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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
________________
FORM 10-Q
________________
Quarterly Report Pursuant to Section 13 or 15 (d) of the
Securities Exchange Act of 1934
For the quarterly period ended June 30, 2002
Commission File 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 X No ____
-----
As of June 30, 2002, there were 90,659,096 shares of Class A common stock
and 29,282,990 shares of Class B common stock outstanding.
MEDIACOM COMMUNICATIONS CORPORATION AND SUBSIDIARIES
FORM 10-Q
FOR THE PERIOD ENDED JUNE 30, 2002
TABLE OF CONTENTS
PART I
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Page
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Item 1. Financial Statements
Consolidated Balance Sheets (unaudited) -
June 30, 2002 and December 31, 2001.............................................. 1
Consolidated Statements of Operations and Comprehensive Loss (unaudited) -
Three and Six Months Ended June 30, 2002 and 2001................................ 2
Consolidated Statements of Cash Flows (unaudited) -
Six Months Ended June 30, 2002 and 2001.......................................... 3
Notes to Consolidated Financial Statements (unaudited).............................. 4
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations....................................... 9
Item 3. Quantitative and Qualitative Disclosures about Market Risk............................ 18
PART II
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Item 4. Submission of Matters to a Vote of Security Holders................................... 19
Item 6. Exhibits and Reports on Form 8-K...................................................... 19
________________________
You should carefully review the information contained in this Quarterly
Report and in other reports or documents that we file from time to time with the
Securities and Exchange Commission (the "SEC"). In this Quarterly Report, we
state our beliefs of future events and of our future financial performance. In
some cases, you can identify those so-called "forward-looking statements" by
words such as "may," "will," "should," "expects," "plans," "anticipates,"
"believes," "estimates," "predicts," "potential," or "continue" or the negative
of those words and other comparable words. You should be aware that those
statements are only our predictions. Actual events or results may differ
materially. In evaluating those statements, you should specifically consider
various factors, including the risks discussed in our Annual Report on Form 10-K
for the year ended December 31, 2001 and other reports or documents that we file
from time to time with the SEC. Those factors may cause our actual results to
differ materially from any of our forward-looking statements. All
forward-looking statements attributable to us or a person acting on our behalf
are expressly qualified in their entirety by this cautionary statement.
PART I
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ITEM 1. FINANCIAL STATEMENTS
MEDIACOM COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(All dollar amounts in 000's)
(Unaudited)
June 30, December 31,
2002 2001
----------- -----------
ASSETS
Cash and cash equivalents $ 44,831 $ 63,307
Investments 4,070 4,070
Subscriber accounts receivable, net of allowance for doubtful accounts
of $3,442 and $3,243, respectively 38,104 29,818
Prepaid expenses and other assets 15,253 13,678
Investment in cable television systems:
Inventory 31,428 53,676
Property, plant and equipment, net of accumulated depreciation of
$495,612 and $374,268, respectively 1,359,616 1,280,530
Intangible assets, net of accumulated amortization of $272,192 and
$250,288, respectively 2,138,338 2,151,805
----------- -----------
Total investment in cable television systems 3,529,382 3,486,011
Other assets, net of accumulated amortization of $15,023 and
$11,474, respectively 48,572 52,163
----------- -----------
Total assets $ 3,680,212 $ 3,649,047
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Debt $ 2,900,000 $ 2,798,000
Accounts payable and accrued expenses 292,329 292,193
Deferred revenue 45,915 46,150
Deferred income tax liability 4,878 5,128
----------- -----------
Total liabilities $ 3,243,122 $ 3,141,471
----------- -----------
STOCKHOLDERS' EQUITY
Class A common stock, $.01 par value; 300,000,000 shares authorized;
90,659,096 and 90,539,380 shares issued and outstanding, as of
June 30, 2002 and December 31, 2001, respectively 906 905
Class B common stock, $.01 par value; 100,000,000 shares authorized;
29,282,990 and 29,342,990 shares issued and outstanding as of
June 30, 2002 and December 31, 2001, respectively 293 293
Additional paid in capital 976,950 974,760
Accumulated deficit (541,059) (468,382)
----------- -----------
Total stockholders' equity 437,090 507,576
----------- -----------
Total liabilities and stockholders' equity $ 3,680,212 $ 3,649,047
=========== ===========
The accompanying notes to consolidated financial
statements are an integral part of these statements.
1
MEDIACOM COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE LOSS
(All amounts in 000's, except per share data)
(Unaudited)
Three Months Ended June 30, Six Months Ended June 30,
-------------------------- ------------------------
2002 2001 2002 2001
--------- --------- --------- ---------
Revenues $ 230,792 $ 91,864 $ 450,339 $ 180,995
Costs and expenses:
Service costs 89,082 31,370 180,752 61,644
Selling, general and administrative
expenses 42,617 14,834 83,596 30,004
Corporate expenses 3,159 1,950 6,244 3,467
Depreciation and amortization 81,707 53,123 152,565 104,080
Non-cash stock charges relating to
corporate expenses 505 688 1,463 1,883
--------- --------- --------- ---------
Operating income (loss) 13,722 (10,101) 25,719 (20,083)
Interest expense, net 46,599 22,426 93,286 43,159
Loss (gain) on derivative instruments, net 1,716 (232) (853) 1,397
Other expenses (income) 2,869 361 5,913 (29,111)
--------- --------- --------- ---------
Net loss before provision for income taxes (37,462) (32,656) (72,627) (35,528)
Provision for income taxes 25 62 50 125
--------- --------- --------- ---------
Net loss before cumulative effect
of accounting change (37,487) (32,718) (72,677) (35,653)
Cumulative effect of accounting change,
net of tax -- -- -- (1,642)
--------- --------- --------- ---------
Net loss $ (37,487) $ (32,718) $ (72,677) $ (37,295)
Unrealized gain on investments -- 1,012 -- 326
--------- --------- --------- ---------
Comprehensive loss $ (37,487) $ (31,706) $ (72,677) $ (36,969)
========= ========= ========= =========
Basic and diluted loss per share:
Before cumulative effect of
accounting change $ (0.31) $ (0.35) $ (0.61) $ (0.39)
Cumulative effect of accounting
change -- -- -- (0.02)
--------- --------- --------- ---------
Loss per share $ (0.31) $ (0.35) $ (0.61) $ (0.41)
========= ========= ========= =========
Weighted average common shares
outstanding 119,942 92,921 119,917 91,447
The accompanying notes to consolidated financial
statements are an integral part of these statements.
