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, 2002 Commission File Numbers: 333-72440 333-72440-01 MEDIACOM BROADBAND LLC MEDIACOM BROADBAND CORPORATION* (Exact names of Registrants as specified in their charters) DELAWARE 06-1615412 DELAWARE 06-1630167 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Numbers) 100 Crystal Run Road Middletown, New York 10941 (Address of principal executive offices) (845) 695-2600 (Registrants' telephone number) Indicate by check mark whether the Registrants (1) have filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrants were required to file such reports), and (2) have been subject to such filing requirements for the past 90 days: Yes X No __ Indicate the number of shares outstanding of the Registrants' common stock: Not Applicable *Mediacom Broadband Corporation meets the conditions set forth in General Instruction H (1) (a) and (b) of Form 10-Q and is therefore filing this form with the reduced disclosure format.
MEDIACOM BROADBAND LLC AND SUBSIDIARIES FORM 10-Q FOR THE PERIOD ENDED JUNE 30, 2002 TABLE OF CONTENTS PAGE ---- PART I ITEM 1. FINANCIAL STATEMENTS Consolidated Balance Sheets (unaudited) - June 30, 2002 and December 31, 2001..................................................... 1 Consolidated Statements of Operations (unaudited) - Three and Six Months Ended June 30, 2002 ............................................... 2 Consolidated Statement of Cash Flows (unaudited) - Six Months Ended June 30, 2002 ......................................................... 3 Notes to Consolidated Financial Statements (unaudited)................................... 4 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS............................................. 8 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK................................. 17 PART II ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K........................................................... 18 ---------------------------- You should carefully review the information contained in this Quarterly Report and in other reports or documents that we file from time to time with the Securities and Exchange Commission (the "SEC"). In this Quarterly Report, we state our beliefs of future events and of our future financial performance. In some cases, you can identify those so-called "forward-looking statements" by words such as "may," "will," "should," "expects," "plans," "anticipates," "believes," "estimates," "predicts," "potential," or "continue" or the negative of those words and other comparable words. You should be aware that those statements are only our predictions. Actual events or results may differ materially. In evaluating those statements, you should specifically consider various factors, including the risks discussed in our Annual Report on Form 10-K for the year ended December 31, 2001 and other reports or documents that we file from time to time with the SEC. Those factors may cause our actual results to differ materially from any of our forward-looking statements. All forward-looking statements attributable to us or a person acting on our behalf are expressly qualified in their entirety by this cautionary statement.
PART I ITEM 1. FINANCIAL STATEMENTS - MEDIACOM BROADBAND LLC MEDIACOM BROADBAND LLC AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (ALL DOLLAR AMOUNTS IN 000'S) (UNAUDITED) JUNE 30, DECEMBER 31, 2002 2001 -------------- ------------ ASSETS Cash and cash equivalents $ 35,643 $ 55,578 Subscriber accounts receivable, net of allowance for doubtful accounts of $2,385 and $2,148, respectively 22,747 17,504 Prepaid expenses and other assets 6,409 6,600 Investment in cable television systems: Inventory 16,964 24,670 Property, plant and equipment, net of accumulated depreciation of $78,276 and $34,799, respectively 628,017 559,567 Intangible assets, net of accumulated amortization of $60,174 and $51,879, respectively 1,535,009 1,541,464 -------------- ------------ Total investment in cable television systems 2,179,990 2,125,701 Other assets, net of accumulated amortization of $2,289 and $1,086, respectively 19,233 20,284 -------------- ------------ Total assets $ 2,264,022 $ 2,225,667 ============== ============ LIABILITIES, PREFERRED MEMBERS' INTERESTS AND MEMBER'S EQUITY LIABILITIES Debt $ 1,222,000 $ 1,200,000 Accounts payable and accrued expenses 204,058 172,700 Deferred revenue 35,865 36,673 -------------- ------------ Total liabilities $ 1,461,923 $ 1,409,373 -------------- ------------ PREFERRED MEMBERS' INTERESTS 150,000 150,000 -------------- ------------ MEMBER'S EQUITY Capital contributions 725,000 725,000 Accumulated deficit (72,901) (58,706) -------------- ------------ Total member's equity 652,099 666,294 -------------- ------------ Total liabilities, preferred members' interests and member's equity $ 2,264,022 $ 2,225,667 ============== ============ The accompanying notes to consolidated financial statements are an integral part of these statements. 1
MEDIACOM BROADBAND LLC AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (ALL DOLLAR AMOUNTS IN 000'S) (UNAUDITED) THREE MONTHS SIX MONTHS ENDED ENDED JUNE 30, 2002 JUNE 30, 2002 ------------- ------------- Revenues $ 128,264 $ 250,620 Costs and expenses: Service costs 51,395 105,942 Selling, general and administrative expenses 25,795 49,776 Management fee expense 1,731 3,365 Depreciation and amortization 29,053 55,072 ------------- ------------- Operating income 20,290 36,465 ------------- ------------- Interest expense, net 18,776 37,710 Loss on derivative instruments, net 1,585 1,242 Other expenses 1,379 2,708 ------------- ------------- Net loss $ (1,450) $ (5,195) ============= ============= The accompanying notes to consolidated financial statements are an integral part of these statements. 2
MEDIACOM BROADBAND LLC AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS (ALL DOLLAR AMOUNTS IN 000'S) (UNAUDITED) SIX MONTHS ENDED JUNE 30, 2002 ------------- CASH FLOWS PROVIDED BY OPERATING ACTIVITIES: Net loss $ (5,195) Adjustments to reconcile net loss to net cash flows from operating activities: Depreciation and amortization 55,072 Loss on derivative instruments, net 1,242 Amortization of deferred financing costs 1,084 Changes in assets and liabilities, net of effects from acquisitions: Subscriber accounts receivable, net (5,243) Prepaid expenses and other assets 191 Accounts payable and accrued expenses 30,116 Deferred revenue (808) ------------- Net cash flows provided by operating activities 76,459 ------------- CASH FLOWS USED IN INVESTING ACTIVITIES: Capital expenditures (107,401) Other investment activities (1,840) ------------- Net cash flows used in investing activities (109,241) ------------- CASH FLOWS PROVIDED BY FINANCING ACTIVITIES: New borrowings 63,000 Repayment of debt (41,000) Dividend payment to affiliate (9,000) Financing costs (153) ------------- Net cash flows provided by financing activities 12,847 ------------- Net decrease in cash and cash equivalents (19,935) CASH AND CASH EQUIVALENTS, beginning of period 55,578 ------------- CASH AND CASH EQUIVALENTS, end of period $ 35,643 ============= SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid during the period for interest $ 43,172 ============= The accompanying notes to consolidated financial statements are an integral part of these statements. 3
