Form 10-Q
UNITED STATES
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
For the quarterly period ended June 30, 2010
Commission File Number: 0-29227
Mediacom Communications Corporation
(Exact name of Registrant as specified in its charter)
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Delaware
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06-1566067 |
(State of incorporation)
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(I.R.S. Employer |
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Identification Number) |
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 Registrant (1) has filed all reports required to be filed by
Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the Registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. þ Yes o No
Indicate by check mark whether the Registrant has submitted electronically and posted on its
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 Registrant was required to submit and post such files).
o Yes o No
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or smaller reporting company. See the definitions of large accelerated
filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
(Check one):
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o Large accelerated filer
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þ Accelerated filer
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o Non-accelerated filer
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o Smaller reporting company |
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). o Yes þ No
As of July 31, 2010, there were 41,150,242 shares of Class A common stock and 27,001,944 shares of
Class B common stock outstanding.
MEDIACOM COMMUNICATIONS CORPORATION AND SUBSIDIARIES
FORM 10-Q
FOR THE PERIOD ENDED JUNE 30, 2010
TABLE OF CONTENTS
This Quarterly Report on Form 10-Q is for the three and six months ended June 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 Communications Corporation as MCC, and MCC and its consolidated subsidiaries as
we, us and our.
2
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:
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increased levels of competition from existing and new competitors; |
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lower demand for our video, high-speed data and phone services; |
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our ability to successfully introduce new products and services to meet customer demands
and preferences; |
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changes in laws, regulatory requirements or technology that may cause us to incur
additional costs and expenses; |
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greater than anticipated increases in programming costs and delivery expenses related to
our products and services; |
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changes in assumptions underlying our critical accounting policies; |
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the ability to secure hardware, software and operational support for the delivery of
products and services to our customers; |
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disruptions or failures of network and information systems upon which our business
relies; |
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our reliance on certain intellectual property; |
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our ability to generate sufficient cash flow to meet our debt service obligations; |
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fluctuations in short term interest rates which may cause our interest expense to vary
from quarter to quarter; |
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instability in the capital and credit markets, which may impact our ability to refinance
future debt maturities or provide funding for potential strategic transactions, on similar
terms as we currently experience; and |
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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.
3
PART I
ITEM 1. FINANCIAL STATEMENTS
MEDIACOM COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(All dollar amounts in thousands, except par value)
(Unaudited)
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June 30, |
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December 31, |
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2010 |
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2009 |
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ASSETS |
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CURRENT ASSETS |
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Cash and cash equivalents |
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$ |
126,732 |
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$ |
80,916 |
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Accounts receivable, net of allowance for doubtful accounts of $2,610 and $2,180 |
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89,502 |
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86,337 |
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Prepaid expenses and other current assets |
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25,007 |
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17,030 |
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Deferred tax assets |
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22,959 |
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22,616 |
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Total current assets |
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264,200 |
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206,899 |
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Property, plant and equipment, net of accumulated depreciation of $2,075,336 and $1,965,091 |
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1,481,568 |
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1,478,489 |
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Franchise rights |
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1,793,715 |
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1,793,715 |
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Goodwill |
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219,991 |
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219,991 |
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Subscriber lists and other intangible assets, net of accumulated amortization of $153,804
and $152,552 |
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4,220 |
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5,472 |
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Other assets, net of accumulated amortization of $15,018 and $13,961 |
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56,528 |
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50,468 |
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Deferred income taxes non current |
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218,753 |
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222,695 |
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Total assets |
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$ |
4,038,975 |
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$ |
3,977,729 |
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LIABILITIES AND STOCKHOLDERS EQUITY |
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CURRENT LIABILITIES |
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Accounts payable and accrued expenses and other current liabilities |
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$ |
253,785 |
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$ |
268,575 |
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Deferred revenue |
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57,281 |
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56,996 |
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Current portion of long-term debt |
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26,000 |
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95,000 |
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Total current liabilities |
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337,066 |
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420,571 |
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Long-term debt, less current portion |
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3,371,000 |
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3,270,000 |
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Other non-current liabilities |
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57,949 |
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22,130 |
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Total liabilities |
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3,766,015 |
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3,712,701 |
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Commitments and contingencies (Note 9) |
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STOCKHOLDERS EQUITY |
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Class A common stock, $.01 par value; 300,000,000 shares authorized; 97,294,830 shares
issued and 41,121,974 shares outstanding as of June 30, 2010 and 96,554,912 shares issued
and 40,621,955 shares outstanding as of December 31, 2009 |
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411 |
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406 |
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Class B common stock, $.01 par value; 100,000,000 shares authorized; 27,001,944 shares issued
and outstanding |
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270 |
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270 |
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Additional paid-in capital |
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1,017,890 |
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1,013,517 |
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Accumulated deficit |
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(449,992 |
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(454,670 |
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Treasury stock, at cost, 56,172,856 and 55,932,957 shares of Class A common stock |
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(295,619 |
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(294,495 |
) |
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Total stockholders equity |
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272,960 |
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265,028 |
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Total liabilities and stockholders equity |
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$ |
4,038,975 |
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$ |
3,977,729 |
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The accompanying notes to the unaudited financial statements are an integral part of these statements.
4
MEDIACOM COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(All dollar amounts in thousands, except per share data)
(Unaudited)
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Three Months Ended |
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Six Months Ended |
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June 30, |
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June 30, |
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2010 |
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2009 |
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2010 |
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2009 |
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Revenues |
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$ |
377,008 |
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$ |
364,495 |
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$ |
745,687 |
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$ |
724,933 |
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Costs and expenses: |
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Service costs (exclusive of depreciation and amortization) |
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161,704 |
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153,887 |
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319,323 |
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306,695 |
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Selling, general and administrative expenses |
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69,104 |
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67,280 |
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135,478 |
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133,364 |
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Corporate expenses |
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8,443 |
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8,326 |
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16,701 |
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16,533 |
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Depreciation and amortization |
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60,601 |
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57,940 |
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119,901 |
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116,708 |
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Operating income |
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77,156 |
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77,062 |
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154,284 |
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151,633 |
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Interest expense, net |
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(51,883 |
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(51,331 |
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(101,510 |
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(100,252 |
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(Loss) gain on derivatives, net |
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(29,052 |
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25,951 |
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(40,760 |
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24,280 |
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(Loss) gain on sale of cable systems, net |
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(410 |
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13,781 |
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Loss on early extinguishment of debt |
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(1,234 |
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(1,234 |
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Other expense, net |
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(1,449 |
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(2,361 |
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(2,501 |
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(4,826 |
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(Loss) income before income taxes |
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$ |
(6,462 |
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$ |
48,911 |
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$ |
8,279 |
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$ |
84,616 |
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Benefit from (provision for) income taxes |
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2,622 |
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(14,505 |
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(3,601 |
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(27,848 |
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Net (loss) income |
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$ |
(3,840 |
) |
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$ |
34,406 |
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$ |
4,678 |
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$ |
56,768 |
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Basic weighted average shares outstanding |
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68,119 |
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67,435 |
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67,929 |
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74,016 |
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Basic (loss) earnings per share |
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$ |
(0.06 |
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$ |
0.51 |
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$ |
0.07 |
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$ |
0.77 |
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Diluted weighted average shares outstanding |
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68,119 |
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70,857 |
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71,690 |
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77,241 |
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Diluted (loss) earnings per share |
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$ |
(0.06 |
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$ |
0.49 |
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$ |
0.07 |
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$ |
0.73 |
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The accompanying notes to the unaudited financial statements are an integral part of these statements.
5
MEDIACOM COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(All dollar amounts in thousands)
(Unaudited)
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Six Months Ended |
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June 30, |
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2010 |
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2009 |
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OPERATING ACTIVITIES: |
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Net income |
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$ |
4,678 |
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$ |
56,768 |
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Adjustments to reconcile net loss to net cash provided by operating activities: |
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Depreciation and amortization |
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119,901 |
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116,708 |
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Loss (gain) on derivatives, net |
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40,760 |
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(24,280 |
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Loss on early extinguishment of debt |
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1,234 |
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Gain on sale of cable systems, net |
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(12,148 |
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Amortization of deferred financing costs |
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3,130 |
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2,684 |
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Share-based compensation |
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3,772 |
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3,577 |
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Deferred income taxes |
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3,601 |
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27,848 |
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Changes in assets and liabilities, net of effects from acquisitions: |
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Accounts receivable, net |
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(3,165 |
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(5,732 |
) |
Prepaid expenses and other assets |
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(6,377 |
) |
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(6,916 |
) |
Accounts payable and accrued expenses and other current liabilities |
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(719 |
) |
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6,578 |
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Deferred revenue |
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285 |
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1,682 |
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Other non-current liabilities |
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(295 |
) |
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577 |
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Net cash flows provided by operating activities |
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$ |
166,805 |
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$ |
167,346 |
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INVESTING ACTIVITIES: |
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Capital expenditures |
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(122,000 |
) |
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(109,173 |
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Net cash flows used in investing activities |
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$ |
(122,000 |
) |
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$ |
(109,173 |
) |
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FINANCING ACTIVITIES: |
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New borrowings |
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1,323,750 |
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513,875 |
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Repayment of debt |
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(1,291,750 |
) |
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(459,875 |
) |
Net settlement of restricted stock units |
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(1,126 |
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(1,518 |
) |
Repurchases of Class A common stock |
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(110,000 |
) |
Proceeds from issuance of common stock in employee stock purchase plan |
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|
581 |
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|
548 |
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Financing costs |
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(16,546 |
) |
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Other financing activities book overdrafts |
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(13,898 |
) |
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|
460 |
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Net cash flows provided by (used in) financing activities |
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$ |
1,011 |
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$ |
(56,510 |
) |
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Net increase in cash and cash equivalents |
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$ |
45,816 |
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$ |
1,663 |
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CASH AND CASH EQUIVALENTS, beginning of period |
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|
80,916 |
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|
67,111 |
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CASH AND CASH EQUIVALENTS, end of period |
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$ |
126,732 |
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$ |
68,774 |
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SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: |
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Cash paid during the period for interest, net of amounts capitalized |
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$ |
106,343 |
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$ |
102,156 |
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NON-CASH TRANSACTIONS FINANCING: |
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Repurchase of Class A common stock exchanged for assets held for sale (Note 12) |
|
$ |
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$ |
29,284 |
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|
The accompanying notes to the unaudited financial statements are an integral part of these statements.
