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: 333-57285-01
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)
(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 Capital Corporation meets the conditions set forth in General
Instruction H (1) (a) and (b) of Form 10-Q and is therefore filing this form
with the reduced disclosure format.
MEDIACOM LLC AND SUBSIDIARIES
FORM 10-Q
FOR THE PERIOD ENDED JUNE 30, 2002
TABLE OF CONTENTS
PAGE
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PART I
Item 1. Financial Statements
Consolidated Balance Sheets (unaudited) -
June 30, 2002 and December 31, 2001............................................ 1
Consolidated Statements of Operations and Comprehensive Loss (unaudited) -
Three and Six Months Ended June 30, 2002 and 2001.............................. 2
Consolidated Statements of Cash Flows (unaudited) -
Six Months Ended June 30, 2002 and 2001........................................ 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......................... 16
PART II
Item 6. Exhibits and Reports on Form 8-K................................................... 17
------------------------------
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 LLC AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(ALL DOLLAR AMOUNTS IN 000'S)
(UNAUDITED)
JUNE 30, DECEMBER 31,
2002 2001
----------- ------------
ASSETS
Cash and cash equivalents $ 9,352 $ 7,378
Investments 4,070 4,070
Subscriber accounts receivable, net of allowance for doubtful accounts
of $1,057 and $1,095, respectively 15,351 12,314
Prepaid expenses and other assets 5,177 6,917
Preferred investment in affiliated company 150,000 150,000
Investment in cable television systems:
Inventory 14,464 29,012
Property, plant and equipment, net of accumulated depreciation of
$416,385 and $338,930, respectively 727,549 717,595
Intangible assets, net of accumulated amortization of $211,470 and
$197,860, respectively 598,041 605,053
----------- ------------
Total investment in cable television systems 1,340,054 1,351,660
Other assets, net of accumulated amortization of $11,457 and
$9,733, respectively 24,350 26,329
----------- ------------
Total assets $ 1,548,354 $ 1,558,668
=========== ============
LIABILITIES AND MEMBER'S EQUITY
LIABILITIES
Debt $ 1,505,500 $ 1,425,500
Accounts payable and accrued expenses 70,248 111,710
Deferred revenue 10,050 7,467
----------- ------------
Total liabilities $ 1,585,798 $ 1,544,677
----------- ------------
MEMBER'S EQUITY
Capital contributions 521,696 521,696
Other equity 22,965 21,502
Accumulated deficit (582,105) (529,207)
----------- ------------
Total member's equity (37,444) 13,991
----------- ------------
Total liabilities and member's equity $ 1,548,354 $ 1,558,668
=========== ============
The accompanying notes to consolidated financial statements
are an integral part of these statements.
1
MEDIACOM LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE LOSS
(ALL DOLLAR AMOUNTS IN 000'S)
(UNAUDITED)
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
--------------------------- -------------------------
2002 2001 2002 2001
--------- --------- --------- ---------
Revenues $ 102,528 $ 91,651 $ 199,718 $ 180,782
Costs and expenses:
Service costs 37,688 31,284 74,810 61,558
Selling, general and administrative
expenses 16,822 14,792 33,820 29,962
Management fee expense 1,428 1,950 2,878 3,467
Depreciation and amortization 52,412 52,702 97,081 103,485
Non-cash stock charges relating to
management fee expense 505 688 1,463 1,883
--------- --------- --------- ---------
Operating loss (6,327) (9,765) (10,334) (19,573)
Interest expense, net 25,590 22,099 51,079 42,833
Loss (gain) on derivative instruments, net 131 (232) (2,095) 1,397
Investment income from affiliate (4,500) - (9,000) -
Other expenses (income) 1,176 553 2,580 (28,919)
--------- --------- --------- ---------
Net loss before cumulative effect of
accounting change (28,724) (32,185) (52,898) (34,884)
Cumulative effect of accounting change,
net of tax - - - (1,642)
--------- --------- --------- ---------
Net loss $ (28,724) $ (32,185) $ (52,898) $ (36,526)
Unrealized gain on investments - 1,012 - 326
--------- --------- --------- ---------
Comprehensive loss $ (28,724) $ (31,173) $ (52,898) $ (36,200)
========= ========= ========= =========
The accompanying notes to consolidated financial statements
are an integral part of these statements.
