10-Q
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 September 30, 2005
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Commission File Numbers:
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333-57285-01 |
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333-57285 |
Mediacom LLC
Mediacom Capital Corporation*
(Exact names of Registrants as specified in their charters)
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New York
New York
(State or other jurisdiction of
incorporation or organization)
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06-1433421
06-1513997
(I.R.S. Employer
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 þ No o
Indicate by checkmark whether the registrants are accelerated filers (as defined in Rule 12b-2
of the Exchange Act). Yes o No þ
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act). Yes o No þ
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 SEPTEMBER 30, 2005
TABLE OF CONTENTS
This Quarterly Report contains certain forward-looking statements relating to future
events and 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 continues or the negative of
those words and other comparable words. These forward-looking statements are subject to risks and
uncertainties that could cause actual results to differ materially from historical results or those
we anticipate. Factors that could cause actual results to differ from those contained in the
forward-looking statements include: competition in our video, high-speed Internet access and
telephone businesses; our ability to achieve anticipated customer and revenue growth and to
successfully introduce new products and services; increasing programming costs; changes in laws and
regulations; our ability to generate sufficient cash flow to meet our debt service obligations and
the other risks and uncertainties discussed in our Annual Report on Form 10-K for the year ended
December 31, 2004 and other reports or documents that we file from time to time with the
Securities and Exchange Commission (SEC). Statements included in this Quarterly Report are
based upon information known to us as of the date that this Quarterly Report is filed with the SEC,
and we assume no obligation to (and expressly disclaim any such obligation to) publicly update or
alter our forward-looking statements made in this Quarterly Report, whether as a result of new
information, future events or otherwise, except as otherwise required by applicable federal
securities laws.
PART I
ITEM 1. FINANCIAL STATEMENTS
MEDIACOM LLC AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(All dollar amounts in thousands)
(Unaudited)
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September 30, |
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December 31, |
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2005 |
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2004 |
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ASSETS |
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CURRENT ASSETS |
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Cash and cash equivalents |
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$ |
6,427 |
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$ |
12,131 |
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Investments |
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1,987 |
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Subscriber accounts receivable, net of allowance for doubtful
accounts of $1,143 and $856, respectively |
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26,075 |
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26,929 |
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Prepaid expenses and other assets |
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3,456 |
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14,216 |
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Total current assets |
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35,958 |
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55,263 |
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Preferred equity investment in affiliated company |
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150,000 |
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150,000 |
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Investment in cable television systems: |
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Property, plant and equipment, net of accumulated depreciation of
$798,679 and $728,048, respectively |
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714,895 |
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698,363 |
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Franchise costs, net of accumulated amortization of
$102,195 and $102,195, respectively |
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552,513 |
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552,513 |
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Goodwill, net of accumulated amortization of
$2,682 and $2,682, respectively |
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11,535 |
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11,535 |
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Subscriber lists and other intangible assets, net of accumulated
amortization of $138,453 and $137,738, respectively |
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99 |
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814 |
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Total investment in cable television systems |
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1,279,042 |
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1,263,225 |
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Other assets, net of accumulated amortization of $12,063 and
$14,443, respectively |
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24,275 |
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23,412 |
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Total assets |
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$ |
1,489,275 |
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$ |
1,491,900 |
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LIABILITIES AND MEMBERS DEFICIT |
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CURRENT LIABILITIES |
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Accrued liabilities |
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$ |
95,432 |
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$ |
107,520 |
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Deferred revenue |
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18,586 |
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17,876 |
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Current portion of long-term debt |
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6,405 |
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6,384 |
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Total current liabilities |
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120,423 |
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131,780 |
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Long-term debt, less current portion |
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1,477,979 |
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1,466,793 |
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Other non-current liabilities |
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10,111 |
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12,634 |
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Total liabilities |
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1,608,513 |
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1,611,207 |
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Commitments and contingencies |
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MEMBERS DEFICIT |
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Capital contributions |
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548,521 |
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548,521 |
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Accumulated deficit |
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(667,759 |
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(667,828 |
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Total members deficit |
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(119,238 |
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(119,307 |
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Total liabilities and members deficit |
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$ |
1,489,275 |
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$ |
1,491,900 |
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1
MEDIACOM LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(All dollar amounts in thousands)
(Unaudited)
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Three Months Ended |
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September 30, |
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2005 |
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2004 |
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Revenues |
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$ |
122,274 |
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$ |
116,048 |
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Costs and expenses: |
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Service costs (exclusive of depreciation and amortization of
$25,445 and $28,074, respectively, shown separately below) |
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51,258 |
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46,720 |
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Selling, general and administrative expenses |
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23,905 |
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22,442 |
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Management fee expense |
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2,464 |
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2,297 |
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Depreciation and amortization |
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25,445 |
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28,074 |
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Operating income |
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19,202 |
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16,515 |
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Interest expense, net |
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(25,427 |
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(24,656 |
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Gain (loss) on derivatives, net |
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2,936 |
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(2,072 |
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Gain on sale of assets and investments, net |
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1,446 |
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Investment income from affiliate |
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4,500 |
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4,500 |
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Other expense |
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(1,045 |
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(1,027 |
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Net income (loss) |
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$ |
1,612 |
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$ |
(6,740 |
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2
MEDIACOM LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(All dollar amounts in thousands)
(Unaudited)
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Nine Months Ended |
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September 30, |
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2005 |
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2004 |
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Revenues |
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$ |
362,810 |
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$ |
355,962 |
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Costs and expenses: |
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Service costs (exclusive of depreciation and amortization of
$74,232 and $81,823, respectively, shown separately below) |
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148,628 |
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138,434 |
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Selling, general and administrative expenses |
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69,900 |
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65,541 |
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Management fee expense |
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7,374 |
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6,737 |
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Depreciation and amortization |
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74,232 |
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81,823 |
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Operating income |
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62,676 |
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63,427 |
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Interest expense, net |
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(75,573 |
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(72,455 |
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Loss on early extinguishment of debt |
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(4,742 |
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Gain on derivatives, net |
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5,297 |
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2,798 |
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Gain on sale of assets and investments, net |
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2,628 |
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5,885 |
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Investment income from affiliate |
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13,500 |
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13,500 |
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Other expense |
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(3,717 |
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(3,103 |
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Net income |
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$ |
69 |
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$ |
10,052 |
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3
MEDIACOM LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(All dollar amounts in thousands)
(Unaudited)
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Nine Months Ended |
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September 30, |
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2005 |
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2004 |
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CASH FLOWS FROM OPERATING ACTIVITIES: |
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Net income |
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$ |
69 |
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$ |
10,052 |
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Adjustments to reconcile net income (loss) to net cash provided by
operating activities: |
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Depreciation and amortization |
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74,232 |
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81,823 |
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Gain on derivatives, net |
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(5,297 |
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(2,798 |
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Gain on sale of assets and investments, net |
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(2,628 |
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(5,885 |
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Loss on early extinguishment of debt |
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4,742 |
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Amortization of deferred financing costs |
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2,313 |
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2,475 |
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Amortization of deferred compensation |
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84 |
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Changes in assets and liabilities, net of effects from acquisitions: |
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Subscriber accounts receivable, net |
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854 |
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1,350 |
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Prepaid expenses and other assets |
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10,813 |
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4,946 |
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Accrued liabilities |
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(12,089 |
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1,041 |
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Deferred revenue |
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710 |
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1,716 |
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Other non-current liabilities |
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(2,607 |
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2,747 |
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Net cash flows provided by operating activities |
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71,196 |
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97,467 |
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CASH FLOWS FROM INVESTING ACTIVITIES: |
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Capital expenditures |
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(89,840 |
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(61,509 |
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Acquisition of cable television systems |
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(3,372 |
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Proceeds from the sale of assets and investments |
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4,616 |
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10,556 |
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Other investment activities |
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(23 |
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Net cash flows used in investing activities |
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(85,224 |
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(54,348 |
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CASH FLOWS FROM FINANCING ACTIVITIES: |
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New borrowings |
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493,000 |
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85,000 |
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Repayment of debt |
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(284,626 |
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(134,048 |
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Redemption of senior notes |
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(200,000 |
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Other financing activities |
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(50 |
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Net cash flows provided by (used in) financing activities |
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8,324 |
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(49,048 |
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Net decrease in cash and cash equivalents |
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(5,704 |
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(5,929 |
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CASH AND CASH EQUIVALENTS, beginning of period |
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12,131 |
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13,417 |
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CASH AND CASH EQUIVALENTS, end of period |
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$ |
6,427 |
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$ |
7,488 |
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SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: |
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Cash paid during the period for interest, net of amounts capitalized |
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$ |
94,008 |
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$ |
83,332 |
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4
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 operation of cable systems serving smaller cities and towns in the United
States.
Mediacom relies on its parent, MCC, for various services such as corporate and administrative
support. The financial position, results of operations and cash flows of Mediacom could differ
from those that would have resulted had Mediacom operated autonomously or as an entity independent
of MCC.
Mediacom Capital Corporation (Mediacom Capital), a New York corporation wholly-owned by
Mediacom, co-issued, jointly and severally with Mediacom, public debt securities. Mediacom Capital
has no operations, revenues or cash flows, and has no assets, liabilities or stockholders equity
on its consolidated balance sheets other than a one-hundred dollar receivable from an affiliate and
the same dollar amount of common stock. Therefore, separate financial statements have not been
presented for this entity.
(2) Statement of Accounting Presentation and Other Information
Basis of Preparation of Unaudited Consolidated Financial Statements
Mediacom has prepared these unaudited consolidated financial statements as of September 30,
2005 and 2004. In the opinion of management, such statements include all adjustments, consisting
of normal recurring accruals and adjustments, necessary for a fair presentation of the Companys
consolidated results of operations and financial position for the interim periods presented. The
accounting policies followed during such interim periods reported are in conformity with generally
accepted accounting principles in the United States of America and are consistent with those
applied during annual periods. For additional disclosures, including a summary of the Companys
accounting policies, the interim unaudited consolidated financial statements should be read in
conjunction with the Companys Annual Report on Form 10-K for the year ended December 31, 2004
(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, 2005.
Revenue Recognition
Revenues from video, data and phone services are recognized when the services are provided to
the customers. Credit risk is managed by disconnecting services to customers who are delinquent.
Installation revenues are recognized as customer connections are completed because installation
revenues are less than direct installation costs. Advertising sales are recognized in the period
that the advertisements are exhibited. Under the terms of its franchise agreements, the Company is
required to pay local franchising authorities up to 5% of its gross revenues derived from providing
cable services. The Company normally passes these fees through to its customers. Franchise fees
are reported in their respective revenue categories and included in selling, general and
administrative expenses.
Allowance for Doubtful Accounts
The allowance for doubtful accounts represents the Companys best estimate of probable losses
in the accounts receivable balance. The allowance is based on the number of days outstanding,
customer balances, historical experience and other currently available information. During the
three months ended September 30, 2005, the Company revised its estimate of probable losses in the
accounts receivable of its advertising business to better reflect historical experience. The
change in the estimate of probable losses did not result in a material impact to the consolidated
statement of operations for the three and nine months ended September 30, 2005.