MEDIACOM BROADBAND LLC AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (1) ORGANIZATION Mediacom Broadband LLC ("Mediacom Broadband," and collectively with its subsidiaries, the "Company"), a Delaware limited liability company, was formed in April 2001 for the purpose of acquiring cable systems from AT&T Broadband, LLC ("AT&T Broadband"). Through these cable systems (the "AT&T cable systems"), the Company provides entertainment, information and telecommunications services to its subscribers. As of June 30, 2002, the Company had acquired and was operating cable television systems in the states of Georgia, Illinois, Iowa and Missouri. Mediacom Broadband Corporation, a Delaware corporation wholly-owned by Mediacom Broadband, was organized in May 2001 for the sole purpose of acting as co-issuer with Mediacom Broadband of $400.0 million aggregate principal amount of the 11% senior notes due July 15, 2013. Mediacom Broadband Corporation does not conduct operations of its own. The Company was initially capitalized on June 29, 2001 with an equity contribution of $336.4 million from the Company's parent and manager, Mediacom Communications Corporation ("MCC"), a Delaware corporation. On July 18, 2001, the Company received an additional equity contribution of $388.6 million from MCC and a $150.0 million preferred equity investment from subsidiaries of Mediacom LLC, a New York limited liability company wholly-owned by MCC. (2) STATEMENT OF ACCOUNTING PRESENTATION AND OTHER INFORMATION BASIS OF PREPARATION OF CONSOLIDATED FINANCIAL STATEMENTS The consolidated condensed financial statements as of June 30, 2002 are unaudited. However, in the opinion of management, such statements include all adjustments, including normal recurring adjustments, necessary for a fair presentation of the results for the periods presented. The accounting policies followed during such interim periods reported are in conformity with generally accepted accounting principles in the United States of America and are consistent with those applied during annual periods. For additional disclosures, including a summary of the Company's accounting policies, the interim financial statements should be read in conjunction with the Company's Annual Report on Form 10-K for the year ended December 31, 2001 (File Nos. 333-72440 and 333-72440-01). 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, 2002. Prior to the June 29, 2001 acquisition of certain cable systems from affiliates of AT&T Broadband, the Company had no active business operations (see Note 3). The results of operations for the two day period ended June 30, 2002 were not material and, as such, were not presented herein for comparative purposes. RECLASSIFICATIONS Certain prior periods amounts have been reclassified to conform to the current period presentation. RECENT ACCOUNTING PRONOUNCEMENTS Effective January 1, 2002, the Company adopted, Statement of Financial Accounting Standards No. 141 ("SFAS 141") "Business Combinations" and No. 142 ("SFAS 142") "Goodwill and Other Intangible Assets". SFAS 141 requires all business combinations initiated after June 30, 2001 to be accounted for using the purchase method. Adoption of SFAS 141 had no effect on the Company's results of operations or financial position as the Company accounts for all acquisitions under the purchase method. The provisions of SFAS 142 prohibit the amortization of goodwill and indefinite-lived intangible assets, which are required to be tested annually for impairment. The Company has determined that its cable franchise costs are indefinite-lived assets. The impact of adopting SFAS 142 was to reduce amortization expense by $50.4 million for the six months ended June 30, 2002. Based on the Company's review, there has been no impairment of goodwill and indefinite-lived intangible assets under SFAS 142. 4
MEDIACOM BROADBAND LLC AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) The following table provides a reconciliation of the pro forma results of operations for the six months ended June 30, 2001 to the net loss that would have been reported had SFAS No. 142 been applied as of January 1, 2001, assuming the purchase of the AT&T cable systems had been consummated as of January 1, 2001 (dollars in thousands): Reported pro forma net loss.......................... $ (67,132) Add back: franchise cost amortization............. 50,394 ----------- Adjusted pro forma net loss.......................... $ (16,738) =========== As of June 30, 2002, intangible assets subject to amortization principally consisted of subscriber lists, which are being amortized over five years. As of June 30, 2002, the Company's amortizable intangible assets had a gross value of $83.5 million, with accumulated amortization of $8.4 million. The Company's estimated aggregate amortization expense for the remainder of 2002 is $8.3 million and $16.7 million for each of the years 2003 through 2006. In July 2001, the FASB issued Statement of Financial Accounting Standards No. 143 ("SFAS 143"), "Accounting for Asset Retirement Obligations," which addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. SFAS 143 will become effective for fiscal years beginning after June 15, 2002. The Company does not expect that adoption of SFAS 143 will have a material impact on its results of operations or financial position. In August 2001, the FASB issued Statement of Financial Accounting Standards No. 144 ("SFAS 144") "Accounting for the Impairment or Disposal of Long-Lived Assets," which addresses financial accounting and reporting for the impairment or disposal of long-lived assets and provides guidance on classification and accounting for such assets when held for sale or abandonment. The Company adopted this standard effective January 1, 2002 and there was no impact on its results of operations or financial position. (3) ACQUISITIONS The Company completed the undernoted acquisitions of cable systems in 2001. These acquisitions were made to increase the number of customers and markets it serves. These acquisitions were accounted for using the purchase method of accounting, and accordingly, the purchase price of these acquisitions has been allocated to the assets acquired and liabilities assumed at their estimated fair values at their respective date of acquisition. The results of operations of the acquisitions have been included with those of the Company since the dates of acquisition. On June 29, 2001, the Company acquired cable systems serving