2
MEDIACOM LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(ALL DOLLAR AMOUNTS IN 000'S)
(UNAUDITED)
SIX MONTHS ENDED JUNE 30,
------------------------
2002 2001
--------- ----------
CASH FLOWS PROVIDED BY OPERATING ACTIVITIES:
Net loss $ (52,898) $ (36,526)
Adjustments to reconcile net loss to net cash flows from operating
activities:
Depreciation and amortization 97,081 101,445
(Gain) loss on derivative instruments, net (2,095) 1,397
Vesting of management stock 1,463 1,883
Elimination and amortization of deferred SoftNet revenue - (30,244)
Amortization of deferred financing costs 1,556 2,040
Cumulative effect of accounting change, net of tax - 1,642
Changes in assets and liabilities, net of effects from acquisitions:
Subscriber accounts receivable, net (3,052) 2,004
Prepaid expenses and other assets 1,740 (7,531)
Accounts payable and accrued expenses (39,373) 12,086
Subscriber advances - (1,392)
Management fees payable - 1,982
Deferred revenue 2,583 (121)
--------- ----------
Net cash flows provided by operating activities 7,005 48,665
--------- ----------
CASH FLOWS USED IN INVESTING ACTIVITIES:
Capital expenditures (78,425) (107,646)
Acquisitions of cable television systems (6,548) -
Other investment activities (29) (938)
--------- ----------
Net cash flows used in investing activities (85,002) (108,584)
--------- ----------
CASH FLOWS PROVIDED BY FINANCING ACTIVITIES:
New borrowings 164,000 547,000
Repayment of debt (84,000) (471,000)
Financing costs (29) (12,880)
--------- ----------
Net cash flows provided by financing activities 79,971 63,120
--------- ----------
Net increase in cash and cash equivalents 1,974 3,201
CASH AND CASH EQUIVALENTS, beginning of period 7,378 4,093
--------- ----------
CASH AND CASH EQUIVALENTS, end of period $ 9,352 $ 7,294
========= ==========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for interest $ 53,963 $ 30,500
========= ==========
The accompanying notes to consolidated financial statements
are an integral part of these statements.
3
MEDIACOM LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(1) ORGANIZATION
Mediacom LLC ("Mediacom," and collectively with its subsidiaries, the
"Company"), a New York limited liability company wholly-owned by Mediacom
Communications Corporation ("MCC"), is involved in the acquisition and
development of cable television systems serving smaller cities and towns in the
United States. Through these 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 22
states, principally Alabama, California, Delaware, Florida, Illinois, Indiana,
Iowa, Kentucky, Minnesota, Missouri, North Carolina and South Dakota.
On February 9, 2000, MCC, a Delaware corporation organized in November
1999, completed an initial public offering of its Class A common stock.
Immediately prior to the completion of its initial public offering, MCC issued
shares of its Class A and Class B common stock in exchange for all of the
outstanding membership interests in Mediacom and became the sole member and
manager of Mediacom.
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 public debt securities. Mediacom Capital
has nominal assets and does not conduct operations of its own.
(2) STATEMENT OF ACCOUNTING PRESENTATION AND OTHER INFORMATION
BASIS OF PREPARATION OF CONSOLIDATED FINANCIAL STATEMENTS
The consolidated financial statements as of June 30, 2002 and 2001 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. 333-57285-01 and
333-57285). 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. In accordance with EITF
No. 01-09, the Company has revised its classification of distribution fees,
received in exchange for carriage of programming services, from revenues to an
offset to service costs in its consolidated statements of operations and
comprehensive loss. As a result, the Company has reclassified 2001 amounts to
conform with the 2002 presentation.
CUMULATIVE EFFECT OF ACCOUNTING CHANGE
Effective January 1, 2001, the Company adopted Statement of Financial
Accounting Standards No. 133 ("SFAS 133"), "Accounting for Derivative
Instruments and Hedging Activities." As a result, the Company recorded a charge
of approximately $1.6 million, as a change in accounting principle, in the first
quarter of 2001.
