SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
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Annual Report Pursuant to Section 13 or 15 (d) of the
Securities Exchange Act of 1934
For the fiscal year ended December 31, 2002
Commission File Number: 0-29227
MEDIACOM COMMUNICATIONS CORPORATION
(Exact name of Registrant as specified in its charter)
DELAWARE 06-1566067
(State of incorporation) (I.R.S. Employer
Identification Number)
100 CRYSTAL RUN ROAD
Middletown, New York 10941
(Address of principal executive offices)
(845) 695-2600
(Registrant's telephone number)
Securities registered pursuant to Section 12(b) of the Exchange Act:
None
Securities registered pursuant to Section 12(g) of the Exchange Act:
Class A Common Stock, $0.01 par value per share
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No __
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K: [X]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes X No __
As of June 28, 2002, the aggregate market value of the Class A common
stock of the Registrant held by non-affiliates of the Registrant was
approximately $482.8 million.
As of March 25, 2003, there were outstanding 89,610,341 shares of Class A
common stock and 28,913,145 shares of Class B common stock.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement for the 2003 Annual Meeting of
Stockholders are incorporated by reference into Items 10, 11, 12 and 13 of Part
III.
MEDIACOM COMMUNICATIONS CORPORATION
2002 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
Page
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PART I
Item 1. Business.............................................................................. 4
Item 2. Properties............................................................................ 23
Item 3. Legal Proceedings..................................................................... 23
Item 4. Submission of Matters to a Vote of Security Holders................................... 24
Item 4A. Directors and Executive Officers of the Registrant.................................... 24
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters................. 27
Item 6. Selected Financial Data............................................................... 28
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations................................................................ 32
Item 7A. Quantitative and Qualitative Disclosures About Market Risk............................ 48
Item 8. Financial Statements and Supplementary Data........................................... 49
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.................................................................. 74
PART III
Item 10. Directors and Executive Officers of the Registrant.................................... 75
Item 11. Executive Compensation................................................................ 75
Item 12. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters.......................................................... 75
Item 13. Certain Relationships and Related Transactions........................................ 75
Item 14. Controls and Procedures............................................................... 75
PART IV
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K....................... 76
2
References in this Annual Report to "we," "us," or "our" are to Mediacom
Communications Corporation and its direct and indirect subsidiaries since its
initial public offering in February 2000 and to Mediacom LLC and its direct and
indirect subsidiaries prior to the initial public offering, unless the context
specifies or requires otherwise.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
You should carefully review the information contained in this Annual
Report and in other reports or documents that we file from time to time with the
Securities and Exchange Commission (the "SEC"). In this Annual Report, we state
our beliefs of future events and of our future financial performance. In some
cases, you can identify those so-called "forward-looking statements" by words
such as "may," "will," "should," "expects," "plans," "anticipates," "believes,"
"estimates," "predicts," "potential," or "continue" or the negative of those
words and other comparable words. You should be aware that those statements are
only our predictions. Actual events or results may differ materially. In
evaluating those statements, you should specifically consider various factors,
including the risks discussed in this Annual Report and other reports or
documents that we file from time to time with the SEC. Those factors may cause
our actual results to differ materially from any of our forward-looking
statements. All forward-looking statements attributable to us or a person acting
on our behalf are expressly qualified in their entirety by this cautionary
statement.
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PART I
ITEM 1. BUSINESS
INTRODUCTION
We are currently the nation's eighth largest cable television company
based on customers served and the leading cable operator focused on serving the
smaller cities and towns in the United States. We provide our customers with a
wide array of broadband products and services, including traditional analog
video services, digital television, high-speed Internet access, video-on-demand
and high-definition television. As of December 31, 2002, our cable systems
passed approximately 2.7 million homes and served approximately 1.6 million
basic subscribers in 23 states. A basic subscriber is a customer that subscribes
to a package of basic cable television services. Approximately 60% of our
customers are located within the top 100 television markets in the United
States. We were founded in July 1995 by Rocco B. Commisso, our Chairman and
Chief Executive Officer.
Since commencement of our operations in March 1996, we have experienced
significant growth by executing a disciplined strategy of acquiring
underperforming cable systems and improving their operating and financial
performance. In 2001, we acquired cable systems from AT&T Broadband, LLC that
served approximately 800,000 basic subscribers, for an aggregate purchase price
of about $2.06 billion. Since inception, we have acquired cable systems for an
aggregate purchase price of $3.37 billion that served approximately 1.6 million
basic subscribers as of December 31, 2002.
We believe that our high-speed, interactive broadband network is the
superior platform for the delivery of video, voice and data services to the
homes and businesses in the communities we serve. Available service offerings
depend on the bandwidth capacity of the broadband network. Bandwidth, expressed
in megahertz (MHz), is a measure of information-carrying capacity that can be
used to distribute telecommunication services. The greater the bandwidth, the
greater the capacity of the system to deliver service offerings. We are now in
the final stages of an aggressive network upgrade program that we expect to
substantially complete by June 30, 2003. As of December 31, 2002, approximately
96% of our cable network was upgraded with 550MHz to 870MHz bandwidth capacity
and about 91% of our homes passed were activated with two-way communications
capability.
As a result of our upgrade program, we have seen a significant increase
in our cable systems' network capacity, quality and reliability, facilitating
the widespread introduction of additional programming and other services, such
as digital video and high-speed Internet access, and the recent deployment of
video-on-demand and a limited high-definition television offering. We also
believe our network has the capability for additional services such as
telephony. As of December 31, 2002, our digital cable service was available to
about 1.5 million basic subscribers, or 97% of our total basic subscribers, and
we served 371,000 digital customers. As of the same date, our high-speed
Internet access, or cable modem service, was marketed to approximately 2.3
million homes passed by our cable systems, or 85% of our total homes passed, and
we served 191,000 data customers.
Our principal executive offices are located at 100 Crystal Run Road,
Middletown, New York 10941 and our telephone number at that address is (845)
695-2600. Our website is located at www.mediacomcc.com. We have made available
free of charge through our website (follow the Corporate Info link to the
Investor Relations tab to "Annual Reports/SEC Filings") our annual report on
Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and
amendments to those reports filed or furnished pursuant to Section 13(a) or
15(d) of the Securities Exchange Act of 1934 as soon as reasonably practicable
after such material was electronically filed with, or furnished to, the
Securities and Exchange Commission. The information on our website is not part
of this Annual Report.
4
DESCRIPTION OF OUR BUSINESS
We offer our customers a full array of traditional analog video services,
also referred to as our core cable television services. In addition, we offer to
a significant portion of our customer base advanced broadband products and
services such as digital cable television and high-speed Internet access. We
launched video-on-demand service in certain cable systems in 2002 and recently
deployed a limited high-definition television service in certain cable systems.
We plan to expand the availability of these services during 2003. We are also
exploring other opportunities in interactive video, Internet protocol telephony,
or IP telephony, and other broadband services.
TRADITIONAL ANALOG VIDEO SERVICES
We receive the majority of our revenues from subscription services.
Subscribers typically pay us on a monthly basis and generally may discontinue
services at any time. Monthly subscription rates and related charges vary
according to the type of service selected and the type of equipment used by
subscribers.
We design both our basic channel line-up and our additional channel
offerings for each system according to demographics, programming preferences,
channel capacity, competition, price sensitivity and local regulation. Our core
cable television service offerings are presented in an analog format and include
the following in most of our cable systems:
Limited Basic Service. Our limited basic service includes, for a monthly
fee, local broadcast channels, network and independent stations, limited
satellite-delivered programming, and local public, government, home-shopping and
leased access channels.
Expanded Basic Service. Our expanded basic service includes, for an
additional monthly fee, various satellite-delivered channels such as CNN, MTV,
USA Network, ESPN, Lifetime, Nickelodeon and TNT.
Premium Service. Our premium services are satellite-delivered channels
consisting principally of feature films, original programming, live sports
events, concerts and other special entertainment features, usually presented
without commercial interruption. These services include HBO, Cinemax, Showtime,
The Movie Channel and Starz/Encore. Such premium programming services are
offered by our systems both on a per-channel basis and as part of premium
service packages designed to enhance customer value.
Pay-Per-View Service. Our pay-per-view services allow customers to pay to
view a single showing of a feature film, live sporting event, concert and other
special event, on an unedited, commercial-free basis. Such pay-per-view services
are offered by us on a per-viewing basis, with subscribers only paying for
programs which they select for viewing.
DIGITAL CABLE SERVICES
Digital video technology has significantly enhanced and expanded the
video and other service offerings we provide to our customers. This technology
has enabled us to improve picture quality and reliability, and to greatly
increase our channel offerings through the use of compression, which converts
one analog channel into eight to 12 digital channels. We now offer up to 250
analog and digital channels in many of our cable systems.
We currently offer our customers several digital cable programming
packages that include:
. up to 41 digital basic channels;
. up to 61 multichannel premium services;
. up to 60 pay-per-view movie and sports channels;
. up to 45 channels of digital music; and
. an interactive on-screen program guide to help them navigate
their viewing choices.
5
Subscribers typically pay us on a monthly basis for digital cable
services and generally may discontinue services at any time. Monthly rates vary
generally according to the level of service and the number of digital converters
selected by the subscriber.
As of December 31, 2002, our digital service was available to about 1.5
million basic subscribers, or approximately 97% of our subscriber base, and we
served 371,000 digital customers. By year-end 2003, we expect our digital cable
service to be available to about 98% of our subscriber base, and to serve
between 425,000 and 435,000 digital customers.
HIGH-SPEED INTERNET ACCESS
Our broadband cable network enables our high-speed Internet customers,
also referred to as cable modem customers, to transmit data up to 100 times
faster than traditional telephone modem technologies. Our cable modem customers
can receive and transmit large files over the Internet in a fraction of the time
required when using the traditional telephone modem. Our high-speed Internet
access service also allows much quicker response times when surfing the
Internet, providing a richer experience for the customer that capitalizes on the
significant capacity of our broadband cable network. In addition, cable modem
service eliminates the need to use a telephone line to access the Internet. It
is also always activated, and as a result, the customer does not need to dial
into an Internet service provider and await authorization.
Monthly subscription rates and related charges vary according to whether
the customer leases or owns the cable modem and whether the customer subscribes
to our video services.
We recently began providing commercial high-speed Internet access
services to small and medium-sized businesses. Our commercial data service
offerings allow businesses with multiple users to select faster data
transmission speeds than our residential service.
As of December 31, 2002, our cable modem service was marketed to about
2.3 million homes passed by our cable systems, or 85% of our homes passed, and
we served 191,000 data customers. By year-end 2003, we expect our cable modem
service to be marketed to about 97% of our homes passed, and to serve between
265,000 and 275,000 data customers.
ADVERTISING
Our cable systems receive revenue from the sale of local advertising on
satellite-delivered channels such as CNN, MTV, USA Network, ESPN, Lifetime,
Nickelodeon and TNT. As part of the acquisitions of the AT&T cable systems in
2001, we purchased an advertising sales infrastructure that includes in-house
production facilities, production and administrative employees and a sales
workforce. We are expanding the use of this advertising infrastructure to
generate additional advertising revenues in the cable systems we owned prior to
the acquisitions of the AT&T cable systems, as the third-party advertising
agreements covering those cable systems expire beginning in 2003. We also expect
that the increasing concentration of customers served by our master headend
facilities as a result of our headend consolidation program will enable us to
increase our advertising revenues.
VIDEO-ON-DEMAND
Video-on-demand is an interactive television service that provides access
to movies or special events on demand with the ability to fast forward, pause
and rewind selected programming. Customers can watch their selected feature
repeatedly during the viewing window, which typically runs up to 24 hours, or
stop the selection before it is completed and return to it at a later time
during the viewing window. Fees are typically charged on a per-selection basis,
although certain individual categories of programming are also available for a
flat monthly fee. The provision of video-on-demand services requires the use of
servers at the headend facility of our cable systems. We currently offer
video-on-demand service to approximately 18% of our digital customers. By
year-end 2003, we expect video-on-demand service to be available to
approximately 50% of our digital customers.
6
HIGH-DEFINITION TELEVISION
High-definition television provides picture quality at a higher
resolution than standard television. A television set capable of receiving and
displaying high-definition signals is required to utilize this service. We are
currently offering limited high-definition television service in markets serving
approximately 23% of our basic subscribers. During 2003, we expect to expand the
number of channels broadcast in high-definition in the markets where we already
provide this service.
TELECOMMUNICATIONS SERVICES
We are exploring technologies using IP telephony as well as traditional
switching technologies that are currently available to transmit telephony
signals over our cable network. We are currently conducting a technical trial of
hybrid IP telephony service which combines the technology of IP telephony with
traditional phone technology. As part of our headend consolidation plans, we
have deployed over 8,000 route miles of fiber optic cable resulting in the
creation of large, high-capacity regional networks. We have constructed our
networks with excess fiber optic capacity, thereby affording us the flexibility
to pursue new data and telecommunications opportunities.
7
DESCRIPTION OF OUR CABLE SYSTEMS
OVERVIEW
The following table provides an overview of selected operating and
technical statistics for our cable systems for the years ended:
2002 2001 2000 1999 1998
------------ ------------ ------------ ------------ ------------
OPERATING DATA:
Homes passed/(1)/ ................................ 2,715,000 2,630,000 1,173,000 1,071,500 520,000
Basic subscribers/(2)/ ........................... 1,592,000 1,595,000 779,000 719,000 354,000
Basic penetration/(3)/ ........................... 58.6% 60.6% 66.4% 67.1% 68.1%
Average monthly revenues
per basic subscriber/(4)/........................ $ 50.10 $ 44.54 $ 38.34 $ 35.01 $ 32.88
DIGITAL CABLE:
Digital-ready basic subscribers/(5)/.............. 1,540,000 1,400,000 400,000 168,000 --
Digital customers ................................ 371,000 321,000 40,000 5,300 --
Digital penetration/(6)/ ......................... 24.1% 22.9% 10.0% 3.2% --
DATA:
Data-ready homes passed/(7)/...................... 2,460,000 1,780,000 550,000 120,000 --
Data-ready homes marketed/(8)/ ................... 2,320,000 1,420,000 486,000 105,500 --
Data customers ................................... 191,000 115,000 15,600 5,100 4,729
Data penetration/(9)/ ............................ 8.2% 8.1% 3.2% 4.8% --
Revenue Generating Units:/(10)/ .................. 2,154,000 2,031,000 834,600 729,400 358,729
Customer Relationships:/(11)/ .................... 1,611,000 1,607,000 N/A N/A N/A
CABLE NETWORK DATA:
Miles of plant ................................... 45,000 44,100 24,500 22,444 11,950
Density/(12)/ .................................... 60 60 48 48 44
Percentage of cable network at
550MHz to 870MHz ................................ 96% 75% 74% 57% 45%
- ----------
/(1)/ Represents the number of single residence homes, apartments and
condominium units passed by the cable distribution network in a cable
system's service area.
/(2)/ Represents a dwelling with one or more television sets that receives a
package of over-the-air broadcast stations, local access channels or
certain satellite-delivered cable television services. Accounts that are
billed on a bulk basis, which typically receive discounted rates, are
converted into full-price equivalent basic subscribers by dividing total
bulk billed basic revenues of a particular system by the applicable
combined limited and expanded cable rate charged to basic subscribers in
that system. Basic subscribers include connections to schools, libraries,
local government offices and employee households that may not be charged
for limited and expanded cable services, but may be charged for premium
units, pay-per-view events or high-speed Internet service. Customers who
exclusively purchase high-speed Internet service are not counted as basic
subscribers. Our methodology of calculating the number of basic
subscribers may not be identical to those used by other cable companies.
/(3)/ Represents basic subscribers as a percentage of homes passed.
/(4)/ Represents average monthly revenues for the last three months of the
period divided by average basic subscribers for such period. Includes the
revenues from cable systems acquired during the last three months of the
period as if such acquisitions were completed at the beginning of the
three month period.
/(5)/ A subscriber is digital-ready if the subscriber is in a cable system
where digital cable services are available.
/(6)/ Represents digital customers as a percentage of digital-ready basic
subscribers.
/(7)/ A home passed is data-ready if it is in a cable system with two-way
communications capability.
/(8)/ Represents data-ready homes passed where cable modem service is
available.
/(9)/ Represents the number of total data customers as a percentage of
data-ready homes marketed.
/(10)/ Represents the sum of basic subscribers, digital customers and data
customers.
/(11)/ Represents the total number of customers that receive at least one level
of service, encompassing video and data services, without regard to which
service(s) customers purchase. This information is not available for
periods prior to 2001.
/(12)/ Represents homes passed divided by miles of plant.
8
SELECTED OPERATING DATA
Our systems currently are organized into three operating divisions. The
following table sets forth the principal states served by such divisions, and
their respective basic subscribers, digital customers and data customers as of
December 31, 2002:
BASIC DIGITAL DATA
DIVISION STATES SUBSCRIBERS CUSTOMERS CUSTOMERS
- -------- ------ ----------- --------- ---------
Midwest Illinois, Indiana, Iowa, Kentucky,
Missouri 558,000 113,000 66,600
North Central Iowa, Minnesota, South Dakota 580,000 144,000 77,800
Southern Alabama, California, Delaware, Florida,
Georgia, North Carolina 454,000 114,000 46,600
----------- --------- ---------
Total 1,592,000 371,000 191,000
=========== ========= =========
TECHNOLOGY OVERVIEW
As part of our commitment to maximize customer satisfaction, to improve
our competitive position and to introduce new and enhanced products and services
to our customers, we continue to make significant investments to upgrade our
cable network. The primary objectives of our upgrade program are to:
. increase the bandwidth capacity to 870MHz;
. activate two-way communications capability;
. consolidate our headend facilities, through the extensive
deployment of fiber optic networks; and
. allow us to provide digital cable television, high-speed Internet
access, interactive video and other telecommunications services.
We expect to substantially complete our cable network upgrade program by
June 30, 2003. The following table describes the technological state of our
cable network as of December 31, 2001 and 2002 and the projected state of our
cable network as of June 30, 2003, based on our current upgrade plans:
PERCENTAGE OF CABLE NETWORK
---------------------------------
LESS THAN 550MHZ- TWO-WAY
550MHZ 870MHZ CAPABLE
--------- ------- -------
December 31, 2001.......................................... 25% 75% 68%
December 31, 2002.......................................... 4% 96% 91%
June 30, 2003.............................................. 2% 98% 98%
A central feature of our upgrade program is the deployment of high
capacity, hybrid fiber-optic coaxial architecture. The hybrid fiber-optic
coaxial architecture combines the use of fiber optic cable, which can carry
hundreds of video, data and voice channels over extended distances, with coaxial
cable, which requires a more extensive signal amplification in order to obtain
the desired levels for delivering channels. We design our network to connect
fiber optic cable to individual nodes serving an average of 350 homes or
commercial buildings. A node is a single connection to a cable system's main,
high-capacity fiber optic cable that is shared by a number of customers. Coaxial
cable is then connected from each node to the individual homes or buildings. Our
network design generally provides for six strands of fiber to each node, with
two strands active and four strands reserved for future services. We believe
hybrid fiber-optic coaxial architecture provides higher capacity, superior
signal quality, greater network reliability, reduced operating costs and more
reserve capacity for the addition of future services than traditional coaxial
network design.
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Two-way communications capability permits our customers to send and
receive signals over the cable network so that interactive services, such as
video-on-demand, are accessible and high-speed Internet access does not require
a separate telephone line. This capability also positions us to offer cable
telephony, using either IP telephony as it becomes commercially feasible, or the
traditional switching technologies that are currently available. Our plans for
two-way communications capability, together with hybrid fiber-optic coaxial
architecture, enhances our cable network's ability to provide advanced
telecommunications services.
As of December 31, 2002, our cable systems were operated from 176 headend
facilities. Fiber optics and advanced transmission technologies make it cost
effective to consolidate our headend facilities, allowing us to realize
operating efficiencies and resulting in lower fixed capital costs on a per home
basis as we introduce new products and services. We expect that by June 2003,
about 95% of our customers will be served by 50 master headend facilities.
As part of our headend consolidation program, we have deployed over 8,000
route miles of fiber optic cable, creating large regional fiber optic networks
with the potential to provide advanced telecommunications services. We are
constructing our regional networks with excess fiber optic capacity to
accommodate new and expanded products and services in the future.
SALES AND MARKETING
We seek to be the premier provider of entertainment, information and
telecommunications services in the markets we serve. Our marketing programs and
campaigns offer a variety of cable services, creatively packaged and tailored to
appeal to each of our local markets and to segments within each market. We
routinely survey our customers to ensure that we are meeting their demands and
our customer surveys keep us abreast of our competition so that we can
effectively counter competitors' service offerings and promotional campaigns.
We use a coordinated array of marketing techniques to attract and retain
customers and to increase premium service penetration, including door-to-door
and direct mail solicitation, telemarketing, media advertising, local
promotional events, typically sponsored by programming services and
cross-channel promotion of new services and pay-per-view.
We build awareness of our brand through a variety of promotional
campaigns. As a result of our branding efforts, our emphasis on customer service
and our investments in the cable network, we believe we have developed a
reputation for quality, reliability and timely introduction of new products and
services.
We invest a significant amount of time, effort and financial resources in
the training and evaluation of our marketing professionals and customer sales
representatives. Our customer sales representatives customize their sales
presentation to fit each of our customers' specific needs by conducting focused
consumer research and are given the incentive to use their frequent contact with
our customers as opportunities to sell our new products and services.
PROGRAMMING SUPPLY
Except as noted below, we have various contracts to obtain basic and
premium programming for our cable systems from program suppliers whose
compensation is typically based on a fixed monthly fee per customer. Our
programming contracts are generally for a fixed period of time.
We are a member of the National Cable Television Cooperative, Inc., a
programming cooperative consisting of small to medium-sized multiple system
operators serving, in the aggregate, over 12 million cable subscribers. The
cooperative may help create efficiencies in the areas of obtaining and
administering programming contracts, as well as securing, in some cases, more
favorable programming rates and contract terms for small to medium-sized cable
operators. We negotiate programming contract renewals both directly and through
the cooperative.
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Following our acquisitions of the AT&T cable systems, substantially all
programming services carried on those cable systems were without written
contracts with the respective program suppliers. We have completed agreements
for several of those services and are continuing to negotiate terms for the
remainder of the services. From time to time, the contracts covering the
programming services carried on our cable systems expire, and we generally
provide such services to our customers without written contracts with the
respective program suppliers as we negotiate contract renewals.
Our programming costs are expected to rise in the future due to increased
costs to purchase programming, particularly sports programming, additional
programming being provided to our customers, and other factors affecting the
cable television industry. Although we are legally be able to pass through
expected increases in our programming costs to customers, there can be no
assurance that competitive conditions or other factors in the marketplace will
allow us to do so.
We also have various retransmission consent arrangements with commercial
broadcast stations, which generally expire in December 2005. In some cases,
retransmission consents have been contingent upon our carriage of satellite
delivered cable programming offered by companies affiliated with the stations'
owners or the broadcast network carried by such stations.
CUSTOMER SERVICE AND COMMUNITY RELATIONS
System reliability and customer satisfaction represent a cornerstone of
our business strategy. We expect that ongoing investments in our cable network
and our regional calling centers will significantly strengthen customer service,
enhancing the reliability of our cable network and allowing us to introduce new
products and services to our customers. We maintain regional calling centers
which service virtually all of our customers. They are staffed with dedicated
personnel who provide service to our customers 24 hours a day, seven days a
week, on a toll-free basis. We believe our regional calling centers allow us to
coordinate more effectively installation appointments and reduce response time
to customer inquiries. We continue to invest in both personnel and equipment of
our regional calling centers to ensure that these operating units are
professionally managed and employ state-of-the-art technology.
In addition, we are dedicated to fostering strong community relations in
the communities served by our cable systems. We support local charities and
community causes in various ways, including staged events and promotional
campaigns to raise funds and supplies for persons in need and in-kind donations
that include production services and free airtime on cable networks. We
participate in the "Cable in the Classroom" program, which is a national effort
by cable companies to provide schools with free cable television service and,
where available, Internet access. We also install and provide free cable
television service to government buildings and not-for-profit hospitals in our
franchise areas. We believe that our relations with the communities in which our
cable systems operate are generally good.
FRANCHISES
Cable systems are generally operated under non-exclusive franchises
granted by local governmental authorities. These franchises typically contain
many conditions, such as: time limitations on commencement and completion of
construction; conditions of service, including number of channels, types of
programming and the provision of free service to schools and other public
institutions; and the maintenance or posting of insurance or indemnity bonds by
the cable operator. Many of the provisions of local franchises are subject to
federal regulation under the Communications Act of 1934, as amended.