approximately 94,000 basic subscribers in the state of Missouri from affiliates of AT&T Broadband for a purchase price of approximately $300.0 million. The purchase price has been preliminarily allocated as follows: approximately $82.2 million to property, plant and equipment and approximately $217.8 million to intangible assets. Such allocations are subject to adjustments based upon the final appraisal information received by the Company. The acquisition was financed with a portion of MCC's $336.4 million equity contribution on June 29, 2001. On July 18, 2001, the Company acquired cable systems serving approximately 706,000 basic subscribers in the states of Georgia, Illinois and Iowa from affiliates of AT&T Broadband for an aggregate purchase price of approximately $1.77 billion. The purchase price has been preliminarily allocated as follows: approximately $478.9 million to property, plant and equipment and approximately $1.29 billion to intangible assets. Such allocations are subject to adjustments based upon the final appraisal information received by the Company. These acquisitions were financed with a portion of MCC's $388.6 million equity contribution on July 18, 2001, and the $150.0 million preferred equity investment by subsidiaries of Mediacom LLC, the net proceeds from the Company's private offering of 11% senior notes due 2013 and borrowings under the Company's subsidiary credit facilities. 5
MEDIACOM BROADBAND LLC AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) The opening balance sheet for the acquisitions is as follows (dollars in thousands): Accounts receivable.................................... $ 5,758 Intangible assets...................................... 1,551,188 Property, plant and equipment.......................... 562,646 Accrued expenses....................................... (6,256) ------------ Total.............................................. $ 2,113,336 ============ Summarized below are the pro forma unaudited results of operations for the six months ended June 30, 2001, assuming the purchase of the AT&T cable systems had been consummated as of January 1, 2001. Adjustments have been made to depreciation and amortization, reflecting the fair value of the assets acquired, and interest expense reflecting the debt incurred to finance the acquisitions. The pro forma results may not be indicative of the results that would have occurred if the acquisitions had been completed at the beginning of the period presented or which may be obtained in the future (dollars in thousands). Revenues.................................................. $ 229,991 Operating loss............................................ (22,322) Net loss.................................................. (67,132) (4) DEBT As of June 30, 2002 and December 31, 2001, debt consisted of: JUNE 30, DECEMBER 31, 2002 2001 ------------- ------------ (DOLLARS IN THOUSANDS) Subsidiary credit facility ............ $ 822,000 $ 800,000 11% senior notes ...................... 400,000 400,000 ------------- ------------ $ 1,222,000 $ 1,200,000 ============= ============ The average interest rate on outstanding debt under the subsidiary credit facility was 4.1% for the three months ended June 30, 2002, before giving effect to the interest rate exchange agreements discussed below. As of June 30, 2002, the Company had unused credit commitments of approximately $577.5 million under its subsidiary credit facility, of which about $403.0 million could be borrowed and used for general corporate purposes under the most restrictive covenants in the Company's debt arrangements. The Company was in compliance with all debt covenants as of June 30, 2002. The Company uses interest rate exchange agreements in order to fix the interest rate for the duration of the contract as a hedge against interest rate volatility. As of June 30, 2002, the Company had entered into interest rate exchange agreements with various banks pursuant to which the interest rate on $150.0 million is fixed at a weighted average rate of approximately 4.1%, plus the average applicable margin over the eurodollar rate option under the subsidiary credit agreement. Under the terms of the interest rate exchange agreements, which expire from 2005 through 2007, the Company is exposed to credit loss in the event of nonperformance by the other parties. However, the Company does not anticipate their nonperformance. 6
MEDIACOM BROADBAND LLC AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) The fair value of the interest rate exchange agreements is the estimated amount that the Company would receive or pay to terminate such agreements, taking into account current interest rates and the current creditworthiness of the Company's counterparties. At June 30, 2002, the Company would have paid approximately $1.2 million if the exchange agreements were terminated, inclusive of accrued interest. (5) PREFERRED MEMBERS' INTERESTS On July 18, 2001, the Company received a $150.0 million preferred equity investment from Mediacom LLC. The preferred equity investment has a 12% annual dividend, payable quarterly in cash. The proceeds from the preferred equity investment were used to fund a portion of the Company's acquisitions of the AT&T cable systems. (6) SUBSEQUENT EVENT On July 1, 2002, the Company paid a $4.5 million cash dividend to MCC, which MCC used to make an interest payment on its $172.5 million 5.25% convertible senior notes due 2006. 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion should be read in conjunction with the Company's consolidated financial statements as of and for the three and six months ended June 30, 2002 and with the Company's annual report on Form 10-K for the year ended December 31, 2001. ORGANIZATION Mediacom Broadband LLC was organized as a Delaware limited liability company in April 2001 and serves as a holding company for its operating subsidiaries. Mediacom Broadband Corporation, its wholly-owned subsidiary, was organized as a Delaware corporation in May 2001 for the sole purpose of acting as a co-issuer with the Company's 11% senior notes due 2013 and does not conduct operations of its own. The Company's parent and manager, Mediacom Communications Corporation ("MCC"), was organized as a Delaware corporation in November 1999. See Note 1 of the Company's consolidated financial statements. ACQUISITIONS The Company commenced operations on June 29, 2001 with the acquisition from AT&T Broadband, LLC of cable systems serving approximately 94,000 basic subscribers in the state of Missouri. The purchase price for these cable systems was approximately $300.0 million. On July 18, 2001, the Company acquired from AT&T Broadband cable systems serving approximately 706,000 basic subscribers in the states of Georgia, Illinois and Iowa. The aggregate purchase price for these cable systems was approximately $1.77 billion. GENERAL The Company has generated significant increases