6
MEDIACOM COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND BASIS OF PRESENTATION
Organization
Mediacom Communications Corporation (MCC, and collectively with its subsidiaries, we, our or
us) is a holding company, and does not have any operations or hold any assets other than
investments in, and advances to, its wholly-owned subsidiaries, Mediacom Broadband LLC (Mediacom
Broadband) and Mediacom LLC. The various operating subsidiaries of Mediacom Broadband and
Mediacom LLC (Mediacom Broadband Group and Mediacom LLC Group, respectively, and together the
Operating Subsidiaries) conduct all of our consolidated operations and own substantially all of
our consolidated assets. The Operating Subsidiaries are separate and distinct legal entities and
have no obligation, contingent or otherwise, to make funds available to Mediacom Broadband or
Mediacom LLC.
Basis of Presentation
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.
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 $9.5 million and $9.4 million
for the three months ended June 30, 2010 and 2009, respectively, and approximately $18.9 million
for each of the six months ended June 30, 2010 and 2009.
2. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In January 2010, the FASB issued Accounting Standards Update (ASU) ASU No. 2010-06, Improving
Disclosures about Fair Value Measurements, which amends Accounting Standards Codification (ASC)
820 Fair Value Measurements and Disclosures 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.
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 June 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. |
7
As of June 30, 2010, our interest rate exchange agreement liabilities, net, were valued at $91.1
million using Level 2 inputs, as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value as of June 30, 2010 |
|
(dollars in thousands) |
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate exchange agreements |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate exchange agreements |
|
$ |
|
|
|
$ |
91,124 |
|
|
$ |
|
|
|
$ |
91,124 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate exchange agreements liabilities, net |
|
$ |
|
|
|
$ |
91,124 |
|
|
$ |
|
|
|
$ |
91,124 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2009, our interest rate exchange agreement liabilities, net, were valued at
$50.4 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 |
|
$ |
|
|
|
$ |
4,791 |
|
|
$ |
|
|
|
$ |
4,791 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate exchange agreements |
|
$ |
|
|
|
$ |
55,155 |
|
|
$ |
|
|
|
$ |
55,155 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate exchange agreements liabilities, net |
|
$ |
|
|
|
$ |
50,364 |
|
|
$ |
|
|
|
$ |
50,364 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4. (LOSS) EARNINGS PER SHARE
We calculate earnings or loss per share in accordance with ASC 260 Earnings per Share (ASC
260) by dividing the net income or loss by the weighted average number of shares of common stock
outstanding during the period. Diluted earnings per share (Diluted EPS) are computed by dividing
the net income by the weighted average number of shares of common stock outstanding during the
period plus the effects of any potentially dilutive securities. Diluted EPS consider the impact of
potentially dilutive securities except in periods in which there is a loss because the inclusion of
the potential shares of common stock would have an anti-dilutive effect. Our potentially dilutive
securities include shares of common stock which may be issued upon exercise of our stock options or
vesting of restricted stock units. Diluted EPS exclude the impact of potential shares of common
stock related to our stock options in periods in which the option exercise price is greater than
the average market price of our Class A common stock during the period.
Our potentially dilutive securities include shares of common stock which may be issued upon
exercise of our stock options or vesting of restricted stock units. For the three months ended
June 30, 2010, we generated a net loss, and therefore the inclusion of the potential shares of
common stock would have been anti-dilutive. Accordingly, diluted loss per share equaled basic loss
per share for such period. Diluted loss per share for the three months ended June 30, 2010 excluded
approximately 4.1 million potential shares of common stock related to our share-based compensation
plans.
For the three months ended June 30, 2009 and for the six months ended 2010 and 2009, we generated
net income. Accordingly, diluted earnings per share for such periods, respectively, included
approximately 3.4 million, 3.8 million and 3.2 million potential shares of common stock related to
our share-based compensation plans.
8
5. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consisted of the following (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
December 31, |
|
|
|
2010 |
|
|
2009 |
|
Cable systems, equipment and subscriber devices |
|
$ |
3,364,888 |
|
|
$ |
3,252,864 |
|
Vehicles |
|
|
73,704 |
|
|
|
75,494 |
|
Furniture, fixtures and office equipment |
|
|
66,881 |
|
|
|
64,099 |
|
Buildings and leasehold improvements |
|
|
43,796 |
|
|
|
43,493 |
|
Land and land improvements |
|
|
7,635 |
|
|
|
7,630 |
|
|
|
|
|
|
|
|
|
|
|
3,556,904 |
|
|
|
3,443,580 |
|
Accumulated depreciation |
|
|
(2,075,336 |
) |
|
|
(1,965,091 |
) |
|
|
|
|
|
|
|
Property, plant and equipment, net |
|
$ |
1,481,568 |
|
|
$ |
1,478,489 |
|
|
|
|
|
|
|
|
9
6. ACCOUNTS PAYABLE, ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accounts payable, accrued expenses and other current liabilities consisted of the following
(dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
December 31, |
|
|
|
2010 |
|
|
2009 |
|
Liabilities under interest rate exchange agreements |
|
$ |
40,446 |
|
|
$ |
40,591 |
|
Accrued programming costs |
|
|
39,485 |
|
|
|
34,917 |
|
Accrued taxes and fees |
|
|
31,800 |
|
|
|
30,611 |
|
Accrued payroll and benefits |
|
|
30,052 |
|
|
|
31,451 |
|
Accrued interest |
|
|
25,018 |
|
|
|
30,310 |
|
Accrued property, plant and equipment |
|
|
23,828 |
|
|
|
12,188 |
|
Accrued service costs |
|
|
15,703 |
|
|
|
17,751 |
|
Subscriber advance payments |
|
|
15,529 |
|
|
|
15,563 |
|
Accounts payable |
|
|
6,612 |
|
|
|
13,287 |
|
Accrued telecommunications |
|
|
3,721 |
|
|
|
5,105 |
|
Book overdrafts(1) |
|
|
3,380 |
|
|
|
17,305 |
|
Other accrued expenses |
|
|
18,211 |
|
|
|
19,496 |
|
|
|
|
|
|
|
|
Accounts payable, accrued expenses and other current liabilities |
|
$ |
253,785 |
|
|
$ |
268,575 |
|
|
|
|
|
|
|
|
|
|
|
(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 cash flows from financing activities in our consolidated statement of
cash flows. |
7. DEBT
Debt consisted of the following (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
December 31, |
|
|
|
2010 |
|
|
2009 |
|
Bank credit facilities |
|
$ |
2,547,000 |
|
|
$ |
2,515,000 |
|
81/2% senior notes due 2015 |
|
|
500,000 |
|
|
|
500,000 |
|
9⅛% senior notes due 2019 |
|
|
350,000 |
|
|
|
350,000 |
|
|
|
|
|
|
|
|
|
|
$ |
3,397,000 |
|
|
$ |
3,365,000 |
|
Less: Current portion |
|
|
26,000 |
|
|
|
95,000 |
|
|
|
|
|
|
|
|
Total long-term debt |
|
$ |
3,371,000 |
|
|
$ |
3,270,000 |
|
|
|
|
|
|
|
|
Bank Credit Facilities
As of June 30, 2010, the Operating Subsidiaries maintained an aggregate $3.281 billion of senior
secured credit facilities (the credit facilities), of which $2.547 billion was outstanding. The
average interest rates on such outstanding debt, including the effect of the interest rate exchange
agreements discussed below, was 5.1%, as compared to 5.3% as of the same date last year.
As of June 30, 2010, we had no outstanding balance under our revolving credit commitments of $734.5
million, with $18.5 million of letters of credit issued under the credit facilities to various
parties as collateral for our performance relating to insurance and franchise requirements, and
$716.0 million of unused lines. 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 as of June 30, 2010. As of the same date, our revolving credit commitments were
scheduled to expire in the amounts of $79.0 million, $430.3 million and $225.2 million on September
30, 2011, December 31, 2012 and December 31, 2014, respectively, and are not subject to scheduled
reductions prior to maturity.
The credit agreements for each of the credit facilities contain 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 June 30, 2010, the principal financial covenants of the $1.479
billion credit facility maintained by the Mediacom LLC Group (the LLC credit facility) required
compliance with a ratio of indebtedness to 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 June
30, 2010, the LLC credit facilitys senior leverage ratio and interest coverage ratio were 4.4 to
1.0 and 2.8 to 1.0, respectively. As of June 30, 2010, the principal financial covenant of the
$1.802 billion credit facility maintained by the Mediacom Broadband Group (the Broadband credit
facility) required a senior leverage ratio of no more than 6.0 to 1.0 at any time. As of June
30, 2010, the Broadband credit facilitys
senior leverage ratio was 4.1 to 1.0. The terms indebtedness, system cash flow, operating
cash flow and interest expense are defined in the credit agreements for the LLC credit facility
and the Broadband credit facility. The credit facilities are collateralized by all of Mediacom
Broadband and Mediacom LLCs ownership interests in their respective operating subsidiaries, and
are guaranteed by them on a limited recourse basis to the extent of such ownership interests.
10
New Financings
On April 23, 2010, the Mediacom LLC Group entered into an incremental facility agreement that
provides for a new term loan under the LLC credit facility in the principal amount of $250.0
million (Term Loan E) and borrowed the full amount on the same date. 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 LLC 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 LLC credit facility (Term Loan C, Term Loan D and Term Loan E).
