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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
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Annual Report Pursuant to Section 13 or 15 (d) of the
Securities Exchange Act of 1934
For the fiscal year ended December 31, 2001
Commission File Numbers: 333-72440
333-72440-01
Mediacom Broadband LLC
Mediacom Broadband Corporation*
(Exact names of Registrants as specified in their charters)
Delaware 06-1615412
Delaware 06-1630167
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Numbers)
100 Crystal Run Road
Middletown, New York 10941
(Address of principal executive offices)
(845) 695-2600
(Registrants' telephone number)
Securities registered pursuant to Section 12(b) of the Exchange Act:
None
Securities registered pursuant to Section 12(g) of the Exchange Act:
None
Indicate by check mark whether the Registrants (1) have filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrants were required to file such reports), and (2) have been subject to
such filing requirements for the past 90 days:
Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrants' knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K: Not Applicable
State the aggregate market value of the common equity held by
non-affiliates of the Registrants: Not Applicable
Indicate the number of shares outstanding of the Registrants' common stock:
Not Applicable
*Mediacom Broadband Corporation meets the conditions set forth in General
Instruction I (1) (a) and (b) of Form 10-K and is therefore filing this form
with the reduced disclosure format.
MEDIACOM BROADBAND LLC
2001 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
PART I
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Page
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Item 1. Business.................................................................... 4
Item 2. Properties.................................................................. 28
Item 3. Legal Proceedings........................................................... 28
Item 4. Submission of Matters to a Vote of Security Holders......................... 28
PART II
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Item 5. Market for Registrants' Common Equity and Related Stockholder Matters....... 29
Item 6. Selected Financial Data..................................................... 30
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations..................................................... 33
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.................. 50
Item 8. Financial Statements and Supplementary Data................................. 51
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure...................................................... 80
PART III
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Item 10. Directors and Executive Officers of the Registrants......................... 81
Item 11. Executive Compensation...................................................... 84
Item 12. Security Ownership of Certain Beneficial Owners and Management.............. 84
Item 13. Certain Relationships and Related Transactions.............................. 85
PART IV
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Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K............. 86
2
Mediacom Broadband LLC was organized as a Delaware limited liability
company in 2001 and is a wholly-owned subsidiary of Mediacom Communications
Corporation, a Delaware corporation. Mediacom Broadband Corporation was
organized as a Delaware corporation in 2001 and is a wholly-owned subsidiary of
Mediacom Broadband LLC. Mediacom Broadband Corporation was formed for the sole
purpose of acting as co-issuer with Mediacom Broadband LLC of debt securities
and does not conduct operations of its own.
References in this Annual Report to "we," "us," or "our" are to Mediacom
Broadband LLC and its direct and indirect subsidiaries, unless the context
specifies or requires otherwise. References in this Annual Report to "MCC" are
to Mediacom Communications Corporation.
Cautionary Statement Regarding Forward-Looking Statements
You should carefully review the information contained in this Annual Report
and in other reports or documents that we file from time to time with the
Securities and Exchange Commission (the "SEC"). In this Annual Report, we state
our beliefs of future events and of our future financial performance. In some
cases, you can identify those so-called "forward-looking statements" by words
such as "may," "will," "should," "expects," "plans," "anticipates," "believes,"
"estimates," "predicts," "potential," or "continue" or the negative of those
words and other comparable words. You should be aware that those statements are
only our predictions. Actual events or results may differ materially. In
evaluating those statements, you should specifically consider various factors,
including the risks discussed in this Annual Report for the year ended December
31, 2001 and other reports or documents that we file from time to time with the
SEC. Those factors may cause our actual results to differ materially from any of
our forward-looking statements. All forward-looking statements attributable to
us or a person acting on our behalf are expressly qualified in their entirety by
this cautionary statement.
3
PART I
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ITEM 1. BUSINESS
Our Manager
Mediacom Communications Corporation, our parent and manager, is currently
the nation's eighth largest cable television company based on customers served
and the leading cable operator focused on serving the smaller cities and towns
in the United States. Mediacom Communications provides its customers with a wide
array of broadband products and services, including traditional video services,
digital television and high-speed Internet access. As of December 31, 2001, our
manager's cable systems, which are owned and operated through the operating
subsidiaries of Mediacom Broadband LLC and Mediacom LLC, passed approximately
2.6 million homes and served approximately 1.6 million basic subscribers in 23
states. A basic subscriber is a customer that subscribes to a package of basic
cable television services. Our manager was founded in July 1995 by Rocco B.
Commisso, its Chairman and Chief Executive Officer, and its Class A common stock
is traded on The Nasdaq National Market under the symbol MCCC.
Mediacom Broadband LLC
We are a wholly-owned subsidiary of our manager. Prior to June 29, 2001, we
had no operations or significant assets. On June 29, 2001, we acquired from AT&T
Broadband, LLC cable systems serving approximately 94,000 basic subscribers in
the state of Missouri for a purchase price of approximately $300.0 million in
cash. On July 18, 2001, we acquired from AT&T Broadband cable systems serving
approximately 706,000 basic subscribers in the states of Georgia, Illinois and
Iowa for an aggregate purchase price of approximately $1.77 billion in cash.
As of December 31, 2001, these cable systems passed approximately 1.4
million homes and served approximately 824,000 basic subscribers in Georgia,
Illinois, Iowa and Missouri. These cable systems are located in markets that are
contiguous with, or in close proximity to, cable systems owned and operated by
Mediacom LLC, a wholly-owned subsidiary of our manager. Except as separately
defined in historical combined financial statements appearing elsewhere in this
Annual Report as Mediacom Systems (Predecessor Company), these cable systems are
referred to in this report as our cable systems or the AT&T cable systems.
We believe that our high-speed, interactive broadband network is the
superior platform for the delivery of video, voice and data services to the
homes and businesses in the communities we serve. We now have underway an
aggressive network upgrade program that we expect to substantially complete by
June 30, 2003. As of December 31, 2001, approximately 55% of our cable network
was upgraded with 550MHz to 870MHz bandwidth capacity and about 57% of our homes
passed were activated with two-way communications capability.
Our technologically advanced network has already enabled us to offer
advanced broadband products and services to a significant number of our
customers. As of December 31, 2001, our digital cable service was available to
about 800,000 basic subscribers, or 97% of our total basic subscribers, and our
high-speed Internet access, or cable modem service, was marketed to 810,000
homes passed by our cable systems, or 57% of our total homes passed. As we
continue to upgrade our cable systems, we expect to see significant increases in
our cable systems' network capacity, facilitating the introduction of additional
programming, digital video and high-speed Internet access in virtually all of
our cable systems, and providing the network capability for additional services
such as video-on-demand and telephony.
Our manager's principal executive offices are located at 100 Crystal Run
Road, Middletown, New York 10941, and our manager's telephone number at that
address is (845) 695-2600. Our manager's website is located at
www.mediacomcc.com. The information on our manager's website is not part of this
Annual Report.
4
General Business Developments
2001 Acquisitions
On June 29, 2001, we acquired from AT&T Broadband cable systems serving
approximately 94,000 basic subscribers in the state of Missouri. The purchase
price for these cable systems was approximately $300.0 million. This transaction
comprised cable systems serving Columbia, Jefferson City and Springfield,
Missouri.
On July 18, 2001, we acquired from AT&T Broadband cable systems serving
approximately 706,000 basic subscribers in the states of Georgia, Illinois and
Iowa. The aggregate purchase price for these cable systems was approximately
$1.77 billion. These transactions comprised cable systems serving the cities and
surrounding communities of Albany, Columbus, Tifton and Valdosta, Georgia;
Carbondale, Charleston, Effingham, Marion, Moline and Rock Island, Illinois; and
Ames, Cedar Rapids, Clinton, Davenport, Des Moines, Dubuque, Fort Dodge, Iowa
City, Mason City and Waterloo, Iowa.
2001 Financings
On June 29, 2001, we completed an offering of $400.0 million in aggregate
principal amount of 11% senior notes due July 2013. The net proceeds from this
offering were used to pay a portion of the purchase price and related fees and
expenses for the acquisitions of the AT&T cable systems.
On June 29, 2001, we received a $336.4 million equity contribution from our
manager. We received an additional $388.6 million equity contribution from our
manager on July 18, 2001. The proceeds were used to pay a portion of the
purchase price and related fees and expenses for the acquisitions of the AT&T
cable systems.
On July 18, 2001, we received a $150.0 million preferred equity investment
from Mediacom LLC. The preferred equity investment has a 12% annual dividend,
payable quarterly in cash. The proceeds from the preferred equity investment
were used to pay a portion of the purchase price and related fees and expenses
for the acquisitions of the AT&T cable systems.
On July 18, 2001, our operating subsidiaries entered into a $1.4 billion
senior secured credit facility. The credit facility consists of a $600.0 million
revolving credit facility, a $300.0 million tranche A term loan and a $500.0
million tranche B term loan. Borrowings under this facility, in the amount of
$855.0 million, were used to fund a portion of the purchase price and related
fees and expenses for the acquisitions of the AT&T cable systems.
2002 Events
On February 4, 2002, we and our manager filed a registration statement with
the SEC under which we may sell debt securities unconditionally guaranteed by
our manager for a maximum amount of $1.5 billion. The SEC declared this
registration statement effective on February 13, 2002.
During February 2002, we completed the transition of our cable modem
customers, which totaled over 77,000, to our manager's new, proprietary Mediacom
Online(SM) high-speed Internet service, from the third-party provider
Excite@Home.
5
Business Strategy
Our objective is to be the dominant provider of entertainment, information
and telecommunications services in the smaller cities and towns in the United
States we serve. The key elements of our business strategy are to:
Improve the Operating and Financial Performance of Our Cable Systems
We seek to rapidly integrate acquired cable systems and improve their
operating and financial performance by implementing our manager's operating
practices and capital investment program. Prior to the completion of an
acquisition, our manager formulates plans for customer care and billing
improvements, network upgrades, headend consolidation, new product and service
launches, competitive positioning and human resource requirements of our cable
systems. After completing an acquisition, our manager implements managerial,
operating, purchasing, personnel and engineering changes designed to affect
these plans. Our manager also expects to generate cost savings by eliminating
significant amounts of overhead expenses historically incurred by the owners of
the cable systems we acquire.
Develop Efficient Operating Clusters
Our manager's cable systems are currently organized in three operating
divisions based on their geographic location. Our cable systems are included in
these divisional clusters. By operating geographically clustered cable systems,
our manager expects to generate operating efficiencies through the consolidation
of many managerial, customer service, marketing, administrative and technical
functions. The clustering of cable systems also enables our manager to
consolidate signal processing and distribution facilities, or headend
facilities, which lowers the fixed capital costs required on a per home basis to
introduce new products and services. Our cable systems are located in markets
which are contiguous with, or in close proximity to, Mediacom LLC's cable
systems. We believe this will enable us to generate additional operating
efficiencies as our manager further consolidates its operations.
Rapidly Upgrade Our Cable Network
We are rapidly upgrading our cable network to provide new broadband
products and services, improve our competitive position and increase overall
customer satisfaction. By December 2002, we anticipate that about 92% of our
cable network will be upgraded with 550MHz to 870MHz bandwidth capacity and
approximately 87% of our homes passed will have two-way communications
capability. In addition, we expect to eliminate up to 120 of our 137 headend
facilities by June 2003. As part of our headend consolidation program, we plan
to deploy approximately 2,500 route miles of fiber optic cable to create large
regional fiber optic networks with the potential to provide advanced
telecommunications services.
Our upgrade plans will allow us to:
. offer digital cable television, high-speed Internet access and
interactive video services;
. increase channel capacity to a minimum of 82 channels, and
significantly more with digital video technology;
. activate the two-way communications capability of our systems, which
gives our customers the ability to send and receive signals over our
cable network;
. increase the average number of customers served by our master headend
facilities, which lowers the fixed capital costs required on a per
home basis to introduce new products and services, increases the speed
and effectiveness of our deployment of these new products and services
and improves our ability to sell advertising on our cable systems; and
. utilize our regional fiber optic networks to offer advanced
telecommunications services.
6
Introduce New and Advanced Broadband Products and Services
We believe that significant opportunities exist to increase our revenues by
expanding the array of products and services we offer. We have used and will
continue to use the expanded channel capacity of our upgraded systems to
introduce several new basic programming services, additional premium services
and numerous pay-per-view channels.
Utilizing digital video technology, we offer multiple packages of premium
services, several pay-per-view channels on a near video-on-demand basis, digital
music services and interactive program guides. As of December 31, 2001, our
digital cable service was available to about 800,000 basic subscribers.
We also offer high-speed Internet access at speeds up to 100 times faster
than a conventional telephone modem. As of December 31, 2001, our cable modem
service was marketed to about 810,000 homes passed by our cable systems. During
February 2002, we completed the transition of our cable modem customers, which
numbered over 77,000, to our manager's new, proprietary Mediacom Online(SM)
high-speed Internet service, from the third-party provider Excite@Home. In
addition, we are currently exploring other opportunities in interactive video
and telecommunications services. We currently offer Internet over the television
through a trial with WorldGate Service Inc. in our Waterloo, Iowa cable system.
Maximize Customer Satisfaction to Build Customer Loyalty
As a result of our strong regional and local management presence, we are
responsive to customer needs and preferences and better positioned to strengthen
relations with the local government authorities and the communities we serve. We
seek a higher level of customer satisfaction by providing effective customer
service and attractively priced product and service offerings. We believe our
investments in our cable network are increasing customer satisfaction as a
result of a wide array of new product and service introductions, greater
technical reliability and improved quality of service. We have regional calling
centers that are staffed with dedicated personnel who provide service 24 hours a
day, seven days a week to approximately 83% of our customers. We believe that
our focus on customer service has enhanced our reputation in the communities we
serve, which has increased customer loyalty and the potential demand for our new
and enhanced products and services.
Acquire Underperforming Cable Systems Principally in Smaller Cities and Towns
Our disciplined acquisition strategy targets underperforming cable systems
serving primarily smaller cities and towns. These cable systems are typically
located within the top 50 to 100 television markets where customers generally
require cable to clearly receive a full complement of off-air television
signals. We believe that there are advantages in acquiring and operating cable
systems in small and medium-sized markets, including:
. less direct wireline competition given the lower housing densities and
the resulting higher costs per customer of constructing a cable
network;
. higher penetration levels of our services and lower customer turnover
as a result of fewer competing entertainment alternatives; and
. generally lower overhead and operating costs than those incurred by
cable operators serving larger markets.
In addition, we seek to acquire or trade for cable systems in close
proximity to our existing operations because it is more cost effective to
provide cable television and advanced telecommunications services over an
expanded subscriber base within a concentrated geographic area. Our acquisition
strategy will continue to focus on cable systems that have a complementary
geographic fit with our existing operations, but we will also continue to
consider opportunities to enter new market territories if they are of sufficient
size to provide the clustering benefits noted above.
7
Implement a Flexible Financing Structure
To support our business strategy and enhance our financial flexibility, we
have developed a financing strategy utilizing a blend of equity and debt capital
to complement our acquisition and operating activities. We have diversified our
sources of debt capital by raising long-term debt while utilizing our operating
subsidiaries to access debt in the commercial bank market.
We believe our financing strategy is beneficial because it broadens our
access to various equity and debt markets, enhances our flexibility in managing
our capital structure, reduces our overall cost of debt capital and permits us
to maintain a substantial liquidity position in the form of unused and available
subsidiary credit facilities. As of December 31, 2001, the unused credit
commitments under our subsidiary credit facilities were approximately $599.6
billion, of which over $350.0 million could be borrowed and used for general
corporate purposes under the most restrictive covenants in our debt
arrangements, and our annualized cost of debt capital was approximately 6.7%.
Products and Services
We provide our customers with the ability to select from a full array of
core cable television service packages. In addition, we offer most of our
customers advanced broadband products and services such as digital cable
television and high-speed Internet access. These products and services have been
introduced to a significant portion of our customer base. In 2002, we plan to
further introduce digital cable and high-speed Internet access across our cable
systems and to aggressively market these services to our customer base. We are
also exploring opportunities in interactive video, Internet protocol telephony,
or IP telephony, and other telecommunications services.
Core Cable Television Services
We design both our basic channel line-up and our additional channel
offerings for each system according to demographics, programming preferences,
channel capacity, competition, price sensitivity and local regulation. Our core
cable television service offerings generally include the following:
Limited Basic Service. Our limited basic service generally includes, for a
monthly fee, local broadcast channels, network and independent stations, limited
satellite-delivered programming, and local public, government, home-shopping and
leased access channels.
Expanded Basic Service. Our expanded basic service generally includes, for
an additional monthly fee, various satellite-delivered networks such as CNN,
MTV, USA Network, ESPN, Lifetime, Nickelodeon and TNT.
Premium Service. Our premium services are satellite-delivered channels
consisting principally of feature films, original programming, live sports
events, concerts and other special entertainment features, usually presented
without commercial interruption. HBO, Cinemax, Showtime, The Movie Channel and
Starz are typical examples. Such premium programming services are offered by the
systems both on a per-channel basis and as part of premium service packages
designed to enhance customer value.
Pay-Per-View Service. Our pay-per-view services allow customers to pay to
view a single showing of a feature film, live sporting event, concert and other
special event, on an unedited, commercial-free basis. Such pay-per-view services
are offered by us on a per-viewing basis, with subscribers only paying for
programs which they select for viewing.
8
Digital Cable Services
Digital video technology offers significant advantages. Most importantly,
this technology allows us to greatly increase our channel offerings through the
use of compression, which converts one analog channel into eight to 12 digital
channels. The implementation of digital technology has significantly enhanced
and expanded the video and other service offerings we provide to our customers.
We currently offer our customers several digital cable programming packages
that include:
. up to 64 multichannel premium services;
. up to 39 pay-per-view movie and sports channels;
. up to 45 channels of digital music; and
. an interactive on-screen program guide to help them navigate the new
digital choices.
As of December 31, 2001, digital cable service was available to about
800,000 basic subscribers, or approximately 97% of our total subscriber base,
and we served approximately 233,000 digital customers.
High-Speed Internet Access
Our broadband cable network enables data to be transmitted up to 100 times
faster than traditional telephone modem technologies. This high-speed capability
allows cable modem customers to receive and transmit large files from the
Internet in a fraction of the time required when using the traditional telephone
modem. It also allows much quicker response times when surfing the Internet,
providing a richer experience for the customer. In addition, cable modem service
eliminates the need for using a telephone line to access the Internet. It also
is always activated, and as a result, the customer does not need to dial into an
Internet service provider and await authorization.
As of December 31, 2001, our cable modem service was marketed to
approximately 810,000 homes passed by our cable systems, or 57% of our total
homes passed, and we served about 77,000 cable modem customers. During February
2002, we completed the transition of our cable modem customers to our manager's
new, proprietary Mediacom Online(SM) high-speed Internet service, from the
third-party provider Excite@Home. As part of the launch of Mediacom Online, our
manager signed a multi-year agreement with AT&T Corp. under which AT&T provides
the Internet protocol network backbone and certain core Internet support
functions for our manager's new service. Also, our regional calling centers now
provide technical customer support for our cable modem customers.
Advertising
Our cable systems receive revenue from the sale of local advertising on
satellite-delivered channels such as CNN, MTV, USA Network, ESPN, Lifetime,
Nickelodeon and TNT. Our cable systems' advertising sales infrastructure
comprises several-in-house production facilities, production and administrative
employees and a sales workforce. Advertising sales accounted for 6.1% of our
combined revenue for the year ended December 31, 2001. We expect that the
increasing concentration of customers served by our master headend facilities as
a result of our headend consolidation program will enable us to increase our
advertising revenues.
Video-On-Demand
Video-on-demand is an interactive television service that provides access
to hundreds of movies or special events on demand with video cassette recorder
functionality, or the ability to fast forward, pause and rewind a program at
will. Customers can also watch a selected feature repeatedly during the viewing
window, which typically runs up to 24 hours, or stop the selection before it is
completed and return to it at a later time during the viewing window. Fees are
typically charged on a per-selection basis, although certain individual
categories of programming are also available for a flat monthly fee. The
provision of video-on-demand services requires the use of servers at the headend
facility of our cable systems. We plan to launch video-on-demand service in at
least one cable system during 2002.
9
Future Services
Interactive Services. Our upgraded cable network has the capacity to
deliver various additional interactive television services. These services can
be divided between two general service categories: enhanced television and
Internet access over the television. These services enable the customer to
interact over the television set, generally by using a conventional remote
television control or a computer keyboard, to either buy a product or service or
request information on a product or service.
Enhanced television includes such services as ancillary programming
information, interactive advertising and impulse sales and purchases. Internet
access and e-mail over the television are delivered using a set-top box with the
customer using a wireless keyboard. We currently offer Internet over the
television on a trial basis with WorldGate in our Waterloo, Iowa cable system.
We continue to evaluate opportunities to trial and/or launch additional
interactive products and services in our cable systems.
Telecommunications Services. We are exploring technologies using IP
telephony as well as traditional switching technologies that are currently
available to transmit telephony signals over our cable network. Our headend
consolidation plans include the installation of approximately 2,500 route miles
of fiber optic cable resulting in the creation of large, high-capacity regional
networks. We are constructing our networks with excess fiber optic capacity,
thereby affording us the flexibility to pursue new data and telecommunications
opportunities. We are in discussions with several telecommunications service
providers.
10
Description of Our Cable Systems
Overview
The table below provides an overview of selected operating and technical
statistics for our cable systems for the year ended December 31, 2001.