As of December 31, 2002, our cable systems were subject to 1,502
franchises. These franchises, which are non-exclusive, provide for the payment
of fees to the issuing authority. In most of the cable systems, such franchise
fees are passed through directly to the customers. The Cable Communications
Policy Act of 1984, or the 1984 Cable Act, prohibits franchising authorities
from imposing franchise fees in excess of 5% of gross revenues from cable
services and also permits the cable operator to seek renegotiation and
modification of franchise requirements if warranted by changed circumstances.
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Substantially all of the basic subscribers of our cable systems are in
service areas that require a franchise. The table below groups the franchises of
our cable systems by year of expiration and presents the approximate number and
percentage of basic subscribers for each group as of December 31, 2002.
PERCENTAGE OF NUMBER OF PERCENTAGE OF
NUMBER OF TOTAL BASIC TOTAL BASIC
YEAR OF FRANCHISE EXPIRATION FRANCHISES FRANCHISES SUBSCRIBERS SUBSCRIBERS
---------------------------- ---------- ------------- ----------- -------------
2003 through 2006.......................... 371 24.7% 443,800 27.9%
2007 and thereafter........................ 1,131 75.3 1,148,200 72.1
---------- ------------- ----------- -------------
Total................................. 1,502 100.0% 1,592,000 100.0%
========== ============= =========== =============
The 1984 Cable Act provides, among other things, for an orderly franchise
renewal process in which franchise renewal will not be unreasonably withheld or,
if renewal is denied and the franchising authority acquires ownership of the
cable system or effects a transfer of the cable system to another person, the
cable operator generally is entitled to the fair market value for the cable
system covered by such franchise. In addition, the 1984 Cable Act established
comprehensive renewal procedures, which require that an incumbent franchisee's
renewal application be assessed on its own merits and not as part of a
comparative process with competing applications.
We believe that we generally have good relationships with our franchising
communities. We have never had a franchise revoked or failed to have a franchise
renewed. In addition, substantially all of our franchises eligible for renewal
have been renewed or extended prior to their stated expirations, and no
franchise community has refused to consent to a franchise transfer to us.
COMPETITION
We, like most cable systems, compete on the basis of several factors,
including price and the quality and variety of products and services offered. We
face competition from various communications and entertainment providers, the
number and type of which we expect to increase as we expand the products and
services offered over our broadband network. In recent years, Congress has
passed legislation and the Federal Communications Commission (the "FCC") has
adopted policies authorizing new technologies and a more favorable operating
environment for certain existing technologies that provide, or may provide,
substantial additional competition for cable systems. The extent to which a
cable television service is competitive depends in significant part upon the
cable system's ability to provide a greater variety of programming, superior
technical performance and superior customer service than are available over the
air or through competitive alternative delivery sources. We believe our ability
to package multiple services, such as digital television, two-way, high-speed
Internet access and video-on-demand is an advantage in our competitive business
environment.
PROVIDERS OF BROADCAST TELEVISION AND OTHER ENTERTAINMENT
The extent to which a cable system competes with over-the-air
broadcasting, which provides signals that a viewer is able to receive directly,
depends upon the quality and quantity of the broadcast signals available by
direct antenna reception compared to the quality and quantity of such signals
and alternative services offered by a cable system. Cable systems also face
competition from other sources of entertainment such as live sporting events,
movie theaters and home video products, including videotape recorders and
videodisc players.
DIRECT BROADCAST SATELLITE PROVIDERS
Individuals can purchase home satellite dishes, which allow them to
receive satellite-delivered broadcast and non-broadcast program services,
commonly known as DBS, that formerly were available only to cable television
subscribers. According to recent industry reports, DBS providers currently sell
video programming services to over 20 million individual households,
condominiums, apartments and office complexes in the United States. Two
companies, DIRECTV and EchoStar, provide service to substantially all of these
DBS customers.
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DBS service can be received virtually anywhere in the continental United
States through the installation of a small rooftop or side-mounted antenna. DBS
providers use video compression technology to increase channel capacity and
digital technology to improve the quality of the signals transmitted to their
customers, and typically offer more than 300 channels of programming. In
addition to the non-broadcast programming services we offer in our cable
systems, under legislation enacted in 1999, DBS providers also deliver local
broadcast signals in certain markets that we serve. This change in law
eliminated a significant competitive advantage which cable system operators had
over DBS providers, as previously DBS providers were not permitted to retransmit
local broadcast signals. We believe our digital cable service is competitive
with the services delivered to customers by DBS systems.
DBS providers are also developing ways to bring advanced communications
services to their customers. They are currently offering two alternatives of
satellite-delivered high-speed Internet access service. One alternative is a
one-way service that utilizes a telephone return path, in contrast to our
two-way, high-speed service, which does not require a telephone line. The other
alternative is a two-way, high-speed service, which requires additional
equipment purchases by the customer and is offered at higher prices than our own
equivalent service.
MULTICHANNEL MULTIPOINT DISTRIBUTION SYSTEMS
Multichannel multipoint distribution systems deliver programming services
over microwave channels licensed by the FCC and received by subscribers with
special antennas. These wireless cable systems are less capital intensive and
subject to fewer regulatory requirements than cable systems, and are not
required to obtain local franchises or pay franchise fees. To date, the ability
of wireless cable services to compete with cable systems has been limited by a
channel capacity of up to 35 channels and the need for unobstructed
line-of-sight over-the-air transmission. Although relatively few wireless cable
systems in the United States are currently in operation or under construction,
virtually all markets have been licensed or tentatively licensed. The use of
digital compression technology, and the FCC's recent amendment to its rules to
permit reverse path or two-way transmission over wireless facilities, may enable
multichannel multipoint distribution systems to deliver more channels and
additional services, including Internet related services. Digital compression
technology refers to the conversion of the standard video signal into a digital
signal and the compression of that signal to facilitate multiple channel
transmissions through a single channel's signal.
PRIVATE CABLE TELEVISION SYSTEMS
Private cable television systems compete with conventional cable
television systems for the right to service condominiums, apartment complexes
and other multiple unit residential developments. The operators of these private
systems, known as satellite master antenna television (SMATV) systems, provide
improved reception of local television stations and several of the same
satellite-delivered programming services offered by franchised cable systems.
SMATV system operators often enter into exclusive agreements with apartment
building owners or homeowners' associations that preclude franchised cable
television operators from serving residents of such private complexes and
typically are not subject to regulation like local franchised cable operators.
However, the 1984 Cable Act gives franchised cable operators the right to use
existing compatible easements within their franchise areas on nondiscriminatory
terms and conditions. Accordingly, where there are preexisting compatible
easements, cable operators may not be unfairly denied access or discriminated
against with respect to access to the premises served by those easements.
Conflicting judicial decisions have been issued interpreting the scope of the
access right granted by the 1984 Cable Act, particularly with respect to
easements located entirely on private property. Under the Telecommunications Act
of 1996, satellite master antenna television systems can interconnect
non-commonly owned buildings without having to comply with local, state and
federal regulatory requirements that are imposed upon cable systems providing
similar services, as long as they do not use public rights of way. The FCC has
held that the latter provision is not violated so long as interconnection across
public rights of way is provided by a third party.
TRADITIONAL OVERBUILDS
Cable television systems are operated under non-exclusive franchises
granted by local authorities. More than one cable system may legally be built in
the same area by another cable operator, a municipal-owned utility or another
service provider. Some of these competitors may be granted franchises on more
favorable terms or conditions or enjoy other advantages such as exemptions from
taxes or regulatory requirements to which we are subject. Well financed
businesses from outside the cable industry, such as public utilities which
already possess or are developing fiber optic and other transmission facilities
in the areas they serve, may over time become competitors. We believe that
various entities are currently offering cable service to an estimated 9.4% of
the homes passed in the service areas of our franchises.
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INTERNET ACCESS
We offer high-speed Internet access in many of our cable systems. This
kind of service is sometimes called "cable modem service." Our cable systems
compete with a number of other companies, many of which have substantial
resources, such as existing Internet service providers, commonly known as ISPs,
DBS providers, and local and long distance telephone companies.
The deployment of digital subscriber line technology, known as DSL,
allows Internet access to subscribers at data transmission speeds equal to or
greater than that of standard telephone line modems, putting it in direct
competition with cable modem service. Numerous companies, including telephone
companies, have introduced DSL service and certain telecommunications companies
are seeking to provide high-speed broadband services, including interactive
online services, without regard to present service boundaries and other
regulatory restrictions. DBS providers currently offer satellite-delivered
high-speed Internet access with a telephone return path through a one-way
service or a two-way interactive high-speed service.
A number of ISP's have asked local authorities and the FCC to give them
rights of access to cable systems' broadband infrastructure so that they can
deliver their services directly to cable systems' customers. This kind of access
is often called "open access." Many local franchising authorities have examined
the issue of open access and a few have required cable operators to provide such
access. Several Federal courts have ruled that localities are not authorized to
require open access. The FCC is presently considering this issue. If we were
required to provide open access to ISPs as a result of FCC action or court
decisions, other companies could use our cable system infrastructure to offer
Internet services competitive with our own.
OTHER COMPETITION
Advances in communications technology, as well as changes in the
marketplace and the regulatory and legislative environment, are constantly
occurring. The FCC has authorized a new interactive television service which
permits non-video transmission of information between an individual's home and
entertainment and information service providers. This service, which can be used
by direct broadcast satellite systems, television stations and other video
programming distributors, including cable television systems, is an alternative
technology for the delivery of interactive video services. It does not appear at
the present time that this service will have a material impact on the operations
of cable television systems.
The FCC has allocated spectrum in the 28GHz range for a new multichannel
wireless service that can be used to provide video and telecommunications
services. The FCC completed the process of awarding licenses to use this
spectrum via a market-by-market auction. We do not know whether such a service
would have a material impact on the operations of cable television systems.
The 1996 Telecom Act directed the FCC to establish, and the FCC has
adopted, regulations and policies for the issuance of licenses for digital
television to incumbent television broadcast licensees. Digital television can
deliver high-definition television pictures and multiple digital-quality program
streams, as well as CD-quality audio programming and advanced digital services,
such as data transfer or subscription video. The FCC also has authorized
television broadcast stations to transmit text and graphic information that may
be useful to both consumers and businesses. The FCC also permits commercial and
non-commercial FM stations to use their subcarrier frequencies to provide
non-broadcast services, including data transmission.
EMPLOYEES
As of December 31, 2002, we employed 3,407 full-time employees and 175
part-time employees. Approximately 1.8% of our employees were represented by a
labor union at that time. Such employees have since voted to decertify this
labor union. As of the filing date of this report, none of our employees were
represented by a labor union. We consider our relations with our employees to be
generally good.
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LEGISLATION AND REGULATION
GENERAL
A federal law known as the Communications Act of 1934, as amended (the
"Communications Act"), establishes a national policy to guide the regulation,
development and operation of cable communications systems.
The Communications Act allocates principal responsibility for enforcing
the federal policies among the FCC and state and local governmental authorities.
The FCC and state regulatory agencies regularly conduct administrative
proceedings to adopt or amend regulations implementing the statutory mandate of
the Communications Act. At various times, interested parties to these
administrative proceedings challenge the new or amended regulations and policies
in the courts with varying levels of success. We expect that further court
actions and regulatory proceedings will occur and will refine the rights and
obligations of various parties, including the government, under the
Communications Act. The results of these judicial and administrative proceedings
may materially affect the cable industry and our business and operations. In the
following paragraphs, we summarize the federal laws and regulations materially
affecting the growth and operation of the cable industry. We also provide a
brief description of certain state and local laws.
FEDERAL REGULATION
The Communications Act and the regulations and policies of the FCC affect
significant aspects of our cable system operations, including:
. subscriber rates;
. the content of the programming we offer to subscribers, as well
as the way we sell our program packages to subscribers;
. the use of our cable systems by the local franchising
authorities, the public and other unrelated companies;
. our franchise agreements with local governmental authorities;
. cable system ownership limitations and prohibitions; and
. our use of utility poles and conduit.
SUBSCRIBER RATES
The Communications Act and the FCC's regulations and policies limit the
ability of cable systems to raise rates for basic services and equipment. No
other rates can be regulated. Federal law exempts cable systems from rate
regulation of cable services and customer equipment only in communities that are
subject to effective competition, as defined by federal law.
Where there is no effective competition to the cable operator's services,
federal law gives local franchising authorities the responsibility to regulate
the rates charged by the operator for:
. the lowest level of programming service offered by cable
operator, typically called basic service, which includes the
local broadcast channels and any public access or governmental
channels that are required by the operator's franchise;
. the installation of cable service and related service calls; and
. the installation, sale and lease of equipment used by subscribers
to receive basic service, such as converter boxes and remote
control units.
Local franchising authorities who wish to regulate basic service rates
and related equipment rates must first obtain FCC certification to regulate by
following a simplified FCC certification process and agreeing to follow
established FCC rules and policies when regulating the cable operator's rates.
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Several years ago, the FCC adopted detailed rate regulations, guidelines
and rate forms that a cable operator and the local franchising authority must
use in connection with the regulation of basic service and equipment rates. The
FCC adopted a benchmark methodology as the principal method of regulating rates.
However, if this methodology produces unacceptable rates, the operator may also
justify rates using a detailed cost-of-service methodology. The FCC's rules also
require franchising authorities to regulate equipment rates on the basis of
actual cost plus a reasonable profit, as defined by the FCC.
If the local franchising authority concludes that a cable operator's
rates are too high under the FCC's rate rules, the local franchising authority
may require the cable operator to reduce rates and to refund overcharges to
subscribers, with interest. The cable operator may appeal adverse local rate
decisions to the FCC.
The FCC's regulations allow a cable operator to modify regulated rates on
a quarterly or annual basis to account for changes in:
. the number of regulated channels;
. inflation; and
. certain external costs, such as franchise and other governmental
fees, copyright and retransmission consent fees, taxes,
programming fees and franchise-related obligations.
The Communications Act and the FCC's regulations also:
. require cable operators to charge uniform rates throughout each
franchise area that is not subject to effective competition;
. prohibit regulation of non-predatory bulk discount rates offered
by cable operators to subscribers in commercial and residential
developments; and
. permit regulated equipment rates to be computed by aggregating
costs of broad categories of equipment at the franchise, system,
regional or company level.
CONTENT REQUIREMENTS
The Communications Act and the FCC's regulations contain broadcast signal
carriage requirements that allow local commercial television broadcast stations:
. to elect once every three years to require a cable system to
carry the station, subject to certain exceptions; or
. to negotiate with us on the terms by which we carry the station
on our cable systems, commonly called retransmission consent.
The Communications Act requires a cable operator to devote up to
one-third of its activated channel capacity for the mandatory carriage of local
commercial television stations. The Communications Act also gives local
non-commercial television stations mandatory carriage rights; however, such
stations are not given the option to negotiate retransmission consent for the
carriage of their signals by cable systems. Additionally, cable systems must
obtain retransmission consent for:
. all distant commercial television stations, except for commercial
satellite-delivered independent superstations such as WGN;
. commercial radio stations; and
. certain low-power television stations.
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The FCC has recently adopted regulations for mandatory carriage of
digital television signals offered by local television broadcasters. Under these
regulations, local television broadcast stations transmitting solely in a
digital format are entitled to request carriage in their choice of digital or
converted analog format. Stations transmitting in both digital and analog
formats, which is permitted during the current several-year transition period,
have no carriage rights for the digital format during the transition unless and
until they turn in their analog channel. We are unable to predict the impact of
these new carriage requirements on the operations of our cable systems.
The Communications Act requires our cable systems, other than those
systems which are subject to effective competition, to permit subscribers to
purchase video programming we offer on a per channel or a per program basis
without the necessity of subscribing to any tier of service other than the basic
cable service tier.
To increase competition between cable operators and other video program
distributors, the Communications Act and the FCC's regulations:
. preclude any satellite video programmer affiliated with a cable
company, or with a common carrier providing video programming
directly to its subscribers, from favoring an affiliated company
over competitors;
. require such programmers to sell their programming to other
unaffiliated video program distributors; and
. limit the ability of such programmers to offer exclusive
programming arrangements to their related parties.
The FCC actively regulates other aspects of our programming, involving
such areas as:
. our use of syndicated and network programs and local sports
broadcast programming;
. advertising in children's programming;
. political advertising;
. origination cablecasting;
. adult programming;
. sponsorship identification; and
. closed captioning of video programming.
USE OF OUR CABLE SYSTEMS BY THE GOVERNMENT AND UNRELATED THIRD PARTIES
The Communications Act allows local franchising authorities and unrelated
third parties to have access to our cable systems' channel capacity for their
own use. For example, it:
. permits franchising authorities to require cable operators to set
aside channels for public, educational and governmental access
programming; and
. requires a cable system with 36 or more activated channels to
designate a significant portion of its channel capacity for
commercial leased access by third parties to provide programming
that may compete with services offered by the cable operator.
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The FCC regulates various aspects of third party commercial use of
channel capacity on our cable systems, including:
. the maximum reasonable rate a cable operator may charge for third
party commercial use of the designated channel capacity;
. the terms and conditions for commercial use of such channels; and
. the procedures for the expedited resolution of disputes
concerning rates or commercial use of the designated channel
capacity.
FRANCHISE MATTERS
We have non-exclusive franchises in virtually every community in which we
operate that authorize us to construct, operate and maintain our cable systems.
Although franchising matters are normally regulated at the local level through a
franchise agreement or a local ordinance, the Communications Act provides
oversight and guidelines to govern our relationship with local franchising
authorities.
For example, the Communications Act:
. affirms the right of franchising authorities, which may be state
or local, depending on the practice in individual states, to
award one or more franchises within their jurisdictions;
. generally prohibits us from operating in communities without a
franchise;
. encourages competition with existing cable systems by:
. allowing municipalities to operate their own cable
systems without franchises, and
. preventing franchising authorities from granting
exclusive franchises or from unreasonably refusing to
award additional franchises covering an existing cable
system's service area;
. permits local authorities, when granting or renewing our
franchises, to establish requirements for cable-related
facilities and equipment, but prohibits franchising authorities
from establishing requirements for specific video programming or
information services other than in broad categories;
. permits us to obtain modification of our franchise requirements
from the franchise authority or by judicial action if warranted
by commercial impracticability; and
. generally prohibits franchising authorities from:
. imposing requirements during the initial cable franchising
process or during franchise renewal that require, prohibit
or restrict us from providing telecommunications services,
. imposing franchise fees on revenues we derive from
providing telecommunications services over our cable
systems,
. restricting our use of any type of subscriber equipment or
transmission technology, and
. limits our payment of franchise fees to the local franchising
authority to 5.0% of our gross revenues derived from providing
cable services over our cable system.
The Communications Act contains renewal procedures designed to protect us
against arbitrary denials of renewal of our franchises although, under certain
circumstances, the franchising authority could deny us a franchise renewal.
Moreover, even if our franchise is renewed, the franchising authority may seek
to impose upon us new and more onerous requirements, such as significant
upgrades in facilities and services or increased franchise fees as a condition
of renewal to the extent permitted by law. Similarly, if a franchising
authority's consent is required for the purchase or sale of our cable system or
franchise, the franchising authority may attempt to impose more burdensome or
onerous franchise requirements on the purchaser in connection with a request for
such consent. Historically, cable operators providing satisfactory services to
their subscribers and complying with the terms of their franchises have almost
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always obtained franchise renewals. We believe that we have generally met the
terms of our franchises and have provided quality levels of service. We
anticipate that our future franchise renewal prospects generally will be
favorable.
Various courts have considered whether franchising authorities have the
legal right to limit the number of franchises awarded within a community and to
impose substantive franchise requirements. These decisions have been
inconsistent and, until the U.S. Supreme Court rules definitively on the scope
of cable operators' First Amendment protections, the legality of the franchising
process generally and of various specific franchise requirements is likely to be
in a state of flux.
OWNERSHIP LIMITATIONS
The Communications Act generally prohibits us from owning or operating a
satellite master antenna television system or multichannel multipoint
distribution system in any area where we provide franchised cable service and do
not have effective competition, as defined by federal law. We may, however,
acquire and operate a satellite master antenna television system in our existing
franchise service areas if the programming and other services provided to the
satellite master antenna television system subscribers are offered according to
the terms and conditions of our local franchise agreement.
The Communications Act also authorizes the FCC to adopt nationwide limits
on the number of subscribers under the control of a cable operator and to impose
limits on the number of channels which can be occupied on a cable system by a
video programmer in which a cable operator has an interest. The U.S. Court of
Appeals for the District of Columbia Circuit overturned the FCC's rules
implementing these statutory provisions and remended the case to the FCC for
further proceedings.
The 1996 amendments to the Communications Act eliminated the statutory
prohibition on the common ownership, operation or control of a cable system and
a television broadcast station in the same service area. The identical FCC
regulation has been invalidated by a federal appellate court. The FCC has
eliminated its regulatory restriction on cross-ownership of cable systems and
national broadcasting networks.
The 1996 amendments to the Communications Act also made far-reaching
changes in the relationship between local telephone companies and cable service
providers. These amendments:
. eliminated federal legal barriers to competition in the local
telephone and cable communications businesses, including allowing
local telephone companies to offer video services in their local
telephone service areas;
. preempted legal barriers to telecommunications competition that
previously existed in state and local laws and regulations;
. set basic standards for relationships between telecommunications
providers; and
. generally limited acquisitions and prohibited joint ventures
between local telephone companies and cable operators in the same
market.
Local telephone companies may provide service as traditional cable
operators with local franchises or they may opt to provide their programming
over open video systems, subject to certain conditions, including, but not
limited to, setting aside a portion of their channel capacity for use by
unaffiliated program distributors on a non-discriminatory basis. The decision as
to whether an operator of an open video system must obtain a local franchise is
left to each community.
POLE ATTACHMENT REGULATION
The Communications Act requires the FCC to regulate the rates, terms and
conditions imposed by public utilities, other than municipally or
cooperatively-owned utilities, for cable systems' use of utility pole and
conduit space unless state authorities have demonstrated to the FCC that they
adequately regulate pole attachment rates, as is the case in certain states in
which we operate. In the absence of state regulation, the FCC administers pole
attachment rates on a formula basis. The FCC adopted a new rate formula that
became effective in 2001 which governs the maximum rate certain utilities may
charge for attachments to their poles and conduit by companies providing
telecommunications services, including cable operators.
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Increases in attachment rates due to the FCC's new rate formula are
phased in over a five-year period in equal annual increments, beginning in
February 2001. A federal appellate court found that the provision of Internet
access by a cable system was neither a cable service or a telecommunications
service, thus the FCC lacked authority to regulate pole attachment rates for
cable systems which offer Internet access. The Supreme Court recently reversed
the federal appellate court decision and upheld the FCC's authority to regulate
pole attachment rates. We are unable to predict the ultimate impact of any
revised FCC rate formula or of any new pole attachment rate regulations on our
business and operations.
OTHER REGULATORY REQUIREMENTS OF THE COMMUNICATIONS ACT AND THE FCC
The FCC has adopted cable inside wiring rules to provide a more specific
procedure for the disposition of residential home wiring and internal building
wiring that belongs to an incumbent cable operator that is forced by the
building owner to terminate its cable services in a building with multiple
dwelling units.
The Communications Act includes provisions, among others, regulating and
the FCC actively regulates other parts of our cable operations, involving such
areas as:
. equal employment opportunity;
. consumer protection and customer service;
. technical standards and testing of cable facilities;
. consumer electronics equipment compatibility;
. registration of cable systems;
. maintenance of various records and public inspection files;
. microwave frequency usage; and
. antenna structure notification, marking and lighting.
The FCC may enforce its regulations through the imposition of fines, the
issuance of cease and desist orders or the imposition of other administrative
sanctions, such as the revocation of FCC licenses needed to operate transmission
facilities often used in connection with cable operations. The FCC has ongoing
rulemaking proceedings that may change its existing rules or lead to new
regulations. We are unable to predict the impact that any further FCC rule
changes may have on our business and operations.
COPYRIGHT
Our cable systems typically include in their channel line-ups local and
distant television and radio broadcast signals, which are protected by the
copyright laws. We do not obtain a license to use this programming directly from
the owners of the programming, but instead comply with an alternative federal
compulsory copyright licensing process. In exchange for filing certain reports
and contributing a percentage of our revenues to a federal copyright royalty
pool, we obtain blanket permission to retransmit the copyrighted material
carried on these broadcast signals. The nature and amount of future copyright
payments for broadcast signal carriage cannot be predicted at this time.
In a report to Congress, the U.S. Copyright Office recommended that
Congress make major revisions to both the cable television and satellite
compulsory licenses. Congress recently modified the satellite compulsory license
in a manner that permits DBS providers to become more competitive with cable
operators. The possible simplification, modification or elimination of the cable
communications compulsory copyright license is the subject of continuing
legislative review. The elimination or substantial modification of the cable
compulsory license could adversely affect our ability to obtain suitable
programming and could substantially increase the cost of programming that
remains available for distribution to our subscribers. We are unable to predict
the outcome of this legislative activity.