in revenues principally as a result of its acquisition activities and increases in monthly revenues per basic subscriber. Approximately 85.5% of the Company's revenues for the six months ended June 30, 2002 are attributable to video revenues from monthly subscription fees charged to customers for the Company's core cable television services, including basic, expanded basic and premium programming, digital cable television programming services, wire maintenance, equipment rental, services to commercial establishments pay-per-view charges, installation and reconnection fees, late payment fees, and other ancillary revenues. Data revenues from cable modem service and advertising revenues represent 8.3% and 6.2% of revenues, respectively. Franchise fees charged to customers are included in their corresponding revenue category. The Company's operating expenses consist of service costs and selling, general and administrative expenses directly attributable to its cable systems. Service costs include fees paid to programming suppliers, expenses related to copyright fees, wages and salaries of technical personnel, high-speed Internet access costs and plant operating costs. Programming costs have historically increased at rates in excess of inflation due to increases in the number of programming services the Company has offered and significant increases in the rates charged for the programming services already carried on their cable systems. Under the Federal Communication Commission's existing cable rate regulations, the Company is allowed to increase its rates for cable television services to more than cover any increases in the programming costs. However, competitive conditions or other factors in the marketplace may limit their ability to increase their rates Selling, general and administrative expenses include wages and salaries for customer service and administrative personnel, franchise fees and expenses related to billing, marketing, bad debt, advertising and office administration. Management fee expense reflects compensation of corporate employees and other corporate overhead. 8
The high level of depreciation and amortization associated with the Company's acquisition activities and capital investment program, as well as the interest expense related to their financing activities, have caused the Company to report net losses in its limited operating history. The Company believes that such net losses are common for cable television companies and anticipates that it will continue to incur net losses for the foreseeable future. Operating cash flow represents operating income (loss) before depreciation and amortization and restructuring charge. Operating cash flow: . is not intended to be a performance measure that should be regarded as an alternative either to operating income (loss) or net income (loss) as an indicator of operating performance, or to the statement of cash flows as a measure of liquidity; . is not intended to represent funds available for debt service, dividends, reinvestment or other discretionary uses; and . should not be considered in isolation or as a substitute for measures of performance prepared in accordance with generally accepted accounting principles. Operating cash flow is included herein because the Company's management believes that operating cash flow is a meaningful measure of performance as it is commonly used by the cable television industry and by the investment community to analyze and compare cable television companies. The Company's definition of operating cash flow may not be identical to similarly titled measures reported by other companies. CRITICAL ACCOUNTING POLICIES The following represents the Company's critical accounting policies which reflect significant judgments and uncertainties and could possibly result in materially different results under different conditions or assumptions. PROPERTY, PLANT AND EQUIPMENT In accordance with Statement of Financial Accounting Standards No. 51, "Financial Reporting by Cable Television Companies," the Company capitalizes a portion of direct and indirect costs related to the construction, replacement and installation of property, plant and equipment. Capitalized costs are recorded as additions to property, plant and equipment and depreciated over the life of the related assets. The Company performs periodic evaluations of the estimates used to determine the amount of costs that are capitalized. IMPAIRMENT OF LONG-LIVED ASSETS The Company follows the provisions of Statement of Financial Accounting Standards No. 121 ("SFAS 121"), "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of," which requires that long-lived assets and certain identifiable intangibles to be held and used by any entity be reviewed for impairment at each year end and whenever events or changes in circumstances indicate the carrying amount of an asset may not be recoverable. Based on the Company's review, there has been no impairment of long-lived assets under SFAS 121. GOODWILL AND OTHER INTANGIBLE ASSETS Effective January 1, 2002, the Company adopted Statement of Financial Accounting Standards No. 142 ("SFAS 142"), "Goodwill and Other Intangible Assets." The provisions of SFAS 142 prohibit the amortization of goodwill and indefinite-lived intangible assets and require assets to be tested annually for impairment. The Company has determined that its cable franchise costs are indefinite-lived assets. The impact of adopting SFAS 142 was to reduce amortization expense by $50.4 million for the six months ended June 30, 2002. Based on the Company's review, there has been no impairment of goodwill and indefinite-lived intangible assets under SFAS 142. 9
ACTUAL RESULTS OF OPERATIONS The following information includes the actual results of operations of the Company subsequent to its acquisitions of the AT&T cable systems on June 29 and July 18, 2001, and the historical pro forma results of predecessor operations prior to those dates. For a more detailed discussion of the presentation of the historical pro forma results of the AT&T cable systems and certain changes that have occurred as a result of the Company's acquisitions of such cable systems, see the "Introduction" section of "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the Company's Annual Report on Form 10-K for the year ended December 31, 2001. The historical pro forma results of operations for the three and six months ended June 30, 2001 reflect a reclassification from selling, general and administrative expenses to service costs to conform to the presentation of the Company's results of operations. The information and the following discussion and analysis are presented for comparative purposes only. Basic subscribers were 833,000 at June 30, 2002, as compared to 800,000 at June 30, 2001. Digital customers were 227,000 at June 30, 2002, as compared to 210,000 at June 30, 2001. Data customers were 89,000 at June 30, 2002, as compared to 62,000 at June 30, 2001. THREE MONTHS ENDED JUNE 30, 2002 COMPARED TO THREE MONTHS ENDED JUNE 30, 2001 THREE MONTHS ENDED JUNE 30, ----------------------------- 2002 2001 ----------- ----------- (DOLLARS IN THOUSANDS) Revenues.................................................................. $ 128,264 $ 117,274 Costs and expenses: Service costs.......................................................... 