SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------
FORM 10-Q
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE
Securities Exchange Act of 1934
For the quarterly period ended
JUNE 30, 1998
COMMISSION REGISTRATION NUMBERS: 333-57285-01
333-57285
Mediacom LLC
Mediacom Capital Corporation*
(Exact names of Registrants as specified in their charters)
NEW YORK 06-1433421
NEW YORK 06-1513997
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Numbers)
100 CRYSTAL RUN ROAD
Middletown, New York 10941
(Address of principal executive offices)
914-695-2600
(Registrants' telephone number including area code)
Indicate by check mark whether the Registrants (1) have filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrants were required to file such reports), and (2) have been subject to
such filing requirements for the past 90 days:
Yes No X **
--- ---
** Registrants are submitting this Form 10-Q on a voluntary basis. Neither
of the Registrants are currently subject to the filing requirements under
Section 13 or 15(d) of the Securities Exchange Act of 1934.
Number of shares of common stock outstanding of Mediacom Capital
Corporation as of the date hereof: 100
*Mediacom Capital Corporation meets the conditions set forth in General
Instruction H (1) (a) and (b) of Form 10-Q and is therefore filing this form
with the reduced disclosure format.
MEDIACOM LLC AND SUBSIDIARIES
SECOND QUARTER REPORT
FOR THE THREE MONTHS ENDED JUNE 30, 1998
INDEX
Page
----
PART I FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements of Mediacom LLC
and Subsidiaries 2
Notes to Consolidated Financial Statements 6
Financial Statement of Mediacom Capital Corporation 12
Note to Financial Statement 13
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 14
PART II OTHER INFORMATION
Items 1-6. None
1
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MEDIACOM LLC AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(All dollar amounts in 000's)
JUNE 30, DECEMBER 31,
1998 1997
----------------- -----------------
ASSETS (Unaudited)
------
Cash and cash equivalents $ 1,408 $ 1,027
Subscriber accounts receivable, net of allowance for
doubtful accounts of $359 and $56 5,043 618
Prepaid expenses and other assets 2,761 1,358
Investment in cable television systems:
Inventory 4,213 1,032
Property, plant and equipment, at cost 200,117 51,735
Less- accumulated depreciation (18,317) (5,737)
---------- ----------
Property, plant and equipment, net 181,800 45,998
Intangible assets, net 234,286 47,859
---------- ----------
Total investment in cable television systems 420,299 94,889
Other assets, net 19,714 4,899
---------- ----------
Total assets $449,225 $102,791
========== ==========
LIABILITIES AND MEMBERS' EQUITY
--------------------------------
LIABILITIES
Debt $315,129 $ 72,768
Accounts payable 4,948 853
Accrued expenses 28,022 4,021
Subscriber advances 612 603
Management fees payable 519 105
Commitments and contingencies
---------- ----------
Total liabilities 349,230 78,350
MEMBERS' EQUITY
Capital contributions 124,990 30,990
Accumulated deficit (24,995) (6,549)
---------- ----------
Total members' equity 99,995 24,441
---------- ----------
Total liabilities and members' equity $449,225 $102,791
========== ==========
See accompanying notes to consolidated financial statements
2
MEDIACOM LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(All dollar amounts in 000's)
(Unaudited)
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
--------------------------- ---------------------------
1998 1997 1998 1997
Revenues $34,125 $3,125 $ 60,068 $ 6,019
--------- -------- ---------- ---------
Costs and expenses:
Service costs 11,641 923 21,463 1,813
Selling, general and administrative expenses 6,238 582 11,541 1,016
Management fee expense 1,575 156 2,782 301
Depreciation and amortization 16,193 1,098 27,422 2,705
--------- -------- ---------- ---------
Operating income (loss) (1,522) 366 (3,140) 184
--------- -------- ---------- ---------
Interest expense, net 6,721 930 11,738 1,819
Other expenses 228 435 3,568 438
--------- -------- ---------- ---------
Net loss $(8,471) $ (999) $(18,446) $(2,073)
========= ======== ========== =========
See accompanying notes to consolidated financial statements
3
MEDIACOM LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN MEMBERS' EQUITY
(All dollar amounts in 000's)
Balance, commencement of operations (March 12, 1996) $ 5,490
Capital contributions 1,000
Net loss (1,953)
----------
Balance, December 31, 1996 4,537
Capital contributions 24,500
Net loss (4,596)
----------
Balance, December 31, 1997 24,441
Capital contributions 94,000
Net loss (unaudited) (18,446)
----------
Balance, June 30, 1998 $ 99,995
==========
See accompanying notes to consolidated financial statements
4
MEDIACOM LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(All dollar amounts in 000's)
(UNAUDITED)
SIX MONTHS ENDED JUNE 30,
------------------------------------
1998 1997
------------ -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (18,446) $ (1,306)
Adjustments to reconcile net loss to net cash flows from operating
activities:
Depreciation and amortization 27,422 2,705
(Increase) decrease in subscriber accounts receivable (4,425) (258)
(Increase) decrease in prepaid expenses and other assets (1,403) 671
Increase (decrease) in accounts payable and accrued expenses 28,096 354
Increase (decrease) in subscriber advances 9 468
Increase (decrease) in management fees payable 414 24
Other 136 125
----------- ----------
Net cash flows from operating activities 31,803 2,783
----------- ----------
CASH FLOWS USED IN INVESTING ACTIVITIES:
Capital expenditures (16,884) (1,539)
Acquisitions of cable television systems (337,195) (43,061)
