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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Securities Exchange Act of 1934
For the quarterly period ended September 30, 2010
Commission File Numbers: | 333-57285-01 | |
333-57285 |
Mediacom LLC
Mediacom Capital Corporation*
Mediacom Capital Corporation*
(Exact names of Registrants as specified in their charters)
New York New York | 06-1433421 06-1513997 | |
(State or other jurisdiction of | (I.R.S. Employer | |
incorporation or organization) | Identification Numbers) |
100 Crystal Run Road
Middletown, New York 10941
(Address of principal executive offices)
Middletown, New York 10941
(Address of principal executive offices)
(845) 695-2600
(Registrants’ telephone number)
(Registrants’ telephone number)
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.þ Yeso No
Indicate by check mark whether the Registrants have submitted electronically and posted on their respective corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrants were required to submit and post such files). o Yeso No
Indicate by check mark whether the Registrants are large accelerated filers, accelerated filers, non-accelerated filers, or smaller reporting companies. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
o Large accelerated filers | o Accelerated filers | þ Non-accelerated filers | o Smaller reporting companies |
Indicate by check mark whether the Registrants are shell companies (as defined in Rule 12b-2 of the Exchange Act).o Yesþ No
Indicate the number of shares outstanding of the Registrants’ common stock: Not Applicable
* | Mediacom Capital Corporation meets the conditions set forth in General Instruction H (1) (a) and (b) of Form 10-Q and is therefore filing this form with the reduced disclosure format. |
MEDIACOM LLC AND SUBSIDIARIES
FORM 10-Q
FOR THE PERIOD ENDED SEPTEMBER 30, 2010
TABLE OF CONTENTS
FOR THE PERIOD ENDED SEPTEMBER 30, 2010
TABLE OF CONTENTS
Page | ||||||||
PART I | ||||||||
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6 | ||||||||
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16 | ||||||||
29 | ||||||||
29 | ||||||||
PART II | ||||||||
30 | ||||||||
30 | ||||||||
30 | ||||||||
Exhibit 31.1 | ||||||||
Exhibit 31.2 | ||||||||
Exhibit 32.1 | ||||||||
Exhibit 32.2 |
This Quarterly Report on Form 10-Q is for the three and nine months ended September 30, 2010. Any statement contained in a prior periodic report shall be deemed to be modified or superseded for purposes of this Quarterly Report to the extent that a statement contained herein modifies or supersedes such statement. The Securities and Exchange Commission (“SEC”) allows us to “incorporate by reference” information that we file with them, which means that we can disclose important information to you by referring you directly to those documents. Information incorporated by reference is considered to be part of this Quarterly Report. Throughout this Quarterly Report, we refer to Mediacom LLC as “Mediacom LLC,” and Mediacom LLC and its consolidated subsidiaries as “we,” “us” and “our.”
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Cautionary Statement Regarding Forward-Looking Statements
You should carefully review the information contained in this Quarterly Report and in other reports or documents that we file from time to time with the SEC.
In this Quarterly 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 “anticipates,” “believes,” “continue,” “could,” “estimates,” “expects,” “intends,” “may,” “plans,” “potential,” “predicts,” “should” or “will,” or the negative of those and other comparable words. These forward-looking statements are not guarantees of future performance or results, and are subject to risks and uncertainties that could cause actual results to differ materially from historical results or those we anticipate as a result of various factors, many of which are beyond our control. Factors that may cause such differences to occur include, but are not limited to:
• | increased levels of competition from existing and new competitors; |
• | lower demand for our video, high-speed data and phone services; |
• | our ability to successfully introduce new products and services to meet customer demands and preferences; |
• | changes in laws, regulatory requirements or technology that may cause us to incur additional costs and expenses; |
• | greater than anticipated increases in programming costs and delivery expenses related to our products and services; |
• | changes in assumptions underlying our critical accounting policies; |
• | the ability to secure hardware, software and operational support for the delivery of products and services to our customers; |
• | disruptions or failures of network and information systems upon which our business relies; |
• | our reliance on certain intellectual property; |
• | our ability to generate sufficient cash flow to meet our debt service obligations; |
• | our ability to refinance future debt maturities or provide future funding for general corporate purposes and potential strategic transactions, on similar terms as we currently experience; and |
• | other risks and uncertainties discussed in this Quarterly Report, our Annual Report on Form 10-K for the year ended December 31, 2009 and other reports or documents that we file from time to time with the SEC. |
Statements included in this Quarterly Report are based upon information known to us as of the date that this Quarterly Report is filed with the SEC, and we assume no obligation to update or alter our forward-looking statements made in this Quarterly Report, whether as a result of new information, future events or otherwise, except as required by applicable federal securities laws.
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PART I
ITEM 1. FINANCIAL STATEMENTS
MEDIACOM LLC AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(All dollar amounts in thousands)
(Unaudited)
September 30, | December 31, | |||||||
2010 | 2009 | |||||||
ASSETS | ||||||||
CURRENT ASSETS | ||||||||
Cash | $ | 7,073 | $ | 8,868 | ||||
Restricted cash and cash equivalents | 8,850 | — | ||||||
Accounts receivable, net of allowance for doubtful accounts of $1,228 and $927 | 34,048 | 37,405 | ||||||
Prepaid expenses and other current assets | 8,398 | 7,272 | ||||||
Total current assets | 58,369 | 53,545 | ||||||
Preferred equity investment in affiliated company | 150,000 | 150,000 | ||||||
Property, plant and equipment, net of accumulated depreciation of $1,185,230 and $1,098,785 | 692,291 | 694,216 | ||||||
Franchise rights | 616,807 | 616,807 | ||||||
Goodwill | 24,046 | 24,046 | ||||||
Subscriber lists, net of accumulated amortization of $117,672 and $117,351 | 606 | 927 | ||||||
Other assets, net of accumulated amortization of $3,349 and $2,920 | 28,504 | 28,679 | ||||||
Total assets | $ | 1,570,623 | $ | 1,568,220 | ||||
LIABILITIES AND MEMBERS’ DEFICIT | ||||||||
CURRENT LIABILITIES | ||||||||
Accounts payable, accrued expenses and other current liabilities | $ | 148,861 | $ | 213,974 | ||||
Deferred revenue | 25,624 | 25,327 | ||||||
Current portion of long-term debt | 12,000 | 59,500 | ||||||
Total current liabilities | 186,485 | 298,801 | ||||||
Long-term debt, less current portion | 1,510,000 | 1,450,500 | ||||||
Other non-current liabilities | 35,609 | 9,906 | ||||||
Total liabilities | 1,732,094 | 1,759,207 | ||||||
Commitments and contingencies (Note 9) | ||||||||
MEMBERS’ DEFICIT | ||||||||
Capital contributions | 478,973 | 455,973 | ||||||
Accumulated deficit | (640,444 | ) | (646,960 | ) | ||||
Total members’ deficit | $ | (161,471 | ) | $ | (190,987 | ) | ||
Total liabilities and members’ deficit | $ | 1,570,623 | $ | 1,568,220 | ||||
The accompanying notes to the unaudited financial statements are an integral part of these statements.
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MEDIACOM LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(All dollar amounts in thousands)
(Unaudited)
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Revenues | $ | 163,564 | $ | 157,802 | $ | 487,203 | $ | 476,805 | ||||||||
Costs and expenses: | ||||||||||||||||
Service costs (exclusive of depreciation and amortization) | 74,278 | 70,747 | 218,780 | 212,346 | ||||||||||||
Selling, general and administrative expenses | 28,282 | 27,276 | 82,018 | 81,343 | ||||||||||||
Management fee expense | 3,093 | 3,026 | 9,108 | 9,004 | ||||||||||||
Depreciation and amortization | 26,593 | 27,687 | 80,803 | 84,154 | ||||||||||||
Operating income | 31,318 | 29,066 | 96,494 | 89,958 | ||||||||||||
Interest expense, net | (23,543 | ) | (23,415 | ) | (68,973 | ) | (68,737 | ) | ||||||||
(Loss) gain on derivatives, net | (10,255 | ) | (3,300 | ) | (31,139 | ) | 7,793 | |||||||||
Loss on sale of cable systems, net | — | — | — | (377 | ) | |||||||||||
Loss on early extinguishment of debt | — | (5,899 | ) | (1,234 | ) | (5,899 | ) | |||||||||
Investment income from affiliate | 4,500 | 4,500 | 13,500 | 13,500 | ||||||||||||
Other expense, net | (717 | ) | (1,143 | ) | (2,136 | ) | (2,895 | ) | ||||||||
Net income (loss) | $ | 1,303 | $ | (191 | ) | $ | 6,512 | $ | 33,343 | |||||||
The accompanying notes to the unaudited financial statements are an integral part of these statements.
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MEDIACOM LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(All dollar amounts in thousands)
(Unaudited)
Nine Months Ended | ||||||||
September 30, | ||||||||
2010 | 2009 | |||||||
OPERATING ACTIVITIES: | ||||||||
Net income | $ | 6,512 | $ | 33,343 | ||||
Adjustments to reconcile net loss to net cash flows provided by operating activities: | ||||||||
Depreciation and amortization | 80,803 | 84,154 | ||||||
Loss (gain) on derivatives, net | 31,139 | (7,793 | ) | |||||
Loss on sale of cable systems, net | — | 377 | ||||||
Loss on early extinguishment of debt | 1,234 | 3,707 | ||||||
Amortization of deferred financing costs | 2,398 | 1,168 | ||||||
Share-based compensation | 429 | 435 | ||||||
Changes in assets and liabilities, net of effects from acquisitions: | ||||||||
Accounts receivable, net | 3,357 | (2,193 | ) | |||||
Prepaid expenses and other assets | (1,141 | ) | 1,959 | |||||
Accounts payable, accrued expenses and other current liabilities | (71,756 | ) | (3,719 | ) | ||||
Deferred revenue | 297 | 938 | ||||||
Other non-current liabilities | (189 | ) | (190 | ) | ||||
Net cash flows provided by operating activities | $ | 53,083 | $ | 112,186 | ||||
INVESTING ACTIVITIES: | ||||||||
Capital expenditures | (71,190 | ) | (69,634 | ) | ||||
Investment in restricted cash and cash equivalents (Note 1) | (8,850 | ) | — | |||||
Net cash flows used in investing activities | $ | (80,040 | ) | $ | (69,634 | ) | ||
FINANCING ACTIVITIES: | ||||||||
New borrowings | 498,875 | 1,016,750 | ||||||
Repayment of debt | (486,875 | ) | (724,750 | ) | ||||
Issuance of bank debt | — | 350,000 | ||||||
Redemption of senior notes | — | (625,000 | ) | |||||
Capital contributions from parent | 60,000 | 150,498 | ||||||
Capital distributions to parent | (37,000 | ) | (180,000 | ) | ||||
Financing costs | (6,918 | ) | (23,896 | ) | ||||
Other financing activities — book overdrafts | (2,920 | ) | (682 | ) | ||||
Net cash flows provided by (used in) financing activities | $ | 25,162 | $ | (37,080 | ) | |||
Net change in cash and cash equivalents | (1,795 | ) | 5,472 | |||||
CASH, beginning of period | 8,868 | 10,060 | ||||||
CASH, end of period | $ | 7,073 | $ | 15,532 | ||||
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: | ||||||||
Cash paid during the period for interest, net of amounts capitalized | $ | 76,970 | $ | 92,076 | ||||
NON-CASH TRANSACTIONS — FINANCING: | ||||||||
Exchange of cable systems with affiliate (Note 10) | $ | — | $ | 63,240 | ||||
The accompanying notes to the unaudited financial statements are an integral part of these statements.