Borrowings under Term Loan E generally 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 for the LLC
credit facility), 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 the Mediacom LLC Group under Term Loan E are governed by the terms of the credit
agreement for the LLC credit facility.
On April 23, 2010, the credit agreement for the LLC credit facility was amended to:
|
|
|
extend the termination date with respect to $225.2 million of the revolving credit portion of the LLC credit facility
from September 30, 2011 to December 31, 2014 (or June 30, 2014 if Term Loan C under the LLC 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; |
|
|
|
|
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 be increased to 6.0 to 1.0 and the interest
coverage ratio covenant will no longer be applicable. |
On April 23, 2010, the Mediacom Broadband Group entered into an incremental facility agreement that
provides for a new term loan under the Broadband credit facility in the principal amount of $600.0
million (Term Loan F), and borrowed the full amount on the same date. The proceeds from Term
Loan F were used to repay the outstanding balance of both Term Loan E and the revolving credit
portion of the Broadband credit facility, without any reduction in the revolving credit
commitments, and to pay related fees and expenses. Following the borrowing of Term Loan F, there
were two term loans outstanding under the Broadband credit facility (Term Loan D and Term Loan F).
Borrowings under Term Loan F generally 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 for the
Broadband credit facility), 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 F, 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 F matures on October 23, 2017, and is subject to quarterly reductions of
0.25% of the original principal amount beginning on September 30, 2010. The obligations of the
Mediacom Broadband Group under Term Loan F are governed by the terms of the credit agreement for
the Broadband credit facility.
11
On April 23, 2010, the credit agreement for the Broadband credit facility was amended to:
|
|
|
increase the permitted amount of incremental facilities by $250 million; and |
|
|
|
|
permit additional incremental facility term loans in an aggregate principal
amount equal to not more than 50% of any future reductions in the revolving
credit commitments. |
Senior Notes
As of June 30, 2010, we had an aggregate $850 million of senior notes outstanding, consisting of
$500 million of senior notes at Mediacom Broadband and $350 million of senior notes at Mediacom
LLC. The indentures governing our senior notes contain various covenants, though they are generally
less restrictive than those found in our credit facilities. As of June 30, 2010, the principal
financial covenant of these senior notes had a limitation on the incurrence of additional
indebtedness based upon a maximum ratio of total indebtedness to operating cash flow, as defined
(the total leverage ratio), of 8.5 to 1.0. As of June 30, 2010, the total leverage ratio at each
of Mediacom Broadband and Mediacom LLC was 5.9 to 1.0. 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 facilities 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 six months ended June
30, 2010 and 2009.
As of June 30, 2010, we had current interest rate swaps with various banks pursuant to which the
interest rate on $1.5 billion was fixed at a weighted average rate of 3.5%. Our current interest
rate swaps are scheduled to expire in the amounts of $300 million, $500 million and $700 million
during the years ended December 31, 2010, 2011 and 2012, respectively.
As of June 30, 2010, we had also 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% on $200 million of floating
rate debt, which will commence in December 2010; (ii) a two-year period at a weighted average rate
of 2.8% on $300 million of floating rate debt, which will commence in December 2010; (iii) a
three-year period at a weighted average rate of 3.5% on $200 million of floating rate debt, which
will commence in December 2011; (iv) a two and a half-year period at a weighted average rate of
3.9% on $200 million of floating rate debt, which will commence in June 2012; and (v) a two-year
period at a weighted average rate of 3.5% on $400 million of floating rate debt, 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 June 30, 2010, based upon mark-to-market valuation, we recorded on our
consolidated balance sheet, an accumulated current liability of $40.4 million and an accumulated
long-term liability of $50.7 million. As of December 31, 2009, based upon mark-to-market valuation,
we recorded on our consolidated balance sheet a long-term asset of $4.8 million, an accumulated
current liability of $40.6 million and an accumulated long-term liability of $14.6 million.
As a result of the mark-to-market valuations on these interest rate swaps, we recorded a net loss
on derivatives of $29.1 million and a net gain on derivatives of $26.0 million for the three months
ended June 30, 2010 and 2009, respectively, and a net loss on derivatives of $40.8 million and a
net gain on derivatives of $24.3 million for the six months ended June 30, 2010 and 2009,
respectively.
Covenant Compliance and Debt Ratings
For all periods through June 30, 2010, we were in compliance with all of the covenants under the
credit facilities and senior note arrangements. There are no covenants, events of default,
borrowing conditions or other terms in the credit facilities 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 Moodys, and B+, with
a negative outlook, by Standard and Poors. The negative outlook on our corporate credit ratings
assigned by Standard and Poors was due to the potential implications of the going private
transaction proposed by our founder, Chairman and Chief Executive Officer, Rocco B. Commisso. See
Note 14. 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.
12
Fair Value
As of June 30, 2010, the fair values of our senior notes and credit facilities are as follows
(dollars in thousands):
|
|
|
|
|
8 1/2% senior notes due 2015 |
|
$ |
485,000 |
|
9⅛% senior notes due 2019 |
|
|
341,250 |
|
|
|
|
|
|
|
$ |
826,250 |
|
|
|
|
|
|
|
|
|
|
Bank credit facilities |
|
$ |
2,381,191 |
|
|
|
|
|
8. STOCKHOLDERS EQUITY
Stock Repurchase Plans
During the three and six months ended June 30, 2010, we did not repurchase any shares of our common
stock under our common stock repurchase program. As of June 30, 2010, approximately $47.6 million
remained available under our Class A common stock repurchase program.
Share-based Compensation
Total share-based compensation expense for the three months ended June 30, 2010 and 2009, was as
follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, |
|
|
|
2010 |
|
|
2009 |
|
Share-based compensation expense by type of award: |
|
|
|
|
|
|
|
|
Employee stock options |
|
$ |
640 |
|
|
$ |
632 |
|
Employee stock purchase plan |
|
|
110 |
|
|
|
103 |
|
Restricted stock units |
|
|
1,147 |
|
|
|
1,098 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total share-based compensation expense |
|
$ |
1,897 |
|
|
$ |
1,833 |
|
|
|
|
|
|
|
|
During the three months ended June 30, 2010, there were no restricted stock units and no stock
options that had been granted to our employees under our compensation programs. Each of the
restricted stock units and stock options in our stock compensation programs are exchangeable and
exercisable into a share of our Class A common stock. During the three months ended June 30, 2010,
no restricted stock units vested and options to purchase approximately 6,000 shares of Class A
common stock were exercised.
Total share-based compensation expense for the six months ended June 30, 2010 and 2009, was as
follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, |
|
|
|
2010 |
|
|
2009 |
|
Share-based compensation expense by type of award: |
|
|
|
|
|
|
|
|
Employee stock options |
|
$ |
1,265 |
|
|
$ |
1,157 |
|
Employee stock purchase plan |
|
|
224 |
|
|
|
233 |
|
Restricted stock units |
|
|
2,283 |
|
|
|
2,187 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total share-based compensation expense |
|
$ |
3,772 |
|
|
$ |
3,577 |
|
|
|
|
|
|
|
|
During the six months ended June 30, 2010, there were approximately 823,000 restricted stock units
and 786,000 stock options that had been granted to our employees under our compensation programs.
The weighted average fair values associated with these grants were $4.55 per restricted stock unit
and $4.80 per stock option. During the six months ended June 30, 2010, approximately 606,000
restricted stock units vested and options to purchase approximately 6,000 shares of Class A common
stock were exercised.
13
Employee Stock Purchase Plan
Under our employee stock purchase plan, all employees are allowed to participate in the purchase of
shares of our Class A common stock at a 15% discount on the date of the allocation. Shares
purchased by employees under our plan amounted to approximately 128,000 for each of the three and
six months ended June 30, 2010 and approximately 160,000 for each of the three and six months ended
June 30, 2009. The net proceeds to us were approximately $0.3 million for each of the three months
ended June 30, 2010 and 2009. The net proceeds to us were approximately $0.6 million for each of
the six months ended June 30, 2010 and 2009.
9. COMMITMENTS AND CONTINGENCIES
Legal Proceedings
Mediacom LLC, one of our wholly owned subsidiaries, is named as a defendant in a putative class
action, captioned Gary 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 Mediacom LLC, 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.
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. Mediacom LLC is vigorously defending against the claims made by the
other members of the class, including filing and responding to post trial motions 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. Mediacom LLC has tendered the lawsuit to our insurance carrier for defense and
indemnification. The carrier has agreed to defend Mediacom LLC under a reservation of rights, and a
declaratory judgment action is pending regarding the carriers defense and coverage
responsibilities.
A purported class action in the United States District Court for the Southern District of New York
entitled Jim Knight v. Mediacom Communications Corp., in which we were 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 us and rented a cable box distributed by us. The
plaintiff alleges that we improperly tie 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. We were served
with the complaint on April 16, 2010 and we have responded. We believe we have substantial defenses
to the claims asserted in the complaint, and we intend to defend the action vigorously.
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. The lawsuits, Colleen Witmer vs. Mediacom Communications Corporation et al., J.
Malcolm Gray v. Mediacom Communications Corporation et al. and Haverhill Retirement System v.
Mediacom Communications Corporation, relate to the offer by Rocco B. Commisso to acquire all of
the outstanding shares of Mediacom common stock not already owned by Mr. Commisso (see Note 14).
The three lawsuits have been consolidated for all purposes in the Delaware Chancery Court. The
lawsuits allege breach of fiduciary duty and seek injunctive relief to prevent consummation of the
proposed transaction or in the alternative, rescission and compensatory damages. We and our
directors intend to defend the actions vigorously.
We 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.
14
10. INCOME TAXES
We have utilized ASC 270 Interim Reporting (ASC 270) to record income taxes on an interim
period basis.