2
MEDIACOM COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(All dollar amounts in 000's)
(Unaudited)
Six Months Ended June 30,
--------------------------
2002 2001
----------- -----------
CASH FLOWS PROVIDED BY OPERATING ACTIVITIES:
Net loss $ (72,677) $ (37,295)
Adjustments to reconcile net loss to net cash flows from operating
activities:
Depreciation and amortization 152,565 101,953
(Gain) loss on derivative instruments, net (853) 1,397
Vesting of management stock 1,463 1,883
Deferred income taxes (250) --
Amortization of SoftNet revenue -- (287)
Termination of SoftNet agreement -- (29,957)
Amortization of deferred financing costs 3,262 2,127
Cumulative effect of accounting change, net of tax -- 1,642
Changes in assets and liabilities, net of effects from acquisitions:
Subscriber accounts receivable, net (8,301) 828
Prepaid expenses and other assets (1,575) (4,487)
Accounts payable and accrued expenses 983 14,997
Deferred revenue (235) (121)
----------- -----------
Net cash flows provided by operating activities 74,382 52,680
----------- -----------
CASH FLOWS USED IN INVESTING ACTIVITIES:
Capital expenditures (186,928) (108,497)
Cash deposited in escrow -- (418,667)
Acquisitions of cable television systems (6,548) (308,116)
Other investment activities (1,868) (936)
Sale of short-term investments, net -- (264,924)
----------- -----------
Net cash flows used in investing activities (195,344) (1,101,140)
----------- -----------
CASH FLOWS PROVIDED BY FINANCING ACTIVITIES:
New borrowings 227,000 1,119,500
Repayment of debt (125,000) (471,000)
Net proceeds from sale of Class A common stock -- 433,019
Proceeds from issuance of common stock in employee stock purchase
plan and options exercised 728 340
Financing costs (242) (29,390)
----------- -----------
Net cash flows provided by financing activities 102,486 1,052,469
----------- -----------
Net (decrease) increase in cash and cash equivalents (18,476) 4,009
CASH AND CASH EQUIVALENTS, beginning of period 63,307 4,152
----------- -----------
CASH AND CASH EQUIVALENTS, end of period $ 44,831 $ 8,161
=========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for interest $ 101,764 $ 30,500
=========== ===========
The accompanying notes to consolidated financial
statements are an integral part of these statements.
3
MEDIACOM COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(1) Organization
Mediacom Communications Corporation ("MCC,") and collectively with its
direct and indirect subsidiaries, the ("Company") is involved in the acquisition
and development of cable television systems serving smaller cities and towns in
the United States. Through these cable systems, the Company provides
entertainment, information and telecommunications services to its subscribers.
As of June 30, 2002, the Company had acquired and was operating cable systems in
23 states, principally Alabama, California, Delaware, Florida, Georgia,
Illinois, Indiana, Iowa, Kentucky, Minnesota, Missouri, North Carolina and South
Dakota.
MCC, a Delaware corporation organized in November 1999, completed an
initial public offering on February 9, 2000. Prior to the initial public
offering, MCC had no assets, liabilities, contingent liabilities or operations.
Immediately prior to the completion of its initial public offering, MCC issued
shares of its Class A and Class B common stock in exchange for all of the
outstanding membership interests in Mediacom LLC, a New York limited liability
company organized in July 1995. As a result of this exchange, Mediacom LLC
became a wholly-owned subsidiary of MCC.
Mediacom Broadband LLC, a wholly-owned subsidiary of MCC, was organized as
a Delaware limited liability company in April 2001 for the purpose of acquiring
cable television systems from AT&T Broadband, LLC ("AT&T Broadband") in the
states of Georgia, Illinois, Iowa and Missouri (the "AT&T cable systems"). The
Company completed the acquisitions of the AT&T cable systems in June and July
2001.
(2) Statement of Accounting Presentation and Other Information
Basis of Preparation of Consolidated Financial Statements
The consolidated financial statements as of June 30, 2002 and 2001 are
unaudited. However, in the opinion of management, such statements include all
adjustments, including normal recurring adjustments, necessary for a fair
presentation of the results for the periods presented. The accounting policies
followed during such interim periods reported are in conformity with generally
accepted accounting principles in the United States of America and are
consistent with those applied during annual periods. For additional disclosures,
including a summary of the Company's accounting policies, the interim financial
statements should be read in conjunction with the Company's Annual Report on
Form 10-K for the year ended December 31, 2001 (File No. 0-29227). The results
of operations for the interim periods are not necessarily indicative of the
results that might be expected for future interim periods or for the full year
ending December 31, 2002. In accordance with EITF No. 01-09, the Company has
revised its classification of distribution fees, received in exchange for
carriage of programming services, from revenues to an offset to service costs in
its consolidated statements of operations and comprehensive loss. As a result,
the Company has reclassified 2001 amounts to conform with the 2002 presentation.
Cumulative Effect of Accounting Change
Effective January 1, 2001, the Company adopted Statement of Financial
Accounting Standards No. 133 ("SFAS 133"), "Accounting for Derivative
Instruments and Hedging Activities." As a result, the Company recorded an after
tax charge of approximately $1.6 million, as a change in accounting principle,
in the first quarter of 2001.
Reclassifications
Certain reclassifications have been made to prior year's amounts to conform
to the current year's presentation.
4
MEDIACOM COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Recent Accounting Pronouncements
Effective January 1, 2002, the Company adopted, Statement of Financial
Accounting Standards No. 141 ("SFAS 141") "Business Combinations" and No. 142
("SFAS 142") "Goodwill and Other Intangible Assets". SFAS 141 requires all
business combinations initiated after June 30, 2001 to be accounted for using
the purchase method. Adoption of SFAS 141 had no effect on the Company's results
of operations or financial position as the Company accounts for all acquisitions
under the purchase method. The provisions of SFAS 142 prohibit the amortization
of goodwill and indefinite-lived intangible assets, which are required to be
tested annually for impairment. The Company has determined that its cable
franchise costs are indefinite-lived assets. The impact of adopting SFAS 142 was
to reduce amortization expense by $72.9 million for the six months ended June
30, 2002. Based on the Company's review, there has been no impairment of
goodwill and indefinite-lived intangible assets under SFAS 142.
The following table provides a reconciliation of the pro forma results of
operations for the six months ended June 30, 2001 to the pro forma net loss that
would have been reported had SFAS No. 142 been applied as of January 1, 2001,
assuming the purchase of the AT&T cable systems had been consummated as of
January 1, 2001 (dollars in thousands):
Reported pro forma net loss.............................. $ (114,674)
Add back: franchise cost amortization................. 72,261
Add back: goodwill amortization....................... 650
-----------
Adjusted pro forma net loss.............................. $ (41,763)
===========
Reported pro forma basic and diluted loss per share...... $ (1.25)
Add back: franchise cost amortization................. .79
Add back: goodwill amortization....................... .01
-----------
Adjusted pro forma basic and diluted loss per share...... $ (.45)
===========
As of June 30, 2002, intangible assets subject to amortization principally
consisted of subscriber lists, which are being amortized over five years, and
covenants not to compete, which are being amortized over three to seven years.
