UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-Q/A
(Amendment
No. 2)
Quarterly
Report Pursuant to Section 13 or 15(d) of the
Securities
Exchange Act of 1934
For
the quarterly period ended September 30, 2005
Commission
File Number: 0-29227
Mediacom
Communications Corporation
(Exact
name of Registrant as specified in its charter)
|
Delaware
|
06-1566067
|
|
(State
of incorporation)
|
(I.R.S.
Employer
|
|
Identification
Number)
|
100
Crystal Run Road
Middletown,
NY 10941
(Address
of principal executive offices)
(845)
695-2600
(Registrant’s
telephone number)
Indicate
by check mark whether the Registrant (1) has filed all reports required to
be
filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during
the
preceding 12 months (or for such shorter period that the Registrant was required
to file such reports), and (2) has been subject to such filing requirements
for
the past 90 days. Yes R
No
£
Indicate
by check mark whether the registrant is an accelerated filer (as defined in
Rule
12b-2 of the Exchange Act). Yes R
No
£
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes £
No
R
As
of
October 31, 2005 there were 89,614,692 shares of Class A common stock and
27,336,939 shares of Class B common stock outstanding.
EXPLANATORY
NOTE
Mediacom
Communications Corporation hereby amends its Quarterly Report on Form 10-Q
for
the quarterly period ended September 30, 2005, filed on November 9, 2005,
as set forth in this Quarterly Report on Form 10-Q/A (Amendment No. 2) (the
“Form 10-Q/A”). This Form 10-Q/A amends Exhibit 31.1 (Rule 13a-14(a)
certifications) to add paragraph number 3.
2
MEDIACOM
COMMUNICATIONS CORPORATION AND SUBSIDIARIES
FORM
10-Q/A
FOR
THE PERIOD ENDED SEPTEMBER 30, 2005
TABLE
OF CONTENTS
|
PART
I
|
||
|
Item
2.
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
|
|
|
PART
II
|
||
|
Item
6.
|
Exhibits
|
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.
3
PART
I
ITEM
2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS
OF OPERATIONS
The
following discussion should be read in conjunction with the Company’s unaudited
consolidated financial statements as of, and for the three and nine months
ended, September 30, 2005 and 2004, and with the Company’s annual report on Form
10-K for the year ended December 31, 2004.
Overview
Mediacom
Communications Corporation is currently the nation’s eighth largest cable
television company based on customers served and the leading cable operator
focused on serving the smaller cities and towns in the United States. 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”) and 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 service 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 2.80 million homes
and
served 1.43 million basic subscribers in 23 states. We provide digital video
services to 477,000 digital customers and HSD service to 453,000 customers,
representing a digital penetration of 33.4% of our basic subscribers and data
penetration of 16.2% 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 92%
of
our basic subscribers, as compared to an estimated 62% and 28% at year-end
2003
and 2002, respectively. 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 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 additional 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 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 Company’s 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 incremental 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.
4
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
|
$ 274,959
|
$ 261,025
|
$
13,934
|
5.3%
|
|
Costs
and expenses:
|
||||
|
Service
costs
|
111,462
|
102,131
|
9,331
|
9.1%
|
|
Selling,
general and administrative expenses
|
58,019
|
55,292
|
2,727
|
4.9%
|
|
Corporate
expenses
|
5,466
|
5,095
|
371
|
7.3%
|
|
Depreciation
and amortization
|
54,851
|
55,631
|
(780)
|
(1.4%)
|
|
Operating
income
|
45,161
|
42,876
|
2,285
|
5.3%
|
|
Interest
expense, net
|
(52,374)
|
(48,709)
|
(3,665)
|
7.5%
|
|
Gain
(loss) on derivatives, net
|
5,092
|
(4,218)
|
9,310
|
NM
|
|
Gain
on sale of assets and investments, net
|
1,445
|
—
|
1,445
|
NM
|
|
Other
expense
|
(2,047)
|
(2,593)
|
546
|
(21.1%)
|
|
Net
loss before provision for income taxes
|
(2,723)
|
(12,644)
|
9,921
|
NM
|
|
Provision
for income taxes
|
(8)
|
(163)
|
155
|
NM
|
|
Net
loss
|
$
(2,731)
|
$
(12,807)
|
$
10,076
|
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
|
|
|
||
|
|
Amount
|
%
of Revenues
|
Amount
|
%
of Revenues
|
$
Change
|
%
Change
|
|
Video
|
$
211,561
|
77.0%
|
$
208,655
|
79.9%
|
$2,906
|
1.4%
|
|
Data
|
49,830
|
18.1%
|
39,192
|
15.0%
|
10,638
|
27.1%
|
|
Advertising
|
13,568
|
4.9%
|
13,178
|
5.1%
|
390
|
3.0%
|
|
$
274,959
|
100.0%
|
$
261,025
|
100.0%
|
$
13,934
|
5.3%
|
|
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
rose 5.3%, largely attributable to an increase in data revenues.