Copyrighted material in programming supplied to cable television systems
by pay cable networks and basic cable networks is licensed by the networks
through private agreements with the copyright owners. These entities offer
through to-the-viewer licenses to the cable networks that cover the
retransmission of the cable networks' programming by cable television systems to
their customers.
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Our cable systems also utilize music in other programming and advertising
that we provide to subscribers. The rights to use this music are controlled by
various music performing rights organizations from which performance licenses
must be obtained. Cable industry representatives recently negotiated standard
license agreements with the three largest music performing rights organizations
covering locally originated programming, including advertising inserted by the
cable operator in programming produced by other parties. These standard
agreements require the payment of music license fees for earlier time periods,
but such license fees have not had a significant impact on our business and
operations.
CABLE MODEM SERVICE
There are currently few laws or regulations which specifically regulate
communications or commerce over the Internet. Section 230 of the Communications
Act declares it to be the policy of the United States to promote the continued
development of the Internet and other interactive computer services and
interactive media, and to preserve the vibrant and competitive free market that
presently exists for the Internet and other interactive computer services,
unfettered by federal or state regulation. One area in which Congress did
attempt to regulate content over the Internet involved the dissemination of
obscene or indecent materials.
The Digital Millennium Copyright Act is intended to reduce the liability
of online service providers for listing or linking to third-party Websites that
include materials that infringe copyrights or other rights or if customers use
the service to publish or disseminate infringing materials. The Children's
Online Protection Act and the Children's Online Privacy Protection Act are
intended to restrict the distribution of certain materials deemed harmful to
children and impose additional restrictions on the ability of online services to
collect user information from minors. In addition, the Protection of Children
From Sexual Predators Act of 1998 requires online service providers to report
evidence of violations of federal child pornography laws under certain
circumstances.
A number of ISP's have asked local authorities and the FCC to give them
rights of access to cable systems' broadband infrastructure so that they can
deliver their services directly to cable systems' customers. This kind of access
is often called "open access." Many local franchising authorities have examined
the issue of open access and a few have required cable operators to provide such
access. Several Federal courts have ruled that localities are not authorized to
require open access.
On March 14, 2002, the FCC announced that it was classifying Internet
access service provided through cable modems as an interstate information
service. At the same time, the FCC initiated a rulemaking proceeding designed to
address a number of issues resulting from this regulatory classification,
including the following:
. the FCC confirmed that there is no current legal requirement for
cable operators to grant open access now that cable modem service
is classified as an information service. The FCC is considering,
however, whether it has the authority to impose open access
requirements and, if so, whether it should do so, or whether to
permit local authorities to impose such a requirement.
. the FCC confirmed that because cable modem service is an
information service, not a cable service, local franchise
authorities may not collect franchise fees on cable modem service
revenues under existing law and regulations.
. the FCC concluded that federal law does not permit local
franchise authorities to impose additional franchise requirements
on cable modem service. It is considering, however, whether local
franchise authorities nonetheless have the authority to impose
restrictions, requirements or fees because cable modem service is
delivered over cable using public rights of way.
. the FCC is considering whether cable operators providing cable
modem service should be required to contribute to a "universal
service fund" designed to support making service available to all
consumers, including those in low income, rural and high-cost
areas at rates that are reasonably comparable to those charged in
urban areas.
. the FCC is considering whether it should take steps to ensure
that the regulatory burdens on cable systems providing cable
modem service are comparable to those of other providers of
Internet access service, such as telephone companies. One method
of achieving comparability would be to make cable operators
subject to some of the regulations that do not now apply to them,
but are applicable to telephone companies.
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Challenges to the FCC's classification of cable Internet access service
have been filed in federal courts. In previous actions over the regulatory
classification of cable modem service, the courts issued conflicting decisions.
These conflicting rulings and the new court proceedings increase the possibility
that the classification of cable Internet service could be decided by the
Supreme Court.
STATE AND LOCAL REGULATION
Our cable systems use local streets and rights-of-way. Consequently, we
must comply with state and local regulation, which is typically imposed through
the franchising process. Our cable systems generally are operated in accordance
with non-exclusive franchises, permits or licenses granted by a municipality or
other state or local government entity. Our franchises generally are granted for
fixed terms and in many cases are terminable if we fail to comply with material
provisions. The terms and conditions of our franchises vary materially from
jurisdiction to jurisdiction. Each franchise generally contains provisions
governing:
. franchise fees;
. franchise term;
. system construction and maintenance obligations;
. system channel capacity;
. design and technical performance;
. customer service standards;
. sale or transfer of the franchise;
. territory of the franchise;
. indemnification of the franchising authority;
. use and occupancy of public streets; and
. types of cable services provided.
In the process of renewing franchises, a franchising authority may seek
to impose new and more onerous requirements, such as upgraded facilities,
increased channel capacity or enhanced services, although protections available
under the Communications Act require the municipality to take into account the
cost of meeting such requirements. The Communications Act also contains renewal
procedures and criteria designed to protect incumbent franchisees against
arbitrary denials of renewal.
A number of states subject cable systems to the jurisdiction of
centralized state governmental agencies, some of which impose regulation of a
character similar to that of a public utility. Attempts in other states to
regulate cable systems are continuing and can be expected to increase. To date,
other than Delaware, no state in which we operate has enacted such state-level
regulation. State and local franchising jurisdiction is not unlimited; it must
be exercised consistently with federal law. The Communications Act immunizes
franchising authorities from monetary damage awards arising from regulation of
cable systems or decisions made on franchise grants, renewals, transfers and
amendments.
OTHER REGULATION
Existing federal, state and local laws and regulations and state and
local franchise requirements are currently the subject of judicial proceedings,
legislative hearings and administrative proposals which could change, in varying
degrees, the manner in which cable systems operate. Neither the outcome of these
proceedings nor their impact upon the cable industry or our business or
operations can be predicted at this time.
22
ITEM 2. PROPERTIES
Our principal physical assets consist of cable television operating plant
and equipment, including signal receiving, encoding and decoding devices,
headend facilities and distribution systems and equipment at or near customers'
homes for each of the systems. The signal receiving apparatus typically includes
a tower, antenna, ancillary electronic equipment and earth stations for
reception of satellite signals. Headend facilities are located near the
receiving devices. Our distribution system consists primarily of coaxial and
fiber optic cables and related electronic equipment. Customer premise equipment
consists of decoding converters and cable modems.
Our cable television plant and related equipment generally are attached
to utility poles under pole rental agreements with local public utilities,
although in some areas the distribution cable is buried in underground ducts or
trenches. The physical components of the cable systems require maintenance and
periodic upgrading to improve system performance and capacity.
We own and lease the real property housing our regional call centers,
business offices and warehouses throughout our operating regions. Our headend
facilities, signal reception sites and microwave facilities are located on owned
and leased parcels of land, and we generally own the towers on which certain of
our equipment is located. We own most of our service vehicles. We believe that
our properties, both owned and leased, are in good condition and are suitable
and adequate for our operations.
ITEM 3. LEGAL PROCEEDINGS
There are no material pending legal proceedings to which we are a party
or to which any of our properties are subject.
23
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year ended December 31, 2002.
ITEM 4A. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Name Age Position
---- --- ------------------------------------------
Rocco B. Commisso...................................... 53 Chairman and Chief Executive Officer
Mark E. Stephan........................................ 46 Senior Vice President, Chief Financial
Officer, Treasurer and Director
James M. Carey......................................... 51 Senior Vice President, Operations
John G. Pascarelli..................................... 41 Senior Vice President, Marketing and
Consumer Services
Joseph Van Loan........................................ 61 Senior Vice President, Technology
Italia Commisso Weinand................................ 49 Senior Vice President, Programming and
Human Resources
Charles J. Bartolotta.................................. 48 Senior Vice President, Customer Operations
Calvin G. Craib........................................ 48 Senior Vice President, Business Development
William I. Lees, Jr.................................... 44 Senior Vice President, Corporate Controller
Joseph E. Young........................................ 54 Senior Vice President, General Counsel and
Secretary
Craig S. Mitchell...................................... 44 Director
William S. Morris III.................................. 68 Director
Thomas V. Reifenheiser................................. 67 Director
Natale S. Ricciardi.................................... 54 Director
Robert L. Winikoff..................................... 56 Director
Rocco B. Commisso has 25 years of experience with the cable television
industry and has served as our Chairman and Chief Executive Officer since
founding our predecessor company in July 1995. From 1986 to 1995, he served as
Executive Vice President, Chief Financial Officer and a director of Cablevision
Industries Corporation. Prior to that time, Mr. Commisso served as Senior Vice
President of Royal Bank of Canada's affiliate in the United States from 1981,
where he founded and directed a specialized lending group to media and
communications companies. Mr. Commisso began his association with the cable
industry in 1978 at The Chase Manhattan Bank, where he managed the bank's
lending activities to communications firms including the cable industry. He
serves on the board of directors of the National Cable Television Association,
Cable Television Laboratories, Inc and C-SPAN. Mr. Commisso holds a Bachelor of
Science in Industrial Engineering and a Master of Business Administration from
Columbia University.
Mark E. Stephan has 16 years of experience with the cable television
industry and has served as our Senior Vice President, Chief Financial Officer
and Treasurer since the commencement of our operations in March 1996. Before
joining us, Mr. Stephan served as Vice President, Finance for Cablevision
Industries from July 1993. Prior to that time, Mr. Stephan served as Manager of
the telecommunications and media lending group of Royal Bank of Canada.
James M. Carey has 21 years of experience in the cable television
industry. Before joining us in September 1997, Mr. Carey was founder and
President of Infinet Results, a telecommunications consulting firm, from
December 1996. Mr. Carey served as Executive Vice President, Operations at
MediaOne Group from August 1995 to November 1996, where he was responsible for
MediaOne's Atlanta cable operations. Prior to that time, he served as Regional
Vice President of Cablevision Industries' Southern region. Mr. Carey is a member
of the board of directors of the American Cable Association and the Cable
Television Association of Georgia.
24
John G. Pascarelli has 22 years of experience in the cable television
industry. Before joining us in March 1998, Mr. Pascarelli served as Vice
President, Marketing for Helicon Communications Corporation from January 1996 to
February 1998 and as Corporate Director of Marketing for Cablevision Industries
from 1988 to 1995. Prior to that time, Mr. Pascarelli served in various
marketing and system management capacities for Continental Cablevision, Inc.,
Cablevision Systems and Storer Communications. Mr. Pascarelli is a member of the
board of directors of the Cable and Telecommunications Association for
Marketing.
Joseph Van Loan has 30 years of experience in the cable television
industry. Before joining us in November 1996, Mr. Van Loan served as Senior Vice
President, Engineering for Cablevision Industries from 1990. Prior to that time,
he managed a private telecommunications consulting practice specializing in
domestic and international cable television and broadcasting and served as Vice
President, Engineering for Viacom Cable. Mr. Van Loan received the 1986 Vanguard
Award for Science and Technology from the National Cable Television Association.
Italia Commisso Weinand has 26 years of experience in the cable
television industry. Before joining us in April 1996, Ms. Weinand served as
Regional Manager for Comcast Corporation from July 1985. Prior to that time, Ms.
Weinand held various management positions with Tele-Communications, Times Mirror
Cable and Time Warner. Ms. Weinand is the sister of Mr. Commisso.
Charles J. Bartolotta has 20 years of experience in the cable television
industry. Before joining us in October 2000, Mr. Bartolotta served as Division
President for AT&T Broadband, LLC from July 1998, where he was responsible for
managing an operating division serving nearly three million customers. Prior to
that time, he served as Regional Vice President of Telecommunications, Inc. from
January 1997 and as Vice President and General Manager for TKR Cable Company
from 1989. Prior to that time, Mr. Bartolotta held various management positions
with Cablevision Systems Corporation.
Calvin G. Craib has 21 years of experience in the cable television
industry. Before joining us in April 1999 as Vice President, Business
Development, Mr. Craib served as Vice President, Finance and Administration for
Interactive Marketing Group from June 1997 to December 1998 and as Senior Vice
President, Operations, and Chief Financial Officer for Douglas Communications
from January 1990 to May 1997. Prior to that time, Mr. Craib served in various
financial management capacities at Warner Amex Cable and Tribune Cable.
William I. Lees, Jr. joined us in October 2001 as Senior Vice President,
Corporate Controller. Previously, Mr. Lees served as Executive Vice President
and Chief Financial Officer for Regus Business Centre Corp., a multinational
real estate services company, from July 1999 to September 2001. Prior to that
time, he served as Corporate Controller and Director for Formica Corporation
from September 1998 to July 1999, and as Chief Financial Officer for Imperial
Schrade Corporation from September 1993 to September 1998. He was previously
employed for 13 years by Ernst & Young.
Joseph E. Young has 18 years of experience with the cable television
industry. Before joining us in November 2001 as Senior Vice President, General
Counsel, Mr. Young served as Executive Vice President, Legal and Business
Affairs, for LinkShare Corporation, an Internet-based provider of marketing
services, from September 1999 to October 2001. Prior to that time, he practiced
corporate law with Baker & Botts, LLP from January 1995 to September 1999.
Previously, Mr. Young was a partner with the Law Offices of Jerome H. Kern and a
partner with Shea & Gould.
Craig S. Mitchell has held various management positions with Morris
Communications Company LLC for more than the past five years. He currently
serves as its Vice President of Finance and Treasurer and is also a member of
its board of directors.
William S. Morris III has served as the Chairman and Chief Executive
Officer of Morris Communications for more than the past five years. He was the
Chairman of the board of directors of the Newspapers Association of America for
1999-2000.
25
Thomas V. Reifenheiser served for more than five years as a Managing
Director and Group Executive of the Global Media and Telecom Group of Chase
Securities Inc. until his retirement in September 2000. He joined Chase in 1963
and had been the Global Media and Telecom Group Executive since 1977. He also
had been a director of the Management Committee of The Chase Manhattan Bank. Mr.
Reifenheiser is a member of the board of directors of Cablevision Systems
Corporation and Lamar Advertising Company, a leading owner and operator of
outdoor advertising and logo sign displays.
Natale S. Ricciardi has held various management positions with Pfizer
Inc. for more than the past five years. Mr. Ricciardi joined Pfizer in 1972 and
currently serves as its Vice President, U.S. Manufacturing, with responsibility
for all of Pfizer's U.S. manufacturing facilities.
Robert L. Winikoff has been a partner of the law firm of Sonnenschein
Nath & Rosenthal since August 2000. Prior thereto, he was a partner of the law
firm of Cooperman Levitt Winikoff Lester & Newman, P.C. for more than five
years. Sonnenschein Nath & Rosenthal currently serves as our outside general
counsel and prior to such representation Cooperman Levitt Winikoff Lester &
Newman, P.C. served as our outside general counsel since 1995.
26
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our Class A common stock has been traded on the Nasdaq National Market
under the symbol "MCCC" since February 4, 2000, the date of our initial public
offering. Prior to that time, there was no public market for our common stock.
The following table sets forth, for the periods indicated, the high and low
closing sales prices for our Class A common stock as reported by the Nasdaq
National Market:
2002 2001
-------------------- -------------------
High Low High Low
--------- -------- -------- --------
First Quarter $ 18.22 $ 13.68 $ 22.06 $ 16.56
Second Quarter $ 13.78 $ 7.45 $ 21.99 $ 15.22
Third Quarter $ 7.25 $ 3.98 $ 18.96 $ 12.91
Fourth Quarter $ 10.36 $ 3.63 $ 18.26 $ 12.14
As of March 25, 2003, there were approximately 131 holders of record of
our Class A common stock and 6 holders of record of our Class B common stock.
The number of Class A stockholders does not include beneficial owners holding
shares through nominee names.
We have never declared or paid any dividends on our common stock. We
currently anticipate that we will retain all of our future earnings for use in
the expansion and operation of our business. Thus, we do not anticipate paying
any cash dividends on our common stock in the foreseeable future. Our future
dividend policy will be determined by our board of directors and will depend on
various factors, including our results of operations, financial condition,
capital requirements and investment opportunities.
During the year ended December 31, 2002, we granted stock options to
certain of our employees to purchase an aggregate of 604,735 shares of Class A
common stock at an exercise price ranging from $11.96 to $12.49 per share.
The grant of stock options to the employees and non-employee directors of
MCC was not registered under the Securities Act of 1933 because the stock
options either did not involve an offer or sale for purposes of Section 2(a)(3)
of the Securities Act of 1933, in reliance on the fact that the stock options
were granted for no consideration, or were offered and sold in transactions not
involving a public offering, exempt from registration under the Securities Act
of 1933 pursuant to Section 4(2).
27
ITEM 6. SELECTED FINANCIAL DATA
Mediacom Communications Corporation was organized as a Delaware
corporation in November 1999 and completed an initial public offering in
February 2000. Mediacom LLC was formed as a New York limited liability company
in July 1995 and since that time its taxable income or loss has been included in
the federal and certain state income tax returns of its members. Upon completion
of our initial public offering, we became subject to the provisions of
Subchapter C of the Internal Revenue Code. As a C corporation, we are subject to
federal, state and local income taxes.
In the table below, we provide you with selected historical consolidated
financial and operating data for the years ended December 31, 1998 through 2002
and balance sheet data as of December 31, 1998 through 2002, which are derived
from our audited consolidated financial statements. We have significantly
expanded our business through acquisitions. In 2001, we acquired from AT&T
Broadband, LLC cable systems serving approximately 800,000 basic subscribers for
an aggregate purchase price of $2.06 billion. In 2000, we acquired cable systems
serving approximately 53,000 basic subscribers for an aggregate purchase price
of $109.2 million. In 1999, we acquired cable systems serving approximately
358,000 basic subscribers for an aggregate purchase price of $759.6 million.
See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
YEARS ENDED DECEMBER 31,
------------------------------------------------------------------------
2002 2001 2000 1999 1998
------------ ------------ ------------ ------------ ------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
STATEMENT OF OPERATIONS DATA:
Revenues $ 923,033 $ 585,175 $ 328,258 $ 174,961 $ 129,297
Costs and expenses:
Service costs(1) 359,737 219,479 110,442 56,967 43,849
Selling, general and administrative
expenses 173,970 105,794 55,820 32,949 25,596
Corporate expenses(2) 12,752 8,705 6,029 6,951 5,797
Depreciation and amortization 319,435 310,785 178,331 101,065 65,793
Non-cash stock charges relating to
corporate expenses(3) 5,323 2,904 28,254 15,445 -
------------ ------------ ------------ ------------ ------------
Operating income (loss) 51,816 (62,492) (50,618) (38,416) (11,738)
Interest expense, net(4) 188,304 139,867 68,955 37,817 23,994
Loss on derivative instruments, net(5) 13,877 8,441 - - -
Other expense (income)(6) 11,093 (21,653) 30,024 5,087 4,058
------------ ------------ ------------ ------------ ------------
Net loss before income taxes (161,458) (189,147) (149,597) (81,320) (39,790)
Provision for income taxes 200 87 250 - -
------------ ------------ ------------ ------------ ------------
Net loss before cumulative effect of
accounting change (161,658) (189,234) (149,847) (81,320) (39,790)
Cumulative effect of accounting
change(7) - (1,642) - - -
------------ ------------ ------------ ------------ ------------
Net loss $ (161,658) $ (190,876) $ (149,847) $ (81,320) $ (39,790)
============ ============ ============ ============ ============
Basic and diluted loss per share:(8)
Before cumulative effect of
accounting change $ (1.35) $ (1.78) $ (1.79) $ (7.82) $ (5.28)
Cumulative effect of accounting
change - (0.02) - - -
------------ ------------ ------------ ------------ ------------
Loss per share $ (1.35) $ (1.80) $ (1.79) $ (7.82) $ (5.28)
============ ============ ============ ============ ============
Weighted average common shares
outstanding(8) 119,607,605 105,779,737 83,803,032 10,403,749 7,537,912
BALANCE SHEET DATA (END OF PERIOD):
Total assets $ 3,703,974 $ 3,664,848 $ 1,379,972 $ 1,272,881 $ 451,152
Total debt 3,019,000 2,798,000 987,000 1,139,000 337,905
Total stockholders' equity 346,541 507,576 261,621 54,615 78,651
(continued on next page)
28
YEARS ENDED DECEMBER 31,
------------------------------------------------------------------------
2002 2001 2000 1999 1998
------------ ------------ ------------ ------------ ------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
OTHER DATA:
System cash flow(9) $ 393,642 $ 265,725 $ 161,996 $ 85,045 $ 59,852
System cash flow margin(10) 42.6% 45.4% 49.4% 48.6% 46.3%
Operating cash flow(9) . $ 380,890 $ 257,020 $ 155,967 $ 78,094 $ 54,055
Operating cash flow margin(11) 41.2% 43.9% 47.5% 44.6% 41.8%
Net cash flows provided by (used in):
Operating activities $ 174,203 $ 258,625 $ 95,527 $ 54,216 $ 53,556
Investing activities (421,602) (2,402,947) (297,110) (851,548) (397,085)
Financing activities 215,316 2,203,477 201,262 799,593 344,714
OPERATING DATA
(END OF PERIOD, EXCEPT AVERAGE):
Homes passed(12) 2,715,000 2,630,000 1,173,000 1,071,500 520,000
Basic subscribers(13) 1,592,000 1,595,000 779,000 719,000 354,000
Basic penetration(14) 58.6% 60.6% 66.4% 67.1% 68.1%
Digital customers(15) 371,000 321,000 40,000 5,300 -
Data customers(16) 191,000 115,000 15,600 5,100 4,729
Average monthly revenues per basic
subscriber(17) $ 50.10 $ 44.54 $ 38.34 $ 35.01 $ 32.88
- ----------
(1) Service costs for the years ended December 31, 2002 and 2001 include $4.3
million and $5.8 million, respectively, of non-recurring incremental
expenses related to the transition from Excite@Home to Mediacom
Online(SM).
(2) Represents actual corporate expenses subsequent to our initial public
offering in February 2000 and fees paid to Mediacom Management
Corporation, a Delaware corporation, for management services rendered to
our operating subsidiaries under management agreements prior to our
initial public offering. Such management agreements were terminated upon
the completion of our initial public offering. At that time, Mediacom
Management's employees became our employees and its corporate overhead
became our corporate overhead. See Note 10 of our consolidated financial
statements.
(3) Non-cash stock charges relating to corporate expenses:
. for the years ended December 31, 2002 and 2001 resulted from the
vesting of equity grants made during 1999 to certain members of our
management team.
. for the year ended December 31, 2000 consist of a one-time $24.5
million charge resulting from the termination of the management
agreements with Mediacom Management upon completion of our initial
public offering in February 2000 and a $3.8 million charge relating
to the vesting of equity grants made during 1999 to certain members
of our management team.
. for the year ended December 31, 1999 consist of a $0.6 million
charge resulting from amendments to our management agreements with
Mediacom Management and a $14.8 million charge relating to the
vesting of equity grants to certain members of our management team.
See Notes 10 and 14 of our consolidated financial statements.
(4) Net of interest income. Interest income for the periods presented was
not material.
(5) Loss on derivatives, net, represents the change in the fair value of our
interest rate derivatives as a result of the decrease in market interest
rates. See Note 7 of our consolidated financial statements.
(6) Includes $30.0 million of deferred revenue recognized during the year
ended December 31, 2001 resulting from the termination of our
relationship with SoftNet Systems, Inc. During the year ended December
31, 2000, a $28.5 million non-cash charge was recorded relating to the
decline in value of our investment in shares of SoftNet Systems common
stock that was deemed other than temporary. See Note 13 of our
consolidated financial statements.
29
(7) Relates to our adoption of Statements of Financial Accounting Standards
No. 133, "Accounting for Derivative Instruments and Hedging
Activities."
(8) Basic and diluted loss per share is calculated based on the weighted
average shares outstanding. Since our initial public offering in February
2000, the weighted average shares outstanding was based on the actual
number of shares outstanding. Prior to our initial public offering, the
weighted average shares outstanding was computed based on the conversion
ratio used to exchange the Mediacom LLC's membership units for shares of
Mediacom Communications Corporation Class A and Class B common stock
immediately prior to our initial public offering. See Note 3 of our
consolidated financial statements.
(9) Operating cash flow and system cash flow represent non-GAAP measures and
are included in this report because our management believes that
operating cash flow and system cash flow are meaningful measures of
performance commonly used in the cable television industry and by the
investment community to analyze and compare cable television companies.
Our definitions of operating cash flow and system cash flow may not be
identical to similarly titled measures reported by other companies.