As of June 30, 2002, these amortizable intangible assets had a gross value of
$223.3 million, with accumulated amortization of $114.2 million. The Company's
estimated aggregate amortization expense for the remainder of 2002 through 2006
is $21.9 million, $37.1 million, $16.7 million, $16.7 million and $16.7 million,
respectively.
In July 2001, the FASB issued Statement of Financial Accounting Standards
No. 143 ("SFAS 143"), "Accounting for Asset Retirement Obligations," which
addresses financial accounting and reporting for obligations associated with the
retirement of tangible long-lived assets and the associated asset retirement
costs. SFAS 143 will become effective for fiscal years beginning after June 15,
2002. The Company does not expect that adoption of SFAS 143 will have a material
impact on its results of operations or financial position.
In August 2001, the FASB issued Statement of Financial Accounting Standards
No. 144 ("SFAS 144") "Accounting for the Impairment or Disposal of Long-Lived
Assets," which addresses financial accounting and reporting for the impairment
or disposal of long-lived assets and provides guidance on classification and
accounting for such assets when held for sale or abandonment. The Company
adopted this standard effective January 1, 2002 and there was no impact on its
results of operations or financial position.
5
MEDIACOM COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(3) Acquisitions
The Company made acquisitions of cable systems in 2002 and 2001 to increase
the number of customers and markets it serves. These acquisitions were accounted
for using the purchase method of accounting, and accordingly, the purchase price
of the acquired systems has been allocated to the assets acquired and
liabilities assumed at their estimated fair values at their respective date of
acquisition. The results of operations of the acquired systems have been
included with those of the Company since the dates of acquisition.
2002
During the three months ended March 31, 2002, the Company acquired cable
systems serving approximately 3,000 basic subscribers for an aggregate purchase
price of approximately $6.5 million. The purchase price has been preliminarily
allocated to intangible assets. The cable systems serve communities contiguous
with the Company's existing operations. These acquisitions were financed with
borrowings under the Company's subsidiary credit facilities.
2001
On June 29, 2001, the Company acquired cable systems serving approximately
94,000 basic subscribers in the state of Missouri from affiliates of AT&T
Broadband, for a purchase price of approximately $300.0 million. The purchase
price has been preliminarily allocated as follows: approximately $82.2 million
to property, plant and equipment and approximately $217.8 million to intangible
assets. Such allocations are subject to adjustments based upon the final
appraisal information received by the Company. This acquisition was financed
with a portion of the net proceeds from the Company's public offering of 29.9
million shares of its Class A common stock.
On July 18, 2001, the Company acquired cable systems serving approximately
706,000 basic subscribers in the states of Georgia, Illinois and Iowa from
affiliates of AT&T Broadband, for an aggregate purchase price of approximately
$1.77 billion. The purchase price has been preliminarily allocated as follows:
approximately $478.9 million to property, plant and equipment and approximately
$1.29 billion to intangible assets. Such allocations are subject to adjustments
based upon the final appraisal information received by the Company. This
acquisition was financed with a portion of the net proceeds from the Company's
public offerings of 29.9 million shares of its Class A common stock and its 5
1/4% convertible senior notes due 2006, the net proceeds of its 11% senior notes
due 2013 and borrowings under the Company's subsidiary credit facilities.
The opening balance sheet for the cable systems acquired in 2001 is as
follows (dollars in thousands):
Accounts receivable.................................... $ 5,758
Intangible assets...................................... 1,551,188
Property, plant and equipment.......................... 562,646
Accrued expenses....................................... (6,256)
------------
Total.............................................. $ 2,113,336
============
6
MEDIACOM COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Summarized below are the pro forma unaudited results of operations for the
six months ended June 30, 2001, assuming the purchase of the AT&T cable systems
had been consummated as of January 1, 2001. Adjustments have been made to
depreciation and amortization, reflecting the fair value of the assets acquired,
and to interest expense reflecting the debt incurred to finance the
acquisitions. The pro forma results may not be indicative of the results that
would have occurred if the acquisitions had been completed at the beginning of
the period presented or which may be obtained in the future (in thousands,
except per share amounts):
Revenues................................................ $ 410,986
Operating loss.......................................... (41,767)
Net loss................................................ (114,674)
Basic and diluted loss per share........................ $ (1.25)
Weighted average common shares outstanding.............. 91,447
(4) Loss Per Share
The Company calculates loss per share in accordance with Statement of
Financial of Accounting Standards No. 128 ("SFAS 128"), "Earnings per Share."
Since the Company has reported a net loss for the periods, the effects of the
inclusion of stock options and convertible debt would be anti-dilutive and
therefore, in accordance with SFAS 128, are not included in the computation of
diluted loss per share.
(5) Debt
As of June 30, 2002 and December 31, 2001, debt consisted of:
June 30, December 31,
2002 2001
---------- ----------
(dollars in thousands)
Bank credit facilities $1,502,500 $1,400,500
8 1/2% senior notes 200,000 200,000
7 7/8% senior notes 125,000 125,000
9 1/2% senior notes 500,000 500,000
11% senior notes 400,000 400,000
5 1/4% convertible senior notes 172,500 172,500
---------- ----------
$2,900,000 $2,798,000
========== ==========
The average interest rate on outstanding debt under the bank credit
facilities was 3.7% for the three months ended June 30, 2002 before giving
effect to the interest rate exchange agreements discussed below. As of June 30,
2002, the Company had unused credit commitments of approximately $990.5 million
under its bank credit facilities, of which about $794.0 million could be
borrowed and used for general corporate purposes under the most restrictive
covenants in the Company's debt arrangements. The Company was in compliance with
all debt covenants as of June 30, 2002.
The Company uses interest rate exchange agreements in order to fix the
interest rate for the duration of the contract as a hedge against interest rate
volatility. As of June 30, 2002, the Company had entered into interest rate
exchange agreements with various banks pursuant to which the interest rate on
$320.0 million is fixed at a weighted average rate of approximately 5.5%, plus
the average applicable margin over the eurodollar rate option under the bank
credit agreements. Under the terms of the interest rate exchange agreements,
which expire from 2002 through 2007, the Company is exposed to credit loss in
the event of nonperformance by the other parties. However, the Company does not
anticipate their nonperformance.
7
MEDIACOM COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The fair value of the interest rate exchange agreements is the estimated
amount that the Company would receive or pay to terminate such agreements,
taking into account current interest rates and the current creditworthiness of
the Company's counterparties. At June 30, 2002, the Company would have paid
approximately $9.2 million if the exchange agreements were terminated, inclusive
of accrued interest.
(6) SoftNet
As of January 31, 2001, the Company formally terminated its relationship
with SoftNet in all material respects. The Company recognized revenue of
approximately $0.3 million for the period ended January 31, 2001 and recognized
the remaining deferred revenue of approximately $30.0 million as other income in
the consolidated statements of operations in the first quarter of 2001.