Video
revenues increased 1.4%, as a result of rate increases applied on our
subscribers and higher fees from our advanced video products and services,
offset by a 2.2% decrease of basic subscribers from 1,461,000 to 1,429,000.
Average monthly video revenue per basic subscriber rose 4.1% from $47.12 to
$49.06. 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 29,000
basic
subscribers, compared to a loss of 82,000 in the same period last year. During
the three months ended September 30, 2005, we lost 17,000 basic subscribers,
compared to a loss of 30,000 in the same period last year. In addition, our
digital television product category has rebounded significantly, growing 81,000
digital customers during the nine months ended September 30, 2005, compared
to a
loss of 1,000 in the same period last year. We had 477,000 digital customers
as
of September 30, 2005, compared to 382,000 as of September 30,
2004.
Data
revenues rose 27.1%, primarily due to a 29.4% year-over-year increase in data
customers from 350,000 to 453,000, 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 $38.59 to $37.73 largely due to
promotional offers in 2005.
Advertising
revenues increased 3.0%, as a result of stronger national and regional
advertising. This 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.
5
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, 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 9.1% and included incremental costs related to hurricanes in 2005
and
2004 of $0.5 million and $0.8 million, respectively. Programming costs increased
6.3%, as a result of lower launch support, which we receive from our programming
suppliers in return for our carriage of their services, and higher unit costs
charged by them, significantly offset by a lower base of basic subscribers
during the quarter ended September 30, 2005. Employee costs grew 7.0%, primarily
due to increased headcount and overtime of our technicians to prepare our
network for phone service, and increased overtime for customer installation
activity and hurricane-related repairs. Field operating costs rose 24.8%,
primarily due to higher vehicle fuel costs and the greater use of outside
contractors for hurricane-related repairs and customer activity typically
performed by our service employees, and to a lesser extent, increases in routine
plant repairs and maintenance. Service costs as a percentage of revenues were
40.5% for the three months ended September 30, 2005, as compared to 39.1% for
the three months ended September 30, 2004.
Selling,
general and administrative expenses include: wages and salaries for our call
centers, 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 4.9% and included incremental costs
related to hurricanes in 2005 and 2004 of $0.3 million and $0.2 million,
respectively. Employee costs increased 18.9%, primarily due to higher staffing,
commissions and benefit costs of customer service and direct sales personnel,
which resulted from higher levels of customer activity. This increase in
selling, general and administrative expense was offset in part by an 8.0%
decrease in bad debt expense primarily as a result of a change of estimate
in
our advertising business to better reflect historical collection experience.
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.
Corporate
expenses reflect compensation of corporate employees and other corporate
overhead. Corporate expenses rose 7.3%, principally due to increases in employee
compensation including amortization of non-cash stock-based compensation and
higher legal and accounting fees. Corporate expenses as a percentage of revenues
were 2.0% and 2.0% for the three months ended September 30, 2005 and 2004,
respectively.
Depreciation
and amortization decreased 1.4%, as a result of asset retirements and a sale
of
cable system assets in 2004, 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, increased 7.5% principally due to higher market interest rates
on
variable rate debt. This increase was offset in part by funding the redemption
in April 2005 of our 81/2% Senior Notes due 2008 (“81/2% Senior Notes due 2008”)
with 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 $800.0 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 quarterly mark-to-market valuation
of
these interest rate swaps, we recorded a net gain on derivatives amounting
to
$5.1 million for the three months ended September 30, 2005, as compared to
a
loss on derivatives of $4.2 million for the three months ended September 30,
2004.