The following represents a reconciliation of operating income (loss) to
operating cash flow and system cash flow:
YEARS ENDED DECEMBER 31,
-----------------------------------------------------------------
2002 2001 2000 1999 1998
---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
(UNAUDITED)
Operating income (loss) $ 51,816 $ (62,492) $ (50,618) $ (38,416) $ (11,738)
Adjustments:
Depreciation and amortization 319,435 310,785 178,331 101,065 65,793
Non-cash stock charges relating to
corporate expenses 5,323 2,904 28,254 15,445 -
Non-recurring incremental expenses 4,316 5,823 - - -
---------- ---------- ---------- ---------- ----------
Operating cash flow 380,890 257,020 155,967 78,094 54,055
Corporate expenses 12,752 8,705 6,029 6,951 5,797
---------- ---------- ---------- ---------- ----------
System cash flow $ 393,642 $ 265,725 $ 161,996 $ 85,045 $ 59,852
========== ========== ========== ========== ==========
These measurements of operating cash flow and system cash flow are:
. not intended to be a performance measure that should be regarded as
an alternative either to operating income (loss) or net income
(loss) as an indicator of operating performance or to the statement
of cash flows as a measure of liquidity;
. not intended to represent funds available for debt service,
dividends, reinvestment or other discretionary uses; and
. should not be considered in isolation or as a substitute for
measures of performance prepared in accordance with generally
accepted accounting principles.
(10) Represents system cash flow as a percentage of revenues. This measurement
is used by us, and is commonly used in the cable television industry, to
analyze and compare cable television companies on the basis of operating
performance, for the reasons discussed in note 9 above.
(11) Represents operating cash flow as a percentage of revenues. This
measurement is used by us, and is commonly used in the cable television
industry, to analyze and compare cable television companies on the basis
of operating performance, for the reasons discussed in note 9 above.
30
(12) Represents the number of single residence homes, apartments and
condominium units passed by the cable distribution network in a cable
system's service area.
(13) Represents a dwelling with one or more television sets that receives a
package of over-the-air broadcast stations, local access channels or
certain satellite-delivered cable television services. Accounts that are
billed on a bulk basis, which typically receive discounted rates, are
converted into full-price equivalent basic subscribers by dividing total
bulk billed basic revenues of a particular system by the applicable
combined limited and expanded cable rate charged to basic subscribers in
that system. Basic subscribers include connections to schools, libraries,
local government offices and employee households that may not be charged
for limited and expanded cable services, but may be charged for premium
units, pay-per-view events or high-speed Internet service. Customers who
exclusively purchase high-speed Internet service are not counted as basic
subscribers. Our methodology of calculating the number of basic
subscribers may not be identical to those used by other cable companies.
(14) Represents basic subscribers as a percentage of homes passed.
(15) Represents customers that receive digital cable services.
(16) Represents customers that access the Internet through cable modem service
or a conventional modem and telephone line connection.
(17) Represents average monthly revenues for the last three months of the
period divided by average basic subscribers for such period. Average
monthly revenues per basic subscriber includes the revenues of
acquisitions of cable systems made during the last three months of the
period as if such acquisitions were completed at the beginning of the
three month period. This measurement is commonly used in the cable
television industry to analyze and compare cable television companies on
the basis of operating performance.
31
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Reference is made to the "Risk Factors" below for a discussion of
important factors that could cause actual results to differ from expectations
and any of our forward-looking statements contained herein. The following
discussion should be read in conjunction with our audited consolidated financial
statements as of and for the years ended December 31, 2002, 2001 and 2000.
ORGANIZATION
Mediacom Communications Corporation was organized as a Delaware
corporation in November 1999 and completed an initial public offering in
February 2000. Immediately prior to the completion of our initial public
offering, we issued shares of common stock in exchange for all of the
outstanding membership interests in Mediacom LLC, a New York limited liability
company, upon which Mediacom LLC became our wholly-owned subsidiary. Mediacom
LLC commenced operations in March 1996 and until June 2001 served as the holding
company for all of our operating subsidiaries.
Mediacom Broadband LLC, our wholly-owned subsidiary, was organized as a
Delaware limited company in April 2001 for the purpose of acquiring cable
systems from AT&T Broadband, LLC. Mediacom Broadband LLC's operating
subsidiaries completed the acquisitions of the AT&T cable systems in June and
July 2001.
Until our initial public offering in February 2000, Mediacom Management
Corporation, a Delaware corporation, provided management services to the
operating subsidiaries of Mediacom LLC under management agreements and received
annual management fees. Such management agreements were terminated upon the date
of our initial public offering. At that time, Mediacom Management's employees
became our employees and its corporate overhead became our corporate overhead.
These employee expenses and corporate overhead are reflected as our corporate
expenses. See Note 10 of our consolidated financial statements.
ACQUISITIONS
We significantly expanded our business in the last three years through
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. On June 29, 2001, we acquired from AT&T Broadband, LLC cable
systems in the state of Missouri serving approximately 94,000 basic subscribers
for a purchase price of approximately $300.0 million. On July 18, 2001, we
acquired from AT&T Broadband cable systems in the states of Georgia, Illinois
and Iowa serving approximately 706,000 basic subscribers for an aggregate
purchase price of approximately $1.76 billion. 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 88.1% 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, 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 7.6% and 4.3% of our revenues, respectively. Franchise fees
charged to customers are included in their corresponding revenue category.
32
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 access
costs and plant operating costs. Programming costs have historically increased
at rates in excess of inflation due to the introduction of new programming
services 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. Corporate expenses reflect compensation of corporate
employees and other corporate overhead.
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
The following historical information includes the results of operations
of the AT&T cable systems, acquired in June and July 2001, only for that portion
of the respective period that we owned such cable systems.
Basic subscribers were 1,592,000 at December 31, 2002, as compared to
1,595,000 at December 31, 2001. We acquired 3,000 basic subscribers during the
first quarter of 2002.
Digital customers were 371,000 at December 31, 2002, as compared to
321,000 at December 31, 2001.
Data customers were 191,000 at December 31, 2002, as compared to 115,000
at December 31, 2001.
Revenues. Revenues increased 57.7% to $923.0 million for the year ended
December 31, 2002 as compared to $585.2 million for the year ended December 31,
2001. Of the revenue increase of $337.8 million, $249.2 was attributable to the
acquisitions of the AT&T cable systems. Excluding the effects of such
acquisitions, revenues increased primarily due to rate increases in our video
services and to customer growth in our digital 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,
----------------------------------------
2002 2001
----------------------------------------
% of % of
Amount Revenues Amount Revenues
--------- -------- -------- --------
Video.......... $ 812.8 88.1% $ 541.5 92.5%
Data........... 70.7 7.6 26.2 4.5
Advertising.... 39.5 4.3 17.5 3.0
--------- -------- -------- --------
$ 923.0 100.0% $ 585.2 100.0%
========= ======== ======== ========
Video revenues increased 50.1% to $812.8 million for the year ended
December 31, 2002, as compared to $541.5 million for the year ended December 31,
2001. Of the video revenue increase of $271.3 million, $219.7 million was
attributable to the acquisitions of the AT&T cable systems. Excluding the
effects of such acquisitions, video revenues increased primarily due to rate
increases in our video services and to customer growth in our digital cable
services.
33
Data revenues increased 169.8% to $70.7 million for the year ended
December 31, 2002, as compared to $26.2 million for the year ended December 31,
2001. Of the data revenue increase of $44.5 million, $13.8 million was
attributable to the acquisitions of the AT&T cable systems. Excluding the
effects of such acquisitions, data revenues increased primarily due to customer
growth in our high-speed Internet access service.
Advertising revenues increased 125.7% to $39.5 million for the year ended
December 31, 2002, as compared to $17.5 million for the year ended December 31,
2001. Of the advertising revenue increase of $22.0 million, $15.8 million was
attributable to the acquisitions of the AT&T cable systems. Excluding the
effects of such acquisitions, advertising revenues increased primarily due to a
general improvement in local and national advertising markets.
Service costs. Service costs increased 63.9% to $359.7 million for the
year ended December 31, 2002, as compared to $219.5 million for the year ended
December 31, 2001. Of the service costs increase of $140.2 million, $102.2
million was attributable to the acquisitions of the AT&T cable systems.
Excluding the effects of such acquisitions, service costs increased primarily
due to higher programming expenses, including rate increases by programming
suppliers for existing services and the cost 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 39.0% for the year ended December 31, 2002, as
compared with 37.5% for the year ended December 31, 2001.
Selling, general and administrative expenses. Selling, general and
administrative expenses increased 64.4% to $174.0 million for the year ended
December 31, 2002, as compared to $105.8 million for the year ended December 31,
2001. Of the selling, general and administrative expenses increase of $68.2
million, $57.4 million was attributable to the acquisitions of the AT&T cable
systems. Excluding the effects of such acquisitions, selling, general and
administrative expenses increased primarily as a result of higher marketing
expenses related to our digital and high-speed Internet services. As a
percentage of revenues, selling, general and administrative expenses were 18.8%
for the year ended December 31, 2002 as compared with 18.1% for the year ended
December 31, 2001.
Corporate expenses. Corporate expenses increased 46.5% to $12.8 million
for the year ended December 31, 2002, as compared to $8.7 million for the year
ended December 31, 2001. This was principally due to an increase in corporate
employees and their related costs. As a percentage of revenues, corporate
expenses were 1.4% for the year ended December 31, 2002 as compared with 1.5%
for the year ended December 31, 2001.
Depreciation and amortization. Depreciation and amortization increased
2.8% to $319.4 million for the year ended December 31, 2002, as compared to
$310.8 million for the year ended December 31, 2001. This was due to the
depreciation and amortization expense associated with our purchase of the AT&T
cable systems and ongoing investments in our cable systems. This increase was
substantially offset by the adoption of SFAS 142, effective January 1, 2002,
which reduced amortization expense by $144.9 million during the year ended
December 31, 2002.
Non-cash stock charges relating to corporate expenses. Non-cash stock
charges relating to corporate expenses 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 represented 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 such equity interests was accelerated, and
accordingly, the remainder of the related charges were expensed.
Interest expense, net. Interest expense, net, increased 34.6% to $188.3
million for the year ended December 31, 2002 as compared to $139.9 million for
the year ended December 31, 2001. This was due primarily to additional
indebtedness resulting from the acquisitions of the AT&T cable systems and the
ongoing investments in our cable systems, partially offset by lower interest
rates on our variable rate debt.
Loss on derivative instruments, net. Loss on derivative instruments, net,
was $13.9 million for the year ended December 31, 2002, as compared to $8.4
million for the year ended December 31, 2001 primarily due to an increase in the
notional amount of interest rate exchange agreements under which we pay fixed
interest rates, and a decline in market interest rates.
34
Other expenses (income). Other expenses were $11.1 million for the year
ended December 31, 2002, as compared to $21.7 million of other income 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.
Net loss. Due to the factors described above, we generated a net loss of
$161.7 million for the year ended December 31, 2002 as compared to a net loss of
$190.9 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 and the acquisitions of the AT&T cable systems
(together, the "2000-2001 Acquisitions"), only for that portion of the
respective period that such cable systems were owned by us.
Basic subscribers were 1,595,000 at December 31, 2001, as compared to
779,000 at December 31, 2000.
Digital customers were 321,000 at December 31, 2001, as compared to
40,000 at December 31, 2000.
Data customers were 115,000 at December 31, 2001, as compared to 15,600
at December 31, 2000.
Revenues. Revenues increased 78.3% to $585.2 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 $256.9 million, $234.3 was attributable to the
2000-2001 Acquisitions. Excluding the effects 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.......... $ 541.5 92.5% $ 317.9 96.8
Data........... 26.2 4.5 5.9 1.8
Advertising.... 17.5 3.0 4.5 1.4
--------- -------- -------- --------
$ 585.2 100.0% $ 328.3 100.0%
========= ======== ======== ========
Video revenues increased 70.1% to $541.5 million for the year ended
December 31, 2001, as compared to $317.9 million for the year ended December 31,
2000. Of the video revenue increase of $223.6million, $203.7million was
attributable to the 2000-2001 Acquisitions. Excluding the effects of such
acquisitions, video revenues increased primarily due to basic rate increases
largely associated with new programming introductions and to customer growth in
our digital cable services.
Data revenues increased 376.4% to $26.2 million for the year ended
December 31, 2001, as compared to $5.9 million for the year ended December 31,
2000. Of the data revenue increase of $20.3 million, $17.1 million was
attributable to the 2000-2001 Acquisitions. Excluding the effects of such
acquisitions, data revenues increased primarily due to customer growth in our
high-speed Internet access service.
Advertising revenues increased by 288.9% to $17.5 million for the year
ended December 31, 2001, as compared to $4.5 million for the year ended December
31, 2000. The advertising revenue increase of $13.0 million was principally
attributable to the 2000-2001 Acquisitions.
35
Service costs. Service costs increased 98.7% to $219.5 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
$5.8 million of incremental expenses related to the transition from Excite@Home
to our Mediacom Online(SM) high-speed Internet access service. Of the increase
in service costs of $109.1 million, $96.6 million was attributable to the
2000-2001 Acquisitions. Excluding the effects of such acquisitions, these costs
increased primarily as a result of higher programming expenses, including rate
increases by programming suppliers for existing services and the costs of new
channel additions. As a percentage of revenues, service costs were 37.5% 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 89.5% to $105.8 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 $50.0
million, $45.5 million was attributable to the 2000-2001 Acquisitions. Excluding
the effects of such 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 18.1% for the year ended December 31, 2001, as
compared with 17.0% for the year ended December 31, 2000.
Corporate expenses. Corporate expenses increased 44.4% to $8.7 million
for the year ended December 31, 2001 as compared to $6.0 million for the year
ended December 31, 2000. The increase is primarily due to the increased number
of corporate employees as a result of the acquisition of the AT&T cable systems.
As a percentage of revenues, corporate expenses were 1.5% for the year ended
December 31, 2001 as compared with 1.8% for the year ended December 31, 2000.
Depreciation and amortization. Depreciation and amortization increased
74.3% to $310.8 million for the year ended December 31, 2001 as compared to
$178.3 million in the year ended December 31, 2000. This increase was due to our
purchase of the 2000-2001 Acquisitions and capital expenditures associated with
the upgrade of our cable systems.
Non-cash stock charges relating to corporate expenses. Non-cash stock
charges relating to corporate expenses 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 our initial public
offering.
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.
Interest expense, net. Interest expense, net, increased 102.8% to $139.9
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 additional
indebtedness resulting from the acquisition of the AT&T cable systems, partially
offset by declining interest rates on our variable rate debt.
Other expenses (income). Other income of $21.7 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 was principally due to a 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 deemed other than temporary.
Provision for income taxes. Provision for income taxes was $0.1 million
for the year ended December 31, 2001 as compared to $0.3 million for the year
ended December 31, 2000. This provision primarily relates to minimum state and
local taxes and capital taxes.
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.
36
Net loss. Principally due to the increases in depreciation and
amortization expense and interest expense, net, in part offset by other income,
net loss was $190.9 million for the year ended December 31, 2001 as compared to
a net loss of $149.8 million for the year ended December 31, 2000.
LIQUIDITY AND CAPITAL RESOURCES
Our business requires substantial capital for the upgrade, expansion and
maintenance of our cable network. In addition, we have pursued, and will
continue to pursue, a business strategy that includes selective acquisitions. We
have funded and will continue to fund our working capital requirements, capital
expenditures and acquisitions through a combination of internally generated
funds, long-term borrowings and equity financings.
OPERATING ACTIVITIES
Cash provided by operations for the years ended December 31, 2002 and
2001 was $174.2 million and $258.6 million, respectively. There were significant
working capital sources relating to the acquisitions of the AT&T cable systems
in 2001 that did not recur in 2002.
INVESTING ACTIVITIES
Cash used in investing activities for the years ended December 31, 2002
and 2001 was $421.6 million and $2.4 billion, respectively. In 2001, we
completed the acquisitions of the AT&T cable systems. In 2002, we did not
complete any significant acquisitions of cable systems.
Our capital expenditures were $408.3 million, $285.4 million and $183.5
million for the years ended December 31, 2002, 2001 and 2000, respectively. The
higher capital expenditures in 2002 reflect the significant investments we have
made as a result of our accelerated network upgrade program and our ownership of
the AT&T cable systems for the full year. As of December 31, 2002, as a result
of our cumulative capital investment in our network upgrade program,
approximately 96% of our cable network was upgraded with 550MHz to 870MHz
bandwidth capacity and about 91% of our homes passed were activated with two-way
communications capability. At year end 2002, our digital cable service was
available to approximately 1.5 million basic subscribers, and our cable modem
service was marketed to about 2.3 million homes passed by our cable systems.
We expect to complete our planned network upgrade program by June 2003,
at which time we anticipate that approximately 98% of our cable network will be
upgraded with 550MHz to 870MHz bandwidth capacity with two-way communications
capability. To achieve these targets and to fund other requirements, including
the infrastructure for our high-speed Internet service, cable modems, digital
converters, new plant construction, headend eliminations, regional fiber
interconnections and network replacement, we expect to invest between $250.0
million and $270.0 million in capital expenditures in 2003.
On June 29, 2001, we completed the acquisition of AT&T cable systems
serving approximately 94,000 basic subscribers in Missouri. The purchase price
for these cable systems was approximately $300.0 million.
On July 18, 2001, we completed the acquisition of AT&T cable systems
serving approximately 706,000 basic subscribers in Georgia, Illinois and Iowa.
The aggregate purchase price for these cable systems was approximately $1.76
billion.
FINANCING ACTIVITIES
Cash provided by financing activities for the years ended December 31,
2002 and 2001 was $215.3 million and $2.2 billion, respectively. In 2001, cash
provided by financing activities funded our acquisitions of the AT&T cable
systems.
To finance our prior acquisitions and our network upgrade program and to
provide liquidity for future capital needs, we completed the undernoted
financing arrangements.
37
On January 24, 2001, our direct and indirect subsidiaries, Mediacom LLC
and Mediacom Capital Corporation, a New York corporation, completed an offering
of $500.0 million of 9 1/2% senior notes due January 2013. Interest on the 9
1/2% senior notes is payable semi-annually on January 15 and July 15, which
commenced on July 15, 2001. Approximately $467.5 million of the net proceeds
were used to repay a substantial portion of the indebtedness outstanding under
our bank credit facilities and related accrued interest. The balance of the net
proceeds was used for general corporate purposes.
On June 27, 2001, we completed a public offering of 29.9 million shares
of our Class A common stock at $15.22 per share for total net proceeds of
approximately $432.9 million. The net proceeds from this offering were used to
pay a portion of the purchase price for the acquisitions of AT&T cable systems.
On June 27, 2001, we completed a public offering of $172.5 million of 5
1/4% convertible senior notes due July 2006. Interest on the 5 1/4% convertible
senior notes is payable semi-annually on January 1 and July 1 of each year,
which commenced on January 1, 2002. The convertible senior notes are convertible
at any time at the option of the holder into our Class A common stock at an
initial conversion rate of 53.4171 shares per $1,000 principal amount of notes,
which is equivalent to a price of $18.72 per share. The conversion rate is
subject to adjustment, as defined in the indenture to the convertible senior
notes. We may redeem the convertible senior notes at 101.313% of par value from
July 5, 2004 through June 30, 2005 and at par value thereafter. The net proceeds
from this offering were used to pay a portion of the purchase price for the
acquisitions of the AT&T cable systems.
On June 29, 2001, our direct and indirect subsidiaries, Mediacom
Broadband LLC and Mediacom Broadband Corporation, a Delaware corporation,
completed an offering of $400.0 million of 11% senior notes due July 2013.
Interest on the 11% senior notes is payable semi-annually on January 15 and July
15 of each year, which commenced on January 15, 2002. The net proceeds from this
offering were used to pay a portion of the purchase price for the acquisitions
of the AT&T cable systems.
The operating subsidiaries of Mediacom Broadband LLC have a $1.4 billion
bank credit facility expiring in September 2010, of which $898.0 million was
outstanding as of December 31, 2002. The operating subsidiaries of Mediacom LLC
have two bank credit facilities aggregating $1.1 billion, of which $723.5
million was outstanding as of December 31, 2002. Mediacom LLC's bank credit
facilities expire in September 2008 and December 2008, however, their final
maturities are subject to earlier repayment on dates ranging from June 2007 to
December 2007 if Mediacom LLC does not refinance its $200.0 million 8 1/2%
senior notes due April 2008 prior to March 31, 2007.
We have entered into interest rate exchange agreements, which expire from
April 2003 through March 2007, to hedge $940.0 million of floating rate debt,
including $150.0 million completed subsequent to December 31, 2002. Under the
terms of all of our interest rate exchange agreements, we are exposed to credit
loss in the event of nonperformance by the other parties to the interest rate
exchange agreements. However, we do not anticipate their nonperformance. As of
the date of this report, about 77% of our outstanding indebtedness was at fixed
interest rates or subject to interest rate protection.
As of December 31, 2002, our total debt was $3.019 billion and we had
unused credit commitments of about $844.0 million under all of our bank credit
facilities and our annualized cost of debt capital was approximately 6.6%. As of
January 1, 2003, after giving effect to scheduled step downs in the maximum
leverage covenants in our bank credit facilities, approximately $600.0 million
could be borrowed and used for general corporate purposes under the most
restrictive covenants in our debt arrangements. As of December 31, 2002, we were
in compliance with all debt covenants.
During October 2002, we purchased approximately 1.5 million shares of our
Class A common stock for an aggregate cost of approximately $6.0 million at
share prices ranging from $3.59 to $4.29 per share. These purchases were
completed under the $50.0 million Class A stock repurchase program authorized by
the Board of Directors in May 2000. As of the filing date of this report,
approximately $43.4 million of the original $50.0 million authorization remains
available under the Class A stock repurchase program.
Although we have not generated earnings sufficient to cover fixed
charges, we have generated cash and obtained financing sufficient to meet our
short-term requirements, including our debt service, working capital, capital
expenditure and acquisition requirements. We expect that we will continue to be
able to generate funds and obtain financing sufficient to service our long-term
business plan, service our debt obligations and complete any future
38
acquisitions. However, there can be no assurance that we will be able to obtain
sufficient financing, or, if we were able to do so, that the terms would be
favorable to us.
CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS
The table below summarizes our contractual obligations and commercial
commitments for the five years subsequent to December 31, 2002 and thereafter.
The amounts represent the maximum future contractual obligations, some of which
may be settled by delivering equity securities.
LONG-TERM OPERATING
DEBT/(a)/ LEASES TOTAL
------------ ------------ ------------
(DOLLARS IN THOUSANDS)
2003....................... $ 2,000 $ 3,341 $ 5,341
2004....................... 10,500 2,316 12,816
2005....................... 57,000 1,658 58,658
2006....................... 383,750 1,373 385,123
2007 ...................... 247,000 1,119 248,119
Thereafter................. 2,318,750 5,720 2,324,470
------------ ------------ ------------
Total cash obligations..... $ 3,019,000 $ 15,527 $ 3,034,527
============ ============ ============
- ----------
/(a)/ Includes $172.5 million of convertible senior notes due 2006.
CRITICAL ACCOUNTING POLICIES
The foregoing discussion and analysis of our financial condition and
results of operations is based upon our consolidated financial statements, which
have been prepared in accordance with accounting principles generally accepted
in the United States. The preparation of these financial statements requires us
to make estimates and assumptions that affect the reported amounts of assets,
liabilities, revenues and expenses, and related disclosure of contingent assets
and liabilities. Periodically, we evaluate our estimates, including those
related to doubtful accounts, long-lived assets, capitalized costs and accruals.
We base our estimates on historical experience and on various other assumptions
that we believe are reasonable. Actual results may differ from these estimates
under different assumptions or conditions.
We believe the following represent the most significant and subjective
estimates used in the preparation of our consolidated financial statements. For
a detailed description of our significant accounting policies, please see Note 2
of our consolidated financial statements.
PROPERTY, PLANT AND EQUIPMENT
In accordance with Statement of Financial Accounting Standards No. 51,
"Financial Reporting by Cable Television Companies," we capitalize a portion of
direct and indirect costs related to the construction, replacement and
installation of property, plant and equipment, including certain costs related
to new video and new high-speed Internet subscriber installations. Capitalized
costs are recorded as additions to property, plant and equipment and depreciated
over the life of the related assets. We perform periodic evaluations of the
estimates used to determine the amount of costs that are capitalized.
IMPAIRMENT OF LONG-LIVED ASSETS
We follow the provisions of Statement of Financial Accounting Standards
No. 144 ("SFAS 144"), "Accounting for the Impairment or Disposal of Long-Lived
Assets" SFAS 144 addresses financial accounting and reporting for the impairment
or disposal of long-lived assets and provides guidance on classification and
accounting for such assets when held for sale or abandonment. Based on our
review, there has been no impairment of long-lived assets under SFAS 144.