5
MEDIACOM LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Programming Costs
The Company has various fixed-term carriage contracts to obtain programming for its cable
systems from content suppliers whose compensation is generally based on a fixed monthly fee per
customer. These programming contracts are subject to negotiated renewal. The Company recognizes
programming costs when it distributes the related programming. These programming costs are usually
payable each month based on calculations performed by the Company and are subject to adjustments
based on the results of periodic audits by the content suppliers. Historically, such audit
adjustments have been immaterial to the Companys total programming costs. Some content suppliers
offer financial incentives to support the launch of a channel and ongoing marketing support. When
such financial incentives are received, the Company records them as liabilities in its consolidated
balance sheets and recognizes such amounts as a reduction of programming costs (which are a
component of service costs in the consolidated statement of operations) over the carriage term of
the programming contract.
Property, Plant and Equipment
Property, plant and equipment are recorded at cost. Additions to property, plant and
equipment generally include material, labor and indirect costs. Depreciation is calculated on a
straight-line basis over the following useful lives:
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Buildings
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40 years |
Leasehold improvements
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Life of respective lease |
Cable systems and equipments and subscriber devices
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4 to 20 years |
Vehicles
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5 years |
Furniture, fixtures and office equipment
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5 years |
The Company capitalizes the costs associated with the construction of cable transmission and
distribution facilities, the addition of network and other equipment and new customer
installations. Repairs and maintenance are expensed as incurred. Capitalized costs include direct
labor and material as well as certain indirect costs including interest. The Company performs
periodic evaluations of certain estimates used to determine the amount and extent that such costs
are capitalized. Any changes to these estimates, which may be significant, are applied
prospectively in the period in which the evaluations were completed. The costs of disconnecting
service at a customers dwelling or reconnecting to a previously installed dwelling are charged as
expense in the period incurred. Costs associated with subsequent installations of additional
services not previously installed at a customers dwelling are capitalized to the extent such costs
are incremental and directly attributable to the installation of such additional services. At the
time of retirements, sales or other dispositions of property, the original cost and related
accumulated depreciation are removed from the respective accounts and the gains and losses are
presented as a separate component in the consolidated statement of operations.
Long-Lived Assets
In accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived
Assets, the Company periodically evaluates the recoverability and estimated lives of its
long-lived assets, including property and equipment and intangible assets subject to amortization,
whenever events or changes in circumstances indicate that the carrying amount may not be
recoverable or the useful life has changed. When the carrying amount is not recoverable, the
measurement for such impairment loss is based on the fair value of the asset, typically based upon
the future cash flows discounted at a rate commensurate with the risk involved. Unless presented
separately, the loss is included as a component of either depreciation expense or amortization
expense, as appropriate.
Intangible Assets
In accordance with SFAS No. 142, Goodwill and Other Intangible Assets, the amortization of
goodwill and indefinite-lived intangible assets is prohibited and requires such assets to be tested
annually for impairment, or more frequently if impairment indicators arise. The Company has
determined that its cable franchise costs and goodwill are indefinite-lived assets and therefore
not amortizable. Other finite-lived intangible assets, which consist primarily of subscriber lists
and covenants not to compete, continue to be amortized over their useful lives of 5 to 10 years and
5 years, respectively.
6
MEDIACOM LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The Company annually tests its franchise value for impairment under SFAS No. 142 by utilizing
a discounted cash flow methodology. In performing an impairment test in accordance with SFAS No.
142, the Company considers the guidance contained in EITF Issue
No. 02-7, Unit of Accounting for
Testing Impairment of Indefinite-Lived Intangible Assets, whereby the Company considers
assumptions, such as future cash flow expectations and other future benefits related to the
intangible assets, when measuring the fair value of each cable systems clusters other net assets.
If the determined fair value of the Companys franchise costs is less than the carrying amount on
the financial statements, an impairment charge would be recognized for the difference between the
fair value and the carrying value of the assets. To test the impairment of the goodwill carried on
the Companys financial statements, the fair value of the cable system clusters tangible and
intangible assets (including franchise costs) other than goodwill is deducted from the cable system
clusters fair value. The balance represents the fair value of goodwill which is then compared to
the carrying value of goodwill to determine if there is any impairment.
Derivative Instruments
The Company accounts for derivative instruments in accordance with SFAS No. 133 Accounting
for Derivative Instruments and Hedging Activities, SFAS No. 138 Accounting for Certain Derivative
Instruments and Certain Hedging Activitiesan amendment of FASB Statement No. 133, and SFAS No.
149 Amendment of Statement 133 on Derivative Instruments and Hedging Activities. These
pronouncements require that all derivative instruments be recognized on the balance sheet at fair
value. The Company enters into interest rate exchange agreements to fix the interest rate on a
portion of its variable interest rate debt to reduce the potential volatility in its interest
expense that would otherwise result from changes in market interest rates. The Companys
derivative instruments are recorded at fair value and are included in other current assets, other
assets and other liabilities in its consolidated balance sheet. The Companys accounting policies
for these instruments are based on whether they meet its criteria for designation as hedging
transactions, which include the instruments effectiveness in risk reduction and, in most cases, a
one-to-one matching of the derivative instrument to its underlying transaction. Gains and losses
from changes in fair values of derivatives that are not designated as hedges for accounting
purposes are recognized in the consolidated statement of operations. The Company has no derivative
financial instruments designated as hedges. Therefore, changes in fair value for the respective
periods were recognized in the consolidated statement of operations.
Income Taxes
Since the Company is a limited liability company, it is not subject to federal or state income
taxes and no provision for income taxes relating to its operations has been reflected in the
accompanying consolidated financial statements. Income or loss of the Company is reported in MCCs
income tax returns.
Comprehensive Income
SFAS No. 130, Reporting Comprehensive Income, requires companies to classify items of other
comprehensive income by their nature in the financial statements and display the accumulated
balance of other comprehensive income separately from retained earnings and paid-in capital in the
equity section of a statement of financial position. The Company has had no other comprehensive
income items to report.
Reclassifications
Certain reclassifications have been made to the prior years amounts to conform to the current
years presentation.
(3) Recent Accounting Pronouncements
In December 2004, the FASB issued SFAS No. 123R, Amendment of Statement 123 on Share-Based
Payment. SFAS No. 123R requires companies to expense the value of employee stock options, stock
granted through the employee stock purchase program and similar awards. On April 14, 2005, the
Securities and Exchange
7
MEDIACOM LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Commission (SEC) approved a new rule delaying the effective date until the beginning of a
companys next fiscal year that commences after June 15, 2005. The Company plans on adopting SFAS
No. 123R effective January 1, 2006 and expects that the adoption of SFAS No. 123R will have a
material impact on its consolidated statement of operations.
SFAS No. 123R permits companies to adopt its requirements using either a modified
prospective method, or a modified retrospective method. Under the modified prospective
method, compensation cost is recognized in the financial statements beginning with the effective
date, based on the requirements of SFAS 123R for all share-based payments granted after that date,
and based on the requirements of SFAS 123 for all unvested awards granted prior to the effective
date of SFAS 123R. Under the modified retrospective method, the requirements are the same as
under the modified prospective method, but also permits entities to restate financial statements
of previous periods based on proforma disclosures made in accordance with SFAS 123.
The Company will adopt SFAS No. 123R effective January 1, 2006 and plans to utilize the
modified prospective method. The Company currently utilizes the Black Scholes option pricing
model to measure the fair value of stock options granted to employees. While SFAS 123R permits
entities to continue to use such a model, the standard also permits the use of a lattice model.
The Company has not yet determined which model it will use to measure the fair value of employee
stock options granted after the adoption of SFAS 123R.
(4) Property, Plant and Equipment
As of September 30, 2005 and December 31, 2004, property, plant and equipment consisted of
(dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
|
|
2005 |
|
|
2004 |
|
Land and land improvements |
|
$ |
1,486 |
|
|
$ |
1,428 |
|
Buildings and leasehold improvements |
|
|
16,462 |
|
|
|
15,606 |
|
Cable systems, equipment and subscriber devices |
|
|
1,448,418 |
|
|
|
1,365,701 |
|
Vehicles |
|
|
29,991 |
|
|
|
28,347 |
|
Furniture, fixtures and office equipment |
|
|
17,217 |
|
|
|
15,329 |
|
|
|
|
|
|
|
|
|
|
|
1,513,574 |
|
|
|
1,426,411 |
|
Accumulated depreciation |
|
|
(798,679 |
) |
|
|
(728,048 |
) |
|
|
|
|
|
|
|
Property, plant and equipment, net |
|
$ |
714,895 |
|
|
$ |
698,363 |
|
|
|
|
|
|
|
|
Depreciation expenses for the three and nine months ended September 30, 2005 were
approximately $25.3 million and $73.5 million, respectively, and $26.0 million and $75.4 million
for the respective periods in 2004. As of September 30, 2005 and 2004, the Company had property
under capitalized leases of $4.7 million and $4.7 million, respectively, before accumulated
depreciation, and $3.2 million and $3.8 million, respectively, net of accumulated depreciation.
During the three and nine months ended September 30, 2005, the Company capitalized interest expense
of $0.6 million and $1.5 million, respectively. For the three and nine months ended September 30,
2004, the Company capitalized $0.3 million and $1.1 million, respectively.
(5) Intangible Assets
The Company operates its cable systems under non-exclusive cable franchises that are granted
by state or local government authorities for varying lengths of time. The Company acquired these
cable franchises through acquisitions of cable systems and they were accounted for using the
purchase method of accounting.
8
MEDIACOM LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Amortization expense for the three and nine months ended September 30, 2005 was approximately
$0.1 million and $0.7 million, respectively, and $2.1 million and $6.4 million for the respective
periods in 2004. The Companys estimated aggregate amortization expense for 2005 is $0.1 million,
after which the assets will be fully amortized.
Pursuant to SFAS No. 142, Goodwill and Other Intangible Assets, the Company completed its
last annual impairment test as of October 1, 2004, which reflected no impairment of franchise costs
or goodwill. As of September 30, 2005, there have been no events since then that would require an
impairment analysis to be completed before the next annual test date.