Operating Data:
Homes passed/(1)/................................................. 1,430,000
Basic subscribers/(2)/............................................ 824,000
Basic penetration/(3)/............................................ 57.6%
Average monthly revenues
per basic subscriber/(4)/...................................... $ 47.98
Digital Cable:
Digital-ready basic subscribers/(5)/.............................. 800,000
Digital customers................................................. 233,000
Digital penetration/(6)/.......................................... 29.1%
Data:
Data-ready homes passed/(7)/...................................... 815,000
Data-ready homes marketed/(8)/.................................... 810,000
Cable modem customers............................................. 77,000
Data penetration/(9)/............................................. 9.5%
Cable Network Data:
Miles of plant.................................................... 19,100
Density/(10)/..................................................... 75
Percentage of cable network at
550MHz to 870MHz............................................... 55%
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/(1)/ Represents the number of single residence homes, apartments and
condominium units passed by the cable distribution network in a cable
system's service area.
/(2)/ Represents subscribers of a cable system who receive a package of
over-the-air broadcast stations, local access channels or certain
satellite-delivered cable television services.
/(3)/ Represents basic subscribers as a percentage of homes passed.
/(4)/ Represents average monthly revenues for the last three months of the
period divided by average basic subscribers for such period.
/(5)/ A subscriber is digital-ready if the subscriber is in a cable system where
digital cable services are available.
/(6)/ Represents digital customers as a percentage of digital-ready basic
subscribers.
/(7)/ A home passed is data-ready if it is in a cable system with two-way
communications capability.
/(8)/ Represents data-ready homes passed where cable modem service is available.
/(9)/ Represents the number of cable modem customers as a percentage of
data-ready homes marketed.
/(10)/ Represents homes passed divided by miles of plant.
11
Selected Operating Region Data
Our manager currently organizes its cable systems into three operating
divisions. Our cable systems are included in this organizational structure. The
following table sets forth the principal states served by such divisions, and
their respective basic subscribers, digital customers and data customers as of
December 31, 2001:
Basic Digital Data
Division States Subscribers Customers Customers
- ------------- ------------------------ ----------- --------- ---------
Midwest Iowa, Illinois, Missouri 284,300 82,100 31,100
North Central Iowa 390,700 109,900 42,900
Southern Georgia 149,000 41,000 3,000
------- ------- ------
Total 824,000 233,000 77,000
======= ======= ======
Technology Overview
As part of our commitment to maximize customer satisfaction, to improve our
competitive position and to introduce new and enhanced products and services to
our customers, we continue to make significant investments to upgrade our cable
network. The current objectives of our upgrade program are to:
. increase the bandwidth capacity to 870MHz;
. activate two-way communications capability;
. consolidate our headend facilities, through the extensive deployment
of fiber optic networks; and
. allow us to provide digital cable television, high-speed Internet
access, interactive video and other telecommunications services.
We expect to substantially complete our cable network upgrade program by
June 30, 2003. The following table describes the technological state of our
cable network as of December 31, 2001 and the projected state of our cable
network through June 30, 2003, based on our current upgrade plans:
Percentage of Cable Network
-----------------------------
Less than 550MHz- Two-Way
550MHz 870MHz Capable
--------- ------ -------
December 31, 2001.................... 45% 55% 57%
December 31, 2002.................... 8% 92% 87%
June 30, 2003........................ 2% 98% 95%
A central feature of our upgrade program is the deployment of high
capacity, hybrid fiber-optic coaxial architecture. The hybrid fiber-optic
coaxial architecture combines the use of fiber optic cable, which can carry
hundreds of video, data and voice channels over extended distances, with coaxial
cable, which requires a more extensive signal amplification in order to obtain
the desired levels for delivering channels. We design our network to connect
fiber optic cable to individual nodes serving an average of 350 homes or
commercial buildings. A node is a single connection to a cable system's main,
high-capacity fiber optic cable that is shared by a number of customers. Coaxial
cable is then connected from each node to the individual homes or buildings. Our
network design generally provides for six strands of fiber to each node, with
two strands active and four strands reserved for future services. We believe
hybrid fiber-optic coaxial architecture provides higher capacity, superior
signal quality, greater network reliability, reduced operating costs and more
reserve capacity for the addition of future services than traditional coaxial
network design.
12
Two-way communications capability permits our customers to send and receive
signals over the cable network so that interactive services, such as
video-on-demand, are accessible and high-speed Internet access does not require
a separate telephone line. This capability also positions us to offer cable
telephony, using either IP telephony as it becomes commercially feasible, or the
traditional switching technologies that are currently available. We believe our
plans for two-way communications capability, together with hybrid fiber-optic
coaxial architecture, enhances our cable network's ability to provide advanced
telecommunications services.
As of December 31, 2001, our cable systems were operated from 137 headend
facilities. We believe that fiber optics and advanced transmission technologies
make it cost effective to consolidate our headend facilities, allowing us to
realize operating efficiencies and resulting in lower fixed capital costs on a
per home basis as we introduce new products and services. We plan to eliminate
up to 120 headend facilities, by June 2003.
As part of our headend consolidation program, we plan to deploy over 2,500
route miles of fiber optic cable to create large regional fiber optic networks
with the potential to provide advanced telecommunications services. We are
constructing our regional networks with excess fiber optic capacity to
accommodate new and expanded products and services in the future.
Sales and Marketing
We seek to be the premier provider of entertainment, information and
telecommunications services in the markets we serve. Our marketing programs and
campaigns offer a variety of cable services creatively packaged and tailored to
appeal to each of our local markets and to segments within each market. We
routinely survey our customers to ensure that we are meeting their demands and
our customer surveys keep us abreast of our competition so that we can
effectively counter competitors' service offerings and promotional campaigns.
We use a coordinated array of marketing techniques to attract and retain
customers and to increase premium service penetration, including door-to-door
and direct mail solicitation, telemarketing, media advertising, local
promotional events, typically sponsored by programming services and
cross-channel promotion of new services and pay-per-view.
We build awareness of our brand through a variety of promotional campaigns.
As a result of our branding efforts, our emphasis on customer service and our
investments in the cable network, we believe we have developed a reputation for
quality, reliability and timely introduction of new products and services.
We invest a significant amount of time, effort and financial resources in
the training and evaluation of our marketing professionals and customer sales
representatives. Our customer sales representatives customize their sales
presentation to fit each of our customers' specific needs by conducting focused
consumer research and are given the incentive to use their frequent contact with
our customers as opportunities to sell our new products and services. As a
result, as we accelerate the introduction of new products and services to our
customers, we believe we can and achieve higher success rates in attracting and
retaining customers.
Programming Supply
We obtain basic and premium programming for our cable systems from program
suppliers whose compensation is typically based on a fixed fee per customer.
Programming contracts are generally for fixed periods and are subject to
negotiated renewal. Some program suppliers provide volume discount pricing
structures or offer marketing support. Substantially all of the cable
programming services carried on our cable systems are provided to customers
without written contracts with the respective program suppliers. Our manager is
currently negotiating the terms of these programming services with the
respective program suppliers. Our manager, through a wholly-owned subsidiary, is
a member of the National Cable Television Cooperative, Inc., a programming
cooperative consisting of small to medium-sized multiple system operators
serving, in the aggregate, over 12 million cable subscribers. The cooperative
may help create efficiencies in the areas of obtaining and administering
programming contracts, as well as securing, in some cases, more favorable
programming rates and contract terms for small to medium-sized cable operators.
We may join this cooperative to secure certain programming for our cable
systems, and we may secure other programming on a direct basis with programming
suppliers or indirectly through our manager.
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We expect our programming costs to increase in the future due to additional
programming being provided to our customers, increased costs to purchase
programming, inflationary increases and other factors affecting the cable
television industry. Although we will legally be able to pass through expected
increases in our programming costs to customers, there can be no assurance that
competitive conditions or other factors in the marketplace will allow us to do
so.
We also have various retransmission consent arrangements with commercial
broadcast stations, which generally expire in December 2002. None of these
consents require payment of fees for carriage. However, in some cases
retransmission consents have been contingent upon our carriage of
satellite-delivered cable programming offered by companies affiliated with the
stations' owners or the broadcast network carried by such stations.
Currently, there are over 200 cable programming networks carried or seeking
to be carried on our cable systems. We expect to use the analog and digital
channel capacity resulting from our capital improvement program to negotiate
favorable long-term contracts with our programming suppliers.
Customer Service and Community Relations
System reliability and customer satisfaction represent a cornerstone of our
business strategy. We expect that ongoing investments in our cable network and
our regional calling centers will significantly strengthen customer service,
enhancing the reliability of our cable network and allowing us to introduce new
products and services to our customers. We maintain regional calling centers,
that service approximately 83% of our cable systems' customers. They are staffed
with dedicated personnel who provide service to our customers 24 hours a day,
seven days a week, on a toll-free basis. We believe our regional calling centers
allow us to coordinate more effectively installation appointments and reduce
response time to customer inquiries. We continue to invest in both personnel and
equipment of our regional calling centers to ensure that these operating units
are professionally managed and employ state-of-the-art technology.
In addition, we are dedicated to fostering strong community relations in
the communities served by our cable systems. We support local charities and
community causes in various ways, including staged events and promotional
campaigns to raise funds and supplies for persons in need and in-kind donations
that include production services and free airtime on cable networks. We
participate in the "Cable in the Classroom" program, which is a national effort
by cable companies to provide schools with free cable television service and,
where available, Internet access. We also install and provide free cable
television service to government buildings and not-for-profit hospitals in our
franchise areas. We believe that our relations with the communities in which our
cable systems operate are generally good.
Franchises
Cable systems are generally operated under non-exclusive franchises granted
by local governmental authorities. These franchises typically contain many
conditions, such as: time limitations on commencement and completion of
construction; conditions of service, including number of channels, types of
programming and the provision of free service to schools and other public
institutions; and the maintenance or posting of insurance or indemnity bonds by
the cable operator. Many of the provisions of local franchises are subject to
federal regulation under the Communications Act of 1934, as amended.
As of December 31, 2001, our cable systems were subject to approximately
469 franchises. These franchises, which are non-exclusive, provide for the
payment of fees to the issuing authority. In most of the cable systems, such
franchise fees are passed through directly to the customers. The Cable
Communications Policy Act of 1984, or the 1984 Cable Act, prohibits franchising
authorities from imposing franchise fees in excess of 5% of gross revenues from
cable services and also permits the cable operator to seek renegotiation and
modification of franchise requirements if warranted by changed circumstances.
Substantially all of the basic subscribers of our cable systems are in
service areas that require a franchise. The table below groups the franchises of
our cable systems by year of expiration and presents the approximate number and
percentage of basic subscribers for each group as of December 31, 2001.
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Percentage of Number of Percentage of
Number of Total Basic Total Basic
Year of Franchise Expiration Franchises Franchises Subscribers Subscribers
- -------------------------------- ---------- ------------- ----------- -------------
2002 through 2005............... 146 31.1% 257,215 31.2%
2006 and thereafter............. 323 68.9 566,785 68.8
--- ----- ------- -----
Total...................... 469 100.0% 824,000 100.0%
=== ===== ======= =====
The 1984 Cable Act provides, among other things, for an orderly franchise
renewal process in which franchise renewal will not be unreasonably withheld or,
if renewal is denied and the franchising authority acquires ownership of the
cable system or effects a transfer of the cable system to another person, the
cable operator generally is entitled to the fair market value for the cable
system covered by such franchise. In addition, the 1984 Cable Act established
comprehensive renewal procedures, which require that an incumbent franchisee's
renewal application be assessed on its own merits and not as part of a
comparative process with competing applications.
We believe that we generally have good relationships with our franchising
communities. We have never had a franchise revoked or failed to have a franchise
renewed. In addition, substantially all of our franchises eligible for renewal
have been renewed or extended prior to their stated expirations, and no
franchise community has refused to consent to a franchise transfer to us.
Competition
We, like most cable systems, compete on the basis of several factors,
including price and the quality and variety of products and services offered. We
face competition from various communications and entertainment providers, the
number and type of which we expect to increase as we expand the products and
services offered over our broadband network. In recent years, the Federal
Communications Commission (the "FCC") has adopted policies authorizing new
technologies and a more favorable operating environment for certain existing
technologies that provide, or may provide, substantial additional competition
for cable systems. The extent to which a cable television service is competitive
depends in significant part upon the cable system's ability to provide a greater
variety of programming, superior technical performance and superior customer
service than are available over the air or through competitive alternative
delivery sources. We believe our ability to package multiple services, such as
digital television and two-way, high-speed Internet access, is an advantage in
our competitive business environment.
Providers of Broadcast Television and Other Entertainment
The extent to which a cable system competes with over-the-air broadcasting,
which provides signals that a viewer is able to receive directly, depends upon
the quality and quantity of the broadcast signals available by direct antenna
reception compared to the quality and quantity of such signals and alternative
services offered by a cable system. Cable systems also face competition from
other sources of entertainment such as live sporting events, movie theaters and
home video products, including videotape recorders and videodisc players.
Direct Broadcast Satellite Providers
Individuals can purchase home satellite dishes, which allow them to receive
satellite-delivered broadcast and non-broadcast program services, commonly known
as DBS, that formerly were available only to cable television subscribers.
According to recent government and industry reports DBS providers currently sell
video programming services to approximately 17.5 million individual households,
condominiums, apartments and office complexes in the United States.
DBS service can be received virtually anywhere in the continental United
States through the installation of a small roof top or side-mounted antenna. DBS
providers use video compression technology to increase channel capacity and
digital technology to improve the quality of the signals transmitted to their
customers. DBS providers offer the non-broadcast programming services we offer
in our cable systems, and although under legislation enacted in 1999 they are
now able to deliver local broadcast signals, they currently deliver virtually no
local broadcast signals in the markets we serve. This change in law eliminated a
significant competitive advantage which cable system operators had over DBS
providers, as previously DBS providers were not permitted to retransmit local
broadcast signals. DBS service is being heavily marketed on a nationwide basis
by several service operators. We believe our digital cable service is
competitive with the services delivered to customers by DBS systems.
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DBS providers are also developing ways to bring advanced communications
services to their customers. They are currently offering satellite-delivered
high-speed Internet access services with a telephone return path and are
beginning to provide true two-way interactivity. We believe that our Internet
access service is superior to the service currently offered by DBS providers
because our service does not rely on a telephone line. In order for DBS
providers to offer true two-way high-speed Internet access services, additional
equipment is required and their service is typically offered at higher prices
for equivalent services.
Two major companies, DirecTV and Echostar, are currently providing
nationwide high-power DBS services, which typically offer to their customers
more than 300 channels of programming, including programming similar to that
provided by cable systems. A proposed merger between these two entities is
presently undergoing regulatory scrutiny. If the merger is consummated, the
combined entity would serve over 16.0 million subscribers. DirecTV and Echostar
now deliver local broadcast signals in a number of the largest markets and we
believe they plan to expand such carriage to many more markets. The FCC has
adopted rules effective January 2002 which place a must-carry requirement on DBS
providers in any market where they retransmit one or more local signals. The
current capacity limitations of satellite technology may limit the DBS
providers' ability to comply with these must-carry requirements. A judicial
challenge to the January 2002 requirement on the grounds that it is
unconstitutional is pending. These developments could result in greater
challenges for us and other cable system operators.
Multichannel Multipoint Distribution Systems
Multichannel multipoint distribution systems deliver programming services
over microwave channels licensed by the FCC and received by subscribers with
special antennas. These wireless cable systems are less capital intensive and
subject to fewer regulatory requirements than cable television systems, and are
not required to obtain local franchises or pay franchise fees. To date, the
ability of wireless cable services to compete with cable systems has been
limited by a channel capacity of up to 35 channels and the need for unobstructed
line-of-sight over-the-air transmission. Although relatively few wireless cable
systems in the United States are currently in operation or under construction,
virtually all markets have been licensed or tentatively licensed. The use of
digital compression technology, and the FCC's recent amendment to its rules to
permit reverse path or two-way transmission over wireless facilities, may enable
multichannel multipoint distribution systems to deliver more channels and
additional services, including Internet related services. Digital compression
technology refers to the conversion of the standard video signal into a digital
signal and the compression of that signal to facilitate multiple channel
transmissions through a single channel's signal.
Private Cable Television Systems
Private cable television systems compete with conventional cable television
systems for the right to service condominiums, apartment complexes and other
multiple unit residential developments. The operators of these private systems,
known as satellite master antenna television (SMATV) systems, provide improved
reception of local television stations and several of the same
satellite-delivered programming services offered by franchised cable systems.
SMATV system operators often enter into exclusive agreements with apartment
building owners or homeowners' associations that preclude franchised cable
television operators from serving residents of such private complexes and
typically are not subject to regulation like local franchised cable operators.
However, the 1984 Cable Act gives franchised cable operators the right to use
existing compatible easements within their franchise areas on nondiscriminatory
terms and conditions. Accordingly, where there are preexisting compatible
easements, cable operators may not be unfairly denied access or discriminated
against with respect to access to the premises served by those easements.
Conflicting judicial decisions have been issued interpreting the scope of the
access right granted by the 1984 Cable Act, particularly with respect to
easements located entirely on private property. Under the Telecommunications Act
of 1996, satellite master antenna television systems can interconnect
non-commonly owned buildings without having to comply with local, state and
federal regulatory requirements that are imposed upon cable systems providing
similar services, as long as they do not use public rights of way. The FCC has
held that the latter provision is not violated so long as interconnection across
public rights of way is provided by a third party.
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Traditional Overbuilds
Cable television systems are operated under non-exclusive franchises
granted by local authorities. More than one cable system may legally be built in
the same area. Franchising authorities have from time to time granted additional
franchises to other companies, including other cable operators or telephone
companies, and these additional franchises might contain terms and conditions
more favorable than those afforded to the incumbent cable operator. In addition,
entities willing to establish an open video system, under which they offer
unaffiliated programmers non-discriminatory access to a portion of the system's
cable system, may be able to avoid significant local franchising requirements.
Well financed businesses from outside the cable industry, such as public
utilities which already possess or are developing fiber optic and other
transmission facilities in the areas they serve, may over time become
competitors. We believe that various entities are currently offering cable
service to an estimated 10.2% of the homes passed in the service areas of our
cable systems' franchises.
Internet Access
We offer high-speed Internet access in many of our cable systems. This kind
of service is sometimes called "cable modem service." Our cable systems compete
with a number of other companies, many of which have substantial resources, such
as existing Internet service providers, commonly known as ISPs, DBS providers
and local and long distance telephone companies.
The deployment of digital subscriber line technology, known as DSL, allows
Internet access to subscribers at data transmission speeds equal to or greater
than that of modems over conventional telephone lines, putting it in direct
competition with cable modem service. Numerous companies, including telephone
companies, have introduced DSL service and certain telecommunications companies
are seeking to provide high-speed broadband services, including interactive
online services, without regard to present service boundaries and other
regulatory restrictions. Congress is currently considering legislation that, if
enacted into law, will eliminate or reduce significantly many of the regulatory
restrictions on the offering of high-speed broadband services by local telephone
companies. DBS providers currently offer satellite-delivered high-speed Internet
access services with a telephone return path and are beginning to provide true
two-way interactivity.
A number of ISP's have asked local authorities and the FCC to give them
rights of access to cable systems' broadband infrastructure so that they can
deliver their services directly to cable systems' customers. This kind of access
is often called "open access." Many local franchising authorities have been
examining the issue of open access and a few have required cable operators to
provide such access. Several Federal courts have ruled that localities are not
authorized to require open access. On March 14, 2002, the FCC announced that
there is no current legal requirement for cable operators to grant open access
now that cable modem service is classified as an information service. The FCC,
however, stated that it is considering whether it has the authority to impose
open access requirements and, if so, whether it should do so. If we were
required to provide open access to ISPs as a result of FCC action or court
decisions, other companies could use our cable system infrastructure to offer
Internet services competitive with our own.
Other Competition
Advances in communications technology, as well as changes in the
marketplace and the regulatory and legislative environment, are constantly
occurring. The FCC has authorized a new interactive television service which
permits non-video transmission of information between an individual's home and
entertainment and information service providers. This service, which can be used
by direct broadcast satellite systems, television stations and other video
programming distributors, including cable television systems, is an alternative
technology for the delivery of interactive video services. It does not appear at
the present time that this service will have a material impact on the operations
of cable television systems.
The FCC has allocated spectrum in the 28GHz range for a new multichannel
wireless service that can be used to provide video and telecommunications
services. The FCC completed the process of awarding licenses to use this
spectrum via a market-by-market auction. We do not know whether such a service
would have a material impact on the operations of cable television systems.
17
The 1996 Telecom Act directed the FCC to establish, and the FCC has
adopted, regulations and policies for the issuance of licenses for digital
television to incumbent television broadcast licensees. Digital television can
deliver high definition television pictures and multiple digital-quality program
streams, as well as CD-quality audio programming and advanced digital services,
such as data transfer or subscription video. The FCC also has authorized
television broadcast stations to transmit text and graphic information that may
be useful to both consumers and businesses. The FCC also permits commercial and
noncommercial FM stations to use their subcarrier frequencies to provide
non-broadcast services, including data transmission.
Employees
As of December 31, 2001, we employed 1,787 full-time employees and 30
part-time employees. Approximately 6.3% of our cable systems' employees are
represented by unions but are not covered by any collective bargaining
agreements. We consider our relations with our employees to be generally good.
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Legislation and Regulation
General
A federal law known as the Communications Act of 1934, as amended (the
"Communications Act"), establishes a national policy to guide the regulation,
development and operation of cable communications systems.