Other, net - (214)
----------- ----------
Net cash flows used in investing activities (354,079) (44,814)
----------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
New borrowings 456,400 62,600
Repayment of debt (214,175) (38,200)
Capital contributions 94,000 19,500
Financing costs (13,568) (1,419)
----------- ----------
Net cash flows from financing activities 322,657 42,481
----------- ----------
Net increase in cash and cash equivalents 381 450
CASH AND CASH EQUIVALENTS, beginning of period 1,027 396
----------- ----------
CASH AND CASH EQUIVALENTS, end of period $ 1,408 $ 846
=========== ==========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid during the period for interest $ 7,482 $ 1,830
=========== ==========
See accompanying notes to consolidated financial statements
5
MEDIACOM LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998
(ALL DOLLAR AMOUNTS IN 000'S)
(UNAUDITED)
(1) STATEMENT OF ACCOUNTING PRESENTATION AND OTHER INFORMATION
Mediacom LLC ("Mediacom" and collectively with its subsidiaries, the
"Company"), a New York limited liability company, was formed in July 1995
principally to acquire and operate cable television systems. As of June 30,
1998, the Company had acquired and was operating cable television systems in
fourteen states principally Alabama, California, Florida, Kentucky, Missouri and
North Carolina (see Note 2).
Mediacom Capital Corporation ("Mediacom Capital"), a New York corporation
wholly-owned by Mediacom, was organized in March 1998 for the sole purpose of
acting as co-issuer with Mediacom of $200,000 aggregate principal amount of 8.5%
Senior Notes due 2008 (the "Senior Notes"), which were issued on April 1, 1998
(see Note 3). Mediacom Capital has nominal assets and does not conduct
operations of its own. The Senior Notes are joint and several obligations of
Mediacom and Mediacom Capital, although Mediacom received all the net proceeds
of the offering of the Senior Notes.
The consolidated financial statements include the accounts of Mediacom and
its subsidiaries and have been prepared in accordance with the rules and
regulations of the Securities and Exchange Commission. Accordingly, certain
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted.
The consolidated financial statements as of June 30, 1998 and 1997 are
unaudited; however, in the opinion of management, such statements include all
adjustments, consisting only of 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 principles and are consistent with those applied during
annual periods. The interim financial statements should be read in conjunction
with the Company's Amendment No. 1 to its Registration Statement on Form S-4
(Registration Nos. 333-57285-01 and 333-57285) for additional disclosures,
including a summary of the Company's accounting policies. 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 ended
December 31, 1998.
During the second quarter of 1998, the Company commenced capitalizing
interest on projects under construction. Such interest is charged to the
property, plant and equipment accounts and amortized over the approximate life
of the related assets. The capitalized interest for the three months ended June
30, 1998, was $148.
(2) ACQUISITIONS
The Company has completed the undernoted acquisitions (the "Acquired
Systems") in 1998 and 1997. 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. Such
allocations are subject to adjustments upon the final appraisal information
received by the Company. The results of operations of the Acquired Systems have
been included with those of the Company since the date of acquisition.
6
MEDIACOM LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998
(ALL DOLLAR AMOUNTS IN 000'S)
(UNAUDITED)
(2) ACQUISITIONS (CON'T)
1998
----
On January 9, 1998, Mediacom California LLC ("Mediacom California"), a
directly owned subsidiary of Mediacom, acquired the assets of a cable television
system serving approximately 17,200 subscribers in Clearlake, California and
surrounding communities (the "Clearlake System") for a purchase price of
$21,400. The purchase price has been preliminarily allocated as follows:
approximately $8,560 to property, plant and equipment, $8,515 to franchise costs
and $4,325 to subscriber lists. Additionally, approximately $205 of direct
acquisition costs has been allocated to other assets. In the first quarter of
1998, the Company recorded acquisition reserves related to this acquisition in
the amount of approximately $370, which are included in intangible assets and
accrued expenses. The acquisition of the Clearlake System was financed with
borrowings under the Company's bank credit facilities (see Note 3).
On January 23, 1998, Mediacom Southeast LLC ("Mediacom Southeast"), a
directly owned subsidiary of Mediacom, acquired the assets of cable television
systems serving approximately 260,100 subscribes in various regions of the
United States (the "Cablevision Systems") for a purchase price of approximately
$308,700. The purchase price has been preliminarily allocated as follows:
approximately $123,500 to property, plant and equipment, $120,200 to franchise
costs and $65,000 to subscriber lists. Additionally, approximately $2,630 of
direct acquisition costs has been allocated to other assets. In the first
quarter of 1998, the Company recorded acquisition reserves related to this
acquisition in the amount of approximately $3,750, which are included in
intangible assets and accrued expenses. The acquisition of the Cablevision
Systems and related closing costs and adjustments were financed with equity
contributions, borrowings under the Company's bank credit facilities, and other
bank debt (see Notes 1 and 3).