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MEDIACOM LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION
Basis of Preparation of Unaudited Consolidated Financial Statements
Mediacom LLC (“Mediacom LLC” and collectively with its subsidiaries, “we,” “our” or “us”), a New York limited liability company wholly-owned by Mediacom Communications Corporation (“MCC”), is involved in the acquisition and operation of cable systems serving smaller cities and towns in the United States. Our principal operating subsidiaries conduct all of our consolidated operations and own substantially all of our consolidated assets. Our operating subsidiaries are separate and distinct legal entities and have no obligation, contingent or otherwise, to make funds available to us.
We have prepared these unaudited consolidated financial statements in accordance with the rules and regulations of the Securities and Exchange Commission (the “SEC”). In the opinion of management, such statements include all adjustments, consisting of normal recurring accruals and adjustments, necessary for a fair presentation of our consolidated results of operations and financial position for the interim periods presented. The accounting policies followed during such interim periods reported are in conformity with generally accepted accounting principles in the United States of America and are consistent with those applied during annual periods. For a summary of our accounting policies and other information, refer to our Annual Report on Form 10-K for the year ended December 31, 2009. The results of operations for the interim periods are not necessarily indicative of the results that might be expected for future interim periods or for the full year ending December 31, 2010.
Mediacom Capital Corporation (“Mediacom Capital”), a New York corporation wholly-owned by us, co-issued, jointly and severally with us, public debt securities. Mediacom Capital has no operations, revenues or cash flows and has no assets, liabilities or stockholders’ equity on its balance sheet, other than a one-hundred dollar receivable from an affiliate and the same dollar amount of common stock. Therefore, separate financial statements have not been presented for this entity.
Franchise fees imposed by local governmental authorities are collected on a monthly basis from our customers and are periodically remitted to the local governmental authorities. Because franchise fees are our obligation, we present them on a gross basis with a corresponding operating expense. Franchise fees reported on a gross basis amounted to approximately $3.1 million and $3.2 million for the three months ended September 30, 2010 and 2009, respectively, and approximately $9.5 million and $9.4 million for the nine months ended September 30, 2010 and 2009, respectively.
Restricted cash and cash equivalents
Restricted cash and cash equivalents represent funds pledged to insurance carriers as security under a master pledge and security agreement. Pledged funds are invested in short-term, highly liquid investments. We retain ownership of the pledged funds, and under the terms of the pledge and security agreement, we can withdraw any of the funds, with the restrictions removed from such funds, provided comparable substitute collateral is pledged to the insurance carriers.
Reclassifications
Certain reclassifications have been made to prior year amounts to conform to the current year presentation.
2. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In January 2010, the FASB issued Accounting Standards Update (“ASU”) No. 2010-06,Improving Disclosures about Fair Value Measurements, which amends Accounting Standards Codification (“ASC”) No. 820 —Fair Value Measurements and Disclosures(“ASC 820”) to add new requirements for disclosures about transfers into and out of Levels 1 and 2 and separate disclosures about purchases, sales, issuances, and settlements relating to Level 3 measurements. The ASU also clarifies existing fair value disclosures about the level of disaggregation and about inputs and valuation techniques used to measure fair value. The ASU is effective for the first reporting period (including interim periods) beginning after December 15, 2009, except for the requirement to provide the Level 3 activity of purchases, sales, issuances, and settlements on a gross basis, which will be effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years. Early adoption is permitted. We do not expect that this ASU will have a significant impact on the consolidated financial statements or related disclosures.
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3. FAIR VALUE
The tables below set forth our financial assets and liabilities measured at fair value on a recurring basis using a market-based approach at September 30, 2010. These assets and liabilities have been categorized according to the three-level fair value hierarchy established by ASC 820, which prioritizes the inputs used in measuring fair value, as follows:
• | Level 1 — Quoted market prices in active markets for identical assets or liabilities. |
• | Level 2 — Observable market based inputs or unobservable inputs that are corroborated by market data. |
• | Level 3 — Unobservable inputs that are not corroborated by market data. |
As of September 30, 2010, our interest rate exchange agreement liabilities, net, were valued at $50.8 million using Level 2 inputs, as follows:
Fair Value as of September 30, 2010 | ||||||||||||||||
(dollars in thousands) | Level 1 | Level 2 | Level 3 | Total | ||||||||||||
Assets | ||||||||||||||||
Interest rate exchange agreements | $ | — | $ | — | $ | — | $ | — | ||||||||
Liabilities | ||||||||||||||||
Interest rate exchange agreements | $ | — | $ | 50,845 | $ | — | $ | 50,845 | ||||||||
Interest rate exchange agreements — liabilities, net | $ | — | $ | 50,845 | $ | — | $ | 50,845 | ||||||||
As of December 31, 2009, our interest rate exchange agreement liabilities, net, were valued at $19.7 million using Level 2 inputs, as follows:
Fair Value as of December 31, 2009 | ||||||||||||||||
(dollars in thousands) | Level 1 | Level 2 | Level 3 | Total | ||||||||||||
Assets | ||||||||||||||||
Interest rate exchange agreements | $ | — | $ | 3,053 | $ | — | $ | 3,053 | ||||||||
Liabilities | ||||||||||||||||
Interest rate exchange agreements | $ | — | $ | 22,758 | $ | — | $ | 22,758 | ||||||||
Interest rate exchange agreements — liabilities, net | $ | — | $ | 19,705 | $ | — | $ | 19,705 | ||||||||
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4. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consisted of the following (dollars in thousands):
September 30, | December 31, | |||||||
2010 | 2009 | |||||||
Cable systems, equipment and subscriber devices | $ | 1,794,962 | $ | 1,717,512 | ||||
Vehicles | 35,436 | 36,507 | ||||||
Furniture, fixtures and office equipment | 29,673 | 21,692 | ||||||
Buildings and leasehold improvements | 15,915 | 15,755 | ||||||
Land and land improvements | 1,535 | 1,535 | ||||||
1,877,521 | 1,793,001 | |||||||
Accumulated depreciation | (1,185,230 | ) | (1,098,785 | ) | ||||
Property, plant and equipment, net | $ | 692,291 | $ | 694,216 | ||||
5. ACCOUNTS PAYABLE, ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accounts payable, accrued expenses and other current liabilities consisted of the following (dollars in thousands):
September 30, | December 31, | |||||||
2010 | 2009 | |||||||
Accounts payable — affiliates | $ | 35,457 | $ | 101,340 | ||||
Liabilities under interest rate exchange agreements | 20,048 | 17,854 | ||||||
Accrued programming costs | 17,973 | 16,056 | ||||||
Accrued taxes and fees | 14,157 | 12,910 | ||||||
Accrued payroll and benefits | 11,830 | 10,999 | ||||||
Accrued service costs | 8,623 | 10,303 | ||||||
Accrued property, plant and equipment | 6,579 | 4,231 | ||||||
Subscriber advance payments | 5,897 | 5,875 | ||||||
Accrued interest | 5,421 | 13,853 | ||||||
Accounts payable | 5,268 | 4,864 | ||||||
Book overdrafts(1) | 3,147 | 6,067 | ||||||
Accrued telecommunications costs | 1,735 | 2,542 | ||||||
Other accrued expenses | 12,726 | 7,080 | ||||||
Accounts payable, accrued expenses and other current liabilities | $ | 148,861 | $ | 213,974 | ||||
(1) | Book overdrafts represent outstanding checks in excess of funds on deposit at our disbursement accounts. We transfer funds from our depository accounts to our disbursement accounts upon daily notification of checks presented for payment. Changes in book overdrafts are reported as part of net cash flows provided by (used in) financing activities in our Consolidated Statements of Cash Flows. |
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6. DEBT
Debt consisted of the following (dollars in thousands):
September 30, | December 31, | |||||||
2010 | 2009 | |||||||
Bank credit facilities | $ | 1,172,000 | $ | 1,160,000 | ||||
9⅛% senior notes due 2017 | 350,000 | 350,000 | ||||||
$ | 1,522,000 | $ | 1,510,000 | |||||
Less: Current portion | 12,000 | 59,500 | ||||||
Total long-term debt | $ | 1,510,000 | $ | 1,450,500 | ||||
Bank Credit Facility
As of September 30, 2010, our operating subsidiaries maintained an aggregate $1.476 billion senior secured credit facility (the “credit facility”), of which $1.172 billion was outstanding. The average interest rates on such outstanding debt, including the effect of the interest rate exchange agreements discussed below, was 4.8%, as compared to 4.2% as of the same date last year.
As of September 30, 2010, we had no outstanding balance under our $304.2 million revolving credit facility, with $303.8 million of unused lines after taking into account $0.4 million of letters of credit issued under the credit facility to various parties as collateral for our performance relating to franchise requirements. As of the same date, based on the terms and conditions of our debt arrangements, all of our unused revolving credit lines were available to be borrowed and used for general corporate purposes. Our revolving credit commitments are scheduled to expire in the amounts of $79.0 million and $225.2 million on September 30, 2011 and December 31, 2014, respectively, and are not subject to scheduled reductions prior to maturity.
The credit agreement for the credit facility contains various covenants that, among other things, impose certain limitations on mergers and acquisitions, consolidations and sales of certain assets, liens, the incurrence of additional indebtedness, certain restricted payments and certain transactions with affiliates. As of September 30, 2010, the principal financial covenants of the credit facility required compliance with a ratio of indebtedness to annualized system cash flow (the “senior leverage ratio”) of no more than 6.0 to 1.0 at any time and a ratio of operating cash flow to interest expense (the “interest coverage ratio”) of no less than 2.0 to 1.0 at the end of a quarterly period. As of such date, our operating subsidiaries’ senior leverage ratio and interest coverage ratio were 4.5 to 1.0 and 2.6 to 1.0, respectively. The terms “indebtedness,” “system cash flow,” “operating cash flow” and “interest expense” are defined in the credit agreement for the credit facility. The credit facility is collateralized by all of our ownership interests in our operating subsidiaries, and is guaranteed by us on a limited recourse basis to the extent of such ownership interests.
