offering were as follows (dollars in millions):
YEAR ENDED DECEMBER 31,
------------------------------------------------------
2002 2001
----------------------- -----------------------
% of % of
Amount Revenues Amount Revenues
--------- -------- -------- --------
Video.......... $ 379.8 92.6% $ 355.3 96.2%
Data........... 25.7 6.3 9.8 2.7
Advertising.... 4.7 1.1 4.2 1.1
--------- -------- -------- --------
$ 410.2 100.0% $ 369.3 100.0%
========= ======== ======== ========
Video revenues increased 6.9% to $379.8 million for the year ended December
31, 2002, as compared to $355.3 million for the year ended December 31, 2001.
Video revenues increased primarily due to rate increases in our video services
and to customer growth in our digital cable services, partially offset by a
decline in basic subscribers.
Data revenues increased 162.2% to $25.7 million for the year ended December
31, 2002, as compared to $9.8 million for the year ended December 31, 2001. Data
revenues increased primarily due to customer growth in our high-speed Internet
access service.
Advertising revenues increased 11.9% to $4.7 million for the year ended
December 31, 2002, as compared to $4.2 million for the year ended December 31,
2001. Advertising revenues increased primarily due to a general improvement in
local and national advertising markets.
Service costs. Service costs increased 17.0% to $152.7 million for the year
ended December 31, 2002, as compared to $130.5 million for the year ended
December 31, 2001. Service costs increased due to higher programming expenses,
including rate increases by programming suppliers for existing services and the
costs of new channel additions, and greater technical employee support and other
operating costs directly related to customer growth in our high-speed Internet
access services. As a percentage of revenues, service costs were 37.2% for the
year ended December 31, 2002, as compared with 35.3% for the year ended December
31, 2001.
Selling, general and administrative expenses. Selling, general and
administrative expenses increased 7.4% to $68.6 million for the year ended
December 31, 2002, as compared to $63.8 million for the year ended December 31,
2001. Selling, general and administrative expenses increased primarily as a
result of higher marketing expenses related to our digital and high-speed
Internet access services, customer service expenses and billing costs. As a
percentage of revenues, selling, general and administrative expenses were 16.7%
for the year ended December 31, 2002 as compared with 17.3% for the year ended
December 31, 2001.
29
Management fee expense. Our management fee expense was $5.8 million for the
years ended December 31, 2002 and December 31, 2001. As a percentage of
revenues, management fee expense was 1.4% for the year ended December 31, 2002
as compared with 1.6% for the year ended December 31, 2001.
Depreciation and amortization. Depreciation and amortization decreased
12.1% to $194.9 million for the year ended December 31, 2002, as compared to
$221.6 million for the year ended December 31, 2001. This decrease reflected the
adoption of SFAS 142, effective January 1, 2002, which reduced amortization
expense by $44.7 million during the year ended December 31, 2002, partially
offset by depreciation expense associated with our ongoing investments in our
cable systems.
Non-cash stock charges relating to management fee expense. Non-cash stock
charges relating to management fee expense increased 83.3% to $5.3 million for
the year ended December 31, 2002, as compared to $2.9 million for the year ended
December 31, 2001. This charge represents vesting in equity interests granted to
certain members of MCC's management team in 1999. During the year ended December
31, 2002, the vesting in the equity interests was accelerated, and accordingly,
the remainder of the related charges were expensed.
Interest expense, net. Interest expense, net, increased 9.2% to $102.5
million for the year ended December 31, 2002, as compared to $93.8 million for
the year ended December 31, 2001. This was due to higher average borrowings
under our bank credit facilities, partially offset by lower interest rates on
our variable rate debt.
(Gain) loss on derivative instruments, net. Gain on derivative instruments,
net, was $1.2 million for the year ended December 31, 2002, as compared to loss
on derivative instruments, net, of $8.4 million for the year ended December 31,
2001. This gain was primarily due to a shorter average time to maturity of our
interest rate exchange agreements.