1997
----
On June 24, 1997, Mediacom Delaware LLC ("Mediacom Delaware"), a directly
owned subsidiary of Mediacom, acquired the assets of a cable television system
serving approximately 29,300 subscribers in lower Delaware and southwestern
Maryland for a purchase price of $42,900. The purchase price has been
preliminarily allocated as follows: approximately $21,450 to property, plant
and equipment, $14,200 to franchise costs and $7,250 to subscriber lists.
Additionally, approximately $275 of direct acquisition costs has been allocated
to other assets.
On September 19, 1997, Mediacom California acquired the assets of a cable
television system serving approximately 9,600 subscribers in Sun City,
California for a purchase price of $11,500. The purchase price has been
preliminarily allocated as follows: approximately $4,600 to property, plant and
equipment, $4,500 to franchise costs and $2,400 to subscriber lists.
Additionally, approximately $167 of direct acquisition costs has been allocated
to other assets.
7
MEDIACOM LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998
(ALL DOLLAR AMOUNTS IN 000'S)
(UNAUDITED)
(2) ACQUISITIONS (CON'T)
The Company has reported the operating results of the Acquired Systems from
the date of their respective acquisition. Unaudited pro forma operating results
of the Company assuming the acquisitions of the Acquired Systems had been
consummated on January 1, 1997 are as follows:
PRO FORMA RESULTS FOR THE
SIX MONTHS ENDED JUNE 30,
-------------------------------------
1998 1997
Revenues $65,804 $59,824
-------- --------
Operating expenses and costs:
Service costs 23,674 23,161
Selling, general and administrative expenses 12,226 11,469
Management fee expense 3,040 2,861
Depreciation and amortization 29,750 27,476
-------- --------
Operating loss $(2,886) $(5,143)
======== ========
The pro forma financial information presented above has been prepared for
comparative purposes only and does not purport to be indicative of the operating
results which actually would have resulted had the acquisitions of the Acquired
Systems been consummated on January 1, 1997.
On June 24, 1998, the Company entered into an asset purchase agreement with
Bootheel Video, Inc., a wholly-owned subsidiary of CSC Holdings, Inc. (formerly
known as Cablevision Systems Corporation), to acquire a cable television system
serving approximately 3,900 subscribers in Caruthersville, Missouri (the
"Caruthersville System") for a cash purchase price of $5,000.
(3) DEBT
As of June 30, 1998 and December 31, 1997, debt consisted of:
JUNE 30, DECEMBER 31,
1998 1997
---------- ------------
Mediacom:
Holding Company Notes (a) - -
8-1/2% Senior Notes (b) $200,000 -
Subsidiaries:
Bank Credit Facilities (c) 111,800 $69,575
Seller Note (d) 3,329 3,193
---------- ---------
$315,129 $72,768
========== =========
8
MEDIACOM LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998
(ALL DOLLAR AMOUNTS IN 000'S)
(UNAUDITED)
(3) DEBT (CON'T)
(a) On January 23, 1998, Mediacom issued two notes (the "Holding Company
Notes") to a bank in the aggregate principal amount of $20,000 to finance
in part the acquisition of the Cablevision Systems. On April 1, 1998, the
Holding Company Notes were repaid in full from the net proceeds of the
Offering (as defined below).
(b) On April 1, 1998, Mediacom and Mediacom Capital jointly issued (the
"Offering") $200,000 aggregate principal amount of 8.5% Senior Notes due
on April 15, 2008. The Senior Notes are unsecured obligations of the
Company, and the indenture agreement for the Senior Notes stipulates,
among other things, restrictions on incurrence of indebtedness,
distributions, mergers and asset sales and has cross-default provisions
related to other debt of the Company. Interest accrues at 8.5% per annum,
beginning from the date of issuance and is payable semi-annually on April
15 and October 15 of each year, commencing on October 15, 1998. The
Senior Notes may be redeemed at the option of Mediacom, in whole or part,
at any time after April 15, 2003, at redemption prices decreasing from
104.25% of their principal amount to 100% in 2006, plus accrued and unpaid
interest.