The Communications Act allocates principal responsibility for enforcing the
federal policies among the FCC and state and local governmental authorities. The
FCC and state regulatory agencies regularly conduct administrative proceedings
to adopt or amend regulations implementing the statutory mandate of the
Communications Act. At various times, interested parties to these administrative
proceedings challenge the new or amended regulations and policies in the courts
with varying levels of success. We expect that further court actions and
regulatory proceedings will occur and will refine the rights and obligations of
various parties, including the government, under the Communications Act. The
results of these judicial and administrative proceedings may materially affect
the cable industry and our business and operations. In the following paragraphs,
we summarize the federal laws and regulations materially affecting the growth
and operation of the cable industry. We also provide a brief description of
certain state and local laws.
Federal Regulation
The Communications Act and the regulations and policies of the FCC affect
significant aspects of our cable system operations, including:
. subscriber rates;
. the content of the programming we offer to subscribers, as well as the
way we sell our program packages to subscribers;
. the use of our cable systems by the local franchising authorities, the
public and other unrelated companies;
. our franchise agreements with local governmental authorities;
. cable system ownership limitations and prohibitions; and
. our use of utility poles and conduit.
Subscriber Rates
The Communications Act and the FCC's regulations and policies limit the
ability of cable systems to raise rates for basic services and equipment. No
other rates can be regulated. Federal law exempts cable systems from rate
regulation of cable services and customer equipment in communities that are
subject to effective competition, as defined by federal law.
Where there is no effective competition to the cable operator's services,
federal law gives local franchising authorities the right to regulate the rates
charged by the operator for:
. the lowest level of programming service offered by cable operator,
typically called basic service, which includes the local broadcast
channels and any public access or governmental channels that are
required by the operator's franchise;
. the installation of cable service and related service calls; and
. the installation, sale and lease of equipment used by subscribers to
receive basic service, such as converter boxes and remote control
units.
19
Local franchising authorities who wish to regulate basic service rates and
related equipment rates must first obtain FCC certification to regulate by
following a simplified FCC certification process and agreeing to follow
established FCC rules and policies when regulating the cable operator's rates.
Several years ago, the FCC adopted detailed rate regulations, guidelines
and rate forms that a cable operator and the local franchising authority must
use in connection with the regulation of basic service and equipment rates. The
FCC adopted a benchmark methodology as the principal method of regulating rates.
However, if this methodology produces unacceptable rates, the operator may also
justify rates using a detailed cost-of-service methodology. The FCC's rules also
require franchising authorities to regulate equipment rates on the basis of
actual cost plus a reasonable profit, as defined by the FCC.
If the local franchising authority concludes that a cable operator's rates
are too high under the FCC's rate rules, the local franchising authority may
require the cable operator to reduce rates and to refund overcharges to
subscribers, with interest. The cable operator may appeal adverse local rate
decisions to the FCC.
The FCC's regulations allow a cable operator to modify regulated rates on a
quarterly or annual basis to account for changes in:
. the number of regulated channels;
. inflation; and
. certain external costs, such as franchise and other governmental fees,
copyright and retransmission consent fees, taxes, programming fees and
franchise-related obligations.
The Communications Act and the FCC's regulations also:
. require cable operators to charge uniform rates throughout each
franchise area that is not subject to effective competition;
. prohibit regulation of non-predatory bulk discount rates offered by
cable operators to subscribers in commercial and residential
developments; and
. permit regulated equipment rates to be computed by aggregating costs
of broad categories of equipment at the franchise, system, regional or
company level.
Content Requirements
The Communications Act and the FCC's regulations contain broadcast signal
carriage requirements that allow local commercial television broadcast stations:
. to elect once every three years to require a cable system to carry the
station, subject to certain exceptions; or
. to negotiate with us on the terms pursuant to which we carry the
station on our cable operators, commonly called retransmission
consent.
The Communications Act requires a cable operator to devote up to one-third
of its activated channel capacity for the mandatory carriage of local commercial
television stations. The Communications Act also gives local non-commercial
television stations mandatory carriage rights; however, such stations are not
given the option to negotiate retransmission consent for the carriage of their
signals by cable systems. Additionally, cable systems must obtain retransmission
consent for:
20
. all distant commercial television stations, except for commercial
satellite-delivered independent superstations such as WGN;
. commercial radio stations; and
. certain low-power television stations.
The FCC has recently adopted regulations for mandatory carriage of digital
television signals offered by local television broadcasters. Under these
regulations, local television broadcast stations transmitting solely in a
digital format are entitled to request carriage in their choice of digital or
converted analog format. Stations transmitting in both digital and analog
formats, which is permitted during the current several-year transition period,
have no carriage rights for the digital format during the transition unless and
until they turn in their analog channel. We are unable to predict the impact of
these new carriage requirements on the operations of our cable systems.
The Communications Act requires our cable systems, other than those systems
which are subject to effective competition, to permit subscribers to purchase
video programming we offer on a per channel or a per program basis without the
necessity of subscribing to any tier of service other than the basic cable
service tier. However, we are not required to comply with this requirement until
October 2002 for any of our cable systems that do not have addressable converter
boxes or that have other substantial technological limitations. Many of our
cable systems do not have the technological capability to offer programming in
the manner required by the statute and thus currently are exempt from complying
with the requirement. We are unable to predict whether the full implementation
of this statutory provision will have a material impact on the operation of our
cable systems.
To increase competition between cable operators and other video program
distributors, the Communications Act and the FCC's regulations:
. preclude any satellite video programmer affiliated with a cable
company, or with a common carrier providing video programming directly
to its subscribers, from favoring an affiliated company over
competitors;
. require such programmers to sell their programming to other
unaffiliated video program distributors; and
. limit the ability of such programmers to offer exclusive programming
arrangements to their related parties.
The FCC actively regulates other aspects of our programming, involving such
areas as:
. our use of syndicated and network programs and local sports broadcast
programming;
. advertising in children's programming;
. political advertising;
. origination cablecasting;
. adult programming;
. sponsorship identification; and
. closed captioning of video programming.
21
Use of Our Cable Systems by the Government and Unrelated Third Parties
The Communications Act allows local franchising authorities and unrelated
third parties to have access to our cable systems' channel capacity for their
own use. For example, it:
. permits franchising authorities to require cable operators to set
aside channels for public, educational and governmental access
programming; and
. requires a cable system with 36 or more activated channels to
designate a significant portion of its channel capacity for commercial
leased access by third parties to provide programming that may compete
with services offered by the cable operator.
The FCC regulates various aspects of third party commercial use of channel
capacity on our cable systems, including:
. the maximum reasonable rate a cable operator may charge for third
party commercial use of the designated channel capacity;
. the terms and conditions for commercial use of such channels; and
. the procedures for the expedited resolution of disputes concerning
rates or commercial use of the designated channel capacity.
Franchise Matters
We have non-exclusive franchises in virtually every community in which we
operate that authorize us to construct, operate and maintain our cable systems.
Although franchising matters are normally regulated at the local level through a
franchise agreement or a local ordinance, the Communications Act provides
oversight and guidelines to govern our relationship with local franchising
authorities.
For example, the Communications Act:
. affirms the right of franchising authorities, which may be state or
local, depending on the practice in individual states, to award one or
more franchises within their jurisdictions;
. generally prohibits us from operating in communities without a
franchise;
. encourages competition with existing cable systems by:
. allowing municipalities to operate their own cable systems
without franchises, and
. preventing franchising authorities from granting exclusive
franchises or from unreasonably refusing to award additional
franchises covering an existing cable system's service area;
. permits local authorities, when granting or renewing our franchises,
to establish requirements for cable-related facilities and equipment,
but prohibits franchising authorities from establishing requirements
for specific video programming or information services other than in
broad categories;
. permits us to obtain modification of our franchise requirements from
the franchise authority or by judicial action if warranted by
commercial impracticability; and
. generally prohibits franchising authorities from:
. imposing requirements during the initial cable franchising
process or during franchise renewal that require, prohibit or
restrict us from providing telecommunications services,
22
. imposing franchise fees on revenues we derive from providing
telecommunications services over our cable systems,
. restricting our use of any type of subscriber equipment or
transmission technology, and
. limits our payment of franchise fees to the local franchising
authority to 5.0% of our gross revenues derived from providing cable
services over our cable system.
The Communications Act contains renewal procedures designed to protect us
against arbitrary denials of renewal of our franchises although, under certain
circumstances, the franchising authority could deny us a franchise renewal.
Moreover, even if our franchise is renewed, the franchising authority may seek
to impose upon us new and more onerous requirements, such as significant
upgrades in facilities and services or increased franchise fees as a condition
of renewal to the extent permitted by law. Similarly, if a franchising
authority's consent is required for the purchase or sale of our cable system or
franchise, the franchising authority may attempt to impose more burdensome or
onerous franchise requirements on the purchaser in connection with a request for
such consent. Historically, cable operators providing satisfactory services to
their subscribers and complying with the terms of their franchises have almost
always obtained franchise renewals. We believe that we have generally met the
terms of our franchises and have provided quality levels of service. We
anticipate that our future franchise renewal prospects generally will be
favorable.
Various courts have considered whether franchising authorities have the
legal right to limit the number of franchises awarded within a community and to
impose substantive franchise requirements. These decisions have been
inconsistent and, until the U.S. Supreme Court rules definitively on the scope
of cable operators' First Amendment protections, the legality of the franchising
process generally and of various specific franchise requirements is likely to be
in a state of flux.
Ownership Limitations
The Communications Act generally prohibits us from owning or operating a
satellite master antenna television system or multichannel multipoint
distribution system in any area where we provide franchised cable service and do
not have effective competition, as defined by federal law. We may, however,
acquire and operate a satellite master antenna television system in our existing
franchise service areas if the programming and other services provided to the
satellite master antenna television system subscribers are offered according to
the terms and conditions of our local franchise agreement.
The Communications Act also authorizes the FCC to adopt nationwide limits
on the number of subscribers under the control of a cable operator. The U.S.
Court of Appeals for the District of Columbia Circuit recently vacated the FCC's
current limit of 30% of subscribers to all multi-channel video programming
distributors nationwide. We currently account for fewer subscribers than that
limit and, therefore, the limit does not currently affect us and we do not
expect it to affect any future acquisitions we may undertake in the foreseeable
future.
The Communications Act and FCC regulations also impose limits on the number
of channels that can be occupied on a cable system by a video programmer in
which a cable operator has an interest. A federal appellate court affirmed the
statutory ownership restrictions, but overturned the FCC's revised 30%
subscriber ownership limitation and the rule regarding the number of channels on
a cable system which can be occupied by programming affiliated with the cable
operator on the basis that they do not pass constitutional muster. These matters
were sent back to the FCC for further proceedings.
The 1996 amendments to the Communications Act eliminated the statutory
prohibition on the common ownership, operation or control of a cable system and
a television broadcast station in the same service area. The identical FCC
regulation has been invalidated by a federal appellate court. The FCC has
eliminated its regulatory restriction on cross-ownership of cable systems and
national broadcasting networks.
23
The 1996 amendments to the Communications Act also made far-reaching
changes in the relationship between local telephone companies and cable service
providers. These amendments:
. eliminated federal legal barriers to competition in the local
telephone and cable communications businesses, including allowing
local telephone companies to offer video services in their local
telephone service areas;
. preempted legal barriers to telecommunications competition that
previously existed in state and local laws and regulations;
. set basic standards for relationships between telecommunications
providers; and
. generally limited acquisitions and prohibited joint ventures between
local telephone companies and cable operators in the same market.
Local telephone companies may provide service as traditional cable
operators with local franchises or they may opt to provide their programming
over open video systems, subject to certain conditions, including, but not
limited to, setting aside a portion of their channel capacity for use by
unaffiliated program distributors on a non-discriminatory basis. The decision as
to whether an operator of an open video system must obtain a local franchise is
left to each community.
Pole Attachment Regulation
The Communications Act requires the FCC to regulate the rates, terms and
conditions imposed by public utilities, for cable systems' use of utility pole
and conduit space unless state authorities have demonstrated to the FCC that
they adequately regulate pole attachment rates, as is the case in certain states
in which we operate. In the absence of state regulation, the FCC administers
pole attachment rates on a formula basis. The FCC adopted a new rate formula
that became effective in 2001 which governs the maximum rate certain utilities
may charge for attachments to their poles and conduit by companies providing
telecommunications services, including cable operators. A federal appellate
court is currently evaluating whether the FCC's rate formulas, as applied in a
specific case, provide "just compensation" under Federal Constitution.
Increases in attachment rates due to the FCC's new rate formula are phased
in over a five-year period in equal annual increments, beginning in February
2001. A federal appellate court found that the provision of Internet access by a
cable system was neither a cable service or a telecommunications service, thus
the FCC lacked authority to regulate pole attachment rates for cable systems
which offer Internet access. The Supreme Court recently reversed the federal
appellate court ruling and upheld the FCC's authority to regulate pole
attachment rates. We are unable to predict the ultimate impact of any revised
FCC rate formula or of any new pole attachment rate regulations on our business
and operations.
Other Regulatory Requirements of the Communications Act and the FCC
The FCC has adopted cable inside wiring rules to provide a more specific
procedure for the disposition of residential home wiring and internal building
wiring that belongs to an incumbent cable operator that is forced by the
building owner to terminate its cable services in a building with multiple
dwelling units. The FCC is also considering additional rules relating to inside
wiring that, if adopted, may disadvantage incumbent cable operators.
The Communications Act includes provisions, among others, regulating and
the FCC actively regulates other parts of our cable operations, involving such
areas as:
. equal employment opportunity;
. consumer protection and customer service;
. technical standards and testing of cable facilities;
. consumer electronics equipment compatibility;
24
. registration of cable systems;
. maintenance of various records and public inspection files;
. microwave frequency usage; and
. antenna structure notification, marking and lighting.
The FCC may enforce its regulations through the imposition of fines, the
issuance of cease and desist orders or the imposition of other administrative
sanctions, such as the revocation of FCC licenses needed to operate transmission
facilities often used in connection with cable operations. The FCC has ongoing
rulemaking proceedings that may change its existing rules or lead to new
regulations. We are unable to predict the impact that any further FCC rule
changes may have on our business and operations.
Other bills and administrative proposals pertaining to cable communications
have previously been introduced in Congress or considered by other governmental
bodies over the past several years. It is probable that Congress and other
governmental bodies will continue to analyze the regulation of cable
communications services.
Copyright
Our cable systems typically include in their channel line-ups local and
distant television and radio broadcast signals, which are protected by the
copyright laws. We generally do not obtain a license to use this programming
directly from the owners of the programming, but instead comply with an
alternative federal compulsory copyright licensing process. In exchange for
filing certain reports and contributing a percentage of our revenues to a
federal copyright royalty pool, we obtain blanket permission to retransmit the
copyrighted material carried on these broadcast signals. The nature and amount
of future copyright payments for broadcast signal carriage cannot be predicted
at this time.
In a report to Congress, the U.S. Copyright Office recommended that
Congress make major revisions to both the cable television and satellite
compulsory licenses. Congress recently modified the satellite compulsory license
in a manner that permits DBS providers to become more competitive with cable
operators. The possible simplification, modification or elimination of the cable
communications compulsory copyright license is the subject of continuing
legislative review. The elimination or substantial modification of the cable
compulsory license could adversely affect our ability to obtain suitable
programming and could substantially increase the cost of programming that
remains available for distribution to our subscribers. We are unable to predict
the outcome of this legislative activity.
Copyrighted music performed in programming supplied to cable television
systems by pay cable networks and basic cable networks is licensed by the
networks through private agreements with the major performing rights
organizations in the United States. These organizations offer through to the
viewer licenses to the cable networks that cover the retransmission of the cable
networks' programming by cable television systems to their customers.
Our cable systems also utilize music in other programming and advertising
that we provide to subscribers. The rights to use this music are controlled by
various music performing rights organizations from which performance licenses
must be obtained. Cable industry representatives recently negotiated standard
license agreements with the two remaining sizable music performing rights
organizations covering locally originated programming, including advertising
inserted by the cable operator in programming produced by other parties. We
expect that these organizations will now seek to execute these standard
agreements with most cable operators, including us. Although each of these
agreements will require the payment of music license fees for earlier time
periods, we do not believe such license fees will have a significant impact on
our business and operations.
Cable Modem Service
There are currently few laws or regulations which specifically regulate
communications or commerce over the Internet. Section 230 of the Communications
Act declares it to be the policy of the United States to promote the continued
development of the Internet and other interactive computer services and
interactive media, and to preserve the vibrant and competitive free market that
presently exists for the Internet and other interactive computer services,
25
unfettered by federal or state regulation. One area in which Congress did
attempt to regulate content over the Internet involved the dissemination of
obscene or indecent materials.
The Digital Millennium Copyright Act is intended to reduce the liability of
online service providers for listing or linking to third-party Websites that
include materials that infringe copyrights or other rights or if customers use
the service to publish or disseminate infringing materials. The Children's
Online Protection Act and the Children's Online Privacy Protection Act are
intended to restrict the distribution of certain materials deemed harmful to
children and impose additional restrictions on the ability of online services to
collect user information from minors. In addition, the Protection of Children
From Sexual Predators Act of 1998 requires online service providers to report
evidence of violations of federal child pornography laws under certain
circumstances.
A number of ISP's have asked local authorities and the FCC to give them
rights of access to cable systems' broadband infrastructure so that they can
deliver their services directly to cable systems' customers. This kind of access
is often called "open access." Many local franchising authorities have been
examining the issue of open access and a few have required cable operators to
provide such access. Several Federal courts have ruled that localities are not
authorized to require open access. On March 14, 2002, the FCC announced that
there is no current legal requirement for cable operators to grant open access.
On the same date, however, the FCC announced that it is considering whether it
has the authority to impose open access requirements and, if so, whether it
should do so.
There is uncertainty about whether Internet access service provided by
cable operators should be classified as an information service,
telecommunications service, or cable service under the Communications Act of
1934. The decision about the proper classification will affect our business and
operations, including, but not limited to, whether we will be required to pay
local government franchise fees on cable Internet revenues. On March 14, 2002,
the FCC announced that it was classifying Internet access service provided
through cable modems as an interstate information service. At the same time, the
FCC initiated a rulemaking proceeding designed to address a number of issues
resulting from this regulatory classification, including the following:
. The FCC confirmed that there is no current legal requirement for cable
operators to grant open access now that cable modem service is
classified as an information service. The FCC is considering, however,
whether it has the authority to impose open access requirements and,
if so, whether it should do so, or whether to permit local authorities
to impose such a requirement.
. The FCC confirmed that because cable modem service is an information
service, not a cable service, local franchise authorities may not
collect franchise fees on cable modem service revenues under existing
law and regulations.
. The FCC concluded that federal law does not permit local franchise
authorities to impose additional franchise requirements on cable modem
service. It is considering, however, whether local franchise
authorities nonetheless have the authority to impose restrictions,
requirements or fees because cable modem service is delivered over
cable using public rights of way.
. The FCC is considering whether cable operators providing cable modem
service should be required to contribute to a "universal service fund"
designed to support making service available to all consumers,
including those in low income, rural and high-cost areas at rates that
are reasonably comparable to those charged in urban areas.
. The FCC is considering whether it should take steps to ensure that the
regulatory burdens that cable systems providing cable modem service
are comparable to those of other providers of Internet access service,
such as telephone companies. One method of achieving comparability
would be to make cable operators subject to some of the regulations
that do not now apply to them, but are applicable to telephone
companies.
Challenges to the FCC's classification of cable Internet access service
have been filed in federal courts. In previous actions over the regulatory
classification of cable modem service, the courts issued conflicting decisions.
These conflicting rulings and the new court proceedings increase the possibility
that the classification of cable Internet service could be decided by the
Supreme Court.
26
State and Local Regulation
Our cable systems use local streets and rights-of-way. Consequently, we
must comply with state and local regulation, which is typically imposed through
the franchising process. Our cable systems generally are operated in accordance
with non-exclusive franchises, permits or licenses granted by a municipality or
other state or local government entity. Our franchises generally are granted for
fixed terms and in many cases are terminable if we fail to comply with material
provisions. The terms and conditions of our franchises vary materially from
jurisdiction to jurisdiction. Each franchise generally contains provisions
governing:
. franchise fees;
. franchise term;
. system construction and maintenance obligations;
. system channel capacity;
. design and technical performance;
. customer service standards;
. sale or transfer of the franchise;
. territory of the franchise;
. indemnification of the franchising authority;
. use and occupancy of public streets; and
. types of cable services provided.
In the process of renewing franchises, a franchising authority may seek to
impose new and more onerous requirements, such as upgraded facilities, increased
channel capacity or enhanced services, although protections available under the
Communications Act require the municipality to take into account the cost of
meeting such requirements. The Communications Act also contains renewal
procedures and criteria designed to protect incumbent franchisees against
arbitrary denials of renewal.
A number of states subject cable systems to the jurisdiction of centralized
state governmental agencies, some of which impose regulation of a character
similar to that of a public utility. Attempts in other states to regulate cable
systems are continuing and can be expected to increase. To date, other than
Delaware, no state in which we operate has enacted such state-level regulation.
State and local franchising jurisdiction is not unlimited; however, it must be
exercised consistently with federal law. The Communications Act immunizes
franchising authorities from monetary damage awards arising from regulation of
cable systems or decisions made on franchise grants, renewals, transfers and
amendments.
Other Regulation
Existing federal, state and local laws and regulations and state and local
franchise requirements are currently the subject of judicial proceedings,
legislative hearings and administrative proposals which could change, in varying
degrees, the manner in which cable systems operate. Neither the outcome of these
proceedings nor their impact upon the cable industry or our business or
operations can be predicted at this time.