RECLASSIFICATIONS
Certain reclassifications have been made to prior year's amounts to conform
to the current year's 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
4
MEDIACOM LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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 $22.3 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.
The following table provides a reconciliation of the 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 (dollars in
thousands):
Reported net loss................................. $ (36,526)
Add back: franchise cost amortization.......... 21,865
Add back: goodwill amortization................ 457
-----------
Adjusted net loss................................. $ (14,204)
===========
As of June 30, 2002, intangible assets subject to amortization principally
consisted of subscriber lists, which are being amortized over five years, and
covenants not to compete, which are being amortized over three to seven years.
As of June 30, 2002, the Company's amortizable intangible assets had a gross
value of $139.8 million, with accumulated amortization of $105.8 million. The
Company's estimated aggregate amortization expense for the remainder of 2002 and
2003 is $13.6 million and $20.4 million, respectively.
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 the
Company's results of operations or financial position.
(3) ACQUISITIONS
The Company made acquisitions of cable systems in 2002 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
the acquired systems 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 acquired systems have been included with those
of the Company since the dates of acquisition.
During the three months ended March 31, 2002, the Company acquired cable
systems serving approximately 3,000 basic subscribers for an aggregate purchase
price of approximately $6.5 million. The purchase price has been preliminarily
allocated to intangible assets. The cable systems serve communities contiguous
with the Company's existing operations. These acquisitions were financed with
borrowings under the Company's subsidiary credit facilities.
5
MEDIACOM LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(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 facilities............... $ 680,500 $ 600,500
8 1/2% senior notes........................ 200,000 200,000
7 7/8% senior notes........................ 125,000 125,000
9 1/2% senior notes........................ 500,000 500,000
------------ -------------
$ 1,505,500 $ 1,425,500
============ =============
The average interest rate on debt outstanding under the subsidiary credit
facilities was 3.2% 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 $413.0 million
under its subsidiary credit facilities, of which about $391.0 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
$170.0 million is fixed at a weighted average rate of approximately 6.7%, plus
the average applicable margin over the curodollar rate option under the bank
credit agreements. Under the terms of the interest rate exchange agreements,
which expire from 2002 through 2004, the Company is exposed to credit loss in
the event of nonperformance by the other parties. However, the Company does not
anticipate their nonperformance.
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 $8.0 million if the exchange agreements were terminated, inclusive
of accrued interest.
(5) SOFTNET
As of January 31, 2001, the Company formally terminated its relationship
with SoftNet in all material respects. The Company recognized revenue of
approximately $0.3 million for the period ended January 31, 2001 and recognized
the remaining deferred revenue of approximately $30.0 million as other income in
the consolidated statements of operations in the first quarter of 2001.
(6) EQUITY
On July 17, 2001, the Company paid a $125.0 million cash dividend to MCC
that was funded with borrowings under its subsidiary credit facilities.
6
MEDIACOM LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(7) INVESTMENTS
On July 18, 2001, the Company made a $150.0 million preferred equity
investment in Mediacom Broadband LLC, a Delaware limited liability company
wholly-owned by MCC, that was funded with borrowings under the Company's
subsidiary credit facilities. The preferred equity investment has a 12% annual
cash dividend, payable quarterly in cash.
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 2001 and with the Company's annual report on Form 10-K for the
year ended December 31, 2001.
ORGANIZATION
Mediacom LLC ("Mediacom") was organized as a New York limited liability
company in July 1995 and serves as a holding company for its operating
subsidiaries. Mediacom Capital Corporation, Mediacom's wholly-owned subsidiary,
was organized as a New York corporation in March 1998 for the sole purpose of
acting as a co-issuer with Mediacom of public debt securities and does not
conduct operations of its own. Mediacom Communications Corporation ("MCC") was
organized as a Delaware corporation in November 1999 and completed an initial
public offering in February 2000. Immediately prior to the completion of MCC's
initial public offering, MCC issued shares of its common stock in exchange for
all of Mediacom's outstanding membership interests and became the Mediacom's
sole member and manager. See Note 1 of the Company's consolidated financial
statements.
ACQUISITIONS
The Company has expanded its business through acquisitions. All
acquisitions have been accounted for under the purchase method of accounting
and, therefore, the Company's historical results of operations include the
results of operations for each acquired system subsequent to its respective
acquisition date. These acquisitions affect the comparability of the Company's
historical results of operations.