51,395 48,125 Selling, general and administrative expenses........................... 25,795 25,500 Management fee expense................................................. 1,731 7,325 Depreciation and amortization.......................................... 29,053 38,568 ----------- ----------- Operating income (loss)................................................... 20,290 (2,244) ----------- ----------- Interest expense, net..................................................... 18,776 - Loss on derivative instruments, net....................................... 1,585 - Other expenses............................................................ 1,379 - Gain on disposition of assets............................................. - (5,183) ----------- ----------- Net (loss) income before income taxes..................................... $ (1,450) $ 2,939 Benefit for income taxes.................................................. - (1,632) ----------- ----------- Net (loss) income......................................................... $ (1,450) $ 4,571 =========== =========== Revenues. Revenues increased by 9.4% to $128.3 million for the three months ended June 30, 2002, as compared to $117.3 million for the three months ended June 30, 2001. Revenues by service offering are as follows (dollars in millions): THREE MONTHS ENDED JUNE 30, ------------------------------------------------------ 2002 2001 ----------------------- ----------------------- % of % of Amount Revenues Amount Revenues --------- -------- -------- -------- Video.......... $ 109.0 85.0% $ 102.6 87.5% Data........... 10.8 8.4% 6.8 5.8% Advertising.... 8.5 6.6% 7.9 6.7% --------- -------- -------- -------- $ 128.3 100.0% $ 117.3 100.0% ========= ======== ======== ======== Video revenues increased by 6.2% to $109.0 million for the three months ended June 30, 2002, as compared to $102.6 million for the three months ended June 30, 2001. Video revenues increased primarily due to rate increases and customer growth in the Company's basic and digital cable services. 10
Data revenues increased by 58.8% to $10.8 million for the three months ended June 30, 2002, as compared to $6.8 million for the three months ended June 30, 2001. Data revenues increased primarily due to customer growth in the Company's high-speed Internet access service. Advertising revenues increased by 7.6% to $8.5 million for the three months ended June 30, 2002, as compared to $7.9 million for the three months ended June 30, 2001. Advertising revenues increased due to greater advertising capacity resulting from new channel additions. Service costs. Service costs increased 6.8% to $51.4 million for the three months ended June 30, 2002, as compared to $48.1 million for the three months ended June 30, 2001. Service costs increased primarily as a result of higher programming expenses, including rate increases by programming suppliers for existing services and the cost of new channel additions, and greater employee costs associated with customer growth in the Company's digital cable and high-speed Internet access services, partially offset by higher capitalized labor and overhead associated with the significant increase in the Company's cable network upgrade and headend elimination activities. As a percentage of revenues, service costs were 40.1% for the three months ended June 30, 2002, as compared with 41.0% for the three months ended June 30, 2001. Selling, general and administrative expenses. Selling, general and administrative expenses increased 1.2% to $25.8 million for the three months ended June 30, 2002, as compared to $25.5 million for the three months ended June 30, 2001. These costs increased primarily as a result of higher marketing expenses and costs associated with the Company's in-house advertising operation, partially offset by a reduction in bad debt and billing expenses. As a percentage of revenues, selling, general and administrative expenses were 20.1% for the three months ended June 30, 2002 as compared with 21.7% for the three months ended June 30, 2001. Management fee expense. Management fee expense decreased 76.4% to $1.7 million for the three months ended June 30, 2002, as compared to $7.3 million the three months ended June 30, 2001. As a percentage of revenues, management fee expense was 1.3% for the three months ended June 30, 2002 as compared with 6.2% for the three months ended June 30, 2001. This decrease was due to the lower management fees charged by MCC subsequent to the Company's acquisitions of the AT&T cable systems. Depreciation and amortization. Depreciation and amortization decreased 24.7% to $29.1 million for the three months ended June 30, 2002, as compared to $38.6 million for the three months ended June 30, 2001. This decrease was substantially due to the impact of adopting SFAS 142, which reduced amortization expense by $25.2 million during the three months ended June 30, 2000. This was partially offset by the preliminary purchase price recorded in connection with the Company's acquisitions of the AT&T cable systems, which increased the assets that were subject to amortization. Interest expense, net. Interest expense, net, was $18.8 million for the three months ended June 30, 2002. This amount represented interest on financings for the Company's acquisitions of the AT&T cable systems. For the three months ended June 30, 2001, the AT&T cable systems had no material indebtedness and were not otherwise allocated any interest expense by AT&T Broadband. Loss on derivative instruments, net. Loss on derivative instruments, net, was $1.6 million for the three months ended June 30, 2002, primarily due to declining interest rates. Other expenses. Other expenses were $1.4 million for the three months ended June 30, 2002. This amount represented fees on unused credit commitments under the Company's bank credit facility and amortization of deferred financing costs. Gain on the disposition of assets. Gain on the disposition of assets was $5.2 million for the three months ended June 30, 2001. This amount represented AT&T Broadband's sale of the Missouri systems to Mediacom Broadband LLC. Benefit for income taxes. The Company had no provision for income taxes for the three months ended June 30, 2002 as compared to a benefit for income taxes of $1.6 million for the three months ended June 30, 2001. Under the Company's ownership, the AT&T cable systems are organized as limited liability companies and are subject to minimum income taxes. Net loss. Due to the factors described above, the Company generated a net loss of $1.5 million for the three months ended June 30, 2002 as compared to net income of $4.6 million for the three months ended June 30, 2001. 11