27
ITEM 2. PROPERTIES
Our principal physical assets consist of cable television operating plant
and equipment, including signal receiving, encoding and decoding devices,
headend facilities and distribution systems and equipment at or near customers'
homes for each of the systems. The signal receiving apparatus typically includes
a tower, antenna, ancillary electronic equipment and earth stations for
reception of satellite signals. Headend facilities are located near the
receiving devices. Our distribution system consists primarily of coaxial and
fiber optic cables and related electronic equipment. Customer premise equipment
consists of decoding converters and cable modems.
Our cable television plant and related equipment generally are attached to
utility poles under pole rental agreements with local public utilities, although
in some areas the distribution cable is buried in underground ducts or trenches.
The physical components of the cable systems require maintenance and periodic
upgrading to improve system performance and capacity.
We own and lease the real property housing our regional call centers,
business offices and warehouses throughout our operating regions. Our headends,
signal reception sites and microwave facilities are located on owned and leased
parcels of land, and we generally own the towers on which certain of our
equipment is located. We own most of our service vehicles. We believe that our
properties, both owned and leased, are in good condition and are suitable and
adequate for our operations.
ITEM 3. LEGAL PROCEEDINGS
There are no material pending legal proceedings to which we are a party or
to which any of our properties are subject.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year ended December 31, 2001.
28
PART II
-------
ITEM 5. MARKET FOR REGISTRANTS' COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
There is no public trading market for our equity, all of which is held by
MCC.
29
ITEM 6. SELECTED FINANCIAL DATA
In the table below, we provide you with:
. selected historical financial data for the period from January 1, 1997
through February 28, 1999 ("Old Mediacom") and for the period March 1,
1999 through July 18, 2001 ("New Mediacom"), and balance sheet data as
of December 31, 1997 through 2000 and July 18, 2001, which are derived
from the audited financial statements of Mediacom Systems (Predecessor
Company). (See Note 1 to the Mediacom Systems (Predecessor Company)
combined financial statements); and
. selected historical consolidated financial and operating data for the
period from our inception on April 5, 2001 through December 31, 2001
and balance sheet data as of December 31, 2001, which are derived from
our audited consolidated financial statements.
See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
Mediacom
Mediacom Systems (Predecessor Company) Broadband LLC
------------------------------------------------------------------------------------ ---------------
Period from Period from Inception
January 1 from March 1 January 1 (April 5, 2001)
Year Ended Year Ended Through Through Year Ended Through Through
December 31, December 31, February 28, December 31, December 31, July 18, December 31,
1997 1998 1999 1999 2000 2001 2001
------------ ------------ ------------ ------------ ------------ ---------- ---------------
(unaudited) (dollars in thousands, except per share amounts)
Statement of Operations
Data:
Revenues $382,613 $368,290 $ 63,335 $ 336,571 $ 439,541 $ 249,238 $ 215,900
Costs and expenses:
Service costs (1) 175,615 165,519 31,500 168,582 223,530 117,205 89,006
Selling, general and
administrative expenses 30,991 29,953 5,586 35,466 39,892 42,449 42,442
Management fee expense(2) 11,261 12,778 1,927 13,440 22,267 18,625 2,875
Depreciation and
amortization 62,159 63,786 10,831 90,166 137,182 83,610 88,463
Restructuring charge(3) -- -- -- -- -- 570 --
-------- -------- -------- ---------- ---------- ---------- ----------
Operating income (loss) 102,587 96,254 13,491 28,917 16,670 (13,221) (6,886)
Interest expense, net(4) -- -- -- -- -- -- 41,430
Other expenses -- -- -- -- -- -- 2,270
Gain on disposition of
assets(5) -- -- -- -- -- 5,183 --
-------- -------- -------- ---------- ---------- ---------- ----------
Net income (loss) before
income taxes 102,587 96,254 13,491 28,917 16,670 (8,038) (50,586)
Provision (benefit) for
income taxes (6) 41,035 38,905 5,440 11,620 6,646 (3,546) --
-------- -------- -------- ---------- ---------- ---------- ----------
Net income (loss) $ 61,552 $ 57,349 $ 8,051 $ 17,297 $ 10,024 $ (4,492) $ 50,586
======== ======== ======== ========== ========== ========== ==========
Balance Sheet Data
(end of period):
Total assets $840,055 $933,530 $937,792 $2,306,050 $2,307,354 $1,941,047 $2,282,667
Total debt -- -- -- -- -- -- 1,200,000
Total member's equity -- -- -- -- -- -- 666,294
(continued on next page)
30
Mediacom
Mediacom Systems (Predecessor Company) Broadband LLC
------------------------------------------------------------------------------------ ---------------
Period from Period from Inception
January 1 from March 1 January 1 (April 5, 2001)
Year Ended Year Ended Through Through Year Ended Through Through
December 31, December 31, February 28, December 31, December 31, July 18, December 31,
1997 1998 1999 1999 2000 2001 2001
------------ ------------ ------------ ------------ ------------ ---------- ---------------
(unaudited) (dollars in thousands, except per share amounts)
Other Data:
System cash flow(7) $176,007 $172,818 $ 26,249 $ 132,523 $ 176,119 $ 89,584 $ 84,473
System cash flow margin(8) 46.0% 46.9% 41.4% 39.4% 40.1% 35.9% 39.1%
Operating cash flow(9) $164,746 $160,040 $ 24,322 $ 119,083 $ 153,852 $ 70,959 $ 81,598
Operating cash flow margin(10) 43.1% 43.5% 38.4% 35.4% 35.0% 28.5% 37.8%
Net cash flows provided by
(used in):
Operating activities $ 98,608 $ 10,607 $ 89,707 $ 119,756 $(34,278) $ 161,651
Investing activities (84,076) (16,028) (159,052) (131,177) (34,682) (2,199,583)
Financing activities (11,158) (74) 77,695 14,493 47,806 (2,045,510)
Operating Data:
(end of period, except
average):
Homes passed(11) 1,430,000
Basic subscribers(12) 824,000
Basic penetration(13) 57.6%
Digital customers (14) 233,000
Cable modem customers(15) 77,000
Average monthly revenues per
basic subscriber(16) $ 47.98
- ----------
(1) Service costs for the period from our inception on April 5, 2001 through
December 31, 2001 include $2.9 million of incremental expenses incurred
during the fourth quarter related to the transition from Excite@Home to
Mediacom Online(SM).
(2) For all periods presented prior to our inception on April 5, 2001,
management fees were paid to AT&T Broadband, LLC. Upon our acquisition of
our cable systems, Mediacom Communications Corporation replaced AT&T
Broadband as manager and AT&T Broadband was no longer entitled to receive
management fees from our cable systems.
(3) As part of a cost reduction plan undertaken by our predecessor company in
2001, approximately 63 employees were terminated, resulting in a
restructuring charge of approximately $570,000. The entire charge was paid
in cash by our predecessor company.
(4) For all periods presented prior to our inception on April 5, 2001, our
cable systems operated as fully integrated businesses of AT&T Broadband and
no debt or interest expense was allocated to these operations.
(5) Represents the gain on disposition from the sale of the Missouri systems to
Mediacom Broadband LLC on June 29, 2001 for cash proceeds of approximately
$308.1 million, before final closing adjustments.
(6) Provision (benefit) for income taxes in Mediacom Systems (Predecessor
Company) combined financial statements were based upon the AT&T cable
systems' contribution to the overall tax liability or benefit of AT&T Corp.
and its affiliates. Under our ownership, these cable systems are organized
as limited liability companies and are subject to minimum income taxes.
(7) Represents operating cash flow, as defined in note 9 below, before
management fee expense. System cash flow:
. is not intended to be a performance measure that should be regarded as
an alternative either to operating income (loss) or net income (loss)
as an indicator of operating performance or to the statement of cash
flows as a measure of liquidity;
. is not intended to represent funds available for debt service,
dividends, reinvestment or other discretionary uses; and
. should not be considered in isolation or as a substitute for measures
of performance prepared in accordance with generally accepted
accounting principles.
31
System cash flow is included in this report because our management
believes that system cash flow is a meaningful measure of performance
commonly used in the cable television industry and by the investment
community to analyze and compare cable television companies. Our
definition of system cash flow may not be identical to similarly
titled measures reported by other companies.
(8) Represents system cash flow as a percentage of revenue. This measurement is
used by us, and is commonly used in the cable television industry, to
analyze and compare cable television companies on the basis of operating
performance, for the reasons discussed in note 7 above.
(9) Represents operating income (loss) before depreciation and amortization and
restructuring charge. Operating cash flow:
. is not intended to be a performance measure that should be regarded as
an alternative either to operating income (loss) or net income (loss)
as an indicator of operating performance or to the statement of cash
flows as a measure of liquidity;
. is not intended to represent funds available for debt service,
dividends, reinvestment or other discretionary uses; and
. should not be considered in isolation or as a substitute for measures
of performance prepared in accordance with generally accepted
accounting principles.
Operating cash flow is included in this report because our management
believes that operating cash flow is a meaningful measure of performance
commonly used in the cable television industry and by the investment
community to analyze and compare cable television companies. Our definition
of operating cash flow may not be identical to similarly titled measures
reported by other companies.
(10) Represents operating cash flow as a percentage of revenue. This measurement
is used by us, and is commonly used in the cable television industry, to
analyze and compare cable television companies on the basis of operating
performance, for the reasons discussed in note 9 above.
(11) Represents the number of single residence homes, apartments and condominium
units passed by the cable distribution network in a cable system's service
area.
(12) Represents subscribers of a cable television system who receive a package
of over-the-air broadcast stations, local access channels or certain
satellite-delivered cable television services.
(13) Represents basic subscribers as a percentage of homes passed.
(14) Represents customers that receive digital cable services.
(15) Represents customers that access the Internet through cable modem service.
(16) Represents average monthly revenues for the last three months of the period
divided by average basic subscribers for such period. This measurement is
commonly used in the cable television industry to analyze and compare cable
television companies on the basis of operating performance.
32
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Reference is made to the "Risk Factors" below for a discussion of important
factors that could cause actual results to differ from expectations and any of
our forward-looking statements contained herein. The following discussion should
be read in conjunction with our audited consolidated financial statements as of
December 31, 2001 and for the period from our inception (April 5, 2001) through
December 31, 2001.
Organization
We were organized as a Delaware limited liability company in April 2001 and
serve as a holding company for our operating subsidiaries. Mediacom Broadband
Corporation, our wholly-owned subsidiary, was organized as a Delaware
corporation in May 2001 for the sole purpose of acting as a co-issuer with us of
our 11% senior notes due 2013 and does not conduct operations of its own. Our
parent and manager, Mediacom Communications Corporation ("MCC"), was organized
as a Delaware corporation in November 1999. See Note 1 of our consolidated
financial statements.
Introduction
We commenced operations on June 29, 2001 with the acquisition from AT&T
Broadband, LLC of cable systems serving approximately 94,000 basic subscribers
in the state of Missouri. The purchase price for these cable systems was
approximately $300.0 million. This transaction comprised of cable systems
serving Columbia, Jefferson City and Springfield, Missouri.
On July 18, 2001, we acquired from AT&T Broadband cable systems serving
approximately 706,000 basic subscribers in the states of Georgia, Illinois and
Iowa. The aggregate purchase price for these cable systems was approximately
$1.77 billion. These transactions comprised of cable systems serving the cities
and surrounding communities of Albany, Columbus, Tifton and Valdosta, Georgia;
Carbondale, Charleston, Effingham, Marion, Moline and Rock Island, Illinois; and
Ames, Cedar Rapids, Clinton, Davenport, Des Moines, Dubuque, Fort Dodge, Iowa
City, Mason City and Waterloo, Iowa. The acquisitions of the AT&T cable systems
have been accounted for under the purchase method of accounting and, therefore,
our results of operations include the results of operations for each acquired
system subsequent to its respective acquisition date.
The following discussion and analysis is based on our financial condition
and results of operations from the dates of acquisition discussed above and the
historical combined financial statements of the AT&T cable systems (referred to
herein as the Mediacom Systems (Predecessor Company) Combined Financial
Statements) prior to the acquisitions. We believe the historical combined
financial statements of the AT&T cable systems do not reflect changes that have
occurred as a result of our acquisitions of these cable systems. Furthermore, we
believe these changes affect the comparability of the historical results of
operations based upon the following factors:
. Management Fees - Upon completion of our acquisitions, under
management agreements between MCC and our subsidiaries, MCC replaced
AT&T Broadband as the manager of the AT&T cable systems. As a result,
AT&T Broadband was no longer entitled to receive management fees from
the AT&T cable systems. For the period from January 1, 2001 through
July 18, 2001 and the year ended December 31, 2000, combined
management fees represented 7.5% and 5.1%, respectively, of the AT&T
cable systems' combined revenue. By comparison, for the period from
inception (April 5, 2001) through December 31, 2001, management fees
represented 1.3% of our revenues.
. Interest Expense - Historically, the AT&T cable systems had no
material indebtedness and were not otherwise allocated any interest
expense by AT&T Broadband. As a result of our acquisitions of the AT&T
cable systems and the financings related to such acquisitions, we have
a substantial amount of indebtedness and expect to incur significant
interest expense.
33
. Provision (benefit) for Income Taxes - The AT&T cable systems were not
separate taxable entities for federal and state income tax purposes
and their results of operations were included in the consolidated
federal and state income tax returns of AT&T Corp. ("AT&T") and its
affiliates. The provision for income taxes in the historical combined
financial statements of the AT&T cable systems was based upon the AT&T
cable systems' contribution to the overall income tax liability or
benefit of AT&T and its affiliates. Our cable systems are organized
as limited liability companies and are subject to minimum income
taxes.
General
Approximately 88.8% of our revenues for the year ended December 31, 2001
are attributable to monthly subscription fees charged to customers for our core
cable television services, including basic, expanded basic and premium
programming, digital cable television programming services, cable modem service,
wire maintenance, equipment rental and services to commercial establishments
provided by our cable systems. The remaining 11.2% of revenue represents
pay-per-view charges, installation and reconnection fees, late payment fees,
advertising revenues and other ancillary revenues. Franchise fees charged to
customers are included in their corresponding revenue category.
Our operating expenses consist of service costs and selling, general and
administrative expenses directly attributable to our cable systems. Service
costs include fees paid to programming suppliers, expenses related to copyright
fees, wages and salaries of technical personnel and plant operating costs.
Programming costs have historically increased at rates in excess of inflation
due to increases in the number of programming services we have offered and
significant increases in the rates charges for the programming services already
carried on our cable systems. Under the Federal Communication Commission's
existing cable rate regulations, we will be able to increase our rates for cable
television services to more than cover any increases in the programming costs.
However, competitive conditions and other factors in the marketplace may limit
our ability to increase our rates. Selling, general and administrative expenses
directly attributable to our cable systems include wages and salaries for
customer service and administrative personnel, franchise fees and expenses
related to billing, marketing, bad debt, advertising and office administration.
Management fee expense reflects fees paid for management services rendered to
our operating subsidiaries.
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
in our limited operating history. 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.
Operating cash flow represents operating loss before depreciation and
amortization and restructuring charge. Operating cash flow:
. is not intended to be a performance measure that should be regarded as
an alternative either to operating income (loss) or net income (loss)
as an indicator of operating performance, or to the statement of cash
flows as a measure of liquidity;
. is not intended to represent funds available for debt service,
dividends, reinvestment or other discretionary uses; and
. should not be considered in isolation or as a substitute for measures
of performance prepared in accordance with generally accepted
accounting principles.
Operating cash flow is included herein because our management believes that
operating cash flow is a meaningful measure of performance as it is commonly
used by the cable television industry and by the investment community to analyze
and compare cable television companies. Our definition of operating cash flow
may not be identical to similarly titled measures reported by other companies.
34
Critical Accounting Policies
The following represents our critical accounting policies which reflect
significant judgments and uncertainties and could possibly result in materially
different results under different conditions or assumptions. For a detailed
description of our significant accounting policies, please see Note 2 to our
consolidated financial statements.
Impairment of Long-Lived Assets
The Company follows the provisions of Statement of Financial Accounting
Standards No. 121 ("SFAS 121"), "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed of." SFAS 121 requires that
long-lived assets and certain identifiable intangibles to be held and used by
any entity be reviewed for impairment at each year end and whenever events or
changes in circumstances indicate the carrying amount of an asset may not be
recoverable. Based on our review there has been no impairment of long-lived
assets of the Company under SFAS 121.
Property, Plant and Equipment
We capitalize a portion of direct and indirect costs related to the
construction, replacement and installation of property, plant and equipment.
Capitalized costs are charged 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.
Actual Results of Operations
Year Ended December 31,
-----------------------
2001/(1)/ 2000
---------- ----------
(dollars in thousands)
Revenues .............................................. $465,138 $439,541
Costs and expenses:
Service costs ...................................... 206,211 192,543
Selling, general and administrative expenses ....... 84,891 70,879
Management fee expense ............................. 21,500 22,267
Restructuring charge ............................... 570 --
Depreciation and amortization ...................... 172,073 137,182
-------- --------
Operating (loss) income ............................... (20,107) 16,670
-------- --------
Interest expense, net ................................. 41,430 --
Other expenses ........................................ 2,270 --
-------- --------
Net (loss) income before income taxes ................. $(63,807) $ 16,670
(Benefit) provision for income taxes .................. (3,546) 6,646
-------- --------
Net (loss) income ..................................... $(60,261) $ 10,024
======== ========
Other Data:
Operating cash flow ................................... $151,966 $153,852
Operating cash flow margin/(2)/ ....................... 32.7% 35.0%
- ----------
/(1)/ Represents the actual results of our operations from inception to December
31, 2001 and the Mediacom Systems combined results of operations from
January 1, 2001 through July 18, 2001. This information is presented for
comparative purposes only.
/(2)/ Represents operating cash flow as a percentage of revenues.
35
Year Ended December 31, 2001 Compared to Year Ended December 31, 2000
Revenues. Revenues increased 5.8% to $465.1 million for the year ended
December 31, 2001 as compared to $439.5 million for the year ended December 31,
2000. Revenues increased principally as a result of customer growth in our
high-speed Internet access and digital cable services and basic rate increases
in our core cable television services, partially offset by a decline in basic
subscribers.
Service costs. Service costs increased 7.1% to $206.2 million for the year
ended December 31, 2001 as compared to $192.5 million for the year ended
December 31, 2000. The increase was due principally to higher programming
expenses, including rate increases by programming suppliers and the cost of new
channel additions. Service costs for the year ended December 31, 2001 also
include $2.9 million of incremental expenses related to the transition from
Excite@Home to MCC's Mediacom Online(SM) high-speed Internet service. As a
percentage of revenues, service costs were 44.3% for the year ended December 31,
2001, as compared with 43.8% for the year ended December 31, 2000.
Selling, general and administrative expenses. Selling, general and
administrative expenses increased 19.8% to $84.9 million for the year ended
December 31, 2001 as compared to $70.9 million for the year ended December 31,
2000. These costs increased primarily as a result of higher marketing costs and
bad debt expense. As a percentage of revenues, selling, general and
administrative expenses were 18.3% for the year ended December 31, 2001 as
compared with 16.1% for the year ended December 31, 2000.
Management fee expense. Management fee expense decreased 3.4% to $21.5
million for the year ended December 31, 2001 as compared to $22.3 million the
year ended December 31, 2000. As a percentage of revenues, management fee
expense was 4.6% for the year ended December 31, 2001 as compared with 5.1% for
the year ended December 31, 2000. This decrease was due to the lower management
fees charged by MCC subsequent to our acquisitions of the AT&T cable systems.
Restructuring charge. Restructuring charge was $570,000 for the year ended
December 31, 2001. Restructuring charge was part of a cost reduction plan
undertaken by AT&T Broadband in 2001, whereby certain employees of the Georgia
systems were terminated resulting in a one-time charge.
Depreciation and amortization. Depreciation and amortization increased
25.4% to $172.1 million for the year ended December 31, 2001 as compared to
$137.2 million for the year ended December 31, 2000. This increase was
substantially due to our accounting for the acquired assets based upon our
preliminary purchase price allocation in connection with our acquisitions of the
AT&T cable systems and the capital expenditures associated with the upgrade of
the cable systems.
Interest expense, net. Interest expense, net, was $41.4 million for the
year ended December 31, 2001. This amount represents interest on financings for
our acquisitions of the AT&T cable systems. Historically, the AT&T cable systems
had no material indebtedness and were not otherwise allocated any interest
expense by AT&T Broadband.
Other expenses. Other expense was $2.3 million for the year ended December
31, 2001. This amount represents fees on unused credit commitments under our
subsidiary credit facility.
Gain on disposition of assets. The financial statements for the year ended
December 31, 2001 included a gain of approximately $5.2 million on the sale to
us of the Missouri cable systems. This gain will not impact our future results.
Provision (benefit) for income taxes. Provision for income taxes decreased
for the year ended December 31, 2001, as compared to the year ended December 31,
2000, due to lower taxable income. This decrease was partially offset by
deferred taxes incurred from the sale of the Missouri cable systems. Under our
ownership, the AT&T cable systems are organized as limited liability companies
and are subject to minimum income taxes. There was no provision or benefit for
income taxes for Medicom Broadband in 2001.
Net (loss) income. Due primarily to the increases in depreciation and
amortization expense and interest expense, net, we generated a net loss of $60.3
million for the year ended December 31, 2001 as compared to net income of $10.0
million for the year ended December 31, 2000.
36
Operating cash flow. Operating cash flow decreased 1.2% to $152.0 million
for the year ended December 31, 2001 as compared to $153.9 million for the year
ended December 31, 2000. Operating cash flow decreased because the increase in
revenues resulting from customer growth in our high-speed Internet access and
digital cable services and an increase in the average monthly basic service rate
charged to subscribers was more than offset by increases in programming
expenses, marketing costs and bad debt expense. As a percentage of revenues,
operating cash flow was 32.7% for the year ended December 31, 2001, as compared
with 35.0% 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.