6
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.
Other
Expense
Other
expense was $2.0 million and $2.6 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.
Provision
for Income Taxes
Provision
for income taxes was approximately $80,000 for the three months ended September
30, 2005, as compared to a provision for income taxes of $0.2 million for the
three months ended September 30, 2004. Our income taxes relate to state income
tax liabilities.
Net
Loss
As
a
result of the factors described above, we incurred a net loss for the three
months ended September 30, 2005 of $2.7 million, as compared to a net loss
of
$12.8 million for the three months ended September 30, 2004.
Actual
Results of Operations
Nine
Months Ended September 30, 2005 Compared To Nine Months Ended
September 30,
2004
The
following table sets forth the 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
|
$
818,535
|
$
792,063
|
$
26,472
|
3.3%
|
|
Costs
and expenses:
|
||||
|
Service
costs
|
325,911
|
303,892
|
22,019
|
7.2%
|
|
Selling,
general and administrative expenses
|
171,763
|
162,030
|
9,733
|
6.0%
|
|
Corporate
expenses
|
16,355
|
14,943
|
1,412
|
9.4%
|
|
Depreciation
and amortization
|
162,530
|
163,826
|
(1,296)
|
(0.8%)
|
|
Operating
income
|
141,976
|
147,372
|
(5,396)
|
(3.7%)
|
|
Interest
expense, net
|
(153,784)
|
(143,276)
|
(10,508)
|
7.3%
|
|
Loss
on early extinguishment of debt
|
(4,742)
|
—
|
(4,742)
|
NM
|
|
Gain
on derivatives, net
|
11,513
|
9,498
|
2,015
|
21.2%
|
|
Gain
on sale of assets and investments, net
|
2,628
|
5,885
|
(3,257)
|
(55.3%)
|
|
Other
expense
|
(7,276)
|
(7,406)
|
130
|
(1.8%)
|
|
Net
(loss) income before benefit from (provision for) income
taxes
|
(9,685)
|
12,073
|
(21,758)
|
NM
|
|
Benefit
from (provision for) income taxes
|
124
|
(490)
|
614
|
NM
|
|
Net
(loss) income
|
$
(9,561)
|
$
11,583
|
$
(21,144)
|
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
|
|
|
||
|
|
Amount
|
%
of Revenues
|
Amount
|
%
of Revenues
|
$
Change
|
%
Change
|
|
Video
|
$
637,256
|
77.9%
|
$
641,322
|
81.0%
|
$
(4,066)
|
(0.6%)
|
|
Data
|
142,810
|
17.4%
|
114,385
|
14.4%
|
28,425
|
24.9%
|
|
Advertising
|
38,469
|
4.7%
|
36,356
|
4.6%
|
2,113
|
5.8%
|
|
$
818,535
|
100.0%
|
$
792,063
|
100.0%
|
$
26,472
|
3.3%
|
|
7
Revenues
rose 3.3%, largely attributable to an increase in data revenues.
Video
revenues decreased 0.6%, as a result of a 2.2% reduction in basic subscribers
from 1,461,000 as of September 30, 2004, to 1,429,000 as of September 30, 2005,
offset in part by the impact of rate increases applied on our basic subscribers
and higher fees from our advanced video products and services. 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.
Average monthly video revenue per basic subscriber increased 3.4% from $47.44
to
$49.05.
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 24.9%, primarily due to a 29.4% year-over-year increase in data
customers from 350,000 to 453,000 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 $40.35 to $38.67, largely due to
promotional offers in 2005.
Advertising
revenues increased 5.8%, as a result of stronger national and regional
advertising. This 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 increased 7.2% and included incremental costs related to hurricanes in
2005 and 2004 of $0.5 million and $0.8 million, respectively. Programming costs
increased 4.4%, as a result of lower launch support, which we receive from
our
programming suppliers in return for our carriage of their services, and higher
unit costs charged by them, significantly offset by a lower base of basic
subscribers for the nine months ended September 30, 2005. Field operating costs
rose 21.3%, primarily due to the greater use of outside contractors for
hurricane-related repairs and for customer activity typically performed by
our
service employees and, to a lesser extent, increases in vehicle fuel costs.