8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the Company's
consolidated financial statements as of and for the three and six months ended
June 30, 2002 and 2001 and with the Company's annual report on Form 10-K for the
year ended December 31, 2001.
Organization
Mediacom Communications Corporation ("MCC") was organized as a Delaware
corporation in November 1999 and completed an initial public offering in
February 2000. Immediately prior to the completion of its initial public
offering, MCC issued shares of common stock in exchange for all of the
outstanding membership interests in Mediacom LLC, a New York limited liability
company, upon which Mediacom LLC became MCC's wholly-owned subsidiary. Mediacom
LLC commenced operations in March 1996.
Mediacom Broadband LLC, a wholly-owned subsidiary of MCC, was organized as
a Delaware limited liability company in April 2001 for the purpose of acquiring
cable systems from AT&T Broadband, LLC. Mediacom Broadband LLC's operating
subsidiaries completed the acquisitions of the AT&T cable systems in June and
July 2001.
Acquisitions
The Company has significantly expanded its business through acquisitions.
All acquisitions have been accounted for under the purchase method of accounting
and, therefore, the Company's historical results of operations include the
results of operations for each acquired system subsequent to its respective
acquisition date. These acquisitions affect the comparability of the Company's
historical results of operations.
2002 Acquisitions
During the three months ended March 31, 2002, the Company acquired cable
systems serving approximately 3,000 basic subscribers for an aggregate purchase
price of approximately $6.5 million. These acquisitions were financed with
borrowings under the Company's bank credit facilities. The cable systems serve
communities contiguous with the Company's existing operations.
2001 Acquisitions
On June 29, 2001, the Company completed the acquisition of AT&T cable
systems serving approximately 94,000 basic subscribers in the state of Missouri.
The purchase price for these cable systems was approximately $300.0 million.
On July 18, 2001, the Company completed the acquisitions of AT&T cable
systems serving approximately 706,000 basic subscribers in the states of
Georgia, Illinois and Iowa. The aggregate purchase price for these cable systems
was approximately $1.77 billion.
General
The Company has generated significant increases in revenues principally as
a result of its acquisition activities and increases in monthly revenues per
basic subscriber. Approximately 89.2% of the Company's revenues for the six
months ended June 30, 2002 are attributable to video revenues from monthly
subscription fees charged to customers for the Company's core cable television
services, including basic, expanded basic and premium programming, digital cable
television programming services, wire maintenance, equipment rental, services to
commercial establishments, pay-per-view charges, installation and reconnection
fees, late payment fees, and other ancillary revenues. Data revenues from cable
modem service and advertising revenues represent 6.8% and 4.0% of revenues,
respectively. Franchise fees charged to customers are included in their
corresponding revenue category.
9
The Company's operating expenses consist of service costs and selling,
general and administrative expenses directly attributable to its cable systems.
Service costs include fees paid to programming suppliers, expenses related to
copyright fees, wages and salaries of technical personnel, high-speed Internet
access costs and plant operating costs. Programming costs have historically
increased at rates in excess of inflation due to increases in the number of
programming services the Company has offered and significant increases in the
rates charged for the programming services already carried on the Company's
cable systems. Under the Federal Communication Commission's existing cable rate
regulations, the Company's allowed to increase its rates for cable television
services to more than cover any increases in the programming costs. However,
competitive conditions or other factors in the marketplace may limit the
Company's ability to increase its rates. Selling, general and administrative
expenses include wages and salaries for customer service and administrative
personnel, franchise fees and expenses related to billing, marketing, bad debt,
advertising and office administration. Corporate expenses reflect compensation
of corporate employees and other corporate overhead.
The high level of depreciation and amortization associated with the
Company's acquisition activities and capital investment program, as well as the
interest expense related to the Company's financing activities, have caused the
Company to report net losses in its limited operating history. The Company
believes that such net losses are common for cable television companies and
anticipates that it will continue to incur net losses for the foreseeable
future.
Operating cash flow represents operating income (loss) before depreciation
and amortization and non-cash stock charges relating to corporate expenses.
Operating cash flow:
o is not intended to be a performance measure that should be regarded as
an alternative either to operating income (loss) or net income (loss)
as an indicator of operating performance, or to the statement of cash
flows as a measure of liquidity;
o is not intended to represent funds available for debt service,
dividends, reinvestment or other discretionary uses; and
o should not be considered in isolation or as a substitute for measures
of performance prepared in accordance with generally accepted
accounting principles.
Operating cash flow is included herein because the Company's management
believes that operating cash flow is a meaningful measure of performance as it
is commonly used by the cable television industry and by the investment
community to analyze and compare cable television companies. The Company's
definition of operating cash flow may not be identical to similarly titled
measures reported by other companies.
Critical Accounting Policies
The following represents the Company's critical accounting policies which
reflect significant judgments and uncertainties and could possibly result in
materially different results under different conditions or assumptions.
Property, Plant and Equipment
In accordance with Statement of Financial Accounting Standards No. 51,
"Financial Reporting by Cable Television Companies," the Company capitalizes a
portion of direct and indirect costs related to the construction, replacement
and installation of property, plant and equipment. Capitalized costs are
recorded as additions to property, plant and equipment and depreciated over the
life of the related assets. The Company performs periodic evaluations of the
estimates used to determine the amount of costs that are capitalized.
Impairment of Long-Lived Assets
The Company follows the provisions of Statement of Financial Accounting
Standards No. 121 ("SFAS 121"), "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed of," which requires that
long-lived assets and certain identifiable intangibles to be held and used by
any entity be reviewed for impairment at each year end and whenever events or
changes in circumstances indicate the carrying amount of an asset may not be
recoverable. Based on the Company's review, there has been no impairment of
long-lived assets under SFAS 121.
10
Goodwill and Other Intangible Assets
Effective January 1, 2002, the Company adopted Statement of Financial
Accounting Standards No. 142 ("SFAS 142"), "Goodwill and Other Intangible
Assets." The provisions of SFAS 142 prohibit the amortization of goodwill and
indefinite-lived intangible assets and require assets to be tested annually for
impairment. The Company has determined that its cable franchise costs are
indefinite-lived assets. The impact of adopting SFAS 142 was to reduce
amortization expense by $72.9 million for the six months ended June 30, 2002.
Based on the Company's review, there has been no impairment of goodwill and
indefinite-lived intangible assets under SFAS 142.
Actual Results of Operations
The following historical information includes the results of operations of
the AT&T cable systems, acquired in June and July 2001, only for that portion of
the respective period that such cable television systems were owned by the
Company.
Basic subscribers were 1,585,000 at June 30, 2002, as compared to 868,000
at June 30, 2001, which included 94,000 basic subscribers in Missouri acquired
on June 29, 2001 (the "Missouri systems") as part of the AT&T cable systems.