Investing Activities
On June 29, 2001, we acquired from AT&T Broadband cable systems in the
state of Missouri serving approximately 94,000 basic subscribers. The purchase
price, after final working capital adjustments, for these cable systems was
approximately $300.0 million. This transaction comprised cable systems serving
Columbia, Jefferson City and Springfield, Missouri.
On July 18, 2001, we acquired from AT&T Broadband cable systems in the
states of Georgia, Illinois and Iowa serving approximately 706,000 basic
subscribers. The aggregate purchase price, after final working capital
adjustments, for these cable systems was approximately $1.77 billion. These
transactions comprised cable systems serving the cities and surrounding
communities of Albany, Columbus, Tifton and Valdosta, Georgia; Carbondale,
Charleston, Effingham, Marion, Moline and Rock Island, Illinois; and Ames, Cedar
Rapids, Clinton, Davenport, Des Moines, Dubuque, Fort Dodge, Iowa City, Mason
City and Waterloo, Iowa.
Our capital expenditures were approximately $38.1 million for the period
from our inception (April 5, 2001) through December 31, 2001. As of December 31,
2001, approximately 55% of our cable network was upgraded with 550MHz to 870MHz
bandwidth capacity and about 57% of our homes passed were activated with two-way
communications capability. At yearend 2001, our digital cable service was
available to approximately 800,000 basic subscribers, and our cable modem
service was marketed to about 810,000 homes passed by our cable systems.
We plan to continue our aggressive cable network upgrade program and expect
that approximately 92% of our cable network will be upgraded with 550MHz to
870MHz bandwidth capacity and about 87% of our homes passed will have two-way
communications capability by yearend 2002. To achieve these targets and to fund
other requirements, including cable modems, digital converters, new plant
construction, headend eliminations, regional fiber interconnections and network
repair and maintenance, we expect to invest between $230.0 million and $240.0
million in capital expenditures in 2002.
Financing Activities
On June 29, 2001, we completed an offering of $400.0 million of 11% senior
notes due June 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.
On June 29, 2001, MCC made a $336.4 million equity contribution to us. MCC
made an additional $388.6 million equity contribution to us on July 18, 2001.
The proceeds were used to pay a portion of the purchase price for the
acquisitions of the AT&T cable systems.
On July 18, 2001, we received a $150.0 million preferred equity investment
from Mediacom LLC, a New York limited liability company wholly-owned by MCC. The
preferred equity investment has a 12% annual dividend, payable quarterly in
cash. The proceeds from the preferred equity investment were used to pay a
portion of the purchase price for the acquisitions of the AT&T cable systems.
37
On July 18, 2001, our operating subsidiaries entered into a $1.4 billion
senior secured credit facility. The credit facility consists of a $600.0 million
revolving credit facility, a $300.0 million tranche A term loan and a $500.0
million tranche B term loan. The revolving credit facility expires on March 31,
2010 and commitments under the revolving credit facility will be reduced in
quarterly installments beginning on December 31, 2004. 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. 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 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%. Borrowings
under this facility, in the amount of $855.0 million, were used to pay a portion
of the purchase price for the acquisitions of the AT&T cable systems.
As of December 31, 2001, our total debt was $1.2 billion and we had
approximately $599.6 million of unused credit commitments under our subsidiary
credit facilities, of which over $350.0 million could be borrowed and used for
general corporate purposes under the most restrictive covenants in our debt
arrangements. On such date, about 33% of our outstanding indebtedness was at
fixed interest rates, and our weighted average cost of indebtedness was
approximately 6.7%.
As of December 31, 2001, we were in compliance with all covenants in our
subsidiary credit facility and our public debt indenture.
On January 24, 2002, we entered into interest rate swap agreements, which
expire in 2007, to hedge $50.0 million of floating rate debt under our
subsidiary credit facility. Under the terms of all of our interest rate swap
agreements, we are exposed to credit loss in the event of nonperformance by the
other parties to the interest rate swap agreements. However, we do not
anticipate nonperformance by the counterparties.
On February 4, 2002, we and MCC filed a registration statement with the SEC
under which we may sell debt securities unconditionally guaranteed by MCC for a
maximum amount of $1.5 billion. The SEC declared this registration statement
effective on February 13, 2002.
Although we have not generated earnings sufficient to cover fixed charges,
we have generated cash and obtained financing sufficient to meet 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 obligations and complete any future acquisitions.
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, 2001 and thereafter.
The amounts represent the maximum future contractual obligations.
Payments Due by Period
----------------------
(dollars in millions)
2003 2005 After
Contractual Obligations Total 2002 to 2004 to 2006 2006
----------------------- ------ ------ ------- ------- -------
Long-term debt $1,200 $-- $ 8 $78 $1,114
Operating leases 5 1 2 1 1
------ --- --- --- ------
Total contractual cash
obligations $1,205 $ 1 $10 $79 $1,115
====== === === === ======
38
Recent Accounting Pronouncements
In July 2001, the Financial Accounting Standards Board ("FASB") issued
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 on July 1, 2001
had no effect on our results of operations or financial position as we account
for all acquisitions under the purchase method. Under SFAS 142, goodwill and
intangible assets with indefinite lives are no longer amortized but reviewed
annually for impairment (or more frequently if impairment indicators arise).
Separable intangible assets that are not deemed to have indefinite lives will
continue to be amortized over their useful lives. We adopted this standard
effective January 1, 2002 and are evaluating our goodwill and other specifically
identifiable intangibles for impairment in accordance with the standard's
guidance. We are also currently evaluating whether franchise licenses qualify as
indefinite life intangibles under the new standard. If we conclude that
franchise licenses are indefinite life intangibles, they will no longer be
amortized. Amortization of goodwill and franchise licenses was approximately
$51.8 million for the period from our inception on April 5, 2001 through
December 31, 2001. We acquired cable systems in June and July 2001, so the
amortization of goodwill and franchise licenses for the period ended December
31, 2001 does not incorporate the full-year impact of those transactions. For
the year ending December 31, 2002, if we conclude that goodwill and franchise
licenses are indefinite life intangible assets, our preliminary estimate is that
the adoption of SFAS 142 will reduce amortization expense in our consolidated
statements of operations by approximately $67.0 million.
In July 2001, the FASB issued SFAS No. 143 ("SFAS 143"), Accounting for
Asset Retirement Obligations, which addresses financial accounting and reporting
for obligations associated with the retirement of tangible long-lived assets and
the associated asset retirement costs. SFAS 143 will become effective for fiscal
years beginning after June 15, 2002. We do not expect adoption of SFAS 143 will
have a material impact on our results of operations or financial position.
In August 2001, the FASB issued Statements of Financial Accounting
Standards No. 144, ("SFAS 144") "Accounting for the Impairment or Disposal of
Long-Lived Assets". This statement 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.
SFAS 144 is effective for fiscal years beginning after December 15, 2001. We
adopted this standard effective January 1, 2002 and do not expect a material
impact on our results of operations or financial position.
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 we are allowed
under the Federal Communications Commission's existing cable rate regulations to
increase our rates for cable television services to more than cover any
increases in programming costs. However, competitive conditions and other
factors in the marketplace may limit our ability to increase our rates.
Risk Factors
We had no operating history prior to June 29, 2001. The financial
information included in this report may not be indicative of our results as an
independent company.
We began operations as a stand-alone company on June 29, 2001, the date we
acquired from AT&T Broadband cable systems serving about 94,000 basic
subscribers in the state of Missouri. On July 18, 2001 we acquired from AT&T
Broadband cable systems serving about 706,000 basic subscribers in the states of
Georgia, Illinois and Iowa. Accordingly, we have only a limited history of
operating those systems and can provide you with only limited information upon
which to evaluate our performance in managing them. Our historical financial
information included in this report for periods after the acquisitions may not
be indicative of the future results we can achieve with our cable systems.
39
Except as noted in the previous paragraph, for the periods during which
financial statements of the AT&T cable systems are presented in this annual
report, the AT&T cable systems operated as fully integrated businesses of AT&T
Broadband. The AT&T cable systems combined financial statements (referred to as
the Mediacom Systems (Predecessor Company) Combined Financial Statements) have
been derived from the financial statements and accounting records of AT&T
Broadband and reflect significant assumptions and allocations. This historical
financial information presents the business of the AT&T cable systems as if they
had been a separate stand-alone enterprise. This information may not necessarily
reflect what the results of operations, financial position and cash flows would
have been during the periods presented if the businesses had been a separate,
stand-alone entity during the periods presented and may not be indicative of our
future results of operations, financial position and cash flows.
In particular, the costs during the periods presented were based on
internal cost allocation methods determined by AT&T Broadband. Much of the costs
are for services provided by AT&T Broadband and its affiliates. The AT&T cable
systems relied on AT&T Broadband and its related companies for providing certain
administrative, management and other services. These costs do not necessarily
represent what our actual costs would have been if we had operated the AT&T
cable systems as a stand-alone company and performed these services ourselves or
if we had purchased these services from independent parties. Further, these
costs may not be indicative of what our actual costs will be going forward. In
addition, the combined financial statements of the AT&T cable systems include
certain assets, liabilities, revenues and expenses that were not historically
recorded at the level of, but are associated with, the AT&T cable systems.
Moreover, the historical financial statements of the AT&T cable systems
reflect the results of operations, cash flows and financial condition of a
mature cable television business with no debt. We incurred significant amounts
of debt in order to fund the acquisitions of the AT&T cable systems. In
addition, a primary component of our business strategy is to make significant
capital expenditures, financed in part with additional debt, in order to upgrade
our network to allow us to offer advanced broadband products and services,
including digital cable and cable modem services, to substantially all of our
customers. Accordingly, the historical financial information of the AT&T cable
systems included in this annual report is not necessarily indicative of our
future results of operations, cash flows and financial condition.
We expect to continue to incur net losses and we may not be profitable in the
future.
We reported a net loss for the period from our inception on April 5, 2001
through December 31, 2001. We expect to continue to incur net losses in the
future. The principal reasons for such expected net losses include the
depreciation and amortization expenses associated with acquisitions and the
capital expenditures related to expanding and upgrading our cable systems, as
well as interest costs associated with 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 current interest on our 11% senior notes due 2013 and our other
obligations, and to repay the principal amount of these 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 contractual restrictions, including the
agreements governing our subsidiary credit facility. Our subsidiary credit
facility permits our subsidiaries to distribute cash to us, but only so long as
there is no default under such credit facility. If there were a default under
our subsidiary credit facility, we would not have any cash to pay interest on
our obligations.
40
If we are unable to successfully integrate our newly acquired cable systems,
our business and results of operations could be adversely affected.
We acquired all of our cable systems in June and July 2001. We may acquire
more cable systems in the future, through direct acquisitions, system swaps or
otherwise. These integration and management of the cable systems we have already
acquired or may acquire, involve the following principal risks that could
adversely affect our business and results of operations:
. our acquisitions may result in significant unexpected operating
difficulties, liabilities or contingencies;
. the integration of acquired cable systems may place significant
demands on our management, diverting their attention from, and making
it more difficult for them to manage, our other cable systems;
. the integration of acquired cable systems may require significant
financial resources that could otherwise be used for the ongoing
development of our other cable systems, including our network upgrade
program;
. we may be unable to recruit additional qualified personnel which may
be required to integrate and manage acquired cable systems; and
. some of our existing operational, financial and management systems may
be incompatible with or inadequate to effectively integrate and manage
acquired cable systems and any steps taken to implement changes in our
cable systems may not be sufficient.
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, 2001 was approximately $1.2 billion. Our
interest expense for the period from our inception on April 5, 2001 through
December 31, 2001 was $41.4 million. On a pro forma basis, our interest expense
for the year ended December 31, 2001 was $88.3 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:
. we may have difficulty borrowing money for working capital, capital
expenditures, acquisitions or other purposes;
. we may need to use a large portion of our revenues to pay interest on
borrowings under our subsidiary credit facility 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.
41
A default under our indenture or our subsidiary credit facility could result
in an acceleration of our indebtedness or a foreclosure on the membership
interests of our operating subsidiaries.
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 our subsidiary credit
facility. A default under our subsidiary credit facility could result in a
foreclosure by the lenders on the membership interests pledged under such
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.
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 equity interests or debt;
. pledge assets; and
. issue 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 requires substantial capital for the upgrade, expansion and
maintenance of our cable systems and the launch and expansion of new or
additional services. We cannot assure you that our anticipated levels of capital
expenditures will be sufficient to accomplish our planned system upgrades,
maintenance and expansion, or to roll out advanced services. If there is
accelerated growth in digital cable customers or in the delivery of other
advanced services or if costs increase, 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, or 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
42
or expand our cable 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 unable to successfully implement our business strategy, our
business, financial condition and results of operations could be adversely
affected.
The implementation of our business strategy will place significant demands
on our and our manager's management and operational, financial and marketing
resources. We cannot assure you that our manager or we will be successful in
operating our cable systems. The successful implementation of our business
strategy involves the following principal risks that could materially adversely
affect our business, financial condition and results of operations:
. the operation of our cable systems places significant demands on our
manager's management team and may result in significant unexpected
operating difficulties, liabilities or contingencies;
. our manager may be unable to recruit additional qualified personnel
which may be required to integrate and manage our cable systems; and
. some of our manager's operational, financial and management systems
may be incompatible with or inadequate to effectively implement our
business strategy.
In addition, each of the above risks may apply to any future acquisition of
cable systems.
If we are unsuccessful in expanding and introducing new and advanced
services, 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 and digital programming services, the launch of additional
services, such as video-on-demand or Internet telephony, and acquisitions of
additional cable systems. We may not be able to successfully expand or launch
these new or additional services, and it is possible that they will not generate
significant revenue growth. As of the date of this report, there are 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.
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 television
industry has experienced a rapid escalation in the cost of programming,
particularly sports programming. The escalation 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. 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.
Failure to negotiate programming contracts for our cable systems could
adversely affect our business and results of operations.
Substantially all of the cable television programming services carried on
our cable systems are provided to customers without written contracts with the
respective programming suppliers. Our manager is currently negotiating with
these suppliers on our behalf, but we are unable to guarantee that the outcome
of any negotiations will be favorable to us. While we could obtain access to
most of these programming services by joining a national programming purchasing
cooperative or by relying on certain protective provisions of the Communications
Act, we
43
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, telephone companies, and, most significantly, from direct
broadcast satellite operators. Our high-speed Internet 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 expect 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.
Recent changes in the regulatory environment may introduce additional
competitors in our markets.
Recent changes in federal law and recent administrative and judicial
decisions have removed restrictions that have limited entry into the cable
television industry by potential competitors such as telephone companies and
public utility holding companies. As a result, competition may materialize in
our franchise areas from other cable television operators, other video
programming distribution systems and other broadband telecommunications services
to the home. For example, these developments could enable local telephone and
utility companies to provide a wide variety of video services in their service
areas that will be directly competitive with the services provided by cable
systems in the same area.
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,
although they currently deliver virtually no local broadcast signals in the
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 with a
telephone return path and are beginning to provide true two-way interactivity.
On October 28, 2001, EchoStar Communications Corporation (which does business as
DISH Network) announced that it has agreed to acquire Hughes Electronics Corp.
(which does business as DIRECTV). If consummated, this combination would create
a much stronger competitive challenge for us and other cable system operators.
We may not be able to obtain critical items at a reasonable cost or when
required, which could adversely affect our 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
44
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. In addition, some suppliers
have commenced bankruptcy proceedings or experienced other financial
difficulties that may affect the availability of these items. 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.
Among other things, we rely on local telephone companies and other firms to
provide data communications capacity through local telecommunications lines and
leased long-distance lines. We may experience disruptions or capacity
constraints in these telecommunications services. If disruptions or capacity
constraints occur, we may have no means of replacing these services on a timely
basis, or at all. In Iowa and Illinois, we rely on subsidiaries of McLeodUSA
Inc. ("McLeod") to provide us with the right to use optical fiber we need to
operate and expand our business. McLeod recently filed for Chapter 11 bankruptcy
protection under the United States Bankruptcy Code, however, the subsidiaries of
McLeod, with which we are counterparties, have not become directly involved in
the bankruptcy proceedings. If the subsidiaries were to become involved, it is
possible that the bankruptcy court would authorize them to terminate the
contract that gives us the right to use such optical fiber. We might not be able
to find alternative sources to replace the optical fiber, and constructing our
own fiber would be costly and may take a significant amount of time. The
provision of our services to certain customers in our affected areas could be
severely interrupted or delayed for prolonged periods. As a result, our business
and results of operations could be materially adversely affected.
We also rely on AT&T Corp. to provide, under a multi-year contract with our
manager, the Internet protocol network backbone and certain core Internet
support functions for our cable modem service. If AT&T Corp. ceased to provide
these services during or after the term of the contract and we were unable to
secure alternative arrangements on acceptable terms, our high-speed Internet
access business could be materially and negatively impacted.
Our business and results of operations could be adversely affected by labor
disputes.
Approximately 6.3% of our cable systems' employees are represented by labor
unions but are not covered by any collective bargaining agreements. We are
negotiating in good faith with the labor unions regarding new labor contracts.
We cannot assure you that any negotiations we may undertake with such unions
will result in outcomes satisfactory to us. Although we believe that our
relations with our employees are generally good, we cannot assure you that our
employees who are not currently represented by any union, will not seek to be
represented by unions under collective bargaining agreements in the future. A
prolonged work stoppage, strike or slowdown at our systems could have a material
adverse effect on our business and results of operations.
We depend on our manager for the provision of essential management functions.
We do not have separate senior management and are dependent on our manager
for the operation of our business. Our manager also manages Mediacom LLC's
operating subsidiaries. Following our acquisitions of the AT&T cable systems,
the number of customers served by the cable systems managed by our manager
increased significantly and our manager continues to devote a significant
portion of its personnel and other resources to the management of Mediacom LLC's
cable systems. As a result, the attention of our manager's senior executive
officers may be diverted from the management of our cable systems and the
allocation of resources between our cable systems and Mediacom LLC's cable
systems could give rise to conflicts of interest.
The successful execution of our business strategy depends on the ability of
our manager to efficiently manage our cable systems. If our manager were to
experience any material adverse change in its business, the risks described in
this risk factor could intensify and our business, financial condition and
results of operations could be materially adversely affected. In addition, we
are also dependent on our manager to operate Mediacom LLC's cable systems
effectively in order to enable us to achieve operating synergies, such as the
joint purchasing of programming. Mediacom LLC's operating subsidiaries have
substantial indebtedness that, among other things, could make our manager more
vulnerable to economic downturns and to adverse developments in its business.
Although our manager
45
charged management fees to our operating subsidiaries in an amount equal to 1.3%
of our gross operating revenues for the period from our inception on April 5,
2001 through December 31, 2001, we cannot assure you that it will not exercise
its right under its management agreements with our operating subsidiaries to
increase the management fees, which under such agreements may not exceed 4.0% of
each subsidiary's gross operating revenues.
46
If our manager were to lose key personnel, our business could be adversely
affected.
If any of our manager's key personnel ceases to participate in our business
and operations, our profitability could suffer. Our success is substantially
dependent upon the retention of, and the continued performance by, our manager's
key personnel, including Rocco B. Commisso, the Chairman and Chief Executive
Officer of our manager. Our manager has not entered into an employment agreement
with Mr. Commisso. Neither our manager nor we currently maintains key man life
insurance on Mr. Commisso or other key personnel.
In addition, our bank credit facility provides 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 the aggregate voting power of the
common stock of or manager on a fully-diluted basis equal or exceeding (i) 35%
or (ii) the amount of aggregate voting power of the common stock of our manager
on a fully diluted basis owned by Mr. Commisso and such affiliates at the time.
The Chairman and Chief Executive Officer of our manager has the ability to
control all major decisions, which could inhibit or prevent a change of control
or change in management. A sale of his stock in our manager could result in a
change of control that could have unpredictable effects.
Rocco B. Commisso, the Chairman and Chief Executive Officer of our manager,
beneficially owned common stock of our manager representing approximately 80.6%
of the combined voting power of all of its common stock as of December 31, 2001.
As a result, Mr.Commisso generally has the ability to control the outcome of
all matters requiring approval by stockholders of our manager, including the
election of its entire board of directors, and Mr. Commisso may be deemed to
control our company.
We cannot assure you that Mr. Commisso will maintain all or any portion of
his ownership in our manager or that he would continue as an officer or director
of our manager if he sold a significant part of his stock. The disposition by
Mr. Commisso of a sufficient number of his shares of our manager's stock could
result in a change in control of our manager and of us, 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 agreement.
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. 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 subject to non-renewal or termination by local
authorities, which could cause us to lose our right to operate some of our
systems.
Historically, cable operators providing satisfactory services to their
subscribers and complying with the terms of their franchises have almost always
obtained franchise renewals. In addition, the Communications Act contains
renewal procedures and criteria designed to protect incumbent franchisees
against arbitrary denials of renewal. However, cable television companies
operate under non-exclusive franchises granted by local authorities that are
subject to renewal, renegotiation and termination from time to time. Our cable
systems are dependent upon the
47
retention and renewal of their respective local franchises. 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 the Communications Act requires the municipality to
take into account the cost of meeting such requirements, there is no assurance
that we will not be required to make significant additional investments in its
cable television systems as part of the franchise renewal process. There can be
no assurance that we will continue to be able to renew franchises in the future
on acceptable terms. The non-renewal or termination of franchises with respect
to a significant portion of any of our cable systems would have a material
adverse effect on our business 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 December 31, 2001, approximately 10.2% 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.