During the three months ended March 31, 2002, the Company acquired cable
systems serving approximately 3,000 basic subscribers for an aggregate purchase
price of approximately $6.5 million. These acquisitions were financed with
borrowings under the Company's bank credit facilities. The cable systems serve
communities contiguous with the Company's existing operations.
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 93.9% 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 4.9% and 1.2% 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 the Company's
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 the
Company's ability to increase its 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
charges incurred under the Company's management agreement with MCC.
8
The high level of depreciation and amortization associated with our
acquisition activities and capital investment program, as well as the interest
expense related to the Company's 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 loss before depreciation and
amortization and non-cash stock charges relating to management fee expense.
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 $22.3 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
Basic subscribers were 752,000 at June 30, 2002, as compared to 774,000 at
June 30, 2001. The Company acquired 3,000 basic subscribers during the first
quarter of 2002.
Digital customers were 102,000 at June 30, 2002, as compared to 66,000 at
June 30, 2001.
Data customers were 56,000 at June 30, 2002, as compared to 21,000 at June
30, 2001.
THREE MONTHS ENDED JUNE 30, 2002 COMPARED TO THREE MONTHS ENDED JUNE 30, 2001
Revenues. Revenues increased by 11.9% to $102.5 million for the three
months ended June 30, 2002, as compared to $91.7 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.......... $ 95.6 93.3% $ 88.6 96.6%
Data........... 5.7 5.5% 2.0 2.2%
Advertising.... 1.2 1.2% 1.1 1.2%
--------- -------- -------- --------
$ 102.5 100.0% $ 91.7 100.0%
========= ======== ======== ========
Video revenues increased by 7.9% to $95.6 million for the three months
ended June 30, 2002, as compared to $88.6 million for the three months ended
June 30, 2001. Video revenues increased primarily due to basic rate increases
largely associated with new programming introductions and to customer growth in
the Company's digital cable services, partially offset by a decline in basic
subscribers.
Data revenues increased by 185.0% to $5.7 million for the three months
ended June 30, 2002, as compared to $2.0 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 9.1% to $1.2 million for the three months
ended June 30, 2002, as compared to $1.1 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 20.5% to $37.7 million for the three
months ended June 30, 2002, as compared to $31.3 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 costs of new channel additions, greater service costs
associated with customer growth in the Company's digital cable and high-speed
Internet access services, and increased utilities expense. As a percentage of
revenues, service costs were 36.8% for the three months ended June 30, 2002, as
compared with 34.1% for the three months ended June 30, 2001.
Selling, general and administrative expenses. Selling, general and
administrative expenses increased 13.7% to $16.8 million for the three months
ended June 30, 2002, as compared to $14.8 million for the three months ended
June 30, 2001. Selling, general and administrative expenses increased primarily
as a result of higher marketing expenses, billing costs and taxes. As a
percentage of revenues, selling, general and administrative expenses were 16.4%
for the three months ended June 30, 2002 as compared with 16.1% for the three
months ended June 30, 2001.
Management fee expense. The Company's management fee expense decreased
26.8% to $1.4 million for the three months ended June 30, 2002, as compared to
$2.0 million for the three months ended June 30, 2001. The decrease was due to
the sharing of MCC's overhead with Mediacom Broadband LLC, a wholly-owned
subsidiary of MCC that commenced operations in June 2001. As a percentage of
revenues, management fee expense was 1.4% for the three months ended June 30,
2002 as compared with 2.1% for the three months ended June 30, 2001.
10
Depreciation and amortization. Depreciation and amortization decreased 0.6%
to $52.4 million for the three months ended June 30, 2002, as compared to $52.7
million for the three months ended June 30, 2001. This decrease is primarily due
to the impact of adopting SFAS 142, which reduced amortization expense by $11.2
million during the three months ended June 30, 2002, partially offset by capital
expenditures associated with the upgrade of the Company's cable systems.
Non-cash stock charges relating to management fee expense. Non-cash stock
charges relating to management fee expense decreased 26.6% to $0.5 million for
the three months ended June 30, 2002, as compared to $0.7 million for the three
months ended June 30, 2001. This charge represents vesting in equity interests
granted to certain members of MCC's management team in 1999.