Employee costs grew 5.7%, primarily due to increased headcount and overtime
of
our technicians to prepare our network for phone service, and increased overtime
for customer installation activity and hurricane-related repair, partially
offset by a decrease in certain employee insurance expenses. Service costs
as a
percentage of revenues were 39.8% for the nine months ended September 30, 2005,
as compared to 38.4% for the nine months ended September 30, 2004.
Selling,
general and administrative expenses rose 6.0% and included incremental costs
related to hurricanes in 2005 and 2004 of $0.3 million and $0.2 million,
respectively. Employee costs increased 16.3%, primarily due to higher staffing
and benefit costs as a result of higher levels of customer activity. Marketing
costs grew 15.7% as a result of increased costs associated with contracted
direct sales personnel and advertising campaigns to support sales of our
products and services. This increase in selling, general and administrative
expense was significantly offset by a 16.3% decrease in bad debt expense
primarily as a result of more effective customer credit and collection
activities and better collection experience in our advertising business.
Selling, general and administrative expenses as a percentage of revenues were
21.0% and 20.5% 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.
Corporate
expenses reflect compensation of corporate employees and other corporate
overhead. Corporate expenses rose 9.4%, principally due to increases in employee
compensation including amortization of non-cash stock-based compensation and
higher legal and accounting fees. Corporate expenses as a percentage of revenues
were 2.0% and 1.9% for the nine months ended September 30, 2005 and 2004,
respectively.
Depreciation
and amortization decreased 0.8%, as a result of asset retirements and a sale
of
cable system assets in 2004, 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, increased 7.3%, due to higher market interest rates on variable
rate debt and to a lesser extent, slightly higher indebtedness. This increase
was offset in part by funding the redemption in April 2005 of our 81/2% Senior
Notes due 2008 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 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 unamortized 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 $800.0 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 quarterly mark-to-market valuation
of
these interest rate swaps, we recorded a gain on derivatives amounting to $11.5
million for the nine months ended September 30, 2005, as compared to a gain
on
derivatives of $9.5 million for the nine 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 $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 nine months ended September 30, 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.
Other
Expense
Other
expense was $7.3 million and $7.4 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.
8
Benefit
from (Provision for) Income Taxes
Benefit
from income taxes was approximately $0.1 million for the nine months ended
September 30, 2005, as compared to a provision for income taxes of $0.5 million
for the nine months ended September 30, 2004. Our income taxes relate to state
income tax liabilities.
Net
Loss (Income)
As
a
result of the factors described above, we incurred a net loss for the nine
months ended September 30, 2005 of $9.6 million, as compared to net income
of
$11.6 million for the nine months ended September 30, 2004.
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. During
2005, we expect to spend about $228 million on capital expenditures. In the
nine
months ended September 30, 2005, we made $179.2 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 $3.07
billion. Of this amount, $220.9 million matures within the twelve months ending
September 30, 2006. We continue to extend our debt maturities through the
refinancing of debt, as discussed below. Given our level of indebtedness, we
also have significant interest expense obligations. During the nine months
ended
September 30, 2005, we paid cash interest of $184.4 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
and convertible senior notes.
During
the nine months ended September 30, 2005, we generated $121.2 million of net
cash flows from operating activities, which together with the $35.2 million
of
cash provided by financing activities and the $18.2 million decrease in our
cash
balances, funded net cash flows used in investing activities of $174.6. Our
cash
requirements were predominantly capital expenditures during the nine months
ended September 30, 2005.
We
own
our cable systems through two principal subsidiaries, Mediacom LLC and Mediacom
Broadband LLC. The operating subsidiaries of Mediacom LLC have a $1.15 billion
bank credit facility expiring in 2012, of which $857.9 million was outstanding
as of September 30, 2005. The operating subsidiaries of Mediacom Broadband
LLC
have a $1.4 billion bank credit facility (the “Broadband Credit Facility”)
expiring in 2014, of which $809.0 million was outstanding as of September 30,
2005. The Broadband Credit Facility consists of a revolving credit commitment,
a
$300.0 million term loan and a $500.0 million term loan. In October 2005, the
Broadband Credit Facility was amended to increase the revolving credit
commitment portion from approximately $543.0 million to approximately $650.5
million, of which approximately $430.3 million is not subject to scheduled
reductions prior to the termination date; and to extend the termination date
of
the commitments not subject to reductions from March 2010 to December
2012.