(6) Accrued Liabilities
Accrued liabilities consist of the following as of September 30, 2005 and December 31, 2004
(dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
|
|
2005 |
|
|
2004 |
|
Accrued interest |
|
$ |
16,285 |
|
|
$ |
33,041 |
|
Accrued payroll and benefits |
|
|
9,695 |
|
|
|
7,724 |
|
Accrued programming costs |
|
|
22,306 |
|
|
|
25,693 |
|
Accrued property, plant and equipment |
|
|
10,997 |
|
|
|
8,394 |
|
Accrued service costs |
|
|
6,436 |
|
|
|
5,738 |
|
Accrued taxes and fees |
|
|
15,001 |
|
|
|
13,667 |
|
Accrued telecommunications |
|
|
2,506 |
|
|
|
4,436 |
|
Subscriber advance payments |
|
|
5,302 |
|
|
|
4,747 |
|
Other accrued expenses |
|
|
6,904 |
|
|
|
4,080 |
|
|
|
|
|
|
|
|
|
|
$ |
95,432 |
|
|
$ |
107,520 |
|
|
|
|
|
|
|
|
9
MEDIACOM LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(7) Debt
As of September 30, 2005 and December 31, 2004, debt consisted of (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
|
|
2005 |
|
|
2004 |
|
Bank credit facilities |
|
$ |
857,875 |
|
|
$ |
646,000 |
|
81/2% senior notes |
|
|
|
|
|
|
200,000 |
|
77/8% senior notes |
|
|
125,000 |
|
|
|
125,000 |
|
91/2% senior notes |
|
|
500,000 |
|
|
|
500,000 |
|
Capital lease obligations |
|
|
1,509 |
|
|
|
2,177 |
|
|
|
|
|
|
|
|
|
|
$ |
1,484,384 |
|
|
$ |
1,473,177 |
|
Less: current portion |
|
|
6,405 |
|
|
|
6,384 |
|
|
|
|
|
|
|
|
Total long-term debt |
|
$ |
1,477,979 |
|
|
$ |
1,466,793 |
|
|
|
|
|
|
|
|
The average interest rate on debt outstanding under the bank credit facilities was 5.7% and
3.1% as of September 30, 2005 and 2004, respectively, before giving effect to the interest rate
exchange agreements discussed below. As of September 30, 2005, the Company had unused credit
commitments of approximately $278.6 million under its bank credit facilities, all of which could be
borrowed and used for general corporate purposes based on the terms and conditions of the Companys
debt arrangements. The Company was in compliance with all covenants under its debt arrangements as
of and for all periods through September 30, 2005.
The Company uses interest rate exchange agreements in order to fix the interest rate on its
floating rate debt. As of September 30, 2005, the Company had interest rate exchange agreements
with various banks pursuant to which the interest rate on $400.0 million is fixed at a weighted
average rate of approximately 3.2%. Under the terms of the interest rate exchange agreements,
which expire from 2006 through 2009, the Company is exposed to credit loss in the event of
nonperformance by the other parties. However, due to the creditworthiness of the Companys
counterparties, which are major banking firms with investment grade ratings, the Company does not
anticipate their nonperformance. At the end of each quarterly reporting period, the carrying
values of these swap agreements are marked to market. The fair values of these agreements are the
estimated amounts that the Company would receive or pay to terminate such agreements, taking into
account market interest rates, the remaining time to maturities and the creditworthiness of the
Companys counterparties. At September 30, 2005, based on the mark-to-market valuation, the
Company recorded on its consolidated balance sheet an accumulated investment in derivatives of $6.9
million, which is a component of prepaid expenses and other assets and non current other assets.
In April 2005, the Company redeemed all of its outstanding 81/2% Senior Notes due 2008 (the
Notes). The redemption price was equal to 101.417% of the outstanding principal amount of the
Notes plus accrued interest. The Company has recorded in its consolidated statement of operations
for the nine months ended September 30, 2005, a loss on early extinguishment of debt of $4.7
million, representing $2.8 million of call premium and the write-off of $1.9 million of unamortized
original issue discount and deferred financing costs. The Company funded the redemption with a
combination of cash on hand and borrowings under the revolving credit portion of the Companys
credit facilities.
As a result of the mark-to-market valuations of these interest rate swaps, the Company
recorded a gain of $2.9 million and a loss of $2.1 million for the three months ended September 30,
2005 and 2004, respectively, and gain of $5.3 million and a loss of $2.8 million for the nine
months ended September 30, 2005 and 2004, respectively.
As of September 30, 2005, approximately $9.4 million of letters of credit were issued to
various parties as collateral for the Companys performance relating primarily to insurance and
franchise requirements.
(8) Stock-Based Compensation
The Company accounts for stock-based compensation in accordance with APB Opinion No. 25,
Accounting for Stock Issued to Employees, and related interpretations, as permitted by SFAS No.
123, Accounting for Stock-Based Compensation, (SFAS No. 123) as amended. Compensation expense
for stock options, restricted stock
10
MEDIACOM LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
units and other equity awards to employees is recorded by measuring the intrinsic value, defined as
the excess, if any, of the quoted market price of the stock at the date of the grant over the
amount an employee must pay to acquire the stock, and amortizing the intrinsic value to
compensation expense over the vesting period of the award.
During the nine months ended September 30, 2005, certain employees received grants of stock
options exercisable on underlying MCC shares. The stock option grants totaled 18,000 options which
had an exercise price of $5.42 and vest equally over four years. No compensation cost has been
recognized for any option grants in the accompanying consolidated statements of operations since
the exercise price of the options was at fair market value at the date of grant.
During the nine months ended September 30, 2005, certain employees received 100,800 restricted
stock units on underlying MCC shares. The restricted stock units were issued at a weighted average
price of $5.49 per share, with a weighted average vesting period of 3.6 years. During the three
and nine months ended September 30, 2005, the Company recorded $35,000 and $84,000, respectively,
of compensation expense in its consolidated statements of operations related to the grants of
restricted stock units. During the three and nine months ended September 30, 2005, 300 restricted
stock units were forfeited.
Had the Company applied the fair value recognition provisions of SFAS No. 123 to stock-based
compensation, the Companys net income (loss) would have been changed from the as reported
amounts to the pro forma amounts as follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2005 |
|
|
2004 |
|
|
2005 |
|
|
2004 |
|
Net (loss) income as reported |
|
$ |
1,612 |
|
|
$ |
(6,740 |
) |
|
$ |
69 |
|
|
$ |
10,052 |
|
Add: Total stock-based compensation
expense included in net income
as reported above |
|
|
35 |
|
|
|
|
|
|
|
84 |
|
|
|
|
|
Deduct: Total stock-based compensation
expense determined under fair
value based method for all awards |
|
|
(217 |
) |
|
|
(588 |
) |
|
|
(654 |
) |
|
|
(1,781 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma net income (loss) |
|
$ |
1,430 |
|
|
$ |
(7,328 |
) |
|
$ |
(501 |
) |
|
$ |
8,271 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The effects of applying SFAS No. 123 in the pro forma net (loss) income disclosure above are
not likely to be representative of the effects on the pro forma disclosure in the future.
(9) Investment in Affiliated Company
The Company has a $150.0 million preferred equity investment in Mediacom Broadband LLC. The
preferred equity investment has a 12% annual cash dividend, payable quarterly in cash. During the
nine months ended September 30, 2005, the Company received in aggregate $13.5 million in cash
dividends on the preferred equity.
(11) Legal Proceedings
The Company, MCC and its subsidiaries or other affiliated companies are also involved in
various other legal actions arising in the ordinary course of business. In the opinion of
management, the ultimate disposition of these matters will not have a significant or adverse effect
on the Companys financial position, operations or cash flows.
(12) Sale of Assets and Investments
The Company recorded a net gain on sale of assets and investments amounting to $1.4 million
and $2.6 million for the three and nine months ended September 30, 2005, respectively and $5.9
million for the nine months ended September 30, 2004. The net gain for the nine months ended
September 30, 2005 was due to the sale of the Companys remaining
11
MEDIACOM LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
investment in American Independence Corporation common stock. The gain for the respective period
in 2004 was due to the sale of a non-strategic cable system with approximately 3,450 subscribers
for gross proceeds of about $10.6 million.
(13) Hurricane Losses
In July and August 2005, Hurricanes Dennis and Katrina impacted the Companys systems in
Alabama, Florida, and Mississippi, initially affecting about 45,000 and 55,000 basic subscribers,
respectively. As of September 30, 2005, the Company estimated that these hurricanes resulted in
the loss of approximately 9,000 basic subscribers, 2,000 digital customers and 1,000 data
customers. As a result, for the three month period ended September 30, 2005, the Company: (i)
recorded revenues that reflected $0.6 million of service interruption credits issued to customers,
$0.7 million of lost revenues from customers whose homes were destroyed or otherwise rendered
uninhabitable and $0.2 million of lost revenues in the advertising sales business; (ii) incurred
additional service costs of approximately $0.5 million to cover the repair of the Companys
facilities, including increased employee and outside contractor costs; (iii) incurred additional
selling, general and administrative costs of approximately $0.3 million related to additional
customer service employee costs required to support customers needs; and (iv) recorded an increase
in depreciation expense of $0.6 million due to the impairment of cable plant and equipment.
Subsequent impairment charges may result when the Company completes its assessment of the damage.
In addition, the Company spent $4.1 million of capital expenditures to replace or rebuild property,
plant and equipment damaged by these hurricanes during the three months ended September 30, 2005.
In September 2004, Hurricane Ivan impacted the Companys systems in Alabama and Florida
initially affecting over 100,000 basic subscribers. This hurricane caused losses of approximately
9,000 basic subscribers, 2,000 digital customers and 1,000 data customers. As a result, for the
three month period ended September 30, 2004, the Company: (i) recorded revenues that reflected
$2.9 million of service interruption credits issued to customers; (ii) incurred additional service
costs of approximately $0.8 million to cover the repair of the Companys facilities, including
increased employee and outside contractor costs; (iii) incurred additional selling, general and
administrative costs of approximately $0.2 million related to additional customer service employee
costs required to support customers needs; and (iv) recorded an increase in depreciation expense
of $2.1 million due to the impairment of cable plant and equipment. In addition, the Company had
capital expenditures of $8.1 million and $1.0 million in 2004 and the nine months ended September
30, 2005, respectively, to replace or rebuild property, plant and equipment damaged by Hurricane
Ivan.
The Company estimates that after September 30, 2005 it may spend an additional $5.5 million to
rebuild the remainder of its damaged cable plant and other property and equipment, assuming the
complete recovery of the affected communities, although it cannot be certain about the timing of
such spending.
The Company is insured against certain losses related to the hurricanes, principally facility
damage, subject to varying deductible amounts. The Company cannot estimate at this time the
amounts that will be ultimately recoverable under its insurance policies.
12
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the Companys unaudited
consolidated financial statements as of, and for the three and nine months ended, September 30,
2005 and 2004, and with the Companys annual report on Form 10-K for the year ended December 31,
2004.
Overview
We are a wholly-owned subsidiary of Mediacom Communications Corporation (MCC). Through our
interactive broadband network, we provide our customers with a wide array of broadband products and
services, including analog and digital video services, such as video-on-demand (VOD),
high-definition television (HDTV), digital video recorders (DVRs), high-speed data access
(HSD) and, in certain markets, phone service. We currently offer video
and HSD bundles and, with our recent introduction of phone in certain markets, we offer triple-play
bundles of video, HSD and voice. Bundled products and services offer our customers a single
provider contact for provisioning, billing and customer care.
As of September 30, 2005, our cable systems passed an estimated 1.34 million homes and served
655,000 basic subscribers. We provide digital video services to 197,000 digital customers and HSD
to 201,000 data customers, representing a digital penetration of 30.1% of our basic subscribers and
data penetration of 15.0% of our estimated homes passed, respectively.