Investment income from affiliate. Investment income from affiliate was
$18.0 million for the year ended December 31, 2002, as compared to $8.1 million
for the year ended December 31, 2001. This amount represents the investment
income on our $150.0 million preferred equity investment in Mediacom Broadband
LLC. See "Liquidity and Capital Resources"-"Investing Activities."
Other expenses (income). Other expenses were $4.8 million for the year
ended December 31, 2002, as compared to other income of $23.9 million for the
year ended December 31, 2001. Other expenses represented fees on unused credit
commitments under our bank credit facilities and amortization of deferred
financing costs. Other income in 2001 reflected the recognition of the remaining
$30.0 million of deferred revenue resulting from the termination of our contract
with SoftNet Systems, partially offset by fees on unused credit commitments and
amortization of deferred financing costs.
Net loss. Due to the factors described above, we generated a net loss of
$105.1 million for the year ended December 31, 2002 as compared to a net loss of
$127.3 million for the year ended December 31, 2001.
Year Ended December 31, 2001 Compared to Year Ended December 31, 2000
The following historical information includes the results of operations of
the 2000 Acquisitions, only for that portion of the respective period that such
cable systems were owned by us.
Basic subscribers were 771,000 at December 31, 2001, as compared to 779,000
at December 31, 2000.
Digital customers were 88,000 at December 31, 2001, as compared to 40,000
at December 31, 2000.
Data customers were 38,000 at December 31, 2001, as compared to 15,600 at
December 31, 2000.
30
Revenues. Revenues increased 12.5% to $369.3 million for the year ended
December 31, 2001 as compared to $328.3 million for the year ended December 31,
2000. Of the revenue increase of $41.0 million, $18.4 million was attributable
to the 2000 Acquisitions. Excluding the effect of such acquisitions, revenues
increased primarily due to basic rate increases associated with new programming
introductions in our core cable television services and to customer growth in
our digital cable and high-speed Internet access services, partially offset by a
slight decline in basic subscribers. Revenues by service offering were as
follows (dollars in millions):
YEAR ENDED DECEMBER 31,
------------------------------------------------------
2001 2000
----------------------- -----------------------
% of % of
Amount Revenues Amount Revenues
--------- -------- -------- --------
Video.......... $ 355.3 96.2% $ 317.9 96.8%
Data........... 9.8 2.7 5.9 1.8
Advertising.... 4.2 1.1 4.5 1.4
--------- -------- -------- --------
$ 369.3 100.0% $ 328.3 100.0%
========= ======== ======== ========
Video revenues increased 11.6% to $355.3 million for the year ended
December 31, 2001, as compared to $317.9 million for the year ended December 31,
2000. Video revenues increased primarily due to basic rate increases largely
associated with new programming introductions and to customer growth in our
digital cable services, partially offset by a decline in basic subscribers.
Data revenues increased 78.2% to $9.8 million for the year ended December
31, 2001, as compared to $5.9 million for the year ended December 31, 2000. Data
revenues increased primarily due to customer growth in our high-speed Internet
access service.
Advertising revenues decreased 6.7% to $4.2 million for the year ended
December 31, 2001, as compared to $4.5 million for the year ended December 31,
2000. Advertising revenues decreased primarily due to a general decline in local
and national advertising markets.
Service costs. Service costs increased 18.1% to $130.5 million for the year
ended December 31, 2001 as compared to $110.4 million for the year ended
December 31, 2000. Service costs for the year ended December 31, 2001 include
$2.9 million of incremental expenses related to the transition Excite@Home to
MCC's Mediacom OnlineSM high-speed Internet service. Of the increase in service
costs of $20.1 million, $7.6 million was attributable to the 2000 Acquisitions.
Excluding the 2000 Acquisitions, these costs increased primarily as a result of
higher programming expenses, including rate increases by programming suppliers
for existing services and the cost of new channel additions. As a percentage of
revenues, service costs were 35.3% for the year ended December 31, 2001, as
compared with 33.6% for the year ended December 31, 2000.
