SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
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Quarterly Report Pursuant to Section 13 or 15 (d) of the
Securities Exchange Act of 1934
For the quarterly period ended September 30, 2001
Commission File Numbers: 333-72440
333-72440-01
Mediacom Broadband LLC
Mediacom Broadband Corporation*
(Exact names of Registrants as specified in their charters)
Delaware 06-1615412
Delaware 06-1630167
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Numbers)
100 Crystal Run Road
Middletown, New York 10941
(Address of principal executive offices)
(845) 695-2600
(Registrants' telephone number)
Indicate by check mark whether the Registrants (1) have filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrants were required to file such reports), and (2) have been subject to
such filing requirements for the past 90 days:
Yes No X
--- ---
Indicate the number of shares outstanding of the Registrants' common stock:
Not Applicable
*Mediacom Broadband 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 BROADBAND LLC AND SUBSIDIARIES
FORM 10-Q
FOR THE PERIOD ENDED SEPTEMBER 30, 2001
TABLE OF CONTENTS
PART I
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Page
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Item 1. Financial Statements
Mediacom Broadband LLC
----------------------
Consolidated Balance Sheets -
September 30, 2001 (unaudited)............................................................ 1
Consolidated Statements of Operations -
Three Months Ended September 30, 2001 and Period from Inception (April 5, 2001) through
September 30, 2001 (unaudited)............................................................ 2
Consolidated Statements of Cash Flows-
Period from Inception (April 5, 2001) through September 30, 2001 (unaudited).............. 3
Notes to Consolidated Financial Statements (unaudited)....................................... 4
Mediacom Systems (Predecessor Company)
--------------------------------------
Combined Balance Sheets -
July 18, 2001 (unaudited) and December 31, 2000........................................... 8
Combined Statements of Operations and Parent's Investment -
Period from July 1, 2001 through July 18, 2001, Three Months Ended September 30, 2000,
Period from January 1, 2001 through July 18, 2001 and Nine Months Ended September 30, 2000
(unaudited)............................................................................... 9
Combined Statements of Cash Flows -
Period from January 1, 2001 through July 18, 2001 and Nine Months Ended
September 30, 2000 (unaudited)............................................................ 10
Notes to Combined Financial Statements (unaudited)........................................... 11
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations................................................ 16
Item 3. Quantitative and Qualitative Disclosures about
Market Risk.................................................................................. 23
PART II
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Item 6. Exhibits and Reports on Form 8-K............................................................... 24
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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
Securities and Exchange Commission (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 "may," "will," "should," "expects," "plans," "anticipates,"
"believes," "estimates," "predicts," "potential," or "continue" or the negative
of those words and other comparable words. You should be aware that those
statements are only our predictions. Actual events or results may differ
materially. In evaluating those statements, you should specifically consider
various factors, including the risks discussed in our exchange offer prospectus
dated November 7, 2001 and other reports or documents that we file from time to
time with the SEC. Those factors may cause our actual results to differ
materially from any of our forward-looking statements. All forward-looking
statements attributable to us or a person acting on our behalf are expressly
qualified in their entirety by this cautionary statement.
PART I
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ITEM 1. FINANCIAL STATEMENTS - MEDIACOM BROADBAND LLC
MEDIACOM BROADBAND LLC AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(All dollar amounts in 000's)
September 30,
2001
-----------
ASSETS (Unaudited)
Cash and cash equivalents $ 12,249
Subscriber accounts receivable, net of allowance for
doubtful accounts of $1,184 20,586
Prepaid expenses and other assets 5,605
Investment in cable television systems:
Inventory 4,203
Property, plant and equipment, net of accumulated
depreciation of $15,710 550,534
Intangible assets, net of accumulated amortization
of $17,844 1,575,555
-----------
Total investment in cable television systems 2,130,292
Other assets, net of accumulated amortization of $414 20,204
-----------
Total assets $ 2,188,936
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LIABILITIES, PREFERRED MEMBERS' INTERESTS
AND MEMBER'S EQUITY
LIABILITIES
Debt $ 1,202,000
Accounts payable and accrued expenses 121,307
Management fees payable 1,368
Deferred revenue 10,316
-----------
Total liabilities $ 1,334,991
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PREFERRED MEMBERS' INTERESTS 150,000
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MEMBER'S EQUITY
Capital contributions 725,000
Accumulated deficit (21,055)
-----------
Total member's equity 703,945
-----------
Total liabilities, preferred members' interests and member's equity $ 2,188,936
===========
The accompanying notes to consolidated financial statements
are an integral part of these statements.
1
MEDIACOM BROADBAND LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(All dollar amounts in 000's)
(Unaudited)
Inception
Three Months (April 5, 2001)
Ended through
September 30, September 30,
2001 2001
-------- --------
Revenues $ 97,727 $ 97,940
Costs and expenses:
Service costs 39,590 39,675
Selling, general and administrative expenses 19,039 19,081
Management fee expense 1,368 1,368
Depreciation and amortization 33,818 33,968
-------- --------
Operating income 3,912 3,848
-------- --------
Interest expense, net 20,604 20,848
Other expenses 435 435
-------- --------
Net loss $(17,127) $(17,435)
======== ========
The accompanying notes to consolidated financial statements
are an integral part of these statements.
2
MEDIACOM BROADBAND LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(All dollar amounts in 000's)
(Unaudited)
Inception
(April 5, 2001)
through
September 30,
2001
-----------
CASH FLOWS PROVIDED BY OPERATING ACTIVITIES:
Net loss $ (17,435)
Adjustments to reconcile net loss to net cash flows from operating activities:
Depreciation and amortization 33,968
Changes in assets and liabilities, net of effects from acquisitions:
Subscriber accounts receivable (20,577)
Prepaid expenses and other assets (5,605)
Accounts payable and accrued expenses 79,148
Management fees payable 1,368
Deferred revenue 10,316
-----------
Net cash flows provided by operating activities 81,183
-----------
CASH FLOWS USED IN INVESTING ACTIVITIES:
Capital expenditures (12,533)
Acquisitions of cable television systems (2,109,153)
Other, net (42)
-----------
Net cash flows used in investing activities (2,121,728)
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CASH FLOWS PROVIDED BY FINANCING ACTIVITIES:
New borrowings 1,257,000
Repayment of debt (55,000)
Preferred members' interests 150,000
Dividend payment to affiliate (3,620)
Capital contributions 725,000
Financing costs (20,586)
-----------
Net cash flows provided by financing activities 2,052,794
-----------
Net increase in cash and cash equivalents 12,249
CASH AND CASH EQUIVALENTS, beginning of period --
-----------
CASH AND CASH EQUIVALENTS, end of period $ 12,249
===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid during the period for interest $ 4,280
===========
The accompanying notes to consolidated financial statements
are an integral part of these statements.
3
MEDIACOM BROADBAND LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(1) Organization
Mediacom Broadband LLC ("Mediacom Broadband," and collectively with its
subsidiaries, the "Company"), a Delaware limited liability company, was formed
in April 2001 for the purpose of acquiring cable systems from AT&T Broadband,
LLC ("AT&T Broadband"). Through these cable systems (the "AT&T systems"), the
Company provides entertainment, information and telecommunications services to
its subscribers. As of September 30, 2001, the Company had acquired and was
operating cable television systems in the states of Georgia, Illinois, Iowa and
Missouri.
Mediacom Broadband Corporation, a Delaware corporation wholly-owned by
Mediacom Broadband, was organized in May 2001 for the sole purpose of acting as
co-issuer with Mediacom Broadband of $400.0 million aggregate principal amount
of the 11% senior notes due July 15, 2013. Mediacom Broadband Corporation does
not conduct operations of its own.
