Attached files
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
Form 10-Q
CURRENT REPORT
(Mark One)
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. |
For the quarterly period ended September 30, 2009
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934. |
For the transition period from to .
Atlantic Broadband Finance, LLC
(Exact Name of Registrant As Specified In Charter)
Delaware | 333-115504 | 20-0226936 | ||
(State or Other Jurisdiction of Incorporation) |
(Commission File Number) |
(IRS Employer Identification No.) |
One Batterymarch Park, Suite 405
Quincy, MA 02169
(Address of Principal Executive Offices, including Zip Code)
(617) 786-8800
(Registrants telephone number, including area code)
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 periods 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 ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ¨ No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definition of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer | ¨ | Accelerated filer | ¨ | |||
Non-accelerated filer | x | Smaller Reporting Company | ¨ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.): Yes ¨ No x
Indicate the number of shares outstanding of each of the registrants classes of common units, as of the last practicable date. Atlantic Broadband Holdings I, LLC owns 100% of the registrants equity.
Table of Contents
FORWARD LOOKING STATEMENTS
Statements in this document that are not historical facts are hereby identified as forward looking statements for the purposes of the safe harbor provided by Section 21E of the Securities Act of 1933 (the Securities Act). Atlantic Broadband Finance, LLC (the Company) cautions readers that such forward looking statements, including without limitation, those relating to the Companys future business prospects, revenue, working capital, liquidity, capital needs, interest costs and income, wherever they occur in this document or in other statements attributable to the Company, are necessarily estimates reflecting the judgment of the Companys senior management and involve a number of risks and uncertainties that could cause actual results to differ materially from those suggested by the forward looking statements. Such forward looking statements should, therefore, be considered in light of the factors set forth in Item 2. Managements Discussion and Analysis of the Financial Condition and Results of Operations.
The forward looking statements contained in this report are made under the caption Managements Discussion and Analysis of Financial Condition and Results of Operations. Moreover, the Company, through its senior management, may from time to time make forward looking statements about matters described herein or in other matters concerning the Company.
The Company disclaims any intent or obligation to update forward looking statements to reflect changed assumptions, the occurrence of unanticipated events or changes to future operating results over time.
2
Table of Contents
ATLANTIC BROADBAND FINANCE, LLC
TABLE OF CONTENTS
Page | ||||
Part 1. Financial Information | ||||
Item 1. | ||||
Financial Statements (Unaudited) | 4-14 | |||
Condensed Consolidated Balance Sheets December 31, 2008 and September 30, 2009 | ||||
Condensed Consolidated Statements of Operations Three and nine months ended September 30, 2008 and 2009 | ||||
Condensed Consolidated Statements of Cash Flows Nine months ended September 30, 2008 and 2009 | ||||
Notes to Condensed Consolidated Financial Statements | ||||
Item 2. | Managements Discussion and Analysis of Financial Condition and Results of Operations | 15 | ||
Item 3. | Quantitative and Qualitative Disclosures of Market Risk | 19 | ||
Item 4T. | Controls and Procedures | 19 | ||
Part 2. Other Information | ||||
Item 1. | Legal Proceedings | 20 | ||
Item 1A. | Risk Factors | 20 | ||
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | 20 | ||
Item 3. | Defaults upon Senior Securities | 20 | ||
Item 4. | Submission of Matters to a Vote of Security Holders | 20 | ||
Item 5. | Other Information | 20 | ||
Item 6. | Exhibits | 20 | ||
Signatures | 21 | |||
Certifications |
3
Table of Contents
ATLANTIC BROADBAND FINANCE, LLC
Condensed Consolidated Balance Sheets
(Unaudited)
(in thousands)
December 31, 2008 |
September 30, 2009 |
|||||||
Assets |
||||||||
Current assets |
||||||||
Cash and cash equivalents |
$ | 7,007 | $ | 22,209 | ||||
Accounts receivablenet of allowance for doubtful accounts of $479 and $433, respectively |
9,055 | 7,848 | ||||||
Prepaid expenses and other current assets |
1,774 | 2,275 | ||||||
Total current assets |
17,836 | 32,332 | ||||||
Plant, property and equipment, net |
204,065 | 195,865 | ||||||
Franchise rights |
524,400 | 524,400 | ||||||
Goodwill |
35,905 | 35,905 | ||||||
Other intangible assets, net |
283 | 23 | ||||||
Debt issuance costs, net |
7,206 | 6,771 | ||||||
Total assets |
$ | 789,695 | $ | 795,296 | ||||
Liabilities and Members Equity |
||||||||
Current liabilities |
||||||||
Current portion of debt |
$ | 4,528 | $ | 11,373 | ||||
Current portion of capital lease obligations |
199 | 56 | ||||||
Accrued interest |
6,874 | 3,207 | ||||||
Accounts payable |
13,293 | 11,604 | ||||||
Accrued expenses |
10,733 | 11,639 | ||||||
Unearned service revenue |
4,390 | 4,471 | ||||||
Total current liabilities |
40,017 | 42,350 | ||||||
Long-term debt |
610,122 | 586,964 | ||||||
Fair value of derivative instruments |