(c) On January 23, 1998, Mediacom Southeast entered into an eight and one half
year, $225,000 reducing revolver and term loan agreement (the "Southeast
Credit Facility"). On June 24, 1997, Mediacom California, Mediacom
Delaware and Mediacom Arizona LLC, a directly owned subsidiary of Mediacom
(collectively, the "Western Group"), entered into an eight and one half
year, $100,000 reducing revolver and term loan agreement (the "Western
Credit Facility" and, together with the Southeast Credit Facility, the
"Bank Credit Facilities"). At June 30, 1998, the aggregate bank
commitments under the Bank Credit Facilities were $324,950. The Bank
Credit Facilities are non- recourse to Mediacom and have no cross-default
provisions relating directly to each other. The reducing revolving credit
lines under the Bank Credit Facilities make available a maximum commitment
amount for a period of up to eight and one half years, which is subject to
quarterly reductions, beginning September 30, 1998, ranging from 0.21% to
12.42% of the original commitment amount of the reducing revolver. The
term loans under the Bank Credit Facilities are repaid in consecutive
installments beginning September 30, 1998, ranging from 0.42% to 12.92% of
the original term loan amount. The Bank Credit Facilities require
mandatory reductions of the reducing revolvers and mandatory prepayments
of the term loans from excess cash flow, as defined, beginning December
31, 1999. The Bank Credit Facilities provide for interest at varying rates
based upon various borrowing options and the attainment of certain
financial ratios and for commitment fees of 3/8% to 1/2% per annum on the
unused portion of available credit under the reducing revolver credit
lines. The effective interest rates on outstanding debt under the Bank
Credit Facilities were 8.1% at June 30, 1998 and 8.7% at December 31,
1997, after giving effect to the interest rate swap agreements discussed
below.
The Bank Credit Facilities contain restrictive covenants on the
subsidiaries, including, but not limited to, limitations on mergers and
acquisitions, consolidations and sales of certain assets, liens, the
incurrence of additional indebtedness and certain restrictive payments,
and restrictions on certain transactions with affiliates, and require the
maintenance of certain financial ratios, such as, the leverage ratio, the
interest coverage ratio, the fixed charge coverage ratio and the pro forma
debt service coverage ratio. The Company was in compliance with all
financial ratios as of June 30, 1998.
9
MEDIACOM LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998
(ALL DOLLAR AMOUNTS IN 000'S)
(UNAUDITED)
(3) DEBT (CON'T)
The Bank Credit Facilities are secured by Mediacom's pledge of all its
ownership interests in the subsidiaries and a first priority lien on all the
tangible and intangible assets of the subsidiaries, other than real
property. The indebtedness under the Bank Credit Facilities is guaranteed
by Mediacom on a limited recourse basis to the extent of its ownership
interests in the subsidiaries. At June 30, 1998, the Company had $212,650
of unused bank commitments under the Bank Credit Facilities, of which
approximately $204,500 could have been borrowed by the subsidiaries for
purposes of distributing such borrowed proceeds to Mediacom under the most
restrictive covenants of the Bank Credit Facilities.
The stated maturities of all debt outstanding under the Bank Credit
Facilities as of June 30, 1998 are as follows:
1998 $ 250
1999 2,000
2000 2,300
2001 6,600
2002 9,500
Thereafter 91,150
---------
$111,800
=========
As of June 30, 1998, the Company had entered into interest rate exchange
agreements (the "Swaps") with various banks pursuant to which the interest
rate on $62,000 is fixed at a weighted average swap rate of approximately
6.2%, plus the average applicable margin over the Eurodollar Rate option
under the Bank Credit Facilities. Under the terms of the Swaps, which
expire from 1998 through 2002, the Company is exposed to credit loss in the
event of nonperformance by the other parties to the Swaps. However, the
Company does not anticipate nonperformance by the counterparties.
(d) Seller Note
-----------
In connection with the acquisition of a cable television system in June
1996, the Western Group issued to the seller an unsecured senior
subordinated note (the "Seller Note") in the amount of $2,800, with a final
maturity of June 28, 2006. Interest is deferred throughout the term of the
Seller Note and is payable at maturity or upon prepayment. For the five-
year period ending June 28, 2001, the annual interest rate is 9.0%. After
the initial five-year period, the annual interest rate increases to 15.0%,
with an interest clawback for the first five years. After the initial
seven-year period, the interest rate increases to 18.0%, with an interest
clawback for the first seven years. There are no penalties associated with
prepayment of this note.
The Seller Note agreement contains a debt incurrence covenant limiting the
ability of the Western Group to incur additional indebtedness. The Seller
Note is subordinated and junior in right of payment to all senior
obligations of the Western Group, as defined in the Western Credit Facility.
10
MEDIACOM LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998
(ALL DOLLAR AMOUNTS IN 000'S)
(UNAUDITED)
(4) COMMITMENTS AND CONTINGENCIES
Pursuant to the Cable Television Consumer and Competition Act of 1992, the
Federal Communications Commission ("FCC") has adopted comprehensive regulations
governing rates charged to subscribers for basic cable and cable programming
services. These rates must be set using a benchmark formula. Alternatively, a
cable operator can attempt to establish higher rates through a cost-of-
service showing. The FCC has also adopted regulations that permit
qualifying small cable operators to justify their regulated rates using a
simplified rate-setting methodology. This methodology almost always results in
rates which exceed those produced by the cost-of-service rules applicable to
larger cable television operators. Approximately 82% of the basic subscribers
served by the Company's cable television systems are covered by such FCC rules.