The Company was initially capitalized on June 29, 2001 with an equity
contribution of $336.4 million from the Company's parent and manager, Mediacom
Communications Corporation ("MCC"), a Delaware corporation. On July 18, 2001,
the Company received an additional equity contribution of $388.6 million from
MCC and a $150.0 million preferred equity investment from subsidiaries of
Mediacom LLC, a New York limited liability company wholly-owned by MCC.
(2) Statement of Accounting Presentation and Other Information
Basis of Preparation of Consolidated Financial Statements
The consolidated financial statements as of September 30, 2001 are
unaudited. However, in the opinion of management, such statements include all
adjustments necessary for a fair presentation of the results for the periods
presented. The accounting policies followed during such interim periods reported
are in conformity with generally accepted accounting principles and are
consistent with those applied during annual periods. 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,
2001. The unaudited consolidated financial statements and footnote disclosures
should be read in conjunction with the audited combined financial statements and
related notes thereto for the year ended December 31, 2000 as disclosed in the
Company's exchange offer prospectus dated November 7, 2001 filed with the
Securities and Exchange Commission.
Prior to the June 29, 2001 acquisition of certain cable systems from
affiliates of AT&T Broadband the Company had no active business operations (see
Note 3). All financial information required for the periods prior to the dates
of the AT&T systems acquisitions are included in the Mediacom Systems
(Predecessor Company) combined financial statements included in this filing.
Recent Accounting Pronouncements
In July 2001, the Financial Accounting Standards Board ("FASB") issued
Statements of Financial Accounting Standards No. 141, "Business Combinations"
("SFAS 141") and No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142").
SFAS 141 requires all business combinations initiated after June 30, 2001 to be
accounted for using the purchase method. Adoption of SFAS 141 will have no
effect on the Company's results of operations or financial position. Under SFAS
142, goodwill and intangible assets with indefinite lives will no longer be
amortized but reviewed annually for impairment (or more frequently if impairment
indicators arise). Separable intangible assets that are not deemed to have
indefinite lives will continue to be amortized over their useful lives. The
amortization provisions of SFAS 142 apply immediately to goodwill and intangible
assets acquired after June 30, 2001. With respect to goodwill and intangible
assets acquired prior to July 1, 2001, the Company is required to adopt SFAS 142
effective January 1, 2002. The Company is currently evaluating the effect that
SFAS 142 will have on its results of operations and financial position,
including determining whether the Company's franchise licenses should be
4
MEDIACOM BROADBAND LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
accounted for as indefinite life intangible assets. For the periods ended
September 30, 2001, the Company has continued to amortize all intangible assets,
including its franchise licenses. If it is determined that these intangibles
qualify for indefinite life treatment, the Company will cease amortizing them.
In August 2001, the FASB issued Statements of Financial Accounting
Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets" ("SFAS 144"). This statement addresses financial accounting and
reporting for the impairment or disposal of long-lived assets, and provides
guidance on classification and accounting for such assets when held for sale or
abandonment. SFAS 144 is effective for fiscal years beginning after December 15,
2001. The Company does not expect that adoption of SFAS 144 will have a material
effect on its results of operations or financial position.
(3) Acquisitions
On July 18, 2001, the Company acquired cable systems serving approximately
706,000 basic subscribers in the states of Georgia, Illinois and Iowa from
affiliates of AT&T Broadband for an aggregate purchase price of approximately
$1.79 billion. The purchase price has been preliminarily allocated as follows:
approximately $470.0 million to property, plant and equipment and approximately
$1.32 billion to intangible assets. Such allocations are subject to adjustments
based upon the final appraisal information received by the Company. These
acquisitions were financed with MCC's $388.6 million equity contribution on July
18, 2001, the $150.0 million preferred equity investment by subsidiaries of
Mediacom LLC, the net proceeds from the Company's private offering of 11% senior
notes due 2013 and borrowings under the Company's subsidiary credit facilities.
On June 29, 2001, the Company acquired cable systems serving approximately
94,000 basic subscribers in the state of Missouri from affiliates of AT&T
Broadband, LLC, for a purchase price of approximately $308.1 million. The
purchase price has been preliminarily allocated as follows: approximately $83.7
million to property, plant and equipment and approximately $224.4 million to
intangible assets. Such allocations are subject to adjustments based upon the
final appraisal information received by the Company. This acquisition was
financed with MCC's $336.4 million equity contribution on June 29, 2001.
These acquisitions were accounted for using the purchase method of
accounting, and accordingly, the purchase price of each of these acquired
systems has been allocated to the assets acquired and liabilities assumed at
their estimated fair values at their respective dates of acquisition.
Unaudited Pro Forma Information
The Company has reported the operating results of the acquired systems from
the dates of their respective acquisition. The unaudited pro forma operating
results presented below give pro forma effect to the acquisitions of the
acquired systems as if such transactions had been consummated on January 1,
2000. This financial information has been prepared for comparative purposes only
and does not purport to be indicative of the operating results which actually
would have resulted had the acquisitions of the acquired systems been
consummated at the beginning of the period presented.
5
MEDIACOM BROADBAND LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Nine Months Ended September 30,
-------------------------------
2001 2000
----------- -----------
(dollars in thousands)
Revenues................................................................ $ 347,178 $ 323,197
Operating expenses and costs:
Service costs........................................................ 176,329 160,208
Selling, general and administrative expenses......................... 42,081 29,941
Management fee expense............................................... 19,993 15,354
Depreciation and amortization........................................ 137,585 136,868
Restructuring charge 570 -
----------- -----------
Operating loss.......................................................... (29,380) (19,174)
----------- -----------
Net loss................................................................ $ (88,804) $ (110,365)
=========== ===========
(4) Debt
As of September 30, 2001, debt consisted of (dollars in thousands):
Bank credit facilities (a) ....................................... $ 802,000
11% senior notes (b) ............................................. 400,000
----------
$1,202,000
==========
(a) On July 18, 2001, the operating subsidiaries of Mediacom Broadband
entered into a $1.4 billion senior secured credit facility. The
subsidiary credit facility consists of a $600.0 million revolving
credit facility, a $300.0 million tranche A term loan and a $500.0
million tranche B term loan. The revolving credit facility expires on
March 31, 2010 and commitments under the revolving credit facility
will be reduced in quarterly installments beginning on December 31,
2004. The tranche A term loan matures on March 31, 2010 and the
tranche B term loan matures on September 30, 2010. The term loans are
payable in quarterly installments beginning on September 30, 2004.
Interest on outstanding revolving loans and the tranche A term loan is
payable at either the eurodollar rate plus a floating percentage
ranging from 1.00% to 2.50% or the base rate plus a floating
percentage ranging from 0.25% to 1.50%. Interest on tranche B term
loan is payable at either the eurodollar rate plus a floating
percentage ranging from 2.50% to 2.75% or the base rate plus a
floating percentage ranging from 1.50% to 1.75%. The subsidiary credit
facility requires compliance with certain financial covenants
including, but not limited to, leverage, interest coverage and debt
service coverage ratios, as defined therein. The subsidiary credit
facility also requires compliance with other covenants including, but
not limited to, limitations on mergers and acquisitions,
consolidations and sales of certain assets, liens, the incurrence of
additional indebtedness, certain restrictive payments, and certain
transactions with affiliates. The operating subsidiaries of Mediacom
Broadband were in compliance with all covenants of the subsidiary
credit facility as of September 30, 2001.