1,821 | | ||||||
Other long-term liabilities |
2,206 | 2,192 | ||||||
Total liabilities |
654,166 | 631,506 | ||||||
Members equity |
164,478 | 164,258 | ||||||
Accumulated deficit |
(28,949 | ) | (468 | ) | ||||
Total members equity |
135,529 | 163,790 | ||||||
Total liabilities and members equity |
$ | 789,695 | $ | 795,296 | ||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
4
Table of Contents
ATLANTIC BROADBAND FINANCE, LLC
Condensed Consolidated Statements of Operations
(Unaudited)
(in thousands)
Three Months Ended September 30, |
Nine Months Ended September 30, |
||||||||||||||
2008 | 2009 | 2008 | 2009 | ||||||||||||
Cable service revenue |
$ | 71,066 | $ | 75,573 | $ | 207,739 | $ | 224,623 | |||||||
Operating expenses |
|||||||||||||||
Direct operating expenses (excluding depreciation and amortization shown separately below) |
33,088 | 33,306 | 96,246 | 101,100 | |||||||||||
Selling, general and administrative expenses (excluding depreciation and amortization shown separately below) |
10,272 | 10,191 | 30,724 | 30,740 | |||||||||||
Depreciation and amortization |
10,805 | 10,312 | 32,451 | 31,476 | |||||||||||
Income from operations |
16,901 | 21,764 | 48,318 | 61,307 | |||||||||||
Interest expense |
11,717 | 10,858 | 36,278 | 30,028 | |||||||||||
Loss on extinguishment of debt |
| | | 4,619 | |||||||||||
Net gain on derivative instruments |
(1,454 | ) | | (997 | ) | (1,821 | ) | ||||||||
Net income |
$ | 6,638 | $ | 10,906 | $ | 13,037 | $ | 28,481 | |||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
5
Table of Contents
ATLANTIC BROADBAND FINANCE, LLC
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(in thousands)
Nine Months Ended September 30, |
||||||||
2008 | 2009 | |||||||
Cash flows from operating activities |
||||||||
Net income |
$ | 13,037 | $ | 28,481 | ||||
Adjustments to reconcile net income to net cash provided by operating activities |
||||||||
Depreciation and amortization |
32,451 | 31,476 | ||||||
Amortization of debt issuance costs |
1,716 | 1,781 | ||||||
Loss on extinguishment of debt |
| 4,619 | ||||||
Net gain on derivative instrument |
(997 | ) | (1,821 | ) | ||||
Changes in operating assets and liabilities |
||||||||
Accounts receivable |
14 | 1,207 | ||||||
Prepaid expenses and other current assets |
(384 | ) | (501 | ) | ||||
Accounts payable, accrued expenses, other long-term liabilities and accrued interest |
(6,809 | ) | (5,981 | ) | ||||
Unearned service revenue |
(95 | ) | 81 | |||||
Net cash provided by operating activities |
38,933 | 59,342 | ||||||
Cash flows from investing activities |
||||||||
Purchases of property, plant and equipment |
(29,222 | ) | (21,499 | ) | ||||
Net cash used in investing activities |
(29,222 | ) | (21,499 | ) | ||||
Cash flows from financing activities |
||||||||
Proceeds from issuance of debt |
8,000 | | ||||||
Repayments of debt principal |
(7,396 | ) | (16,313 | ) | ||||
Payments of capital lease obligations |
(307 | ) | (143 | ) | ||||
Dividend to members |
(10,130 | ) | (220 | ) | ||||
Payment of deferred issuance costs |
| (5,965 | ) | |||||
Net cash used in financing activities |
(9,833 | ) | (22,641 | ) | ||||
Net change in cash and equivalents |
(122 | ) | 15,202 | |||||
Cash and cash equivalents, beginning of period |
3,390 | 7,007 | ||||||
Cash and cash equivalents, end of period |
$ | 3,268 | $ | 22,209 | ||||
Supplemental disclosure of cash flow information |
||||||||
Interest paid |
$ | 38,058 | $ | 31,914 | ||||
Supplemental disclosure of noncash investing activities |
||||||||
Capital expenditures included in accounts payable and accrued expenses |
2,475 | 1,517 |
The accompanying notes are an integral part of these condensed consolidated financial statements.
6
Table of Contents
ATLANTIC BROADBAND FINANCE, LLC
Notes to Condensed Consolidated Financial Statements
(Dollars in thousands, except where indicated)
(Unaudited)
1. Description of Business
Atlantic Broadband Finance, LLC (the Company) was formed in Delaware on August 26, 2003. The Company is a wholly-owned subsidiary of Atlantic Broadband Holdings I, LLC (the Parent). The Company and the Parent are wholly-owned indirect subsidiaries of Atlantic Broadband Group, LLC.
On September 3, 2003, the Company entered into a definitive asset purchase agreement with affiliates of Charter Communications, Inc. (Charter) to purchase certain cable systems in Pennsylvania, Florida, Maryland, West Virginia, Delaware and New York (together with the Aiken, SC system referred to below, the Systems) for approximately $738.1 million, subject to closing adjustments. The Company obtained equity and debt financing to fund the acquisition, which was consummated on March 1, 2004. On July 13, 2006, the Company entered into a definitive asset purchase agreement to purchase substantially all of the assets of G Force LLC, owner of certain cable systems in South Carolina for approximately $62.0 million. We obtained additional debt financing and issued a note payable to the seller of the assets to fund this transaction which was consummated on November 1, 2006.
The Systems offer their customers traditional cable video programming as well as high-speed data and telephony services and other advanced video related broadband services such as high definition television. The Systems sell their video programming, high-speed data, telephony and advanced broadband cable services on a subscription basis.