As
of
September 30, 2005, we had unused credit commitments of about $771.7 million
under our bank credit facilities, all of which could be borrowed and used for
general corporate purposes based on the terms and conditions of our debt
arrangements. As of that same date, giving effect to the amendment of the
Broadband Credit Facility, we had unused credit commitments of about $879.2
million, of which approximately $860.5 million 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 debt arrangements. Continued access to
our
credit facilities is subject to our remaining in compliance with the covenants
of these credit facilities, 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 facilities 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 $121.2 million and $172.2 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 $174.6 million and $119.5 million for
the nine months ended September 30, 2005 and 2004, respectively. This increase
was substantially due to higher capital expenditures, which rose to $179.2
million from $126.0 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 increased unit purchases of customer premise equipment,
including the more expensive HDTV and DVR set-tops, and the related installation
costs of our technicians and outside contractors.
Financing
Activities
Net
cash
flows provided by financing activities were $35.2 million for the three months
ended September 30, 2005 as compared to cash used in financing activities of
$65.0 for the nine months ended September 30, 2004. Our financing activities
included the following:
In
January 2005, we borrowed the full amount of our $200.0 million delayed-draw
term loan facility and used the proceeds to reduce outstanding balances under
our revolving credit facilities.
In
April
2005, we redeemed all of our outstanding 81/2% Senior Notes due April 2008.
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 under the revolving credit portion of our credit
facilities.
In
May
2005, we refinanced a $496.3 million term loan with a new term loan in the
amount of $500.0 million. Borrowings under the new term loan bear interest
at a
rate that is 0.5% less than the interest rate of the term loan it replaced.
The
new term loan matures in February 2014, whereas the term loan it replaced had
a
maturity of September 2010.
In
August
2005, we issued $200.0 million aggregate principal amount of 81/2% senior notes
due October 2015 (the “81/2% Senior Notes due 2015”). The 81/2% Senior Notes due
2015 are unsecured obligations of Mediacom Broadband LLC, and the indenture
governing the 81/2% Senior Notes due 2015 stipulates, among other things,
restrictions on incurrence of Indebtedness, distributions, mergers and asset
sales and has cross-default provisions related to other debt of Mediacom
Broadband LLC. The proceeds from this offering were used to reduce outstanding
balances under our revolving credit facilities.
9
During
the nine months ended September 30, 2005, we funded our book overdraft in the
amount of $9.0 million. Book overdrafts represent outstanding checks in excess
of funds on deposit at our disbursement accounts.
Pursuant
to our Board authorized repurchase program, we repurchased 1,082,382 shares
of
our Class A Common Stock for approximately $6.3 million during the nine months
ended September 30, 2005.
In
connection with various financing arrangements during the nine months ended
September 30, 2005, we paid approximately $3.3 million of original issue
discount and $3.0 million in deferred financing fees and expenses.
Other
We
have
entered into interest rate exchange agreements with counterparties, which expire
from June 2005 through March 2009, to hedge $800.0 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 71% 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 $19.3 million of letters of credit were issued
to various parties as collateral for our performance relating 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)*:
|
|
Debt
|
Capital
Leases
|
Operating
Leases
|
Interest
Expense
(1)
|
Total
|
|
October
1, 2005 to September 30, 2006
|
$
218,625(2)
|
$
2,252
|
$
3,934
|
$
218,604
|
$
443,415
|
|
October
1, 2006 to September 30, 2007
|
64,875
|
1,612
|
3,051
|
209,264
|
278,802
|
|
October
1, 2007 to September 30, 2008
|
85,500
|
106
|
2,012
|
205,896
|
293,514
|
|
October
1, 2008 to September 30, 2009
|
110,375
|
—
|
1,528
|
201,385
|
313,288
|
|
October
1, 2009 to September 30, 2010
|
138,625
|
—
|
1,193
|
191,907
|
331,725
|
|
Thereafter
|
2,446,375
|
—
|
3,097
|
497,450
|
2,946,922
|
|
Total
cash obligations
|
$ 3,064,375
|
$
3,970
|
$
14,815
|
$
1,524,506
|
$
4,607,666
|
*
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.