Excluding the AT&T cable systems, basic subscribers declined to 752,000 at June
30, 2002 from 774,000 at June 30, 2001. The Company acquired 3,000 basic
subscribers during the first quarter of 2002.
Digital customers were 329,000 at June 30, 2002, as compared to 86,000 at
June 30, 2001, which included 20,000 digital customers in the Missouri systems.
Excluding the AT&T cable systems, digital customers increased to 102,000 at
June 30, 2002 from 66,000 at June 30, 2001.
Data customers were 145,000 at June 30, 2002, as compared to 31,000 at June
30, 2001, which included 10,000 data customers in the Missouri systems.
Excluding the AT&T cable systems, data customers increased to 56,000 at June 30,
2002 from 21,000 at June 30, 2001.
Three Months Ended June 30, 2002 Compared to Three Months Ended June 30, 2001
Revenues. Revenues increased by 151.2% to $230.8 million for the three
months ended June 30, 2002, as compared to $91.9 million for the three months
ended June 30, 2001. Of the revenue increase of $138.9 million, $117.1 million
was attributable to the acquisitions of the AT&T cable systems. Revenues by
service offering are as follows (dollars in millions):
Three Months Ended June 30,
--------------------------------------------
2002 2001
-------------------- --------------------
% of % of
Amount Revenues Amount Revenues
------ -------- ------ --------
Video ......... $204.4 88.6% $ 88.8 96.6%
Data .......... 16.6 7.2% 2.0 2.2%
Advertising ... 9.8 4.2% 1.1 1.2%
------ ------ ------ ------
$230.8 100.0% $ 91.9 100.0%
====== ====== ====== ======
Video revenues increased by 130.2% to $204.4 million for the three months
ended June 30, 2002, as compared to $88.8 million for the three months ended
June 30, 2001. Of the video revenue increase of $115.6 million, $102.4 million
was attributable to the acquisitions of the AT&T cable systems. Excluding the
effects of the AT&T cable systems acquisitions, video revenues increased
primarily due to basic rate increases largely associated with new programming
introductions and to customer growth in the Company's digital cable services.
11
Data revenues increased to $16.6 million for the three months ended June
30, 2002, as compared to $2.0 million for the three months ended June 30, 2001.
Of the data revenue increase of $14.6 million, $6.8 million was attributable to
the acquisitions of the AT&T cable systems. Excluding the effects of the AT&T
cable systems acquisitions, data revenues increased primarily due to customer
growth in the Company's high-speed Internet access service.
Advertising revenues increased to $9.8 million for the three months ended
June 30, 2002, as compared to $1.1 million for the three months ended June 30,
2001. Of the advertising revenue increase of $8.7 million, $7.9 million was
attributable to the acquisitions of the AT&T cable systems. Excluding the
effects of the AT&T cable systems acquisitions, advertising revenues increased
due to greater advertising capacity resulting from new channel additions.
Service costs. Service costs increased 184.0% to $89.1 million for the
three months ended June 30, 2002, as compared to $31.4 million for the three
months ended June 30, 2001. Service costs increased due to the acquisitions of
the AT&T cable systems, higher programming expenses, including rate increases by
programming suppliers for existing services and the costs of new channel
additions, and greater service costs associated with customer growth in the
Company's digital cable and high-speed Internet access services. As a percentage
of revenues, service costs were 38.6% for the three months ended June 30, 2002,
as compared with 34.1% for the three months ended June 30, 2001.
Selling, general and administrative expenses. Selling, general and
administrative expenses increased 187.3% to $42.6 million for the three months
ended June 30, 2002, as compared to $14.8 million for the three months ended
June 30, 2001. Selling, general and administrative expenses increased primarily
as a result of the acquisitions of the AT&T cable systems, and higher marketing
expenses and taxes. As a percentage of revenues, selling, general and
administrative expenses were 18.5% for the three months ended June 30, 2002 as
compared with 16.1% for the three months ended June 30, 2001.
Corporate expenses. Corporate expenses increased 62.0% to $3.2 million for
the three months ended June 30, 2002, as compared to $2.0 million for the three
months ended June 30, 2001. This was principally due to an increase in corporate
employees and their related costs. As a percentage of revenues, corporate
expenses were 1.4% for the three months ended June 30, 2002 as compared with
2.1% for the three months ended June 30, 2001.
Depreciation and amortization. Depreciation and amortization increased
53.8% to $81.7 million for the three months ended June 30, 2002, as compared to
$53.1 million for the three months ended June 30, 2001. This was due to the
Company's purchase of the AT&T cable systems and capital expenditures associated
with the upgrade of the Company's cable systems, partially offset by the impact
of adopting SFAS 142, which reduced amortization expense by $36.5 million during
the three months ended June 30, 2002.
Non-cash stock charges relating to corporate expenses. Non-cash stock
charges relating to corporate expenses decreased 26.6% to $0.5 million for the
three months ended June 30, 2002, as compared to $0.7 million for the three
months ended June 30, 2001. This charge represents vesting in equity interests
granted to certain members of MCC's management team in 1999.
Interest expense, net. Interest expense, net, increased 107.8% to $46.6
million for the three months ended June 30, 2002 as compared to $22.4 million
for the three months ended June 30, 2001. This was due primarily to additional
indebtedness resulting from the acquisitions of the AT&T cable systems,
partially offset by lower interest rates on the Company's variable rate debt.
Loss (gain) on derivative instruments, net. Loss on derivative instruments,
net, was $1.7 million for the three months ended June 30, 2002, as compared to a
gain on derivative instruments, net, of $0.2 million for the three months ended
June 30, 2001 primarily due to declining interest rates.
Other expenses (income). Other expenses were $2.9 million for the three
months ended June 30, 2002, as compared to $0.4 million for the three months
ended June 30, 2001. This was due primarily to commitment fees for the new bank
credit facility related to the Company's acquisitions of the AT&T cable systems
and amortization of deferred financing costs.
Net loss. Due to the factors described above, the Company generated a net
loss of $37.5 million for the three months ended June 30, 2002 as compared to a
net loss of $32.7 million for the three months ended June 30, 2001.
12
Operating cash flow. Operating cash flow increased 119.5% to $95.9 million
for the three months ended June 30, 2002, as compared to $43.7 million for the
three months ended June 30, 2001. Operating cash flow increased primarily due to
the acquisitions of the AT&T cable systems, basic rate increases in the
Company's video services and the increase in revenue resulting from customer
growth in the Company's digital cable and high-speed Internet access services,
partially offset by increases in programming and selling, general and
administrative expenses. As a percentage of revenues, operating cash flow was
41.6% for the three months ended June 30, 2002 as compared with 47.6% for the
three months ended June 30, 2001. The decrease was primarily due to the
acquisitions of the AT&T cable systems, which had lower operating cash flow
margins than the Company's other cable systems. The lower operating cash flow
margins for the AT&T cable systems were primarily due to their higher
programming costs as a percentage of revenues.