We have faced increasing levels of competition for our video programming services over the
past few years, mostly from direct broadcast satellite (DBS) service providers. Since they have
been permitted to deliver local television broadcast signals beginning in 1999, DirecTV, Inc. and
Echostar Communications Corporation, the two largest DBS service providers, have increased the
number of markets in which they deliver these local television signals. These local-into-local
launches have been the primary cause of our loss of basic subscribers in recent periods. As of September 30, 2005 and
year-end 2004, competitive local-into-local services in our markets covered an estimated 91% of our
basic subscribers, as compared to 48% at year-end 2003. We believe, based on publicly announced
new market launches, that DBS service providers will launch local television channels in additional
markets during the rest of 2005 representing a modest amount of our subscriber base.
Hurricane Losses
In July and August 2005, as a result of Hurricanes Dennis and Katrina, our cable systems in
the areas of Alabama, Florida, and Mississippi experienced, to varying degrees, damage to their
cable plant and other property and equipment, service interruption and loss of customers. Some of
our customers homes in these areas also sustained varying levels of damage, including certain
homes in the Mississippi area that were totally destroyed. Hurricanes Dennis and Katrina initially
disrupted cable service to about 45,000 and 55,000 of our basic subscribers, respectively, in these
states. We estimate that, as of September 30, 2005, the hurricanes caused losses of approximately
9,000 basic subscribers, 2,000 digital customers and 1,000 data customers, which were reflected in
our subscriber and customer counts as of September 30, 2005. We are currently providing service to
substantially all of the surviving households in the affected communities, and we expect to recover
a portion of these lost customers as they return to the region to rebuild or repair their homes.
We anticipate that some customers will move back into their homes or into temporary housing on
their properties while repairs or rebuilding are under way, and potentially reconnect or reactivate
our service at that time.
Our results of operations for the three and nine months ended September 30, 2005 take into
account service interruption credits, lost revenues and incremental costs caused by these
hurricanes. Revenues for the three and nine months ended September 30, 2005 reflected
approximately $0.6 million of service interruption credits issued to customers, $0.7 million of
lost revenues from customers whose homes were destroyed or otherwise rendered uninhabitable and
$0.2 million of lost revenue in the advertising sales business. We also incurred incremental
service costs of approximately $0.5 million to cover the repair of our facilities, including
increased employee and outside contractor costs; incremental selling, general and administrative
costs of approximately $0.3 million related to incremental customer service employee costs required
to support customers needs; and $0.6 million of additional depreciation expense due to the
impairment of the cable plant and other property and equipment. Subsequent impairment charges may
result as we complete our assessment of the damage. Capital expenditures to rebuild our cable
plant and facilities and restore our service were approximately $4.1 million for the three and nine
months ended September 30, 2005.
In September 2004, as a result of Hurricane Ivan, our cable systems in areas of Alabama and
Florida experienced, to varying degrees, damage to cable plant and other property and equipment,
service interruption and
13
loss of customers. The hurricane initially disrupted cable service to over 100,000 of our basic
subscribers in these two states. The hurricane caused losses of 9,000 basic subscribers, 2,000
digital customers and 1,000 data customers, which were reflected in our subscriber and customer
counts as of September 30, 2004.
Our results of operations for the three and nine months ended September 30, 2004 take into
account service interruption credits, lost revenues and incremental costs caused by the hurricane.
Revenues for the three and nine months ended September 30, 2004 reflected approximately $2.9
million of service interruption credits issued to customers. We also incurred incremental service
costs of approximately $0.8 million to cover the repair of the Companys facilities, including
increased employee and outside contractor costs; incremental selling, general and administrative
costs of approximately $0.2 million related to additional customer service employee costs required
to support customers needs; and $2.1 million in additional depreciation expense due to the
impairment of the cable plant and other property. Capital expenditures to rebuild our cable plant
and facilities and restore our service were approximately $8.1 million and $1.0 million for 2004
and the nine months ended September 30, 2005, respectively, for Hurricane Ivan.
We estimate that after September 30, 2005, we may spend an additional $5.5 million to rebuild
the remainder of our damaged cable plant and other property assuming the complete recovery of the
affected communities, although we cannot be certain about the timing of such spending.
We are insured against certain hurricane-related losses, principally damage to our facilities,
subject to varying deductible amounts. We cannot estimate at this time the amounts that will be
ultimately recoverable under our insurance policies.
14
Actual Results of Operations
Three Months Ended September 30, 2005 Compared To Three Months Ended September 30, 2004
The following table sets forth the unaudited consolidated statements of operations for the
three months ended September 30, 2005 and 2004 (dollars in thousands and percentage changes that
are not meaningful are marked NM):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
|
|
|
|
|
|
September 30, |
|
|
|
|
|
|
|
|
|
2005 |
|
|
2004 |
|
|
$ Change |
|
|
% Change |
Revenues |
|
$ |
122,274 |
|
|
$ |
116,048 |
|
|
$ |
6,226 |
|
|
|
5.4 |
% |
Costs and expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service costs |
|
|
51,258 |
|
|
|
46,720 |
|
|
|
4,538 |
|
|
|
9.7 |
% |
Selling, general and
administrative expenses |
|
|
23,905 |
|
|
|
22,442 |
|
|
|
1,463 |
|
|
|
6.5 |
% |
Management fee expense |
|
|
2,464 |
|
|
|
2,297 |
|
|
|
167 |
|
|
|
7.3 |
% |
Depreciation and amortization |
|
|
25,445 |
|
|
|
28,074 |
|
|
|
(2,629 |
) |
|
|
(9.4 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
|
19,202 |
|
|
|
16,515 |
|
|
|
2,687 |
|
|
|
16.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense, net |
|
|
(25,427 |
) |
|
|
(24,656 |
) |
|
|
(771 |
) |
|
|
3.1 |
% |
Gain (loss) on derivatives, net |
|
|
2,936 |
|
|
|
(2,072 |
) |
|
|
5,008 |
|
|
NM |
Gain on sale of assets and investments, net |
|
|
1,446 |
|
|
|
|
|
|
|
1,446 |
|
|
NM |
Investment income |
|
|
4,500 |
|
|
|
4,500 |
|
|
|
|
|
|
|
0.0 |
% |
Other expense |
|
|
(1,045 |
) |
|
|
(1,027 |
) |
|
|
(18 |
) |
|
|
1.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
1,612 |
|
|
$ |
(6,740 |
) |
|
$ |
8,352 |
|
|
NM |
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
The following table sets forth revenue information for the three months ended September 30,
2005 and 2004 (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, |
|
|
|
|
|
|
|
|
|
2005 |
|
|
2004 |
|
|
|
|
|
|
|
|
|
|
|
|
|
% of |
|
|
|
|
|
|
% of |
|
|
|
|
|
|
|
|
|
Amount |
|
|
Revenues |
|
Amount |
|
|
Revenues |
|
$ Change |
|
|
% Change |
Video |
|
$ |
95,812 |
|
|
|
78.4 |
% |
|
$ |
95,728 |
|
|
|
82.5 |
% |
|
$ |
84 |
|
|
|
0.1 |
% |
Data |
|
|
22,348 |
|
|
|
18.2 |
% |
|
|
17,121 |
|
|
|
14.7 |
% |
|
|
5,227 |
|
|
|
30.5 |
% |
Advertising |
|
|
4,114 |
|
|
|
3.4 |
% |
|
|
3,199 |
|
|
|
2.8 |
% |
|
|
915 |
|
|
|
28.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
122,274 |
|
|
|
100.0 |
% |
|
$ |
116,048 |
|
|
|
100.0 |
% |
|
$ |
6,226 |
|
|
|
5.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Video revenues represent monthly subscription fees charged to customers for our core cable
television products and services (including basic, expanded basic and digital cable programming
services, wire maintenance, equipment rental and services to commercial establishments),
pay-per-view charges, installation, reconnection and late payment fees, and other ancillary
revenues. Data revenues primarily represent monthly subscription fees charged to customers,
including commercial establishments, for our data products and services and equipment rental fees.
Franchise fees charged to customers for payment to local franchising authorities are included in
their corresponding revenue category.
Revenues increased 5.4%, largely attributable to an increase in data revenues.
15
Video revenues increased 0.1%, as a result of rate increases applied on our subscribers and
higher fees from our advanced video products and services, offset by a 3.8% decrease in basic
subscribers from 681,000 to 655,000. Average monthly video revenue per basic subscriber rose 7.8%
from $46.15 to $48.21. Our loss of basic subscribers resulted from continuing competitive
pressures by other video providers and, to a lesser extent, the impact of Hurricanes Dennis and
Katrina.
To strengthen our competitiveness, we increased the emphasis on product bundling and on
enhancing and differentiating our video products and services with new digital packages, VOD, HDTV,
DVRs and more local programming. During 2005, we also extended the discount periods of our
promotional campaigns for digital and data services from three and six months to six and twelve
months. This has impacted the growth of our video and data revenues.
Partly as a result of these efforts, our loss of basic subscribers decreased significantly
during the nine months ended September 30, 2005, with a net loss of 20,000 basic subscribers,
compared to a loss of 43,000 in the same period last year. During the three months ended September
30, 2005, we lost 15,000 basic subscribers, compared to a loss of 21,000 in the same period last
year. In addition, our digital television product category has rebounded significantly, growing
37,000 digital customers during the nine months ended September 30, 2005, compared to a gain of
3,000 in the same period last year. We had 197,000 digital customers as of September 30, 2005,
compared to 154,000 as of September 30, 2004.
Data revenues rose 30.5%, primarily due to a 31.4% year-over-year increase in data customers
from 153,000 to 201,000 and, to a much lesser extent, the growth of our commercial service and enterprise network businesses. Average monthly data revenue per data customer decreased from $38.30 to
$37.92, largely due to promotional offers in 2005.
Advertising revenue increased 28.6%, primarily as a result of the interconnection of additional cable systems, which increased the number of homes
available to our advertisers. The increase was offset in part by a decline in political
advertising, which is expected to be much lower in 2005 when compared to the 2004 election year.
Costs and Expenses
Service costs include: programming expenses; employee expenses related to wages and salaries
of technical personnel who maintain our cable network, perform customer installation activities,
and provide customer support; data costs, including costs of bandwidth connectivity and customer
provisioning; and field operating costs, including outside contractors, vehicle, utilities and pole
rental expenses. Programming expenses, which are generally paid on a per subscriber basis, have
historically increased due to both increases in the rates charged for existing programming services
and the introduction of new programming services to our customers.
Service costs grew 9.7% and included incremental costs related to hurricanes in 2005 and 2004
of $0.5 million and $0.8 million, respectively. Programming costs increased 5.2%, as a result of
higher unit costs charged by our programming vendors, offset by a lower base of basic subscribers
during the quarter ended September 30, 2005. Field operating costs rose 24.6%, primarily due
to higher vehicle fuel costs and greater use of outside contractors for hurricane-related repairs
and customer activity typically performed by our technicians. Employee costs grew 5.8%, primarily due to increased
headcount and overtime of our technicians to prepare our network for phone service, increased
overtime and related expenses for higher levels of customer activity, and hurricane repairs.
Service costs as a percentage of revenues were 41.9% for the three months ended September 30, 2005,
as compared to 40.3% for the three months ended September 30, 2004.