A tax benefit of $2.6 million was recorded for the three months ended June 30, 2010. A tax
provision of $14.5 million, $3.6 million and $27.8 million was recorded for the three months ended
June 30, 2009 and the six months ended June 30, 2010 and 2009, respectively. The provision amount
for the three and six months ended June 30, 2010 is based on book income and effective tax rate
(ETR). The ETR for the three and six months ended June 30, 2010 was 41.3% and 42.0%, which
included the effect of state taxes (net of federal tax benefit). For the three and six months ended
June 30, 2009, the tax provision amount substantially represented the increase in the deferred tax
liabilities related to the basis differences of our indefinite-lived intangible assets.
ASC 740 requires that deferred tax assets be reduced by a valuation allowance if it is more likely
than not that some portion or all of the deferred tax assets will not be realized. We periodically
assess the likelihood of realization of our deferred tax assets considering all available evidence,
both positive and negative, including our most recent performance, the scheduled reversal of
deferred tax liabilities, our forecast of taxable income in future periods and the availability of
prudent tax planning strategies. As a result of these assessments in prior periods, we established
valuation allowances on a portion of our deferred tax assets due to the uncertainty surrounding the
realization of these assets. During the fourth quarter of 2009, as a result of the assessment of
our ability to realize deferred assets, we reversed a substantial portion of our valuation
allowance, resulting in a balance in the valuation allowance of $8.2 million as of December 31,
2009. As of June 30, 2010, our valuation allowance remained at approximately $8.2 million.
Adjustments to the valuation allowance will be made if there is a change in our assessment of the
amount of deferred income tax asset that is realizable.
Other tax matters
We have not recorded a liability for unrecognized tax benefits as of June 30, 2010. We do not think
it is reasonably possible that the total amount of unrealized tax benefits will significantly
change in the next twelve months.
We file U.S. federal consolidated income tax returns and income tax returns in various state and
local jurisdictions. Our 2006, 2007 and 2008 U.S. federal tax years and various state and local tax
years from 2005 through 2008 remain subject to income tax examinations by tax authorities. In
addition, tax returns for years prior to 2006 may be subject to examination to the extent net
operating losses have been carried forward from those years and remain available to offset taxable
income in the future.
We classify interest and penalties associated with uncertain tax positions as a component of income
tax expense. During the six months ended June 30, 2010, no interest and penalties were accrued.
15
11. RELATED PARTY TRANSACTIONS
Mediacom Management Corporation (Mediacom Management), a Delaware corporation, holds a 1.0%
direct ownership interest in Mediacom California LLC, which in turn holds a 1.0% interest in
Mediacom Arizona LLC. Revenues from these entities represent approximately 2.5% of our total
revenues. Mediacom Management is wholly-owned by our Chairman and CEO.
One of our directors is a partner of a law firm that performs various legal services for us. For
the six months ended June 30, 2010, approximately $0.7 million was paid to this law firm for
services performed.
12. REPURCHASE OF MEDIACOM CLASS A COMMON STOCK
On September 7, 2008, we entered into a Share Exchange Agreement (the Exchange Agreement) with
Shivers Investments, LLC and Shivers Trading & Operating Company (collectively Shivers), both
affiliates of Morris Communications Company, LLC. We completed the Exchange Agreement on February
13, 2009 (the Completion Date), pursuant to which we exchanged 100% of the shares of stock of a
newly-created subsidiary, which held non-strategic cable television systems serving approximately
25,000 basic subscribers, and $110 million of cash (the Exchange Cash Portion), for 28.3 million
shares of our Class A common stock (the Exchange Shares) held by Shivers.
The Exchange Cash Portion was funded with cash on hand and borrowings made under the revolving
commitments of our bank credit facilities. Both Morris Communications and Shivers are controlled by
William S. Morris III, who at the time was a member of Mediacoms Board of Directors.
Based upon the $4.92 closing price per share of our Class A common stock on the Completion Date
(the Closing Price), we recognized a gain on sale of cable systems, net, of approximately $13.8
million for the six months ended June 30, 2009, which included approximately $1.3 million in legal
and consulting fees, as well as other customary closing adjustments. For the six months ended June
30, 2009, an amount of $29.3 million was recorded in our consolidated statements of cash flows,
under the caption Non-Cash Transactions Financing, to account for the excess value of the
Exchange Shares on the Completion Date over the Exchange Cash Portion. This amount was determined
by the number of Exchange Shares adjusted for the Closing Price less the Exchange Cash Portion.
The results of operations for the exchange assets were as follows (in thousands):
|
|
|
|
|
|
|
Six Months Ended |
|
|
|
June 30, |
|
|
|
2009 |
|
|
|
|
|
|
Revenues |
|
$ |
2,722 |
|
Pre-tax net income |
|
$ |
863 |
|
13. 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.
16
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 units 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 we have two
reporting units for the purpose of applying ASC 350, Mediacom Broadband and Mediacom LLC. We
conducted our annual impairment test as of October 1, 2009.
The economic conditions currently affecting the U.S. economy and how that may impact the long-term
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 when we perform our next
annual impairment testing during the fourth quarter of 2010.
Because we believe there has not been a meaningful change in the long-term fundamentals of our
business during the first half of 2010, we have determined that there has been no triggering event
under ASC 350, and as such, no interim impairment test is required as of June 30, 2010.
14. GOING PRIVATE PROPOSAL
On May 31, 2010, our Board of Directors received a non-binding proposal from our founder, Chairman
and Chief Executive Officer, Rocco B. Commisso, for a going private transaction. The proposal
contemplates the acquisition of all of the Class A and Class B shares of our common stock not
already beneficially owned by Mr. Commisso at a price of $6.00 per share in cash.
Our Board of Directors appointed independent directors Thomas V. Reifenheiser and Natale S.
Ricciardi to a special committee (the Special Committee) empowered to, among other things,
consider the proposal. The Special Committee has retained financial and legal advisors to assist
in its review of the proposed transaction.
17
ITEM 2. MANAGEMENTS 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 six months ended June 30, 2010 and 2009, and with our
annual report on Form 10-K for the year ended December 31, 2009.
Overview
We are the nations eighth largest cable company based on the number of customers who purchase one
or more video services, also known as basic subscribers. We are among the leading cable operators
focused on serving the smaller cities in the United States, with a significant customer
concentration in the Midwestern and Southeastern regions. We are the largest and second largest
cable company in Iowa and Illinois, respectively. Approximately 69% of our basic subscribers are in
the top 100 television markets in the United States, commonly referred to as Nielsen Media Research
designated market areas (DMAs), with more than 55% in DMAs that rank between the 60th and 100th
largest.
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 June 30, 2010,
we offered our bundle of video, HSD and phone services to approximately 94% of our estimated 2.80
million homes passed in 22 states. As of the same date, we served approximately 1.22 million basic
subscribers, 705,000 digital video customers, 814,000 HSD customers and 317,000 phone customers,
aggregating 3.05 million revenue generating units (RGUs).
Direct broadcast satellite (DBS) companies are our most significant video competitor, and we
continue to face increased 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, as well as with national wireless providers and the impact of wireless
substitution, where certain phone customers have chosen a wireless or cellular phone product as
their only phone service. 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. The ongoing economic downturn
has had many effects on our business, including a reduction in sales activity, lower levels of
television advertising and greater instances of customers inability to pay for our products and
services. Most notably, as a result of continuing weak economic conditions and increasing price
competition from DBS providers, we have seen lower demand for our video, HSD and phone services,
which have 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 as a result of the current
downturn or increased competition 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 new
term loans in the aggregate principal amount of $850 million and amendments to our existing bank
credit facilities (the credit facilities), 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 these new term loans were used to repay certain existing term loans and the
full balance of outstanding revolving credit loans under our credit facilities. See Liquidity and
Capital Resources Capital Structure New Financings below and Note 7 in our Notes to
Consolidated Financial Statements for more information.
Going Private Proposal
On May 31, 2010, our Board of Directors received a non-binding proposal from our founder, Chairman
and Chief Executive Officer, Rocco B. Commisso, for a going private transaction. The proposal
contemplates the acquisition of all of the Class A and Class B shares of our common stock not
already beneficially owned by Mr. Commisso at a price of $6.00 per share in cash.
18
Our Board of Directors appointed independent directors Thomas V. Reifenheiser and Natale S.
Ricciardi to a special committee (the Special Committee) empowered to, among other things,
consider the proposal. The Special Committee has retained financial and legal advisors to assist
in its review of the proposed transaction.
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.
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. Advertising revenues may continue to stabilize in 2010,
given improving economic conditions and upcoming 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, 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. In recent years, we have experienced a substantial increase
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, principally due to the increasing demands of sports programmers, television
broadcast station owners for retransmission consent fees, and large programmers for upcoming
contract renewals. 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.
Corporate expenses reflect compensation of corporate employees and other corporate overhead.
Use of Non-GAAP Financial Measures
Adjusted OIBDA and Free Cash Flow are not financial measures 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, and Free Cash Flow as cash flows provided by operating activities less capital
expenditures. Adjusted OIBDA and Free Cash Flow have inherent limitations as discussed below.
19
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.
Free Cash Flow is used by management to evaluate our ability to repay debt and return capital to
stockholders and to facilitate the growth of our business with internally generated funds. A
limitation of Free Cash Flow, however, is that it may be affected by the timing of our capital
spending. We believe Free Cash Flow is useful for investors for the same reasons and provides
measures that can be used to analyze value and compare companies in the cable television industry,
although our measure of Free Cash Flow may not be directly comparable to similar measures reported
by other companies.
Adjusted OIBDA and Free Cash Flow should not be regarded as alternatives 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 they be considered in isolation or as substitutes for financial measures
prepared in accordance with GAAP. We believe that operating income is the most directly comparable
GAAP financial measure to Adjusted OIBDA, and that net cash flows provided by operating activities
is the most directly comparable GAAP financial measure to Free Cash Flow.