(b) On June 29, 2001, Mediacom Broadband and Mediacom Broadband
Corporation (the "Issuers") jointly issued $400.0 million aggregate
principal amount of 11% senior notes due June 2013 (the "11% Senior
Notes"). The 11% Senior Notes are unsecured obligations of the
Issuers, and the indenture for the 11% Senior Notes stipulates, among
other things, restrictions on incurrence of indebtedness,
distributions, mergers and asset sales and has cross-default
provisions related to other debt of the Issuers. Interest accrues at
11% per annum, beginning from the date of issuance and is payable
semi-annually on January 15 and July 15 of each year, commencing on
January 15, 2002. The Issuers were in compliance with the indenture
governing the 11% Senior Notes as of September 30, 2001.
6
MEDIACOM BROADBAND LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The average interest rate on outstanding debt under the subsidiary credit
facilities was 6.0% for the three months ended September 30, 2001.
The stated maturities of all debt outstanding as of September 30, 2001 are
as follows (dollars in thousands):
2002........................................................ $ -
2003........................................................ -
2004........................................................ 8,500
2005........................................................ 35,000
2006........................................................ 42,500
Thereafter ................................................. 1,116,000
------------
$ 1,202,000
============
(5) Preferred Members' Interests
On July 18, 2001, the Company received a $150.0 million preferred equity
investment from subsidiaries of Mediacom LLC. The preferred equity investment
has a 12% annual dividend, payable quarterly in cash. The proceeds from the
preferred equity investment were used to fund a portion of the $2.1 billion
purchase price for the Company's acquisitions of the AT&T systems.
(6) Member's Equity
On June 29, 2001, MCC made a $336.4 million equity contribution to the
Company. MCC made an additional $388.6 million equity contribution to the
Company on July 18, 2001. The proceeds from these equity contributions were used
to fund a portion of the $2.1 billion purchase price for the Company's
acquisitions of the AT&T systems.
(7) Recent Developments
The Company utilizes Excite@Home to provide its customers with high-speed
Internet service. On September 28, 2001, Excite@Home filed for Chapter 11
bankruptcy protection in U.S. Bankruptcy Court in San Francisco. On November 30,
2001 the bankruptcy court authorized, but did not direct, Excite@Home to
terminate services to cable customers. On December 3, 2001, the Company entered
into an agreement with Excite@Home that obligates Excite@Home to provide
continuous high-speed Internet service to the Company's customers through the
end of February 2002. This agreement was approved by the bankruptcy court on
December 11, 2001.
The Company's manager has developed and begun to implement a transition
plan that will enable the Company to continue to provide high-speed Internet
service to its customers after February 2002. There can be no assurance that the
Company will be able to continue to provide high-speed Internet service to its
customers without disruptions.
7
ITEM 1. FINANCIAL STATEMENTS - MEDIACOM SYSTEMS (PREDECESSOR COMPANY)
MEDIACOM SYSTEMS (PREDECESSOR COMPANY)
(A combination of certain assets and liabilities, as defined in note 1)
COMBINED BALANCE SHEETS
(in thousands)
July 18, December 31,
2001 2000
------------ -------------
(unaudited)
Assets
Cash and cash equivalents $ 12,056 $ 21,154
Trade and other receivables, net of allowance for doubtful accounts of $798
and $1,649 at July 18, 2001 and December 31, 2000, respectively 7,203 17,306
Property and equipment, at cost:
Land 3,642 4,259
Distribution systems 505,622 539,322
Support equipment and buildings 42,898 48,011
------------ -------------
552,162 591,592
Less accumulated depreciation 138,095 108,600
------------ -------------
Property and equipment, net 414,067 482,992
Intangible assets, net 1,508,314 1,778,941
Other assets 6,467 6,961
------------ -------------
Total assets $ 1,948,107 $ 2,307,354
============ =============
Liabilities and Parent's Investment
Accounts payable $ 2,219 $ 3,291
Accrued liabilities 14,441 20,715
Deferred tax liability 675,629 790,264
------------ -------------
Total liabilities 692,289 814,270
Parent's investment (note 3) 1,255,818 1,493,084
Commitments and contingencies (note 5)
------------ -------------
Total liabilities and parent's investment $ 1,948,107 $ 2,307,354
============ =============
8
MEDIACOM SYSTEMS (PREDECESSOR COMPANY)
(A combination of certain assets and liabilities, as defined in note 1)
COMBINED STATEMENTS OF OPERATIONS AND PARENT'S INVESTMENT
(in thousands)
(Unaudited)
July 1, 2001 Three Months January 1, 2001 Nine Months
through Ended through Ended
July 18, 2001 September 30, 2000 July 18, 2001 September 30, 2000
------------- ------------------ ------------- ------------------
Revenue $ 19,247 $ 110,737 $ 249,238 $ 323,197
Costs and expenses:
Operating (note 3) 12,235 54,809 136,654 160,208
Selling, general and
administrative 2,165 10,676 23,000 29,941
Management fees (note 3) 2,810 6,403 18,625 15,354
Restructuring charge (note 4) -- -- 570 --
Depreciation 3,755 18,795 48,327 53,310
Amortization 2,880 16,023 35,283 48,426
----------- ----------- ----------- -----------
Operating (loss) income before
income taxes (4,598) 4,031 (13,221) 15,958
Gain on disposition of assets -- -- 11,877 --
----------- ----------- ----------- -----------
Net (loss) income before taxes (4,598) 4,031 (1,344) 15,958
Provision for income taxes (benefit) (1,892) 1,611 (933) 6,378
----------- ----------- ----------- -----------
Net (loss) income (2,706) 2,420 (411) 9,580
Parent's investment:
Beginning of period 1,263,755 1,488,382 1,493,084 1,468,567
Change in transfers from parent, net
(note 3) (5,231) 3,198 64,695 15,853
Disposed cable systems -- -- (301,550) --
----------- ----------- ----------- -----------
End of period $ 1,255,818 $ 1,494,000 $ 1,255,818 $ 1,494,000
=========== =========== =========== ===========
9
MEDIACOM SYSTEMS (PREDECESSOR COMPANY)
(A combination of certain assets and liabilities, as defined in note 1)
COMBINED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
January 1, 2001 Nine Months
through Ended
July 18, 2001 September 30, 2000
------------- ------------------
Cash Flows From Operating Activities
Net (loss) income $ (411) $ 9,580
Adjustments to reconcile net income to net cash (used in) provided by
operating activities:
Gain on disposition of assets (11,877) -
Depreciation and amortization 83,610 101,736
Deferred tax benefit (114,635) (18,137)
Changes in operating assets and liabilities:
Decrease (increase) in trade and other receivables 8,658 268
Increase (decrease) in other assets 336 (2,061)
Increase (decrease) in accounts payable (360) (1,819)
Decrease in accrued liabilities (4,432) (207)
--------- ---------
Net cash (used in) provided by operating activities (39,111) 89,360
--------- ---------
Cash Flows From Investing Activities
Capital expenditures for property and equipment (34,490) (103,955)
Other (192) -
--------- ---------
Net cash used in investing activities (34,682) (103,955)
--------- ---------
Cash Flows From Financing Activities
Change in transfers from parent, net 64,695 15,853
--------- ---------
Net change in cash and cash equivalents (9,098) 1,258
Cash and cash equivalents at beginning of period 21,154 18,082
--------- ---------
Cash and cash equivalents at end of period $ 12,056 $ 19,340
========= =========
10
MEDIACOM SYSTEMS (PREDECESSOR COMPANY)
(A combination of certain assets and liabilities, as defined in note 1)
NOTES TO COMBINED FINANCIAL STATEMENTS
(Unaudited)
(1) Basis of Presentation and Summary of Significant Accounting Policies
Effective upon the end of business on June 29, 2001, subsidiaries of AT&T
Corp. ("AT&T") sold to Mediacom Communications Corporation ("Mediacom") certain
cable television systems serving approximately 94,000 customers located
primarily in Missouri, and wholly owned by various cable subsidiaries and
partnerships of AT&T (the "Missouri Mediacom Systems") for cash proceeds of
approximately $308 million. AT&T recognized an estimated gain on the sale of the
Missouri Systems of approximately $12 million. The results of operations and
cash flows of the Missouri Systems are included in the combined financial
statements through June 29, 2001.