New Financings
On April 23, 2010, our operating subsidiaries entered into an incremental facility agreement that provided for a new term loan under the credit facility in the principal amount of $250.0 million (“Term Loan E”), and borrowed the full amount thereunder. The proceeds from Term Loan E were used to repay the outstanding balance of both Term Loan A and the revolving credit portion of the credit facility, without any reduction in the revolving credit commitments and to pay related fees and expenses. Following the borrowing of Term Loan E, there were three term loans outstanding under the credit facility (Term Loan C, Term Loan D and Term Loan E).
Borrowings under Term Loan E bear interest at a floating rate or rates equal to the Eurodollar Rate or the Base Rate (as such terms are defined in the credit agreement), plus a margin of 3.00% for Eurodollar Rate loans and a margin of 2.00% for Base Rate loans. For the first four years of Term Loan E, the Eurodollar Rate will be subject to a floor of 1.50% and the Base Rate will be subject to a floor of 2.50%. Term Loan E matures on October 23, 2017, and is subject to quarterly reductions of 0.25% of the original principal amount. The obligations of our operating subsidiaries under Term Loan E are governed by the terms of the credit agreement.
On April 23, 2010, the credit agreement for the credit facility was amended to:
• | extend the termination date with respect to $225.2 million of the revolving credit portion of the credit facility from September 30, 2011 to December 31, 2014 (or June 30, 2014 if Term Loan C under the credit facility has not been repaid or refinanced prior to June 30, 2014); |
• | maintain the termination date of September 30, 2011 with respect to $79.0 million of the revolving credit commitments; |
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• | reduce the aggregate of the revolving credit commitments from $400.0 million to $304.2 million as of April 23, 2010; and |
• | permit additional incremental facility term loans in an aggregate principal amount equal to not more than 100% of any future reductions in the revolving credit commitments. |
In addition, the financial covenants were amended as follows:
• | the maximum senior leverage ratio, which is currently 6.0 to 1.0, will be reduced to 5.5 to 1.0 commencing with the quarter ending December 31, 2011 and 5.0 to 1.0 commencing with the quarter ending December 31, 2012 and thereafter, so long as any revolving credit commitments remain outstanding; |
• | the minimum interest coverage ratio will be 2.0 to 1.0 as of the last day of any fiscal quarter ending after April 23, 2010, so long as any revolving credit commitments remain outstanding; and |
• | after the termination of all revolving credit commitments, the maximum senior leverage ratio will increase to 6.0 to 1.0 and the interest coverage ratio covenant will no longer be applicable. |
Senior Notes
As of September 30, 2010, we had an aggregate $350.0 million of senior notes outstanding. The indenture governing our senior notes contains various covenants, though they are generally less restrictive than those found in our credit facility. As of such date, the principal financial covenant of these senior notes had a limitation on the incurrence of additional indebtedness based upon a maximum ratio of indebtedness to annualized operating cash flow (the “total leverage ratio”) of 8.5 to 1.0. As of September 30, 2010, the total leverage ratio was 6.1 to 1.0. The terms “indebtedness” and “operating cash flow” are defined in the indenture governing our senior notes. These covenants also restrict our ability, among other things, to make certain distributions, investments and other restricted payments, sell certain assets, create certain liens, merge, consolidate or sell substantially all of our assets and enter into certain transactions with affiliates.
Interest Rate Swaps
We use interest rate exchange agreements, or interest rate swaps, in order to fix the rate of the applicable Eurodollar portion of debt under the credit facility to reduce the potential volatility in our interest expense that would otherwise result from changes in market interest rates. Our interest rate swaps have not been designated as hedges for accounting purposes, and have been accounted for on a mark-to-market basis as of, and for, the three and nine months ended September 30, 2010 and 2009.
As of September 30, 2010, we had interest rate swaps with various banks pursuant to which the interest rate on $600 million of floating rate debt was fixed at a weighted average rate of 3.0%. Our current interest rate swaps are scheduled to expire in the amounts of $100 million, $300 million and $200 million during the years ended December 31, 2010, 2011 and 2012, respectively.
As of September 30, 2010, we had entered into forward-starting interest rate swaps that will fix rates for: (i) a four-year period at a weighted average rate of 3.1% in the amount of $200 million, which will commence in December 2010; (ii) a two-year period at a weighted average rate of 2.7% in the amount of $200 million, which will commence in December 2010; (iii) a three-year period at a rate of 3.5% in the amount of $100 million, which will commence in December 2011; and (iv) a two-year period at a rate of 3.8% in the amount of $100 million, which will commence in December 2012.
The fair value of our interest rate swaps is the estimated amount that we would receive or pay to terminate such agreements, taking into account market interest rates and the remaining time to maturities. As of September 30, 2010, based upon mark-to-market valuation, we recorded on our consolidated balance sheet an accumulated current liability of $20.0 million and an accumulated long-term liability of $30.8 million. As of December 31, 2009, based upon mark-to-market valuation, we recorded on our consolidated balance sheet a long-term asset of $3.1 million, an accumulated current liability of $17.9 million and an accumulated long-term liability of $4.9 million.
As a result of the mark-to-market valuations on these interest rate swaps, we recorded net losses on derivatives of $10.3 million and $3.3 million for the three months ended September 30, 2010 and 2009, respectively, and a net loss on derivatives of $31.1 million and a net gain on derivatives of $7.8 million for the nine months ended September 30, 2010 and 2009, respectively.
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Covenant Compliance and Debt Ratings
For all periods through September 30, 2010, we were in compliance with all of the covenants under the credit facility and senior note arrangements. There are no covenants, events of default, borrowing conditions or other terms in the credit facility or senior note arrangements that are based on changes in our credit rating assigned by any rating agency.
Our future access to the debt markets and the terms and conditions we receive are influenced by our debt ratings. Our corporate credit ratings are B1, with a stable outlook, by Moody’s, and B+, with a stable outlook, by Standard and Poor’s. Any future downgrade to our credit ratings could result in higher interest rates on future debt issuance than we currently experience, or adversely impact our ability to raise additional funds.
Fair Value
As of September 30, 2010, the fair values of our credit facility and senior notes are as follows (dollars in thousands):
Bank credit facility | $ | 1,131,217 | ||
9⅛% senior notes due 2019 | $ | 363,125 | ||
7. MEMBERS’ DEFICIT
Share-based Compensation
Total share-based compensation expense for the three months ended September 30, 2010 and 2009, was as follows (dollars in thousands):
Three Months Ended | ||||||||
September 30, | ||||||||
2010 | 2009 | |||||||
Share-based compensation expense by type of award: | ||||||||
Employee stock options | $ | 7 | $ | 7 | ||||
Employee stock purchase plan | 23 | 25 | ||||||
Restricted stock units | 116 | 119 | ||||||
Total share-based compensation expense | $ | 146 | $ | 151 | ||||
During the three months ended September 30, 2010, no restricted stock units or stock options were granted to our employees under MCC’s compensation programs. Each of the restricted stock units and stock options in MCC’s stock compensation programs are exchangeable and exercisable into a share of MCC’s Class A common stock. During the three months ended September 30, 2010, no restricted stock units vested and no stock options were exercised.
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Total share-based compensation expense for the nine months ended September 30, 2010 and 2009, was as follows (dollars in thousands):
Nine Months Ended | ||||||||
September 30, | ||||||||
2010 | 2009 | |||||||
Share-based compensation expense by type of award: | ||||||||
Employee stock options | $ | 20 | $ | 22 | ||||
Employee stock purchase plan | 61 | 72 | ||||||
Restricted stock units | 348 | 341 | ||||||
Total share-based compensation expense | $ | 429 | $ | 435 | ||||
During the nine months ended September 30, 2010, approximately 68,000 restricted stock units and no stock options were granted to our employees under MCC’s compensation programs. The weighted average fair values associated with these grants were $4.25 per restricted stock unit. During the nine months ended September 30, 2010, approximately 63,000 restricted stock units were vested and no stock options were exercised.
Employee Stock Purchase Plan
Pursuant to MCC’s employee stock purchase plan, our employees are allowed to participate in the purchase of shares of MCC’s Class A common stock at a 15% discount. Due to the timing of the share purchases under our plan, there were no shares purchased by employees, nor were there any net proceeds received by MCC, for each of the three months ended September 30, 2010 and 2009. Shares purchased by our employees under MCC’s plan amounted to approximately 23,000 and 31,000 for the nine months ended September 30, 2010 and September 30, 2009, respectively. The net proceeds from our employees were approximately $0.1 million for each of the nine months ended September 30, 2010 and 2009.
8. INVESTMENT IN AFFILIATED COMPANY
We have a $150 million preferred equity investment in Mediacom Broadband LLC (“Mediacom Broadband”), a wholly owned subsidiary of MCC. The preferred equity investment has a 12% annual cash dividend, payable quarterly. During each of the three months ended September 30, 2010 and 2009, we received in aggregate $4.5 million in cash dividends on the preferred equity. During each of the nine months ended September 30, 2010 and 2009, we received in aggregate $13.5 million in cash dividends on the preferred equity.
9. COMMITMENTS AND CONTINGENCIES
Legal Proceedings
We are named as a defendant in a putative class action, captionedGary Ogg and Janice Ogg v. Mediacom LLC, pending in the Circuit Court of Clay County, Missouri, originally filed in April 2001. The lawsuit alleges that we, in areas where there was no cable franchise, failed to obtain permission from landowners to place our fiber interconnection cable notwithstanding the possession of agreements or permission from other third parties. While the parties continue to contest liability, there also remains a dispute as to the proper measure of damages. Based on a report by their experts, the plaintiffs claim compensatory damages of approximately $14.5 million. Legal fees, prejudgment interest, potential punitive damages and other costs could increase that estimate to approximately $26.0 million. Before trial, the plaintiffs proposed an alternative damage theory of $42.0 million in compensatory damages. Notwithstanding the verdict in the trial described below, we remain unable to reasonably determine the amount of our final liability in this lawsuit. Prior to trial our experts estimated our liability to be within the range of approximately $0.1 million to $2.3 million. This estimate did not include any estimate of damages for prejudgment interest, attorneys’ fees or punitive damages.