Six Months Ended June 30, 2002 Compared to Six Months Ended June 30, 2001
Revenues. Revenues increased by 148.8% to $450.3 million for the six months
ended June 30, 2002, as compared to $181.0 million for the six months ended June
30, 2001. Of the revenue increase of $269.3 million, $230.0 million was
attributable to the acquisitions of the AT&T cable systems. Revenues by service
offering are as follows (dollars in millions):
Six Months Ended June 30,
------------------------------------------
2002 2001
------------------- ------------------
% of % of
Amount Revenues Amount Revenues
------ -------- ------ --------
Video ........ $401.9 89.2% $175.0 96.7%
Data ......... 30.4 6.8% 3.8 2.1%
Advertising .. 18.0 4.0% 2.2 1.2%
------ ------ ------ ------
$450.3 100.0% $181.0 100.0%
====== ====== ====== ======
Video revenues increased by 129.7% to $401.9 million for the six months
ended June 30, 2002, as compared to $175.0 million for the six months ended June
30, 2001. Of the video revenue increase of $226.9 million, $203.2 million was
attributable to the acquisitions of the AT&T cable systems. Excluding the
effects of the AT&T cable systems acquisitions, video revenues increased
primarily due to basic rate increases largely associated with new programming
introductions and to customer growth in the Company's digital cable services.
Data revenues increased to $30.4 million for the six months ended June 30,
2002, as compared to $3.8 million for the six months ended June 30, 2001. Of the
data revenue increase of $26.6 million, $12.4 million was attributable to the
acquisitions of the AT&T cable systems. Excluding the effects of the AT&T cable
systems acquisitions, data revenues increased primarily due to customer growth
in the Company's high-speed Internet access service.
Advertising revenues increased to $18.0 million for the six months ended
June 30, 2002, as compared to $2.2 million for the six months ended June 30,
2001. Of the advertising revenue increase of $15.8 million, $14.4 million was
attributable to the acquisitions of the AT&T cable systems. Excluding effects of
the AT&T cable systems acquisitions, advertising revenues increased due to
greater advertising capacity resulting from new channel additions.
Service costs. Service costs increased 193.2% to $180.8 million for the six
months ended June 30, 2002, as compared to $61.6 million for the six months
ended June 30, 2001. Service costs increased due to the acquisitions of the AT&T
cable systems, higher programming expenses, including rate increases by
programming suppliers for existing services and the cost of new channel
additions, greater service costs associated with customer growth in the
Company's digital cable and high-speed Internet access services and
non-recurring incremental costs of $4.3 million related to the Company's
high-speed Internet transition completed in February 2002. As a percentage of
revenues, service costs were 40.1% for the six months ended June 30, 2002, as
compared with 34.1% for the six months ended June 30, 2001.
13
Selling, general and administrative expenses. Selling, general and
administrative expenses increased 178.6% to $83.6 million for the six months
ended June 30, 2002, as compared to $30.0 million for the six months ended June
30, 2001. Selling, general and administrative expenses increased primarily as a
result of the acquisitions of the AT&T cable systems, and higher marketing
expenses and taxes. As a percentage of revenues, selling, general and
administrative expenses were 18.6% for the six months ended June 30, 2002 as
compared with 16.6% for the six months ended June 30, 2001.
Corporate expenses. Corporate expenses increased 80.1% to $6.2 million for
the six months ended June 30, 2002, as compared to $3.5 million for the six
months ended June 30, 2001. This was principally due to an increase in corporate
employees and their related costs. As a percentage of revenues, corporate
expenses were 1.4% for the six months ended June 30, 2002 as compared with 1.9%
for the six months ended June 30, 2001.
Depreciation and amortization. Depreciation and amortization increased
46.6% to $152.6 million for the six months ended June 30, 2002, as compared to
$104.1 million for the six months ended June 30, 2001. This increase was due to
the Company's purchase of the AT&T cable systems and capital expenditures
associated with the upgrade of the Company's cable systems, partially offset by
the impact of adopting SFAS 142, which reduced amortization expense by $72.9
million during the six months ended June 30, 2002.
Non-cash stock charges relating to corporate expenses. Non-cash stock
charges relating to corporate expenses decreased 22.3% to $1.5 million for the
six months ended June 30, 2002, as compared to $1.9 million for the six months
ended June 30, 2001. This charge represents vesting in equity interests granted
to certain members of MCC's management team in 1999.
Interest expense, net. Interest expense, net, increased 116.1% to $93.3
million for the six months ended June 30, 2002 as compared to $43.2 million for
the six months ended June 30, 2001. This was due primarily to additional
indebtedness resulting from the acquisitions of the AT&T cable systems,
partially offset by lower interest rates on the Company's variable rate debt.
Loss (gain) on derivative instruments, net. Gain on derivative instruments,
net, was $0.9 million for the six months ended June 30, 2002, as compared to
loss on derivative instruments, net, of $1.4 million for the six months ended
June 30, 2001 primarily due to the decrease in the time to maturity of the
Company's derivative instruments.
Other expenses (income). Other expenses were $5.9 million for the six
months ended June 30, 2002, as compared to $29.1 million of other income for the
six months ended June 30, 2001. Other expenses represented fees on unused credit
commitments under the Company's bank credit facilities, including the new credit
arrangement for the acquisition of the AT&T cable systems, and amortization of
deferred financing costs. Other income reflected the recognition of the
remaining $30.0 million of deferred revenue resulting from the termination of
the Company's contract with SoftNet.
Net loss. Due to the factors described above, the Company generated a net
loss of $72.7 million for the six months ended June 30, 2002 as compared to a
net loss of $37.3 million for the six months ended June 30, 2001.
Operating cash flow. Operating cash flow increased 109.3% to $179.7 million
for the six months ended June 30, 2002, as compared to $85.9 million for the six
months ended June 30, 2001. Operating cash flow increased primarily due to the
acquisitions of the AT&T cable systems, basic rate increases in the Company's
video services and the increase in revenue resulting from customer growth in the
Company's digital cable and high-speed Internet access services, partially
offset by increases in programming and selling, general and administrative
expenses and the non-recurring incremental costs related to the Company's
high-speed Internet transition. As a percentage of revenues, operating cash flow
was 39.9% for the six months ended June 30, 2002 as compared with 47.4% for the
six months ended June 30, 2001. The decrease was primarily due to the
acquisitions of the AT&T cable systems, which had lower operating cash flow
margins than the Company's other cable systems and the non-recurring incremental
costs related to the Company's high-speed Internet transition. The lower
operating cash flow margins for the AT&T cable systems were primarily due to
their higher programming costs as a percentage of revenue.
14
Liquidity and Capital Resources
The Company's business requires substantial capital for the upgrade,
expansion and maintenance of its cable network. In addition, the Company has
pursued, and will continue to pursue, a business strategy that includes
selective acquisitions. The Company has funded and will continue to fund its
working capital requirements, capital expenditures and acquisitions through a
combination of internally generated funds, long-term borrowings and equity
financings.