Once rates for basic cable and cable programming services have been established
pursuant to one of these methodologies, the rate level can subsequently be
adjusted only to reflect changes in the number of regulated channels, inflation,
and increases in certain external costs, such as franchise and other
governmental fees, copyright and retransmission consent fees, taxes, programming
costs and franchise-related obligations. FCC regulations also govern the rates
which can be charged for the lease of customer premises equipment and for
installation services.
As a result of such legislation and FCC regulations, the Company's basic
service and cable programming service rates and its equipment and installation
charges (the "Regulated Services") are subject to the jurisdiction of local
franchising authorities and the FCC. The Company believes that it has complied
in all material respects with the rate regulation provisions of the federal law.
However, the Company's rates for Regulated Services are subject to review by the
FCC if a complaint has been filed, or by the appropriate franchise authority if
it is certified by the FCC to regulate basic rates. If, as a result of the
review process, the Company cannot substantiate the rates charged by its cable
television systems for Regulated Services, the Company could be required to
reduce its rates for Regulated Services to the appropriate level and refund the
excess portion of rates received for up to one year prior to the implementation.
The Company's agreements with franchise authorities require the payment of
fees of up to 5% of annual system revenues. Such franchises are generally
nonexclusive and are granted by local governmental authorities for a specified
term of years, generally for periods of up to fifteen years.
On June 24, 1998, a bank issued a $500 irrevocable letter of credit on
behalf of the Company in favor of the seller of the Caruthersville System to
secure the Company's performance under the related asset purchase agreement (see
Note 2).
11
MEDIACOM CAPITAL CORPORATION
BALANCE SHEET
JUNE 30, 1998
(UNAUDITED)
ASSETS
------
Note receivable - from affiliate for issuance of common stock $ 100
-----
Total assets $ 100
=====
LIABILITIES AND OWNER'S EQUITY
------------------------------
Owner's equity
Common Stock, par value $0.10; 200 shares authorized;
100 shares issued and outstanding $ 10
Additional paid-in capital 90
-----
Total owner's equity $ 100
-----
Total liabilities and owner's equity $ 100
=====
12
MEDIACOM CAPITAL CORPORATION
NOTE TO THE BALANCE SHEET
--------------------
Mediacom Capital Corporation (the "Mediacom Capital"), a New York
corporation, is a wholly owned subsidiary of Mediacom LLC and was organized on
March 9, 1998 for the sole purpose of acting as co-issuer with Mediacom LLC of
$200 million aggregate principal amount of the 8 1/2% Senior Notes due April 15,
2008. Mediacom Capital has no operations.
13
PART I - FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion of the financial condition and results of
operations of the Company, the description of the Company's business, as well as
other sections of this Form 10-Q contain certain forward-looking statements.
The Company's actual results could differ materially from those discussed herein
and its current business plans could be altered in response to market conditions
and other factors beyond the Company's control. Important factors that could
cause or contribute to such differences or changes include those discussed under
"Risk Factors" in the Company's Amendment No. 1 to its Registration Statement on
Form S-4 filed August 10, 1998.
INTRODUCTION AND RECENT DEVELOPMENTS
Mediacom was founded in July 1995, principally to acquire, operate and
develop cable television systems through its subsidiaries in selected non-
metropolitan markets of the United States. To date, the Company has completed
eight acquisitions of cable television systems that, as of June 30, 1998, passed
approximately 486,000 homes and served approximately 345,000 basic subscribers.
The Company's business strategy is to: (i) acquire underperforming and
undervalued cable television systems primarily in non-metropolitan markets, as
well as related telecommunications businesses; (ii) build subscriber clusters
through regionalized operations; (iii) implement operating plans and system
improvements designed to enhance the long-term operational and financial
performance of the Company; and (iv) deploy a flexible financing strategy to
complement the Company's growth objectives and operating plans.
From March 1996 to December 1997, the Company completed six acquisitions of
cable television systems that, as of June 30, 1998, served approximately 65,100
basic subscribers in California, Arizona, Delaware, and Maryland (the "1997
Systems"). In January 1998, the Company acquired cable television systems in
two separate transactions that, as of June 30, 1998, served approximately
279,900 basic subscribers in eleven states, principally Alabama, California,
Florida, Kentucky, Missouri and North Carolina (the "1998 Systems"). The
aggregate purchase price for the 1997 Systems and the 1998 Systems
(collectively, the "Systems) was approximately $428.2 million (before closing
costs and adjustments). See "Business Business Strategy" in the Company's
Amendment No. 1 to its Registration Statement on Form S-4 filed August 10, 1998.
RESULTS OF OPERATIONS
The following historical information includes the results of operations of
the Lower Delaware System (acquired on June 24, 1997), the Sun City System
(acquired on September 19, 1997), the Jones System (acquired on January 9, 1998)
and the Cablevision Systems (acquired on January 23, 1998) only for that portion
of the respective period that such cable television systems were owned by the
Company. See Note 2 to the Company's Consolidated Financial Statements for a
detailed description of the Company's acquisitions in 1997 and 1998.