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On March 9, 2009, a jury trial commenced solely for the claim of Gary and Janice Ogg, the designated class representatives. On March 18, 2009, the jury rendered a verdict in favor of Gary and Janice Ogg setting compensatory damages of $8,863 and punitive damages of $35,000. The Court did not enter a final judgment on this verdict and therefore the amount of the verdict cannot at this time be judicially collected. Although we believe that the particular circumstances of each class member may result in a different measure of damages for each member, if the same measure of compensatory damages was used for each member, the aggregate compensatory damages would be approximately $16.2 million plus the possibility of an award of attorneys’ fees, prejudgment interest, and punitive damages. We are vigorously defending against the claims made by the other members of the class, including filing and responding to post trial motions, which include filing a motion to decertify the class and responding to the plaintiffs’ summary judgment motion, and preparing for subsequent trials, and an appeal, if necessary.
We believe that the amount of actual liability would not have a significant effect on our consolidated financial position, results of operations, cash flows or business. There can be no assurance, however, that the actual liability ultimately determined for all members of the class would not exceed our estimated range or any amount derived from the verdict rendered on March 18, 2009. We have tendered the lawsuit to our insurance carrier for defense and indemnification. The carrier has agreed to defend us under a reservation of rights, and a declaratory judgment action is pending regarding the carrier’s defense and coverage responsibilities.
A purported class action in the United States District Court for the Southern District of New York entitledJim Knight v. Mediacom Communications Corp., in which MCC is named as the defendant, was filed on March 4, 2010. The complaint asserts that the potential class is comprised of all persons who purchased premium cable services from MCC and rented a cable box distributed by MCC. The plaintiff alleges that MCC improperly “ties” the rental of cable boxes to the provision of premium cable services in violation of Section 1 of the Sherman Antitrust Act. The plaintiff also alleges a claim for unjust enrichment and seeks injunctive relief and unspecified damages. MCC was served with the complaint on April 16, 2010. MCC believes they have substantial defenses to the claims asserted in the complaint, and they intend to defend the action vigorously. If MCC is not successful in this litigation, we may have to distribute cash to MCC in order for MCC to pay any damages in regard to this litigation.
Commencing in June 2010, three shareholder class action lawsuits were filed against Mediacom Communications Corporation and its individual directors, all in the Court of Chancery in the State of Delaware under the captions,Colleen Witmer v. Mediacom Communications Corporation et al., J. Malcolm Gray v. Mediacom Communications Corporation et al.andHaverhill Retirement System v. Mediacom Communications Corporation et al.The lawsuits, which were consolidated for all purposes in the Delaware Chancery Court, derived from the previously disclosed offer by Rocco B. Commisso to acquire all of the outstanding shares of MCC common stock not already owned by Mr. Commisso, and allege breach of fiduciary duty and aiding and abetting such breaches, and seek injunctive relief or in the alternative, compensatory damages.
We, our parent company and other subsidiaries or affiliated companies are also involved in various other legal actions arising in the ordinary course of business. In the opinion of management, the ultimate disposition of these other matters will not have a material adverse effect on our consolidated financial position, results of operations, cash flows or business.
10. RELATED PARTY TRANSACTION
Share Exchange Agreement between MCC and an affiliate of Morris Communications
On September 7, 2008, MCC entered into a Share Exchange Agreement (the “Exchange Agreement”) with Shivers Investments, LLC (“Shivers”) and Shivers Trading & Operating Company (“STOC”). Both STOC and Shivers are affiliates of Morris Communications Company, LLC (“Morris Communications”).
On February 13, 2009, MCC completed the Exchange Agreement pursuant to which it exchanged 100% of the shares of stock of a wholly-owned subsidiary, which held approximately $110 million of cash and non-strategic cable systems serving approximately 25,000 basic subscribers contributed to MCC by us, for 28,309,674 shares of MCC Class A common stock held by Shivers.
Asset Transfer Agreement with MCC and Mediacom Broadband
On February 11, 2009, certain of our operating subsidiaries executed an Asset Transfer Agreement (the “Transfer Agreement”) with MCC and the operating subsidiaries of Mediacom Broadband, pursuant to which certain of our cable systems located in Florida, Illinois, Iowa, Kansas, Missouri and Wisconsin, which serve approximately 45,900 basic subscribers would be exchanged for certain of Mediacom Broadband’s cable systems located in Illinois, which served approximately 42,200 basic subscribers, and a cash payment of $8.2 million (the “Asset Transfer”). The Asset Transfer was completed on February 13, 2009 (the “transfer date”). No gain or loss was recorded on the Asset Transfer because we and Mediacom Broadband are under common control.
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As part of the Transfer Agreement, we contributed to MCC cable systems located in Western North Carolina, which served approximately 25,000 basic subscribers. These cable systems were part of the Exchange Agreement noted above. In connection therewith, we received a $74 million cash contribution on February 12, 2009, of which funds had been contributed to MCC by Mediacom Broadband on the same date.
In total, we received $82.2 million under the Transfer Agreement (the “Transfer Proceeds”), which were used by us to repay a portion of the outstanding balance under the revolving commitments of our operating subsidiaries’ bank credit facility.
On February 12, 2009, after giving effect to the debt repayment funded by the Transfer Proceeds, our operating subsidiaries borrowed approximately $110 million under the revolving commitments of our bank credit facility. This represented net new borrowings of about $28 million. On February 12, 2009, we contributed approximately $110 million to MCC to fund its cash obligation under the Exchange Agreement.
The net assets of the cable systems we received as part of the Asset Transfer were accounted for as a transfer of businesses under common control in accordance with ASC 805. Under this method of accounting: (i) the net assets we received have been recorded at Mediacom Broadband’s carrying amounts; (ii) the net assets of the cable systems we transferred to Mediacom Broadband through MCC were removed from our consolidated balance sheet at net book value on the transfer date; (iii) for the cable systems we received, we recorded their results of operations as if the transfer date was January 1, 2009; and (iv) for the cable systems we transferred to Mediacom Broadband through MCC, we ceased recording those results of operations as of the transfer date. As a result of the Transfer Agreement and Asset Transfer, there was an excess in the net book value of assets exchanged equal to $63.2 million, which is presented in our Consolidated Statements of Cash Flows, Non-Cash Transactions — Financing, for 2009.
We recognized an additional $5.5 million in revenues and $1.7 million of net income, for the period January 1, 2009 through the transfer date, because we recorded the results of operations for the cable systems we received as part of the Asset Transfer, as if the transfer date was January 1, 2009. This $1.7 million of cash flows was recorded under the caption capital contributions from parent on our Consolidated Statements of Cash Flows for the nine months ended September 30, 2009.
The financial statements for the periods prior to January 1, 2009 were not adjusted for the receipt of net assets because the net assets did not meet the definition of a business under generally accepted accounting principles in effect prior to the adoption of ASC 805.
11. GOODWILL AND OTHER INTANGIBLE ASSETS
In accordance with ASC 350 —Intangibles — Goodwill and Other(“ASC 350”) (formerly SFAS No. 142,“Goodwill and Other Intangible Assets”),the amortization of goodwill and indefinite-lived intangible assets is prohibited and requires such assets to be tested annually for impairment, or more frequently if impairment indicators arise. We have determined that our cable franchise rights and goodwill are indefinite-lived assets and therefore not amortizable.
We directly assess the value of cable franchise rights for impairment under ASC 350 by utilizing a discounted cash flow methodology. In performing an impairment test in accordance with ASC 350, we make assumptions, such as future cash flow expectations, customer growth, competition, industry outlook, capital expenditures, and other future benefits related to cable franchise rights, which are consistent with the expectations of buyers and sellers of cable systems in determining fair value. If the determined fair value of our cable franchise rights is less than the carrying amount on the financial statements, an impairment charge would be recognized for the difference between the fair value and the carrying value of such assets.
Goodwill impairment is determined using a two-step process. The first step compares the fair value of a reporting unit with our carrying amount, including goodwill. If the fair value of a reporting unit exceeds our carrying amount, goodwill of the reporting unit is considered not impaired and the second step is unnecessary. If the carrying amount of a reporting unit exceeds our fair value, the second step is performed to measure the amount of impairment loss, if any. The second step compares the implied fair value of the reporting unit’s goodwill, calculated using the residual method, with the carrying amount of that goodwill. If the carrying amount of the goodwill exceeds the implied fair value, the excess is recognized as an impairment loss. We have determined that for the purpose of applying ASC 350, Mediacom LLC and its subsidiaries is our only reporting unit. Our most recently completed annual impairment test was conducted as of October 1, 2009, and we will be conducting our next annual impairment test as of October 1, 2010.
The economic conditions currently affecting the U.S. economy and the long-term impact on the fundamentals of our business may have a negative impact on the fair values of the assets in our reporting units. This may result in the recognition of an impairment loss in the future.
Because we believe there has not been a meaningful change in the long-term fundamentals of our business during the first nine months of 2010, we have determined that there has been no triggering event under ASC 350, and as such, no interim impairment test was required as of September 30, 2010.
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with our unaudited consolidated financial statements as of, and for the three and nine months ended September 30, 2010 and 2009, and with our annual report on Form 10-K for the year ended December 31, 2009.
Overview
We are a wholly-owned subsidiary of Mediacom Communications Corporation (“MCC”). MCC is the nation’s eighth largest cable company based on the number of customers who purchase one or more video services, also known as basic subscribers. Through our interactive broadband network, we provide our customers with a wide variety of advanced products and services, including video services, such as video-on-demand, high-definition television (“HDTV”) and digital video recorders (“DVRs”), high-speed data (“HSD”) and phone service. We offer the triple-play bundle of video, HSD and phone over a single communications platform, a significant advantage over most competitors in our service areas.
As of September 30, 2010, we offered our bundle of video, HSD and phone services to approximately 92% of our estimated 1.29 million homes passed in twenty states. As of the same date, we served approximately 535,000 basic subscribers, 317,000 digital video customers, 374,000 HSD customers and 153,000 phone customers, aggregating 1.38 million revenue generating units (“RGUs”).
Our basic and digital video services compete principally with direct broadcast satellite (“DBS”) companies, and we continue to face significant levels of price competition from these providers, who offer video programming substantially similar to ours. We compete with these providers by offering our triple-play bundle and interactive video services that are unavailable to DBS customers due to the limited two-way interactivity of DBS service. Our HSD service competes primarily with digital subscriber line (“DSL”) services offered by local telephone companies; based upon the speeds we offer, we believe our HSD product is superior to comparable DSL offerings in our service areas. Our phone service mainly competes with substantially comparable phone services offered by local telephone companies and with cellular phone services offered by national wireless providers. We believe our customers prefer the cost savings of the bundled products and services we offer, as well as the convenience of having a single provider contact for ordering, provisioning, billing and customer care.
Our ability to continue to grow our customer base and revenues is dependent on a number of factors, including the competition we face and general economic conditions. As a result of continuing weak economic conditions and significant price competition from DBS providers, we have seen lower demand for our video, HSD and phone services, which has led to a reduction in basic subscribers and slower growth rates of digital, HSD and phone customers. Consequently, we believe we will experience lower revenue growth for the full year 2010 than in prior years. A continuation or broadening of such effects may adversely impact our results of operations, cash flows and financial position.