20
Actual Results of Operations
Three Months Ended June 30, 2010 compared to Three Months Ended June 30, 2009
The table below sets forth the consolidated statements of operations and Adjusted OIBDA for the
three months ended June 30, 2010 and 2009 (dollars in thousands and percentage changes that are not
meaningful are marked NM):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
|
|
|
|
|
|
June 30, |
|
|
|
|
|
|
|
|
|
2010 |
|
|
2009 |
|
|
$ Change |
|
|
% Change |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
377,008 |
|
|
$ |
364,495 |
|
|
$ |
12,513 |
|
|
|
3.4 |
% |
Costs and expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service costs (exclusive of depreciation and amortization) |
|
|
161,704 |
|
|
|
153,887 |
|
|
|
7,817 |
|
|
|
5.1 |
% |
Selling, general and administrative expenses |
|
|
69,104 |
|
|
|
67,280 |
|
|
|
1,824 |
|
|
|
2.7 |
% |
Corporate expenses |
|
|
8,443 |
|
|
|
8,326 |
|
|
|
117 |
|
|
|
1.4 |
% |
Depreciation and amortization |
|
|
60,601 |
|
|
|
57,940 |
|
|
|
2,661 |
|
|
|
4.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
|
77,156 |
|
|
|
77,062 |
|
|
|
94 |
|
|
|
0.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense, net |
|
|
(51,883 |
) |
|
|
(51,331 |
) |
|
|
(552 |
) |
|
|
1.1 |
% |
(Loss) gain on derivatives, net |
|
|
(29,052 |
) |
|
|
25,951 |
|
|
|
(55,003 |
) |
|
NM |
|
Loss on sale of cable systems, net |
|
|
|
|
|
|
(410 |
) |
|
|
410 |
|
|
NM |
|
Loss on early extinguishment of debt |
|
|
(1,234 |
) |
|
|
|
|
|
|
(1,234 |
) |
|
NM |
|
Other expense, net |
|
|
(1,449 |
) |
|
|
(2,361 |
) |
|
|
912 |
|
|
|
(38.6 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income before income taxes |
|
|
(6,462 |
) |
|
|
48,911 |
|
|
|
(55,373 |
) |
|
NM |
|
Benefit from (provision for) income taxes |
|
|
2,622 |
|
|
|
(14,505 |
) |
|
|
17,127 |
|
|
NM |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income |
|
$ |
(3,840 |
) |
|
$ |
34,406 |
|
|
$ |
(38,246 |
) |
|
NM |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted OIBDA |
|
$ |
139,654 |
|
|
$ |
136,835 |
|
|
$ |
2,819 |
|
|
|
2.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
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 |
|
|
|
|
|
|
|
|
|
June 30, |
|
|
|
|
|
|
|
|
|
2010 |
|
|
2009 |
|
|
$ Change |
|
|
% Change |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted OIBDA |
|
$ |
139,654 |
|
|
$ |
136,835 |
|
|
$ |
2,819 |
|
|
|
2.1 |
% |
Non-cash, share-based compensation |
|
|
(1,897 |
) |
|
|
(1,833 |
) |
|
|
(64 |
) |
|
|
3.5 |
% |
Depreciation and amortization |
|
|
(60,601 |
) |
|
|
(57,940 |
) |
|
|
(2,661 |
) |
|
|
4.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
$ |
77,156 |
|
|
$ |
77,062 |
|
|
$ |
94 |
|
|
|
0.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
21
Revenues
The tables below set forth the revenues, and selected subscriber, customer and average monthly
revenue statistics for the three months ended June 30, 2010 and 2009 (dollars in thousands, except
per subscriber data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
|
|
|
|
|
|
June 30, |
|
|
|
|
|
|
|
|
|
2010 |
|
|
2009 |
|
|
$ Change |
|
|
% Change |
|
Video |
|
$ |
232,158 |
|
|
$ |
233,622 |
|
|
$ |
(1,464 |
) |
|
|
(0.6 |
%) |
HSD |
|
|
97,325 |
|
|
|
88,182 |
|
|
|
9,143 |
|
|
|
10.4 |
% |
Phone |
|
|
30,804 |
|
|
|
28,020 |
|
|
|
2,784 |
|
|
|
9.9 |
% |
Advertising |
|
|
16,721 |
|
|
|
14,671 |
|
|
|
2,050 |
|
|
|
14.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Revenues |
|
$ |
377,008 |
|
|
$ |
364,495 |
|
|
$ |
12,513 |
|
|
|
3.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
Increase/ |
|
|
|
|
|
|
2010 |
|
|
2009 |
|
|
(Decrease) |
|
|
% Change |
|
Basic subscribers |
|
|
1,216,000 |
|
|
|
1,282,000 |
|
|
|
(66,000 |
) |
|
|
(5.1 |
%) |
Digital customers |
|
|
705,000 |
|
|
|
658,000 |
|
|
|
47,000 |
|
|
|
7.1 |
% |
HSD customers |
|
|
814,000 |
|
|
|
754,000 |
|
|
|
60,000 |
|
|
|
8.0 |
% |
Phone customers |
|
|
317,000 |
|
|
|
267,000 |
|
|
|
50,000 |
|
|
|
18.7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
RGUs (1) |
|
|
3,052,000 |
|
|
|
2,961,000 |
|
|
|
91,000 |
|
|
|
3.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Average total monthly revenue per
basic subscriber (2) |
|
$ |
102.59 |
|
|
$ |
94.22 |
|
|
$ |
8.37 |
|
|
|
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 increased 3.4%, largely as a result of higher HSD and, to a much lesser extent, phone and
advertising revenues, offset in part by lower video revenues. Average total monthly revenue per
basic subscriber increased 8.9% to $102.59.
Video revenues declined 0.6%, primarily due to a lower number of basic subscribers, offset in part
by video rate increases and continued growth in digital customers and DVR and HDTV services. During
the three months ended June 30, 2010, we lost 18,000 basic subscribers and gained 6,000 digital
customers, as compared to a loss of 15,000 basic subscribers and an increase of 8,000 digital
customers in the prior year period. As of June 30, 2010, we served 1,216,000 basic subscribers,
representing a penetration of 43.4% of our estimated homes passed and 705,000 digital customers,
representing a penetration of 58.0% of our basic subscribers. As of June 30, 2010, 42.2% of our
digital customers were taking our DVR and/or HDTV services, as compared to 36.0% as of the same
date last year.
HSD revenues rose 10.4%, principally due to a 8.0% increase in HSD customers. During the three
months ended June 30, 2010, we gained 10,000 HSD customers, as compared to an increase of 6,000 in
the prior year period. As of June 30, 2010, we served 814,000 HSD customers, representing a
penetration of 29.0% of our estimated homes passed.
Phone revenues grew 9.9%, mainly due to a 18.7% increase in phone customers, offset in part by
higher levels of discounted pricing. During the three months ended June 30, 2010, we gained 17,000
phone customers, as compared to an increase of 8,000 in the prior year period. As of June 30, 2010,
we served 317,000 phone customers, representing a penetration of 12.0% of our estimated marketable
phone homes.
Advertising revenues were 14.0% higher, primarily due to increased local advertising sales, largely
a result of a rebound in automotive and political advertising.
22
Costs and Expenses
Service costs rose 5.1%, primarily due to higher programming expenses and, to a much lesser extent,
employee operating and phone service costs, offset in part by lower HSD delivery expenses.
Programming expenses increased 6.0%, principally due to higher contractual rates charged by our
programming vendors, offset in part by a lower number of video customers. Employee operating
costs were 8.6% higher, principally due to a lower capitalization of labor and overhead costs
resulting from decreased new installation activity. Phone service costs were 9.1% higher, mainly
due to unit growth. HSD delivery expenses were 31.2% lower, principally due to the transition to
an internally managed e-mail system for our customers. Service costs as a percentage of revenues
were 42.9% and 42.2% for the three months ended June 30, 2010 and 2009, respectively.
Selling, general and administrative expenses increased 2.7%, largely as a result of higher
marketing, advertising and bad debt expenses, offset in part by lower employee costs. Marketing
costs were 5.9% higher, primarily due to a greater use of direct mail and television advertising
and contracted telemarketing sales, partly offset by lower direct sales contractor usage.
Advertising expenses grew 8.8%, principally due to increased costs related to higher advertising
sales activity. Bad debt expense rose 7.7% as a result of an increase in the aging of our accounts
receivable, offset in part by a lower number of write-offs. Employee costs fell 6.9%, primarily
due to a favorable shift in employee benefit expenses. Selling, general and administrative expenses
as a percentage of revenues were 18.3% and 18.5% for the three months ended June 30, 2010 and 2009,
respectively.
Corporate expenses rose 1.4%, primarily due to greater legal fees, mostly offset by greater
capitalization of labor costs relating to investments in our phone delivery system. Corporate
expenses as a percentage of revenues were 2.2% and 2.3% for the three months ended June 30, 2010
and 2009, respectively.
Depreciation and amortization grew 4.6%, principally as a result of a greater deployment of
shorter-lived customer premise equipment.
Adjusted OIBDA
Adjusted OIBDA increased 2.1%, mainly due to growth in HSD and, to a lesser extent, phone and
advertising revenues, offset in part by higher service costs.
Operating Income
Operating income was essentially flat, as the increase in Adjusted OIBDA was mostly offset by
higher depreciation and amortization.
Interest Expense, Net
Interest expense, net, grew 1.1%, primarily due to greater amortization of deferred financing
costs, offset in part by a lower average cost of debt.
(Loss) Gain on Derivatives, Net
As of June 30, 2010, we had interest rate exchange agreements, or interest rate swaps, with an
aggregate notional amount of $2.8 billion, of which $1.3 billion 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 $29.1 million and a net gain on derivatives of $26.0 million, for the three months
ended June 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, primarily those that become effective at future dates.
Loss on Sale of Cable Systems, Net
For the three months ended June 30, 2009, we recognized a loss on sale of cable systems, net, of
approximately $0.4 million related to our sale of certain cable systems in Western North Carolina.
Loss on Early Extinguishment of Debt
Loss on early extinguishment of debt totaled $1.2 million for the three months ended June 30, 2010.