On September 30, 2009, the Company had approximately 279,000 cable, 132,000 residential high-speed Internet and 60,000 telephone subscribers on the Systems. The Company has 5 subsidiaries which operate the Systems: Atlantic Broadband (Penn), LLC, Atlantic Broadband (Delmar), LLC, Atlantic Broadband (Miami), LLC, Atlantic Broadband (SC), LLC and Atlantic Broadband Management, LLC (collectively, the Subsidiaries).
2. Risks and Uncertainties
The Companys future operations involve a number of risks and uncertainties. Factors that could affect future operating results and cause actual results to vary from historical results include, but are not limited to, growth of its subscriber base and the Companys ability to service its debt and operations with existing cash flows.
The Company plans to continue the expansion of its existing subscriber base through existing and new services, such as: digital cable, high speed Internet, high-definition television, and telephony services. The Company anticipates additional capital expenditures to facilitate this growth. Under current plans and operations, additional financing in excess of existing facilities is not expected to be required. Operating cash flow is expected to be sufficient to repay current obligations and outstanding debt as they become due through at least the next twelve months. Should the Company fail to meet its expectations, the Company would look to draw down against the existing revolving credit facility, obtain additional financing, refinance existing agreements, and/or reduce capital expenditures.
3. Summary of Significant Accounting Policies
Interim Financial Statements
The condensed consolidated financial statements as of September 30, 2009 and for the three and nine months ended September 30, 2008 and 2009 are unaudited. However, in the opinion of management, such financial statements include all adjustments (consisting primarily of normal recurring adjustments) necessary for the fair statement of the financial information included herein in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP) and pursuant to the rules and regulations of the Securities and Exchange Commission (SEC). The preparation of the consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenue and expenses during the period. Actual results could differ from those estimates. Results of operations for interim periods are not necessarily indicative of results for the full year. These financial statements should be read in conjunction with the annual financial statements and related notes included in the Companys Annual Report on Form 10-K. The balance sheet at December 31, 2008 has been derived from the audited financial statements at that date, but does not include all of the information and footnotes required by U.S. GAAP for complete financial statements.
7
Table of Contents
Basis of Presentation
The financial statements presented herein include the consolidated accounts of Atlantic Broadband Finance, LLC and its Subsidiaries. Intercompany accounts and transactions have been eliminated in consolidation. The Company performed its subsequent events review through November 12, 2009, the date of filing.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make assumptions and estimates that affect the reported amounts of assets and liabilities, derivative financial instruments and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The most significant estimates relate to useful lives of property, plant and equipment and finite-lived intangible assets, the recoverability of the carrying values of goodwill, other intangible assets and fixed assets (which include capitalized labor and overhead costs) and commitments and contingencies. Actual results could differ from those estimates.
Segments
The Financial Accounting Standards Board (FASB) established standards for reporting information about operating segments in annual financial statements and in interim financial reports issued to shareholders. Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated on a regular basis by the chief operating decision maker, or decision making group, in deciding how to allocate resources to an individual segment and in assessing performance of the segment.
The Company manages the Systems operations on the basis of geographic divisional operating segments. The Company has evaluated the criteria for aggregation of the geographic operating segments using the FASB standard. In light of the Systems similar services, means for delivery, similarity in type of customers, the use of a unified network, similar economic characteristics and other considerations across its geographic divisional operating structure, management has determined that the Systems have one reportable segment, broadband services.
Capitalization of Labor and Overhead Costs
The cable industry is capital intensive, and a large portion of our resources are spent on capital activities associated with extending, building and upgrading the cable network. Costs associated with network construction, initial customer installations, installation refurbishments and the addition of network equipment necessary to enable advanced services are capitalized. Costs capitalized as part of initial customer installations include materials, direct labor costs associated with capital projects and certain indirect costs. We capitalize direct labor costs associated with personnel based upon the specific time devoted to construction and customer installation activities. Indirect costs are associated with the activities of personnel who assist in connecting and activating the new service and consist of compensation and overhead costs associated with these support functions. The costs of disconnecting service at a customers dwelling or reconnecting service to a previously installed dwelling are charged to operating expense in the period incurred. Costs for repairs and maintenance are charged to operating expense as incurred, while equipment replacement and betterments, including replacement of cable drops from the pole to dwelling, are capitalized. We amortize the capitalized labor and overhead costs over the life of the related equipment which ranges from 4-15 years. The vast majority of these capitalized costs relate to customer installation activity and related equipment additions. Accordingly, such assets are amortized over the same five year period as the fixed assets acquired as part of the installation.
Judgment is required to determine the extent to which indirect costs, or overhead, are incurred as a result of specific capital activities and, therefore, should be capitalized. We capitalize overhead based upon an allocation of the portion of indirect costs that contribute to capitalizable activities using an overhead rate applied to the amount of direct labor capitalized. We have established overhead rates based on an analysis of the nature of costs incurred in support of capitalizable activities and a determination of the portion of costs which is directly attributable to capitalizable activities. The primary costs that are included in the determination of overhead rates are (i) employee benefits and payroll taxes associated with capitalized direct labor, (ii) direct variable costs associated with capitalizable activities, consisting primarily of installation and construction vehicle costs, (iii) the cost of support personnel, such as dispatch that directly assist with capitalizable installation activities, and (iv) other costs directly attributable to capitalizable activities.