(2) Includes
$172.5 million of convertible senior notes due July 2006.
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 of America. 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 that the application
of
the critical accounting policies discussed below requires significant judgments
and estimates on the part of management. For a summary of our accounting
policies, see Note 1 of our unaudited consolidated financial
statements.
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 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.
Allowance
for Doubtful Accounts
The
allowance for doubtful accounts represents our 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 resulted in a benefit to the consolidated statement
of operations of $0.9 million for the three and nine months ended September
30,
2005.
10
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 sheets and
recognize 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
We
capitalize the costs of new construction and replacement of our cable
transmission and distribution facilities; the addition of network and other
equipment, and new customer service installations. Capitalized costs include
all
direct labor and materials as well as certain indirect costs and are based
on
historical construction and installation costs. Capitalized costs are recorded
as additions to property, plant and equipment and depreciate over the life
of
the related asset. We perform periodic evaluations of certain estimates used
to
determine the amount and extent of such costs that are capitalized. Any changes
to these estimates, which may be significant, are applied prospectively in
the
periods in which the evaluations were completed.
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.
Intangibles
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. We completed our most recent annual
impairment test as of October 1, 2004, which reflected no impairment of our
franchise costs and goodwill. As of September 30, 2005, there were no events
since then that would require an analysis to be completed before the next 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 Activities-an
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 instrument’s
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.
Income
Taxes
We
provide for income taxes using the liability method in accordance with SFAS
No.
109, “Accounting
for Income Taxes,” which
requires an asset and liability based approach in accounting for income taxes.
We recognize deferred tax assets and liabilities for the future tax consequences
attributable to differences between the financial statement carrying amounts
of
existing assets and liabilities and their respective tax bases and expected
benefits of utilizing net operating loss carryforwards. We periodically assess
the likelihood of realization of deferred tax assets and net operating loss
carryforwards by considering the scheduled reversal of deferred tax liabilities,
projected taxable income in future periods and the evaluation of available
prudent tax planning strategies. If our assessment changes in the future, we
may
be required to adjust our valuation allowance against deferred tax assets,
resulting in either an increase or decrease in income tax expense in our
consolidated statement of operations.
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 company’s 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 its consolidated statement of operations and earnings per
share. We currently utilize 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. 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 Commission’s 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.
11
PART
II
ITEM
6. EXHIBITS
|
Exhibit
Number
|
Exhibit
Description
|
|
31.1
|
Rule
13a-14(a) Certifications
|
12
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the Registrant
has
duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
MEDIACOM
COMMUNICATIONS CORPORATION
June
29, 2006
By: /s/
Mark
E. Stephan
Mark
E.
Stephan
<
font id="TAB2" style="LETTER-SPACING: 9pt">
Executive
Vice President
and
<
font id="TAB2" style="LETTER-SPACING: 9pt"> Chief
Financial
Officer
Exhibit
31.1
CERTIFICATIONS
I,
Rocco
B. Commisso, certify that:
(1) I
have
reviewed this report on Form 10-Q of Mediacom Communications
Corporation;
|
(2)
|
Based
on my knowledge, this report does not contain any untrue statement
of a
material fact or omit to state a material fact necessary to make
the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
report; and
|
|
(3)
|
Based
on my knowledge, the financial statements, and other financial information
include 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.
|
June
29, 2006 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 Communications
Corporation;
|
(2)
|
Based
on my knowledge, this report does not contain any untrue statement
of a
material fact or omit to state a material fact necessary to make
the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
report; and
|
|
(3)
|
Based
on my knowledge, the financial statements, and other financial information
include 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.
|
June
29, 2006
Mark
E.
Stephan
<
font id="TAB2" style="LETTER-SPACING: 9pt">
Executive
Vice President
and
Chief
Financial
Officer