Selling, general and administrative expenses include: wages and salaries for our call center,
customer service and support and administrative personnel; franchise fees and taxes; and office
costs related to billing, telecommunications, marketing, bad debt, advertising and office
administration.
Selling, general and administrative expenses rose 6.5% and included incremental costs related
to hurricanes in 2005 and 2004 of $0.3 and $0.2, respectively. Employee costs increased 18.0%,
primarily due to higher staffing,
16
commissions and benefit costs of customer service and direct sales personnel, which resulted
from higher levels of customer activity. Marketing costs increased 18.6% as a result of greater
use of direct sales contractors and television and radio advertising. These increases were offset
in part by a 14.3% decrease in office expenses primarily due to lower telephone costs related to our
customer call centers. Selling, general and administrative expenses as a percentage of revenues
were 21.1% and 21.2% for the three months ended September 30, 2005 and 2004, respectively.
We expect continued revenue growth in advanced services, which include digital video, HDTV,
DVRs, HSD and phone service. As a result, we expect our service costs and selling, general and
administrative expenses to increase.
Management fee expense reflects charges incurred under our management agreements with our
parent, MCC. Management fee expense was $2.5 million for the three months ended September 30, 2005
as compared to $2.3 million for the three months ended September 30, 2004. Management fee expense
as a percentage of revenues was 2.0% for the three months ended September 30, 2005 and September
30, 2004.
Depreciation and amortization decreased 9.4% to $25.4 million for the three months ended
September 30, 2005, as compared to $28.1 million for the three months ended September 30, 2004.
This decrease was principally due to higher levels of plant disposals in 2004
due to the sale of certain assets and a hurricane-related plant write down, offset in part by increased
depreciation for ongoing investments to continue the rollout of products and services and for
investments in our cable network.
Interest Expense, Net
Interest expense, net, rose 3.1%, primarily due to higher market interest rates on variable
rate debt, offset in part by the redemption of our 81/2% Senior Notes due 2008 (81/2 Senior Notes) in
April 2005 which was funded by lower cost bank borrowings.
Gain (Loss) on Derivatives, Net
We enter into interest rate exchange agreements, or interest rate swaps, with counterparties
to fix the interest rate on a portion of our variable rate debt to reduce the potential volatility
in our interest expense that would otherwise result from changes in variable market interest rates.
As of September 30, 2005 we had interest rate swaps with an aggregate principal amount of $400.0
million. The changes in their mark-to-market values are derived from changes in market interest
rates, the decrease in their time to maturity and the creditworthiness of the counterparties. As a
result of the mark-to-market valuation of these interest rate swaps, we recorded a gain on
derivatives amounting to $2.9 million for the three months ended September 30, 2005, as compared to
a loss on derivatives amounting to $2.1 million for the three months ended September 30, 2004.
Gain on Sale of Asset and Investments, Net
We recorded a net gain on sale of assets and investments of $1.4 million for the three months
ended September 30, 2005. The net gain for the third quarter of 2005 was due to the sale of our
remaining investment in American Independence Corporation common stock.
Investment Income from Affiliate
Investment income from affiliate was $4.5 million for the three months ended September 30,
2005 and 2004. This amount represents the investment income on our $150.0 million preferred equity
investment in Mediacom Broadband.
Other Expense
Other expense was $1.0 million and $1.0 million for the three months ended September 30, 2005
and 2004, respectively. Other expense primarily represents amortization of deferred financing
costs and fees on unused credit commitments.
17
Net Income (Loss)
As a result of the factors described above, we generated net income for the three months ended
September 30, 2005 of $1.6 million, as compared to a net loss of $6.7 million for the three months
ended September 30, 2004.
Nine months Ended September 30, 2005 Compared to Nine months Ended September 30, 2004
The following table sets forth our unaudited consolidated statements of operations for the
nine months ended September 30, 2005 and 2004 (dollars in thousands and percentage changes that are
not meaningful are marked NM):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended |
|
|
|
|
|
|
|
|
|
September 30, |
|
|
|
|
|
|
|
|
|
2005 |
|
|
2004 |
|
|
$ Change |
|
|
% Change |
Revenues |
|
$ |
362,810 |
|
|
$ |
355,962 |
|
|
$ |
6,848 |
|
|
|
1.9 |
% |
Costs and expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service costs |
|
|
148,628 |
|
|
|
138,434 |
|
|
|
10,194 |
|
|
|
7.4 |
% |
Selling, general and administrative expenses |
|
|
69,900 |
|
|
|
65,541 |
|
|
|
4,359 |
|
|
|
6.7 |
% |
Management fee expense |
|
|
7,374 |
|
|
|
6,737 |
|
|
|
637 |
|
|
|
9.5 |
% |
Depreciation and amortization |
|
|
74,232 |
|
|
|
81,823 |
|
|
|
(7,591 |
) |
|
|
(9.3 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
|
62,676 |
|
|
|
63,427 |
|
|
|
(751 |
) |
|
|
(1.2 |
%) |
Interest expense, net |
|
|
(75,573 |
) |
|
|
(72,455 |
) |
|
|
(3,118 |
) |
|
|
4.3 |
% |
Loss on early extinquishment of debt |
|
|
(4,742 |
) |
|
|
|
|
|
|
(2,834 |
) |
|
NM |
Gain on derivatives, net |
|
|
5,297 |
|
|
|
2,798 |
|
|
|
2,499 |
|
|
NM |
Gain on sale of assets and investments, net |
|
|
2,628 |
|
|
|
5,885 |
|
|
|
(3,257 |
) |
|
NM |
Investment income |
|
|
13,500 |
|
|
|
13,500 |
|
|
|
|
|
|
|
0.0 |
% |
Other expense |
|
|
(3,717 |
) |
|
|
(3,103 |
) |
|
|
(614 |
) |
|
|
19.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
69 |
|
|
$ |
10,052 |
|
|
$ |
(9,983 |
) |
|
NM |
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
The following table sets forth revenue information for the nine months ended September 30,
2005 and 2004 (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, |
|
|
|
|
|
|
|
|
|
2005 |
|
|
2004 |
|
|
|
|
|
|
|
|
|
|
|
|
|
% of |
|
|
|
|
|
|
% of |
|
|
|
|
|
|
|
|
|
Amount |
|
|
Revenues |
|
Amount |
|
|
Revenues |
|
$ Change |
|
|
% Change |
Video |
|
$ |
288,908 |
|
|
|
79.6 |
% |
|
$ |
296,698 |
|
|
|
83.4 |
% |
|
$ |
(7,790 |
) |
|
|
(2.6 |
%) |
Data |
|
|
63,497 |
|
|
|
17.5 |
% |
|
|
49,968 |
|
|
|
14.0 |
% |
|
|
13,529 |
|
|
|
27.1 |
% |
Advertising |
|
|
10,405 |
|
|
|
2.9 |
% |
|
|
9,296 |
|
|
|
2.6 |
% |
|
|
1,109 |
|
|
|
11.9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
362,810 |
|
|
|
100.0 |
% |
|
$ |
355,962 |
|
|
|
100.0 |
% |
|
$ |
6,848 |
|
|
|
1.9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues increased 1.9%, largely attributable to an increase in data revenues, offset by a
decrease in video revenues.
18
Video revenues decreased 2.6%, as a result of a year-over-year loss in basic subscribers from 681,000 to
655,000, offset in part by rate increases applied on our basic subscribers and higher fees from our
advanced video products and services. Average monthly video revenue per basic subscriber rose 2.8%
from $46.94 to $48.27. Our loss of basic subscribers resulted from continuing competitive
pressures by other video providers and the impact of Hurricanes Dennis and Katrina.
To strengthen our competitiveness, we increased the emphasis on product bundling and on
enhancing and differentiating our video products and services with new digital packages, VOD, HDTV,
DVRs and more local programming. During 2005, we also extended the discount periods of our
promotional campaigns for digital and data services from three and six months to six and twelve
months. This has impacted the growth of our video and data revenues.
Data revenues rose 27.1%, primarily due to a 31.4% year-over-year increase in data customers
from 153,000 to 201,000 and, to a much lesser extent, increased contribution from our commercial
service and enterprise network businesses. Average monthly data revenue per data customer decreased from $40.38 to
$38.83, largely due to promotional offers 2005.
Advertising
revenue increased 11.9%, as a result of stronger national and regional advertising
and the interconnection of additional cable systems, which increased the number
of homes available to our advertisers. The increase was offset in part by a decline in political
advertising, which is expected to be much lower in 2005 when compared to the 2004 election year.
Costs and Expenses
Service costs grew 7.4% and included incremental costs related to hurricanes in 2005 and 2004
of $0.5 million and $0.8 million, respectively. Field operating costs rose 20.6%, significantly
due to greater use of outside contractors for hurricane-related repairs and customer activity
typically performed by our service employees, higher vehicle fuel costs, and to a lesser extent,
increases in plant repairs and maintenance. Programming costs increased 3.5%, as a result of
higher unit costs charged by our programming vendors, offset by a lower base of basic subscribers
during the quarter ended September 30, 2005. Employee costs grew 5.3%, primarily due to increased
headcount and overtime of our technicians to prepare our network for phone service, and increased
overtime and related expenses for higher levels of customer activity, and hurricane repairs.
Service costs as a percentage of revenues were 41.0% for the nine months ended September 30, 2005,
as compared to 38.9% for the nine months ended September 30, 2004.
Selling, general and administrative expenses rose 6.7% and included incremental costs related
to hurricanes in 2005 and 2004 of $0.3 and $0.2, respectively. Employee costs increased 17.7%,
primarily due to higher staffing and benefit costs, which resulted from higher levels of customer
activity. Marketing costs grew 33.7% as a result of greater use of direct sales contractors and
advertising campaigns to support sales of our products and services. These increases were offset in part by a 16.5% decrease in bad debt expense as a
result of more effective customer credit and collection activities and a reduction of telephone costs related to our customer call centers. Selling, general and
administrative expenses as a percentage of revenues were 19.3% and 18.0% for the nine months ended
September 30, 2005 and 2004, respectively.
We expect continued revenue growth in advanced services, which include digital video, HDTV,
DVRs, HSD and phone service. As a result, we expect our service costs and selling, general and
administrative expenses to increase.
Management fee expense reflects charges incurred under our management agreements with our
parent, MCC. Management fee expense was $7.4 million for the nine months ended September 30, 2005
as compared to $6.7 million for the nine months ended September 30, 2004. Management fee expense
as a percentage of revenues was 2.0% for the nine months ended September 30, 2005, as compared with
1.9% for the nine months ended September 30, 2004.
Depreciation and amortization decreased 9.3% to $74.2 million for the nine months ended
September 30, 2005, as compared to $81.8 million for the nine months ended September 30, 2004, as a
result of asset retirements and a
19
disposal of cable system assets in 2004, offset in part by increased deprecation for ongoing
investments to continue the rollout of products and services and for investments in our cable
network.
Interest Expense, Net
Interest expense, net, increased by 4.3%, primarily due to higher market interest rates on
variable rate debt, offset in part by the redemption of our 81/2% Senior Notes with lower cost bank
borrowings.