Goodwill and Intangible Assets
Intangible assets consist primarily of acquired franchise operating rights and subscriber relationships. Franchise operating rights represent the value attributable to agreements with local franchising authorities, which allows access to homes in the public right of
8
Table of Contents
way acquired through a business combination. Subscriber relationships represent the value to the Company of the benefit of acquiring the existing cable television subscriber base. The Company considers franchise operating rights to have an indefinite useful life. The Company reached its conclusion regarding the indefinite useful life of its franchise operating rights principally because (i) there are no known or expected legal, regulatory, contractual, competitive, economic, or other factors limiting the period over which these rights will continue to contribute to the Companys cash flows, (ii) as an incumbent franchisee, the Companys renewal applications are granted by the local franchising authority on their own merits and not as part of a comparative process with competing applications and (iii) under the 1984 Cable Act, a local franchising authority may not unreasonably withhold the renewal of a cable system franchise. The Company will reevaluate the expected life of its cable franchise rights each reporting period to determine whether events and circumstances continue to support an indefinite useful life. The subscriber relationships are being amortized over the estimated useful life of the subscriber base. The useful life for the subscriber relationships is estimated to be approximately three years and at the end of each reporting period, or earlier if circumstances warrant, the Company reassesses the estimated useful life of the relationships.
Goodwill impairment is determined using a two-step process. The first step involves a comparison of the estimated fair value of each of the Companys four reporting units to its carrying amount, including goodwill. In performing the first step, the Company determines the fair value of a reporting unit using a combination of a discounted cash flow (DCF) analysis and a market-based approach. Determining fair value requires the exercise of significant judgment, including judgment about appropriate discount rates, perpetual growth rates, the amount and timing of expected future cash flows, as well as relevant comparable company earnings multiples for the market-based approach. The cash flows employed in the DCF analyses are based on the Companys most recent budget and, for years beyond the budget, the Companys estimates, which are based on assumed growth rates. The discount rates used in the DCF analyses are intended to reflect the risks inherent in the future cash flows of the respective reporting units. In addition, the market-based approach utilizes comparable company public trading values, research analyst estimates and, where available, values observed in private market transactions. If the estimated fair value of a reporting unit exceeds its carrying amount, goodwill of the reporting unit is not impaired and the second step of the impairment test is not necessary. If the carrying amount of a reporting unit exceeds its estimated fair value, then the second step of the goodwill impairment test must be performed. The second step of the goodwill impairment test compares the implied fair value of the reporting units goodwill with its carrying amount to measure the amount of impairment, if any. The implied fair value of goodwill is determined in the same manner as the amount of goodwill recognized in a business combination. In other words, the estimated fair value of the reporting unit is allocated to all of the assets and liabilities of that unit (including any unrecognized intangible assets) as if the reporting unit had been acquired in a business combination and the fair value of the reporting unit was the purchase price paid. If the carrying amount of the reporting units goodwill exceeds the implied fair value of that goodwill, an impairment is recognized in an amount equal to that excess.
The impairment test for other intangible assets not subject to amortization involves a comparison of the estimated fair value of the intangible asset with its carrying value. If the carrying value of the intangible asset exceeds its fair value, an impairment loss is recognized in an amount equal to that excess. The estimates of fair value of intangible assets not subject to amortization are determined using a DCF valuation analysis. The DCF methodology used to value cable franchise rights entails identifying the projected discrete cash flows related to such cable franchise rights and discounting them back to the valuation date. Significant judgments inherent in this analysis include the selection of appropriate discount rates, estimating the amount and timing of estimated future cash flows attributable to cable franchise rights and identification of appropriate terminal growth rate assumptions. The discount rates used in the DCF analyses are intended to reflect the risk inherent in the projected future cash flows generated by the respective intangible assets.
The Company tests for impairment of its goodwill and franchise operating rights annually or whenever events or changes in circumstances indicate that these assets might be impaired. An impairment assessment of goodwill and franchise operating rights could be triggered by a significant reduction in operating results or cash flows at one of more of the Companys systems, or a forecast of such reductions, a significant adverse change in the locations in which the Companys systems operate, or by adverse changes to ownership rules, among others. The Companys 2008 annual impairment test, which was performed as of March 2008, did not result in any goodwill or cable franchise rights impairment. The Company determined that the adverse macro business climate experienced during the end of the fiscal year ended December 31, 2008 was a significant event that indicated that the carrying amount of the goodwill and cable franchise rights might not be recoverable. An interim impairment test as of December 31, 2008 did not result in any goodwill impairments, but did result in a noncash pretax impairment on its cable franchise rights of $23.4 million.
As a result of the cable franchise rights impairment taken in 2008, the carrying values of the Companys impaired cable franchise rights (which represented two of the Companys four operating systems) were re-set to their estimated fair values as of December 31, 2008. Consequently, any further decline in the estimated fair values of these cable franchise rights could result in additional cable franchise rights impairments. Management has no reason to believe that any one system is more likely than any other to incur further impairments of its cable franchise rights. It is possible that such impairments, if required, could be material and may need to be recorded prior to the first quarter of 2010 (i.e., during an interim period) if the Companys results of operations or other factors require such assets to be tested for impairment at an interim date. The Company completed its annual impairment test as of March 1, 2009 and did not identify any additional impairment.