A significant portion of the Company's basic subscribers is included in the
Lower Delaware System, the Sun City System, the Jones System and the Cablevision
Systems. At June 30, 1998, these systems served approximately 319,600 basic
subscribers, representing 92.6% of the approximately 345,000 subscribers served
by the Company as of such date. Accordingly, the Company's aforementioned
acquisition activities have resulted in substantial increases in the revenues,
operating expenses, operating loss, net loss and Adjusted EBITDA (defined below)
for the three and six month periods ended June 30, 1998, compared to the
corresponding periods of 1997. Consequently, the Company believes that any
comparison of its results of operations between the periods in 1998 and 1997 are
not indicative of the Company's results of operations in the future.
14
Revenues increased to approximately $34.1 million and $60.1 million for the
three and six months ended June 30, 1998, respectively, from approximately $3.1
million and $6.0 million for the corresponding periods of 1997, due to: (i) the
inclusion of the results of operations of the Lower Delaware System and the Sun
City System for the full three and six months ended June 30, 1998; (ii) the
inclusion of the results of operations of the Jones System and Cablevision
Systems from their respective acquisition dates; and (iii) the implementation of
basic service rate increases in March and April 1998 affecting approximately
237,000 and 22,000 basic subscribers, respectively. The average monthly basic
service rate increase was approximately $3.20 per affected basic subscriber. Of
the revenues for the six months ended June 30, 1998, approximately 80.0% were
attributable to basic revenues, 15.0% to premium revenues, and 5.0% to other
revenues. Of the revenues for the corresponding period in 1997, approximately
79.0% were attributable to basic revenues, 8.0% to premium revenues and 13.0% to
other revenues.
Service costs increased to approximately $11.6 million and $21.5 million
for the three and six months ended June 30, 1998, respectively, from
approximately $923,000 and $1.8 million for the corresponding periods of 1997.
Substantially all of this increase was due to the inclusion of the
aforementioned acquisitions by the Company. Of the service costs for the six
months ended June 30, 1998, approximately 74.0% were attributable to programming
and copyright costs, 14.0% to technical personnel costs, and 12.0% to plant
operating costs. Of the service costs for the corresponding period in 1997,
approximately 67.0% were attributable to programming and copyright costs, 15.0%
to technical personnel costs, and 18.0% to plant operating costs.
Selling, general and administrative expenses increased to approximately
$6.2 million and $11.5 million for the three and six months ended June 30, 1998,
respectively, from approximately $582,000 and $1.0 million for the corresponding
periods of 1997. Substantially all of this increase was due to the inclusion of
the aforementioned acquisitions by the Company. Of the selling, general and
administrative expenses for the six month period ended June 30, 1998, 30.0% were
attributable to customer service and administrative personnel costs, 24.0% to
franchise fees, other fees and taxes, 12.0% to customer billing expenses, and
34.0% to marketing, advertising sales and office administration expenses. Of the
selling, general and administrative expenses for the corresponding period in
1997, approximately 36.0% were attributable to customer service and
administrative personnel costs, 10.0% to franchise fees, other fees and taxes,
11.0% to customer billing expenses, and 43.0% to marketing, advertising sales
and office administration expenses.
Management fee expense increased to approximately $1.6 million and $2.8
million for the three and six months ended June 30, 1998, respectively, from
approximately $156,000 and $301,000 for the corresponding period of 1997. Such
increase was due to the higher revenues generated in the 1998 periods.
Depreciation and amortization expense increased to approximately $16.2 million
and $27.4 million for the three and six months ended June 30, 1998,
respectively, from approximately $1.1 million and $2.7 million for the
corresponding periods of 1997. This increase was substantially due to the
aforementioned acquisition activity of the Company.
The Company generated an operating loss of approximately $1.5 million and
$3.1 million for the three and six months ended June 30, 1998, respectively,
compared to operating income of approximately $366,000 and $184,000 for the
corresponding periods of 1997, principally due to the increase in depreciation
and amortization expense as discussed above.
Interest expense, net, increased to approximately $6.7 million and $11.7
million for the three and six months ended June 30, 1998, respectively, from
approximately $930,000 and $1.8 million for the corresponding periods of 1997.
This increase was substantially due to the additional debt incurred in
connection with the acquisitions by the Company as discussed above. Other
expenses decreased to approximately $228,000 for the three months ended June 30,
1998, from $435,000 for the corresponding period of 1997 principally due to
acquisition fees paid to Mediacom Management in the 1997 period. Other expenses
increased to approximately $3.6 million for the six months ended June 30, 1998,
from approximately $438,000 for the corresponding period of 1997. This increase
was substantially due to acquisition fees paid to Mediacom Management
Corporation in connection with the acquisitions of the Jones System and the
Cablevision Systems. Due to the factors described above, the net loss increased
to approximately $8.5 million and $18.4 million for the three and six months
ended June 30, 1998, respectively, from approximately $999,000 and $2.1 million
for the corresponding periods of 1997.