39
GOODWILL AND OTHER INTANGIBLE ASSETS
Effective January 1, 2002, we adopted Statement of Financial Accounting
Standards No. 142 ("SFAS 142"), "Goodwill and Other Intangible Assets." The
provisions of SFAS 142 prohibit the amortization of goodwill and
indefinite-lived intangible assets and require such assets to be tested annually
for impairment, or more frequently if impairment indicators arise. We have
determined that our cable franchise costs are indefinite-lived assets. Upon
adoption, we performed initial impairment tests and determined that there was
no impairment. We conducted our annual impairment tests as of September 30,
2002, utilizing discounted cash flow analysis, and they did not result in any
impairment of goodwill or indefinite-lived intangible assets. The impact of
adopting SFAS 142 was to reduce amortization expense by $144.9 million for the
year ended December 31, 2002.
RECENT ACCOUNTING PRONOUNCEMENTS
In December 2002, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 148, "Accounting for Stock-Based
Compensation-Transition and Disclosure" ("SFAS 148"), which (i) amends SFAS
Statement No. 123, "Accounting for Stock-Based Compensation," to provide
alternative methods of transition for an entity that voluntarily changes to the
fair value based method of accounting for stock-based employee compensation;
(ii) amends the disclosure provisions of SFAS 123 to require prominent
disclosure about the effects on reported net income of an entity's accounting
policy decisions with respect to stock-based employee compensation; and (iii)
amends APB Opinion No. 28, "Interim Financial Reporting," to require disclosure
about those effects in interim financial information. Items (ii) and (iii) of
the new requirements in SFAS 148 are effective for financial statements for
fiscal years ending after December 15, 2002. We have included the requirements
of item (ii) in Note 15 of our consolidated financial statements and will
include the requirements of item (iii) beginning in our first interim period
after December 15, 2002.
INFLATION AND CHANGING PRICES
Our systems' costs and expenses are subject to inflation and price
fluctuations. Such changes in costs and expenses can generally be passed through
to subscribers. Programming costs have historically increased at rates in excess
of inflation and are expected to continue to do so. We believe that under the
Federal Communications Commission's existing cable rate regulations we may
increase rates for cable television services to more than cover any increases in
programming and copyright costs. However, competitive conditions and other
factors in the marketplace may limit our ability to increase our rates.
RISK FACTORS
We have a history of net losses and may not be profitable in the future.
We have had a history of net losses and expect to continue to report net
losses for the foreseeable future, which could cause the prices at which our
stock and other securities trade to decline and adversely affect our ability to
finance our business in the future. We reported net losses of $149.8 million,
$190.9 million and $161.7 million for the years ended December 31, 2000, 2001
and 2002, respectively. The principal reasons for our prior and anticipated net
losses include the depreciation and amortization expenses associated with our
acquisitions, the capital expenditures related to expanding and upgrading our
cable systems and interest costs on borrowed money.
We are a holding company with no operations and we depend on our operating
subsidiaries for cash to fund our obligations.
As a holding company, we do not have any operations or hold any assets
other than our investments in and our advances to our operating subsidiaries.
Consequently, our subsidiaries conduct all of our consolidated operations and
own substantially all of our consolidated assets. The only source of cash we
have to pay interest on, and repay the principal of, our indebtedness and to
meet our other obligations is the cash that our subsidiaries generate from their
operations and their borrowings. Our subsidiaries are not obligated to make
funds available to us. Our subsidiaries' ability to make payments to us will
depend upon their operating results and will be subject to applicable laws and
40
contractual restrictions, including the agreements governing our subsidiary
credit facilities and other indebtedness. Those agreements permit our
subsidiaries to distribute cash to us under certain circumstances, but only so
long as there is no default under any of such agreements.
We have grown rapidly and have a limited history of operating all of our
current cable systems, which may make it difficult for you to evaluate our
performance.
We began operations in 1996 and have grown rapidly since then,
principally through acquisitions. In late 1999, we completed acquisitions that
doubled the number of subscribers served by our cable systems. In June and July
2001, we made other acquisitions that again doubled our subscribers. As a
result, you have limited information upon which to evaluate our performance in
managing all of our current systems, and our historical financial information
may not be indicative of the future results we can achieve with our cable
systems.
We have substantial existing debt and may incur substantial additional
debt, which could adversely affect our ability to obtain financing in the future
and require our operating subsidiaries to apply a substantial portion of their
cash flow to debt service.
Our total debt as of December 31, 2002 was approximately $3.0 billion.
Our interest expense for the year ended December 31, 2002 was $188.3 million. We
cannot assure you that our business will generate sufficient cash flows to
permit us, or our subsidiaries, to repay indebtedness or that refinancing of
that indebtedness will be possible on commercially reasonable terms or at all.
This high level of debt and our debt service obligations could have
material consequences, including that:
. our ability to access new sources of financing for working
capital, capital expenditures, acquisitions or other purposes may
be limited;
. we may need to use a large portion of our revenues to pay
interest on borrowings under our subsidiary credit facilities and
our senior notes, which will reduce the amount of money available
to finance our operations, capital expenditures and other
activities;
. some of our debt has a variable rate of interest, which may
expose us to the risk of increased interest rates;
. we may be more vulnerable to economic downturns and adverse
developments in our business;
. we may be less flexible in responding to changing business and
economic conditions, including increased competition and demand
for new products and services;
. we may be at a disadvantage when compared to those of our
competitors that have less debt; and
. we may not be able to implement our strategy.
We anticipate incurring additional debt to fund the expansion,
maintenance and upgrade of our cable systems. If new debt is added to our
current debt levels, the related risks that we now face could intensify.
A default under our indentures or our subsidiary credit facilities could
result in an acceleration of our indebtedness and other material adverse
effects.
The agreements and instruments governing our own and our subsidiaries'
indebtedness contain numerous financial and operating covenants. The breach of
any of these covenants could cause a default, which could result in the
indebtedness becoming immediately due and payable. If this were to occur, we
would be unable to adequately finance our operations. In addition, a default
could result in a default or acceleration of our other indebtedness subject to
cross-default provisions. If this occurs, we may not be able to pay our debts or
borrow sufficient funds to refinance them. Even if new financing is available,
it may not be on terms that are acceptable to us. The membership interests of
our operating subsidiaries are pledged as security under the respective
subsidiary credit facilities. A default under one of our subsidiary credit
facilities could result in a foreclosure by the lenders on the membership
interests pledged under that facility. Because we are dependent upon our
operating subsidiaries for all of our revenues, a foreclosure would have a
material adverse effect on our business, financial condition and results of
operations.
41
The terms of our indebtedness could materially limit our financial and
operating flexibility.
Several of the covenants contained in the agreements and instruments
governing our own and our subsidiaries' indebtedness could materially limit our
financial and operating flexibility by restricting, among other things, our
ability and the ability of our operating subsidiaries to:
. incur additional indebtedness;
. create liens and other encumbrances;
. pay dividends and make other payments, investments, loans and
guarantees;
. enter into transactions with related parties;
. sell or otherwise dispose of assets and merge or consolidate with
another entity;
. repurchase or redeem capital stock, other equity interests or
debt;
. pledge assets; and
. issue capital stock or other equity interests.
Complying with these covenants could cause us to take actions that we
otherwise would not take or cause us not to take actions that we otherwise would
take.
We may not be able to obtain additional capital to continue the development
of our business.
Our business has required substantial capital for the upgrade, expansion
and maintenance of our cable systems and the launch and expansion of new or
additional services. While we have substantially completed our planned system
upgrades, if there is accelerated growth in our digital cable and data
customers, or we decide to introduce new advanced services, or the cost to
provide these services increases, we may need to make unplanned additional
capital expenditures. We may not be able to obtain the funds necessary to
finance our capital improvement program or any additional capital requirements
through internally generated funds, additional borrowings or other sources. If
we are unable to obtain these funds, we would not be able to implement our
business strategy and our results of operations would be adversely affected.
If we are unable to keep pace with technological change, our business and
results of operations could be adversely affected.
The cable business is characterized by rapid technological change and the
introduction of new products and services. We cannot assure you that we will be
able to fund the capital expenditures necessary to keep pace with technological
developments. We also cannot assure you that we will successfully anticipate the
demand of our customers for products and services requiring new technology. This
type of rapid technological change could adversely affect our plans to upgrade
or expand our systems and respond to competitive pressures. Our inability to
upgrade, maintain and expand our systems and provide advanced services in a
timely manner, or to anticipate the demands of the market place, could adversely
affect our ability to compete. Consequently, our business and results of
operations could suffer materially.
If we are unsuccessful in implementing our growth strategy, our business
and results of operations could be adversely affected.
We expect that a substantial portion of our future growth in revenues
will come from the expansion of relatively new services, such as high-speed
Internet access service, digital cable services and video-on-demand, and
acquisitions of additional cable systems. We may not be able to successfully
expand these services, and it is possible that they will not generate
significant revenue growth. As of the filing date of this report, there were no
material pending acquisitions. We may not be successful in identifying
attractive acquisition targets or obtaining the financing necessary to complete
future acquisitions. Among other things, in recent years, the cable television
industry has undergone dramatic consolidation, which has reduced the number of
future acquisition prospects and may increase the purchase price for any
acquisitions we pursue.
42
Our programming costs are increasing, and our business and results of
operations will be adversely affected if we cannot pass through a sufficient
part of the additional costs to subscribers.
Our programming costs have been, and are expected to continue to be, one
of our largest single expense items. In recent years, the cable and satellite
video industries have experienced a rapid increase in the cost of programming,
particularly sports programming. This increase in programming costs is expected
to continue, and we may not be able to pass programming cost increases on to our
customers. In addition, as we add programming to our basic and expanded basic
programming tiers, we may not be able pass all of our costs of the additional
programming on to our customers without the potential loss of basic subscribers.
To the extent that we are unable to pass increased or additional programming
costs through to subscribers, our business and results of operations will be
adversely affected.
We also expect to be subject to increasing financial and other demands by
broadcasters to obtain the required consents for the transmission of broadcast
programming to our subscribers. We cannot predict the impact of these
negotiations on our business and results of operations or the effect on our
subscribers should we be required to suspend the carriage of this programming.
Failure to negotiate or renew programming contracts could adversely affect
our business and results of operations.
Following our acquisitions of the AT&T cable systems, substantially all
of the programming services carried on those cable systems were without written
contracts with the respective program suppliers. We have completed agreements
for several of those programming services and are continuing to negotiate terms
for the remainder of the services. From time to time, the contracts covering the
programming services carried on our cable systems expire, and we generally
provide such services to our customers without written contracts with the
respective program suppliers as we negotiate contract renewals. While we could
obtain access to most of these programming services through a national
programming purchasing cooperative or by relying on certain protective
provisions of the Communications Act, we are unable to guarantee that we will be
able to provide without interruption any programming service that is not covered
by a written contract. Prolonged loss of access to certain of these programming
services could result in our customers switching to our competitors or have
other material adverse effects on our business and results of operations.
We may not be able to compete effectively in the highly competitive media
and telecommunications industries.
The communications industry in which we operate is highly competitive and
is often subject to rapid and significant changes and developments in the
marketplace and in the regulatory and legislative environment. In some
instances, we compete against companies with fewer regulatory burdens, easier
access to financing, greater resources and operating capabilities, greater brand
name recognition and long-standing relationships with regulatory authorities.
Our traditional cable television business faces direct competition from other
cable companies, municipal-owned utilities, telephone companies, and, most
significantly, from direct broadcast satellite operators. Our high-speed
Internet access service is subject to competition from telephone companies using
digital subscriber line technology, direct broadcast satellite operators and
other Internet service providers. We also face competition from over-the-air
television and radio broadcasters and from other communications and
entertainment media such as movie theaters, live entertainment and sports
events, newspapers and home video products.
We anticipate that future advances in communications technology could
lead to the introduction of new competitors, products and services that may
compete with our businesses. We cannot assure you that upgrading our cable
systems will allow us to compete effectively. Additionally, if we expand and
introduce new and enhanced telecommunications services, we will be subject to
competition from new and established telecommunications providers. We cannot
predict the extent to which competition may affect our business and results of
operations in the future.
43
Continued growth of direct broadcast satellite operators could adversely
affect our business and results of operations.
Direct broadcast satellite operators have grown at a rate far exceeding
the cable television industry growth rate and have emerged as a significant
competitor to cable operators. Direct broadcast satellite service consists of
television programming transmitted via high-powered satellites to individual
homes, each served by a small satellite dish. Legislation permitting direct
broadcast satellite operators to transmit local broadcast signals was enacted on
November 29, 1999. This eliminated a significant competitive advantage that
cable system operators had over direct broadcast satellite operators. Direct
broadcast satellite operators deliver local broadcast signals in many markets
that we serve. These companies and others are also developing ways to bring
advanced communications services to their customers. They are currently offering
satellite-delivered high-speed Internet access services.
We may not be able to obtain critical items at a reasonable cost or when
required, which could adversely affect business, financial condition and results
of operations.
We depend on third-party suppliers for equipment, software, services and
other items that are critical for the operation of our cable systems and the
provision of advanced services, including analog and digital set-top converter
boxes, servers and routers, fiber-optic cable, telephone circuits, software, the
"backbone" telecommunications network for our Internet access service and
construction services for expansion and upgrades of our cable systems. These
items are available from a limited number of suppliers. Demand for these items
has increased with the general growth in demand for Internet and
telecommunications services. We typically do not carry significant inventories
of equipment. Moreover, if there are no suppliers that are able to provide
set-top converter boxes that comply with evolving Internet and
telecommunications standards or that are compatible with other equipment and
software that we use, our business, financial condition and results of
operations could be materially adversely affected. If we are unable to obtain
critical equipment, software, services or other items on a timely basis and at
an acceptable cost, our ability to offer our products and services and roll out
advanced services may be impaired, and our business, financial condition and
results of operations could be materially adversely affected.
The loss of key personnel could have a material adverse effect on our
business.
Our success is substantially dependent upon the retention and continued
performance of our key personnel, including Rocco B. Commisso, our Chairman and
Chief Executive Officer. We have not entered into an employment agreement with
Mr. Commisso. If Mr. Commisso or any of our other key personnel cease to be
employed by us for any reason, our business could be materially adversely
affected. We do not currently maintain key man life insurance on Mr. Commisso or
other key personnel.
In addition, our subsidiary credit facilities provide that a default will
result if any person or group, other than Mr. Commisso and certain of his
affiliates, becomes the beneficial owner of an amount of aggregate voting power
of our common stock on a fully-diluted basis that equals or exceeds the greater
of: (i) 35% and (ii) the amount of aggregate voting power of our common stock on
a fully diluted basis owned by Mr. Commisso and such affiliates at the time.
Our Chairman and Chief Executive Officer has the ability to control all
major corporate decisions, which could inhibit or prevent a change of control or
change in management. A sale of his stock could result in a change of control
that would have unpredictable effects.
Rocco B. Commisso, our Chairman and Chief Executive Officer, beneficially
owned our common stock representing approximately 80.4% of the combined voting
power as of December 31, 2002. As a result, Mr. Commisso will generally have the
ability to control the outcome of all matters requiring stockholder approval,
including the election of our entire board of directors, the approval of any
merger or consolidation and the sale of all or substantially all of our assets.
Mr. Commisso's voting power may have the effect of discouraging offers to
acquire Mediacom because any such acquisition would require his consent.
44
We cannot assure you that Mr. Commisso will maintain all or any portion
of his ownership or that he would continue as an officer or director if he sold
a significant part of his stock. The disposition by Mr. Commisso of a sufficient
number of shares could result in a change in control of our company, and we
cannot assure you that a change of control would not adversely affect our
business, financial condition or results of operations. As noted above, it could
also result in a default under our subsidiary credit agreements.
Our cable television business is subject to extensive governmental
regulation.
The cable television industry is subject to extensive legislation and regulation
at the federal and local levels, and, in some instances, at the state level, and
many aspects of such regulation are currently the subject of judicial and
administrative proceedings and legislative and administrative proposals. We
expect that court actions and regulatory proceedings will continue to refine our
rights and obligations under applicable federal, state and local laws. The
results of these judicial and administrative proceedings and legislative
activities may materially affect our business operations. Local authorities
grant us non-exclusive franchises that permit us to operate our cable systems.
We will have to renew or renegotiate these franchises from time to time. Local
franchising authorities may demand concessions, or other commitments, as a
condition to renewal, which concessions or other commitments could be costly to
obtain. The Communications Act contains renewal procedures and criteria designed
to protect incumbent franchisees against arbitrary denials fo renewal, and
although such Act requires the local franchising authorities to take into
account the costs of meeting such concessions or commitments, there is no
assurance that we will not be required to meet their demands in order to obtain
renewals. We cannot predict whether any of the markets in which we operate will
expand the regulation of our cable systems in the future or the impact that any
such expanded regulation may have upon our business.
Similarly, due to the increasing popularity and use of commercial online
services and the Internet, it is possible that a number of laws and regulations
may be adopted with respect to commercial online services and the Internet,
including laws covering such issues as privacy, access to some types of content
by minors, pricing, bulk e-mail or "spam," encryption standards, consumer
protection, electronic commerce, taxation of e-commerce, copyright infringement
and other intellectual property matters. The adoption of such laws or
regulations in the future may decrease the growth of such services and the
Internet, which could in turn decrease the demand for our cable modem service,
increase our costs of providing such service or have other adverse effects on
our business, financial condition and results of operations.
Our franchises are non-exclusive and local franchising authorities may
grant competing franchises in our markets.
Our cable systems are operated under non-exclusive franchises granted by
local franchising authorities. As a result, competing operators of cable systems
and other potential competitors, such as municipal utility providers, may be
granted franchises and may build cable systems in markets where we hold
franchises. Any such competition could adversely affect our business. The
existence of multiple cable systems in the same geographic area is generally
referred to as an "overbuild." As of the filing date of this report,
approximately 9.4% of the homes passed by our cable systems were overbuilt by
other cable operators. We cannot assure you that competition will not develop in
other markets that we now serve or that we will serve after any future
acquisitions.
45
Pending FCC and court proceedings could adversely affect our Internet
access service.
The legal and regulatory status of providing high-speed Internet access
service by cable television companies is uncertain. The adoption of new rules by
the FCC or rulings in court proceedings could place additional costs and
regulatory burdens on us, reduce our anticipated revenues or increase our
anticipated costs for this service, complicate the franchise renewal process,
result in greater competition or otherwise adversely affect our business.
Although the FCC has issued a declaratory ruling that cable modem service, as it
is currently offered, is properly classified as an interstate information
service that is not subject to common carrier regulation, the FCC is still
considering whether to require cable companies to provide capacity on their
systems to other entities to deliver high-speed Internet directly to customers,
also known as "open access", whether certain other regulatory requirements do or
should apply to cable modem service, and whether and to what extent this service
may be subject to local franchise authorities' regulatory requirements or
franchise fees. There can be no assurance that regulatory authorities will not
impose "open access" or similar requirements on us as part of an industry-wide
requirement. Such requirements could have a negative impact on our business and
results of operations.
We may be subject to legal liability because of the acts of our Internet
service customers or because of our own negligence.
Our cable modem service enables individuals to access the Internet and to
exchange information, generate content, conduct business and engage in various
online activities on an international basis. The law relating to the liability
of providers of these online services for activities of their users is currently
unsettled both within the United States and abroad. Potentially, third parties
could seek to hold us liable for the actions and omissions of our cable modem
service customers, such as defamation, negligence, copyright or trademark
infringement, fraud or other theories based on the nature and content of
information that our customers use our service to post, download or distribute.
We also could be subject to similar claims based on the content of other
Websites to which we provide links or third-party products, services or content
that we may offer through our Internet service. Due to the global nature of the
Web, it is possible that the governments of other states and foreign countries
might attempt to regulate its transmissions or prosecute us for violations of
their laws.
It is also possible that, if any information provided directly by us will
contain errors or otherwise be negligently provided to users, resulting in third
parties making claims against us. For example, we offer Web-based email
services, which expose us to potential risks, such as liabilities or claims
resulting from unsolicited email, lost or misdirected messages, illegal or
fraudulent use of email, or interruptions or delays in email service.
To date, no one has filed a claim of any of these kinds against us, but
someone may file a claim of that type in the future in either domestic or
international jurisdictions, and may be successful in imposing liability on us.
Our defense of any such actions could be costly and involve significant
distraction of our management and other resources. If we are held or threatened
with significant liability, we may decide to take actions to reduce our exposure
to this type of liability. This may require us to spend significant amounts of
money for new equipment and may also require us to discontinue offering some
features or our cable modem service.
Since we launched our proprietary Mediacom Online(SM) Internet service in
February 2002, we from time to time receive notices of claimed infringements by
our cable modem service users. The owners of copyrights and trademarks have been
increasing active in seeking to prevent use of the Internet to violate their
rights. In many cases, their claims of infringement are based on the acts of
customers of an Internet service provider--for example, a customer's use of an
Internet service or the resources it provides to post, download or disseminate
copyrighted music or other content without the consent of the copyright owner or
to seek to profit from the use of the goodwill associated with another person's
trademark. In some cases, copyright and trademark owners have sought to recover
damages from the Internet service provider, as well as or instead of the
customer. The law relating to the potential liability of Internet service
providers in these circumstances is unsettled. In 1996, Congress adopted the
Digital Millennium Copyright Act, which is intended to grant ISPs protection
against certain claims of copyright infringement resulting from the actions of
customers, provided that the ISP complies with certain requirements. So far,
Congress has not adopted similar protections for trademark infringement claims.
46
If we offer telecommunications services, we may become subject to
additional regulatory burdens.
If we provide telecommunications services over our communications
facilities, we may be required to obtain additional federal, state and local
permits or other governmental authorizations to offer these services. This
process, together with accompanying regulation of these services, would place
additional costs and regulatory burdens on us.
47
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
In the normal course of business, we use interest rate exchange
agreements in order to fix the interest rate on our floating rate debt. As of
December 31, 2002, we had interest rate exchange agreements with various banks
pursuant to which the interest rate on $790.0 million is fixed at a weighted
average rate of approximately 4.0%, plus the average applicable margin over the
eurodollar rate option under our bank credit agreements. Under the terms of the
interest rate exchange agreements, which expire from 2003 through 2007, we are
exposed to credit loss in the event of nonperformance by the other parties.
However, we do not anticipate their nonperformance. At December 31, 2002, we
would have paid approximately $24.0 million if we terminated these agreements,
inclusive of accrued interest. The table below provides information on our
long-term debt. See Note 7 to our consolidated financial statements.
EXPECTED MATURITY
----------------------------------------------------------------------
(ALL DOLLAR AMOUNTS IN THOUSANDS)
2003 2004 2005 2006 2007 THEREAFTER TOTAL FAIR VALUE
-------- -------- --------- --------- --------- ----------- ----------- -----------
Fixed rate $ - $ - $ - $ - $ - $ 200,000 $ 200,000 $ 181,000
Weighted average
interest rate 8.5% 8.5% 8.5% 8.5% 8.5% 8.5% 8.5%
Fixed rate $ - $ - $ - $ - $ - $ 125,000 $ 125,000 $ 104,000
Weighted average
interest rate 7.9% 7.9% 7.9% 7.9% 7.9% 7.9% 7.9%
Fixed rate $ - $ - $ - $ - $ - $ 500,000 $ 500,000 $ 456,000
Weighted average
interest rate 9.5% 9.5% 9.5% 9.5% 9.5% 9.5% 9.5%
Fixed rate $ - $ - $ - $ - $ - $ 400,000 $ 400,000 $ 421,000
Weighted average
interest rate 11.0% 11.0% 11.0% 11.0% 11.0% 11.0% 11.0%
Fixed rate $ - $ - $ - $ 172,500 $ - $ - $ 172,500 $ 144,000
Weighted average
interest rate 5.3% 5.3% 5.3% 5.3% 5.3% 5.3% 5.3%
Variable rate $ 2,000 $ 10,500 $ 57,000 $ 211,250 $ 247,000 $ 1,093,750 $ 1,621,500 $ 1,621,500
Weighted average
interest rate 4.3% 4.3% 4.3% 4.3% 4.3% 4.3% 4.3%
48
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
MEDIACOM COMMUNICATIONS CORPORATION AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
CONTENTS
PAGE
Report of Independent Accountants-PricewaterhouseCoopers LLP............................................ 50
Report of Independent Public Accountants-Arthur Andersen LLP............................................ 52
Consolidated Balance Sheets as of December 31, 2002 and 2001............................................ 53
Consolidated Statements of Operations for the Years Ended December 31, 2002, 2001 and 2000.............. 54
Consolidated Statements of Changes in Stockholders' Equity for the Years Ended
December 31, 2002, 2001 and 2000....................................................................... 55
Consolidated Statements of Cash Flows for the Years Ended December 31, 2002, 2001 and 2000.............. 56
Notes to Consolidated Financial Statements.............................................................. 57
Financial Statement Schedule: Schedule II-Valuation and Qualifying Accounts............................ 73
49
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders of Mediacom Communications Corporation:
In our opinion, the accompanying consolidated balance sheet as of December 31,
2002 and the related consolidated statements of operations, of changes in
stockholders' equity, and of cash flows present fairly, in all material
respects, the financial position of Mediacom Communications Corporation and its
subsidiaries (the Company) at December 31, 2002, and the results of their
operations and their cash flows for the year then ended in conformity with
accounting principles generally accepted in the United States of America. These
financial statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audit. We conducted our audit of these statements in accordance with
auditing standards generally accepted in the United States of America, which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion. The Company's consolidated financial
statements as of December 31, 2001, and for each of the two years in the period
ended December 31, 2001, were audited by other independent accountants who have
ceased operations. Those independent accountants expressed an unqualified
opinion on those financial statements in their report dated February 13, 2002.