9
Table of Contents
Amortization expense on intangible assets with a definite life for the next five years as of September 30, 2009 is as follows:
Amortization Expense | |||
2009 |
$ | 23 | |
Thereafter |
|
Recently Issued Accounting Standards
In September 2006, the FASB issued authoritative guidance which defines fair value, establishes guidelines for measuring fair value and expands disclosures regarding fair value measurements. This guidance does not require any new fair value measurements but rather eliminates inconsistencies in guidance found in various prior accounting pronouncements. This guidance is effective for fiscal years beginning after November 15, 2007. However, on February 6, 2008, the FASB issued authoritative guidance which defers the effective date of the new accounting standard for one year for nonfinancial assets and nonfinancial liabilities except for those items that are recognized or disclosed at fair value in the financial statements on a recurring basis at least annually. For 2008, we did adopt the guidance except as it applies to those nonfinancial assets and nonfinancial liabilities. The partial adoption of the guidance did not have a material impact on our financial position, results of operations or cash flows. The adoption of remaining portions of the guidance in 2009 did not have a material impact on our financial position, results of operations or cash flows.
In December 2007, the FASB issued authoritative guidance which clarifies that a noncontrolling interest in a subsidiary is an ownership interest in the consolidated entity that should be reported as equity in the consolidated financial statements. This guidance is effective as of January 1, 2009 for the Company. The adoption of this guidance did not have a material impact on our consolidated financial position, results of operations or cash flows.
In December 2007, the FASB issued authoritative guidance which requires that the acquiring entity in a business combination to recognize the full fair value of assets acquired and liabilities assumed in the transaction; requires certain contingent assets and liabilities acquired to be recognized at their fair values on the acquisition date; requires contingent consideration to be recognized at its fair value on the acquisition date and changes in the fair value to be recognized in earnings until settled; requires the expensing of most transaction and restructuring costs; and generally requires the reversal of valuation allowances related to acquired deferred tax assets and changes to acquired income tax uncertainties to also be recognized in earnings. This guidance is effective for financial statements issued for fiscal years beginning after December 15, 2008. The Company will apply this guidance prospectively to any business combination with an acquisition date, as defined therein, that is subsequent to the effective date of the accounting.
In March 2008, the FASB issued authoritative guidance which requires specific disclosures regarding the location and amounts of derivative instruments in the Companys financial statements; how derivative instruments and related hedged items are accounted for; and how derivative instruments and related hedged items affect the Companys financial position, financial performance, and cash flows. This guidance is effective for the Company on January 1, 2009. We have provided the required disclosures regarding derivative instruments in 2009 in Note 8.
In April 2008, the FASB issued authoritative guidance which amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under previous accounting statements. This guidance is effective for the Company on January 1, 2009. The adoption of this accounting standard did not have a material impact on our consolidated financial position, results of operations or cash flows.
In April 2009, the FASB issued authoritative guidance position which requires companies to disclose the fair value of financial instruments within interim financial statements, adding to the current requirement to provide such disclosures annually. This guidance is effective for the Company in the second quarter of 2009 and we have included disclosures as required.
In May 2009, the FASB issued authoritative guidance which requires an entity to evaluate events or transactions after the balance sheet date for potential recognition or disclosure. The Company adopted this guidance during the second quarter of 2009 and there was no impact on the Companys consolidated financial position, results of operations or of cash flows for the three months ended June 30, 2009. The Company has evaluated all potential subsequent events through November 12, 2009, the filing date for this Quarterly Report on Form 10-Q.
10
Table of Contents
In June 2009, the FASB issued authoritative guidance which establishes the FASB Accounting Standards Codification to become the source of authoritative U.S. GAAP recognized by the FASB to be applied by nongovernmental agencies. The guidance, which changes the referencing of financial standards, is effective for interim or annual financial periods ending after September 15, 2009. We adopted the Codification for the three months ended September 30, 2009, which did not have any impact on the Companys consolidated financial statements.
In August 2009, the FASB issued authoritative guidance which clarifies the application of certain valuation techniques in circumstances in which a quoted price in an active market for the identical liability is not available and clarifies that when estimating the fair value of a liability, the fair value is not adjusted to reflect the impact of contractual restrictions that prevent its transfer. The guidance is effective for the first reporting period beginning after issuance. We expect to adopt the guidance during the three months ended December 31, 2009 and do not expect it to have a material impact on our financial position, results of operations or cash flows.
In October 2009, the FASB issued authoritative guidance related to Multiple-Deliverable Revenue Arrangements. The guidance addresses how to separate deliverables and how to measure and allocate arrangement consideration to one or more units of accounting. The guidance is effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010. We do not expect the adoption of this guidance to have a material impact on our financial position, results of operations or cash flows.
4. Fair Value Measurements
On January 1, 2008, we adopted a newly issued authoritative guidance for fair value measurements of all financial assets and liabilities. Our adoption of this guidance did not impact our financial position, results of operations or liquidity. In accordance with the guidance, we elected to defer until January 1, 2009 the application of the authoritative guidance to fair value nonfinancial assets and liabilities that are not recognized or disclosed at fair value in the financial statements on a recurring basis. The adoption of this guidance for nonfinancial assets and liabilities did not have a material impact on our financial position, results of operations or liquidity.