15
Adjusted EBITDA represents operating income (loss) before depreciation and
amortization. Adjusted EBITDA is not intended to be a performance measure that
should be regarded as an alternative either to operating income or net income as
an indicator of operating performance or to the statement of cash flows as a
measure of liquidity, as determined in accordance with generally accepted
accounting principles. Adjusted EBITDA is included herein because the Company
believes that EBITDA is a meaningful measure of performance as it is commonly
used in the cable television industry to analyze and compare cable television
companies on the basis of operating performance, leverage and liquidity. In
addition, the primary debt instruments of the Company contain certain covenants,
compliance with which is measured by computations similar to determining
Adjusted EBITDA. The Company's definition of Adjusted EBITDA may not be
identical to similarly titled measures by other companies.
The three-month period ended June 30, 1998 is the only period in which the
Company operated all of the Systems. Adjusted EBITDA increased to approximately
$14.7 million and $24.3 million for the three and six months ended June 30,
1998, respectively, from approximately $1.5 million and $2.9 million for the
corresponding periods of 1997. This increase was substantially due to the
aforementioned acquisitions of the Company. Adjusted EBITDA as a percentage of
revenues decreased to 43.0% and 40.4% for the three and six months ended June
30, 1998, respectively, from 46.9% and 48.0% for the corresponding periods of
1997. This decrease was principally due to the higher programming costs of the
acquired 1998 Systems in relation to the revenues generated by these cable
television systems.
LIQUIDITY AND CAPITAL RESOURCES
The cable television business is a capital-intensive business that
generally requires financing for the upgrade, expansion and maintenance of the
technical infrastructure. In addition, the Company has pursued, and continues
to pursue, a business strategy that includes selective acquisitions. Since it
commenced operations in March 1996, the Company has funded its debt service,
working capital requirements, capital expenditures and acquisitions through a
combination of internally generated funds, long-term borrowings and equity
contributions. The Company intends to continue to finance such expenditures
through these same sources and the Company believes that it will continue to
generate internal funds and be able to obtain financing sufficient to meet such
expenditures and requirements.
During the first six months of 1998, the Company incurred capital
expenditures (other than those related to acquisitions) of approximately $16.9
million in connection with the maintenance, replacement, expansion and upgrading
of the Company's Systems. Cash generated from operations and bank borrowings
funded these requirements. For 1998, the Company intends to spend approximately
$35.0 million for capital expenditures. The Company expects to fund these
capital expenditures through cash generated from operations and its available
borrowings under the subsidiary bank facilities, as discussed below.
The Company expects to spend approximately $140.0 million for capital
expenditures over the five-year period ending December 31, 2002, as follows:
(i) $70.0 million to establish a technical standard of 550MHz bandwidth capacity
in cable television systems serving 80.0% of its basic subscribers; (ii) $64.0
million for ongoing maintenance and replacement and for installations and
extensions to the cable plant related to customer growth; and (iii) $6.0 million
for the purchase of additional addressable converters. The Company is
evaluating the economic viability of upgrading its larger systems to 750MHz
bandwidth capacity, which would require additional capital investment. The
Company intends to utilize its cash generated from operations and its available
unused credit commitments under its subsidiary credit facilities, as described
below, to fund the foregoing expenditures.
Mediacom is a limited liability company which serves as the holding company
for its various subsidiaries, each of which are also limited liability
companies. The Company's financing strategy is to raise equity from its members
and issue public long-term debt at the holding company level, while utilizing
its subsidiaries to access debt capital in the bank and private placement
markets through multiple stand-alone borrowing groups. The Company believes
that this financing strategy is beneficial because it broadens the Company's
access to various debt markets, enhances its flexibility in managing the
Company's capital structure, reduces the overall cost of debt capital and
permits the Company to maintain a substantial liquidity position in the form of
unused and available bank credit commitments.
16
Financings of the Company's subsidiaries are currently effected through two
stand-alone borrowing groups, the Western Group and Mediacom Southeast, each
with separate lending groups. The credit arrangements of these borrowing groups
are non-recourse to Mediacom, have no cross-default provisions relating directly
to each other, have different revolving credit and term periods and contain
separately negotiated covenants tailored for each borrowing group. These credit
arrangements permit the stand-alone borrowing groups, subject to covenant
restrictions, to make distributions to Mediacom. As of June 30, 1998, the
Company was in compliance with all of the financial covenants as provided in its
bank credit arrangements. A description of the principal provisions of each of
the credit arrangements of the Company's stand-alone borrowing groups is set
forth in Note 3 of the Company's Consolidated Financial Statements.
As of June 30, 1998, in order to finance its working capital requirements,
capital expenditures and acquisitions and to provide liquidity for future
capital requirements, the Company completed the following financing
arrangements: (i) a $100.0 million bank credit facility for the Western Group
expiring in September 2005; (ii) a $225.0 million bank credit for Mediacom
Southeast expiring in June 2006; (iii) a seller note in the original principal
amount of $2.8 million issued by the Western Group in connection with the
acquisition of a cable television system; (iv) Senior Notes in the aggregate
principal amount of $200.0 million (see below); and (v) $135.5 million of equity
capital committed by the members of Mediacom, of which $125.0 million has been
invested to date in Mediacom. See Notes 1 and 3 of the Company's Consolidated
Financial Statements.