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 FCC is considering
whether it should adopt new rules regulating cable modem service, and federal
court actions raising various issues relating to that kind of service are
pending. 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.
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 our manager launched its 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
48
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.
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.
49
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to some market risk due to the floating interest rate under
our subsidiary credit facility. Our subsidiary credit facility has interest
payments based on a floating rate (a base rate or LIBOR, at its option) plus a
variable amount based on operating results. Three month LIBOR at December 31,
2001 was 1.91%. A 1.0% increase in LIBOR would result in a $8.0 million pro
forma annual increase in interest expense. We expect any new financing
arrangements to expose us to similar risks. The table below provides information
on our long-term debt. See Note 6 to our consolidated financial statements.
Changes in economic conditions could result in higher interest rates,
thereby increasing our interest expense and lease payments and reducing our
funds available for capital investment, operations or other purposes. In
addition, a substantial portion of our cash flow must be used to service our
debt, which may affect our ability to make future acquisitions or capital
expenditures. We may from time to time use interest rate protection agreements
to minimize our exposure to interest rate fluctuation. However, there can be no
assurance that hedges will be implemented, or if implemented will achieve the
desired effect. We may experience loss and a negative impact on earnings or net
assets as a result of interest rate fluctuations.
Expected Maturity
------------------------------------------------------------
(All dollar amounts in thousands)
2002 2003 2004 2005 2006 Thereafter Total Fair Value
----- ----- ------ ------- ------- ---------- -------- ----------
Fixed rate $ -- $ -- $ -- $ -- $ -- $400,000 $400,000 $436,000
Weighted average
interest rate 11.0% 11.0% 11.0% 11.0% 11.0% 11.0% 11.0%
Variable rate $ -- $ -- $8,500 $35,000 $42,500 $714,000 $800,000 $800,000
Weighted average
interest rate 4.9% 4.9% 4.9% 4.9% 4.9% 4.9% 4.9%
50
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
MEDIACOM BROADBAND LLC AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Contents
--------
Page
----
Mediacom Broadband LLC
Report of Independent Public Accountants................................................................ 52
Consolidated Balance Sheet as of December 31, 2001...................................................... 53
Consolidated Statement of Operations for Period from Inception (April 5, 2001) through
December 31, 2001.................................................................................... 54
Consolidated Statement of Changes in Member's Equity for the Period from Inception (April 5, 2001)
through December 31, 2001............................................................................ 55
Consolidated Statement of Cash Flows for Period from Inception (April 5, 2001) through
December 31, 2001.................................................................................... 56
Notes to Consolidated Financial Statements.............................................................. 57
Schedule II - Valuation and Qualifying Accounts......................................................... 65
Mediacom Systems (Predecessor Company)
Report of Independent Accountants-"New Mediacom"........................................................ 66
Report of Independent Accountants-"Old Mediacom"........................................................ 67
Combined Balance Sheets as of July 18, 2001 and December 31, 2000....................................... 68
Combined Statements of Operations and Parent's Investment for the Period from January 1 to July
18, 2001, Year ended December 31, 2000, Period from March 1 to December 31, 1999 and Period
from January 1 to February 28, 1999.................................................................. 69
Combined Statements of Cash Flows for the Period from January 1 to July 18, 2001, Year ended
December 31, 2000, Period from March 1 to December 31, 1999 and Period from January 1 to
February 28, 1999.................................................................................... 70
Notes to Combined Financial Statements.................................................................. 71
Schedule II - Valuation and Qualifying Accounts......................................................... 79
51
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Member of Mediacom Broadband LLC:
We have audited the accompanying consolidated balance sheet of Mediacom
Broadband LLC (a Delaware limited liability company) and subsidiaries as of
December 31, 2001, and the related consolidated statements of operations,
changes in member's equity and cash flows for the period from inception (April
5, 2001) through 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 audit.
We conducted our audit 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 audit provides 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 Broadband LLC and its
subsidiaries as of December 31, 2001 and the results of their operations and
their cash flows for the period from inception (April 5, 2001) through December
31, 2001 in conformity with accounting principles generally accepted in the
United States.
Our audit was 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 BROADBAND LLC AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(All dollar amounts in 000's)
December 31,
2001
------------
ASSETS
Cash and cash equivalents ......................................................... $ 7,578
Short-term investments ............................................................ 48,000
Subscriber accounts receivable, net of allowance for doubtful accounts of $2,148... 17,504
Prepaid expenses and other assets ................................................. 63,600
Investment in cable television systems:
Inventory ...................................................................... 24,670
Property, plant and equipment, at cost ......................................... 594,366
Less: accumulated depreciation ................................................. (34,799)
----------
Property, plant and equipment, net ........................................... 559,567
Intangible assets, net of accumulated amortization of $51,879 .................. 1,541,464
Total investment in cable television systems ................................. 2,125,701
Other assets, net of accumulated amortization of $1,086 ........................... 20,284
----------
Total assets ................................................................. $2,282,667
==========
LIABILITIES, PREFERRED MEMBERS' INTERESTS
AND MEMBERS' EQUITY
LIABILITIES
Debt ........................................................................... $1,200,000
Accounts payable and accrued expenses .......................................... 229,700
Deferred revenue ............................................................... 36,673
----------
Total liabilities ............................................................ 1,466,373
----------
Commitments and Contingencies (Note 11)
PREFERRED MEMBERS' INTERESTS ...................................................... 150,000
----------
MEMBER'S EQUITY
Capital contributions .......................................................... 725,000
Accumulated deficit ............................................................ (58,706)
----------
Total member's equity ........................................................ 666,294
----------
Total liabilities, preferred members' interests and member's equity........... $2,282,667
==========
The accompanying notes to consolidated financial statements are an integral
part of these statements.
53
MEDIACOM BROADBAND LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(All amounts in 000's)
Inception
(April 5, 2001)
through
December 31,
2001
---------------
Revenues .................................................... $215,900
Costs and expenses:
Service costs .......................................... 89,006
Selling, general and administrative expenses ........... 42,442
Management fee expense ................................. 2,875
Depreciation and amortization .......................... 88,463
--------
Operating loss .............................................. (6,886)
Interest expense, net ....................................... 41,430
Other expenses .............................................. 2,270
--------
Net loss .................................................... $(50,586)
========
The accompanying notes to consolidated financial statements are an integral
part of these statements.
54
MEDIACOM BROADBAND LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN
MEMBER'S EQUITY
(All dollar amounts in 000's)
Capital Accumulated
Contributions Deficit Total
------------- ----------- --------
Balance, Inception (April 5, 2001) $ -- $ -- $ --
Comprehensive loss:
Net loss -- (50,586)
Comprehensive loss -- -- (50,586)
Equity contribution from MCC 725,000 -- 725,000
Dividend payments on Preferred
Members' Interest -- (8,120) (8,120)
-------- -------- --------
Balance, December 31, 2001 $725,000 $(58,706) $666,294
======== ======== ========
The accompanying notes to consolidated financial statements are an integral
part of these statements.
55
MEDIACOM BROADBAND LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(All dollar amounts in 000's)
Inception
(April 5, 2001)
Through
December 31, 2001
-----------------
CASH FLOWS PROVIDED BY OPERATING ACTIVITIES:
Net loss ..................................................................... $ (50,586)
Adjustments to reconcile net loss to net cash flows from operating activities:
Depreciation and amortization .............................................. 88,463
Changes in assets and liabilities, net of effects from acquisitions:
Subscriber accounts receivable, net ...................................... (11,746)
Prepaid expenses and other assets ........................................ (63,600)
Other assets ............................................................. 1,086
Accounts payable and accrued expenses .................................... 161,361
Deferred revenue ......................................................... 36,673
-----------
Net cash flows provided by operating activities ........................ 161,651
-----------
CASH FLOWS USED IN INVESTING ACTIVITIES:
Capital expenditures ......................................................... (38,102)
Acquisitions of cable television systems ..................................... (2,113,336)
Short-term investments ....................................................... (48,000)
Other, net ................................................................... (145)
-----------
Net cash flows used in investing activities ............................ (2,199,583)
-----------
CASH FLOWS PROVIDED BY FINANCING ACTIVITIES:
New borrowings ............................................................... 1,282,000
Repayment of debt ............................................................ (82,000)
Preferred member's interests ................................................. 150,000
Dividend payment to affiliate ............................................... (8,120)
Capital contributions ........................................................ 725,000
Financing costs .............................................................. (21,370)
-----------
Net cash flows provided by financing activities ........................ 2,045,510
-----------
Net increase in cash and cash equivalents .............................. 7,578
CASH AND CASH EQUIVALENTS, beginning of period .................................. --
-----------
CASH AND CASH EQUIVALENTS, end of period ........................................ $ 7,578
===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for interest ..................................... $ 13,091
===========
The accompanying notes to consolidated financial statements are an integral
part of these statements.
56
MEDIACOM BROADBAND LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Limited Liability Company
Organization
Mediacom Broadband LLC ("Mediacom Broadband," and collectively with its
subsidiaries, the "Company"), a Delaware limited liability company, a
wholly-owned subsidiary of Mediacom Communications Corporation ("MCC") was
formed in April 2001 for the purpose of acquiring cable systems from AT&T
Broadband, LLC ("AT&T Broadband"). Through these cable systems (the "AT&T cable
systems"), the Company provides entertainment, information and
telecommunications services to its subscribers. As of December 31, 2001, the
Company had acquired and was operating cable television systems in the states of
Georgia, Illinois, Iowa and Missouri.
Mediacom Broadband Corporation, a Delaware corporation wholly-owned by
Mediacom Broadband, was organized in May 2001 for the sole purpose of acting as
co-issuer with Mediacom Broadband of $400.0 million aggregate principal amount
of the 11% senior notes due July 15, 2013. Mediacom Broadband Corporation does
not conduct operations of its own.
Capitalization
The Company was initially capitalized on June 29, 2001 with an equity
contribution of $336.4 million from the Company's parent and manager, MCC, a
Delaware corporation. On July 18, 2001, the Company received an additional
equity contribution of $388.6 million from MCC and a $150.0 million preferred
equity investment from Mediacom LLC, a New York limited liability company
wholly-owned by MCC.
(2) Summary of Significant Accounting Policies
Basis of Preparation of Consolidated Financial Statements
The consolidated financial statements include the accounts of Mediacom
Broadband 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 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
selling costs incurred. Additional installation revenues collected, if any, are
deferred and amortized to income over the estimated average life of a
subscriber. 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.
57
MEDIACOM BROADBAND LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
Short-Term Investments
Short-term investments consist of money market investments which are stated
at cost which approximates market value.
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 average cost method.
Property, Plant and Equipment
Property, plant and equipment is recorded at time of purchase and
capitalized at cost. The Company capitalizes a portion of direct and indirect
costs related to the construction, replacement and installation of property,
plant and equipment. The Company capitalized interest in connection with cable
system construction of approximately $0.3 million for the period ended December
31, 2001. 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............................................ 45 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
Intangible Assets
Intangible assets include franchising costs, goodwill, subscriber lists and
covenants not to compete. Amortization of intangible assets is calculated on a
straight-line basis over the following lives:
Franchising costs.................................... 15 years
Goodwill ............................................ 15 years
Subscriber lists..................................... 5 years
Covenants not to compete............................. 3 to 7 years
Impairment of Long-Lived Assets
58
The Company follows the provisions of Statement of Financial Accounting
Standards No. 121 ("SFAS 121"), "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed of." SFAS 121 requires that
long-lived assets and certain identifiable intangibles to be held and used by
any entity be reviewed for impairment at each year end and whenever events or
changes in circumstances indicate the carrying amount of an asset may not be
recoverable. There has been no impairment of long-lived assets of the Company
under SFAS 121.
Other Assets
Other assets include debt financing costs of approximately $20.3 million as
of December 31, 2001. Financing costs incurred to raise debt are deferred and
amortized over the expected term of such financings and are included in other
expense.
Accounting for Derivative Instruments
The Company accounts for derivative instruments in accordance with
Financial Accounting Standards Board ("FASB") Statement of Financial Accounting
Standards No. 133 ("SFAS 133"), "Accounting for Derivative Instruments and
Hedging Activities." Changes in fair value of derivative instruments that do not
qualify for hedge relationship designation are recognized in earnings.
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, if any, as a
component of accumulated comprehensive loss.
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.
Recent Accounting Pronouncements
In July 2001, the FASB issued 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 on July 1, 2001 had no effect on the
Company's results of operations or financial position as the Company accounts
for all acquisitions under the purchase method. Under SFAS 142, goodwill and
intangible assets with indefinite lives are no longer amortized but reviewed
annually for impairment (or more frequently if impairment indicators arise).
Separable intangible assets that are not deemed to have indefinite lives will
continue to be amortized over their useful lives. The Company adopted this
standard effective January 1, 2002 and is evaluating its goodwill and other
specifically identifiable intangibles for impairment in accordance with the
standard's guidance. The Company is also currently evaluating whether franchise
licenses qualify as indefinite life intangibles under the new standard. If the
Company concludes that franchise licenses are indefinite life intangibles, they
will no longer be amortized. Amortization of goodwill and franchise licenses was
approximately $51.8 million for the year ended December 31, 2001. The Company
acquired cable systems in June and July 2001, so the amortization of goodwill
and franchise licenses for the period ended December 31, 2001 does not
incorporate the full-year impact of those transactions. For the year ending
December 31, 2002, if the Company concludes that goodwill and franchise licenses
are indefinite life intangible assets, the Company's preliminary estimate is
that the adoption of SFAS 142 will reduce amortization expense in its
consolidated statements of operations by approximately $67.0 million.
In July 2001, the FASB issued SFAS No. 143 ("SFAS 143"), Accounting for
Asset Retirement Obligations, which addresses financial accounting and reporting
for obligations associated with the retirement of tangible long-lived assets and
the associated asset retirement costs. SFAS 143 will become effective for fiscal
years beginning after June 15, 2002. The Company does not expect adoption of
SFAS 143 will have a material impact on its results of operations or financial
position.
59
MEDIACOM BROADBAND LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In August 2001, the FASB issued Statements of Financial Accounting
Standards No. 144, ("SFAS 144") "Accounting for the Impairment or Disposal of
Long-Lived Assets". This statement 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.
SFAS 144 is effective for fiscal years beginning after December 15, 2001. The
Company adopted this standard effective January 1, 2002 and does not expect a
material impact on the Company's results of operations or financial position.
(3) Acquisitions
The Company has completed the undernoted acquisitions (the "Acquired
Systems") in 2001. These acquisitions were made to increase the cable network of
the Company. 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 date of acquisition. The results of operations
of the Acquired Systems have been included with those of the Company since the
dates of acquisition.
The opening balance sheet for the Acquired Systems is as follows (dollars
in thousands):
Accounts receivable........................................... $ 5,758
Intangible assets............................................. 1,551,188
Property, plant and equipment................................. 562,646
Accrued expenses.............................................. (6,256)
----------
Total..................................................... $2,113,336
==========
On June 29, 2001, the Company acquired from AT&T Broadband cable systems
serving approximately 94,000 basic subscribers in the state of Missouri for a
purchase price of approximately $300.0 million. The purchase price has been
preliminarily allocated as follows: approximately $82.2 million to property,
plant and equipment and approximately $217.8 million to franchise costs and
subscriber lists. Such allocations are subject to adjustments based upon the
final appraisal information to be received by the Company. This acquisition
was financed with MCC's $336.4 million equity contribution on June 29, 2001.
On July 18, 2001, the Company acquired from AT&T Broadband cable systems
serving approximately 706,000 basic subscribers in the states of Georgia,
Illinois and Iowa for an aggregate purchase price of approximately $1.77
billion. The purchase price has been preliminarily allocated as follows:
approximately $478.9 million to property, plant and equipment and approximately
$1.29 billion to franchise costs and subscriber lists. Such allocations are
subject to adjustments based upon the final appraisal information to be
received by the Company. These acquisitions were financed with MCC's $388.6
million equity contribution on July 18, 2001, the $150.0 million preferred
equity investment from Mediacom LLC, the net proceeds from the Company's
private offering of 11% senior notes due 2013 and borrowings under the
Company's subsidiary credit facility.
Summarized below are the pro forma unaudited results of operations for the
years ended December 31, 2001 and 2000, assuming the purchase of the Acquired
Systems 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.
60
MEDIACOM BROADBAND LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2001 2000
--------- ----------
(in thousands, except per
share amounts)
(unaudited)
Revenues........................................... $ 465,138 $ 439,541
Operating loss..................................... $ (33,747) $ (27,382)
Net loss........................................... $(124,338) $(145,659)
(4) Property, Plant and Equipment
As of December 31, 2001, property, plant and equipment consisted of:
2001
-----------
(dollars in
thousands)
Land and land improvements........................................ $ 14
Buildings and leasehold improvements.............................. 598
Cable systems, equipment and subscriber devices................... 591,561
Vehicles.......................................................... 462
Furniture, fixtures and office equipment.......................... 1,731
--------
594,366
Accumulated depreciation.......................................... (34,799)
--------
Property, plant and equipment, net................................ $559,567
========
Depreciation expense for the period ended December 31, 2001 was
approximately $36.4 million.
(5) Intangible Assets
The following table summarizes the net asset value for each intangible
asset category as of December 31, 2001:
2001
-----------
(dollars in
thousands)
Franchising costs................................................. $1,592,396
Subscriber lists.................................................. 947
----------
1,593,343
Accumulated amortization.......................................... (51,879)
----------
Intangible assets, net............................................ $1,541,464
==========
Amortization expense for the period ended December 31, 2001 was
approximately $51.9 million.
61
MEDIACOM BROADBAND LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(6) Debt
As of December 31, 2001, debt consisted of:
2001
----------
Bank credit facility............................................. $ 800,000
11% senior notes................................................. 400,000
----------
$1,200,000
Bank Credit Facility
On July 18, 2001, the operating subsidiaries of Mediacom Broadband 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 (the "Broadband Credit Agreement"). 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
of the revolver. 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 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 Broadband Credit Agreement requires compliance with certain financial
covenants including, but not limited to, leverage, interest coverage and debt
service coverage ratios, as defined therein. The Broadband Credit Agreement also
requires 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 restrictive
payments, and certain transactions with affiliates. The Company was in
compliance with all covenants of the Broadband Credit Agreement as of December
31, 2001.
The Broadband Credit Agreement is secured by Mediacom Broadband's pledge of
all its ownership interests in its operating subsidiaries and is guaranteed by
Mediacom Broadband on a limited recourse basis to the extent of such ownership
interests. At December 31, 2001, the Company had $599.6 million of unused bank
commitments under the Broadband Credit Agreement of which over $350.0 million
could be borrowed and used for general corporate purposes under the most
restrictive covenants in the Company's debt arrangements.
The average interest rate on debt outstanding under the Broadband Credit
Agreement was 4.9% for the three months ended December 31, 2001.
Senior Notes
On June 29, 2001, Mediacom Broadband and Mediacom Broadband Corporation
(the "Issuers") jointly issued $400.0 million aggregate principal amount of 11%
senior notes due June 2013 (the "11% Senior Notes"). The 11% Senior Notes are
unsecured obligations of the Issuers, and the indenture for the 11% 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 the Issuers. Interest accrues at 11% per annum, beginning from
the date of issuance and is payable semi-annually on January 15 and July 15 of
each year, which commenced on January 15, 2002. The Issuers were in compliance
with the indenture governing the 11% Senior Notes as of December 31, 2001.
62
MEDIACOM BROADBAND LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Fair Value and Debt Maturities
The fair value of the Company's debt is estimated based on the current
rates offered to the Company for debt of the same remaining maturities. The fair
value of the senior bank debt approximates the carrying value. The fair value at
December 31, 2001 of the 11% Senior Notes was approximately $436.0 million.
The stated maturities of all debt outstanding as of December 31, 2001 are
as follows (dollars in thousands):
2002............................................................. $ --
2003............................................................. --
2004............................................................. 8,500
2005............................................................. 35,000
2006............................................................. 42,500
Thereafter....................................................... 1,114,000
----------
$1,200,000
==========
(7) Preferred Members' Interests
On July 18, 2001, the Company received a $150.0 million preferred equity
investment from Mediacom LLC. The preferred equity investment has a 12% annual
dividend, payable quarterly in cash. The proceeds from the preferred equity
investment were used to fund a portion of the Company's acquisitions of the AT&T
cable systems.
(8) Member's Equity
On June 29, 2001, MCC made a $336.4 million equity contribution to the
Company. MCC made an additional $388.6 million equity contribution to the
Company on July 18, 2001. The proceeds from these equity contributions were used
to fund a portion of the $2.07 billion purchase price for the Company's
acquisitions of the AT&T cable systems.
(9) Related Party Transactions
MCC manages the Company pursuant to a management agreement with each
operating subsidiary. Pursuant to the management agreements, MCC has full and
exclusive authority to manage the day to day operations and conduct the business
of the Company. The Company remains responsible for all expenses and liabilities
relating to construction, development, operation, maintenance, repair, and
ownership of its systems.
As compensation for the performance of its services, subject to certain
restrictions, MCC is entitled under each management agreement to receive
management fees in an amount not to exceed 4.0% of the annual gross operating
revenues of each of the operating subsidiaries. MCC is also entitled to the
reimbursement of all expenses necessarily incurred in its capacity as manager.
63
MEDIACOM BROADBAND LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(10) Employee Benefit Plans
Substantially all employees of the Company are eligible to participate in a
deferred arrangement pursuant to the Internal Revenue Code Section 401(k) (the
"Plan"). Under such arrangement, eligible employees may contribute up to 15% of
their current pre-tax compensation to the Plan. 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 $0.4 million for the period
ended December 31, 2001.