Recent Developments
New Financings
On April 23, 2010, we completed financing transactions (the “new financings”) that provided for a new term loan in the principal amount of $250 million and amendments to our existing bank credit facility (the “credit facility”) which, among other things, extended the termination date on certain of our total revolving credit commitments, and reduced the commitments thereunder. The net proceeds from the new term loan were used to repay an existing term loan and the full balance of outstanding revolving credit loans under our credit facility. See “Liquidity and Capital Resources — Capital Structure — New Financings” below and Note 6 in our Notes to Consolidated Financial Statements for more information.
Revenues, Costs and Expenses
Video revenues primarily represent monthly subscription fees charged to customers for our core cable products and services (including basic and digital cable programming services, wire maintenance, equipment rental and services to commercial establishments), pay-per-view charges, installation, reconnection and late payment fees, franchise fees and other ancillary revenues. HSD revenues primarily represent monthly fees charged to customers (including small to medium sized commercial establishments) for our HSD products and services and equipment rental fees, as well as fees charged to large-sized businesses for our scalable, fiber- based enterprise network products and services. Phone revenues primarily represent monthly fees charged to customers (including small to medium sized commercial establishments) for our phone service. Advertising revenues represent the sale of advertising placed on our video services.
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If we continue to lose video customers as a result of competition and weak economic conditions, our video revenues could continue to decline for the foreseeable future. However, we believe this will be mostly offset through increased gains in penetration of our advanced video services as well as rate increases. We expect further growth in HSD and phone revenues, as we believe we will continue to expand our penetration of our HSD and phone services. However, future growth in HSD and phone customers may be adversely affected by intensifying competition, weakened economic conditions and, specific to phone, wireless substitution. We expect advertising revenues to continue to stabilize during the remainder of 2010, given improving economic conditions and the impact of political elections.
Service costs consist primarily of video programming costs and other direct costs related to providing and maintaining services to our customers. Significant service costs include: programming expenses; wages and salaries of technical personnel who maintain our cable network, perform customer installation activities and provide customer support; HSD costs, including costs of bandwidth connectivity and customer provisioning and costs related to our enterprise networks business and our network operations center; phone service costs, including delivery and other expenses; and field operating costs, including outside contractors, vehicle, utilities and pole rental expenses. These costs generally rise because of customer growth, contractual increases in video programming rates and inflationary cost increases for personnel, outside vendors and other expenses. Costs relating to personnel and their support may increase as the percentage of our expenses that we can capitalize declines due to lower levels of new service installations. Service delivery related costs may also fluctuate with the level of investment we make, and corresponding operational efficiencies achieved by such investments. We anticipate that our service costs will continue to grow, but should remain fairly consistent as a percentage of our revenues, with the exception of programming costs, which we discuss below.
Video programming expenses, which are generally paid on a per subscriber basis, have historically been our largest single expense item, and in recent years we have experienced substantial increases in the cost of our programming, particularly sports and local broadcast programming, well in excess of the inflation rate or the change in the consumer price index. We believe that these expenses will continue to grow due to the increasing demands of sports and other large programmers for contract renewals and television broadcast station owners for retransmission consent fees, including certain large programmers who also own major market television broadcast stations. While such growth in programming expenses can be partially offset by rate increases, it is expected that our video gross margins will continue to decline, as increases in programming costs outpace any growth in video revenues.
Significant selling, general and administrative expenses include: wages and salaries for our call centers, customer service and support and administrative personnel; franchise fees and taxes; marketing; bad debt; billing; advertising; and office costs related to telecommunications and office administration. These costs typically rise because of customer growth and inflationary cost increases for employees and other expenses, but we expect such costs should remain fairly consistent as a percentage of revenues.
Management fee expenses reflect compensation of corporate employees and other corporate overhead.
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Use of Non-GAAP Financial Measures
“Adjusted OIBDA” is not a financial measure calculated in accordance with generally accepted accounting principles (“GAAP”) in the United States. We define Adjusted OIBDA as operating income before depreciation and amortization and non-cash, share-based compensation charges. Adjusted OIBDA has inherent limitations as discussed below.
Adjusted OIBDA is one of the primary measures used by management to evaluate our performance and to forecast future results. We believe Adjusted OIBDA is useful for investors because it enables them to assess our performance in a manner similar to the methods used by management, and provides a measure that can be used to analyze, value and compare the companies in the cable industry. A limitation of Adjusted OIBDA, however, is that it excludes depreciation and amortization, which represents the periodic costs of certain capitalized tangible and intangible assets used in generating revenues in our business. Management uses a separate process to budget, measure and evaluate capital expenditures. In addition, Adjusted OIBDA also has the limitation of not reflecting the effect of our non-cash, share-based compensation charges. We believe that excluding share-based compensation allows investors to better understand our performance without the effects of these obligations that are not expected to be settled in cash. Adjusted OIBDA may not be comparable to similarly titled measures used by other companies, which may have different depreciation and amortization policies, as well as different share-based compensation programs.
Adjusted OIBDA should not be regarded as an alternative to operating income or net income (loss) as indicators of operating performance, or to the statement of cash flows as measures of liquidity, nor should it be considered in isolation or as a substitute for financial measures prepared in accordance with GAAP. We believe that operating income is the most directly comparable GAAP financial measure to Adjusted OIBDA.
Actual Results of Operations
Three Months Ended September 30, 2010 compared to Three Months Ended September 30, 2009
The table below sets forth our consolidated statements of operations and Adjusted OIBDA for the three months ended September 30, 2010 and 2009 (dollars in thousands and percentage changes that are not meaningful are marked NM).
Three Months Ended | ||||||||||||||||
September 30, | ||||||||||||||||
2010 | 2009 | $ Change | % Change | |||||||||||||
Revenues | $ | 163,564 | $ | 157,802 | $ | 5,762 | 3.7 | % | ||||||||
Costs and expenses: | ||||||||||||||||
Service costs (exclusive of depreciation and amortization) | 74,278 | 70,747 | 3,531 | 5.0 | % | |||||||||||
Selling, general and administrative expenses | 28,282 | 27,276 | 1,006 | 3.7 | % | |||||||||||
Management fee expense | 3,093 | 3,026 | 67 | 2.2 | % | |||||||||||
Depreciation and amortization | 26,593 | 27,687 | (1,094 | ) | (4.0 | %) | ||||||||||
Operating income | 31,318 | 29,066 | 2,252 | 7.7 | % | |||||||||||
Interest expense, net | (23,543 | ) | (23,415 | ) | (128 | ) | 0.5 | % | ||||||||
Loss on derivatives, net | (10,255 | ) | (3,300 | ) | (6,955 | ) | NM | |||||||||
Loss on early extinguishment of debt | — | (5,899 | ) | 5,899 | NM | |||||||||||
Investment income from affiliate | 4,500 | 4,500 | — | NM | ||||||||||||
Other expense, net | (717 | ) | (1,143 | ) | 426 | (37.3 | %) | |||||||||
Net income (loss) | $ | 1,303 | $ | (191 | ) | $ | 1,494 | NM | ||||||||
Adjusted OIBDA | $ | 58,057 | $ | 56,904 | $ | 1,153 | 2.0 | % | ||||||||
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The table below represents a reconciliation of Adjusted OIBDA to operating income, which is the most directly comparable GAAP measure (dollars in thousands).
Three Months Ended | ||||||||||||||||
September 30, | ||||||||||||||||
2010 | 2009 | $ Change | % Change | |||||||||||||
Adjusted OIBDA | $ | 58,057 | $ | 56,904 | $ | 1,153 | 2.0 | % | ||||||||
Non-cash, share-based compensation | (146 | ) | (151 | ) | 5 | (3.3 | %) | |||||||||
Depreciation and amortization | (26,593 | ) | (27,687 | ) | 1,094 | (4.0 | %) | |||||||||
Operating income | $ | 31,318 | $ | 29,066 | $ | 2,252 | 7.7 | % | ||||||||
Revenues
The tables below set forth our revenues and selected subscriber, customer and average monthly revenue statistics as of, and for the three months ended, September 30, 2010 and 2009 (dollars in thousands, except per subscriber data).
Three Months Ended | ||||||||||||||||
September 30, | ||||||||||||||||
2010 | 2009 | $ Change | % Change | |||||||||||||
Video | $ | 100,298 | $ | 100,341 | $ | (43 | ) | (0.0 | %) | |||||||
HSD | 44,348 | 40,224 | 4,124 | 10.3 | % | |||||||||||
Phone | 14,681 | 13,390 | 1,291 | 9.6 | % | |||||||||||
Advertising | 4,237 | 3,847 | 390 | 10.1 | % | |||||||||||
Total Revenues | $ | 163,564 | $ | 157,802 | $ | 5,762 | 3.7 | % | ||||||||
September 30, | Increase/ | |||||||||||||||
2010 | 2009 | (Decrease) | % Change | |||||||||||||
Basic subscribers | 535,000 | 561,000 | (26,000 | ) | (4.6 | %) | ||||||||||
Digital customers | 317,000 | 296,000 | 21,000 | 7.1 | % | |||||||||||
HSD customers | 374,000 | 345,000 | 29,000 | 8.4 | % | |||||||||||
Phone customers | 153,000 | 128,000 | 25,000 | 19.5 | % | |||||||||||
RGUs(1) | 1,379,000 | 1,330,000 | 49,000 | 3.7 | % | |||||||||||
Average total monthly revenue per basic subscriber (2) | $ | 101.53 | $ | 93.26 | $ | 8.27 | 8.9 | % |
(1) | RGUs represent the total of basic subscribers and digital, HSD and phone customers. | |
(2) | Represents total average monthly revenues for the quarter divided by total average basic subscribers for such period. |
Revenues grew $5.8 million, or 3.7%, primarily due to higher HSD and, to a much lesser extent, phone revenues. Average total monthly revenue per basic subscriber increased $8.27, or 8.9%, to $101.53.
Video revenues were essentially flat, largely as a result of a lower number of basic subscribers, mostly offset by basic video rate increases and higher revenues from our digital, DVR and HDTV services. During the three months ended September 30, 2010, we lost 4,000 basic subscribers and gained 6,000 digital customers, as compared to a loss of 6,000 basic subscribers and an increase of 4,000 digital customers in the prior year period. As of September 30, 2010, we served 535,000 basic subscribers, representing a penetration of 41.4% of our estimated homes passed, and 317,000 digital customers, representing a penetration of 59.3% of our basic subscribers. As of September 30, 2010, 43.0% of our digital customers were taking our DVR and/or HDTV services, as compared to 35.7% as of the same date last year.