This amount represented the write-off of certain deferred financing costs associated with prior
financings that were repaid during the period. For more information,
see Liquidity and Capital Resources Capital Structure New Financings.
23
Other Expense, Net
Other expense, net, was $1.4 million and $2.4 million for the three months ended June 30, 2010 and
2009, respectively. During the three months ended June 30, 2010, other expense, net, consisted of
$1.0 million of revolving credit facility commitment fees and $0.4 million of other fees. During
the three months ended June 30, 2009, other expense, net, included $1.1 million of deferred
financing costs, $1.0 million for revolving credit facility commitment fees and $0.3 million of
other fees.
Benefit from (Provision for) Income Taxes
Our benefit from income taxes was $2.6 million and our provision for income taxes was $14.5 million
for the three months ended June 30, 2010 and 2009, respectively. The benefit (provision) for income
taxes for each of the three months ended June 30, 2010 and 2009 resulted from non-cash charges
related to our deferred tax positions. See Note 10 to Consolidated Financial Statements.
Net (Loss) Income
We recognized a net loss of $3.8 million for the three months ended June 30, 2010, compared to net
income of $34.4 million for the prior year period. The swing from net income in the prior year period to a net loss was principally the result of a $29.1 million loss on derivatives, as compared to a $26.0 million gain on derivatives, offset in part by a $14.5 million provision for income taxes, for the three months ended June 30, 2009.
Actual Results of Operations
Six Months Ended June 30, 2010 compared to Six Months Ended June 30, 2009
The table below sets forth the consolidated statements of operations and Adjusted OIBDA for the six
months ended June 30, 2010 and 2009 (dollars in thousands and percentage changes that are not
meaningful are marked NM). The following financial and operating results reflected the February
2009 divesture of certain cable systems in Western North Carolina, which served 25,000 basic
subscribers, 10,000 digital customers, 13,000 HSD customers and 3,000 phone customers, aggregating
51,000 RGUs. During the six months ended June 30, 2009, such cable systems recorded revenues of
$2.7 million, service costs of $1.3 million, selling, general and administrative expenses of $0.5
million and $0.9 million of operating income. Where the inclusion of such results in the prior
years data may affect comparisons to 2010 results, the effect of such 2009 results are referred to
as the impact of the WNC Divesture. For more information, see Note 12 in our Notes to
Consolidated Financial Statements.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended |
|
|
|
|
|
|
|
|
|
June 30, |
|
|
|
|
|
|
|
|
|
2010 |
|
|
2009 |
|
|
$ Change |
|
|
% Change |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
745,687 |
|
|
$ |
724,933 |
|
|
$ |
20,754 |
|
|
|
2.9 |
% |
Costs and expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service costs (exclusive of depreciation and amortization) |
|
|
319,323 |
|
|
|
306,695 |
|
|
|
12,628 |
|
|
|
4.1 |
% |
Selling, general and administrative expenses |
|
|
135,478 |
|
|
|
133,364 |
|
|
|
2,114 |
|
|
|
1.6 |
% |
Corporate expenses |
|
|
16,701 |
|
|
|
16,533 |
|
|
|
168 |
|
|
|
1.0 |
% |
Depreciation and amortization |
|
|
119,901 |
|
|
|
116,708 |
|
|
|
3,193 |
|
|
|
2.7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
|
154,284 |
|
|
|
151,633 |
|
|
|
2,651 |
|
|
|
1.7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense, net |
|
|
(101,510 |
) |
|
|
(100,252 |
) |
|
|
(1,258 |
) |
|
|
1.3 |
% |
(Loss) gain on derivatives, net |
|
|
(40,760 |
) |
|
|
24,280 |
|
|
|
(65,040 |
) |
|
NM |
|
Gain on sale of cable systems, net |
|
|
|
|
|
|
13,781 |
|
|
|
(13,781 |
) |
|
NM |
|
Loss on early extinguishment of debt |
|
|
(1,234 |
) |
|
|
|
|
|
|
(1,234 |
) |
|
NM |
|
Other expense, net |
|
|
(2,501 |
) |
|
|
(4,826 |
) |
|
|
2,325 |
|
|
|
(48.2 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
|
8,279 |
|
|
|
84,616 |
|
|
|
(76,337 |
) |
|
|
(90.2 |
%) |
Provision for income taxes |
|
|
(3,601 |
) |
|
|
(27,848 |
) |
|
|
24,247 |
|
|
|
(87.1 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
4,678 |
|
|
$ |
56,768 |
|
|
$ |
(52,090 |
) |
|
|
(91.8 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted OIBDA |
|
$ |
277,957 |
|
|
$ |
271,918 |
|
|
$ |
6,039 |
|
|
|
2.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
24
The table below represents a reconciliation of Adjusted OIBDA to operating income, which is the
most directly comparable GAAP measure (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended |
|
|
|
|
|
|
|
|
|
June 30, |
|
|
|
|
|
|
|
|
|
2010 |
|
|
2009 |
|
|
$ Change |
|
|
% Change |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted OIBDA |
|
$ |
277,957 |
|
|
$ |
271,918 |
|
|
$ |
6,039 |
|
|
|
2.2 |
% |
Non-cash, share-based compensation |
|
|
(3,772 |
) |
|
|
(3,577 |
) |
|
|
(195 |
) |
|
|
5.5 |
% |
Depreciation and amortization |
|
|
(119,901 |
) |
|
|
(116,708 |
) |
|
|
(3,193 |
) |
|
|
2.7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
$ |
154,284 |
|
|
$ |
151,633 |
|
|
$ |
2,651 |
|
|
|
1.7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
The tables below set forth the revenues, and selected subscriber, customer and average monthly
revenue statistics for the six months ended June 30, 2010 and 2009 (dollars in thousands, except
per subscriber data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended |
|
|
|
|
|
|
|
|
|
June 30, |
|
|
|
|
|
|
|
|
|
2010 |
|
|
2009 |
|
|
$ Change |
|
|
% Change |
|
Video |
|
$ |
461,130 |
|
|
$ |
467,991 |
|
|
$ |
(6,861 |
) |
|
|
(1.5 |
%) |
HSD |
|
|
192,645 |
|
|
|
175,088 |
|
|
|
17,557 |
|
|
|
10.0 |
% |
Phone |
|
|
61,066 |
|
|
|
54,620 |
|
|
|
6,446 |
|
|
|
11.8 |
% |
Advertising |
|
|
30,846 |
|
|
|
27,234 |
|
|
|
3,612 |
|
|
|
13.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Revenues |
|
$ |
745,687 |
|
|
$ |
724,933 |
|
|
$ |
20,754 |
|
|
|
2.9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
Increase/ |
|
|
|
|
|
|
2010 |
|
|
2009 |
|
|
(Decrease) |
|
|
% Change |
|
Basic subscribers |
|
|
1,216,000 |
|
|
|
1,282,000 |
|
|
|
(66,000 |
) |
|
|
(5.1 |
%) |
Digital customers |
|
|
705,000 |
|
|
|
658,000 |
|
|
|
47,000 |
|
|
|
7.1 |
% |
HSD customers |
|
|
814,000 |
|
|
|
754,000 |
|
|
|
60,000 |
|
|
|
8.0 |
% |
Phone customers |
|
|
317,000 |
|
|
|
267,000 |
|
|
|
50,000 |
|
|
|
18.7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
RGUs |
|
|
3,052,000 |
|
|
|
2,961,000 |
|
|
|
91,000 |
|
|
|
3.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Average total monthly revenue per basic subscriber |
|
$ |
101.29 |
|
|
$ |
92.94 |
|
|
$ |
8.35 |
|
|
|
9.0 |
% |
Revenues increased 2.9%, largely as a result of higher HSD and, to a much lesser extent, phone and
advertising revenues, offset in part by lower video revenues. Average total monthly revenue per
basic subscriber rose 9.0% to $101.29.
Video revenues fell 1.5%, principally due to a lower number of basic subscribers, offset in part by
video rate increases and continued growth in digital customers and DVR and HDTV services. During
the six months ended June 30, 2010, we lost 22,000 basic subscribers and gained 27,000 digital
customers, as compared to a loss of 11,000 basic subscribers and a gain of 25,000 digital
customers in the prior year period, excluding the impact of the WNC Divesture.
HSD revenues rose 10.0%, primarily due to a 8.0% increase in HSD customers. During the six months
ended June 30, 2010, we gained 36,000 HSD customers, as compared to an increase of 30,000 in the
prior year period, excluding the impact of the WNC Divesture.
Phone revenues grew 11.8%, mainly due to a 18.7% increase in phone customers, offset in part by
higher levels of discounted pricing. During the six months ended June 30, 2010, we gained 30,000
phone customers, as compared to an increase of 22,000 in the prior year period, excluding the
impact of the WNC Divesture.
Advertising revenues were 13.3% higher as a result of increased local and, to a lesser extent,
national advertising sales, partly a result of a rebound in automotive and, to a lesser extent,
political advertising.
25
Costs and Expenses
Service costs rose 4.1%, primarily due to higher programming expenses and, to a much lesser extent,
field operating and phone service costs, offset in part by lower HSD delivery expenses. Programming
expenses increased 5.0%, mostly due to higher contractual rates charged by our programming vendors
offset in part by a lower number of video customers. Field operating costs grew 8.9%, largely as a
result of higher vehicle fuel and fiber lease costs. Phone service costs rose 9.9%, mainly due to
unit growth. HSD delivery expenses fell 36.0%, principally due to the transition to an internally
managed e-mail system for our customers. Service costs as a percentage of revenues were 42.8% and
42.3% for the six months ended June 30, 2010 and 2009, respectively.
Selling, general and administrative expenses increased 1.6%, largely as a result of higher
marketing, bad debt and advertising expenses, mostly offset by lower employee costs. Marketing
costs were 4.3% higher, primarily due to a greater use of direct mail and television advertising
and contracted telemarketing sales, partly offset by lower direct sales contractor usage.