(11) Commitments and Contingencies
Under various lease and rental agreements for offices, warehouses and
computer terminals, the Company had rental expense of approximately $1.9 million
for the years ended December 31, 2001. Future minimum annual rental payments are
as follows (dollars in thousands):
2002................................................................ $1,302
2003................................................................ 947
2004................................................................ 750
2005................................................................ 432
2006................................................................ 315
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 $1.3 million for
the period ended December 31, 2001.
As of December 31, 2001, approximately $0.4 million of letters of credit
were issued in favor of various parties to secure the Company's performance
relating to 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.
(12) Subsequent Events
On February 4, 2002, the Company and MCC filed a registration statement
with the Securities and Exchange Commission under which it may sell debt
securities unconditionally guaranteed by MCC for a maximum amount of $1.5
billion. The Securities and Exchange Commission declared this registration
statement effective on February 13, 2002.
During February 2002, the Company completed the transition of its
high-speed Internet customers, which numbered over 77,000, to MCC's new,
proprietary Mediacom Online(SM) high-speed Internet service from the third-party
provider Excite@Home. As part of the launch of Mediacom Online, MCC signed a
multi-year agreement with AT&T Corp. ("AT&T") under which AT&T provides the
Internet protocol network backbone and certain core Internet support functions
for MCC's new service.
64
Schedule II
MEDIACOM BROADBAND LLC AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
(All dollar amounts in 000's)
Additions
-----------------------------
Balance at Charged to Charged
beginning of costs to other Balance at
period and expenses accounts /(1)/ Deductions end of period
------------ ------------ -------------- ---------- -------------
December 31, 2001
Allowance for doubtful accounts
Current receivables ....... $-- $3,477 $ 2,557 $3,886 $ 2,148
Acquisition reserves/(1)/
Accrued expenses .......... $-- $ -- $42,156 $5,577 $36,579
- ----------
/(1)/ Additions were charged in connection with purchase accounting.
65
REPORT OF INDEPENDENT ACCOUNTANTS
To Mediacom Broadband LLC:
In our opinion, the accompanying combined balance sheets and the related
combined statements of operations and parent's investment and of cash flows
present fairly, in all material respects, the financial position of Mediacom
Systems ("New Mediacom") (a combination of certain assets and liabilities as
defined in Note 1 to the combined financial statements) at July 18, 2001 and
December 31, 2000, and the results of their operations and their cash flows for
the period from January 1, 2001 to July 18, 2001, the year ended December 31,
2000, the period March 1, 1999 to December 31, 1999, in conformity with
accounting principles generally accepted in the United States of America. These
financial statements are the responsibility of the Companies' 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.
As discussed in Note 1, on March 9, 1999 (effective March 1, 1999 for financial
reporting purposes), AT&T Corp., the parent company of New Mediacom, acquired
Tele-Communications, Inc., parent company of Old Mediacom, in a business
combination accounted for as a purchase. As a result of the acquisition, the
combined financial statements for the periods after the acquisition reflects
AT&T Corp.'s basis in the business.
As discussed in Note 1, effective June 29, 2001 and July 18, 2001, the Mediacom
Systems were sold to Mediacom Communications Corporation.
/s/ PRICEWATERHOUSECOOPERS LLP
Denver, Colorado
March 8, 2002
66
REPORT OF INDEPENDENT ACCOUNTANTS
To Mediacom Broadband LLC:
In our opinion, the accompanying combined statements of operations and parent's
investment and of cash flows of Mediacom Systems ("Old Mediacom") (a combination
of certain assets and liabilities as defined in Note 1 to the combined financial
statements) present fairly, in all material respects, the results of their
operations and their cash flows for the period from January 1, 1999 to February
28, 1999, in conformity with accounting principles generally accepted in the
United States of America. These financial statements are the responsibility of
the Companies' 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.
/s/ PRICEWATERHOUSECOOPERS LLP
Denver, Colorado
March 8, 2002
67
MEDIACOM SYSTEMS (PREDECESSOR COMPANY)
(A combination of certain assets and liabilities, as defined in note 1)
COMBINED BALANCE SHEETS
(in thousands)
July 18, December 31,
2001 2000
---------- ------------
ASSETS
Cash and cash equivalents $ -- $ 21,154
Trade and other receivables, net of allowance for doubtful accounts of $798 and
$1,649 at July 18, 2001 and December 31, 2000, respectively 12,676 17,306
Property and equipment, at cost:
Land 3,642 4,259
Distribution systems 505,622 539,322
Support equipment and buildings 42,898 48,011
---------- ----------
552,162 591,592
Less accumulated depreciation 138,095 108,600
---------- ----------
Property and equipment, net 414,067 482,992
Intangible assets, net (note 2) 1,508,314 1,778,941
Other assets 5,990 6,961
---------- ----------
Total assets $1,941,047 $2,307,354
========== ==========
LIABILITIES AND PARENT'S INVESTMENT
Accounts payable $ 2,219 $ 3,291
Accrued liabilities 21,360 20,715
Deferred tax liability (note 7) 675,629 790,264
---------- ----------
Total liabilities 699,208 814,270
Parent's investment (note 4) 1,241,839 1,493,084
Commitments (note 8)
---------- ----------
Total liabilities and parent's investment $1,941,047 $2,307,354
========== ==========
68
MEDIACOM SYSTEMS (PREDECESSOR COMPANY)
(A combination of certain assets and liabilities, as defined in note 1)
COMBINED STATEMENTS OF OPERATIONS AND PARENT'S INVESTMENT
(in thousands)
Old
New Mediacom Mediacom
----------------------------------------- ------------
Period from
January 1 Year Ten months Two months
to ended ended ended
July 18, December 31, December 31, February 29,
2001 2000 1999 1999
----------- ------------ ------------ ------------
Revenue $ 249,238 $ 439,541 $ 336,571 $ 63,335
Costs and expenses:
Operating (note 4) 117,205 192,543 145,297 27,200
Selling, general and administrative 42,449 70,879 58,751 9,886
Management fees (note 4) 18,625 22,267 13,440 1,927
Restructuring charge (note 5) 570 -- -- --
Depreciation 48,327 72,615 43,632 7,819
Amortization 35,283 64,567 46,534 3,012
---------- ---------- ---------- --------
Operating income (loss) before income taxes (13,221) 16,670 28,917 13,491
Gain on disposition of assets 5,183 -- -- --
---------- ---------- ---------- --------
Net income (loss) before taxes (8,038) 16,670 28,917 13,491
Provision for income taxes (benefit) (3,546) 6,646 11,620 5,440
---------- ---------- ---------- --------
Net income (loss) (4,492) 10,024 17,297 8,051
Parent's investment:
Beginning of period 1,493,084 1,468,567 1,353,312 598,247
Change in transfers from parent, net (note 4) 47,806 14,493 63,758 (121)
Disposed cable systems (294,559) -- -- --
Acquisition of cable systems (note 3) -- -- 34,200 --
---------- ---------- ---------- --------
End of period $1,241,839 $1,493,084 $1,468,567 $606,177
========== ========== ========== ========
69
MEDIACOM SYSTEMS (PREDECESSOR COMPANY)
(A combination of certain assets and liabilities, as defined in note 1)
COMBINED STATEMENTS OF CASH FLOWS
(in thousands)
Old
New Mediacom Mediacom
----------------------------------------- ------------
Period from
January 1 Year Ten months Two months
to ended ended ended
July 18, December 31, December 31, February 29,
2001 2000 1999 1999
----------- ------------ ------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (4,492) $ 10,024 $ 17,297 $ 8,051
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating
activities:
Gain on disposition of assets (5,183) -- -- --
Depreciation and amortization 83,610 137,182 90,166 10,831
Deferred tax benefit (114,635) (24,781) (20,225) (2,898)
Changes in operating assets and liabilities:
Decrease (increase) in trade and other
receivables 3,185 (2,801) (2,815) (969)
Decrease (increase) in other assets 813 57 (187) (3,094)
Increase (decrease) in accounts payable (360) (761) 2,022 337
Increase in accrued liabilities 2,784 836 3,449 (1,651)
--------- --------- --------- --------
Net cash provided by (used in) operating
activities (34,278) 119,756 89,707 10,607
--------- --------- --------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures for property and
equipment (34,490) (131,177) (159,052) (16,028)
Other (192) -- -- --
--------- --------- --------- --------
Net cash used in investing activities (34,682) (131,177) (159,052) (16,028)
--------- --------- --------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Change in transfers from parent, net 47,806 14,493 77,695 (74)
--------- --------- --------- --------
Net change in cash and cash equivalents (21,154) 3,072 8,350 (5,495)
Cash and cash equivalents at beginning of period 21,154 18,082 9,732 15,227
--------- --------- --------- --------
Cash and cash equivalents at end of period $ -- $ 21,154 $ 18,082 $ 9,732
========= ========= ========= ========
70
MEDIACOM SYSTEMS (PREDECESSOR COMPANY)
(A combination of certain assets and liabilities, as defined in note 1)
NOTES TO COMBINED FINANCIAL STATEMENTS
(1) Basis of Presentation and Summary of Significant Accounting Policies
Effective upon the end of business on June 29, 2001, subsidiaries of AT&T
Corp. ("AT&T") sold to Mediacom Communications Corporation ("Mediacom") certain
cable television systems serving approximately 94,000 customers located
primarily in Missouri, and wholly owned by various cable subsidiaries and
partnerships of AT&T (the "Missouri Mediacom Systems") for net cash proceeds of
approximately $300 million. AT&T recognized an estimated gain on the sale of the
Missouri MediaCom Systems of approximately $5 million. The results of operations
and cash flows of the Missouri Mediacom Systems are included in the combined
financial statements through June 29, 2001.
Effective upon the end of business on July 18, 2001, subsidiaries of AT&T
sold to Mediacom certain cable television systems serving approximately 706,000
customers located primarily in Iowa, Georgia and Southern Illinois, and wholly
owned by various cable subsidiaries and partnerships of AT&T for net cash
proceeds of approximately $1.77 billion. AT&T recognized an estimated loss on
this sale of approximately $93 million. These cable systems combined with the
Missouri Mediacom Systems are collectively referred to herein as the "Mediacom
Systems" or the "Systems" except that the balance sheet at July 18, 2001,
excludes the Missouri Mediacom Systems which was sold effective June 29, 2001.
The accompanying combined financial statements include the specific
accounts directly related to the activities of the Mediacom Systems. All
significant inter-system accounts and transactions have been eliminated in
combination. The combined net assets of the Mediacom Systems are referred to as
"Parent's Investment."
On March 9, 1999, AT&T acquired AT&T Broadband, LLC ("AT&T Broadband,"
formerly known as Tele-Communications, Inc.) in a merger (the "AT&T Merger"). In
the AT&T Merger, AT&T Broadband became a subsidiary of AT&T. For financial
reporting purposes, the AT&T Merger was deemed to have occurred on March 1,
1999. The combined financial statements of Mediacom Systems for periods prior to
March 1, 1999 are referred to herein as "Old Mediacom." The combined financial
statements of Mediacom Systems for periods subsequent to February 28, 1999 are
referred to herein as "New Mediacom." Due to the application of purchase
accounting in connection with the AT&T Merger, the predecessor combined
financial statements of Old Mediacom are not comparable to the successor
combined financial statements of New Mediacom.
Certain costs of AT&T Broadband are charged to the Systems based primarily
on Mediacom Systems' number of customers (see note 4). Although such allocations
are not necessarily indicative of the costs that would have been incurred by the
Mediacom Systems on a stand alone basis, management believes that the resulting
allocated amounts are reasonable.
The net assets of the Systems are held by various wholly-owned subsidiaries
and partnerships of AT&T Broadband. Accordingly, the combined financial
statements of the Mediacom Systems do not reflect all of the assets,
liabilities, revenues and expenses that would be indicative of a stand-alone
business. The financial condition, results of operations and cash flows of the
Mediacom Systems could differ from reported results had the Mediacom Systems
operated autonomously or as an entity independent of AT&T. In particular, no
interest expense incurred by AT&T and its subsidiaries on their debt obligations
has been allocated to the Mediacom Systems.
The Mediacom Systems are included in the consolidated federal income tax
return of AT&T and its affiliates for the period from January 1 to July 18,
2001, the year ended December 31, 2000 and the ten months ended December 31,
1999. The Mediacom Systems are included in the consolidated federal income tax
return of Tele-Communications, Inc. ("TCI") and its affiliates for the two
months ended February 28, 1999. Combined income tax provisions or benefits,
related to tax payments or refunds, and deferred tax balances of AT&T and its
affiliates or TCI and its affiliates, as applicable, have been allocated to the
Mediacom Systems based principally on the taxable income and tax credits
directly attributable to the Mediacom Systems, essentially a stand alone
presentation. These allocations reflect the Mediacom Systems' contribution to
AT&T's or TCI's consolidated taxable income and consolidated tax liability and
tax credit position, as applicable.
71
MEDIACOM SYSTEMS (PREDECESSOR COMPANY)
(A combination of certain assets and liabilities, as defined in note 1)
NOTES TO COMBINED FINANCIAL STATEMENTS
Cash and Cash Equivalents
Cash and cash equivalents consist of deposits with banks and financial
institutions that are unrestricted as to withdrawal or use and have maturities
of less than 90 days.
AT&T performs cash management functions on behalf of AT&T Broadband,
including the Mediacom Systems. Substantially all of the Systems' cash balances
are swept to AT&T on a daily basis, where they are managed and invested by AT&T.
Transfers of cash to and from AT&T are reflected as a component of Parent's
investment, with no interest income or expense reflected. Net transfers to or
from AT&T are assumed to be settled in cash. AT&T's capital contributions for
purchase business combinations to the Systems have been treated as non-cash
transactions. In addition, proceeds from the sale of the Missouri Mediacom
Systems have been treated as a non-cash transaction with AT&T.
Effective on the date of sale of the respective Mediacom Systems, all cash
was swept by AT&T through Parent's investment.
Property and Equipment
Property and equipment is stated at cost, including acquisition costs
allocated to tangible assets acquired. Construction costs, labor and applicable
overhead related to installations are capitalized. Interest capitalized was not
significant for any periods presented.
Depreciation is computed on a straight-line basis using estimated useful
lives of 3 to 15 years for distribution systems and 3 to 40 years for support
equipment and buildings.
Repairs and maintenance are charged to operations, and renewals and
additions are capitalized. At the time of ordinary retirements, sales or other
dispositions of property, the original cost and cost of removal of such property
are charged to accumulated depreciation, and salvage, if any, is credited
thereto. Gains or losses are only recognized in connection with the sale of
properties in their entirety.
Intangible Assets
Intangible assets consist primarily of franchise costs and intangibles for
customer relationships. Franchise costs represent the difference between AT&T
Broadband's allocated historical cost of acquired assets of the Mediacom Systems
and amounts allocated to the tangible assets. Franchise costs and customer
relationships are generally amortized on a straight-line basis over 25 to 40 and
10 years, respectively. Costs incurred by the Mediacom Systems in negotiating
and renewing franchise agreements are amortized on a straight-line basis over
the average lives of the franchise, generally 10 to 20 years.
Impairment of Long-lived Assets
Management of the Systems periodically reviews the carrying amounts of
property and equipment and its identifiable intangible assets to determine
whether current events or circumstances warrant adjustments to such carrying
amounts. If an impairment adjustment is deemed necessary, based on an analysis
of undiscounted cash flows, such loss is measured by the amount that the
carrying value of such assets exceeds the fair value. Considerable management
judgment is necessary to estimate the fair value of assets, accordingly, actual
results could vary significantly from such estimates.
72
MEDIACOM SYSTEMS (PREDECESSOR COMPANY)
(A combination of certain assets and liabilities, as defined in note 1)
NOTES TO COMBINED FINANCIAL STATEMENTS
Income Taxes
Mediacom Systems is not a separate taxable entity for federal and state
income tax purposes and its results of operations are included in the
consolidated federal and state income tax returns of AT&T and its affiliates or
TCI and its affiliates, as applicable. Mediacom Systems' provision or benefit
for income taxes is based upon its contribution to the overall income tax
liability or benefit of AT&T and its affiliates or TCI and its affiliates, as
applicable.
Revenue Recognition
Revenue for customer fees, equipment rental, advertising, pay-per-view
programming and revenue sharing agreements is recognized in the period that
services are delivered. Installation revenue is recognized in the period the
installation services are provided to the extent of direct selling costs. Any
remaining amount is deferred and recognized over the estimated average period
that customers are expected to remain connected to the cable distribution
system.
Statement of Cash Flows
Transactions effected through the intercompany account due to (from) parent
have been considered constructive cash receipts and payments for purposes of the
combined statement of cash flows.
Stock-Based Compensation
Stock-based compensation is accounted for in accordance with Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees"
("APB 25") and related interpretations. The Systems follow the disclosure-only
provisions of Statement of Financial Accounting Standard ("SFAS") No. 123,
"Accounting for Stock-Based Compensation" ("SFAS 123").
Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of revenue and
expenses during the reporting period. Actual results could differ from those
estimates.
Reclassifications
Certain prior periods amounts have been reclassified to conform to the
current period presentation.
Recent Pronouncements
In 2001, the Financial Accounting Standards Board ("FASB") issued
Statements of Financial Accounting Standards No. 141, "Business Combinations"
("SFAS 141") and No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142").
SFAS 141 requires all business combinations initiated after June 30, 2001 to be
accounted for using the purchase method. Under SFAS 142, goodwill and intangible
assets with indefinite lives will no longer be amortized, but rather will be
tested for impairment upon adoption and at least annually thereafter. Separable
intangible assets that are not deemed to have indefinite lives will continue to
be amortized over their useful lives. The amortization provisions of SFAS 142
apply immediately to goodwill and intangible assets acquired after June 30,
2001. With respect to goodwill and intangible assets acquired prior to July 1,
2001, the provisions of SFAS 142 are effective January 1, 2002. Management is
currently evaluating the effect that SFAS 141 and SFAS 142 will have on the
results of operations, financial position or cash flows of the Systems.
73
MEDIACOM SYSTEMS (PREDECESSOR COMPANY)
(A combination of certain assets and liabilities, as defined in note 1)
NOTES TO COMBINED FINANCIAL STATEMENTS
In 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations" ("SFAS 143"). This standard requires that obligations associated
with the retirement of tangible long-lived assets be recorded as liabilities
when those obligations are incurred, with the amount of the liability initially
measured at fair value. Upon initially recognizing a liability for an asset
retirement obligation, an entity must capitalize the cost by recognizing an
increase in the carrying amount of the related long-lived asset. Over time, this
liability is accreted to its present value, and the capitalized cost is
depreciated over the useful life of the related asset. Upon settlement of the
liability, an entity either settles the obligation for its recorded amount or
incurs a gain or loss upon settlement. SFAS 143 is effective for financial
statements issued for fiscal years beginning after June 15, 2002. Management of
the Systems does not expect that the adoption of this statement will have a
material impact on the Systems' results of operations, financial position or
cash flows.
In 2001, the FASB issued Statements of Financial Accounting Standards No.
144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS
144"). This statement addresses financial accounting and reporting for the
impairment or disposal of long-lived assets. SFAS 144 supersedes Statement of
Financial Accounting standards No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed of", and provides
guidance on classification and accounting for fiscal years beginning after
December 15, 2001. Management of the Systems does not expect that the adoption
of SFAS 144 will have a material impact on the Systems' financial position,
results of operations or cash flows.
(2) Intangibles
Intangible assets are summarized as follows (amounts in thousands):
July 18, December 31,
2001 2000
---------- -------------
Franchise costs $1,560,198 $1,802,251
Other intangible assets 78,124 87,791
---------- ----------
1,638,322 1,890,042
Less accumulated amortization 130,008 111,101
---------- ----------
Intangibles, net $1,508,314 $1,778,941
========== ==========
Amortization expense on franchise costs was $30.5 million, $55.3 million,
$36.8 million and $3.0 million for the period from January 1 to July 18, 2001,
the year ended December 31, 2000, the ten months ended December 31, 1999 and the
two months ended February 28, 1999, respectively. Amortization expense for other
intangible assets was $4.8 million, $9.3 million, $9.7 million and $0 for the
period from January 1 to July 18, 2001, the year ended December 31, 2000, the
ten months ended December 31, 1999 and the two months ended February 28, 1999,
respectively.
(3) Acquisitions
During May of 1999, AT&T Broadband paid cash to acquire a cable television
system serving customers located in Iowa (the "1999 Acquisition"). The 1999
Acquisition was deemed effective as of May 1, 1999 for financial reporting
purposes, accordingly, the acquired system has been included in the accompanying
combined financial results of Mediacom Systems since May 1, 1999. The 1999
Acquisition has been reflected as a contribution from AT&T Broadband.
74
MEDIACOM SYSTEMS (PREDECESSOR COMPANY)
(A combination of certain assets and liabilities, as defined in note 1)
NOTES TO COMBINED FINANCIAL STATEMENTS
During June of 1999, AT&T Broadband paid cash and traded cable television
systems in exchange for cable television systems serving customers located in
Southern Illinois (the "1999 Exchange"). The 1999 Exchange was deemed to be
effective as of June 1, 1999 for financial reporting purposes, accordingly, the
acquired systems have been included in the accompanying combined financial
results of Mediacom Systems since June 1, 1999. The 1999 Exchange has been
reflected as a contribution from AT&T Broadband.
(4) Parent's Investment
Parent's investment in the Mediacom Systems is summarized as follows
(amounts in thousands):
July 18, December 31,
2001 2000
---------- -------------
Transfers from parent, net $1,219,010 $1,465,763
Cumulative net income since March 1, 1999 22,829 27,321
---------- ----------
$1,241,839 $1,493,084
========== ==========
The non-interest bearing transfers from parent include AT&T Broadband's
equity in acquired systems, programming charges, management fees and advances
for operations, acquisitions and construction costs, as well as the amounts
charged as a result of the allocation of certain costs from AT&T.