The accounting standard for fair value measurement provides a framework for measuring fair value and requires expanded disclosures regarding fair value measurements. Fair value is defined as the price that would be received for an asset or the exit price that would be paid to transfer a liability in the principal or most advantageous market in an orderly transaction between market participants on the measurement date. The guidance also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs, where available. The following summarizes the three levels of inputs required by the standard that we use to measure fair value, as well as the assets and liabilities that we value using those levels of inputs.
Level 1: | Quoted prices in active markets for identical assets or liabilities. | |
Level 2: | Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the related assets or liabilities. Our Level 2 assets are interest rate swaps whose fair value we determine using a pricing model predicated upon observable market inputs. The Companys derivative instruments are pay-fixed, receive-variable interest rate swaps based on LIBOR swap rate. The LIBOR swap rate is observable at commonly quoted intervals for the full term of the swaps and therefore is considered a level 2 item. | |
Level 3: | Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. |
The following table sets forth the financial assets and liabilities as of September 30, 2009 that we measured at fair value on a recurring basis by level within the fair value hierarchy. As required by the authoritative guidance, assets and liabilities measured at fair value are classified in their entirety based on the lowest level of input that is significant to their fair value measurement (dollars in thousands):
Level 1 | Level 2 | Level 3 | Balance as of December 31, 2008 |
Balance as of September 30, 2009 | ||||||
Liabilities |
||||||||||
Interest Rate Swaps |
| | | 1,821 | |
11
Table of Contents
In September 2006, the Company entered into four swap agreements with a forward start date of March 19, 2007 for a total notional value of $225,000 with a term of two years at a fixed rate of 5.08%. These agreements ended in March 2009. Therefore, there are no financial assets or liabilities as of September 30, 2009 that we measured at fair value on a recurring basis.
5. Plant, Property and Equipment
Plant, property and equipment consist of the following:
December 31, 2008 |
September 30, 2009 | |||||
Distribution facilities |
$ | 210,237 | $ | 222,335 | ||
Subscriber equipment |
60,475 | 62,757 | ||||
Headend equipment |
39,918 | 42,197 | ||||
Buildings and leasehold improvements |
10,012 | 10,168 | ||||
Office equipment and other |
16,406 | 17,753 | ||||
Vehicles and equipment |
9,485 | 10,537 | ||||
Land |
1,992 | 1,992 | ||||
Construction in progress |
3 | 715 | ||||
Material inventory |
3,316 | 3,128 | ||||
Total plant, property and equipment |
351,844 | 371,582 | ||||
Less: accumulated depreciation |
147,779 | 175,717 | ||||
Plant, property and equipment, net |
$ | 204,065 | $ | 195,865 | ||
Depreciation expense for the three and nine months ended September 30, 2008 was $10,596 and $31,823, respectively and for the three and nine months ended September 30, 2009 was $10,246 and $31,216, respectively.
6. Finite-Lived Intangible Assets
Intangible assets consist of the following:
December 31, 2008 |
September 30, 2009 | |||||
Subscriber relationships |
$ | 45,411 | $ | 45,411 | ||
Other intangible assets |
2,200 | 2,200 | ||||
Total intangible assets |
47,611 | 47,611 | ||||
Less: Accumulated amortization |
47,328 | 47,588 | ||||
Intangible assets, net |
$ | 283 | $ | 23 | ||
Amortization expense for the three and nine months ended September 30, 2008 was $209 and $628, respectively and for the three and nine months ended September 30, 2009 was $66 and $260, respectively.
7. Accrued Expenses
Accrued expenses consist of the following:
December 31, 2008 |
September 30, 2009 | |||||
Franchise, copyright and revenue sharing fees |
$ | 2,693 | $ | 2,557 | ||
Payroll and related taxes |
3,030 | 3,180 | ||||
Other accrued expenses |
5,010 | 5,902 | ||||
Total accrued liabilities |
$ | 10,733 | $ | 11,639 | ||
12
Table of Contents
8. Debt
On February 10, 2004, the Company entered into $305.0 million of term loans (the Term Loans) and a $90.0 million revolving credit facility (the Revolver) with a group of banks and institutional investors led by Merrill Lynch & Company, General Electric Capital Corporation, Societe Generale and Calyon Corporate and Investment Bank. These two facilities are governed by a single credit agreement dated as of February 10, 2004 (collectively, the Senior Credit Facility), which was amended and restated as of February 9, 2005 under substantially the same terms.
The net proceeds from the Senior Credit Facility were primarily used to acquire and operate the Systems.
On August 23, 2006, the Company amended its Senior Credit Facility to increase the Term Loan commitment by $50.0 million in anticipation of the pending acquisition of G Force LLC. The acquisition closed and the additional Term Loan borrowings occurred on November 1, 2006. The additional borrowings were made under the same conditions as the original Term Loans.
On March 6, 2007, the Company amended its Senior Credit Facility and increased the Term Loan commitment and borrowings by $104.5 million. The proceeds of the additional Term Loans were used to provide a dividend to our members of $77.6 million and to reduce outstanding Revolver borrowings by $23.0 million. The balance of the proceeds were used for working capital purposes. The additional borrowings were made under substantially the same conditions as the original Term Loans.