Advertising expenses grew 5.5%, principally due to increased costs related to higher advertising
sales activity. Bad debt expense rose 6.9% as a result of an increase in the aging of our accounts
receivable, offset in part by a lower number of written off accounts. Employee costs fell 10.3%,
primarily due to a favorable shift in employee benefit expenses. Selling, general and
administrative expenses as a percentage of revenues were 18.2% and 18.4% for the six months ended
June 30, 2010 and 2009, respectively.
Corporate expenses rose 1.0%, primarily due to greater legal fees, mostly offset by lower employee
costs and greater capitalization of labor costs relating to our ongoing migration of our phone
delivery system to an in-house platform. Corporate expenses as a percentage of revenues were 2.2%
and 2.3% for the six months ended June 30, 2010 and 2009, respectively.
Depreciation and amortization increased 2.7%, largely as a result of greater deployment of
shorter-lived customer premise equipment, offset in part by an unfavorable comparison to the prior
year period in which we experienced write-offs related to ice storms.
Adjusted OIBDA
Adjusted OIBDA increased 2.2%, mainly due to growth in HSD revenues and, to a lesser extent, phone
revenues, offset in part by higher service costs and, to a lesser extent, lower video revenues.
Operating Income
Operating income was 1.7% higher, primarily due to the increase in Adjusted OIBDA, offset in part
by higher depreciation and amortization.
Interest Expense, Net
Interest expense, net, grew 1.3%, primarily due to greater amortization of deferred financing
costs, offset in part by a lower average cost of debt.
(Loss) Gain on Derivatives, Net
As a result of the quarterly mark-to-market valuation of our interest rate swaps, based upon
information provided by our counterparties, we recorded a net loss on derivatives of $40.8 million
and a net gain on derivatives of $24.3 million, for the six months ended June 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, primarily those that
become effective at future dates.
Gain on Sale of Cable Systems, Net
For the six months ended June 30, 2009, we recognized a gain on sale of cable systems, net, of
approximately $13.8 million related to our sale of certain cable systems in Western North Carolina.
Other Expense, Net
Other expense, net, was $2.5 million and $4.8 million for the six months ended June 30, 2010 and
2009, respectively. During the six months ended June 30, 2010, other expense, net, consisted of
$1.9 million of revolving credit facility commitment fees and $0.6 million of other fees. During
the six months ended June 30, 2009, other expense, net, included $2.3 million of revolving credit
facility commitment fees, $2.1 million of deferred financing costs and $0.4 million of other fees.
26
Loss on Early Extinguishment of Debt
Loss on early extinguishment of debt totaled $1.2 million for the six months ended June 30, 2010.
This amount represented the write-off of certain deferred financing costs associated with prior
financings that were repaid during the period. For more information, see Liquidity and Capital
Resources Capital Structure New Financings.
Provision for Income Taxes
Our provision for income taxes was $3.6 million and $27.8 million for the six months ended June 30,
2010 and 2009, respectively. See Note 10 to Consolidated Financial Statements.
Net Income
We recognized net income of $4.7 million for the six months ended June 30, 2010, compared to net
income of $56.8 million for the prior year period. The decrease in net income was primarily the result of a $40.8 million loss on derivatives, as compared to a $24.3 million gain on derivatives and a $13.8 million gain on the sale of cable systems, offset in part by a $27.8 million provision for income taxes, for the six months ended June 30, 2009.
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, repurchases of
our Class A common stock and other investments. 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 $13.0 million and in each of the
years ending December 31, 2011 through 2014 of $26.0 million. As of June 30, 2010, our sources of
liquidity included $126.7 million of cash and cash equivalents on hand and $716.0 million of unused and available lines under our revolving credit facilities.
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 $166.8 million for the six months ended June
30, 2010, primarily due to Adjusted OIBDA of $278.0 million, offset in part by interest expense of
$101.5 million and, to a much lesser extent, a $10.3 million net change in operating assets and
liabilities. The net change in operating assets and liabilities was principally due to an increase
in prepaid expenses and other assets of $6.4 million and an increase in accounts receivable, net,
of $3.2 million.
Net cash flows provided by operating activities were $167.3 million for the six months ended June
30, 2009, primarily due to Adjusted OIBDA of $271.9 million, offset in part by interest expense of
$100.3 million. The net change in operating assets and liabilities was approximately $3.8 million,
largely as a result of an increase in prepaid expenses and other assets of $6.9 million and an
increase in accounts receivable, net, of $5.7 million, offset in part by an increase in accounts
payable, accrued expenses and other current liabilities of $6.6 million and an increase in deferred
revenue of $1.7 million.
Net Cash Flows Used in Investing Activities
Capital expenditures continue to be our primary use of capital resources and the entirety of our
net cash flows used in investing activities. Net cash flows used in investing activities were
$122.0 million for the six months ended June 30, 2010, as compared to $109.2 million for the prior
year period. The $12.8 million increase in capital expenditures largely reflected greater
investments in the internal phone platform and, to a much lesser extent, high-speed data delivery
system, offset in part by reduced outlays for customer premise equipment and network improvements
and, to a lesser extent, network extensions.
27
Net Cash Flows Used in Financing Activities
Net cash flows used in financing activities were $1.0 million for the six months ended June 30,
2010, primarily due to net new borrowings of $32.0 million (see New Financings below), mostly
offset by financing costs of $16.5 million and other financing activities, principally book
overdrafts, of $13.9 million.
Net cash flows used in financing activities were $56.5 million for the six months ended June 30,
2009, principally due to the cash portion of the repurchase of the Exchange Agreement totaling
$110.0 million (see Note 12 to our Consolidated Financial Statements), which was funded by net
borrowings of $54.0 million under our revolving credit facilities and cash flows from operating
activities.
Free Cash Flow
The following table reconciles cash flows provided by operating activities to Free Cash Flow:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended |
|
|
|
|
|
|
|
|
|
June 30, |
|
|
|
|
|
|
|
|
|
2010 |
|
|
2009 |
|
|
Change |
|
|
% Change |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash provided by operating activities |
|
$ |
166,805 |
|
|
$ |
167,346 |
|
|
$ |
(541 |
) |
|
|
(0.3 |
%) |
Capital expenditures |
|
|
(122,000 |
) |
|
|
(109,173 |
) |
|
|
(12,827 |
) |
|
|
11.7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Free Cash Flow |
|
$ |
44,805 |
|
|
$ |
58,173 |
|
|
$ |
(13,368 |
) |
|
|
(23.0 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
For the six months ended June 30, 2010, Free Cash Flow decreased 23.0%, largely as a result of a $12.8 million increase in capital expenditures and a $6.5 million net change in certain working capital accounts, partly offset by a $6.0 million rise in Adjusted OIBDA.
Capital Structure
As of June 30, 2010, our outstanding total indebtedness was $3.397 billion, of which approximately
69% was at fixed interest rates or subject to interest rate protection. During the six months ended
June 30, 2010, we paid cash interest of $106.3 million, net of capitalized interest.
Bank Credit Facilities
As of June 30, 2010, we had $3.281 billion of aggregate bank credit facilities (the credit
facilities), of which $2.547 billion was outstanding. The credit agreements governing the credit
facilities contain 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 7 in our Notes to Consolidated Financial Statements for information regarding material
financial covenants.
As of June 30, 2010, we had undrawn revolving credit commitments of $734.5 million, with $18.5
million of letters of credit and $716.0 million of unused lines, all available to be borrowed and
used for general corporate purposes, based on the terms and conditions of our debt arrangements. As
of the same date, our revolving credit commitments were scheduled to expire in the amounts of $79.0
million, $430.3 million and $225.2 million on September 30, 2011, December 31, 2012 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 new term loans under our existing
credit facilities in an aggregate principal amount of $850 million. The new term loans mature 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 these new term loans were largely used to repay certain existing term loans and the
full balance of outstanding revolving credit loans under our credit facilities. On the same date,
we also reduced the total revolving credit commitments under our revolving credit facilities from
$830.3 million to $734.5 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 7 to our Notes to Consolidated Financial
Statements for further information on the new financings.
28
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 facilities to reduce the potential
volatility in our interest expense that would otherwise result from changes in market interest
rates. As of June 30, 2010, we had current interest rate swaps with various banks pursuant to which
the interest rate on $1.5 billion of floating rate debt was fixed at a weighted average rate of
3.5%. We also had $1.3 billion of forward starting interest rate swaps with a weighted average
fixed rate of approximately 3.3% of which $0.5 billion, $0.2 billion and $0.6 billion 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
facilities as of June 30, 2010 and 2009 were 5.1% and 5.3%, respectively.
Senior Notes
As of June 30, 2010, we had $850.0 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 facilities. 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 7 in our Notes to
Consolidated Financial Statements for information regarding material financial covenants.
Covenant Compliance and Debt Ratings
For all periods through June 30, 2010, we were in compliance with all of the covenants under the
credit facilities and senior note arrangements. There are no covenants, events of default,
borrowing conditions or other terms in the credit facilities or senior note arrangements that are
based on changes in our credit rating assigned by any rating agency. We do not believe that we will
have any difficulty complying with any of the applicable covenants in the foreseeable future.
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 Moodys, and B+, with
a negative outlook, by Standard and Poors. The negative outlook on our corporate credit ratings
by Standard and Poors is due to the potential implications of the going private transaction
proposed by our founder, Chairman and Chief Executive Officer, Rocco B. Commisso. See
Note 14 in our Notes to Consolidated Financial Statements. 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, 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 |
|
$ |
26,000 |
|
|
$ |
193,319 |
|
|
$ |
219,319 |
|
July 1, 2011 to June 30, 2013 |
|
|
52,000 |
|
|
|
373,445 |
|
|
|
425,445 |
|
July 1, 2013 to June 30, 2015 |
|
|
1,378,750 |
|
|
|
315,197 |
|
|
|
1,693,947 |
|
Thereafter |
|
|
1,940,250 |
|
|
|
200,113 |
|
|
|
2,140,363 |
|
|
|
|
|
|
|
|
|
|
|
Total cash obligations |
|
$ |
3,397,000 |
|
|
$ |
1,082,074 |
|
|
$ |
4,479,074 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
Refer to Note 7 of our 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 amortization, as of June 30, 2010, and the average
interest rates applicable under such debt obligations. |
29
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 Boards Accounting Standards Codification No.