As discussed above, the Company's consolidated financial statements as of
December 31, 2001, and for each of the two years in the period ended December
31, 2001, were audited by other independent accountants who have ceased
operations. As described in Note 2, those financial statements have been revised
to include the transitional disclosures required by Statement of Financial
Accounting Standards No. 142, "Goodwill and Other Intangible Assets", which was
adopted by the Company as of January 1, 2002. We audited the transitional
disclosures for 2001 and 2000 included in Note 2. In our opinion, the
transitional disclosures for 2001 and 2000 in Note 2 are appropriate. However,
we were not engaged to audit, review, or apply any procedures to the 2001 or
2000 financial statements of the Company other than with respect to such
disclosures and, accordingly, we do not express an opinion or any other form of
assurance on the 2001 or 2000 financial statements taken as a whole.
As discussed in Note 2 to the consolidated financial statements, the Company
changed its method of accounting for goodwill effective January 1, 2002.
/S/ PricewaterhouseCoopers LLP
New York, New York
February 24, 2003
50
REPORT OF INDEPENDENT ACCOUNTANTS
ON FINANCIAL STATEMENT SCHEDULE
To the Shareholders of Mediacom Communications Corporation:
Our audit of the consolidated financial statements referred to in our report
dated February 24, 2003 appearing in this Annual Report on Form 10-K also
included an audit of the financial statement schedule [previously referred to as
Schedule II - Valuation and Qualifying Accounts by the predecessor auditor] for
the year ended December 31, 2002 listed in Item 8 of this Form 10-K. In our
opinion, the financial statement schedule for the year ended December 31, 2002
presents fairly, in all material respects, the information set forth therein
when read in conjunction with the related consolidated financial statements. The
financial statement schedules of Mediacom Communications Corporation and its
subsidiaries for the years ended December 31, 2001 and December 31, 2000, were
audited by other independent accountants who have ceased operations. Those
independent accountants expressed an unqualified opinion on those financial
statement schedules in their report dated February 13, 2002.
/S/ PricewaterhouseCoopers LLP
New York, New York
February 24, 2003
51
THE FOLLOWING REPORT IS A COPY OF A REPORT PREVIOUSLY ISSUED BY ARTHUR ANDERSEN
LLP AND HAS NOT BEEN REISSUED BY ARTHUR ANDERSEN LLP.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders of Mediacom Communications Corporation:
We have audited the accompanying consolidated balance sheets of Mediacom
Communications Corporation (a Delaware corporation) and subsidiaries as of
December 31, 2001 and 2000, and the related consolidated statements of
operations, changes in stockholders' equity and cash flows for each of the three
years in the period ended December 31, 2001. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Mediacom Communications
Corporation and its subsidiaries as of December 31, 2001 and 2000, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 2001 in conformity with accounting principles
generally accepted in the United States.
As explained in Note 2 to the consolidated financial statements, effective
January 1, 2001, the Company changed its method of accounting for derivative
instruments.
Our audits were made for the purpose of forming an opinion on the basic
consolidated financial statements taken as a whole. Schedule II--Valuation and
Qualifying Accounts is presented for purposes of complying with the Securities
and Exchange Commission's rules and is not part of the basic consolidated
financial statements. This schedule has been subjected to the auditing
procedures applied in the audit of the basic consolidated financial statements
and, in our opinion, fairly states in all material respects the financial data
required to be set forth therein in relation to the basic consolidated financial
statements taken as a whole.
/S/ ARTHUR ANDERSEN LLP
Stamford, Connecticut
February 13, 2002
52
MEDIACOM COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(All dollar amounts in 000's)
DECEMBER 31,
---------------------------
2002 2001
----------- ------------
ASSETS
Cash and cash equivalents............................................................. $ 31,224 $ 63,307
Investments........................................................................... 4,070 4,070
Subscriber accounts receivable, net of allowance for doubtful accounts
of $3,789 and $3,243, respectively................................................... 56,205 45,619
Prepaid expenses and other assets..................................................... 10,278 13,678
Investment in cable television systems:
Inventory, net..................................................................... 18,795 53,676
Property, plant and equipment, at cost............................................. 2,096,461 1,654,798
Less: accumulated depreciation..................................................... (631,427) (374,268)
----------- ------------
Property, plant and equipment, net............................................... 1,465,034 1,280,530
Intangible assets, net of accumulated amortization of $275,125 and
$250,288 respectively............................................................. 2,072,404 2,151,805
----------- ------------
Total investment in cable television systems..................................... 3,556,233 3,486,011
Other assets, net of accumulated amortization of $17,966 and $11,474
respectively....................................................................... 45,964 52,163
----------- ------------
Total assets..................................................................... $ 3,703,974 $ 3,664,848
=========== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Debt............................................................................... $ 3,019,000 $ 2,798,000
Accounts payable and accrued expenses.............................................. 305,172 329,866
Deferred revenue................................................................... 33,261 29,406
----------- ------------
Total liabilities................................................................ 3,357,433 3,157,272
----------- ------------
Commitments and Contingencies (Note 12)
STOCKHOLDERS' EQUITY
Class A common stock, $.01 par value; 300,000,000 shares authorized;
91,068,774 shares issued and 89,532,030 shares outstanding as of December
31, 2002 and 90,539,380 shares issued and outstanding as of December 31, 2001..... 910 905
Class B common stock, $.01 par value; 100,000,000 shares authorized;
28,991,456 and 29,342,990 shares issued and outstanding as of December 31, 2002
and 2001, respectively............................................................ 291 293
Additional paid-in capital......................................................... 981,343 974,760
Accumulated deficit................................................................ (630,040) (468,382)
Treasury stock, at cost, 1,536,744 shares of Class A common stock.................. (5,963) -
----------- ------------
Total stockholders' equity....................................................... 346,541 507,576
----------- ------------
Total liabilities and stockholders' equity....................................... $ 3,703,974 $ 3,664,848
=========== ============
The accompanying notes to consolidated financial statements
are an integral part of these statements.
53
MEDIACOM COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(All amounts in 000's, except per share amounts)
YEARS ENDED DECEMBER 31,
-----------------------------------------
2002 2001 2000
----------- ----------- ------------
Revenues................................................................ $ 923,033 $ 585,175 $ 328,258
Costs and expenses:
Service costs...................................................... 359,737 219,479 110,442
Selling, general and administrative expenses....................... 173,970 105,794 55,820
Corporate expenses................................................. 12,752 8,705 6,029
Depreciation and amortization...................................... 319,435 310,785 178,331
Non-cash stock charges relating to corporate expenses.............. 5,323 2,904 28,254
----------- ----------- ------------
Operating income (loss)................................................. 51,816 (62,492) (50,618)
Interest expense, net................................................... 188,304 139,867 68,955
Loss on derivative instruments, net..................................... 13,877 8,441 -
Other expenses (income)................................................. 11,093 (21,653) 30,024
----------- ----------- ------------
Net loss before provision for income taxes.............................. (161,458) (189,147) (149,597)
Provision for income taxes.............................................. 200 87 250
----------- ----------- ------------
Net loss before cumulative effect of accounting change.................. (161,658) (189,234) (149,847)
Cumulative effect of accounting change.................................. - (1,642) -
----------- ----------- ------------
Net loss................................................................ $ (161,658) $ (190,876) $ (149,847)
=========== =========== ============
Basic and diluted loss per share:
Before cumulative effect of accounting change...................... $ (1.35) $ (1.78) $ (1.79)
Cumulative effect of accounting change............................. - (0.02) -
----------- ----------- ------------
Loss per share.......................................................... $ (1.35) $ (1.80) $ (1.79)
=========== =========== ============
Weighted average common shares outstanding.............................. 119,608 105,780 83,803
The accompanying notes to consolidated financial statements
are an integral part of these statements.
54
MEDIACOM COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN
STOCKHOLDERS' EQUITY
(All dollar amounts in 000's)
CLASS A CLASS B ADDITIONAL ACCUMULATED
COMMON COMMON PAID-IN CAPITAL COMPREHENSIVE ACCUMULATED
STOCK STOCK CAPITAL CONTRIBUTIONS LOSS DEFICIT
-------- --------- ---------- ------------- ------------- -----------
Balance, December 31, 1999 $ - $ - $ - $ 182,013 $ 261 $ (127,659)
Comprehensive loss:
Net loss - - - - - (149,847)
Unrealized loss on investments, net of
deferred taxes - - - - (675) -
Comprehensive loss
Issuance of common stock in exchange for
membership interests 407 293 181,313 (182,013) - -
Issuance of common stock in initial
public offering, net of issuance costs 200 - 353,895 - - -
Issuance of common stock in employee
stock purchase plan - - 310 - - -
Repurchase of Class A common stock (1) - (657) - - -
Vesting of equity granted to management,
net of forfeiture - - 3,781 - - -
-------- -------- ---------- ------------- ------------- -----------
Balance, December 31, 2000 $ 606 $ 293 $ 538,642 $ - $ (414) $ (277,506)
Comprehensive loss:
Net loss - - - - - (190,876)
Unrealized gain on investments, net of
deferred taxes - - - - 414 -
Comprehensive loss
Exercise of stock options - - 51 - - -
Issuance of common stock, net of
issuance costs 299 - 432,616 - - -
Issuance of common stock in employee
stock purchase plan - - 547 - - -
Vesting of equity granted to management,
net of forfeiture - - 2,904 - - -
-------- -------- ---------- ------------- ------------- -----------
Balance, December 31, 2001 $ 905 $ 293 $ 974,760 $ - $ - $ (468,382)
Net loss - - - - - (161,658)
Issuance of common stock in employee
stock purchase plan 3 - 1,260 - - -
Vesting of equity granted to management,
net of forfeiture - - 5,323 - - -
Transfer of stock 2 (2)
Treasury stock, at cost -
-------- -------- ---------- ------------- ------------- -----------
Balance, December 31, 2002 $ 910 $ 291 $ 981,343 $ - $ - $ (630,040)
======== ======== ========== ============= ============= ===========
TREASURY
STOCK,
AT COST TOTAL
------------ ----------
Balance, December 31, 1999 $ - $ 54,615
Comprehensive loss:
Net loss -
Unrealized loss on investments, net of
deferred taxes -
Comprehensive loss (150,522)
Issuance of common stock in exchange for
membership interests - -
Issuance of common stock in initial
public offering, net of issuance costs - 354,095
Issuance of common stock in employee
stock purchase plan - 310
Repurchase of Class A common stock - (658)
Vesting of equity granted to management,
net of forfeiture - 3,781
------------ ----------
Balance, December 31, 2000 $ - 261,621
Comprehensive loss:
Net loss -
Unrealized gain on investments, net of
deferred taxes -
Comprehensive loss (190,462)
Exercise of stock options - 51
Issuance of common stock, net of -
issuance costs 432,915
Issuance of common stock in employee
stock purchase plan - 547
Vesting of equity granted to management,
net of forfeiture - 2,904
------------ ----------
Balance, December 31, 2001 $ - $ 507,576
Net loss - (161,658)
Issuance of common stock in employee
stock purchase plan - 1,263
Vesting of equity granted to management,
net of forfeiture - 5,323
Transfer of stock -
Treasury stock, at cost (5,963) (5,963)
------------ ----------
Balance, December 31, 2002 $ (5,963) $ 346,541
============ ==========
The accompanying notes to consolidated financial statements
are an integral part of these statements.
55
MEDIACOM COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(All dollar amounts in 000's)
YEARS ENDED DECEMBER 31,
------------------------------------------
2002 2001 2000
------------ ------------ ------------
CASH FLOWS PROVIDED BY OPERATING ACTIVITIES:
Net loss.............................................................. $ (161,658) $ (190,876) $ (149,847)
Adjustments to reconcile net loss to net cash flows from operating
activities:
Depreciation and amortization....................................... 319,435 310,785 178,331
Impairment of available-for-sale securities......................... - 329 28,488
Loss on derivative instruments, net................................. 13,877 8,441 -
Vesting of management stock......................................... 5,323 2,904 3,781
Other non-cash stock charges relating to corporate expenses......... - - 24,473
Deferred income taxes............................................... - (687) -
Amortization of SoftNet Systems revenue............................. - (287) (2,502)
Termination of SoftNet Systems agreement............................ - (29,957) -
Amortization of deferred financing costs............................ 7,183 5,725 -
Cumulative effect of accounting change, net of tax.................. - 1,642 -
Changes in assets and liabilities, net of effects from acquisitions:
Subscriber accounts receivable, net............................... (10,601) (10,560) (980)
Prepaid expenses and other assets................................. 3,400 (9,423) 491
Accounts payable and accrued expenses............................. (6,611) 138,591 13,296
Deferred revenue.................................................. 3,855 31,998 (4)
------------ ------------ ------------
Net cash flows provided by operating activities................. 174,203 258,625 95,527
------------ ------------ ------------
CASH FLOWS USED IN INVESTING ACTIVITIES:
Capital expenditures.................................................. (408,314) (285,396) (183,518)
Acquisitions of cable television systems.............................. (6,548) (2,113,336) (112,142)
Other investing activities............................................ (6,740) (4,215) (1,450)
------------ ------------ ------------
Net cash flows used in investing activities..................... (421,602) (2,402,947) (297,110)
------------ ------------ ------------
CASH FLOWS PROVIDED BY FINANCING ACTIVITIES:
New borrowings........................................................ 539,750 2,396,000 318,000
Repayment of debt..................................................... (318,750) (585,000) (470,000)
Net proceeds from sale of Class A common stock........................ - 432,915 354,095
Proceeds from issuance of common stock in employee stock purchase
plan and options exercised.......................................... 1,263 598 310
Repurchase of Class A common stock.................................... (5,963) - (658)
Financing costs....................................................... (984) (41,036) (485)
------------ ------------ ------------
Net cash flows provided by financing activities................. 215,316 2,203,477 201,262
------------ ------------ ------------
Net (decrease) increase in cash and cash equivalents........... (32,083) 59,155 (321)
CASH AND CASH EQUIVALENTS, beginning of year............................. 63,307 4,152 4,473
------------ ------------ ------------
CASH AND CASH EQUIVALENTS, end of year................................... $ 31,224 $ 63,307 $ 4,152
============ ============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for interest $ 201,275 $ 91,842 $ 74,811
============ ============ ============
The accompanying notes to consolidated financial statements
are an integral part of these statements.
56
MEDIACOM COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) ORGANIZATION
Mediacom Communications Corporation ("MCC," and collectively with its
direct and indirect subsidiaries, the "Company") is involved in the acquisition
and development of cable systems serving smaller cities and towns in the United
States. Through these cable systems, the Company provides entertainment,
information and telecommunications services to its subscribers. As of December
31, 2002, the Company was operating cable systems in 23 states, principally
Alabama, California, Delaware, Florida, Georgia, Illinois, Indiana, Iowa,
Kentucky, Minnesota, Missouri, North Carolina and South Dakota.
MCC, a Delaware corporation organized in November 1999, completed an
initial public offering on February 9, 2000. Prior to the initial public
offering, MCC had no assets, liabilities, contingent liabilities or operations.
Immediately prior to the completion of its initial public offering, MCC issued
shares of its Class A and Class B common stock in exchange for all of the
outstanding membership interests in Mediacom LLC, a New York limited liability
company organized in July 1995. As a result of this exchange, Mediacom LLC
became a wholly-owned subsidiary of MCC.
Mediacom Broadband LLC, a wholly-owned subsidiary of MCC, was organized
as a Delaware limited liability company in April 2001 for the purpose of
acquiring cable systems from AT&T Broadband, LLC in the states of Georgia,
Illinois, Iowa and Missouri (the "AT&T cable systems"). The Company completed
the acquisitions of the AT&T cable systems in June and July 2001.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PREPARATION OF CONSOLIDATED FINANCIAL STATEMENTS
The consolidated financial statements include the accounts of MCC and its
subsidiaries. All significant intercompany transactions and balances have been
eliminated. The preparation of the consolidated financial statements in
conformity with generally accepted accounting principles in the United States of
America requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the reported amounts
of revenues and expenses during the reporting period. Actual results could
differ from those estimates.
REVENUE RECOGNITION
Revenues include amounts billed to customers for services provided,
installations, advertising and other services. Revenues from basic, premium,
pay-per-view and data services are recognized when the services are provided to
the customers. Installation revenues are recognized to the extent of direct
installation costs incurred. Advertising sales are recognized in the period that
the advertisements are exhibited. Franchise fees are collected on a monthly
basis and are periodically remitted to local franchise authorities. Franchise
fees collected and paid are reported as revenues and expenses.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with original
maturities of three months or less to be cash equivalents.
CONCENTRATION OF CREDIT RISK
The Company's accounts receivable are comprised of amounts due from
subscribers in varying regions throughout the United States. Concentration of
credit risk with respect to these receivables is limited due to the large number
of customers comprising the Company's customer base and their geographic
dispersion. The Company invests its cash with high quality financial
institutions.
57
MEDIACOM COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
INVESTMENTS
Investments consist of equity securities. Management classifies these
securities as available-for-sale securities under the provisions defined in the
Statement of Financial Accounting Standards No. 115, "Accounting for Certain
Investments in Debt and Equity Securities." Available-for-sale securities are
carried at market value, with unrealized gains and losses reported as a
component of accumulated comprehensive income (loss). If a decline in the fair
value of the security is judged to be other than temporary, a realized loss will
be recorded.
INVENTORY
Inventory consists primarily of fiber-optic cable, coaxial cable,
electronics, hardware and miscellaneous tools and are stated at the lower of
cost or market. Cost is determined using the first-in first-out (FIFO) method.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is recorded at cost. The Company
capitalizes a portion of direct and indirect costs related to the construction,
replacement and installation of property, plant and equipment, including certain
costs related to new video and new high-speed Internet subscriber installations.
The Company also capitalized interest in connection with cable system
construction of approximately $6.8 million and $4.2 million for the years ended
December 31, 2002 and 2001, respectively. Capitalized costs are charged to
property, plant and equipment and depreciated over the life of the related
assets. The Company performs periodic evaluations of the estimates used to
determine the amount of costs that are capitalized.
Amounts incurred for repairs and maintenance are charged to operations in
the period incurred.
Depreciation is calculated on a straight-line basis over the following
useful lives:
Buildings.......................................... 40 years
Leasehold improvements............................. Life of respective lease
Cable systems and equipment........................ 5 to 10 years
Subscriber devices................................. 5 years
Vehicles........................................... 5 years
Furniture, fixtures and office equipment........... 5 to 10 years
DEFINITE-LIVED INTANGIBLE ASSETS
Definite-lived intangible assets include subscriber lists and covenants
not to compete. Amortization of definite-lived intangible assets is calculated
on a straight-line basis over the following lives:
Subscriber lists................................... 5 to 10 years
Covenants not to compete........................... 3 to 7 years
As of December 31, 2002, these amortizable definite-lived intangible
assets had a gross value of $173.5 million, with accumulated amortization of
$130.1 million. The Company's estimated aggregate amortization expense for 2003
through 2007 and beyond is $23.5 million, $2.6 million, $2.6 million, $2.6
million, $2.6 million and $9.5 million, respectively.
58
MEDIACOM COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
INDEFINITE-LIVED INTANGIBLE ASSETS
Indefinite-lived intangible assets include franchise costs and goodwill.
The Company has adopted Statement of Financial Accounting Standards No. 141
("SFAS 141") "Business Combinations" and No. 142 ("SFAS 142") "Goodwill and
Other Intangible Assets". SFAS 141 requires all business combinations initiated
after June 30, 2001 to be accounted for using the purchase method. Adoption of
SFAS 141 had no effect on the Company's results of operations or financial
position as the Company accounts for all acquisitions under the purchase method.
The provisions of SFAS 142, which were adopted by the Company on January 1,
2002, prohibit the amortization of goodwill and indefinite-lived intangible
assets and require such assets to be tested annually for impairment, or more
frequently if impairment indicators arise. The Company has determined that its
cable franchise costs are indefinite-lived assets. Upon adoption, the Company
performed initial impairment tests and determined that there was no impairment.
The Company conducted its annual impairment tests as of September 30, 2002,
utilizing discounted cash flow analysis, and they did not result in any
impairment of goodwill or indefinite-lived intangible assets. The impact of
adopting SFAS 142 was to reduce amortization expense by $144.9 million for the
year ended December 31, 2002.
The following table provides a reconciliation of the pro forma results of
operations for the years ended December 31, 2001 and 2000 to the pro forma net
loss that would have been reported had franchise cost and goodwill amortization
not been recorded as of January 1, 2000, assuming the purchase of the AT&T cable
systems had been consummated as of January 1, 2000:
2001 2000
------------ ------------
(IN THOUSANDS, EXCEPT PER
SHARE DATA)
(UNAUDITED)
Pro forma net loss (See note 4)...............................$ (266,924) $ (350,890)
Add back: franchise cost amortization...................... 129,978 129,978
Add back: goodwill amortization............................ 14,955 14,955
------------ ------------
Adjusted pro forma net loss...................................$ (121,991) $ (205,957)
Pro forma basic and diluted loss per share (See note 4).......$ (2.52) $ (4.19)
Add back: franchise cost amortization...................... 1.23 1.55
Add back: goodwill amortization............................ .14 .18
------------ ------------
Adjusted pro forma basic and diluted loss per share...........$ (1.15) $ (2.46)
============ ============
IMPAIRMENT OF LONG-LIVED ASSETS
The Company follows the provisions of Statement of Financial Accounting
Standards No. 144 ("SFAS 144"), "Accounting for the Impairment or Disposal of
Long-Lived Assets" SFAS 144 addresses financial accounting and reporting for the
impairment or disposal of long-lived assets and provides guidance on
classification and accounting for such assets when held for sale or abandonment.
There has been no impairment of long-lived assets of the Company under SFAS 144.
The Company adopted SFAS 144 as of January 1, 2002.
OTHER ASSETS
Other assets include debt financing costs of approximately $46.0 million
and $52.2 million as of December 31, 2002 and 2001, respectively. Financing
costs incurred to raise debt are deferred and amortized over the expected term
of such financings and are included in other expense (income).
59
MEDIACOM COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ACCOUNTING FOR DERIVATIVE INSTRUMENTS
Effective January 1, 2001, the Company adopted Statement of Financial
Accounting Standards No. 133 ("SFAS 133"), "Accounting for Derivative
Instruments and Hedging Activities". As a result, the Company recorded an after
tax charge of approximately $1.6 million, as a change in accounting principle,
in the first quarter of 2001. The Company uses interest rate exchange agreements
in order to fix the interest rate for the duration of the contract to hedge
against interest rate volatility.
COMPREHENSIVE LOSS
The Company adopted Statement of Financial Accounting Standards No. 130
("SFAS 130"), "Reporting Comprehensive Income," which establishes standards for
reporting and displaying comprehensive loss and its components in the
consolidated financial statements. In accordance with SFAS 130, the Company
records temporary unrealized gains and losses on investments as a component of
accumulated comprehensive loss.
INCOME TAXES
Prior to MCC's initial public offering, Mediacom LLC, the predecessor
company to MCC, was a New York limited liability company and was not required to
account for income taxes. Currently, the Company recognizes deferred tax assets
and liabilities for the future tax consequences attributable to differences
between the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases. Deferred tax assets and liabilities
are measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or
settled. Valuation allowances are established when necessary to reduce deferred
tax assets to the amount expected to be realized.
STOCK OPTIONS
The Company accounts for its stock option plans under Accounting
Principles Board Opinion No. 25, ("APB 25") "Accounting for Stock Issued to
Employees". Accordingly, compensation cost of stock options is measured as the
excess, if any, of the quoted market price of the Company's stock at the date of
grant over the option exercise price and is charged to operations over the
vesting period. See Note 15 for pro forma information relating to treatment of
the Company's stock option plans under Statement of Financial Accounting
Standards No. 123, ("SFAS 123") "Accounting for Stock-Based Compensation".
SEGMENT REPORTING
In accordance with Statement of Financial Accounting Standards No. 131,
"Disclosure about Segments of an Enterprise and Related Information," segments
have been identified based upon management responsibility. Management has
identified cable services as the Company's one reportable segment.