On June 8, 2009, the Company amended its Senior Credit Facility to extend the maturity date of $325.0 million in Term Loan principal from September 2011 to June 2013 (the Extended Term Loans). The remaining outstanding Term Loan debt of $118.8 million remained unchanged, and matures in September 2011. In addition, $40.0 million in revolving credit commitment was extended from March 1, 2010 to March 1, 2012 (the Extended Revolving Credit Commitments). As a result of the modification to the Senior Credit Facility, the Company incurred $5.9 million of debt financing costs, $4.6 million of which was expensed as a loss on extinguishment of debt and the remaining $1.3 million is being amortized to interest expense over the remaining life of the Senior Credit Facility.
The Senior Credit Facility contains certain restrictive financial covenants that, among other things, require the Company to maintain certain debt service coverage, interest coverage, fixed charge coverage, leverage ratios and a certain level of EBITDA and places certain limitations on additional debt and investments. The Senior Credit Facility contains conditions precedent to borrowing, events of default (including change of control) and covenants customary for facilities of this nature. The Senior Credit Facility is collateralized by substantially all of the assets of the Company and its Subsidiaries.
At December 31, 2008, there was $444.9 million outstanding under the Term Loans and $12.9 million under the Revolver. At September 30, 2009, there was $441.5 million outstanding under the Term Loans with no borrowing outstanding under the Revolver. The interest rate on the Senior Credit Facility will be, at the election of the Company, based on either a Eurodollar or a Base Rate option, each as defined in the credit agreement, plus a spread ranging between 1.0% and 3.25%, or 4.75% with a LIBOR floor of 2.0% on Extended Term Loans and Extended Revolving Credit Commitments. Excluding the interest rate swaps, the weighted average interest rate for 2008 and 2009 on the Term Loan, Extended Term Loans and Revolver was 5.87% and 4.53%, respectively. Interest payments on Base Rate Loans shall be payable in arrears on the last day of each calendar quarter and at maturity. Interest payments on Eurodollar Loans shall be payable on the last day of each interest period relating to such loan and at maturity.
As of September 30, 2009, there was approximately $67.5 million of unused commitments under the Revolver all of which could be drawn in compliance with the financial covenants under the Senior Credit Facility. As noted above, $27.5 million of the commitment expires on March 1, 2010, while the remaining $40.0 million expires on March 1, 2012. In order to maintain the revolving lines of credit, the Company is obligated to pay certain commitment fees at nominal interest rates on the unused portions of the loans.
The Company can make no assurances that it will be able to satisfy and comply with the covenants under the Senior Credit Facility. The Companys ability to maintain its liquidity and maintain compliance with its covenants under the Senior Credit Facility is dependent upon its ability to successfully execute its current business plan. The Company can make no assurances, however, that its business will generate sufficient cash flow from operations or that existing available cash or future borrowings will be available to it under the Senior Credit Facility in an amount sufficient to enable it to pay its indebtedness or to fund its other liquidity needs.
As of September 30, 2009, the Company was in compliance with its covenants under the Senior Credit Facility.
13
Table of Contents
Term Loan installments began on June 30, 2006. The Revolver shall be paid such that the amount outstanding shall not exceed $67.5 million until March 1, 2010, and $40.0 million until the termination date of March 1, 2012. The Revolver shall be paid in full on the termination date of March 1, 2012. Principal payments under the Senior Credit Facility for each year ending December 31, 2009 through 2013 are as follows:
2009 |
$ | 1,132 | |
2010 |
33,157 | ||
2011 |
91,323 | ||
2012 |
3,316 | ||
2013 |
312,564 | ||
$ | 441,492 | ||
Senior Subordinated Notes
On February 10, 2004, the Company issued $150.0 million of 9.375% senior subordinated notes (the Notes). The Notes mature on January 15, 2014. Interest is payable every six months in arrears on January 15 and July 15. The Notes are general unsecured senior subordinated obligations subordinated to the Senior Credit Facility. The proceeds of the offering were used to finance the acquisition of the Systems.
Interest Rate Swap Agreements
The Company entered into three interest rate swap agreements on March 17, 2004 for a total notional value of $230.0 million with a term of three years at a fixed rate of 1.25% for the first year, 2.25% for the second year and rates ranging from 3.53% to 3.58% for the third year. These agreements ended on March 16, 2007. In September 2006, the Company entered into four additional swap agreements with a forward start date of March 19, 2007 for a total notional value of $225.0 million with a term of two years at a fixed rate of 5.08%. These agreements ended in March 2009. The marking-to-market of the interest rate swap agreements resulted in the recognition of $1.5 million and $1.0 million in other income for the three and nine months ended September 30, 2008, respectively, and $1.8 million in other income for the nine months ended September 30, 2009.
Seller Note
In conjunction with the November 1, 2006 acquisition of G Force, LLC, the Company issued to the seller a note in the amount of $6.9 million. This note has an interest rate of 6%, payable semi-annually, and is payable on October 30, 2009.
As of September 30, 2009, the fair value of the Companys total debt outstanding of $598.4 million approximates the cost.
9. Members Equity
The Parent owns all 1,000 units issued by the Company. The Parent contributed $1.7 million in 2003 to effect its formation. In 2004, the Parent contributed $260.8 million which the Company used to acquire the Systems. In March 2007, the Company provided a dividend to its members of $77.6 million. The Company provided additional dividends totaling $10.1 million during the remainder of 2007, $10.1 million during the second quarter of 2008 and $0.2 million during the second quarter of 2009.