Loss on Early Extinguishment of Debt
The 81/2% Senior Notes were redeemed at a price equal to 101.417% of the outstanding principal
amount. As a result of the redemption, we incurred a loss on early extinguishment of debt in the
amount of $4.7 million for the nine months ended September 30, 2005. The loss consisted of $2.8
million of call premium and the write-off of $1.9 million of original issue discount and deferred
financing costs.
Gain on Derivatives, Net
We enter into interest rate exchange agreements, or interest rate swaps, with counterparties
to fix the interest rate on a portion of our variable rate debt to reduce the potential volatility
in our interest expense that would otherwise result from changes in variable market interest rates.
As of September 30, 2005 we had interest rate swaps with an aggregate principal amount of $400.0
million. The changes in their mark-to-market values are derived from changes in market interest
rates, the decrease in their time to maturity and the creditworthiness of the counterparties. As a
result of the mark-to-market valuation of these interest rate swaps, we recorded gains on
derivatives amounting to $5.3 million and $2.8 million for the nine months ended September 30, 2005
and 2004 respectively.
Gain on Sale of Asset and Investments Net
We recorded a net gain on sale of assets and investments of $2.6 million for the nine months
ended September 30, 2005 and $5.9 million for the nine months ended September 30, 2004. The net
gain for the nine months ended September 30, 2005 was due to the sale of our investment in American
Independence Corporation common stock. The net gain for the second quarter of 2004 was due to the
sale of a non-strategic cable system with approximately 3,450 subscribers for gross proceeds of
about $10.6 million.
Investment Income from Affiliate
Investment income from affiliate was $13.5 million for the nine months ended September 30,
2005 and 2004. This amount represents the investment income on our $150.0 million preferred equity
investment in Mediacom Broadband.
Other Expense
Other expense was $3.7 million and $3.1 million for the nine months ended September 30, 2005
and 2004, respectively. Other expense primarily represents amortization of deferred financing
costs and fees on unused credit commitments. The increase was a result of higher commitment fees
during the nine months ended September 30, 2005.
Net Income
As a result of the factors described above, we generated net income for the nine months ended
September 30, 2005 and 2004 of $69,000 and $10.1 million, respectively.
20
Liquidity and Capital Resources
Overview
As an integral part of our business plan, we have invested, and will continue to invest,
significant amounts in our cable systems to enhance their reliability and capacity, which allows
for the introduction of new advanced broadband services. Our capital investments, however, have
recently shifted away from upgrading the cable systems broadband network to the deployment of new
products and services, including digital video, VOD, HDTV, DVRs, HSD and phone service. In the
nine months ended September 30, 2005, we made $89.8 million of capital expenditures, including $5.1
million to rebuild or replace damaged property, plant and equipment caused by Hurricanes Ivan,
Dennis and Katrina. We estimate that after September 30, 2005, we may spend an additional $5.5
million to rebuild the remainder of our damaged cable plant and other property assuming the
complete recovery of the affected communities, although we cannot be certain about the timing of
such spending.
We have a significant level of debt. As of September 30, 2005, our total debt was $1.48
billion. Of this amount, $6.4 million matures within the twelve months ending September 30, 2006.
Given our level of indebtedness, we also have significant amounts of interest expense obligations.
During the quarter ended September 30, 2005 we paid cash interest of $94.0 million. Our cash
interest payments have historically been higher in the first and third calendar quarters of the
year due to the timing of the cash interest payments on our senior notes.
During the nine months ended September 30, 2005, we generated $71.2 million of net cash flows
from operating activities, which together with the $8.3 million provided by financing activities
and $5.7 million decrease in our cash balances funded net cash flows used in investing activities
of $85.2 million. Our cash requirements for investing activities
were predominantly for capital
expenditures for the nine months ended September 30, 2005.
We
have a $1.15 billion bank credit facility expiring in 2012, of
which $857.9 million was
outstanding as of September 30, 2005. As of September 30, 2005,
we had unused credit commitments of about $278.6 million, of which could be borrowed and used for general
corporate purposes based on the terms and conditions of our debt arrangements. For all periods
through September 30, 2005, we were in compliance with all of the covenants under our debit
arrangements. Continued access to our credit facility is subject to our remaining in compliance
with the covenants of our credit facility, including covenants tied to our operating performance.
We believe that we will not have any difficulty in the foreseeable future complying with these
covenants and that we will meet our current and long-term debt service, capital spending and other
cash requirements through a combination of our net cash flows from operating activities, borrowing
availability under our bank credit facility and our ability to secure future external financing.
However, there can be no assurance that we will be able to obtain sufficient future financing, or,
if we were able to do so, that the terms would be favorable to us.
Operating Activities
Net cash flows provided by operating activities were $71.2 million and $97.5 million for the
nine months ended September 30, 2005 and 2004, respectively. This decrease was principally due to
the decline in operating income offset in part by the timing of cash receipts and expense in our
working capital accounts.
Investing Activities
Net cash flows used in investing activities were $85.2 million and $54.3 million for the nine
months ended September 30, 2005 and 2004, respectively. This increase was substantially due to
higher capital expenditures, which rose to $89.8 million from $61.5 million in the same period last
year, resulting mainly from greater levels of customer connection activities, the rebuild of our
plant related to damage from Hurricanes Ivan, Dennis and Katrina, and to a lesser extent, from
network upgrades and the planned investment in our regional fiber network. The capital
expenditures to cover the higher customer connection activity include unit purchases of customer
premise equipment, including the more expensive HDTV and DVR set-tops, and the related installation
costs of technicians and outside contractors.
In January 2005, we loaned $88.0 million to Mediacom Broadband in the form of a demand note,
with an annual interest rate of 6.7%, payable semi-annually in cash. This demand note was repaid
by Mediacom Broadband in April 2005.
21
Financing Activities
Net cash flows provided by financing activities were $8.3 million for the nine months ended
September 30, 2005, as compared to net cash flows used in financing activities of $49.0 million for
the same period last year. Our financing activities included the following:
In January 2005,
we borrowed the full amount under a $200.0 million delayed-draw term loan
facility and used the proceeds to reduce outstanding amounts under our revolving credit facility
and to make the aforementioned loan of $88.0 million to Mediacom Broadband.
On April 15,
2005, we redeemed all of our outstanding 81/2% Senior Notes due 2008 (the Notes).
The redemption price was equal to 101.417% of the outstanding principal amount of the Notes plus
accrued interest. We funded the redemption with a combination of cash on hand and borrowings from
the revolving credit portion of our credit facility.
Other
We have entered into interest rate exchange agreements with counterparties, which expire from
September 2006 through June 2009, to hedge $400.0 million of floating rate debt. Under the terms
of all of our interest rate exchange agreements, we are exposed to credit loss in the event of
nonperformance by the other parties of the agreements. However, due to the high creditworthiness
of our counterparties, which are major banking firms with investment grade ratings, we do not
anticipate their nonperformance. As of September 30, 2005, about 69% of our outstanding
indebtedness was at fixed interest rates or subject to interest rate protection and our annualized
cost of debt was approximately 7.1%.
As of September 30, 2005, approximately $9.4 million of letters of credit were issued to
various parties as collateral for our performance relating primarily to insurance and franchise
requirements.
Contractual Obligations and Commercial Commitments
The following table summarizes our contractual obligations and commercial commitments, and the
effects they are expected to have on our liquidity and cash flow, for the five years subsequent to
September 30, 2005 and thereafter (dollars in thousands)*:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital |
|
|
Operating |
|
|
Interest |
|
|
|
|
|
|
Debt |
|
|
Leases |
|
|
Leases |
|
|
Expense(1) |
|
|
Total |
|
October 1, 2005 to September 30, 2006 |
|
$ |
5,500 |
|
|
$ |
905 |
|
|
$ |
1,589 |
|
|
$ |
105,669 |
|
|
$ |
113,663 |
|
October 1, 2006 to September 30, 2007 |
|
|
5,500 |
|
|
|
597 |
|
|
|
1,250 |
|
|
|
105,327 |
|
|
|
112,674 |
|
October 1, 2007 to September 30, 2008 |
|
|
20,500 |
|
|
|
7 |
|
|
|
870 |
|
|
|
104,995 |
|
|
|
126,372 |
|
October 1, 2008 to September 30, 2009 |
|
|
28,500 |
|
|
|
|
|
|
|
651 |
|
|
|
104,112 |
|
|
|
133,263 |
|
October 1, 2009 to September 30, 2010 |
|
|
49,000 |
|
|
|
|
|
|
|
482 |
|
|
|
102,544 |
|
|
|
152,026 |
|
Thereafter |
|
|
1,373,875 |
|
|
|
|
|
|
|
1,943 |
|
|
|
224,552 |
|
|
|
1,600,370 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cash obligations |
|
$ |
1,482,875 |
|
|
$ |
1,509 |
|
|
$ |
6,785 |
|
|
$ |
747,199 |
|
|
$ |
2,238,368 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* Refer to Note 7 to our unaudited consolidated financial statements for a discussion of our long-term debt. |
|
|
|
(1) |
|
Interest payments on floating rate debt and interest rate swaps are estimated using
amounts outstanding as of September 30, 2005 and the average interest rates applicable under
such debt obligations. |
22
Critical Accounting Policies
The foregoing discussion and analysis of our financial condition and results of operations is
based upon our consolidated financial statements, which have been prepared in accordance with
accounting principles generally accepted in the United States. The preparation of these financial
statements requires us to make estimates and assumptions that affect the reported amounts of
assets, liabilities, revenues and expenses, and related disclosure of contingent assets and
liabilities. Periodically we evaluate our estimates, including those related to doubtful accounts,
long-lived assets, capitalized costs and accruals. We base our estimates on historical experience
and on various other assumptions that we believe are reasonable. Actual results may differ from
these estimates under different assumptions or conditions.
We believe the following represent the most significant and subjective estimates used in the
preparation of our consolidated financial statements:
Revenue Recognition
Revenues from video and data services are recognized when the services are provided to the
customers. Credit risk is managed by disconnecting services to customers who are delinquent.
Installation revenues obtained from the connection of customers to our communications network are
less than direct installation costs. Therefore, installation revenues are recognized as
connections are completed. Advertising sales are recognized in the period that the advertisements
are exhibited. Under the terms of our franchise agreements, we are required to pay up to 5% of our
gross revenues, derived from providing cable services, to the local franchising authorities. We
normally pass these fees through to our customers. Franchise fees are collected on a monthly basis
and are periodically remitted to local franchise authorities. Franchise fees are reported in their
respective revenue categories and included in selling, general and administrative expenses.
Programming Costs
We have various fixed-term carriage contracts to obtain programming for our cable systems from
content suppliers whose compensation is generally based on a fixed monthly fee per customer. These
programming contracts are subject to negotiated renewal. We recognize programming costs when we
distribute the related programming. These programming costs are usually payable each month based
on calculations performed by us and are subject to adjustments based on the results of periodic
audits by the content suppliers. Historically, such audit adjustments have been immaterial to our
total programming costs. Some content suppliers offer financial incentives to support the launch of
a channel and ongoing marketing support. When such financial incentives are received, we defer them
within non-current liabilities in our consolidated balance sheet and recognize such amounts as a
reduction of programming costs (which are a component of service costs in our consolidated
statement of operations) over the carriage term of the programming contract.