Operating cash flow. Operating cash flow increased 35.8% to $49.3 million for the three months ended June 30, 2002, as compared to $36.3 million for the three months ended June 30, 2001. Operating cash flow increased primarily due to rate increases in the Company's video services, the increase in basic subscribers, the increase in revenue resulting from customer growth in the Company's digital cable and high-speed Internet access services, and the reduction in management fee expense, partially offset by the increases in programming, and other service costs and selling, general and administrative expenses. As a percentage of revenues, operating cash flow was 38.5% for the three months ended June 30, 2002 as compared with 31.0% for the three months ended June 30, 2001. SIX MONTHS ENDED JUNE 30, 2002 COMPARED TO SIX MONTHS ENDED JUNE 30, 2001 SIX MONTHS ENDED JUNE 30, ----------------------------- 2002 2001 ------------ ------------ (DOLLARS IN THOUSANDS) Revenues.................................................................. $ 250,620 $ 230,204 Costs and expenses: Service costs.......................................................... 105,942 94,875 Selling, general and administrative expenses........................... 49,776 50,507 Management fee expense................................................. 3,365 15,815 Restructuring charge................................................... - 570 Depreciation and amortization.......................................... 55,072 76,975 ------------ ------------ Operating income (loss)................................................... 36,465 (8,538) ------------ ------------ Interest expense, net..................................................... 37,710 - Loss on derivative instruments, net....................................... 1,242 - Other expenses............................................................ 2,708 - Gain on disposition of assets............................................. - (5,183) ------------ ------------ Net loss before income taxes.............................................. $ (5,195) $ (3,355) Benefit for income taxes.................................................. - (4,223) ------------ ------------ Net (loss) income......................................................... $ (5,195) $ 868 ============ ============ Revenues. Revenues increased by 8.9% to $250.6 million for the six months ended June 30, 2002, as compared to $230.2 million for the six months ended June 30, 2001. Revenues by service offering are as follows (dollars in millions): SIX MONTHS ENDED JUNE 30, --------------------------------------------------- 2002 2001 ----------------------- ----------------------- % of % of Amount Revenues Amount Revenues --------- -------- -------- -------- Video.......... $ 214.2 85.5% $ 203.4 88.3% Data........... 20.7 8.3% 12.4 5.4% Advertising.... 15.7 6.2% 14.4 6.3% --------- -------- -------- -------- $ 250.6 100.0% $ 230.2 100.0% ========= ======== ======== ======== Video revenues increased by 5.3% to $214.2 million for the six months ended June 30, 2002, as compared to $203.4 million for the six months ended June 30, 2001. Video revenues increased primarily due to rate increases and customer growth in the Company's basic and digital cable services. Data revenues increased by 66.9% to $20.7 million for the six months ended June 30, 2002, as compared to $12.4 million for the six months ended June 30, 2001. Data revenues increased primarily due to customer growth in the Company's high-speed Internet access service. Advertising revenues increased by 9.0% to $15.7 million for the six months ended June 30, 2002, as compared to $14.4 million for the six months ended June 30, 2001. Advertising revenues increased due to greater advertising capacity resulting from new channel additions. 12
Service costs. Service costs increased 11.7% to $105.9 million for the six months ended June 30, 2002, as compared to $94.9 million for the six months ended June 30, 2001. Service costs increased primarily as a result of higher programming expenses, including rate increases by programming suppliers for existing services and the cost of new channel additions, and greater employee costs associated with customer growth in the Company's digital cable and high-speed Internet access services, non-recurring incremental costs of $3.0 million related to the Company's high-speed Internet transition completed in February 2002, partially offset by higher capitalized labor and overhead associated with the significant increase in the Company's cable network upgrade and headend elimination activities. As a percentage of revenues, service costs were 42.3% for the six months ended June 30, 2002, as compared with 41.2% for the six months ended June 30, 2001. Selling, general and administrative expenses. Selling, general and administrative expenses decreased 1.4% to $49.8 million for the six months ended June 30, 2002, as compared to $50.5 million for the six months ended June 30, 2001. These costs decreased primarily as a result of higher marketing expenses and costs associated with the Company's in-house advertising operation, partially offset by a reduction in bad debt and billing expenses. As a percentage of revenues, selling, general and administrative expenses were 19.9% for the six months ended June 30, 2002 as compared with 21.9% for the six months ended June 30, 2001. Management fee expense. Management fee expense decreased 78.7% to $3.4 million for the six months ended June 30, 2002, as compared to $15.8 million the six months ended June 30, 2001. As a percentage of revenues, management fee expense was 1.3% for the six months ended June 30, 2002 as compared with 6.9% for the six months ended June 30, 2001. This decrease was due to the lower management fees charged by MCC subsequent to the Company's acquisitions of the AT&T cable systems. Restructuring charge. Restructuring charge was $0.6 million for the six months ended June 30, 2001. Restructuring charge was part of a cost reduction plan undertaken by AT&T Broadband in 2001, whereby certain employees of the AT&T cable systems were terminated resulting in a one-time charge. Depreciation and amortization. Depreciation and amortization decreased 28.5% to $55.1 million for the six months ended June 30, 2002, as compared to $77.0 million for the six months ended June 30, 2001. This decrease was substantially due to the impact of adopting SFAS 142, which reduced amortization expense by $50.4 million during the six months ended June 30, 2002. This was partially offset by the preliminary purchase price recorded in connection with the Company's acquisitions of the AT&T cable systems, which increased the assets that were subject