Investing Activities
The Company's capital expenditures were $186.9 million for six months ended
June 30, 2002. As of June 30, 2002, approximately 85% of the Company's cable
network was upgraded with 550MHz to 870MHz bandwidth capacity and about 78% of
the Company's homes passed were activated with two-way communications
capability. As of June 30, 2002, the Company's digital cable service was
available to approximately 1.5 million basic subscribers, and the Company's
cable modem service was marketed to about 1.9 million homes passed by the
Company's cable systems.
The Company plans to continue its aggressive network upgrade program and
expects that approximately 94% of its cable network will be upgraded with 550MHz
to 870MHz bandwidth capacity and about 88% of the Company's homes passed will
have two-way communications capability by year end 2002. To achieve these
targets and to fund other requirements, including the infrastructure for the
Company's high-speed Internet service, cable modems, digital converters, new
plant construction, headend eliminations, regional fiber interconnections and
network repair and maintenance, the Company expects to invest between $390.0
million and $410.0 million in capital expenditures in 2002. This represents a
reduction of $20.0 million to previous guidance due to enhanced labor
productivity, discounts on material and equipment prices and an anticipated
reduction in the purchase of customer premise equipment.
On June 29, 2001, the Company completed the acquisition of AT&T cable
systems serving approximately 94,000 basic subscribers in Missouri. The purchase
price for the Missouri systems was approximately $300.0 million.
On July 18, 2001, the Company completed the acquisitions of AT&T cable
systems serving approximately 706,000 basic subscribers in Georgia, Illinois and
Iowa. The aggregate purchase price for these cable systems was approximately
$1.77 billion.
During the three months ended March 31, 2002, the Company completed
acquisitions of cable systems serving approximately 3,000 basic subscribers for
an aggregate purchase price of approximately $6.5 million. The cable systems
serve communities contiguous with the Company's existing operations.
Financing Activities
To finance the Company's acquisitions and network upgrade program and to
provide liquidity for future capital needs the Company completed the undernoted
financing arrangements.
On January 24, 2001, the Company's direct and indirect subsidiaries,
Mediacom LLC and Mediacom Capital Corporation, a New York corporation, completed
an offering of $500.0 million of 9 1/2% senior notes due January 2013. Interest
on 9 1/2% senior notes is payable semi-annually on January 15 and July 15, which
commenced on July 15, 2001. Approximately $467.5 million of the net proceeds
were used to repay a substantial portion of the indebtedness outstanding under
the Company's bank credit facilities and related accrued interest. The
balance of the net proceeds was used for general corporate purposes.
On June 27, 2001, the Company completed a public offering of 29.9 million
shares of its Class A common stock at $15.22 per share for total net proceeds of
approximately $432.9 million. The net proceeds from this offering were used to
pay a portion of the purchase price for the acquisitions of AT&T cable systems.
On June 27, 2001, the Company completed a public offering of $172.5 million
of 5 1/4% convertible senior notes due July 2006. Interest on the 5 1/4%
convertible senior notes is payable semi-annually on January 1 and July 1 of
each year, which commenced on January 1, 2002. The convertible senior notes are
convertible at any time at the option of the holder into the Company's Class A
common stock at an initial conversion rate of 53.4171 shares per $1,000
principal amount of notes, which is equivalent to a price of $18.72 per share.
The conversion rate is subject to
15
adjustment, as defined in the indenture to the convertible senior notes. The
Company may redeem the convertible senior notes at 101.313% of par value from
July 5, 2004 through June 30, 2005 and at par value thereafter. The net proceeds
from this offering were used to pay a portion of the purchase price for the
acquisitions of the AT&T cable systems.
On June 29, 2001, the Company's direct and indirect subsidiaries, Mediacom
Broadband LLC and Mediacom Broadband Corporation, a Delaware corporation,
completed an offering of $400.0 million of 11% senior notes due July 2013.
Interest on the 11% senior notes is payable semi-annually on January 15 and July
15 of each year, which commenced on January 15, 2002. The net proceeds from this
offering were used to pay a portion of the purchase price for the acquisitions
of the AT&T cable systems.
The operating subsidiaries of Mediacom Broadband LLC have a $1.4 billion
bank credit facility expiring in September 2010, of which $822.0 million was
outstanding as of June 30, 2002. The operating subsidiaries of Mediacom LLC have
two bank credit facilities, aggregating $1.1 billion, of which $680.5 million
was outstanding as of June 30, 2002. Mediacom LLC's bank credit facilities
expire in September 2008 and December 2008, however, their final maturities are
subject to earlier repayment on dates ranging from June 2007 to December 2007 if
the Company does not refinance its $200.0 million 8 1/2% senior notes due April
2008 prior to March 31, 2007.
The Company has entered into interest rate exchange agreements, which
expire from 2002 through 2007, to hedge $420.0 million of floating rate debt,
including $100.0 million of interest rate exchange agreements completed
subsequent to June 30, 2002. Under the terms of all of the Company's interest
rate exchange agreements, the Company is exposed to credit loss in the event of
nonperformance by the other parties to the interest rate exchange agreements.
However, the Company does not anticipate their nonperformance.
On February 4, 2002, the Company filed a registration statement with the
SEC under which the Company may sell any combination of common and preferred
stock, debt securities, warrants and subscription rights, for a maximum
aggregate amount of $1.5 billion. The SEC declared this registration statement
effective on February 13, 2002. The Company has not issued any securities under
this registration statement.
As of June 30, 2002, the Company's total debt was approximately $2.9
billion. On such date, the Company had about $990.5 million of unused credit
commitments under all of its credit facilities, of which about $794.0 million
could be borrowed and used for general corporate purposes under the most
restrictive covenants in the Company's debt arrangements. As of the date of this
report, about 62% of the Company's outstanding indebtedness is at fixed interest
rates or subject to interest rate protection and the Company's weighted average
cost of indebtedness, including the Company's interest rate exchange agreements,
is approximately 6.6%. As of June 30, 2002, the Company was in compliance with
all debt covenants.
Although the Company has not generated earnings sufficient to cover fixed
charges, the Company has generated cash and obtained financing sufficient to
meet its debt service, working capital, capital expenditure and acquisition
requirements. The Company expects that it will continue to be able to generate
funds and obtain financing sufficient to service the Company's obligations and
complete any future acquisitions. There can be no assurance that the Company
will be able to obtain sufficient financing, or, if it were able to do so, that
the terms would be favorable to the Company.
Cumulative Effect of Accounting Change
Effective January 1, 2001, the Company adopted Statement of Financial
Accounting Standards No. 133 ("SFAS 133"), "Accounting for Derivative
Instruments and Hedging Activities". As a result, the Company recorded an after
tax charge of approximately $1.6 million, as a change in accounting principle,
in the first quarter of 2001.