HSD revenues rose $4.1 million, or 10.3%, principally due to an 8.4% increase in HSD customers. During the three months ended September 30, 2010, we gained 7,000 HSD customers, as compared to an increase of 6,000 in the prior year period. As of September 30, 2010, we served 374,000 HSD customers, representing a penetration of 29.0% of our estimated homes passed.
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Phone revenues grew $1.3 million, or 9.6%, mainly due to a 19.5% increase in phone customers, offset in part by higher levels of discounted pricing. During each of the three months ended September 30, 2010 and 2009, we gained 4,000 phone customers. As of September 30, 2010, we served 153,000 phone customers, representing a penetration of 12.9% of our estimated marketable phone homes.
Advertising revenues were $0.4 million, or 10.1%, higher primarily due to increased national and, to a lesser extent, local sales, with significant contributions from the political category.
Costs and Expenses
Service costs grew $3.5 million, or 5.0%, primarily due to higher programming expenses and, to a much lesser extent, phone service costs, offset in part by lower HSD delivery expenses. Programming expenses increased 6.6%, principally due to higher contractual rates charged by our programming vendors, offset in part by a lower number of video customers. Phone service costs grew 15.6%, mainly due to unit growth. HSD delivery expenses fell 21.7%, principally due to cost savings provided by the transition to an internally managed e-mail system for our customers. Service costs as a percentage of revenues were 45.4% and 44.8% for the three months ended September 30, 2010 and 2009, respectively.
Selling, general and administrative expenses increased $1.0 million, or 3.7%, largely as a result of higher office, bad debt and marketing expenses. Office costs rose 18.8%, primarily due to increased building rent expenses. Bad debt expense grew 11.6%, primarily due to greater collection costs. Marketing costs increased 5.2%, largely as a result of a greater use of print and broadcast advertising and higher employee costs, offset in part by a reduction in third party direct sales. Selling, general and administrative expenses as a percentage of revenues were 17.3% for each of the three months ended September 30, 2010 and 2009.
Management fee expense was $0.1 million, or 2.2%, higher reflecting slightly higher overhead charges at MCC. Management fee expense as a percentage of revenues were 1.9% for each of the three months ended September 30, 2010 and 2009.
Depreciation and amortization fell $1.1 million, or 4.0%, largely as a result of drop-offs of certain fully depreciated assets, mostly offset by greater deployment of shorter-lived customer premise equipment.
Adjusted OIBDA
Adjusted OIBDA increased $1.2 million, or 2.0%, due to greater revenues, offset in part by higher service costs and, to a lesser extent, selling general and administrative expenses.
Operating Income
Operating income grew $2.3 million, or 7.7%, as a result of increased Adjusted OIBDA and the decline in depreciation and amortization.
Interest Expense, Net
Interest expense, net, was $0.1 million, or 0.5%, higher principally due to greater amortization of deferred financing costs.
Loss on Derivatives, Net
As of September 30, 2010, we had interest rate exchange agreements, or interest rate swaps, with an aggregate notional amount of $1.2 billion, of which $600 million are forward-starting interest rate swaps. These swaps have not been designated as hedges for accounting purposes. The changes in their mark-to-market values are derived primarily from changes in market interest rates and the decrease in their time to maturity. As a result of the quarterly mark-to-market valuation of these interest rate swaps based upon information provided by our counterparties, we recorded a net loss on derivatives of $10.3 million and $3.3 million for the three months ended September 30, 2010 and 2009, respectively. Our net loss on derivatives was due to lower expectations of future market interest rates, leading to a decline in the valuation of our interest rate swaps, mainly those that become effective at future dates.
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Loss on Early Extinguishment of Debt
Loss on early extinguishment of debt totaled $5.9 million for the three months ended September 30, 2009. This amount included the write-off of deferred financing costs associated with the redemption of certain of our senior notes and, to a lesser extent, fees related to such redemption. For more information on the new financings, see “Liquidity and Capital Resources —Capital Structure — New Financings.”
Investment Income from Affiliate
Investment income from affiliate was $4.5 million for each of the three months ended September 30, 2010 and 2009. This amount represents the investment income on our $150.0 million preferred equity investment in Mediacom Broadband.
Other Expense, Net
Other expense, net, was $0.7 million and $1.1 million for the three months ended September 30, 2010 and 2009, respectively. During the three months ended September 30, 2010, other expense, net, consisted of $0.6 million of revolving credit facility commitment fees and $0.1 million of other fees. During the three months ended September 30, 2009, other expense, net, consisted of $0.9 million of commitment fees and $0.2 million of deferred financing costs.
Net Income (Loss)
As a result of the factors described above, we recognized net income of $1.3 million for the three months ended September 30, 2010, compared to a net loss of $0.2 million for the prior year period.
Actual Results of Operations
Nine Months Ended September 30, 2010 compared to Nine Months Ended September 30, 2009
On February 11, 2009 (the “Transfer Date”), certain of our operating subsidiaries executed an Asset Transfer Agreement (the “Transfer Agreement”) with MCC and the operating subsidiaries of Mediacom Broadband LLC (“Mediacom Broadband”). As part of the Transfer Agreement, we contributed to MCC cable systems located in Western North Carolina (the “WNC Systems”), and exchanged certain of our cable systems for certain of Mediacom Broadband’s cable systems (the “Asset Transfer”). During the nine months ended September 30, 2009, the WNC Systems recorded $2.7 million of total revenues, $1.4 million of service costs, $0.5 million of selling, general and administrative expenses and $0.9 million of operating income; the results of operations of the exchanged cable systems between us and Mediacom Broadband were substantially similar. The net effects of the Transfer Agreement were the reduction of 28,700 basic subscribers, 9,000 digital customers, 12,000 HSD customers and 2,400 phone customers. Such effects on discussions of subscriber and customer gains and losses are referred to as the “effect of the Transfer Agreement.”
In accordance with ASC 805, the cable systems we received from Mediacom Broadband under the Transfer Agreement were recorded as a business under common control, and therefore we recorded the results of operations of such systems as if the transfer date was January 1, 2009. However, for the cable systems we transferred to Mediacom Broadband, we recorded the results of operations, comprising $5.3 million of revenues and $1.7 million of net income, for the period of January 1, 2009 through the transfer date. Where the inclusion of such results of operations of these transferred cable systems in the prior year’s data may affect comparisons to 2010 results, the effect of such 2009 results are referred to as “related to the Asset Transfer.”
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For more information, see Note 10 in our Notes to Consolidated Financial Statements.
The tables below set forth our consolidated statements of operations for the nine months ended September 30, 2010 and 2009 (dollars in thousands and percentage changes that are not meaningful are marked NM).
Nine Months Ended | ||||||||||||||||
September 30, | ||||||||||||||||
2010 | 2009 | $ Change | % Change | |||||||||||||
Revenues | $ | 487,203 | $ | 476,805 | $ | 10,398 | 2.2 | % | ||||||||
Costs and expenses: | ||||||||||||||||
Service costs (exclusive of depreciation and amortization) | 218,780 | 212,346 | 6,434 | 3.0 | % | |||||||||||
Selling, general and administrative expenses | 82,018 | 81,343 | 675 | 0.8 | % | |||||||||||
Management fee expense | 9,108 | 9,004 | 104 | 1.2 | % | |||||||||||
Depreciation and amortization | 80,803 | 84,154 | (3,351 | ) | (4.0 | %) | ||||||||||
Operating income | 96,494 | 89,958 | 6,536 | 7.3 | % | |||||||||||
Interest expense, net | (68,973 | ) | (68,737 | ) | (236 | ) | 0.3 | % | ||||||||
(Loss) gain on derivatives, net | (31,139 | ) | 7,793 | (38,932 | ) | NM | ||||||||||
Loss on sale of cable systems, net | — | (377 | ) | 377 | NM | |||||||||||
Loss on early extinguishment of debt | (1,234 | ) | (5,899 | ) | 4,665 | NM | ||||||||||
Investment income from affiliate | 13,500 | 13,500 | — | NM | ||||||||||||
Other expense, net | (2,136 | ) | (2,895 | ) | 759 | (26.2 | %) | |||||||||
Net income | $ | 6,512 | $ | 33,343 | $ | (26,831 | ) | (80.5 | %) | |||||||
Adjusted OIBDA | $ | 177,726 | $ | 174,547 | $ | 3,179 | 1.8 | % | ||||||||
The table below represents a reconciliation of Adjusted OIBDA to operating income, which is the most directly comparable GAAP measure (dollars in thousands).
Nine Months Ended | ||||||||||||||||
September 30, | ||||||||||||||||
2010 | 2009 | $ Change | % Change | |||||||||||||
Adjusted OIBDA | $ | 177,726 | $ | 174,547 | $ | 3,179 | 1.8 | % | ||||||||
Non-cash, share-based compensation | (429 | ) | (435 | ) | 6 | (1.4 | %) | |||||||||
Depreciation and amortization | (80,803 | ) | (84,154 | ) | 3,351 | (4.0 | %) | |||||||||
Operating income | $ | 96,494 | $ | 89,958 | $ | 6,536 | 7.3 | % | ||||||||
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Revenues
The tables below set forth our revenues and selected subscriber, customer and average monthly revenue statistics as of, and for the nine months ended, September 30, 2010 and 2009 (dollars in thousands, except per subscriber data).
Nine Months Ended | ||||||||||||||||
September 30, | ||||||||||||||||
2010 | 2009 | $ Change | % Change | |||||||||||||
Video | $ | 300,202 | $ | 306,343 | $ | (6,141 | ) | (2.0 | %) | |||||||
HSD | 131,079 | 120,111 | 10,968 | 9.1 | % | |||||||||||
Phone | 43,597 | 38,658 | 4,939 | 12.8 | % | |||||||||||
Advertising | 12,325 | 11,693 | 632 | 5.4 | % | |||||||||||
Total Revenues | $ | 487,203 | $ | 476,805 | $ | 10,398 | 2.2 | % | ||||||||
September 30, | Increase/ | |||||||||||||||
2010 | 2009 | (Decrease) | % Change | |||||||||||||
Basic subscribers | 535,000 | 561,000 | (26,000 | ) | (4.6 | %) | ||||||||||
Digital customers | 317,000 | 296,000 | 21,000 | 7.1 | % | |||||||||||
HSD customers | 374,000 | 345,000 | 29,000 | 8.4 | % | |||||||||||
Phone customers | 153,000 | 128,000 | 25,000 | 19.5 | % | |||||||||||
RGUs | 1,379,000 | 1,330,000 | 49,000 | 3.7 | % | |||||||||||
Average total monthly revenue per basic subscriber | $ | 99.97 | $ | 91.18 | $ | 8.79 | 9.6 | % |
Revenues increased $10.4 million, or 2.2%, largely as a result of higher HSD and, to a lesser extent, phone revenues, offset in part by a decline in video revenues and an unfavorable comparison to the prior year period, in which we recognized $5.5 million of revenues related to the Asset Transfer. Average total monthly revenue per basic subscriber rose $8.79, or 9.6%, to $99.97.