Effective July 18, 2001, subsidiaries of AT&T sold to Mediacom certain
cable television systems serving approximately 706,000 customers located
primarily in Iowa, Georgia and Southern Illinois, and wholly owned by various
cable subsidiaries and partnerships of AT&T. These cable systems combined with
the Missouri Mediacom Systems are collectively referred to herein as the
"Mediacom Systems" except that the balance sheet at July 18, 2001, excludes the
Missouri Mediacom Systems sold effective June 29, 2001.
In the opinion of management of the Mediacom Systems, the accompanying
unaudited combined financial statements include all adjustments (consisting of
normal recurring items) necessary for a fair presentation of results for the
interim periods presented by the Mediacom Systems. The results of operations for
any interim period are not necessarily indicative of results for the full year.
The unaudited combined financial statements and footnote disclosures should be
read in conjunction with the audited combined financial statements and related
notes thereto for the year ended December 31, 2000.
The accompanying unaudited combined financial statements include the
specific accounts directly related to the activities of the Mediacom Systems.
All significant inter-system accounts and transactions have been eliminated in
combination. The combined net assets of the Mediacom Systems are referred to as
"Parent's Investment."
On March 9, 1999, AT&T acquired AT&T Broadband, LLC ("AT&T Broadband",
formerly known as Tele-Communications, Inc.) in a merger (the "AT&T Merger"). In
the AT&T Merger, AT&T Broadband became a subsidiary of AT&T. For financial
reporting purposes, the AT&T Merger was deemed to have occurred on March 1,
1999.
Certain costs of AT&T Broadband are charged to the Mediacom Systems based
primarily on Mediacom Systems' number of customers (see note 3). Although such
allocations are not necessarily indicative of the costs that would have been
incurred by the Mediacom Systems on a stand alone basis, management of the
Mediacom Systems believes that the resulting allocated amounts are reasonable.
The net assets of the Mediacom Systems are held by various wholly-owned
subsidiaries and partnerships of AT&T Broadband. Accordingly, the unaudited
combined financial statements of the Mediacom Systems do not reflect all of the
assets, liabilities, revenues and expenses that would be indicative of a
stand-alone business. The financial condition, results of operations and cash
flows of the Mediacom Systems could differ from reported results had the
Mediacom Systems operated autonomously or as an entity independent of AT&T. In
particular, no interest expense incurred by AT&T and its subsidiaries on their
debt obligations has been allocated to the Mediacom Systems.
The Mediacom Systems are included in the consolidated federal income tax
return of AT&T and its affiliates. Combined income tax provisions or benefits,
related to tax payments or refunds, and deferred tax balances of AT&T and its
affiliates have been allocated to the Mediacom Systems based principally on the
taxable income and tax credits directly attributable to the Mediacom Systems,
essentially a stand alone presentation. These allocations reflect the Mediacom
Systems' contribution to AT&T's consolidated taxable income and consolidated tax
liability and tax credit position.
11
MEDIACOM SYSTEMS (PREDECESSOR COMPANY)
(A combination of certain assets and liabilities, as defined in note 1)
NOTES TO COMBINED FINANCIAL STATEMENTS
(Unaudited)
Cash and Cash Equivalents
Cash and cash equivalents consist of deposits with banks and financial
institutions that are unrestricted as to withdrawal or use and have maturities
of less than 90 days.
AT&T performs cash management functions on behalf of AT&T Broadband,
including the Mediacom Systems. Substantially all of the Mediacom Systems' cash
balances are swept to AT&T on a daily basis, where they are managed and invested
by AT&T. Transfers of cash to and from AT&T are reflected as a component of
Parent's investment, with no interest income or expense reflected. Net transfers
to or from AT&T are assumed to be settled in cash. AT&T's capital contributions
for purchase business combinations to the Mediacom Systems have been treated as
non-cash transactions.
Property and Equipment
Property and equipment is stated at cost, including acquisition costs
allocated to tangible assets acquired. Construction costs, labor and applicable
overhead related to installations are capitalized. Interest capitalized was not
significant for any periods presented.
Depreciation is computed on a straight-line basis using estimated useful
lives of 3 to 15 years for distribution systems and 3 to 40 years for support
equipment and buildings.
Repairs and maintenance are charged to operations, and renewals and
additions are capitalized. At the time of ordinary retirements, sales or other
dispositions of property, the original cost and cost of removal of such property
are charged to accumulated depreciation, and salvage, if any, is credited
thereto. Gains or losses are only recognized in connection with the sale of
properties in their entirety.
Intangible Assets
Intangible assets consist primarily of franchise costs and intangibles for
customer relationships. Franchise costs represent the difference between AT&T
Broadband's allocated historical cost of acquired assets of the Mediacom Systems
and amounts allocated to the tangible assets. Franchise costs and customer
relationships are generally amortized on a straight-line basis over 25 to 40 and
10 years, respectively. Costs incurred by the Mediacom Systems in negotiating
and renewing franchise agreements are amortized on a straight-line basis over
the average lives of the franchise, generally 10 to 20 years.
Impairment of Long-lived Assets
Management of the Mediacom Systems periodically reviews the carrying
amounts of property and equipment and its identifiable intangible assets to
determine whether current events or circumstances warrant adjustments to such
carrying amounts. If an impairment adjustment is deemed necessary, based on an
analysis of undiscounted cash flows, such loss is measured by the amount that
the carrying value of such assets exceeds the fair value. Considerable
management judgment is necessary to estimate the fair value of assets,
accordingly, actual results could vary significantly from such estimates. Assets
to be disposed of are carried at the lower of their financial statement carrying
amount or fair value less costs to sell.
12
MEDIACOM SYSTEMS (PREDECESSOR COMPANY)
(A combination of certain assets and liabilities, as defined in note 1)
NOTES TO COMBINED FINANCIAL STATEMENTS
(Unaudited)
Income Taxes
The Mediacom Systems is not a separate taxable entity for federal and state
income tax purposes and its results of operations are included in the
consolidated federal and state income tax returns of AT&T and its affiliates.
The Mediacom Systems' provision or benefit for income taxes is based upon its
contribution to the overall income tax liability or benefit of AT&T and its
affiliates.
Revenue Recognition
Revenue for customer fees, equipment rental, advertising, pay-per-view
programming and revenue sharing agreements is recognized in the period that
services are delivered. Installation revenue is recognized in the period the
installation services are provided to the extent of direct selling costs. Any
remaining amount is deferred and recognized over the estimated average period
that customers are expected to remain connected to the cable distribution
system.
Statement of Cash Flows
Transactions effected through the intercompany account due to (from) parent
have been considered constructive cash receipts and payments for purposes of the
combined statement of cash flows.
Stock-Based Compensation
Stock-based compensation is accounted for in accordance with Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees." The
Mediacom Systems follow the disclosure-only provisions of Statement of Financial
Accounting Standard ("SFAS") No. 123, "Accounting for Stock-Based Compensation."
Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of revenue and
expenses during the reporting period. Actual results could differ from those
estimates.