to amortization. Interest expense, net. Interest expense, net, was $37.7 million for the six months ended June 30, 2002. This amount represented interest on financings for the Company's acquisitions of the AT&T cable systems. For the six months ended June 30, 2001, the AT&T cable systems had no material indebtedness and were not otherwise allocated any interest expense by AT&T Broadband. Loss on derivative instruments, net. Loss on derivative instruments, net, was $1.2 million for the six months ended June 30, 2002, primarily due to declining interest rates. Other expenses. Other expenses were $2.7 million for the six months ended June 30, 2002. This amount represented fees on unused credit commitments under the Company's bank credit facility and amortization of deferred financing costs. Gain on disposition of assets. Gain on the disposition of assets was $5.2 million for the six months ended June 30, 2001. This amount represented AT&T Broadband's sale of the Missouri systems to Mediacom Broadband LLC. Benefit for income taxes. The Company had no provision for income taxes for the six months ended June 30, 2002 as compared to a benefit for income taxes of $4.2 million for the six months ended June 30, 2001. Under the Company's ownership, the AT&T cable systems are organized as limited liability companies and are subject to minimum income taxes. Net (loss) income. Due to the factors described above, the Company generated a net loss of $5.2 million for the six months ended June 30, 2002 as compared to net income of $0.9 million for the six months ended June 30, 2001. 13
Operating cash flow. Operating cash flow increased 33.8% to $91.5 million for the six months ended June 30, 2002, as compared to $68.4 million for the six months ended June 30, 2001. Operating cash flow increased primarily due to rate increases in the Company's video services, the increase in basic subscribers, the increase in revenue resulting from customer growth in the Company's digital cable and high-speed Internet access services, and the reduction in management fee expense, partially offset by the increases in programming, and other service costs and the non-recurring incremental costs related to the Company's high-speed Internet transition. As a percentage of revenues, operating cash flow was 36.5% for the six months ended June 30, 2002 as compared with 29.7% for the six months ended June 30, 2001. LIQUIDITY AND CAPITAL RESOURCES The Company's business requires substantial capital for the upgrade, expansion and maintenance of its cable network. In addition, the Company has pursued, and will continue to pursue, a business strategy that includes selective acquisitions. The Company has funded and will continue to fund its working capital requirements, capital expenditures and acquisitions through a combination of internally generated funds, long-term borrowings and equity financings. INVESTING ACTIVITIES The Company's capital expenditures were approximately $107.4 million for the six months ended June 30, 2002. As of June 30, 2002, approximately 73% of the Company's cable network was upgraded with 550MHz to 870MHz bandwidth capacity and about 71% of the Company's homes passed were activated with two-way communications capability. As of June 30, 2002, the Company's digital cable service was available to approximately 820,000 basic subscribers, and the Company's cable modem service was marketed to about 990,000 homes passed by the Company's cable systems. The Company plans to continue its aggressive cable network upgrade program and expects that approximately 91% of its cable network will be upgraded with 550MHz to 870MHz bandwidth capacity and about 84% of the Company's homes passed will have two-way communications capability by year end 2002. These figures represent a revision from previous targets of 92% and 87%, respectively. To achieve these targets and to fund other requirements, including cable modems, digital converters, new plant construction, headend eliminations, regional fiber interconnections and network repair and maintenance, the Company expects to invest between $225.0 million and $235.0 million in capital expenditures in 2002. This represents a reduction of $5.0 million to previous guidance due to enhanced labor productivity, discounts on material and equipment prices and an anticipated reduction in the purchase of customer premise equipment. On June 29, 2001, the Company completed the acquisition of AT&T cable systems serving approximately 94,000 basic subscribers in Missouri. The purchase price for the Missouri systems was approximately $300.0 million. On July 18, 2001, the Company completed the acquisitions of AT&T cable systems serving approximately 706,000 basic subscribers in the states of Georgia, Illinois and Iowa. The aggregate purchase price for these cable systems was approximately $1.77 billion. FINANCING ACTIVITIES To finance the Company's acquisitions and network upgrade program and to provide liquidity for future capital needs the Company completed the undernoted financing arrangements. On June 29, 2001, Mediacom Broadband and Mediacom Broadband Corporation completed an offering of $400.0 million aggregate principal amount of 11% senior notes due June 2013. Interest on the 11% senior notes is payable on January 15 and July 15 of each year, which commenced on January 15, 2002. The proceeds were used to fund a portion of the price for the acquisitions of the AT&T cable systems. On June 29, 2001, MCC made a $336.4 million equity contribution to the Company. MCC made an additional $388.6 million equity contribution to the Company on July 18, 2001. The proceeds were used to fund a portion of the purchase price for the acquisitions of the AT&T cable systems. 14
On July 18, 2001, the Company received a $150.0 million preferred equity investment from subsidiaries of Mediacom LLC, a New York limited liability company wholly owned by MCC. The preferred equity investment has a 12% annual dividend, payable quarterly in cash. The proceeds from the preferred equity investment were used to fund a portion of the purchase price of its acquisitions of the AT&T cable systems. The operating subsidiaries of the Company have a $1.4 billion credit facility expiring in September 2010, of which $822.0 million was outstanding as of June 30, 2002. The Company entered into interest rate exchange agreements, which expire from 2005 through 2007, to hedge $250.0 million of floating rate debt, including $100.0 million of interest rate exchange agreements completed subsequent to June 30, 2002. Under the terms of all of the Company's interest rate exchange agreements, the Company is exposed to credit loss in the event of nonperformance by the other parties. However, the Company does not anticipate their nonperformance. On February 4, 2002, the Company and MCC filed a registration statement with the SEC under which the Company may sell debt securities