Interest expense, net. Interest expense, net, increased 15.8% to $25.6
million for the three months ended June 30, 2002, as compared to $22.1 million
for the three months ended June 30, 2001. This was due to higher average
borrowings under the Company's subsidiary credit facilities, partially offset by
lower interest rates on the Company's variable rate debt.
Loss (gain) on derivative instruments, net. Loss on derivative instruments,
net, was $0.1 million for the three months ended June 30, 2002, as compared to
gain on derivative instruments, net, of $0.2 million for the three months ended
June 30, 2001, primarily due to declining interest rates.
Investment income from affiliate. Investment income from affiliate was $4.5
million for the three months ended June 30, 2002, which was received in cash.
This amount represents the investment income on the Company's $150.0 million
preferred equity investment in Mediacom Broadband LLC.
Other expenses (income). Other expenses were $1.2 million for the three
months ended June 30, 2002, as compared to $0.6 million for the three months
ended June 30, 2001. This was due to fees on unused credit commitments under the
Company's bank credit facilities and amortization on deferred financing costs.
Net loss. Due to the factors described above, the Company generated a net
loss of $28.7 million for the three months ended June 30, 2002 as compared to a
net loss of $32.2 million for the three months ended June 30, 2001.
Operating cash flow. Operating cash flow increased 6.8% to $46.6 million
for the three months ended June 30, 2002 as compared to $43.6 million for the
three months ended June 30, 2001. Operating cash flow increased primarily due to
basic rate increases in the Company's video services and the increase in revenue
resulting from customer growth in the Company's digital cable and high-speed
Internet access services, partially offset by a decline in basic subscribers and
increases in programming and other service costs, and selling, general and
administrative expenses. As a percentage of revenues, operating cash flow was
45.4% for the three months ended June 30, 2002 as compared with 47.6% for the
three months ended June 30, 2001.
SIX MONTHS ENDED JUNE 30, 2002 COMPARED TO SIX MONTHS ENDED JUNE 30, 2001
Revenues. Revenues increased by 10.5% to $199.7 million for the six months
ended June 30, 2002, as compared to $180.8 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.......... $ 187.6 93.9% $ 174.8 96.7%
Data........... 9.8 4.9% 3.8 2.1%
Advertising.... 2.3 1.2% 2.2 1.2%
--------- -------- -------- --------
$ 199.7 100.0% $ 180.8 100.0%
========= ======== ======== ========
11
Video revenues increased by 7.3% to $187.6 million for the six months ended
June 30, 2002, as compared to $174.8 million for the six months ended June 30,
2001. Video revenues increased primarily due to basic rate increases largely
associated with new programming introductions and to customer growth in the
Company's digital cable services, partially offset by a decline in basic
subscribers.
Data revenues increased 157.9% to $9.8 million for the six months ended
June 30, 2002, as compared to $3.8 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 4.5% to $2.3 million for the six months
ended June 30, 2002, as compared to $2.2 million for the six months ended June
30, 2001. Advertising revenues increased due to greater advertising capacity
resulting from new channel additions.
Service costs. Service costs increased 21.5% to $74.8 million for the six
months ended June 30, 2002, as compared to $61.6 million for the six months
ended June 30, 2001. Service costs increased due to higher programming expenses,
including rate increases by programming suppliers for existing services and the
costs of new channel additions, greater service costs associated with customer
growth in the Company's digital cable and high-speed Internet access services
and non-recurring incremental costs of $1.3 million related to the Company's
high-speed Internet transition completed in February 2002. As a percentage of
revenues, service costs were 37.5% for the six months ended June 30, 2002, as
compared with 34.1% for the six months ended June 30, 2001.
Selling, general and administrative expenses. Selling, general and
administrative expenses increased 12.9% to $33.8 million for the six months
ended June 30, 2002, as compared to $30.0 million for the six months ended June
30, 2001. Selling, general and administrative expenses increased primarily as a
result of higher marketing expenses, billing costs and taxes. As a percentage of
revenues, selling, general and administrative expenses were 16.9% for the six
months ended June 30, 2002 as compared with 16.6% for the six months ended June
30, 2001.