350 (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 units 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 we have two
reporting units for the purpose of applying ASC 350, Mediacom Broadband and Mediacom LLC. We
conducted our annual impairment test as of October 1, 2009.
The economic conditions currently affecting the U.S. economy and how that may impact the long-term
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 when we perform our next
annual impairment testing during the fourth quarter of 2010.
Because we believe there has not been a meaningful change in the long-term fundamentals of our
business during the first half of 2010, we have determined that there has been no triggering event
under ASC 350, and as such, no interim impairment test is required as of June 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 Commissions 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.
30
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
Under the supervision and with the participation of our management, including our Chief Executive
Officer and Chief Financial Officer, we evaluated the effectiveness of our disclosure controls and
procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934) as of the end
of the period covered by this report. Based upon that evaluation, our Chief Executive Officer and
Chief Financial Officer concluded that our disclosure controls and procedures were effective as of
June 30, 2010.
There has not been any change in our internal control over financial reporting (as defined in Rule
13a-15(f) under the Exchange Act) during the quarter ended June 30, 2010 that has materially
affected, or is reasonably likely to materially affect, our internal control over financial
reporting.
31
PART II
ITEM 1. LEGAL PROCEEDINGS
See Note 9 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 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Not applicable.
ITEM 3. DEFAULT UPON SENIOR SECURITIES
Not applicable.
ITEM 4. RESERVED
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS
|
|
|
|
|
Exhibit |
|
|
Number |
|
Exhibit Description |
|
|
|
|
|
|
10.1 |
|
|
Amendment No. 5, dated as of April 23, 2010, to the
Amendment and Restatement, dated as of December 16, 2004,
of the Credit Agreement, dated as of July 18, 2001, among
the operating subsidiaries of Mediacom Broadband LLC, the
lenders party thereto and JPMorgan Chase Bank, as
administrative agent for the lenders (1) |
|
|
|
|
|
|
10.2 |
|
|
Incremental Facility Agreement, dated as of April 23, 2010,
between the operating subsidiaries of Mediacom Broadband
LLC, the lenders signatory thereto and JPMorgan Chase Bank,
N.A., as administrative agent (1) |
|
|
|
|
|
|
10.3 |
|
|
Amendment No. 4, dated as of April 23, 2010, to the Credit
Agreement, dated as of October 21, 2004, among the
operating subsidiaries of Mediacom LLC, the lenders party
thereto and JPMorgan Chase Bank, as administrative agent
for the lenders (2) |
|
|
|
|
|
|
10.4 |
|
|
Incremental Facility Agreement, dated as of April 23, 2010,
between the operating subsidiaries of Mediacom LLC, the
lenders signatory thereto and JPMorgan Chase Bank, N.A., as
administrative agent (2) |
|
|
|
|
|
|
31.1 |
|
|
Rule 13a-14(a) Certifications |
|
|
|
|
|
|
32.1 |
|
|
Section 1350 Certifications |
|
|
|
(1) |
|
Filed as an exhibit to the Current Report on Form 8-K, dated April 23, 2010, of Mediacom
Broadband LLC and incorporated herein by reference. |
|
(2) |
|
Filed as an exhibit to the Current Report on Form 8-K, dated April 23, 2010, of Mediacom LLC
and incorporated herein by reference. |
32
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 COMMUNICATIONS CORPORATION
|
|
August 6, 2010 |
By: |
/s/ Mark E. Stephan
|
|
|
|
Mark E. Stephan |
|
|
|
Executive Vice President and Chief Financial Officer |
|
|
33
EXHIBIT INDEX
|
|
|
|
|
Exhibit |
|
|
Number |
|
Exhibit Description |
|
|
|
|
|
|
10.1 |
|
|
Amendment No. 5, dated as of April 23, 2010, to the
Amendment and Restatement, dated as of December 16, 2004,
of the Credit Agreement, dated as of July 18, 2001, among
the operating subsidiaries of Mediacom Broadband LLC, the
lenders party thereto and JPMorgan Chase Bank, as
administrative agent for the lenders (1) |
|
|
|
|
|
|
10.2 |
|
|
Incremental Facility Agreement, dated as of April 23, 2010,
between the operating subsidiaries of Mediacom Broadband
LLC, the lenders signatory thereto and JPMorgan Chase Bank,
N.A., as administrative agent (1) |
|
|
|
|
|
|
10.3 |
|
|
Amendment No. 4, dated as of April 23, 2010, to the Credit
Agreement, dated as of October 21, 2004, among the
operating subsidiaries of Mediacom LLC, the lenders party
thereto and JPMorgan Chase Bank, as administrative agent
for the lenders (2) |
|
|
|
|
|
|
10.4 |
|
|
Incremental Facility Agreement, dated as of April 23, 2010,
between the operating subsidiaries of Mediacom LLC, the
lenders signatory thereto and JPMorgan Chase Bank, N.A., as
administrative agent (2) |
|
|
|
|
|
|
31.1 |
|
|
Rule 13a-14(a) Certifications |
|
|
|
|
|
|
32.1 |
|
|
Section 1350 Certifications |
|
|
|
(1) |
|
Filed as an exhibit to the Current Report on Form 8-K, dated April 23, 2010, of Mediacom
Broadband LLC and incorporated herein by reference. |
|
(2) |
|
Filed as an exhibit to the Current Report on Form 8-K, dated April 23, 2010, of Mediacom LLC
and incorporated herein by reference. |
34
Exhibit 31.1
Exhibit 31.1
CERTIFICATIONS
I, Rocco B. Commisso, certify that:
(1) I have reviewed this report on Form 10-Q of Mediacom Communications Corporation;
(2) Based on my knowledge, this report does not contain any untrue statement of a material fact or
omit to state a material fact necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to the period covered by this
report;
(3) Based on my knowledge, the financial statements, and other financial information included in
this report, fairly present in all material respects the financial condition, results of operations
and cash flows of the registrant as of, and for, the periods presented in this report;
(4) The registrants other certifying officer and I are responsible for establishing and
maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and
15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules
13a-15(f) and 15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and
procedures to be designed under our supervision, to ensure that material information relating to
the registrant, including its consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over
financial reporting to be designed under our supervision, to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrants disclosure controls and procedures and
presented in this report our conclusions about the effectiveness of the disclosure controls and
procedures, as of end of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrants internal control over financial
reporting that occurred during the registrants most recent fiscal quarter (the registrants
fourth fiscal quarter in the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the registrants internal control over financial
reporting; and
(5) The registrants other certifying officer and I have disclosed, based on our most recent
evaluation of internal control over financial reporting, to the registrants auditors and the audit
committee of registrants board of directors (or persons performing the equivalent function):
a) All significant deficiencies and material weaknesses in the design or operation of internal
control over financial reporting which are reasonably likely to adversely affect the registrants
ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a
significant role in the registrants internal control over financial reporting.
|
|
|
|
|
August 6, 2010 |
By: |
/s/ Rocco B. Commisso
|
|
|
|
Rocco B. Commisso |
|
|
|
Chairman and Chief Executive Officer |
|
CERTIFICATIONS
I, Mark E. Stephan, certify that:
(1) I have reviewed this report on Form 10-Q of Mediacom Communications Corporation;
(2) Based on my knowledge, this report does not contain any untrue statement of a material fact or
omit to state a material fact necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to the period covered by this
report;
(3) Based on my knowledge, the financial statements, and other financial information included in
this report, fairly present in all material respects the financial condition, results of operations
and cash flows of the registrant as of, and for, the periods presented in this report;
(4) The registrants other certifying officer and I are responsible for establishing and
maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and
15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules
13a-15(f) and 15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and
procedures to be designed under our supervision, to ensure that material information relating to
the registrant, including its consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over
financial reporting to be designed under our supervision, to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrants disclosure controls and procedures and
presented in this report our conclusions about the effectiveness of the disclosure controls and
procedures, as of end of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrants internal control over financial
reporting that occurred during the registrants most recent fiscal quarter (the registrants
fourth fiscal quarter in the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the registrants internal control over financial
reporting; and
(5) The registrants other certifying officer and I have disclosed, based on our most recent
evaluation of internal control over financial reporting, to the registrants auditors and the audit
committee of registrants board of directors (or persons performing the equivalent function):
a) All significant deficiencies and material weaknesses in the design or operation of internal
control over financial reporting which are reasonably likely to adversely affect the registrants
ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a
significant role in the registrants internal control over financial reporting.
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August 6, 2010 |
By: |
/s/ Mark E. Stephan
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Mark E. Stephan |
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Executive Vice President and Chief Financial Officer |
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Exhibit 32.1
Exhibit 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Mediacom Communications Corporation (the Company) on
Form 10-Q for the period ended June 30, 2010 as filed with the Securities and Exchange Commission
on the date hereof (the Report), Rocco B. Commisso, Chairman and Chief Executive Officer and Mark
E. Stephan, Executive Vice President and Chief Financial Officer of the Company, certify, pursuant
to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:
(1) the Report fully complies with the requirements of section 13(a) or 15(d) of the Securities
Exchange Act of 1934; and,
(2) The information contained in the Report fairly presents, in all material respects, the
financial condition and results of operations of the Company.
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August 6, 2010 |
By: |
/s/ Rocco B. Commisso
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Rocco B. Commisso |
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Chairman and Chief Executive Officer |
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By: |
/s/ Mark E. Stephan
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Mark E. Stephan |
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Executive Vice President and Chief Financial Officer |
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