16
Recent Accounting Pronouncements
Effective January 1, 2002, the Company adopted, Statement of Financial
Accounting Standards No. 141 ("SFAS 141") "Business Combinations" and No. 142
("SFAS 142") "Goodwill and Other Intangible Assets," which requires all business
combinations initiated after June 30, 2001 to be accounted for using the
purchase method. Adoption of SFAS 141 had no effect on the Company's results of
operations or financial position as the Company accounts for all acquisitions
under the purchase method. The provisions of SFAS 142 prohibit the amortization
of goodwill and indefinite-lived intangible assets. Goodwill and
indefinite-lived intangible assets are required to be tested annually for
impairment. The Company has determined that its cable franchise costs are
indefinite-lived assets. The impact of adopting SFAS 142 was to reduce
amortization expense by $72.9 million for the six months ended June 30, 2002.
Based on the Company's review, there has been no impairment of goodwill and
indefinite-lived intangible assets under SFAS 142.
In July 2001, the FASB issued Statement of Financial Accounting Standards
No. 143 ("SFAS 143"), "Accounting for Asset Retirement Obligations," which
addresses financial accounting and reporting for obligations associated with the
retirement of tangible long-lived assets and the associated asset retirement
costs. SFAS 143 will become effective for fiscal years beginning after June 15,
2002. The Company does not expect that adoption of SFAS 143 will have a material
impact on its results of operations or financial position.
In August 2001, the FASB issued Statements of Financial Accounting
Standards No. 144 ("SFAS 144") "Accounting for the Impairment or Disposal of
Long-Lived Assets," which addresses financial accounting and reporting for the
impairment or disposal of long-lived assets and provides guidance on
classification and accounting for such assets when held for sale or abandonment.
The Company adopted this standard effective January 1, 2002 and there was no
impact on its results of operations or financial position.
Inflation and Changing Prices
The Company's systems' costs and expenses are subject to inflation and
price fluctuations. Such changes in costs and expenses can generally be passed
through to subscribers. Programming costs have historically increased at rates
in excess of inflation and are expected to continue to do so. The Company
believes that under the Federal Communications Commission's existing cable rate
regulations the Company may increase rates for cable television services to more
than cover any increases in programming costs. However, competitive conditions
and other factors in the marketplace may limit the Company's ability to increase
its rates.
17
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
In the normal course of business, the Company uses interest rate exchange
agreements in order to fix the interest rate for the duration of the contract as
a hedge against interest rate volatility. As of June 30, 2002, the Company had
interest rate exchange agreements with various banks pursuant to which the
interest rate on $320.0 million is fixed at a weighted average rate of
approximately 5.5%, plus the average applicable margin over the eurodollar rate
option under the Company's bank credit agreements. Under the terms of the
interest rate exchange agreements, which expire from 2002 through 2007, the
Company is exposed to credit loss in the event of nonperformance by the other
parties. However, the Company does not anticipate their nonperformance. At June
30, 2002, the Company would have paid approximately $9.2 million if it
terminated the interest rate exchange agreements, inclusive of accrued interest.
The table below provides information for the Company's long term debt. See Note
5 to the Company's consolidated financial statements.
Expected Maturity
------------------------------------------------------------------------------------
(All dollar amounts in thousands)
2002 2003 2004 2005 2006 Thereafter Total Fair Value
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Fixed rate $ - $ - $ - $ - $ - $ 200,000 $ 200,000 $ 184,000
Weighted average
interest rate 8.5% 8.5% 8.5% 8.5% 8.5% 8.5% 8.5%
Fixed rate $ - $ - $ - $ - $ - $ 125,000 $ 125,000 $ 103,000
Weighted average
interest rate 7.9% 7.9% 7.9% 7.9% 7.9% 7.9% 7.9%
Fixed rate $ - $ - $ - $ - $ - $ 500,000 $ 500,000 $ 449,100
Weighted average
interest rate 9.5% 9.5% 9.5% 9.5% 9.5% 9.5% 9.5%
Fixed rate $ - $ - $ - $ - $ - $ 400,000 $ 400,000 $ 378,000
Weighted average
interest rate 11.0% 11.0% 11.0% 11.0% 11.0% 11.0% 11.0%
Fixed rate $ - $ - $ - $ - $ 172,500 $ - $ 172,500 $ 134,000
Weighted average
interest rate 5.3% 5.3% 5.3% 5.3% 5.3% 5.3% 5.3%
Variable rate $ 750 $ 2,000 $ 10,500 $ 37,000 $ 187,500 $ 1,264,750 $ 1,502,500 $1,502,500
Weighted average
interest rate 3.7% 3.7% 3.7% 3.7% 3.7% 3.7% 3.7%
18
PART II
-------
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
On June 20, 2002, the Company held its annual meeting of stockholders to
(i) elect seven directors to serve for a term of one year and (ii) ratify the
selection of the Company's independent auditors for the year ending December 31,
2002.
The following individuals were elected to serve as directors for a term of
one year:
Vote For Vote Withheld
----------------- ----------------
Rocco B. Commisso 360,236,758 15,827,580
Craig S. Mitchell 374,029,830 2,034,508
William S. Morris III 374,091,276 1,973,062
Thomas V. Reifenheiser 374,203,245 1,861,093
Natale S. Ricciardi 374,203,177 1,861,161
Mark E. Stephan 374,089,946 1,974,392
Robert L. Winikoff 360,800,251 15,264,087
These individuals constituted the Company's entire Board of Directors and
served as its directors immediately preceding the annual meeting.
The stockholders approved the 2001 Employee Stock Purchase Plan. The result
of the vote was as follows: 374,101,578 votes were for the approval, 1,935,949
votes were against the approval and 35,411 votes abstained from the approval.
The stockholders ratified the selection of PricewaterhouseCoopers LLP as
the Company's independent auditors for the year ending December 31, 2002. The
result of the vote was as follows: 374,765,360 votes were for the selection,
496,284 votes were against the selection and 811,294 votes abstained from the
selection.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit
Number Exhibit Description
------ -------------------
4.1 Indenture Supplement No. 1, dated as of August 6, 2002, to the Indenture relating to 11% senior notes
due 2013 of Mediacom Broadband LLC and Mediacom Broadband Corporation.
4.2 Indenture Supplement No. 1, dated as of August 6, 2002, to the Indenture relating to 5.25%
convertible senior notes due 2006 of the Company.
(b) Reports on Form 8-K:
The Company filed a Current Report on Form 8-K under Item 4 - Changes in
Registrant's Certifying Accountant, dated April 19, 2002.
19
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
MEDIACOM COMMUNICATIONS CORPORATION
August 14, 2002 BY: /S/ MARK E. STEPHAN
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Mark E. Stephan
Senior Vice President and
Chief Financial Officer
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