Video revenues fell $6.1 million, or 2.0%, primarily due to a lower number of basic subscribers and, to a lesser extent, an unfavorable comparison to the prior year period, in which we recognized $3.6 million of video revenues related to the Asset Transfer, offset in part by video rate increases and higher revenues from our digital, DVR and HDTV services. During the nine months ended September 30, 2010, we lost 13,000 basic subscribers and gained 17,000 digital customers, as compared to a loss of 11,300 basic subscribers and an increase of 17,000 digital customers in the prior year period, excluding the effect of the Transfer Agreement.
HSD revenues grew $11.0 million, or 9.1%, principally due to the increase in HSD customers, offset in part by an unfavorable comparison to the prior year period, in which we recognized $1.5 million of HSD revenues related to the Asset Transfer. During the nine months ended September 30, 2010, we gained 24,000 HSD customers, as compared to an increase of 20,000 in the prior year period, excluding the effect of the Transfer Agreement.
Phone revenues rose $4.9 million, or 12.8%, mainly due to the increase in phone customers, offset in part by higher levels of discounted pricing. During the nine months ended September 30, 2010, we gained 18,000 phone customers, as compared to an increase of 16,400 in the prior year period, excluding the effect of the Transfer Agreement.
Advertising revenues were $0.6 million, or 5.4%, higher primarily due to increased national and, to a lesser extent, local advertising sales, with significant contributions from the political and automotive categories, offset in part by an unfavorable comparison to the prior year period, in which we recognized $0.4 million of advertising revenues related to the Asset Transfer.
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Costs and Expenses
Service costs increased $6.4 million, or 3.0%, primarily due to higher programming and, to a lesser extent, phone service and field operating costs, offset in part by lower HSD delivery expenses and an unfavorable comparison to the prior year period, in which we recognized $2.5 million of service costs related to the Asset Transfer. The following analysis of service cost components excludes the effects of the Asset Transfer. Programming expenses increased 5.8%, principally due to higher contractual rates charged by our programming vendors, offset in part by a lower number of video customers. Phone service costs rose 12.5%, mainly due to unit growth. Field operating costs were 4.3% higher, largely as a result of higher vehicle fuel, fiber lease and electricity costs, partly offset by lower pole rental costs. HSD delivery expenses fell 30.6%, principally due to the transition to an internally managed e-mail system for our customers. Service costs as a percentage of revenues were 44.9% and 44.5% for the nine months ended September 30, 2010 and 2009, respectively.
Selling, general and administrative were $0.7 million, or 0.8%, higher mainly due to bad debt and office expenses, mostly offset by lower employee costs and an unfavorable comparison to the prior year period, in which we recognized $0.8 million of selling, general and administrative expenses related to the Asset Transfer. The following analysis of selling, general and administrative expenses excludes the effects of the Asset Transfer. Bad debt expense grew 10.1%, largely as a result of an increase in the aging of our accounts receivable and, to a lesser extent, greater collection costs. Office costs were 8.3% higher, reflecting greater overall costs. Employee costs decreased 4.8%, primarily due to a favorable shift in employee benefit expenses. Selling, general and administrative expenses as a percentage of revenues were 16.8% and 17.1% for the nine months ended September 30, 2010 and 2009, respectively.
Management fee expense increased $0.1 million, or 1.2%, reflecting slightly higher overhead charges at MCC. Management fee expenses as a percentage of revenues were 1.9% for each of the nine months ended September 30, 2010 and 2009.
Depreciation and amortization fell $3.4 million, or 4.0%, largely as a result of an favorable comparison to the prior year period in which we experienced write-offs related to ice storms, and, to a lesser extent, the drop-offs of certain fully depreciated assets, offset in part by greater deployment of shorter-lived customer premise equipment.
Adjusted OIBDA
Adjusted OIBDA grew $3.2 million, or 1.8%, largely as a result of greater revenues, offset in part by higher service costs and, to a lesser extent, an unfavorable comparison to the prior year period, in which we recognized $2.2 million of Adjusted OIBDA related to the Asset Transfer and increased selling, general and administrative expenses.
Operating Income
Operating income grew $6.5 million, or 7.3%, mainly due to the growth in Adjusted OIBDA and the decline in depreciation and amortization.
Interest Expense, Net
Interest expense, net, increased $0.2 million, or 0.3%, principally due to greater amortization of deferred financing costs.
(Loss) Gain on Derivatives, Net
We recorded a net loss on derivatives of $31.1 million and a net gain on derivatives of $7.8 million for the nine months ended September 30, 2010 and 2009, respectively. Our net loss on derivatives was due to lower expectations of future market interest rates, leading to a decline in the valuation of our interest rate swaps, mainly those that become effective at future dates.
Loss on Sale of Cable Systems, Net
For the nine months ended September 30, 2009, we recognized a loss on sale of cable systems, net, of approximately $0.4 million related to minor transactions.
Loss on Early Extinguishment of Debt
Loss on early extinguishment of debt totaled $1.2 million for the nine months ended September 30, 2010, representing the write-off of certain deferred financing costs associated with prior financings that were repaid during the period. For more information on the new financings, see “Liquidity and Capital Resources —Capital Structure — New Financings.” Loss on early extinguishment of debt totaled $5.9 million for the nine months ended September 30, 2009, representing the write-off of deferred financing costs associated with certain of our redeemed senior notes and, to a lesser extent, fees related to such redemption.
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Other Expense, Net
Other expense, net, was $2.1 million and $2.9 million for the nine months ended September 30, 2010 and 2009, respectively. During the nine months ended September 30, 2010, other expense, net, consisted of $1.7 million of revolving credit facility commitment fees and $0.4 million of other fees. During the nine months ended September 30, 2009, other expense, net, consisted of $1.9 million of commitment fees, $0.7 million of deferred financing costs and $0.3 million of other fees.
Net Income
As a result of the factors described above, we recognized net income of $6.5 million for the nine months ended September 30, 2010, compared to net income of $33.3 million for the prior year period.
Liquidity and Capital Resources
Overview
Our net cash flows provided by operating and financing activities are used primarily to fund network investments to accommodate customer growth and the further deployment of our advanced products and services, as well as scheduled repayments of our external financing and contributions to our parent. We expect that cash generated by us or available to us will meet our anticipated capital and liquidity needs for the foreseeable future, including scheduled term loan maturities during the remainder of 2010 of $3.0 million and in each of the years ending December 31, 2011 through December 31, 2014 of $12.0 million. As of September 30, 2010, our sources of liquidity included $7.1 million of cash and cash equivalents on hand and $303.8 million of unused and available lines under our revolving credit facility.
In the longer term, specifically 2015 and beyond, we do not expect to generate sufficient net cash flows from operations to fund our maturing term loans and senior notes. If we are unable to obtain sufficient future financing or, if we not able to do so on similar terms as we currently experience, we may need to take other actions to conserve or raise capital that we would not take otherwise. However, we have accessed the debt markets for significant amounts of capital in the past, and expect to continue to be able to access these markets in the future as necessary.
Net Cash Flows Provided by Operating Activities
Net cash flows provided by operating activities were $53.1 million for the nine months ended September 30, 2010, primarily due to Adjusted OIBDA of $177.7 million and, to a much lesser extent, investment income from affiliate of $13.5 million, offset in part by interest expense of $69.0 million and the net change in operating assets and liabilities of $69.4 million. The net change in operating assets and liabilities was substantially due to a decrease in accounts payable, accrued expenses and other current liabilities of $71.8 million, which includes a $65.9 million decline in accounts payable to affiliate.
Net cash flows provided by operating activities were $112.2 million for the nine months ended September 30, 2009, primarily due to Adjusted OIBDA of $174.5 million and, to a much lesser extent, investment income from affiliate of $13.5 million, offset in part by interest expense of $68.7 million. The net change in our operating assets and liabilities was $3.2 million, largely as a result of a decrease in accounts payable, accrued expenses and other current liabilities of $3.7 million and an increase in accounts receivable, net, of $2.2 million, offset in part by higher prepaid expenses and other assets of $2.0 million and an increase in deferred revenue of $0.9 million.
Net Cash Flows Used in Investing Activities
Capital expenditures continue to be our primary use of capital resources and the majority of our net cash flows used in investing activities. Net cash flows used in investing activities were $80.0 million for the nine months ended September 30, 2010, as compared to $69.6 million for the prior year period. The $10.4 million increase in net cash flows used in investing activities was due to an $8.8 million investment in restricted cash and cash equivalents and, to a lesser extent, $1.6 million of greater capital spending. The increase in capital spending largely reflects greater investments in our internal phone platform and, to a much lesser extent, high-speed data delivery system, mostly offset by reduced outlays for network improvements, customer premise equipment and vehicles.
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Net Cash Flows Provided By (Used in) Financing Activities
Net cash flows provided by financing activities were $25.2 million for the nine months ended September 30, 2010, primarily due to capital contributions from parent of $60.0 million and, to a lesser extent, net borrowings of $12.0 million under our bank credit facility (see “New Financings” below), offset in part by capital distributions to parent of $37.0 million and, to a much lesser extent, financing costs of $6.9 million and other financing activities, principally book overdrafts, of $2.9 million.
Net cash flows used in financing activities were $37.1 million for the nine months ended September 30, 2009, principally due to the redemption of $625.0 million of senior notes and, to a much lesser extent, capital contributions to parent of $180.0 million and $23.9 million of financing costs, which were largely funded by the issuance of $350.0 million of senior notes due August 2019, net borrowings of $292.0 million under our bank credit facility, including a new $300.0 million term loan, and capital contributions from parent of $152.2 million. In February 2009, we made a $110.0 million capital contribution to parent to fund its cash obligation under the Exchange Agreement. At the same time, we received an $82.2 million capital contribution from parent under the Transfer Agreement, comprising an $8.2 million payment related to the Asset Transfer, and a $74.0 million payment for our contribution of the WNC Systems to MCC. See Note 10 in our Notes to Consolidated Financial Statements.
Capital Structure
As of September 30, 2010, our outstanding total indebtedness was $1.522 billion, of which approximately 62% was at fixed interest rates or subject to interest rate protection. During the nine months ended September 30, 2010, we paid cash interest of $77.0 million, net of capitalized interest.