On January 9, 1998, the Company completed the acquisition of the Clearlake
System, serving approximately 17,200 subscribers on such date, for a purchase
price of $21.4 million (before closing costs and adjustments). The acquisition
of the Clearlake System and related closing costs and adjustments were financed
with cash on hand and borrowings under the Western Group's bank credit
facility.
On January 23, 1998, the Company completed the acquisition of the
Cablevision Systems, serving approximately 260,100 subscribers on such date, for
a purchase price of approximately $308.7 million (before closing costs and
adjustments). The acquisition of the Cablevision Systems and related closing
costs and adjustments were financed with: (i) $211.0 million of borrowings
under Mediacom Southeast's bank credit facility; (ii) the proceeds of $20.0
million aggregate principal amount of the notes issued by the Company to a bank
(the "Holding Company Notes"); and (iii) $94.0 million of equity capital
contributed to Mediacom by its members. The Holding Company Notes were repaid
in full from the proceeds of the Senior Note issuance (see below).
On April 1, 1998, Mediacom and Mediacom Capital Corporation, a New York
corporation wholly owned by Mediacom, jointly issued $200.0 million aggregate
principal amount of 8.5% Senior Notes due on April 15, 2008. The net proceeds
of the Senior Notes were used at closing to repay outstanding bank debt under
the bank credit facilities in the aggregate principal amount of $173.5 million
and to repay in full the outstanding principal amounts due under the Holding
Company Notes. Interest on the Senior Notes will be payable semi-annually on
April 15 and October 15 of each year, commencing on October 15, 1998.
As a result of the financing transactions described above, including the
effect of the offering of the Senior Notes and the use of the net proceeds
therefrom, as of June 30, 1998, the Company had approximately $212.7 million of
unused bank credit commitments, of which approximately $204.5 million could have
been borrowed and distributed to Mediacom under the most restrictive covenants
in the bank credit facilities. As of June 30, 1998, the Company had entered into
interest rate swap agreements to hedge a notional amount of $62.0 million of
borrowings under the subsidiary credit facilities with expiration dates of
September 1998 through October 2002. As a result of the Company's interest rate
swap agreements, and after giving effect to the issuance of the Senior Notes,
approximately 84.0% of the Company's indebtedness was at fixed interest rates or
subject to interest rate protection as of June 30, 1998. The Company's
effective cost of debt at June 30, 1998, was approximately 8.4% in comparison to
8.7% at December 31, 1997.
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 its obligations under the
Notes. There can be no assurance that the Company will be
17
able to refinance its indebtedness or obtain new financing in the future or, if
the Company were able to do so, that the terms would be favorable to the
Company.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income" and SFAS No. 131, "Disclosure about Segments of an Enterprise and
Related Information," and in 1998, issued SFAS No. 132 "Employer's Disclosure
about Pension and Other Post Retirement Benefits" and SFAS No. 133 "Accounting
for Derivative Instruments and Hedging Activities," The adoption of these
standards are not expected to have a significant impact on the Company's results
of operations, financial position or cash flows, or the Company's consolidated
financial statements and the related footnotes.
INFLATION AND CHANGING PRICES
The Company's costs and expenses are subject to inflation and price
fluctuations. However, because changes in costs are generally passed through to
subscribers, such changes are not expected to have a material effect on the
Company's results of operations.
YEAR 2000
The Company has performed a review of its Year 2000 preparedness relative
to the Systems, its accounting software and its computer hardware. The Company
believes that it will not incur material costs in connection with becoming Year
2000 compliant. In addition, the Company has received communications from its
significant third party vendors and service providers stating that they are
generally on target to become year 2000 compliant in 1999 if they have not
already done so. There can be no assurance that these third party vendors and
service providers will complete their own Year 2000 compliant projects in a
timely manner and that failure to do so would not have any adverse impact on the
Company's business.
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 LLC
August 14, 1998 By: /s/ Rocco B. Commisso
-----------------------------------
Rocco B. Commisso
Manager, Chairman and
Chief Executive Officer
(principal executive officer)
August 14, 1998 By: /s/ Mark E. Stephan
-----------------------------------
Mark E. Stephan
Senior Vice President,
Chief Financial Officer
and Treasurer (principal
financial officer and principal
accounting 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 CAPITAL CORPORATION
August 14, 1998 By: /s/ Rocco B. Commisso
-----------------------------------
Rocco B. Commisso
Chief Executive Officer,
President and Director
(principal executive officer)
August 14, 1998 By: /s/ Mark E. Stephan
-----------------------------------
Mark E. Stephan
Treasurer and Secretary
(principal financial officer
and principal accounting officer)
20