(2) Supplemental Balance Sheet Information
Intangible assets are summarized as follows (amounts in thousands):
July 18, December 31,
2001 2000
------------ ------------
Franchise costs $ 1,560,198 $ 1,802,251
Other intangible assets 78,124 87,791
------------ ------------
1,638,322 1,890,042
Less accumulated amortization 130,008 111,101
------------ ------------
$ 1,508,314 $ 1,778,941
============ ============
Amortization expense on franchise costs was $30.5 million and $41.8 million
for the periods ending July 18, 2001 and September 30, 2000, respectively.
Amortization expense for other intangible assets was $4.8 million and $6.6
million for the periods ending July 18, 2001 and September 30, respectively.
13
MEDIACOM SYSTEMS (PREDECESSOR COMPANY)
(A combination of certain assets and liabilities, as defined in note 1)
NOTES TO COMBINED FINANCIAL STATEMENTS
(Unaudited)
(3) Parent's Investment
Parent's Investment in the Mediacom Systems is summarized as follows
(amounts in thousands):
July 18, December 31,
2001 2000
----------- ------------
Transfers from parent, net $ 1,228,908 $ 1,465,763
Cumulative net income since March 1, 1999 26,910 27,321
----------- ------------
$ 1,255,818 $ 1,493,084
=========== ============
The non-interest bearing transfers from parent include AT&T Broadband's
equity in acquired systems, programming charges, management fees and advances
for operations, acquisitions and construction costs, as well as the amounts
charged as a result of the allocation of certain costs from AT&T.
As a result of AT&T's 100% ownership of the Mediacom Systems, the transfers
from parent amounts have been classified as a component of Parent's Investment
in the accompanying combined balance sheets.
The Mediacom Systems purchase, at AT&T Broadband's cost, certain pay
television and other programming through a certain indirect subsidiary of AT&T
Broadband. Charges for such programming are included in operating expenses in
the accompanying combined financial statements.
Certain subsidiaries of AT&T Broadband provide administrative services to
the Mediacom Systems and have assumed managerial responsibility of the Mediacom
Systems' cable television system operations and construction. As compensation
for these services, the Mediacom Systems pay a monthly management fee calculated
on a per-subscriber basis.
The parent transfers and expense allocation activity consist of the
following (amounts in thousands):
January 1, 2001 Nine months
through ended
July 18, 2001 September 30, 2000
------------- ------------------
Beginning of period $ 1,465,763 $ 1,451,270
Programming charges 77,287 92,344
Management fees 18,625 15,354
Cash transfers (31,217) (91,845)
Disposal of cable systems (301,550) -
----------- -----------
End of period $ 1,228,908 $ 1,467,123
=========== ===========
(4) Restructuring Charge
As part of a cost reduction plan undertaken by AT&T Broadband in 2001,
approximately 63 employees of the Mediacom Systems were terminated, resulting in
a restructuring charge of approximately $570,000 during the first quarter of
2001. Terminated employees primarily performed customer service and field
operations functions. The restructuring charge consists of severance and other
employee benefits. As of July 18, 2001, all of the charge has been paid in cash.
14
MEDIACOM SYSTEMS (PREDECESSOR COMPANY)
(A combination of certain assets and liabilities, as defined in note 1)
NOTES TO COMBINED FINANCIAL STATEMENTS
(Unaudited)
(5) Commitments and Contingencies
The Cable Television Consumer Protection and Competition Act of 1992 (the
"1992 Cable Act") imposed certain rate regulations on the cable television
industry. Under the 1992 Cable Act, all cable systems are subject to rate
regulation, unless they face "effective competition," as defined by the 1992
Cable Act and expanded in the Telecommunications Act of 1996 (the "1996 Act"),
in their local franchise area.
Although the Federal Communications Commission (the "FCC") has established
regulations required by the 1992 Cable Act, local government units (commonly
referred to as local franchising authorities) are primarily responsible for
administering the regulation of a cable system's basic service tier.
Management of the Mediacom Systems believes that it has complied in all
material respects with the provisions of the 1992 Cable Act and the 1996 Act,
including its rate setting provisions. If, as a result of the review process, a
system cannot substantiate its rates, it could be required to retroactively
reduce its rates to the appropriate benchmark and refund the excess portion of
rates received.
Certain plaintiffs have filed or threatened separate class action
complaints against cable systems across the United States alleging that the
systems' delinquency constitutes an invalid liquidated damage provision, a
breach of contact, and violates local consumer protection statutes. Plaintiffs
seek recovery of all late fees paid to the subject systems as a class purporting
to consist of all subscribers who were assessed such fees during the applicable
limitation period, plus attorney fees and costs. In December 2000, a settlement
agreement was approved by the court with respect to certain late fee class
action complaints, which involves certain subscribers of the Mediacom Systems.
Certain other plaintiff suits involving the Mediacom Systems remain unresolved.
The December 2000 settlement and any future settlements are not expected to have
a material impact on the Mediacom Systems' financial condition or results of
operations.
The Mediacom Systems have contingent liabilities related to legal
proceedings and other matters arising in the ordinary course of business.
Although it is reasonably possible the Mediacom Systems may incur losses upon
conclusion of such matters, an estimate of any loss or range of loss cannot be
made.
15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Introduction
On June 29, 2001, Mediacom Broadband LLC ("Mediacom Broadband" and
collectively with its subsidiaries, the "Company") completed the acquisition of
cable systems in Missouri from affiliates of AT&T Broadband, LLC for a purchase
price of approximately $308.1 million. On July 18, 2001, the Company completed
the acquisition of cable systems in Georgia, Illinois and Iowa from affiliates
of AT&T Broadband for an aggregate purchase price of approximately $1.8 billion
in cash. The Missouri systems, together with the Georgia, Illinois and Iowa
systems, are collectively referred to herein as the "AT&T systems". Prior to
June 29, 2001, the Company had no active business operations.
The following discussion and analysis is based on the Company's financial
condition and results of operations from the dates of acquisition discussed
above and the historical combined financial statements of the AT&T systems
(referred to herein as the Mediacom Systems Combined Financial Statements) prior
to the acquisitions. The Company believes the historical combined financial
statements of the AT&T systems do not reflect changes that have occurred as a
result of the Company's acquisitions. Furthermore, the Company believes the
discussion and analysis of the financial condition and results of operations set
forth below are not indicative nor should they be relied upon as an indicator of
its future performance based upon the following issues:
o Management Fees - The Company's manager, Mediacom Communications
Corporation ("MCC"), a Delaware corporation, replaced AT&T Broadband
as the manager of the AT&T systems, and AT&T Broadband is no longer
entitled to receive management fees from the AT&T systems. For the
nine months ended September 30, 2000 and the period from January 1,
2001 through July 18, 2001, combined management fees for the AT&T
systems represented 4.8% and 7.5%, respectively, of the AT&T systems'
combined revenue. By comparison, for the period from Inception (April
5, 2001) through September 30, 2001, the Company's management fees
represented 1.4% of its revenues.
o Service Costs and Selling, General and Administrative Expenses -
Certain service costs and selling, general and administrative expenses
are classified differently in Company's consolidated statement of
operations than they are in the historical combined financial
statements of the AT&T systems. The principal items which are
classified differently are bad debt expense, franchise fees and taxes
and certain employee expenses. The result of the classification
differences, for the three and nine months ended September 30, 2001,
was to decrease service costs and increase selling, general and
administrative expenses by approximately $9.0 million for each of the
periods.
o Programming - The Company believes that programming costs for its
cable systems will initially increase by up to $7.8 million per annum
because certain volume discounts historically received by such cable
systems from AT&T Broadband are not available under the Company's
manager's existing arrangements with programming suppliers. However,
the Company has begun to achieve certain cost savings relating to
plant operations, employee costs and billing expenses that it believes
will substantially offset the increase to programming costs that it
initially expects to incur. In addition, these cost savings do not
include programming discounts the Company's manager expects to realize
as a result of the significant increase in the number of basic
subscribers it serves with the completion of the AT&T acquisitions.
o Interest Expense - Historically, the AT&T systems had no material
indebtedness and were not otherwise allocated any interest expense by
AT&T Broadband. As a result of the Company's acquisitions of the AT&T
systems and the financings related to such acquisitions, the Company
has a substantial amount of indebtedness.
o Provision for Income Taxes - The AT&T systems are not separate taxable
entities for federal and state income tax purposes and their results
of operations have been included in the consolidated federal and state
income tax returns of AT&T Corp. ("AT&T") and its affiliates. The
provision for income taxes in the historical combined financial
statements of the AT&T systems is based upon the AT&T systems'
contribution to the overall income tax liability or benefit of AT&T
and its affiliates. Under the Company's ownership, the AT&T systems
are organized as limited liability companies and are subject to
minimum income taxes.