Allowance for Doubtful Accounts
The allowance for doubtful accounts represents the Companys best estimate of probable losses
in the accounts receivable balance. The allowance is based on the number of days outstanding,
customer balances, historical experience and other currently available information. During the
three months ended September 30, 2005, we revised our estimate of probable losses in the accounts
receivable of our advertising business to better reflect historical experience. The change in the
estimate of probable losses did not result in a material impact to the consolidated statement of
operations for the three and nine months ended September 30, 2005.
Property, Plant and Equipment
In accordance with Statement of Financial Accounting Standards (SFAS) No. 51, Financial
Reporting by Cable Television Companies, we capitalized 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. We perform periodic evaluations of the estimates used to determine
the amount of costs that are capitalized. Any changes to these estimates, which may be
significant, are applied prospectively in the period in which the evaluations were completed.
23
Long-Lived Assets
In accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived
Assets, we periodically evaluate the recoverability and estimated lives of our long-lived assets,
including property and equipment and intangible assets subject to amortization, whenever events or
changes in circumstances indicate that the carrying amount may not be recoverable or the useful
life has changed. When the carrying amount is not recoverable, the measurement for such impairment
loss is based on the fair value of the asset, typically based upon the future cash flows discounted
at a rate commensurate with the risk involved. Any loss is included as a component of either
depreciation expense or amortization expense, as appropriate unless it is material to the period in
question whereby we would present it separately.
Intangible Assets
In accordance with SFAS No. 142, Goodwill and Other Intangible Assets, the amortization of
goodwill and indefinite-lived intangible assets is prohibited and requires such assets to be tested
annually for impairment, or more frequently if impairment indicators arise. We have determined
that our cable franchise costs are indefinite-lived assets. Our annual impairment tests, performed
in the October 2004, determined that there was no impairment of goodwill or indefinite-lived
intangible assets. As of September 30, 2005, there were no events since then that would require an
impairment analysis to be completed before the annual test date.
Derivative Instruments
We account for derivative instruments in accordance with SFAS No. 133 Accounting for
Derivative Instruments and Hedging Activities, SFAS No. 138 Accounting for Certain Derivative
Instruments and Certain Hedging Activitiesan amendment of FASB Statement No. 133, and SFAS No.
149 Amendment of Statement 133 on Derivative Instruments and Hedging Activities. Our primary
objective for holding derivative financial instruments is to manage interest rate risk. Our
derivative instruments are recorded at fair value and are included in other current assets, other
assets and other liabilities. Our accounting policies for these instruments are based on whether
they meet our criteria for designation as hedging transactions, which include the instruments
effectiveness in risk reduction and, in most cases, a one-to-one matching of the derivative
instrument to its underlying transaction. We have no derivative financial instruments designated
as hedges. Gains and losses from changes in the mark-to-market values are currently recognized in
the consolidated statement of operations. Short-term valuation changes derived from changes in
market interest rates, time to maturity and the creditworthiness of the counterparties may increase
the volatility of earnings.
Recent Accounting Pronouncements
In December 2004, the FASB issued SFAS No. 123R, Amendment of Statement 123 on Share-Based
Payment. SFAS No. 123R requires companies to expense the value of employee stock options, stock
granted through the employee stock purchase program and similar awards. SFAS No. 123R was
originally effective for interim periods beginning after June 15, 2005. On April 14, 2005, the
Securities and Exchange Commission approved a new rule delaying the effective date until the
beginning of a companys next fiscal year that commences after June 15, 2005.
SFAS No. 123R permits companies to adopt its requirements using either a modified
prospective method or a modified retrospective
method. Under the modified prospective method,
compensation cost is recognized in the financial statements beginning with the effective date,
based on the requirements of SFAS 123R for all share-based payments granted after that date, and
based on the requirements of SFAS 123 for all unvested awards granted prior to the effective date
of SFAS 123R. Under the modified retrospective method, the requirements are the same as under
the modified prospective method, but also permits entities to restate financial statements of
previous periods based on proforma disclosures made in accordance with SFAS 123.
We will adopt SFAS No. 123R effective January 1, 2006 and plans to utilize the modified
prospective method. We believe the adoption of SFAS No. 123R will have a material impact on our
consolidated statement of operations. We currently utilize the Black-Scholes option pricing model
to measure the fair value of stock options
24
granted to employees. While SFAS 123R permits entities to continue to use such a model, the
standard also permits the use of a lattice model. We have not yet determined which model we will
use to measure the fair value of employee stock options granted after the adoption of SFAS 123R.
Inflation and Changing Prices
Our systems costs and expenses are subject to inflation and price fluctuations. Such changes
in costs and expenses can generally be passed through to subscribers. Programming costs have
historically increased at rates in excess of inflation and are expected to continue to do so. We
believe that under the Federal Communications Commissions existing cable rate regulations, we may
increase rates for cable television services to more than cover any increases in programming.
However, competitive conditions and other factors in the marketplace may limit our ability to
increase rates.
25
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
In the normal course of business, we use interest rate exchange agreements, or interest rate
swaps, with counterparties to fix the interest rate on our variable interest rate debt. As of
September 30, 2005, we had $400.0 million of interest rate swaps with various banks at a
weighted-average fixed rate of approximately 3.2%. The fixed rates of the interest rate swaps are
offset against the applicable three-month London Interbank Offering Rate to determine the interest
expense. Under the terms of the interest rate swaps, which expire from 2006 through 2009, we are
exposed to credit loss in the event of nonperformance by the other parties. However, due to the
high creditworthiness of our counterparties, which are major banking firms with investment grade
ratings, we do not anticipate their nonperformance. At September 30, 2005, based on the
mark-to-market valuation, we would have received approximately $6.9 million, including accrued
interest, if we terminated these agreements.
The table below provides the expected maturity and estimated fair value of our debt as of
September 30, 2005 (dollars in thousands). See Note 7 to our unaudited consolidated financial
statements.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior |
|
|
Bank Credit |
|
|
Capital Lease |
|
|
|
|
|
|
Notes |
|
|
Facility |
|
|
Obligations |
|
|
Total |
|
Expected Maturity: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 1, 2005 to September 30, 2006 |
|
$ |
|
|
|
$ |
5,500 |
|
|
$ |
905 |
|
|
$ |
6,405 |
|
October 1, 2006 to September 30, 2007 |
|
|
|
|
|
|
5,500 |
|
|
|
597 |
|
|
|
6,097 |
|
October 1, 2007 to September 30, 2008 |
|
|
|
|
|
|
20,500 |
|
|
|
7 |
|
|
|
20,507 |
|
October 1, 2008 to September 30, 2009 |
|
|
|
|
|
|
28,500 |
|
|
|
|
|
|
|
28,500 |
|
October 1, 2009 to September 30, 2010 |
|
|
|
|
|
|
49,000 |
|
|
|
|
|
|
|
49,000 |
|
Thereafter |
|
|
625,000 |
|
|
|
748,875 |
|
|
|
|
|
|
|
1,373,875 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
625,000 |
|
|
$ |
857,875 |
|
|
$ |
1,509 |
|
|
$ |
1,484,384 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value |
|
$ |
616,250 |
|
|
$ |
857,875 |
|
|
$ |
1,509 |
|
|
$ |
1,475,634 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average Interest Rate |
|
|
9.2 |
% |
|
|
5.7 |
% |
|
|
3.1 |
% |
|
|
7.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
26
ITEM 4. CONTROLS AND PROCEDURES
Mediacom LLC
The management of Mediacom LLC (Mediacom) carried out an evaluation, with the participation
of Mediacoms Chief Executive Officer and Chief Financial Officer, of the effectiveness of
Mediacoms disclosure controls and procedures as of September 30, 2005. Based upon that
evaluation, Mediacoms Chief Executive Officer and Chief Financial Officer concluded that
Mediacoms disclosure controls and procedures were effective to ensure that information required to
be disclosed by Mediacom in the reports that it files or submits under the Securities Exchange Act
of 1934 is recorded, processed, summarized and reported within the time periods specified in the
rules and forms of the Securities and Exchange Commission. Disclosure controls and procedures
include, without limitation, controls and procedures designed to ensure that information required
to be disclosed by an issuer in the reports that it files or submits under the Exchange Act are
accumulated and communicated to the issuers management, including its principal executive and
principal financial officers, or persons performing similar functions, as appropriate to allow
timely decisions regarding required disclosure.
There has not been any change in Mediacoms internal control over financial reporting in
connection with the evaluation required by Rule 15d-15(d) under the Exchange Act that occurred
during the quarter ended September 30, 2005 that has materially affected, or is reasonably likely
to materially affect, Mediacoms internal control over financial reporting.
Mediacom Capital Corporation
The management of Mediacom Capital Corporation (Mediacom Capital) carried out an evaluation,
with the participation of Mediacom Capitals Chief Executive Officer and Chief Financial Officer,
of the effectiveness of Mediacom Capitals disclosure controls and procedures as of September 30,
2005. Based upon that evaluation, Mediacom Capitals Chief Executive Officer and Chief Financial
Officer concluded that Mediacom Capitals disclosure controls and procedures were effective to
ensure that information required to be disclosed by Mediacom Capital in the reports that it files
or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and
reported within the time periods specified in the rules and forms of the Securities and Exchange
Commission. Disclosure controls and procedures include, without limitation, controls and procedures
designed to ensure that information required to be disclosed by an issuer in the reports that it
files or submits under the Exchange Act are accumulated and communicated to the issuers
management, including its principal executive and principal financial officers, or persons
performing similar functions, as appropriate to allow timely decisions regarding required
disclosure.
There has not been any change in Mediacom Capitals internal control over financial reporting
in connection with the evaluation required by Rule 15d-15(d) under the Exchange Act that occurred
during the quarter ended September 30, 2005 that has materially affected, or is reasonably likely
to materially affect, Mediacom Capitals internal control over financial reporting.
27
PART II
ITEM 1. LEGAL PROCEEDINGS
See Note 11 to our consolidated financial statements.