unconditionally guaranteed by MCC for a maximum amount of $1.5 billion. The SEC declared this registration statement effective on February 13, 2002. The Company has not issued any securities under this registration statement. As of June 30, 2002, the Company's total debt was $1.2 billion. On such date, the Company had approximately $577.5 million of unused credit commitments under its subsidiary credit facility, of which about $403.0 million could be borrowed and used for general corporate purposes under the most restrictive covenants in the Company's debt arrangements. As of the date of this report, about 54% of the Company's outstanding indebtedness is at fixed interest rates or subject to interest rate protection, and its weighted average cost of indebtedness, including such interest rate exchange agreements, is approximately 6.7%. For the three months ended June 30, 2002, the Company's leverage ratio (defined as total debt at period end divided by annualized operating cash flow) was 6.2 times. Interest coverage (defined as operating cash flow divided by total interest expense, net) for such period was 2.6 times. As of June 30, 2002, the Company was in compliance with all debt covenants. Although the Company has not generated earnings sufficient to cover fixed charges, the Company has generated cash and obtained financing sufficient to meet its debt service, working capital, capital expenditure and acquisition requirements. The Company expects that it will continue to be able to generate funds and obtain financing sufficient to service the Company's obligations and complete its future acquisitions. There can be no assurance that the Company will be able to obtain sufficient financing, or, if it were able to do so, that the terms would be favorable to them. RECENT ACCOUNTING PRONOUNCEMENTS Effective January 1, 2002, the Company adopted, Statement of Financial Accounting Standards No. 141 ("SFAS 141") "Business Combinations" and No. 142 ("SFAS 142") "Goodwill and Other Intangible Assets," which requires all business combinations initiated after June 30, 2001 to be accounted for using the purchase method. Adoption of SFAS 141 had no effect on the Company's results of operations or financial position as the Company accounts for all acquisitions under the purchase method. The provisions of SFAS 142 prohibit the amortization of goodwill and indefinite-lived intangible assets, which are required to be tested annually for impairment. The Company has determined that its cable franchise costs are indefinite-lived assets. The impact of adopting SFAS 142 was to reduce amortization expense by $50.4 million for the six months ended June 30, 2002. Based on the Company's review, there has been no impairment of goodwill and indefinite-lived intangible assets under SFAS 142. In July 2001, the FASB issued Statements of Financial Accounting Standards No. 143 ("SFAS 143"), "Accounting for Asset Retirement Obligations," which addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. SFAS 143 will become effective for fiscal years beginning after June 15, 2002. The Company does not expect that adoption of SFAS 143 will have a material impact on its results of operations or financial position. In August 2001, the FASB issued Statements of Financial Accounting Standards No. 144 ("SFAS 144") "Accounting for the Impairment or Disposal of Long-Lived Assets," which addresses financial accounting and reporting for the impairment or disposal of long-lived assets and provides guidance on classification and accounting for such assets when held for sale or abandonment. The Company adopted this standard effective January 1, 2002 and there was no impact on its results of operations or financial position. 15
INFLATION AND CHANGING PRICES The Company's 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. The Company believes that under the Federal Communications Commission's existing cable rate regulations the Company may increase rates for cable television services to more than cover any increases in programming costs. However, competitive conditions and other factors in the marketplace may limit the Company's ability to increase its rates. 16
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK In the normal course of business, the Company uses interest rate exchange agreements in order to fix the interest rate for the duration of the contract as a hedge against interest rate volatility. As of June 30, 2002, the Company had interest rate exchange agreements with various banks pursuant to which the interest rate on $150.0 million is fixed at a weighted average rate of approximately 4.1%, plus the average applicable margin over the eurodollar rate option under the Company's bank credit agreements. Under the terms of the interest rate exchange agreements, which expire from 2005 through 2007, the Company is exposed to credit loss in the event of nonperformance by the other parties. However, the Company does not anticipate their nonperformance. At June 30, 2002 the Company would have paid approximately $1.2 million if it terminated the interest rate exchange agreements, inclusive of accrued interest. The table below provides information for the Company's long term debt. See Note 4 to the Company's consolidated condensed financial statements EXPECTED MATURITY ----------------------------------------------------------------------- (ALL DOLLAR AMOUNTS IN THOUSANDS) 2002 2003 2004 2005 2006 THEREAFTER TOTAL FAIR VALUE -------- --------- -------- -------- -------- ----------- --------- ---------- Fixed rate $ - $ - $ - $ - $ - $ 400,000 $ 400,000 $ 378,000 Weighted average interest rate 11.0% 11.0% 11.0% 11.0% 11.0% 11.0% 11.0% Variable rate $ - $ - $ 8,500 $ 35,000 $ 42,500 $ 736,000 $ 822,000 $ 822,000 Weighted average interest rate 4.1% 4.1% 4.1% 4.1% 4.1% 4.1% 4.1% 17
PART II ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (A) EXHIBITS EXHIBIT ------- NUMBER EXHIBIT DESCRIPTION ------- ------------------- 4.1 Indenture Supplement No. 1, dated as of August 6, 2002, to the Indenture relating to 11% senior notes due 2013 of Mediacom Broadband LLC and Mediacom Broadband Corporation/(1)/. (B) REPORTS ON FORM 8-K The Company filed a Current Report on Form 8-K under Item 4 - Changes in Registrant's Certifying Accountant, dated April 19, 2002. - ---------- /(1)/ Filed as an exhibit to the Quarterly Report on Form 10-Q for the quarter ended June 30, 2002 of Mediacom Communications Corporation and incorporated herein by reference. 18
SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. MEDIACOM BROADBAND LLC August 14, 2002 By: /s/ Mark E. Stephan ------------------- Mark E. Stephan Senior Vice President and Chief Financial Officer 19
SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. MEDIACOM BROADBAND CORPORATION August 14, 2002 By: /s/ Mark E. Stephan ------------------- Mark E. Stephan Treasurer, Secretary and Principal Financial Officer 20