16
Organization
Mediacom Broadband was organized as a Delaware limited liability company in
April 2001 and serves as a holding company for its operating subsidiaries. It
commenced operations with the acquisition of the AT&T systems in Missouri on
June 29, 2001. Mediacom Broadband Corporation, Mediacom Broadband's wholly-owned
subsidiary, was organized as a Delaware corporation in May 2001 for the sole
purpose of acting as a co-issuer with Mediacom Broadband of the 11% senior notes
due 2013 and does not conduct operations of its own. Mediacom Broadband's parent
and manager Mediacom Communications Corporation, was organized as a Delaware
corporation in November 1999. See Note 1 of the Company's consolidated financial
statements.
Acquisitions
All acquisitions have been accounted for under the purchase method of
accounting and, therefore, the Company's results of operations include the
results of operations for each acquired system subsequent to its respective
acquisition date.
On July 18, 2001, the Company completed the acquisitions of AT&T systems
serving approximately 706,000 basic subscribers in the states of Georgia,
Illinois and Iowa. The aggregate purchase price for these cable systems was
approximately $1.79 billion, after preliminary closing adjustments. These
transactions include cable systems serving the cities and surrounding
communities of Albany, Columbus, Tifton and Valdosta, Georgia; Charleston,
Carbondale, Effingham, Marion, Moline and Rock Island, Illinois; and Ames, Cedar
Rapids, Clinton, Davenport, Des Moines, Dubuque, Fort Dodge, Iowa City, Mason
City and Waterloo, Iowa.
On June 29, 2001, the Company completed the acquisition of AT&T systems
serving approximately 94,000 basic subscribers in the state of Missouri. The
purchase price for these cable systems was approximately $308.1 million, after
preliminary closing adjustments. This transaction comprises cable systems
serving Columbia, Jefferson City and Springfield, Missouri.
General
EBITDA represents operating loss before depreciation and amortization and
restructuring charge. EBITDA:
o is not intended to be a performance measure that should be regarded as
an alternative either to operating income or net income as an
indicator of operating performance, or to the statement of cash flows
as a measure of liquidity;
o is not intended to represent funds available for debt service,
dividends, reinvestment or other discretionary uses; and
o should not be considered in isolation or as a substitute for measures
of performance prepared in accordance with generally accepted
accounting principles.
EBITDA is included herein because the Company's management believes that EBITDA
is a meaningful measure of performance as it is commonly used by the cable
television industry and by the investment community to analyze and compare cable
television companies. The Company's definition of EBITDA may not be identical to
similarly titled measures reported by other companies.
Results of Operations
The following historical information includes the results of operations of
the Company subsequent to its acquisitions of the AT&T systems on June 29 and
July 18, 2001, and the historical results of predecessor operations prior to
those dates.
17
Three Months Ended September 30, 2001 Compared to Three Months Ended
September 30, 2000
Three Months Ended September 30,
--------------------------------
2001(1) 2000
--------- ---------
(dollars in thousands)
Revenues ............................................... $ 116,974 $ 110,737
Costs and expenses:
Service costs ....................................... 51,825 54,809
Selling, general and
administrative expenses ........................... 21,204 10,676
Management fee expense .............................. 4,178 6,403
Depreciation and amortization ....................... 40,453 34,818
--------- ---------
Operating (loss) income ................................ (686) 4,031
--------- ---------
Interest expense, net .................................. 20,604 -
Other expenses ......................................... 435 -
--------- ---------
Net (loss) income before income taxes .................. $ (21,725) $ 4,031
(Benefit) provision for income taxes ................... (1,892) 1,611
--------- ---------
Net (loss) income ...................................... $ (19,833) $ 2,420
========= =========
Other Data:
EBITDA ................................................. $ 39,767 $ 38,849
EBITDA margin(2) ....................................... 34.0% 35.1%
- ----------
(1) Represents the actual results of the Company's operations July 1, 2001
to September 30, 2001 and the Mediacom Systems combined results of
operations from July 1, 2001 through July 18, 2001. This information is
presented for comparative purposes only.
(2) Represents EBITDA as a percentage of revenues.
Revenues. Revenues increased 5.6% to $117.0 million for the three months
ended September 30, 2001 as compared to $110.7 million for the three months
ended September 30, 2000. Revenues increased principally as a result of an
increase in the average monthly basic service rate charged to subscribers,
growth of cable modem customers and an increase in pay-per-view and advertising
sales revenue, offset in part by a decrease in basic subscribers.
Service costs. Service costs decreased 5.4% to $51.8 million for the three
months ended September 30, 2001 as compared to $54.8 million for the three
months ended September 30, 2000. These costs decreased primarily as a result of
classification differences amounting to approximately $9.0 million, offset by
higher programming expenses and cable modem service costs. As a percentage of
revenues, service costs were 44.3% for the three months ended September 30,
2001, as compared with 49.5% for the three months ended September 30, 2000.
Selling, general and administrative expenses. Selling, general and
administrative expenses increased 98.6% to $21.2 million for the three months
ended September 30, 2001 as compared to $10.7 million for the three months ended
September 30, 2000. These costs increased primarily as a result of
classification differences amounting to approximately $9.0 million and an
increase in marketing, advertising and office expenses. As a percentage of
revenues, selling, general and administrative expenses were 18.1% for the three
months ended September 30, 2001 as compared with 9.6% for the three months ended
September 30, 2000.
Management fee expense. Management fee expense decreased 34.7% to $4.2
million for the three months ended September 30, 2001 as compared to $6.4
million the three months ended September 30, 2000. As a percentage of revenues,
management fee expense was 3.6% for the three months ended September 30, 2001 as
compared with 5.8% for the three months ended September 30, 2000. The decrease
was primarily due to the lower management fees charged to the Company subsequent
to its acquisitions of the AT&T systems.
Depreciation and amortization. Depreciation and amortization increased
16.2% to $40.5 million for the three months ended September 30, 2001 as compared
to $34.8 million for the three months ended September 30, 2000. This increase
was substantially due to the preliminary purchase price allocation in connection
with the Company's acquisitions of the AT&T systems.
18
Interest expense, net. Interest expense, net, was $20.6 million for the
three months ended September 30, 2001. This amount represents interest on
financings for the Company's acquisitions of the AT&T systems. Historically, the
AT&T systems had no material indebtedness and were not otherwise allocated any
interest expense by AT&T Broadband.
Other expenses. Other expense was $435,000 for the three months ended
September 30, 2001. This amount represents fees on unused credit commitments
under the Company's credit facility.
(Benefit) provision for income taxes. The (Benefit) for income taxes was
$1.9 million for the three months ended September 30, 2001, as compared to a
provision for income taxes of $1.6 million for the three months ended September
30, 2000. This change was primarily due to lower taxable income for the three
months ended September 30, 2001. The Company had no provision for income taxes
for the three months ended September 30, 2001.