Selling, general and administrative expenses. Selling, general and
administrative expenses increased 14.4% to $63.8 million for the year ended
December 31, 2001 as compared to $55.8 million for the year ended December 31,
2000. Of the increase in selling, general and administrative expenses of $8.0
million, $3.0 million was attributable to the 2000 Acquisitions. Excluding the
2000 Acquisitions, these costs increased primarily as a result of higher bad
debt and customer service employee expenses, and increased marketing costs
associated with the promotion of our digital cable and high-speed Internet
access services. As a percentage of revenues, selling, general and
administrative expenses were 17.3% for the year ended December 31, 2001, as
compared with 17.0% for the year ended December 31, 2000.
Management fee expense. Management fee expense decreased 3.3% to $5.8
million for the year ended December 31, 2001 as compared to $6.0 million for the
year ended December 31, 2000. The decrease was primarily due to the sharing of
MCC's overhead with Mediacom Broadband LLC, a Delaware limited liability company
and wholly-owned subsidiary of MCC that commenced operations in June 2001. As a
percentage of revenues, management fee expense was 1.6% for the year ended
December 31, 2001 as compared with 1.8% for the year ended December 31, 2000.
31
Depreciation and amortization. Depreciation and amortization increased
24.6% to $221.6 million for the year ended December 31, 2001 as compared to
$177.9 million in the year ended December 31, 2000. This increase was primarily
due to capital expenditures associated with the upgrade of our cable systems and
our purchase of the 2000 Acquisitions.
Non-cash stock charges relating to management fee expense. Non-cash stock
charges relating to management fee expense decreased 89.7% to $2.9 million for
the year ended December 31, 2001 as compared to $28.3 million in the year ended
December 31, 2000. This decrease is primarily due to a one-time $24.5 million
charge which occurred in February 2000, resulting from the termination of the
management agreements with Mediacom Management on the date of MCC's initial
public offering.
Interest expense, net. Interest expense, net, increased 36.0% to $93.8
million for the year ended December 31, 2001 as compared to $69.0 million for
the year ended December 31, 2000. This increase was due primarily to a higher
interest rate associated with our 9 1/2% senior notes, which were issued in
January 2001, and borrowings under our operating subsidiary credit facilities to
fund a $125.0 million cash dividend to MCC and a $150.0 million preferred equity
investment in Mediacom Broadband LLC in July 2001. This cash dividend and
preferred equity investment funded a portion of the purchase price for Mediacom
Broadband LLC's acquisitions of cable systems from AT&T Broadband, LLC in June
and July 2001.
Loss on derivative instruments, net. Loss on derivative instruments, net,
was $8.4 million for the year ended December 31, 2001, due to the change in the
fair value of our interest rate exchange agreements as a result of the decrease
in market interest rates.
Investment income from affiliate. Investment income from affiliate was $8.1
million for the year ended December 31, 2001. This amount represents the
investment income on our $150.0 million preferred equity investment in Mediacom
Broadband LLC.
Other expenses (income). Other income of $23.9 million for the year ended
December 31, 2001 was principally due to the recognition of the remaining $30.0
million of deferred revenue resulting from the termination of our contract with
SoftNet Systems, offset in part by other expenses. Other expenses of $30.0
million for the year ended December 31, 2000 were principally due to non-cash
loss of $28.5 million resulting from the decline in the value of our investment
in shares of SoftNet Systems common stock that was seemed other than temporary.
Cumulative Effect of Accounting Change. Effective January 1, 2001, we
adopted Statement of Financial Accounting Standards No. 133 ("SFAS 133"),
"Accounting for Derivative Instruments and Hedging Activities". As a result, we
recorded an after tax charge of approximately $1.6 million, as a change in
accounting principle, in the first quarter of 2001.