Management fee expense. The Company's management fee expense decreased
17.0% to $2.9 million for the six months ended June 30, 2002, as compared to
$3.5 million for the six months ended June 30, 2001. The decrease was due to the
sharing of MCC's overhead with Mediacom Broadband LLC. As a percentage of
revenues, management fee expense was 1.4% for the six months ended June 30, 2002
as compared with 1.9% for the six months ended June 30, 2001.
Depreciation and amortization. Depreciation and amortization decreased 6.2%
to $97.1 million for the six months ended June 30, 2002, as compared to $103.5
million for the six months ended June 30, 2001. This decrease is primarily due
to the impact of adopting SFAS 142, which reduced amortization expense by $22.3
million during the six months ended June 30, 2002, partially offset by capital
expenditures associated with the upgrade of the Company's cable systems.
Non-cash stock charges relating to management fee expense. Non-cash stock
charges relating to management fee expense decreased 22.3% to $1.5 million for
the six months ended June 30, 2002, as compared to $1.9 million for the six
months ended June 30, 2001. This charge represents vesting in equity interests
granted to certain members of MCC's management team in 1999.
Interest expense, net. Interest expense, net, increased 19.3% to $51.1
million for the six months ended June 30, 2002, as compared to $42.8 million for
the six months ended June 30, 2001. This was due to higher average borrowings
under the Company's subsidiary credit facilities, partially offset by lower
interest rates on the Company's variable rate debt.
Loss (gain) on derivative instruments, net. Gain on derivative instruments,
net, was $2.1 million for the six months ended June 30, 2002, as compared to
loss on derivative instruments, net, of $1.4 million for the six months ended
June 30, 2001, primarily due to the decrease in time to maturity of the
derivative instruments.
Investment income from affiliate. Investment income from affiliate was $9.0
million for the six months ended June 30, 2002, which was received in cash. This
amount represents the investment income on the Company's $150.0 million
preferred equity investment in Mediacom Broadband LLC.
12
Other expenses (income). Other expenses were $2.6 million for the six
months ended June 30, 2002, as compared to other income of $28.9 million for the
six months ended June 30, 2001. Other expenses represented fees on unused credit
commitments under the Company's bank credit facilities and amortization of
deferred financing costs. Other income reflected the recognition of the
remaining $30.0 million of deferred revenue resulting from the termination of
the Company's contract with SoftNet.
Net loss. Due to the factors described above, the Company generated a net
loss of $52.9 million for the six months ended June 30, 2002 as compared to a
net loss of $36.5 million for the six months ended June 30, 2001.
Operating cash flow. Operating cash flow increased 2.8% to $88.2 million
for the six months ended June 30, 2002 as compared to $85.8 million for the six
months ended June 30, 2001. Operating cash flow increased primarily due to the
basic rate increases in the Company's video services and the increase in revenue
resulting from customer growth in the Company's digital cable and high-speed
Internet access services, partially offset by a decline in basic subscribers and
increases in programming and selling, general and administrative expenses and
the non-recurring incremental costs related to the Company's high-speed Internet
transition. As a percentage of revenues, operating cash flow was 44.2% for the
six months ended June 30, 2002 as compared with 47.5% 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 $78.4 million for six months ended
June 30, 2002. As of June 30, 2002, approximately 94% of the Company's cable
network was upgraded with 550MHz to 870MHz bandwidth capacity and about 87% 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 630,000 basic subscribers, and the Company's cable
modem service was marketed to about 890,000 homes passed by the Company's cable
systems.
The Company plans to continue its aggressive network upgrade program and
expects that approximately 96% of its cable network will be upgraded with 550MHz
to 870MHz bandwidth capacity and approximately 92% of its homes passed will have
two-way communications capability by year end 2002. The target for two-way
communications capability reflects a revision from previous estimate of 90%. 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 $165.0 million and $175.0 million in capital expenditures in
2002. This represents a reduction of $15.0 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 July 18, 2001, the Company made a $150.0 million preferred equity
investment in Mediacom Broadband LLC, that was funded with borrowings under the
Company's subsidiary credit facilities. The preferred equity investment has a
12% annual cash dividend, payable quarterly in cash.