ITEM 6. EXHIBITS
|
|
|
|
|
Exhibit |
|
|
Number |
|
Exhibit Description |
|
|
|
|
31.1 |
|
Rule 15d-14(a) Certifications of Mediacom LLC |
|
31.2 |
|
Rule 15d-14(a) Certifications of Mediacom Capital Corporation |
|
32.1 |
|
Section 1350 Certifications of Mediacom LLC |
|
32.2 |
|
Section 1350 Certifications of Mediacom Capital Corporation |
28
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 |
|
|
|
|
|
November 14, 2005
|
|
By: |
/s/ Mark E. Stephan |
|
|
|
|
Mark E. Stephan |
|
|
|
Executive Vice President,
Chief Financial Officer and Treasurer |
29
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 |
|
|
|
|
|
November 14, 2005
|
|
By: |
/s/ Mark E. Stephan |
|
|
|
|
|
|
|
|
Mark E. Stephan |
|
|
|
Treasurer and Secretary |
30
EX-31.1
Exhibit 31.1
CERTIFICATIONS
I, Rocco B. Commisso, certify that:
(1) |
|
I have reviewed this report on Form 10-Q of Mediacom LLC; |
|
(2) |
|
Based on my knowledge, this report does not contain any untrue statement of a material fact
or omit to state a material fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not misleading with respect to the period
covered by this report; |
|
(3) |
|
Based on my knowledge, the financial statements, and other financial information included in
this report, fairly present in all material respects the financial condition, results of
operations and cash flows of the registrant as of, and for, the periods presented in this
report; |
|
(4) |
|
The registrants other certifying officer and I are responsible for establishing and
maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and
15d-15(e)) for the registrant and have: |
|
a) |
|
Designed such disclosure controls and procedures, or caused such disclosure controls
and procedures to be designed under our supervision, to ensure that material information
relating to the registrant, including its consolidated subsidiaries, is made known to us by
others within those entities, particularly during the period in which this report is being
prepared; |
|
|
b) |
|
Paragraph omitted pursuant to SEC Release Nos. 33-8238 and 34-47986; |
|
|
c) |
|
Evaluated the effectiveness of the registrants disclosure controls and procedures and
presented in this report our conclusions about the effectiveness of the disclosure controls
and procedures, as of end of the period covered by this report based on such evaluation;
and |
|
|
d) |
|
Disclosed in this report any change in the registrants internal control over financial
reporting that occurred during the registrants most recent fiscal quarter (the
registrants fourth fiscal quarter in the case of an annual report) that has materially
affected, or is reasonably likely to materially affect, the registrants internal control
over financial reporting; and |
(5) |
|
The registrants other certifying officer and I have disclosed, based on our most recent
evaluation of internal control over financial reporting, to the registrants auditors and the
audit committee of registrants board of directors (or persons performing the equivalent
function): |
|
a) |
|
All significant deficiencies and material weaknesses in the design or operation of
internal control over financial reporting which are reasonably likely to adversely affect
the registrants ability to record, process, summarize and report financial information;
and |
|
|
b) |
|
Any fraud, whether or not material, that involves management or other employees who
have a significant role in the registrants internal control over financial reporting. |
|
|
|
|
|
|
|
|
November 14, 2005 |
By: |
/s/ Rocco B. Commisso
|
|
|
|
Rocco B. Commisso |
|
|
|
Chief Executive Officer |
|
|
Exhibit 31.1
CERTIFICATIONS
I, Mark E. Stephan, certify that:
(1) |
|
I have reviewed this report on Form 10-Q of Mediacom LLC; |
|
(2) |
|
Based on my knowledge, this report does not contain any untrue statement of a material fact
or omit to state a material fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not misleading with respect to the period
covered by this report; |
|
(3) |
|
Based on my knowledge, the financial statements, and other financial information included in
this report, fairly present in all material respects the financial condition, results of
operations and cash flows of the registrant as of, and for, the periods presented in this
report; |
|
(4) |
|
The registrants other certifying officer and I are responsible for establishing and
maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and
15d-15(e)) for the registrant and have: |
|
a) |
|
Designed such disclosure controls and procedures, or caused such disclosure controls
and procedures to be designed under our supervision, to ensure that material information
relating to the registrant, including its consolidated subsidiaries, is made known to us by
others within those entities, particularly during the period in which this report is being
prepared; |
|
|
b) |
|
Paragraph omitted pursuant to SEC Release Nos. 33-8238 and 34-47986; |
|
|
c) |
|
Evaluated the effectiveness of the registrants disclosure controls and procedures and
presented in this report our conclusions about the effectiveness of the disclosure controls
and procedures, as of end of the period covered by this report based on such evaluation;
and |
|
|
d) |
|
Disclosed in this report any change in the registrants internal control over financial
reporting that occurred during the registrants most recent fiscal quarter (the
registrants fourth fiscal quarter in the case of an annual report) that has materially
affected, or is reasonably likely to materially affect, the registrants internal control
over financial reporting; and |
(5) |
|
The registrants other certifying officer and I have disclosed, based on our most recent
evaluation of internal control over financial reporting, to the registrants auditors and the
audit committee of registrants board of directors (or persons performing the equivalent
function): |
|
a) |
|
All significant deficiencies and material weaknesses in the design or operation of
internal control over financial reporting which are reasonably likely to adversely affect
the registrants ability to record, process, summarize and report financial information;
and |
|
|
b) |
|
Any fraud, whether or not material, that involves management or other employees who
have a significant role in the registrants internal control over financial reporting. |
|
|
|
|
|
|
|
|
|
|
|
|
November 14, 2005
|
|
By:
|
|
/s/ Mark E. Stephan |
|
|
|
|
|
|
|
|
|
|
|
Mark E. Stephan |
|
|
|
|
|
Chief Financial Officer |
|
EX-31.2
Exhibit 31.2
CERTIFICATIONS
I, Rocco B. Commisso, certify that:
(1) |
|
I have reviewed this report on Form 10-Q of Mediacom Capital Corporation; |
|
(2) |
|
Based on my knowledge, this report does not contain any untrue statement of a material fact
or omit to state a material fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not misleading with respect to the period
covered by this report; |
|
(3) |
|
Based on my knowledge, the financial statements, and other financial information included in
this report, fairly present in all material respects the financial condition, results of
operations and cash flows of the registrant as of, and for, the periods presented in this
report; |
|
(4) |
|
The registrants other certifying officer and I are responsible for establishing and
maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and
15d-15(e)) for the registrant and have: |
|
a) |
|
Designed such disclosure controls and procedures, or caused such disclosure controls
and procedures to be designed under our supervision, to ensure that material information
relating to the registrant, including its consolidated subsidiaries, is made known to us by
others within those entities, particularly during the period in which this report is being
prepared; |
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b) |
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Paragraph omitted pursuant to SEC Release Nos. 33-8238 and 34-47986; |
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c) |
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Evaluated the effectiveness of the registrants disclosure controls and procedures and
presented in this report our conclusions about the effectiveness of the disclosure controls
and procedures, as of end of the period covered by this report based on such evaluation;
and |
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d) |
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Disclosed in this report any change in the registrants internal control over financial
reporting that occurred during the registrants most recent fiscal quarter (the
registrants fourth fiscal quarter in the case of an annual report) that has materially
affected, or is reasonably likely to materially affect, the registrants internal control
over financial reporting; and |
(5) |
|
The registrants other certifying officer and I have disclosed, based on our most recent
evaluation of internal control over financial reporting, to the registrants auditors and the
audit committee of registrants board of directors (or persons performing the equivalent
function): |
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a) |
|
All significant deficiencies and material weaknesses in the design or operation of
internal control over financial reporting which are reasonably likely to adversely affect
the registrants ability to record, process, summarize and report financial information;
and |
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b) |
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Any fraud, whether or not material, that involves management or other employees who
have a significant role in the registrants internal control over financial reporting. |
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November 14, 2005
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By:
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/s/ Rocco B. Commisso |
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Rocco B. Commisso |
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Chief Executive Officer |
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Exhibit 31.2
CERTIFICATIONS
I, Mark E. Stephan, certify that:
(1) |
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I have reviewed this report on Form 10-Q of Mediacom Capital Corporation; |
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(2) |
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Based on my knowledge, this report does not contain any untrue statement of a material fact
or omit to state a material fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not misleading with respect to the period
covered by this report; |
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(3) |
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Based on my knowledge, the financial statements, and other financial information included in
this report, fairly present in all material respects the financial condition, results of
operations and cash flows of the registrant as of, and for, the periods presented in this
report; |
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(4) |
|
The registrants other certifying officer and I are responsible for establishing and
maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and
15d-15(e)) for the registrant and have: |
|
a) |
|
Designed such disclosure controls and procedures, or caused such disclosure controls
and procedures to be designed under our supervision, to ensure that material information
relating to the registrant, including its consolidated subsidiaries, is made known to us by
others within those entities, particularly during the period in which this report is being
prepared; |
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|
b) |
|
Paragraph omitted pursuant to SEC Release Nos. 33-8238 and 34-47986; |
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c) |
|
Evaluated the effectiveness of the registrants disclosure controls and procedures and
presented in this report our conclusions about the effectiveness of the disclosure controls
and procedures, as of end of the period covered by this report based on such evaluation;
and |
|
|
d) |
|
Disclosed in this report any change in the registrants internal control over financial
reporting that occurred during the registrants most recent fiscal quarter (the
registrants fourth fiscal quarter in the case of an annual report) that has materially
affected, or is reasonably likely to materially affect, the registrants internal control
over financial reporting; and |
(5) |
|
The registrants other certifying officer and I have disclosed, based on our most recent
evaluation of internal control over financial reporting, to the registrants auditors and the
audit committee of registrants board of directors (or persons performing the equivalent
function): |
|
a) |
|
All significant deficiencies and material weaknesses in the design or operation of
internal control over financial reporting which are reasonably likely to adversely affect
the registrants ability to record, process, summarize and report financial information;
and |
|
|
b) |
|
Any fraud, whether or not material, that involves management or other employees who
have a significant role in the registrants internal control over financial reporting. |
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November 14, 2005
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By: |
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/s/ Mark E. Stephan |
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Mark E. Stephan |
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Principal Financial Officer |
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EX-32.1
Exhibit 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Mediacom LLC (the Company) on Form 10-Q for the
period ended September 30, 2005 as filed with the Securities and Exchange Commission on the date
hereof (the Report), Rocco B. Commisso, Chief Executive Officer and Mark E. Stephan, Chief
Financial Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to §
906 of the Sarbanes-Oxley Act of 2002, that:
|
(1) |
|
the Report fully complies with the requirements of section 13(a) or 15(d) of the
Securities Exchange Act of 1934; and |
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(2) |
|
the information contained in the Report fairly presents, in all material respects, the
financial condition and results of operations of the Company. |
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November 14, 2005
|
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By:
|
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/s/ Rocco B. Commisso |
|
|
|
|
|
|
|
|
|
|
|
Rocco B. Commisso |
|
|
|
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|
Chief Executive Officer |
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By:
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/s/ Mark E. Stephan |
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Mark E. Stephan |
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Chief Financial Officer |
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EX-32.2
Exhibit 32.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Mediacom Capital Corporation (the Company) on
Form 10-Q for the period ended September 30, 2005 as filed with the Securities and Exchange
Commission on the date hereof (the Report), Rocco B. Commisso, Chief Executive Officer and Mark
E. Stephan, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as
adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:
|
(1) |
|
the Report fully complies with the requirements of section 13(a) or 15(d) of the
Securities Exchange Act of 1934; and |
|
|
(2) |
|
the information contained in the Report fairly presents, in all material respects, the
financial condition and results of operations of the Company. |
|
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November 14, 2005
|
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By:
|
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/s/ Rocco B. Commisso |
|
|
|
|
|
|
|
|
|
|
|
Rocco B. Commisso |
|
|
|
|
|
Chief Executive Officer |
|
|
|
|
|
|
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By:
|
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/s/ Mark E. Stephan |
|
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|
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|
Mark E. Stephan |
|
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Principal Financial Officer |
|