Net (loss) income. Due to the factors described above, the Company
generated a net loss of $19.8 million for the three months ended September 30,
2001 as compared to net income of $2.4 million for the three months ended
September 30, 2000.
EBITDA. EBITDA increased 2.4% to $39.8 million for the three months ended
September 30, 2001 as compared to $38.8 million for the three months ended
September 30, 2000. EBITDA increased primarily due to the increase in revenues
and decrease in management fees described above, offset by the increases in
programming, marketing and advertising expenses described above. As a percentage
of revenues, EBITDA was 34.0% for the three months ended September 30, 2001 as
compared with 35.1% for the three months ended September 30, 2000.
Nine Months Ended September 30, 2001 Compared to Nine Months Ended
September 30, 2000
Nine Months Ended September 30,
-------------------------------
2001(1) 2000
--------- ---------
(dollars in thousands)
Revenues .............................................. $ 347,178 $ 323,197
Costs and expenses:
Service costs ...................................... 176,329 160,208
Selling, general and
administrative expenses .......................... 42,081 29,941
Management fee expense ............................. 19,993 15,354
Restructuring charge ............................... 570 -
Depreciation and amortization ...................... 117,578 101,736
--------- ---------
Operating (loss) income ............................... (9,373) 15,958
--------- ---------
Interest expense, net ................................. 20,848 -
Other expenses (income) ............................... 435 -
Gain on disposition of assets ......................... 11,877 -
--------- ---------
Net (loss) income before taxes ........................ (18,779) 15,958
(Benefit) provision for income taxes .................. (933) 6,378
--------- ---------
Net (loss) income ..................................... $ (17,846) $ 9,580
========= =========
Other Data:
EBITDA ................................................ $ 108,775 $ 117,694
EBITDA margin(2) ...................................... 31.3% 36.4%
- ----------
(1) Represents the actual results of the Company's operations from
Inception (April 5, 2001) to September 30, 2001 and the Mediacom Systems
combined results of operations from January 1, 2001 through July 18, 2001.
This information is presented for comparative purposes only.
(2) Represents EBITDA as a percentage of revenues.
19
Revenues. Revenues increased 7.4% to $347.2 million for the nine months
ended September 30, 2001 as compared to $323.2 million for the nine months ended
September 30, 2000. Revenues increased principally as a result of an increase in
the average monthly basic service rate charged to subscribers, growth of cable
modem customers and an increase in pay-per-view and advertising sales revenue,
offset in part by a decrease in basic subscribers.
Service costs. Service costs increased 10.1% to $ 176.3 million for the
nine months ended September 30, 2001 as compared to $160.2 million for the nine
months ended September 30, 2000. The increase was due principally to higher
programming and cable modem service costs, partially offset by classification
differences amounting to approximately $9.0 million. As a percentage of
revenues, service costs were 50.8% for the nine months ended September 30, 2001,
as compared with 50.0% for the nine months ended September 30, 2000.
Selling, general and administrative expenses. Selling, general and
administrative expenses increased 40.5% to $42.1 million for the nine months
ended September 30, 2001 as compared to $ 29.9 million for the nine months ended
September 30, 2000. These costs increased primarily as a result of
classification differences amounting to approximately $9.0 million and an
increase in marketing, advertising and office expenses. As a percentage of
revenues, selling, general and administrative expenses were 12.1% for the nine
months ended September 30, 2001 as compared with 9.3% for the nine months ended
September 30, 2000.
Restructuring charge. Restructuring charge was $570,000 for the nine months
ended September 30, 2001. Restructuring charge was part of a cost reduction plan
undertaken by AT&T Broadband in 2001, whereby certain employees of the Georgia
systems were terminated resulting in a one-time charge.
Management fee expense. Management fee expense increased 20.2% to $20.0
million for the nine months ended September 30, 2001 as compared to $15.4
million the nine months ended September 30, 2000. As a percentage of revenues,
management fee expense was 5.8% for the nine months ended September 30, 2001 as
compared with 4.8% for the nine months ended September 30, 2000. This increase
was due to higher management fees charged by the manager of the AT&T systems on
a per subscriber basis.
Depreciation and amortization. Depreciation and amortization increased
15.6% to $117.6 million for the nine months ended September 30, 2001 as compared
to $101.7 million for the nine months ended September 30, 2000. This increase
was substantially due to capital expenditures associated with the upgrade of the
cable systems and the preliminary purchase price allocation in connection with
the Company's acquisitions of the AT&T systems.
Interest expense, net. Interest expense, net, was $20.8 million for the
nine months ended September 30, 2001. This amount represents interest on
financings for the Company's acquisitions of the AT&T systems. Historically, the
AT&T systems had no material indebtedness and were not otherwise allocated any
interest expense by AT&T Broadband.
Other expenses. Other expense was $435,000 for the nine months ended
September 30, 2001. This amount represents fees on unused credit commitments
under the Company's credit facility.
Gain on disposition of assets. The financial statements for the nine months
ended September 30, 2001 included a gain of approximately $11.9 million on the
sale of the Missouri systems to the Company. This gain will not impact the
future results of the Company.
(Benefit) Provision for income taxes. Provision for income taxes decreased
for the nine months ended September 30, 2001, as compared to the nine months
ended September 30, 2000, due to lower taxable income. This decrease was
partially offset by deferred taxes incurred from the sale of the Missouri
systems.
Net (loss) income. Due to the factors described above, the Company
generated a net loss of $17.8 million for the nine months ended September 30,
2001 as compared to net income of $9.6 million for the nine months ended
September 30, 2000.
20
EBITDA. EBITDA decreased 7.6% to $108.8 million for the nine months ended
September 30, 2001 as compared to $117.7 million for the nine months ended
September 30, 2000. EBITDA decreased because the increase in revenues was more
than offset by increases in programming costs, marketing and advertising
expenses and management fees. As a percentage of revenues, EBITDA was 31.2% for
the nine months ended September 30, 2001, as compared with 36.4% for the nine
months ended September 30, 2000.
Liquidity and Capital Resources
The Company's business requires substantial capital for the upgrade,
expansion and maintenance of its cable network. In addition, the Company has
pursued, and will continue to pursue, a business strategy that includes
selective acquisitions. The Company has funded and will continue to fund its
working capital requirements, capital expenditures and acquisitions through a
combination of internally generated funds, long-term borrowings and equity
financings.
Investing Activities
On July 18, 2001, the Company completed the acquisitions of AT&T systems
serving approximately 706,000 basic subscribers in the states of Georgia,
Illinois and Iowa. The aggregate purchase price for these cable systems was
approximately $1.79 billion, after preliminary closing adjustments.
On June 29, 2001, the Company completed the acquisition of AT&T systems
serving approximately 94,000 basic subscribers in Missouri. The purchase price
for the Missouri systems was approximately $308.1 million, after preliminary
closing adjustments.
The Company expects to spend approximately $60.0 million on capital
expenditures for the period from inception through the end of 2001. The Company
plans to fund these expenditures through net cash flows from operations and
additional borrowings under its subsidiary credit facility. By December
2001, the Company expects that 54% of its cable network will be upgraded with
550MHz
to 870MHz bandwidth capacity and 54% of its homes passed will have two-way
communications. The Company's capital expenditures were $12.5 million for the
period from inception through September 30, 2001.