As a result of AT&T's 100% ownership of the Mediacom Systems, the transfers
from parent amounts have been classified as a component of Parent's investment
in the accompanying combined balance sheets.
The Mediacom Systems purchase, at AT&T Broadband's cost, certain pay
television and other programming through a certain indirect subsidiary of AT&T
Broadband. Charges for such programming are included in operating expenses in
the accompanying combined financial statements.
Certain subsidiaries of AT&T Broadband provide administrative services to
the Mediacom Systems and have assumed managerial responsibility of the Mediacom
Systems' cable television system operations and construction. As compensation
for these services, the Mediacom Systems pay a monthly management fee calculated
on a per-subscriber basis.
The parent transfers and expense allocation activity consist of the
following (amounts in thousands):
New Mediacom Old Mediacom
------------------------------------------- ------------
Period from
January 1 Year Ten months Two months
to ended ended ended
July 18, December 31, December 31, February 28,
2001 2000 1999 1999
----------- ------------ ------------ ------------
Beginning of period $1,465,763 $1,451,270 $1,353,312 $547,498
Programming charges 77,287 123,993 89,664 17,119
Management fees 18,625 22,267 13,440 1,927
Cash transfers (48,106) (131,767) (39,346) (19,167)
Disposal of cable systems (294,559) -- -- --
Acquisition of cable systems -- -- 34,200 --
---------- ---------- ---------- --------
End of period $1,219,010 $1,465,763 $1,451,270 $547,377
========== ========== ========== ========
75
MEDIACOM SYSTEMS (PREDECESSOR COMPANY)
(A combination of certain assets and liabilities, as defined in note 1)
NOTES TO COMBINED FINANCIAL STATEMENTS
(5) Restructuring Charge
As part of a cost reduction plan undertaken by AT&T Broadband in 2001,
approximately 63 employees of the Systems were terminated, resulting in a
restructuring charge of approximately $570,000 during the first quarter of 2001.
Terminated employees primarily performed customer service and field operations
functions. The restructuring charge consists of severance and other employee
benefits. As of July 18, 2001, all of the charge has been paid in cash.
(6) Employee Benefit and Stock-Based Compensation Plans
AT&T sponsors savings plans for the majority of its employees. Prior to the
AT&T Merger, TCI also sponsored savings plans for the majority of its employees.
The plans allow employees to contribute a portion of their pre-tax and/or
after-tax income in accordance with specified guidelines. Employee contributions
are matched up to certain limits. AT&T and TCI contributions, as applicable, for
employees of the Mediacom Systems amounted to $1,082,000, $2,947,000, $2,282,000
and $458,000 for the period from January 1 to July 18, 2001, the year ended
December 31, 2000, the ten months ended December 31, 1999 and the two months
ended February 28, 1999, respectively.
Under AT&T's 1997 Long-term Incentive Program (the "Program"), which was
amended March 14, 2000, AT&T grants stock options, performance shares,
restricted stock and other awards on AT&T common stock as well as stock options
on the AT&T Wireless Group tracking stock. Employees of the Mediacom Systems
were eligible to receive stock options under this program effective with the
AT&T Merger (see note 1).
Under the Program, there were 150 million shares of AT&T common stock
available for grant with a maximum of 22.5 million common shares that could be
used for awards other than stock options. Beginning with January 1, 2000, the
remaining shares available for grant at December 31 of the prior year, plus
1.75% of the shares of AT&T common stock outstanding on January 1 of each year,
become available for grant. There is a maximum of 37.5 million shares that may
be used for awards other than stock options. The exercise price of any stock
option is equal to the stock price when the option is granted. Generally, the
options vest over three or four years and are exercisable up to 10 years from
the date of grant.
Under the AT&T 1996 Employee Stock Purchase Plan (the "Plan"), which was
effective July 1, 1996, AT&T is authorized to sell up to 75 million shares of
AT&T common stock to its eligible employees. Under the terms of the Plan,
employees may have up to 10% of their earnings withheld to purchase AT&T's
common stock. The purchase price of the stock on the date of exercise is 85% of
the average high and low sale prices of shares on the New York Stock Exchange
for that day.
The Systems apply APB 25, and related interpretations in accounting for its
plans. Accordingly, no compensation expense has been recognized for stock-based
compensation plans for the Mediacom Systems.
The Systems have adopted the disclosure-only provisions of SFAS 123. If the
Systems had elected to recognize compensation costs based on the fair value at
the date of grant for AT&T awards granted to Systems' employees in 2000,
consistent with the provisions of SFAS 123, Mediacom Systems' net income (loss)
would have been adjusted to reflect additional compensation expense resulting in
pro forma net income (loss) of $(5,996,000) and $9,339,000 for the period from
January 1, 2001 to July 18, 2001 and the year ended December 31, 2000,
respectively. There were no AT&T awards granted to systems' employees in 1999 or
2001.
76
MEDIACOM SYSTEMS (PREDECESSOR COMPANY)
(A combination of certain assets and liabilities, as defined in note 1)
NOTES TO COMBINED FINANCIAL STATEMENTS
The stock option information included herein has not been adjusted for the
July 2001 split-off of the AT&T Wireless Group from AT&T. AT&T granted
approximately 259,800 and 86,600 stock options to the Mediacom Systems'
employees during 2000 for AT&T stock options and AT&T Wireless Group tracking
stock, respectively. At the date of grant, the exercise price for AT&T options
and AT&T Wireless Group tracking stock options granted to AT&T Broadband
employees during 2000 was $33.81 and $27.56, respectively. The fair value at
date of grant for AT&T options and AT&T Wireless Group tracking stock options
granted to AT&T Broadband employees during 2000 was $10.59 and $11.74,
respectively, and was estimated using the Black-Scholes option-pricing model.
The following assumptions were applied for 2000 for the AT&T options and the
AT&T Wireless Group tracking stock options: (i) expected dividend yield of 1.7%
and 0%, respectively, (ii) expected volatility rate of 34% and 55%,
respectively, (iii) risk-free interest rate of 6.24% and 6.2%, respectively, and
(iv) expected life of 3 years.
(7) Income Taxes
The Mediacom Systems is not a separate taxable entity for federal and state
income tax purposes and its results of operations are included in the
consolidated federal and state income tax returns of AT&T and its affiliates or
TCI and its affiliates, as applicable (see note 1).
The following table shows the principal reasons for the difference between
the effective income tax rate and the U.S. federal statutory income tax rate
(dollar amounts in thousands):
New Mediacom Old Mediacom
------------------------------------------- ------------
Period from
January 1 Year Ten months Two months
to ended ended ended
July 18, December 31, December 31, February 28,
2001 2000 1999 1999
----------- ------------ ------------ ------------
U.S. federal statutory income tax rate 35.0% 35.0% 35.0% 35.0%
Federal income tax at statutory rate $(2,813) $5,834 $10,120 $4,721
State and local income taxes, net of federal
income tax effect (733) 812 1,500 719
------- ------ ------- ------
Provision (benefit) for income taxes $(3,546) $6,646 $11,620 $5,440
======= ====== ======= ======
Effective income tax rate 44.1% 39.9% 40.2% 40.3%
77
MEDIACOM SYSTEMS (PREDECESSOR COMPANY)
(A combination of certain assets and liabilities, as defined in note 1)
NOTES TO COMBINED FINANCIAL STATEMENTS
The components of the provision (benefit) for income taxes are presented in
this table (amounts in thousands):
New Mediacom Old Mediacom
------------------------------------------- ------------
Period from
January 1 Year Ten months Two months
to ended ended ended
July 18, December 31, December 31, February 28,
2001 2000 1999 1999
----------- ------------ ------------ ------------
Current:
Federal $ 103,860 $ 25,053 $ 25,535 $ 6,644
State and local 7,229 6,374 6,310 1,693
Deferred:
Federal (106,278) (19,655) (16,222) (2,309)
State and local (8,357) (5,126) (4,003) (588)
--------- -------- -------- -------
Provision (benefit) for income taxes $ (3,546) $ 6,646 $ 11,620 $ 5,440
========= ======== ======== =======
Deferred income tax liabilities are income taxes Mediacom Systems expects
to incur in future periods. Similarly, deferred income tax assets are recorded
for expected reductions in income taxes payable in future periods. Deferred
income taxes arise because of differences in the book and tax basis of certain
assets and liabilities.
Deferred income tax liabilities consist of the following (amounts in
thousands):
July 18, December 31,
2001 2000
-------- ------------
Long-term deferred income tax liabilities:
Property, plant and equipment $ 62,130 $ 72,417
Franchise costs 590,563 690,070
Other 22,936 27,777
-------- --------
Total long-term deferred income tax liabilities $675,629 $790,264
======== ========
(8) Commitments
The Mediacom Systems lease business offices, have entered into pole rental
agreements and use certain equipment under lease arrangements. Rental expense
for such arrangements amounted to $2,179,000, $2,680,000, $2,331,000 and
$522,000 for the period from January 1 to July 18, 2001, the year ended December
31, 2000, the ten months ended December 31, 1999 and the two months ended
February 28, 1999, respectively.
Future minimum lease payments under noncancelable operating leases for each
of the next five years are summarized as follows (amounts in thousands):
2002 ............................................................ $1,226
2003 ............................................................ 1,210
2004 ............................................................ 1,187
2005 ............................................................ 1,132
2006 ............................................................ 919
It is expected that, in the normal course of business, expiring leases will
be renewed or replaced by leases on other properties.
78
Schedule II
MEDIACOM SYSTEMS (PREDECESSOR COMPANY)
VALUATION AND QUALIFYING ACCOUNTS
(All dollar amounts in 000's)
-------------------------
Balance at Charged to
beginning of costs Balance at
period and expenses Deductions end of period
------------ ------------ ---------- -------------
December 31, 1999
Allowance for doubtful accounts
Current receivables........... $ 792 $5,988 $5,488 $1,292
December 31, 2000
Allowance for doubtful accounts
Current receivables........... $1,292 $7,222 $6,865 $1,649
January 1 to July 18, 2001
Allowance for doubtful accounts
Current receivables........... $1,649 $6,136 $6,987 $ 798
79
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
80
PART III
--------
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANTS
MCC is our sole voting member and manager. MCC serves as manager of our
operating subsidiaries. The executive officers of Mediacom Broadband LLC and the
directors and executive officers of MCC and Mediacom Broadband Corporation are:
Name Age Position
- ---- ---- --------
Rocco B. Commisso...................................... 52 Chairman and Chief Executive Officer
of Mediacom Broadband LLC and MCC and
President and Chief Executive Officer and
Director of Mediacom Broadband Corporation
Mark E. Stephan........................................ 45 Senior Vice President, Chief Financial
Officer and Treasurer of Mediacom Broadband
LLC and MCC, Director of MCC, and Treasurer
and Secretary of Mediacom Broadband
Corporation
James M. Carey......................................... 50 Senior Vice President, Operations of MCC
John G. Pascarelli..................................... 40 Senior Vice President, Marketing and
Consumer Services of MCC
Joseph Van Loan........................................ 60 Senior Vice President, Technology of MCC
Italia Commisso Weinand................................ 48 Senior Vice President, Programming and
Human Resources and Secretary of MCC
Charles J. Bartolotta.................................. 47 Senior Vice President, Customer Operations
of MCC
Calvin G. Craib........................................ 47 Senior Vice President, Business
Development of MCC
William I. Lees, Jr. .................................. 43 Senior Vice President, Corporate
Controller of MCC
Joseph E. Young........................................ 53 Senior Vice President, General Counsel of
MCC
Craig S. Mitchell...................................... 43 Director of MCC
William S. Morris III.................................. 67 Director of MCC
Thomas V. Reifenheiser................................. 66 Director of MCC
Natale S. Ricciardi.................................... 53 Director of MCC
Robert L. Winikoff..................................... 55 Director of MCC
Rocco B. Commisso has 24 years of experience with the cable television
industry and has served as our Chairman and Chief Executive Officer since our
inception in April 2001 and our manager's Chairman and Chief Executive Officer
since founding its predecessor company in July 1995. Mr. Commisso has served as
President, Chief Executive Officer and Director of Mediacom Broadband
Corporation since its inception in May 2001. 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.
81
Mark E. Stephan has 15 years of experience with the cable television
industry and has served as our Senior Vice President, Chief Financial Officer
and Treasurer since our inception in April 2001 and our manager's Senior Vice
President, Chief Financial Officer and Treasurer since the commencement of its
operations in March 1996. Mr. Stephan has served as Director of our manager
since its incorporation in November 1999 and as Treasurer and Secretary of
Mediacom Broadband since its inception in May 2001. From 1993 to February 1996,
Mr. Stephan served as Vice President of Finance for Cablevision Industries.
Prior to that time, Mr. Stephan served as Manager of the telecommunications and
media lending group of Royal Bank of Canada from 1987 to 1992.
James M. Carey has 20 years of experience in the cable television industry.
Before joining our manager 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.
John G. Pascarelli has 21 years of experience in the cable television
industry. Before joining our manager in March 1998, Mr. Pascarelli served as
Vice President, Marketing for Helicon 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, Cablevision Systems and
Storer Communications. Mr. Pascarelli is a member of the board of directors of
the Cable Television Administration and Marketing Association.
Joseph Van Loan has 29 years of experience in the cable television
industry. Before joining our manager in November 1996, Mr. Van Loan served as
Senior Vice President, Engineering for Cablevision Industries from 1990. Prior
to that time, he managed a private telecommunications consulting practice
specializing in domestic and international cable television and broadcasting and
served as Vice President, Engineering for Viacom Cable. Mr. Van Loan received
the 1986 Vanguard Award for Science and Technology from the National Cable
Television Association.
Italia Commisso Weinand has 25 years of experience in the cable television
industry. Before joining our manager in April 1996, Ms. Weinand served as
Regional Manager for Comcast Corporation from July 1985. Prior to that time, Ms.
Weinand held various management positions with Tele-Communications, Times Mirror
Cable and Time Warner. She serves on the board of directors of the National
Cable Television Cooperative, Inc., a programming cooperative consisting of
small to medium-sized multiple system operators. Ms. Weinand is the sister of
Mr. Commisso.
Charles J. Bartolotta has 19 years of experience in the cable television
industry. Before joining our manager in October 2000, Mr. Bartolotta served as
Division President for AT&T Broadband, LLC from July 1998, where he was
responsible for managing an operating division serving nearly three million
customers. Prior to that time, he served as Regional Vice President of
Telecommunications, Inc. from January 1997 and as Vice President and General
Manager for TKR Cable Company from 1989. Prior to that time, Mr. Bartolotta held
various management positions with Cablevision Systems Corporation.
Calvin G. Craib has 20 years of experience in the cable television
industry. Before joining our manager 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 our manager 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.
82
Joseph E. Young has 17 years of experience with the cable television
industry. Before joining our manager in November 2001 as Senior Vice President
and General Counsel, Mr. Young served as Executive Vice President, Legal and
Business Affairs, for LinkShare Corporation, an Internet-based provider of
marketing services, from September 1999 to October 2001. Prior to that time, he
practiced corporate law with Baker & Botts, LLP from January 1995 to September
1999. Previously, Mr. Young was a partner with the Law Offices of Jerome H. Kern
and a partner with Shea & Gould.
Craig S. Mitchell has held various management positions with Morris
Communications Corporation for more than the past five years. He currently
serves as its Vice President of Finance and Treasurer and is also a member of
its board of directors.
William S. Morris III has served as the Chairman and Chief Executive
Officer of Morris Communications for more than the past five years. He was the
Chairman of the board of directors of the Newspapers Association of America for
1999-2000.
Thomas V. Reifenheiser served for more than five years as a Managing
Director and Group Executive of the Global Media and Telecom Group of Chase
Securities Inc. until his retirement in September 2000. He joined Chase in 1963
and had been the Global Media and Telecom Group Executive since 1977. He also
had been a director of the Management Committee of The Chase Manhattan Bank. Mr.
Reifenheiser is a member of the board of directors of Lamar Advertising Company,
a leading owner and operator of outdoor advertising and logo sign displays.
Natale S. Ricciardi has held various management positions with Pfizer Inc.
for more than the past five years. Mr. Ricciardi joined Pfizer in 1972 and
currently serves as its Vice President, U.S. Manufacturing, with responsibility
for all of Pfizer's U.S. manufacturing facilities.
Robert L. Winikoff has been a partner of the law firm of Sonnenschein Nath
& Rosenthal since August 2000. Prior thereto, he was a partner of the law firm
of Cooperman Levitt Winikoff Lester & Newman, P.C. for more than five years.
Sonnenschein Nath & Rosenthal currently serves as MCC's outside general counsel
and prior to such representation Cooperman Levitt Winikoff Lester & Newman, P.C.
served as MCC's outside general counsel since 1995.
83
ITEM 11. EXECUTIVE COMPENSATION
The executive officers and directors of MCC are compensated exclusively by
MCC and do not receive any separate compensation from Mediacom Broadband LLC or
Mediacom Broadband Corporation. MCC acts as our manager and in return receives a
management fee.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Mediacom Broadband Corporation is a wholly-owned subsidiary of Mediacom
Broadband LLC. MCC is the sole voting member of Mediacom Broadband. The address
of MCC is 100 Crystal Run Road, Middletown, New York 10941.
84
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Management Agreements
Pursuant to management agreements between MCC and our operating
subsidiaries, which commenced on the respective dates of the acquisitions of the
AT&T cable systems, MCC is entitled to receive annual management fees in amounts
not to exceed 4.0% of our gross operating revenues. For the period ended
December 31, 2001, MCC received $3.0 million of such management fees.
Other Relationships
J.P. Morgan Securities Inc., Credit Suisse First Boston Corporation,
Salomon Smith Barney Inc., BNY Capital Markets, Inc. and other investment
banking firms or their affiliates have in the past engaged in transactions with
and performed services for us and our affiliates in the ordinary course of
business, including commercial banking, financial advisory and investment
banking services. Furthermore, these companies or their affiliates may perform
similar services for us and our affiliates in the future. Affiliates of certain
of these companies are agents and lenders under our subsidiary credit facility.
The Bank of New York, an affiliate of BNY Capital Markets, Inc., acts as trustee
for our senior notes.
On June 29, 2001, we received a $336.4 million equity contribution from
MCC. We received an additional $388.6 million equity contribution from MCC on
July 18, 2001. The proceeds were used to pay a portion of the purchase price and
related fees and expenses for the acquisitions of the AT&T cable systems.
On July 18, 2001, we received a $150.0 million preferred equity investment
from Mediacom LLC. The preferred equity investment has a 12% annual dividend,
payable quarterly in cash. The proceeds from the preferred equity investment
were used to pay a portion of the purchase price and related fees and expenses
for the acquisitions of the AT&T cable systems.
85
PART IV
-------
ITEM 14. 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.
Exhibits
(b) 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 February 26, 2001 among Mediacom
Communications Corporation and the AT&T Broadband Parties (Central
Missouri)/(1)/
2.2 Asset Purchase Agreement, dated February 26, 2001 among Mediacom
Communications Corporation and the AT&T Broadband Parties
(Georgia)/(1)/
2.3 Asset Purchase Agreement, dated February 26, 2001 among Mediacom
Communications Corporation and the AT&T Broadband Parties
(Iowa/Illinois)/(1)/
2.4 Asset Purchase Agreement, dated February 26, 2001 among Mediacom
Communications Corporation and the AT&T Broadband Parties (Southern
Illinois)/(1)/
3.1 Certificate of Formation of Mediacom Broadband LLC/(2)/
3.2 Amended and Restated Limited Liability Company Operating Agreement of
Mediacom Broadband LLC/(2)/
3.3 Certificate of Incorporation of Mediacom Broadband Corporation/(2)/
3.4 By-Laws of Mediacom Broadband Corporation/(2)/
4.1 Indenture relating to 11% senior notes due 2013 of Mediacom Broadband
LLC and Mediacom Broadband Corporation/(2)/
10.3 Credit Agreement dated as of July 18, 2001 for the Mediacom Broadband
Subsidiary Credit Facility./(2)/
21.1 Subsidiaries of Mediacom Broadband LLC/(2)/
23.1 Consent of Arthur Andersen LLP
23.2 Consent of PricewaterhouseCoopers LLP
(c) Financial Statement Schedule
None.
(d) Reports on Form 8-K
86
None.
- ----------
/(1)/ 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.
/(2)/ Filed as an exhibit to the Registration Statement on Form S-4 (File No.
333-72440) of Mediacom Broadband LLC and Mediacom Broadband Corporation and
incorporated herein by reference.
87
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Mediacom Broadband LLC
March 29, 2002 BY: /S/ Rocco B. Commisso
------------------------------
Rocco B. Commisso
Manager, 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 Manager, Chairman and March 29, 2002
- ------------------------------- Chief Executive Officer (principal
Rocco B. Commisso executive officer)
/S/ Mark E. Stephan Senior Vice President, March 29, 2002
- ------------------------------- Chief Financial Officer and Treasurer
Mark E. Stephan (principal financial officer and principal
accounting officer)
88
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Mediacom Broadband Corporation
March 29, 2002 By: /S/ Rocco B. Commisso
------------------------------
Rocco B. Commisso
President, Chief Executive
Officer and Director
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 President, Chief Executive Officer March 29, 2002
- ------------------------------- and Director (principal executive officer)
Rocco B. Commisso
/S/ Mark E. Stephan Treasurer and Secretary March 29, 2002
- ------------------------------- (principal financial officer
Mark E. Stephan and principal accounting officer)
89