RECLASSIFICATIONS
Certain reclassifications have been made to prior year's amounts to
conform to the current year's presentation.
RECENT ACCOUNTING PRONOUNCEMENTS
In December 2002, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 148, "Accounting for Stock-Based
Compensation-Transition and Disclosure" ("SFAS 148"), which (i) amends SFAS
Statement No. 123, "Accounting for Stock-Based Compensation," to provide
alternative methods of transition for an entity that voluntarily changes to the
fair value based method of accounting for stock-based employee compensation;
60
MEDIACOM COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(ii) amends the disclosure provisions of SFAS 123 to require prominent
disclosure about the effects on reported net income of an entity's accounting
policy decisions with respect to stock-based employee compensation; and (iii)
amends APB Opinion No. 28, "Interim Financial Reporting," to require disclosure
about those effects in interim financial information. Items (ii) and (iii) of
the new requirements in SFAS 148 are effective for financial statements for
fiscal years ending after December 15, 2002.
(3) LOSS PER SHARE
The Company calculates loss per share in accordance with Statement
Financial of Accounting Standards No. 128 ("SFAS 128"), "Earnings per Share."
SFAS 128 computes basic loss per share by dividing the net loss by the weighted
average number of shares of common stock outstanding during the period. Diluted
loss per share is computed by dividing the net loss by the weighted average
number of shares of common stock outstanding during the period plus the effects
of any potentially dilutive securities. Due to its current losses, the Company
does not have any additional securities outstanding that would have a dilutive
effect on the weighted average common shares outstanding. The effects of stock
options and convertible debt were anti-dilutive because the Company generated
net losses for the periods presented. Accordingly, diluted loss per share
equaled basic loss per share. If the Company did not have net losses for the
years ended December 31, 2002 and 2001, the number of dilutive shares that would
have been included in the earnings per share calculation totaled 20,000 and
18,200, respectively. For the year ended December 31, 2000, there were no
dilutive shares that would have been included in the earnings per share
calculation.
The following table summarizes the Company's calculation of basic and
diluted loss per share for the years ended December 31, 2002, 2001 and 2000:
2002 2001 2000
------------ ------------ -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Net loss.............................................. $ (161,658) $ (190,876) $ (149,847)
Basic and diluted loss per share...................... $ (1.35) $ (1.80) $ (1.79)
Weighted average common shares outstanding............ 119,608 105,780 83,803
(4) ACQUISITIONS
The Company has made acquisitions of cable systems to increase the number
of customers and markets it serves. These acquisitions were accounted for using
the purchase method of accounting, and accordingly, the purchase price of these
acquired systems has been allocated to the assets acquired and liabilities
assumed at their estimated fair values at their respective dates of acquisition.
The results of operations of the acquired systems have been included with those
of the Company since the dates of acquisition.
2001
On June 29, 2001, the Company acquired cable systems serving
approximately 94,000 subscribers in the state of Missouri from affiliates of
AT&T Broadband, LLC, for a purchase price of approximately $300.0 million. This
acquisition was financed with a portion of the net proceeds from the Company's
public offering of 29.9 million shares of its Class A common stock (See Note 8).
On July 18, 2001, the Company acquired cable systems serving
approximately 706,000 basic subscribers in the states of Georgia, Illinois and
Iowa from affiliates of AT&T Broadband, LLC, for an aggregate purchase price of
approximately $1.76 billion. This acquisition was financed with a portion of the
net proceeds from the Company's public offerings of 29.9 million shares of Class
A common stock and 5 1/4% convertible senior notes due 2006, the net proceeds of
the 11% senior notes due 2013 and borrowings under the Company's bank credit
facilities (See Notes 7 and 8).
61
MEDIACOM COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The opening unaudited balance sheet for the cable systems acquired in
2001 was as follows (dollars in thousands):
Accounts receivable.................................... $ 7,744
Property, plant and equipment.......................... 579,185
Intangible assets...................................... 1,477,406
Accrued expenses....................................... (6,256)
------------
Total.............................................. $ 2,058,079
============
2000
During 2000, the Company completed nine acquisitions of cable systems
serving 53,000 basic subscribers for an aggregate purchase price of $109.2
million. The cable systems serve communities in the states of Alabama, Illinois,
Iowa, Kentucky, Minnesota and South Dakota. These acquisitions were financed
with borrowings under the Company's bank credit facilities (See Note 7).
Summarized below are the pro forma unaudited results of operations for
the years ended December 31, 2001 and 2000, assuming the purchase of the AT&T
cable systems and the systems acquired in 2000, had been consummated as of
January 1, 2000. Adjustments have been made to: (i) depreciation and
amortization reflecting the fair value of the assets acquired; and (ii) interest
expense reflecting the debt incurred to finance the acquisitions. The pro forma
results may not be indicative of the results that would have occurred if the
acquisitions had been completed on the date indicated or which may be obtained
in the future.
2001 2000
---------- -----------
(IN THOUSANDS, EXCEPT PER
SHARE DATA)
Revenues........................................................... $ 834,126 $ 787,932
Operating loss..................................................... (86,416) (79,564)
Net loss before cumulative effect of accounting change............. (265,282) (350,890)
Net loss........................................................... (266,924) (350,890)
Basic and diluted loss per share................................... $ (2.52) $ (4.19)
Weighted average common shares outstanding......................... 105,780 83,803
(5) PROPERTY, PLANT AND EQUIPMENT
As of December 31, 2002 and 2001, property, plant and equipment
consisted of:
2002 2001
----------- -----------
(DOLLARS IN THOUSANDS)
Land and land improvements...................................... $ 6,536 $ 945
Buildings and leasehold improvements............................ 37,748 13,439
Cable systems, equipment and subscriber devices................. 1,984,694 1,603,041
Vehicles........................................................ 46,007 24,669
Furniture, fixtures and office equipment........................ 21,476 12,704
----------- -----------
2,096,461 1,654,798
Accumulated depreciation........................................ (631,427) (374,268)
----------- -----------
Property, plant and equipment, net.............................. $ 1,465,034 $ 1,280,530
=========== ===========
62
MEDIACOM COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Depreciation expense for the years ended December 31, 2002, 2001 and 2000
was approximately $286.4 million, $185.1 million and $107.0 million,
respectively.
(6) INTANGIBLE ASSETS
The following table summarizes the net asset value for each intangible
asset category as of December 31, 2002 and 2001 (dollars in thousands):
GROSS ASSET ACCUMULATED NET ASSET
2002 VALUE AMORTIZATION VALUE
---- --------------- --------------- ---------------
Franchise costs ......... $ 1,949,670 $ 141,777 $ 1,807,893
Goodwill ................ 224,318 3,231 221,087
Subscriber lists ........ 167,846 124,808 43,038
Covenants not to compete 5,695 5,309 386
--------------- -------------- ---------------
$ 2,347,529 $ 275,125 $ 2,072,404
=============== =============== ===============
GROSS ASSET ACCUMULATED NET ASSET
2002 VALUE AMORTIZATION VALUE
---- --------------- --------------- ---------------
Franchise costs ......... $ 2,241,783 $ 154,793 $ 2,086,990
Goodwill ................ 19,514 3,231 16,283
Subscriber lists ........ 135,096 87,753 47,343
Covenants not to compete 5,700 4,511 1,189
--------------- --------------- ---------------
$ 2,402,093 $ 250,288 $ 2,151,805
=============== =============== ===============
Amortization expense for the years ended December 31, 2002, 2001 and 2000
was approximately $33.0 million, $125.7 million and $71.3 million, respectively.
(7) DEBT
As of December 31, 2002 and 2001, debt consisted of:
2002 2001
------------ ------------
(DOLLARS IN THOUSANDS)
Bank credit facilities....................... $ 1,621,500 $ 1,400,500
8 1/2% senior notes........................ 200,000 200,000
7 7/8% senior notes.......................... 125,000 125,000
9 1/2% senior notes........................ 500,000 500,000
11% senior notes........................... 400,000 400,000
5 1/4% convertible senior notes............ 172,500 172,500
------------ ------------
$ 3,019,000 $ 2,798,000
============ ============
BANK CREDIT FACILITIES
On September 30, 1999, operating subsidiaries of Mediacom LLC entered
into a $550.0 million senior secured credit facility, consisting of a $450.0
million reducing revolving credit facility and a $100.0 million term loan (the
"Mediacom USA Credit Agreement"). The revolving credit facility expires on March
31, 2008, and is subject to earlier expiration on June 30, 2007 if Mediacom LLC
does not refinance the 8 1/2% Senior Notes by March 31, 2007.
63
MEDIACOM COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The revolving credit facility makes available a maximum commitment amount for a
period of up to eight and one-half years, which is subject to quarterly
reductions, beginning September 30, 2002, ranging from 1.25% to 17.50% of the
original commitment amount. As of December 31, 2002, the maximum commitment
amount available under the revolving credit facility was $438.8 million, and
$245.5 million was outstanding under such facility. For the year ended December
31, 2003, the maximum commitment amount under the revolving credit facility will
be reduced by $22.5 million, or 5% of the original commitment amount. The
Mediacom USA Credit Agreement requires mandatory reductions of the revolving
credit facility from excess cash flow, as defined therein, which began on
December 31, 2002. The term loan matures on September 30, 2008, and is subject
to repayment on September 30, 2007 if Mediacom LLC does not refinance the 8 1/2%
Senior Notes by March 31, 2007. The term loan is payable in quarterly
installments which began on September 30, 2002. As of December 31, 2002, the
outstanding debt under the term loan was $99.5 million. For the year ended
December 31, 2003, the outstanding debt under the term loan will be reduced by
$1.0 million or 1% of the original amount of the term loan. The Mediacom USA
Credit Agreement provides for interest at varying rates based upon various
borrowing options and the attainment of certain financial ratios, and for
commitment fees of 1/4% to 3/8% per annum on the unused portion of available
credit under the reducing revolver credit facility. Interest on outstanding
revolver loans is payable at either the eurodollar rate plus a floating
percentage ranging from 0.75% to 2.25% or the base rate plus a floating
percentage ranging from 0% to 1.25%. Interest on the term loan is payable at
either the eurodollar rate plus a floating percentage ranging from 2.50% to
2.75% or the base rate plus a floating rate percentage ranging from 1.50% to
1.75%.
On November 5, 1999, operating subsidiaries of Mediacom LLC entered into
a $550.0 million senior secured credit facility, consisting of a $450.0 million
reducing revolving credit facility and a $100.0 million term loan (the "Mediacom
Midwest Credit Agreement"). The revolving credit facility expires on June 30,
2008, and is subject to earlier expiration on September 30, 2007 if Mediacom LLC
does not refinance the 8 1/2% Senior Notes by March 31, 2007. The revolving
credit facility makes available a maximum commitment amount for a period of up
to eight and one-half years, which is subject to quarterly reductions, beginning
September 30, 2002, ranging from 1.25% to 8.75% of the original commitment
amount. As of December 31, 2002, the maximum commitment amount available under
the revolving credit facility was $438.8 million, and $278.7 million was
outstanding under such facility. For the year ended December 31, 2003, the
maximum commitment amount under the revolving credit facility will be reduced by
$22.5 million, or 5% of the original commitment amount. The Mediacom Midwest
Credit Agreement requires mandatory reductions of the revolving credit facility
from excess cash flow, as defined therein, which began on December 31, 2002. The
term loan matures on December 31, 2008, and is subject to repayment on December
31, 2007 if Mediacom LLC does not refinance the 8 1/2% Senior Notes by March 31,
2007. The term loan is payable in quarterly installments which began on
September 30, 2002. As of December 31, 2002, the outstanding debt under the term
loan was $99.8 million. For the year ended December 31, 2003, the outstanding
debt under the term loan will be reduced by $1.0 million or 1% of the original
amount of the term loan. The Mediacom Midwest Credit Agreement provides for
interest at varying rates based upon various borrowing options and the
attainment of certain financial ratios, and for commitment fees of 1/4% to
3/8% per annum on the unused portion of available credit under the reducing
revolver credit facility. Interest on the outstanding revolver loans is payable
at either the eurodollar rate plus a floating percentage ranging from 0.75% to
2.25% or the base rate plus a floating percentage ranging from 0% to 1.25%.
Interest on the term loan is payable at either the eurodollar rate plus a
floating percentage ranging from 2.50% to 2.75% or the base rate plus a floating
rate percentage ranging from 1.50% to 1.75%.
On July 18, 2001, the operating subsidiaries of Mediacom Broadband LLC
entered into a $1.4 billion senior secured credit facility, consisting of a
$600.0 million revolving credit facility, a $300.0 million tranche A term loan
and a $500.0 million tranche B term loan ("Mediacom Broadband Credit Agreement"
and together with the Mediacom USA Credit Agreement and the Mediacom Midwest
Credit Agreement, the "Bank Credit Agreements"). The revolving credit facility
expires on March 31, 2010, and commitments under the revolving credit facility
are subject to quarterly reductions beginning on December 31, 2004, ranging from
2.00% to 8.00% of the original commitment amount. As of December 31, 2002, $98.0
million was outstanding under the revolving credit facility. The tranche A term
loan matures on March 31, 2010 and the tranche B term loan matures on September
30, 2010. The term loans are payable in quarterly installments beginning on
September 30, 2004. The Mediacom Broadband Credit Agreement requires mandatory
reductions of the revolving credit facility from excess cash flow, as defined
therein, beginning
64
MEDIACOM COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004. The Mediacom Broadband Credit Agreement provides for interest
at varying rates based upon various borrowing options and the attainment of
certain financial ratios, and for commitment fees of 3/8% to 5/8% per annum on
the unused portion of available credit under the revolving credit facility.
Interest on outstanding revolving loans and the tranche A term loan is payable
at either the eurodollar rate plus a floating percentage ranging from 1.00% to
2.50% or the base rate plus a floating percentage ranging from 0.25% to 1.50%.
Interest on the tranche B term loan is payable at either the eurodollar rate
plus a floating percentage ranging from 2.50% to 2.75% or the base rate plus a
floating percentage ranging from 1.50% to 1.75%.
The Bank Credit Agreements require the Company to maintain compliance
with certain financial covenants including, but not limited to, leverage,
interest coverage and pro forma debt service coverage or debt service coverage
ratios, as defined therein. The Bank Credit Agreements also require compliance
with other covenants including, but not limited to, limitations on mergers and
acquisitions, consolidations and sales of certain assets, liens, the incurrence
of additional indebtedness, certain restricted payments, and certain
transactions with affiliates. The Company was in compliance with all covenants
of the Bank Credit Agreements as of December 31, 2002.
The Mediacom USA Credit Agreement and the Mediacom Midwest Credit
Agreement are collateralized by Mediacom LLC's pledge of all its ownership
interests in its operating subsidiaries and is guaranteed by Mediacom LLC on a
limited recourse basis to the extent of such ownership interests. The Mediacom
Broadband Credit Agreement is collateralized by Mediacom Broadband LLC's pledge
of all its ownership interests in its operating subsidiaries and is guaranteed
by Mediacom Broadband LLC on a limited recourse basis to the extent of such
ownership interests.
The average interest rate on debt outstanding under the Bank Credit
Agreements was 4.3% and 5.5% for the year ended December 31, 2002 and December
31, 2001, respectively, before giving effect to the interest rate exchange
agreements discussed below. As of December 31, 2002, the Company had
approximately $844.0 million of unused bank commitments under the Bank Credit
Agreements.
The Company uses interest rate exchange agreements in order to fix the
interest rate for the duration of the contract to hedge against interest rate
volatility. As of December 31, 2002, the Company had interest rate exchange
agreements with various banks pursuant to which the interest rate on $790.0
million is fixed at a weighted average rate of approximately 4.0%, plus the
average applicable margin over the eurodollar rate option under the bank credit
agreements. Under the terms of the interest rate exchange agreements, which
expire from 2003 through 2007, the Company is exposed to credit loss in the
event of nonperformance by the other parties. However, the Company does not
anticipate their nonperformance.
The fair value of the interest rate exchange agreements is the estimated
amount that the Company would receive or pay to terminate such agreements,
taking into account current interest rates and the current creditworthiness of
the Company's counterparties. At December 31, 2002, the Company would have paid
approximately $24.0 million if these agreements were terminated, inclusive of
accrued interest.
SENIOR NOTES
On April 1, 1998, Mediacom LLC and its wholly-owned subsidiary, Mediacom
Capital Corporation, a New York corporation, jointly issued $200.0 million
aggregate principal amount of 8 1/2% senior notes due on April 2008 (the "8 1/2%
Senior Notes"). The 8 1/2% Senior Notes are unsecured obligations of Mediacom
LLC, and the indenture for the 8 1/2% Senior Notes stipulates, among other
things, restrictions on incurrence of indebtedness, distributions, mergers and
asset sales and has cross-default provisions related to other debt of Mediacom
LLC. Mediacom LLC was in compliance with the indenture governing the 8 1/2%
Senior Notes as of December 31, 2002.
On February 26, 1999, Mediacom LLC and Mediacom Capital Corporation
jointly issued $125.0 million aggregate principal amount of 7 7/8% senior notes
due on February 2011 (the "7 7/8% Senior Notes"). The 7 7/8% Senior Notes are
unsecured obligations of Mediacom LLC, and the indenture for the 7 7/8% Senior
Notes stipulates, among
65
MEDIACOM COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
other things, restrictions on incurrence of indebtedness, distributions, mergers
and asset sales and has cross-default provisions related to other debt of
Mediacom LLC. Mediacom LLC was in compliance with the indenture governing the
7 7/8% Senior Notes as of December 31, 2002.
On January 24, 2001, Mediacom LLC and its wholly-owned subsidiary,
Mediacom Capital Corporation, completed an offering of $500.0 million of 9 1/2%
senior notes due January 2013 (the "9 1/2% Senior Notes"). The 9 1/2% Senior
Notes are unsecured obligations of Mediacom LLC, and the indenture for the 9
1/2% Senior Notes stipulates, among other things, restrictions on incurrence of
indebtedness, distributions, mergers, and asset sales and has cross-default
provisions related to other debt of Mediacom LLC. Mediacom LLC was in compliance
with the indenture governing the 9 1/2% Senior Notes as of December 31, 2002.
On June 29, 2001, Mediacom Broadband LLC and its wholly-owned subsidiary,
Mediacom Broadband Corporation, a Delaware corporation, completed an offering of
$400.0 million in aggregate principal amount of 11% senior notes due July 2013
(the "11% Senior Notes"). The 11% Senior Notes are unsecured obligations of
Mediacom Broadband, and the indenture for the 11% Senior Notes stipulates, among
other things, restrictions of incurrence of indebtedness, distributions, mergers
and assets sales and has cross-default provisions related to other debt of
Mediacom Broadband. Mediacom Broadband was in compliance with the indenture
governing the 11% Senior Notes as of December 31, 2002.
CONVERTIBLE SENIOR NOTES
On June 27, 2001, the Company issued $172.5 million aggregate principal
amount of 5 1/4% convertible senior notes ("Convertible Senior Notes") due July
2006. The Convertible Senior Notes are convertible at any time at the option of
the holder into the Company's Class A common stock at an initial conversion rate
of 53.4171 shares per $1,000 principal amount of notes, which is equivalent to a
price of $18.72 per share. The conversion rate is subject to adjustment as
specified in the indenture governing the Convertible Senior Notes. The Company
may redeem the Convertible Senior Notes at 101.313% of par value from July 5,
2004 through June 30, 2005 and at par value thereafter.
FAIR VALUE AND DEBT MATURITIES
The fair value of the Company's bank credit facilities approximate the
carrying value. The fair value at December 31, 2002 of the 8 1/2% Senior Notes,
the 7 7/8% Senior Notes, the 9 1/2% Senior Notes and the 11% Senior Notes was
approximately $181.0 million, $104.0 million, $456.0 million and $421.0 million,
respectively. The fair value at December 31, 2002 of the Convertible Senior
Notes was approximately $144.0 million.
The stated maturities of all debt outstanding as of December 31, 2002 are
as follows (dollars in thousands):
2003....................................................... $ 2,000
2004....................................................... 10,500
2005....................................................... 57,000
2006....................................................... 383,750
2007....................................................... 247,000
Thereafter ................................................ 2,318,750
-----------
$ 3,019,000
===========
66
MEDIACOM COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(8) STOCKHOLDERS' EQUITY
The Company has authorized 300,000,000 shares of Class A common stock,
$0.01 par value and 100,000,000 shares of Class B common stock, $0.01 par value.
The holders of Class A and Class B common stock are entitled to vote as a single
class on each matter in which the shareholders of the Company are entitled to
vote. Each Class A share is entitled to one vote and each Class B share is
entitled to ten votes.
On February 9, 2000, MCC completed an initial public offering of 20.0
million shares of Class A common stock at $19.00 per share. The net proceeds,
after underwriting discounts and other expenses of approximately $25.9 million,
were $354.1 million. Immediately prior to the completion of the initial public
offering, MCC issued 40,657,010 shares of Class A common stock and 29,342,990
shares of Class B common stock in exchange for all the outstanding membership
interests in Mediacom LLC.
In May 2000, the Company announced that its Board of Directors had
authorized a repurchase program pursuant to which MCC may purchase up to $50.0
million of its Class A common stock, in the open market or through privately
negotiated transactions, subject to certain restrictions and market conditions.
During 2000, MCC repurchased 80,000 shares of its Class A common stock for an
aggregate cost of $0.7 million at share prices ranging from $8.00 to $10.75 per
share. MCC did not repurchase any shares of its Class A common stock during
2001. During 2002, MCC repurchased 1,536,744 shares of its Class A common stock
for an aggregate cost of approximately $6.0 million at share prices ranging from
$3.59 to $4.29 per share.
On June 27, 2001, MCC completed a public offering of 29.9 million shares
of its Class A common stock at $15.22 per share. The net proceeds, after
underwriting discounts and other expenses of approximately $22.2 million, were
$432.9 million.
The Company maintains Employee Stock Purchase Plans ("ESPP"). Under the
plans, all employees are allowed to participate in the purchase of MCC's Class A
Common Stock at a 15% discount on the date of the allocation. Shares purchased
by employees amounted to 176,600 and 35,000 in 2002 and 2001, respectively. The
net proceeds to the Company were approximately $1.3 million and $0.5 million in
2002 and 2001, respectively. Compensation expense was not recorded on the
distribution of these shares in accordance with APB No. 25.
(9) INCOME TAX
Income tax expense relates to minimum state and local taxes and capital
taxes that the Company is required to pay in certain jurisdictions. At December
31, 2002, the Company had net operating loss carryforwards of approximately
$700.0 million which will expire in the years 2020 through 2022. The tax benefit
of such operating loss carryforwards will be credited to income when realization
is considered more likely than not.
The reconciliation of the income tax expense at the United States federal
statutory rate to the actual income tax expense is as follows (dollars in
thousands):
2002 2001 2000
---------- ---------- ----------
Tax benefit at the United States statutory rate...... $ (54,896) $ (66,201) $ (52,359)
Compensation due to issuance of stock................ - - 11,423
State taxes, net of federal tax benefit.............. 700 774 250
Other................................................ - - 5
Losses not benefited................................. 54,396 65,514 40,931
---------- ---------- ----------
Total income tax expense........................ $ 200 $ 87 $ 250
========== ========== ==========
67
MEDIACOM COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company's net deferred tax liability consists of the following (dollars in
thousands):
Deferred tax asset: 2002 2001
---------- ----------
Unrealized loss on marketable securities..... $ 11,527 $ 11,527
Reserves and other........................... 28,650 6,841
Net operating loss carryforwards............. 280,163 174,591
---------- ----------
Gross tax assets.................................. 320,340 192,959
Less: Valuation allowance.................... (182,518) (116,458)
---------- ----------
Deferred tax assets............................... 137,822 76,501
Deferred tax liabilities:
Property, plant and equipment................ 137,822 76,501
---------- ----------
Net deferred tax liability........................ $ - $ -
========== ==========
(10) RELATED PARTY TRANSACTIONS
Prior to MCC's initial public offering in February 2000, separate
management agreements between Mediacom Management Corporation ("Mediacom
Management"), a Delaware corporation, and each of Mediacom LLC's operating
subsidiaries provided for Mediacom Management to be paid compensation for
management services performed for the Company. Upon MCC's initial public
offering, all management agreements with Mediacom Management were terminated and
replaced with management agreements between MCC and each operating subsidiary.
Mediacom Management's employees became MCC's employees and its corporate expense
became MCC's corporate expense. The management fee expenses recorded prior to
the initial public offering are reflected as corporate expenses in the
consolidated statements of operations. The Company incurred management fees
under the management agreements of Mediacom Management of approximately $0.6
million for the year ended December 31, 2000.