During the three months ended March 31, 2002, the Company completed
acquisitions of cable systems serving approximately 3,000 basic subscribers for
an aggregate purchase price of $6.5 million. The cable systems serve communities
contiguous with the Company's existing operations.
13
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 January 24, 2001, the Company and its wholly-owned subsidiary, Mediacom
Capital, a New York corporation, completed an offering of $500.0 million of
9 1/2% senior notes due January 2013. Interest on the 9 1/2% senior notes is
payable semi-annually on January 15 and July 15 of each year, which commenced on
July 15, 2001. Approximately $467.5 million of the net proceeds were used to
repay a substantial portion of the indebtedness outstanding under the Company's
subsidiary credit facilities and related accrued interest. The balance of the
net proceeds was used for general corporate purposes.
On July 17, 2001, the Company paid a $125.0 million cash dividend to MCC.
This cash dividend indirectly funded a portion of the purchase price for
Mediacom Broadband LLC's acquisitions of cable systems from AT&T Broadband, LLC.
The Company has two subsidiary credit facilities, each in the amount of
$550.0 million. These subsidiary credit facilities expire in September 2008 and
December 2008, however, their final maturities are subject to earlier repayment
on dates ranging from June 2007 to December 2007 if the Company does not
refinance its $200.0 million 8 1/2% senior notes due April 2008 prior to March
31, 2007.
The Company has entered into interest rate exchange agreements, which
expire from 2002 through 2004, to hedge $170.0 million of floating rate debt.
Under the terms of the 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 approximately $1.5
billion. On such date, the Company had about $413.0 million of unused credit
commitments under its subsidiary credit facilities, of which about $391.0
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 63% 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 7.4 times. Interest coverage (defined as operating cash flow divided by
total interest expense, net) for such period was 2.0 times. Pursuant to the
Company's debt arrangements, operating cash flow includes investment income
received in cash. 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.
CUMULATIVE EFFECT OF ACCOUNTING CHANGE
Effective January 1, 2001, the Company adopted Statement of Financial
Accounting Standards No. 133 ("SFAS 133"), "Accounting for Derivative
Instruments and Hedging Activities." As a result, the Company recorded a charge
of approximately $1.6 million as a change in accounting principle in the first
quarter of 2001.
14
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 $22.3 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 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.
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.
15
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 $170.0 million is fixed at a weighted average rate of
approximately 6.7%, plus the average applicable margin over the curodollar rate
option under the Company's bank credit agreements. Under the terms of the
interest rate exchange agreements, which expire from 2002 through 2004, 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 $8.0 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 financial statements.
EXPECTED MATURITY
-----------------------------------------------------------------------
(ALL DOLLAR AMOUNTS IN THOUSANDS)
2002 2003 2004 2005 2006 THEREAFTER TOTAL FAIR VALUE
-------- --------- -------- -------- --------- ----------- ------------ ------------
Fixed rate $ - $ - $ - $ - $ - $ 200,000 $ 200,000 $ 184,000
Weighted average
interest rate 8.5% 8.5% 8.5% 8.5% 8.5% 8.5% 8.5%
Fixed rate $ - $ - $ - $ - $ - $ 125,000 $ 125,000 $ 103,000
Weighted average
interest rate 7.9% 7.9% 7.9% 7.9% 7.9% 7.9% 7.9%
Fixed rate $ - $ - $ - $ - $ - $ 500,000 $ 500,000 $ 449,100
Weighted average
interest rate 9.5% 9.5% 9.5% 9.5% 9.5% 9.5% 9.5%
Variable rate $ 750 $ 2,000 $ 2,000 $ 2,000 $ 145,000 $ 528,750 $ 680,500 $ 680,500
Weighted average
interest rate 3.2% 3.2% 3.2% 3.2% 3.2% 3.2% 3.2%
16
PART II
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
None.
(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.
17
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, 2002 By: /s/ Mark E. Stephan
-------------------
Mark E. Stephan
Senior Vice President and
Chief Financial Officer
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 CAPITAL CORPORATION
August 14, 2002 By: /s/ Mark E. Stephan
-------------------
Mark E. Stephan
Treasurer, Secretary and
Principal Financial Officer
19