Financing Activities
On June 29, 2001, Mediacom Broadband and Mediacom Broadband Corporation
(the "Issuers") jointly issued $400.0 million aggregate principal amount of 11%
senior notes due June 2013 (the "11% Senior Notes"). The 11% Senior Notes are
unsecured obligations of the Issuers, and the indenture for the 11% Senior Notes
stipulates, among other things, restrictions on incurrence of indebtedness,
distributions, mergers and asset sales and has cross-default provisions related
to other debt of the Issuers. The proceeds were used to fund a portion of the
$2.1 billion purchase price for the acquisitions of the AT&T systems.
On June 29, 2001, MCC made a $336.4 million equity contribution to the
Company. MCC made an additional $388.6 million equity contribution to the
Company on July 18, 2001. The proceeds were used to fund a portion of the $2.1
billion purchase price for the acquisitions of the AT&T systems.
On July 18, 2001, the operating subsidiaries of Mediacom Broadband entered
into a $1.4 billion senior secured credit facility. The credit facility consists
of a $600 million revolving credit facility, a $300 million tranche A term loan
and a $500 million tranche B term loan. The revolving credit facility expires on
March 31, 2010 and commitments under the revolving credit facility will be
reduced in quarterly installments beginning on December 31, 2004. The tranche A
term loan matures on March 31, 2010 and the tranche B term loan matures on
September 30, 2010. The term loans are payable in quarterly installments
beginning on September 30, 2004. Interest on outstanding revolving loans and the
tranche A term loan is payable at either the eurodollar rate plus a floating
percentage ranging from 1.00% to 2.50% or the base rate plus a floating
percentage ranging from 0.25% to 1.50%. Interest on tranche B term loan is
payable at either the eurodollar rate plus a floating percentage ranging from
2.50% to 2.75% or the base rate plus a floating percentage ranging from 1.50% to
1.75%. Borrowings under this facility, in the amount of $855.0 million, were
used to fund a portion of the purchase price for the acquisitions of the AT&T
systems. As of
21
September 30, 2001 the Company had approximately $598.0 million of unused credit
commitments under its subsidiary credit facility.
On July 18, 2001, the Company received a $150.0 million preferred equity
investment from subsidiaries of Mediacom LLC, a New York limited liability
company wholly owned by MCC. The preferred equity investment has a 12% annual
dividend, payable quarterly in cash. The proceeds from the preferred equity
investment were used to fund a portion of the $2.1 billion purchase price of its
acquisitions of AT&T systems.
As of September 30, 2001, the Company's debt was $1.2 billion and it was in
compliance with all of the financial and other covenants in its subsidiary
credit facility and public debt indenture. In addition, the Company's weighted
average cost of indebtedness was 7.6% and approximately 33% of its outstanding
indebtedness was at fixed interest rates at such date.
Although the Company has not generated earnings sufficient to cover fixed
charges, the Company has generated cash and obtained financing sufficient to
meet its debt service, working capital, capital expenditure and acquisition
requirements. The Company expects that it will continue to be able to generate
funds and obtain financing sufficient to service the Company's obligations and
complete its future acquisitions. There can be no assurance that the Company
will be able to obtain sufficient financing, or, if it were able to do so, that
the terms would be favorable to them.
Recent Accounting Pronouncements
In July 2001, the Financial Accounting Standards Board ("FASB") issued
Statements of Financial Accounting Standards No. 141, "Business Combinations"
("SFAS 141") and No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142").
SFAS 141 requires all business combinations initiated after June 30, 2001 to be
accounted for using the purchase method. Adoption of SFAS 141 will have no
effect on the Company's results of operations or financial position. Under SFAS
142, goodwill and intangible assets with indefinite lives will no longer be
amortized but reviewed annually for impairment (or more frequently if impairment
indicators arise). Separable intangible assets that are not deemed to have
indefinite lives will continue to be amortized over their useful lives. The
amortization provisions of SFAS 142 apply immediately to goodwill and intangible
assets acquired after June 30, 2001. With respect to goodwill and intangible
assets acquired prior to July 1, 2001, the Company is required to adopt SFAS 142
effective January 1, 2002. The Company is currently evaluating the effect that
SFAS 142 will have on its results of operations and financial position,
including determining whether the Company's franchise licenses should be
accounted for as indefinite life intangible assets. For the periods ended
September 30, 2001, the Company has continued to amortize all intangible assets,
including its franchise licenses. If it is determined that these intangibles
qualify for indefinite life treatment, the Company will cease amortizing them.
In August 2001, the FASB issued Statements of Financial Accounting
Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets" ("SFAS 144"). This statement addresses financial accounting and
reporting for the impairment or disposal of long-lived assets, and provides
guidance on classification and accounting for such assets when held for sale or
abandonment. SFAS 144 is effective for fiscal years beginning after December 15,
2001. The Company does not expect that adoption of SFAS 144 will have a material
effect on its results of operations or financial position.
Inflation and Changing Prices
The Company's systems' costs and expenses are subject to inflation and
price fluctuations. Since changes in costs can be passed through to subscribers,
such changes are not expected to have a material effect on their results of
operations.
22
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to some market risk due to the floating interest
rate under its subsidiary credit facility. The Company's subsidiary credit
facility has interest payments based on a floating rate (a base rate or LIBOR,
at its option) plus a variable amount based on operating results. Three month
LIBOR at September 30, 2001 was 2.59%. A 1.0% increase in LIBOR would result in
a $8.0 million pro forma annual increase in interest expense. The Company
expects any new financing arrangements to expose it to similar risks. See Note 4
to the Company's consolidated financial statements.
Changes in economic conditions could result in higher interest rates,
thereby increasing the Company's interest expense and lease payments and
reducing its funds available for capital investment, operations or other
purposes. In addition, a substantial portion of the Company's cash flow must be
used to service its debt, which may affect its ability to make future
acquisitions or capital expenditures. The Company may from time to time use
interest rate protection agreements to minimize its exposure to interest rate
fluctuation. However, there can be no assurance that hedges will be implemented,
or if implemented will achieve the desired effect. The Company may experience
loss and a negative impact on earnings or net assets as a result of interest
rate fluctuations.
Expected Maturity
-----------------------------------------------------------------------
(All dollar amounts in thousands)
2002 2003 2004 2005 2006 Thereafter Total Fair Value
---- ---- ---- ---- ---- ---------- ----- ----------
Fixed rate $ - $ - $ - $ - $ - $ 400,000 $ 400,000 $ 401,000
Weighted average
interest rate 11.0% 11.0% 11.0% 11.0% 11.0% 11.0% 11.0%
Variable rate $ - $ - $ 8,500 $ 35,000 $42,500 $ 716,000 $ 802,000 $ 802,000
Weighted average
interest rate 6.0% 6.0% 6.0% 6.0% 6.0% 6.0% 6.0%
23
PART II
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit
Number Exhibit Description
- ------ -------------------
4.1 Indenture relating to the 11% Senior Notes due 2013 of Mediacom
Broadband LLC and Mediacom Broadband Corporation, dated as of June 29,
2001 (1)
10.1 Credit Agreement dated as of July 18, 2001 for the Mediacom Broadband
subsidiary credit facility (1)
(b) Reports on Form 8-K
None.
- --------------
(1) Filed as an exhibit to the Registration Statement on Form S-4 (File No.
333-72440) of Mediacom Broadband LLC and Mediacom Broadband Corporation and
incorporated herein by reference.
24
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
MEDIACOM BROADBAND LLC
December 21, 2001 By: /s/ Mark E. Stephan
-------------------
Mark E. Stephan
Senior Vice President,
Chief Financial Officer, Treasurer
and Principal Financial Officer
25
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
MEDIACOM BROADBAND CORPORATION
December 21, 2001 By: /s/ Mark E. Stephan
-------------------
Mark E. Stephan
Treasurer, Secretary and
Principal Financial Officer
26