Prior to MCC's initial public offering, the Company recorded a deferred
stock expense in 1999 of approximately $25.1 million relating to additional
ownership units of Mediacom LLC that were issued to the sole owner of Mediacom
Management (the "Manager"), who is the Chairman and Chief Executive Officer of
MCC. This deferred expense represented the future benefit of reduced management
fees. During 1999, the Company recorded a non-cash stock charge of approximately
$0.6 million in its consolidated statements of operations for the amortization
of this future benefit. The remaining balance of approximately $24.5 million was
recognized as a non-cash stock charge relating to corporate expense during the
year ended December 31, 2000 as a result of MCC's initial public offering and
the termination of all management agreements with Mediacom Management.
One of the Company's directors is a partner of a law firm that performs
various legal services for the Company. For the years ended December 31, 2002,
2001 and 2000, the Company paid approximately $1.3 million, $3.4 million and
$1.4 million for services performed, respectively.
(11) EMPLOYEE BENEFIT PLANS
Substantially all employees of the Company are eligible to participate in
a defined contribution plan pursuant to the Internal Revenue Code Section 401(k)
(the "Plan"). Under such Plan, eligible employees may contribute up to 15% of
their current pre-tax compensation. The Plan permits, but does not require,
matching contributions and non-matching (profit sharing) contributions to be
made by the Company up to a maximum dollar amount or maximum percentage of
participant contributions, as determined annually by the Company. The Company
presently matches 50% on the first 6% of employee contributions. The Company's
contributions under the Plan totaled approximately $1.8 million, $1.1 million
and $0.6 million for the years ended December 31, 2002, 2001 and 2000,
respectively.
68
MEDIACOM COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(12) COMMITMENTS AND CONTINGENCIES
Under various lease and rental agreements for offices, warehouses and
computer terminals, the Company had rental expense of approximately $5.0
million, $4.7 million and $2.5 million for the years ended December 31, 2002,
2001 and 2000, respectively. Future minimum annual rental payments are as
follows (dollars in thousands):
2003.............................................. $ 3,341
2004.............................................. 2,316
2005.............................................. 1,658
2006.............................................. 1,373
2007.............................................. 1,119
Thereafter........................................ 5,720
In addition, the Company rents utility poles in its operations generally
under short-term arrangements, but the Company expects these arrangements to
recur. Total rental expense for utility poles was approximately $7.0 million,
$4.6 million and $3.0 million for the years ended December 31, 2002, 2001 and
2000, respectively.
As of December 31, 2002, approximately $11.0 million of letters of credit
were issued in favor of various parties to secure the Company's performance
relating to insurance and franchise requirements and pole rentals.
LEGAL PROCEEDINGS
There are no material pending legal proceedings to which the Company is a
party or to which any of the Company's properties are subject.
(13) SOFTNET SYSTEMS
As of January 31, 2001, the Company formally terminated its relationship
with SoftNet Systems in all material respects. The Company recognized revenue of
approximately $0.3 million for the period ended January 31, 2001 and recognized
the remaining deferred revenue of approximately $30.0 million as other income in
the consolidated statements of operations in the first quarter of 2001.
(14) EMPLOYMENT ARRANGEMENTS
During 1999, the Company recorded a deferred non-cash stock expense of
approximately $27.0 million relating to the grant of membership units of
Mediacom LLC to certain employees for past and future services. These units vest
over five years. Upon MCC's initial public offering, all outstanding membership
units were redeemed and converted to common shares of MCC. During 2002, the
vesting of the deferred non-cash stock expense was accelerated, and accordingly,
the remainder of the related charges were expensed. For the years ended December
31, 2002, 2001 and 2000, the Company recorded a non-cash stock charge of
approximately $5.3 million, $2.9 million and $3.8 million, respectively, in its
consolidated statements of operations, relating to the vested and
non-forfeitable shares or membership units.
(15) STOCK OPTIONS
As of December 20, 1999, the Board of Directors of the Company adopted
the 1999 Stock Option Plan for officers, directors and employees. Options
granted under this plan have a ten year life and vest at various times over a
five year period. Our Board of Directors authorized 9,000,000 shares of common
stock to be granted as options under this plan. A maximum of 7,000,000 of these
shares of common stock may be granted as incentive stock options. As
69
MEDIACOM COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
of December 31, 2002, options for 4,393,855 shares (the "Employee Options") had
been granted under the 1999 Stock Option Plan, consisting of 3,444,963 shares of
Class A common stock and 948,892 shares of Class B common stock.
In addition to the above stock option grants, immediately prior to the
completion of the initial public offering, certain employees received options to
purchase 7,200,000 shares of Class B common stock in exchange for the
elimination of the balance of the provision providing for a special allocation
of membership interests in Mediacom LLC. With the exception of such options held
by the manager to purchase approximately 6,900,000 shares of common stock, such
options: (i) vest over five years which vesting period is deemed to have
commenced for these certain members of the management team on various dates
prior to the initial public offering; and (ii) are subject to forfeiture
penalties to the manager during the three year period between the date the
options become vested and the date such certain employee terminates employment
with the Company. The options to purchase 6,900,000 shares of common stock held
by the manager were fully vested upon completion of the initial public offering.
The following table summarizes information concerning stock option
activity for the years ended December 31, 2002 and 2001:
WEIGHTED
AVERAGE
SHARES EXERCISE
PRICE
------------ ------------
Outstanding at January 1, 2000................... - $ -
Granted.......................................... 10,211,000 18.93
Exercised........................................ - -
Forfeited........................................ (303,990) 19.00
------------ ------------
Outstanding at December 31, 2000................. 9,907,010 $ 18.93
Granted.......................................... 778,120 17.24
Exercised........................................ (2,700) 19.00
Forfeited........................................ (173,835) 18.41
------------ ------------
Outstanding at December 31, 2001................. 10,508,595 $ 18.81
Granted.......................................... 604,735 11.97
Exercised........................................ - -
Forfeited........................................ (216,775) 16.69
------------ ------------
Outstanding at December 31, 2002................. 10,896,555 $ 18.47
============ ============
The Company had options exercisable amounting to 8,934,548 and 8,497,496,
with average prices of $18.94 and $18.98 at December 31, 2002 and 2001,
respectively. The weighted average fair value of options granted was $6.04 per
share and $8.61 per share for the years ended December 31, 2002, and 2001,
respectively.
MCC applied APB 25 in accounting for stock options granted to employees
and directors. Accordingly, no compensation cost has been recognized for any
option grants in the accompanying consolidated statements of operations since
the price of the options was at their fair market value at the date of grant.
SFAS 148, requires that information be determined as if the Company had
accounted for employee stock options under the fair value method of this
statement, including disclosing pro forma information regarding net loss and
loss per share. The weighted average fair value of all of the Employee Options
was estimated on the date of grant using the Black-Scholes model with the
following weighted average assumptions: (i) risk free average interest rate of
5.0% and 4.7% for the years ended December 31, 2002 and 2001, respectively; (ii)
expected dividend yields of 0%; (iii) expected lives of 6 years; and (iv)
expected volatility of 45%. Had compensation costs been recorded for the
Employee Options under SFAS 148, the compensation costs would have been $3.5
million, $4.1 million, and $9.6 million for the years ended
70
MEDIACOM COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002, 2001 and 2000, respectively, and MCC's net loss and basic and
diluted loss per share would have been increased from the "as reported" amounts
to the "pro forma" amounts as follows:
YEARS ENDED DECEMBER 31,
--------------------------------------
2002 2001 200
----------- ----------- ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Net loss:
As reported....................................... $ (161,658) $ (190,876) $ (149,847)
Pro forma......................................... $ (165,160) $ (194,972) $ (159,499)
Basic and diluted loss per share:
As reported....................................... $ (1.35) $ (1.80) $ (1.79)
Pro forma......................................... $ (1.38) $ (1.84) $ (1.90)
Excluded from the above pro forma calculation are the 7,200,000
additional stock options issued to certain members of the management team
discussed above since these options were issued in exchange for consideration
representing their fair value.
The following table summarizes information concerning stock options
outstanding as of December 31, 2002:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------------------------------------------------
WEIGHTED
AVERAGE WEIGHTED NUMBER WEIGHTED
RANGE OF NUMBER REMAINING AVERAGE EXERCISABLE AT AVERAGE
EXERCISE OUTSTANDING AT CONTRACTUAL EXERCISE DECEMBER 31, EXERCISE
PRICES DECEMBER 31, 2002 LIFE PRICE 2002 PRICE
--------------------- ----------------- ----------- ---------- -------------- ----------
$7.00 to $12.00...... 592,960 9.09 years $ 11.54 22,400 $ 7.54
$12.01 to $18.00..... 652,925 8.28 years 16.92 134,245 16.95
$18.01 to $22.00..... 9,650,670 3.38 years 19.00 8,777,903 19.00
----------------- ----------- ---------- -------------- ----------
10,896,555 3.98 years $ 18.47 8,934,548 $ 18.94
================= =========== ========== ============== ==========
71
MEDIACOM COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(16) SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
---------- ---------- ----------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
2002
----
Revenues........................... $ 219,547 $ 230,792 $ 233,723 $ 238,971
Operating income................... 11,997 13,722 21,584 4,513
Net loss........................... (35,190) (37,487) (39,940) (49,041)
Basic and diluted loss per share... (0.29) (0.31) (0.33) (0.41)
Weighted average common
shares outstanding................ 119,892 119,942 119,943 118,662
2001
----
Revenues........................... $ 89,131 $ 91,864 $ 191,734 $ 212,446
Operating loss..................... (9,982) (10,101) (8,854) (33,555)
Net loss before cumulative effect of
accounting change................. (2,935) (32,718) (65,262) (88,319)
Net loss........................... (4,577) (32,718) (65,262) (88,319)
Basic and diluted loss per share before
cumulative effect of accounting
change............................ (0.03) (0.35) (0.54) (0.74)
Basic and diluted loss per share/(a)/ (0.05) (0.35) (0.54) (0.74)
Weighted average common
shares outstanding................ 89,956 92,921 119,876 119,882
- ----------
/(a)/ The sum of quarterly earnings may not equal total year earnings per
share due to the effect of the Company's public offering of its shares of its
common stock during 2001.
72
SCHEDULE II
MEDIACOM COMMUNICATIONS CORPORATION AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
(All dollar amounts in 000's)
ADDITIONS DEDUCTIONS
------------------------------ -----------------------------
BALANCE AT CHARGED TO CHARGED TO CHARGED TO CHARGED TO
BEGINNING OF COSTS OTHER COSTS OTHER BALANCE AT
PERIOD AND EXPENSES ACCOUNTS /(1)/ AND EXPENSES ACCOUNTS /(1)/ END OF PERIOD
------------ ------------ -------------- ------------- -------------- -------------
December 31, 2000
Allowance for doubtful accounts
Current receivables............ $ 772 $ 4,292 $ - $ 4,132 $ - $ 932
Acquisition reserves(1)
Accrued expenses............... $ 5,650 $ 2,134 $ - $ 2,402 $ - $ 5,382
December 31, 2001
Allowance for doubtful accounts
Current receivables............ $ 932 $ 9,826 $ 2,557 $ 10,072 $ - $ 3,243
Acquisition reserves(1)
Accrued expenses............... $ 5,382 $ - $ 42,156 $ 10,959 $ - $ 36,579
December 31, 2002
Allowance for doubtful accounts
Current receivables............ $ 3,243 $ 13,685 $ - $ 13,139 $ - $ 3,789
Acquisition reserves(1)
Accrued expenses............... $ 36,579 $ - $ 127 $ 4,613 $ 31,966 $ 127
- ----------
/(1)/ Were recorded in connection with purchase accounting.
73
ITEM 9.CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
We have previously reported in a current report on Form 8-K, dated April
19, 2002, that we terminated our engagement of Arthur Andersen LLP.
74
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item is incorporated by reference from
our Proxy Statement for the 2003 Annual Meeting of Stockholders.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated by reference from
our Proxy Statement for the 2003 Annual Meeting of Stockholders.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The information required by this Item is incorporated by reference from
our Proxy Statement for the 2003 Annual Meeting of Stockholders.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated by reference from
our Proxy Statement for the 2003 Annual Meeting of Stockholders.
ITEM 14. CONTROLS AND PROCEDURES
Within the 90 days prior to the filing date of this report, we carried
out an evaluation, under the supervision and with the participation of our
management, including our Chief Executive Officer and Chief Financial Officer,
of the effectiveness of the design and operation of our disclosure controls and
procedures pursuant to Rule 13a-14 under the Securities Exchange Act of 1934.
Based upon that evaluation, the Chief Executive Officer and Chief Financial
Officer concluded that our disclosure controls and procedures are effective in
timely alerting them to material information relating to us required to be
included in our periodic SEC filings.
There have been no significant changes in our internal controls or in
other factors which could significantly affect internal controls subsequent to
the date we carried out our evaluation.
75
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) FINANCIAL STATEMENTS
Our financial statements as set forth in the Index to Consolidated
Financial Statements under Part II, Item 8 of this Form 10-K are hereby
incorporated by reference.
(b) EXHIBITS
The following exhibits, which are numbered in accordance with Item 601 of
Regulation S-K, are filed herewith or, as noted, incorporated by reference
herein:
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
------- -------------------
2.1 Asset Purchase Agreement, dated April 29, 1999 between Mediacom
LLC and Triax Midwest Associates, L.P./(1)/
2.2 Stock Purchase Agreement, dated May 25, 1999 among Mediacom LLC,
Charles D. Zylstra, Kara M. Zylstra and Trusts created under the
Will dated June 3, 1982 of Roger E. Zylstra, deceased, for the
benefit of Charles D. Zylstra and Kara M. Zylstra /(2)/
2.3 Asset Purchase Agreement, dated February 26, 2001 among Mediacom
Communications Corporation and the AT&T Broadband Parties
(Central Missouri) /(3)/
2.4 Asset Purchase Agreement, dated February 26, 2001 among Mediacom
Communications Corporation and the AT&T Broadband Parties
(Georgia) /(3)/
2.5 Asset Purchase Agreement, dated February 26, 2001 among Mediacom
Communications Corporation and the AT&T Broadband Parties
(Iowa/Illinois) /(3)/
2.6 Asset Purchase Agreement, dated February 26, 2001 among Mediacom
Communications Corporation and the AT&T Broadband Parties
(Southern Illinois) /(3)/
3.1 Restated Certificate of Incorporation of Mediacom Communications
Corporation /(4)/
3.2 By-laws of Mediacom Communications Corporation /(4)/
4.1 Form of certificate evidencing share of Class A common stock
/(4)/
4.2 Indenture relating to 8 1/2% senior notes due 2008 of Mediacom
LLC and Mediacom Capital Corporation /(5)/
4.3 Indenture relating to 7 7/8% senior notes due 2011 of Mediacom
LLC and Mediacom Capital Corporation /(6)/
4.4 Indenture relating to 9 1/2% senior notes due 2013 of Mediacom
LLC and Mediacom Capital Corporation /(3)/
4.5 Indenture relating to 11% senior notes due 2013 of Mediacom
Broadband LLC and Mediacom Broadband Corporation /(5)/
4.6 Indenture relating to 5.25% Convertible Senior Note due 2006
/(7)/
76
4.7 Indenture Supplement No. 1, dated as of August 6, 2002, to the
Indenture relating to 11% senior notes due 2013 of Mediacom
Broadband LLC and Mediacom Broadband Corporation. /(8)/
4.8 Indenture Supplement No. 1, dated as of August 6, 2002, to the
Indenture relating to 5.25% convertible senior notes due 2006 of
the Company. /(8)/
10.1(a) Credit Agreement dated as of September 30, 1999 for the Mediacom
USA Credit Facility /(4)/
10.1(b) Amendment No. 1 dated December 17, 1999 between Mediacom
Southeast LLC, Mediacom California LLC, Mediacom Delaware LLC,
Mediacom Arizona LLC and The Chase Manhattan Bank, as
administrative agent for the lenders. /(3)/
10.1(c) Amendment No. 2 dated February 4, 2000 between Mediacom Southeast
LLC, Mediacom California LLC, Mediacom Delaware LLC, Mediacom
Arizona LLC and The Chase Manhattan Bank, as administrative agent
for the lenders. /(3)/
10.1(d) Amendment No. 3 dated September 12, 2002 between Mediacom
Southeast LLC, Mediacom California LLC, Mediacom Delaware LLC,
Mediacom Arizona LLC and JPMorgan Chase Bank, as administrative
agent for the lenders. /(9)/
10.2(a) Credit Agreement dated as of November 5, 1999 for the Mediacom
Midwest Credit Facility /(4)/
10.2(b) Amendment No. 1 dated December 17, 1999 between Mediacom Illinois
LLC, Mediacom Indiana LLC, Mediacom Iowa LLC, Mediacom Minnesota
LLC, Mediacom Wisconsin LLC, Zylstra Communications Corporation
and The Chase Manhattan Bank, as administrative agent for the
lenders. /(3)/
10.2(c) Amendment No. 2 dated February 4, 2000 between Mediacom Illinois
LLC, Mediacom Indiana LLC, Mediacom Iowa LLC, Mediacom Minnesota
LLC, Mediacom Wisconsin LLC, Zylstra Communications Corporation
and The Chase Manhattan Bank, as administrative agent for the
lenders. /(3)/
10.2(d) Amendment No. 3 dated September 12, 2002 between Mediacom
Illinois LLC, Mediacom Indiana LLC, Mediacom Iowa LLC, Mediacom
Minnesota LLC, Mediacom Wisconsin LLC, Zylstra Communications
Corporation and JPMorgan Chase Bank, as administrative agent for
the lenders. /(9)/
10.3 Credit Agreement dated as of July 18, 2001 for the Mediacom
Broadband Subsidiary Credit Facility. /(5)/
10.3(a) Amendment No. 1 dated September 12, 2002 between MCC Iowa LLC,
MCC Illinois LLC, MCC Georgia LLC, MCC Missouri LLC and JPMorgan
Chase Bank, as administrative agent for the lenders. /(9)/
10.4* 1999 Stock Option Plan /(4)/
10.5* Form of Amended and Restated Registration Rights Agreement by and
among Mediacom Communications Corporation, Rocco B. Commisso, BMO
Financial, Inc., CB Capital Investors, L.P., Chase Manhattan
Capital, L.P., Morris Communications Corporation, Private Market
Fund, L.P. and U.S. Investor, Inc. /(4)/
10.6 1999 Employee Stock Purchase Plan /(4)/
10.7 Fifth Amended and Restated Operating Agreement of Mediacom LLC
/(10)/
10.8 2001 Employee Stock Purchase Plan /(11)/
21.1 Subsidiaries of Mediacom Communications Corporation /(12)/
23.1 Consent of PricewaterhouseCoopers LLP
23.2 Consent of Arthur Andersen LLP /(13)/
(c) FINANCIAL STATEMENT SCHEDULE
None.
77
(d) REPORTS ON FORM 8-K
The Company filed the following report on Form 8-K during the three months
ended December 31, 2002:
DATE OF REPORT DATE REPORT FILED WITH SEC ITEM REPORTED
---------------- -------------------------- ---------------------------------
November 13, 2002 November 13, 2002 Item 9 - Regulation FD Disclosure
* Compensatory plan
/(1)/ Filed as an exhibit to the Quarterly Report on Form 10-Q for the
quarterly period ended March 31, 1999 of Mediacom LLC and Mediacom
Capital Corporation and incorporated herein by reference.
/(2)/ Filed as an exhibit to the Quarterly Report on Form 10-Q for the
quarterly period ended June 30, 1999 of Mediacom LLC and Mediacom
Capital Corporation and incorporated herein by reference.
/(3)/ Filed as an exhibit to the Annual Report on Form 10-K for the fiscal
year ended December 31, 2000 of Mediacom Communications Corporation
and incorporated herein by reference.
/(4)/ Filed as an exhibit to the Registration Statement on Form S-1 (File
No. 333-90879) of Mediacom Communications Corporation and incorporated
herein by reference.
/(5)/ Filed as an exhibit to the Registration Statement on Form S-4 (File
No. 333-57285) of Mediacom LLC and Mediacom Capital Corporation and
incorporated herein by reference.
/(6)/ Filed as an exhibit to the Registration Statement on Form S-4 (File
No. 333-85893) of Mediacom LLC and Mediacom Capital Corporation and
incorporated herein by reference.
/(7)/ Filed as an exhibit to Amendment No. 1 of the Current Report on Form
8-K, dated June 22, 2001, of Mediacom Communications Corporation and
incorporated herein by reference.
/(8)/ Filed as an exhibit to the Quarterly Report on Form 10-Q for the
quarterly period ended June 30, 2002 of Mediacom Communications
Corporation and incorporated herein by reference.
/(9)/ Filed as an exhibit to the Quarterly Report on Form 10-Q for the
quarterly period ended September 30, 2002 of Mediacom Communications
Corporation and incorporated herein by reference.
/(10)/ Filed as an exhibit to the Annual Report on Form 10-K for the fiscal
year ended December 31, 1999 of Mediacom Communications Corporation
and incorporated herein by reference.
/(11)/ Filed as an exhibit to the Registration Statement on Form S-8 (File
No. 333-68306) of Mediacom Communications Corporation and incorporated
herein by reference.
/(12)/ Filed as an exhibit to the Annual Report on Form 10-K for the fiscal
year ended December 31, 2001 of Mediacom Communications Corporation
and incorporated herein by reference.
/(13)/ The consolidated financial statements of Mediacom Communications
Corporation (the "Registrant") as of December 31, 2001 and 2000 and
for the years then ended included in this Annual Report on Form 10-K
which are incorporated by reference into the Registrant's Registration
Statements on Form S-3/A (File No. 333-82124) and Forms S-8 (File Nos.
333-41366, 333-41360 and 333-68306), have been audited by Arthur
Andersen LLP, independent public accountants ("AA"). However, after
reasonable efforts, the Registrant has been unable to obtain the
written consent of AA with respect to the incorporation by reference
of such financial statements in the Registration Statements.
Therefore, the Registrant has dispensed with the requirement to file
the written consent of AA in reliance upon Rule 437a of the Securities
Act of 1933. As a result, you may not be able to recover damages from
AA under Section 11 of the Securities Act of 1933, for any untrue
statements of material fact or any omissions to state a material fact,
if any, contained in the aforementioned financial statements of the
Registrant which are incorporated in the Registration Statements by
reference.
78
SIGNATURES
Pursuant to the requirements of the Securities Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
MEDIACOM COMMUNICATIONS CORPORATION
March 31, 2003 BY: /S/ ROCCO B. COMMISSO
----------------------------------
Rocco B. Commisso
Chairman and Chief
Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
- ------------------------------------- ---------------------------------------------- -----------------
/S/ ROCCO B. COMMISSO Chairman and Chief Executive Officer March 31, 2003
- ----------------------------------- (principal executive officer)
Rocco B. Commisso
/S/ MARK E. STEPHAN Senior Vice President, Chief Financial Officer, March 31, 2003
- ----------------------------------- Treasurer and Director (principal financial
Mark E. Stephan officer and principal accounting officer)
/S/ WILLIAM S. MORRIS III Director March 31, 2003
- -----------------------------------
William S. Morris III
/S/ CRAIG S. MITCHELL Director March 31, 2003
- -----------------------------------
Craig S. Mitchell
/S/ THOMAS V. REIFENHEISER Director March 31, 2003
- -----------------------------------
Thomas V. Reifenheiser
/S/ NATALE S. RICCIARDI Director March 31, 2003
- -----------------------------------
Natale S. Ricciardi
/S/ ROBERT L. WINIKOFF Director March 31, 2003
- -----------------------------------
Robert L. Winikoff
79
CERTIFICATIONS
I, Rocco B. Commisso, certify that:
(1) I have reviewed this annual report on Form 10-K of Mediacom Communications
Corporation;
(2) Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
(3) Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report;
(4) The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
(5) The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
(6) The registrant's other certifying officer and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
March 31, 2003 BY: /S/ ROCCO B. COMMISSO
------------------------------
Rocco B. Commisso
Chief Executive Officer
80
I, Mark E. Stephan, certify that:
(1) I have reviewed this annual report on Form 10-K of Mediacom Communications
Corporation;
(2) Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
(3) Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report;
(4) The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
(5) The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
(6) The registrant's other certifying officer and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
March 31, 2003 BY: /S/ MARK E. STEPHAN
--------------------------------
Mark E. Stephan
Chief Financial Officer
81
EXHIBIT 23.1
Consent of Independent Auditors
We consent to the incorporation by reference in the Registration Statements on
Form S-3/A (File No. 333-82124) and Forms S-8 (File Nos. 333-41366, 333-41360
and 333-68306) of Mediacom Communications Corporation of our report dated
February 24, 2003 relating to the financial statements and financial statement
schedule which is included in this Form 10-K.
/s/ PricewaterhouseCoopers LLP
New York, New York
March 28, 2003