Bank Credit Facility
As of September 30, 2010, we had a $1.476 billion bank credit facility (the “credit facility”), of which $1.172 billion was outstanding. The credit agreement governing the credit facility contains various covenants that, among other things, impose certain limitations on mergers and acquisitions, consolidations and sales of certain assets, liens, the incurrence of additional indebtedness, certain restricted payments and certain transactions with affiliates. See Note 6 in our Notes to Consolidated Financial Statements for information regarding material financial covenants.
As of September 30, 2010, we had no outstanding balance under our $304.2 million revolving credit facility, with $303.8 million of unused lines after taking into account $0.4 million of letters of credit issued under the credit facility. As of the same date, based on the terms and conditions of our debt arrangements, all of our unused revolving credit lines were available to be borrowed and used for general corporate purposes. Our revolving credit commitments are scheduled to expire in the amounts of $79.0 million and $225.2 million on September 30, 2011 and December 31, 2014, respectively, and are not subject to scheduled reductions prior to maturity.
New Financings
On April 23, 2010, we completed new financings that provided for a new term loan under our existing credit facility in the aggregate principal amount of $250 million. The new term loan matures in October 2017, and beginning on September 30, 2010, will be subject to quarterly reductions of 0.25%, with a final payment at maturity representing 92.75% of the original principal amount. The net proceeds of the new term loan were largely used to repay an existing term loan and the full balance of outstanding revolving credit loans under our credit facility. On the same date, we also reduced the total revolving credit commitments under our revolving credit facility from $400.0 million to $304.2 million, while extending the termination date with respect to $225.2 million of such commitments to December 31, 2014. As a result of these transactions, we believe our overall liquidity position has strengthened. See Note 6 in our Notes to Consolidated Financial Statements for further information on the new financings.
Interest Rate Swaps
We use interest rate exchange agreements, or interest rate swaps, in order to fix the rate of the applicable Eurodollar portion of debt under the credit facility to reduce the potential volatility in our interest expense that would otherwise result from changes in market interest rates. As of September 30, 2010, we had interest rate swaps with various banks pursuant to which the interest rate on $600 million of floating rate debt was fixed at a weighted average rate of 3.0%. We also had $600 million of forward starting interest rate swaps with a weighted average fixed rate of approximately 3.2% of which $400 million, $100 million and $100 million commence during the years ended December 31, 2010, 2011 and 2012, respectively. Including the effects of such interest rate swaps, the average interest rates on outstanding debt under our bank credit facility as of September 30, 2010 and 2009 were 4.8% and 4.2%, respectively.
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Senior Notes
As of September 30, 2010, we had $350.0 million of senior notes outstanding. The indentures governing our senior notes also contain various covenants, though they are generally less restrictive than those found in our credit facility. Such covenants restrict our ability, among other things, make certain distributions, investments and other restricted payments, sell certain assets, to make restricted payments, create certain liens, merge, consolidate or sell substantially all of our assets and enter into certain transactions with affiliates. See Note 6 in our Notes to Consolidated Financial Statements for information regarding material financial covenants.
Covenant Compliance and Debt Ratings
For all periods through September 30, 2010, we were in compliance with all of the covenants under the credit facility and senior note arrangements. There are no covenants, events of default, borrowing conditions or other terms in the credit facility or senior note arrangements that are based on changes in our credit rating assigned by any rating agency.
Our future access to the debt markets and the terms and conditions we receive are influenced by our debt ratings. Our corporate credit ratings are B1, with a stable outlook, by Moody’s, and B+, with a stable outlook, by Standard and Poor’s. Any future downgrade to our credit ratings could result in higher interest rates on future debt issuance than we currently experience, or adversely impact our ability to raise additional funds.
Contractual Obligations and Commercial Commitments
Other than the items noted above in“Capital Structure— New Financings,”there have been no material changes to our contractual obligations and commercial commitments as previously disclosed in our annual report on Form 10-K for the year ended December 31, 2009.
The following table updates our contractual obligations and commercial commitments for debt and interest expense after giving effect to the new financings, which occurred in the second quarter of 2010, and the effects they are expected to have on our liquidity and cash flow, for the five years subsequent to June 30, 2010 and thereafter (dollars in thousands)*:
Interest | ||||||||||||
Debt | Expense (1) | Total | ||||||||||
July 1, 2010 to June 30, 2011 | $ | 12,000 | $ | 87,525 | $ | 99,525 | ||||||
July 1, 2011 to June 30, 2013 | 24,000 | 170,310 | 194,310 | |||||||||
July 1, 2013 to June 30, 2015 | 618,750 | 137,080 | 755,830 | |||||||||
Thereafter | 870,250 | 163,321 | 1,033,571 | |||||||||
Total cash obligations | $ | 1,525,000 | $ | 558,236 | $ | 2,083,236 | ||||||
* | Refer to Note 6 in our Notes to Consolidated Financial Statements for a discussion of the new financings. The amounts included in the table herein reflect our contractual obligations and commercial commitments as of June 30, 2010. | |
(1) | Interest payments on floating rate debt and interest rate swaps are estimated using amounts outstanding, and scheduled amortizations, as of June 30, 2010 and the average interest rates applicable under such debt obligations. |
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Critical Accounting Policies
The preparation of our financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. Periodically, we evaluate our estimates, including those related to doubtful accounts, long-lived assets, capitalized costs and accruals. We base our estimates on historical experience and on various other assumptions that we believe are reasonable. Actual results may differ from these estimates under different assumptions or conditions. We believe that the application of the critical accounting policies requires significant judgments and estimates on the part of management. For a summary of our critical accounting policies, please refer to our annual report on Form 10-K for the year ended December 31, 2009.
Goodwill and Other Intangible Assets
In accordance with the Financial Accounting Standards Board’s Accounting Standards Codification No. 350Intangibles — Goodwill and Other(“ASC 350”), the amortization of goodwill and indefinite-lived intangible assets is prohibited and requires such assets to be tested annually for impairment, or more frequently if impairment indicators arise. We have determined that our cable franchise rights and goodwill are indefinite-lived assets and therefore not amortizable.
We directly assess the value of cable franchise rights for impairment under ASC 350 by utilizing a discounted cash flow methodology. In performing an impairment test in accordance with ASC 350, we make assumptions, such as future cash flow expectations, unit growth, competition, industry outlook, capital expenditures, and other future benefits related to cable franchise rights, which are consistent with the expectations of buyers and sellers of cable systems in determining fair value. If the determined fair value of our cable franchise rights is less than the carrying amount on the financial statements, an impairment charge would be recognized for the difference between the fair value and the carrying value of such assets.
Goodwill impairment is determined using a two-step process. The first step compares the fair value of a reporting unit with our carrying amount, including goodwill. If the fair value of a reporting unit exceeds our carrying amount, goodwill of the reporting unit is considered not impaired and the second step is unnecessary. If the carrying amount of a reporting unit exceeds our fair value, the second step is performed to measure the amount of impairment loss, if any. The second step compares the implied fair value of the reporting unit’s goodwill, calculated using the residual method, with the carrying amount of that goodwill. If the carrying amount of the goodwill exceeds the implied fair value, the excess is recognized as an impairment loss. We have determined that for the purpose of applying ASC 350, Mediacom LLC and its subsidiaries is our only reporting unit. Our most recently completed annual impairment test was conducted as of October 1, 2009, and we will be conducting our next annual impairment test as of October 1, 2010.
The economic conditions currently affecting the U.S. economy and the long-term impact on the fundamentals of our business may have a negative impact on the fair values of the assets in our reporting units. This may result in the recognition of an impairment loss in the future. Because we believe there has not been a meaningful change in the long-term fundamentals of our business during the first nine months of 2010, we have determined that there has been no triggering event under ASC 350, and as such, no interim impairment test was required as of September 30, 2010.
Inflation and Changing Prices
Our systems’ costs and expenses are subject to inflation and price fluctuations. Such changes in costs and expenses can generally be passed through to subscribers. Programming costs have historically increased at rates in excess of inflation and are expected to continue to do so. We believe that under the Federal Communications Commission’s existing cable rate regulations we may increase rates for cable television services to more than cover any increases in programming. However, competitive conditions and other factors in the marketplace may limit our ability to increase our rates.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no significant changes to the information required under this Item from what was disclosed in Item 7A of our Annual Report on Form 10-K for the year ended December 31, 2009.
ITEM 4. CONTROLS AND PROCEDURES
Mediacom LLC
Under the supervision and with the participation of the management of Mediacom LLC, including Mediacom LLC’s Chief Executive Officer and Chief Financial Officer, Mediacom LLC evaluated the effectiveness of Mediacom LLC’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) as of the end of the period covered by this report. Based upon that evaluation, Mediacom LLC’s Chief Executive Officer and Chief Financial Officer concluded that Mediacom LLC’s disclosure controls and procedures were effective as of September 30, 2010.
There has not been any change in Mediacom LLC’s internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the quarter ended September 30, 2010 that has materially affected, or is reasonably likely to materially affect, Mediacom LLC’s internal control over financial reporting.
Mediacom Capital Corporation
Under the supervision and with the participation of the management of Mediacom Capital Corporation (“Mediacom Capital”), including Mediacom Capital’s Chief Executive Officer and Chief Financial Officer, Mediacom Capital evaluated the effectiveness of Mediacom Capital’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) as of the end of the period covered by this report. Based upon that evaluation, Mediacom Capital’s Chief Executive Officer and Chief Financial Officer concluded that Mediacom Capital’s disclosure controls and procedures were effective as of September 30, 2010.
There has not been any change in Mediacom Capital’s internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the quarter ended September 30, 2010 that has materially affected, or is reasonably likely to materially affect, Mediacom Capital’s internal control over financial reporting.
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PART II
ITEM 1. LEGAL PROCEEDINGS
See Note 9 in our Notes to Consolidated Financial Statements.
ITEM 1A. RISK FACTORS
There have been no material changes in our risk factors from those disclosed in our Annual Report on Form 10-K for the year ended December 31, 2009.
ITEM 6. EXHIBITS
Exhibit | ||||
Number | Exhibit Description | |||
31.1 | Rule 15d-14(a) Certifications of Mediacom LLC | |||
31.2 | Rule 15d-14(a) Certifications of Mediacom Capital Corporation | |||
32.1 | Section 1350 Certifications of Mediacom LLC | |||
32.2 | Section 1350 Certifications of Mediacom Capital Corporation |
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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 LLC | ||||
November 12, 2010 | By: | /s/ Mark E. Stephan | ||
Mark E. Stephan | ||||
Executive Vice President and Chief Financial Officer |
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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 CAPITAL CORPORATION | ||||
November 12, 2010 | By: | /s/ Mark E. Stephan | ||
Mark E. Stephan | ||||
Executive Vice President and Chief Financial Officer |
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