10. Management Service Agreement
On September 14, 2009, a majority investor of the Company acquired a majority interest in Grande Communications Networks, LLC (Grande), a retail and wholesale provider of cable video programming, high speed data, telephony and other advanced broadband services. Concurrent with this acquisition, the Company entered into a Management Services Agreement (the Agreement) with Grande and Grande Manager LLC to provide management and other services to Grande. Under the terms of the Agreement, designated personnel of the Company will provide general managerial oversight and such management services as mutually agreed upon by and between the Company and Grande with respect to the business and operations of Grande, subject to the authority of Grandes board of directors. In consideration for the Company providing such services, Grande agreed to pay to the Company on a quarterly basis a fee equal to the lesser of 50% of the quarterly expenses associated with the designated Company personnel providing managerial services to Grande, or 5.5% of Grandes total quarterly revenue less certain expenses as further described in the Agreement (the Management Fee). The Management Fee contemplates the recovery of costs to provide managerial services and may not be indicative of the service fee charged by an independent party. The Agreement commenced upon execution and will terminate upon certain events specified within the Agreement, or as mutually agreed upon by the Company and Grande. Any Management Fee earned by the Company will reduce the related selling, general and administrative expense during the period recognized. No Management Fee was recorded during the three months ended September 30, 2009.
14
Table of Contents
ITEM 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis is based upon our unaudited interim consolidated financial statements, and our review of the business and operations of each of the Systems.
Overview of Operations
The operating revenue of the Company is derived primarily from monthly subscription fees charged to customers for video, data and telephony services, equipment rental and ancillary services provided by the Systems. Generally, the customer subscriptions may be discontinued by the customer at any time. In addition, the Company derives revenue from installation and reconnection fees charged to customers to commence and reinstate service, pay-per-view programming where users are charged a fee for individual programs viewed, advertising revenues and franchise fee revenues, which are collected by the Systems and then paid to local franchising authorities.
Expenses consist primarily of operating costs, selling, general and administrative expenses, depreciation and amortization expenses and interest expense. Operating costs primarily include programming costs, the cost of the Systems workforce, cable service related expenses, franchise fees and expenses related to customer billings.
Historical Performance
Operating Data
September 30, 2008 |
December 31, 2008 |
September 30, 2009 |
|||||||
Equivalent Basic Units (EBUs) |
225,519 | 223,583 | 216,002 | ||||||
Digital subscribers |
87,799 | 88,880 | 86,279 | ||||||
High Speed Data (HSD) residential subscribers |
123,312 | 126,143 | 132,234 | ||||||
Telephone residential subscribers |
46,022 | 50,692 | 59,983 | ||||||
Homes passed |
503,021 | 503,842 | 504,836 | ||||||
Internet-ready homes passed |
494,672 | 496,241 | 497,235 | ||||||
Telephone-ready homes passed |
452,153 | 475,756 | 488,426 | ||||||
Basic subscribers |
286,935 | 285,540 | 279,379 | ||||||
Basic penetration of homes passed |
57.0 | % | 56.7 | % | 55.3 | % | |||
Digital penetration of basic subscribers |
30.6 | % | 31.1 | % | 30.9 | % | |||
HSD penetration of internet-ready homes passed |
24.9 | % | 25.4 | % | 26.6 | % | |||
Telephone penetration of telephone-ready homes passed |
10.2 | % | 10.7 | % | 12.3 | % |
Results of Operations
The following tables set forth a summary of the Systems operations for the periods indicated and their percentages of total revenue:
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||||||
2008 | 2009 | 2008 | 2009 | |||||||||||||||||||||||||
Amount | % | Amount | % | Amount | % | Amount | % | |||||||||||||||||||||
(dollars in thousands) | (dollars in thousands) | |||||||||||||||||||||||||||
Revenue: |
||||||||||||||||||||||||||||
Video |
$ | 40,482 | 57.0 | % | $ | 41,076 | 54.4 | % | $ | 119,889 | 57.7 | % | $ | 123,414 | 54.9 | % | ||||||||||||
High Speed Data |
11,928 | 16.8 | 13,315 | 17.6 | 34,445 | 16.6 | 39,315 | 17.5 | ||||||||||||||||||||
Telephone |
4,686 | 6.6 | 6,079 | 8.0 | 12,740 | 6.1 | 17,507 | 7.8 | ||||||||||||||||||||
Advertising Sales |
1,788 | 2.5 | 1,710 | 2.3 | 5,111 | 2.5 | 5,024 | 2.2 | ||||||||||||||||||||
Commercial |
6,292 | 8.8 | 7,465 | 9.9 | 18,208 | 8.8 | 21,703 | 9.7 | ||||||||||||||||||||
Other |
5,890 | 8.3 | 5,928 | 7.8 | 17,346 | 8.3 | 17,660 | 7.9 | ||||||||||||||||||||
Total revenue |
$ | 71,066 | 100.0 | % | $ | 75,573 | 100.0 | % | $ | 207,739 | 100.0 | % | $ | 224,623 | 100.0 | % | ||||||||||||
Costs and expenses: |
||||||||||||||||||||||||||||
Operating (excluding depreciation and amortization and selling, general and administrative listed below) |
33,088 | 46.6 | % | 33,306 | 44.1 | % | 96,246 | 46.3 | % | 101,100 | 45.0 | % | ||||||||||||||||
Selling, general and administrative |
10,272 | 14.5 | % | 10,191 | 13.5 | % | 30,724 | 14.8 | % | 30,740 | 13.7 | % | ||||||||||||||||
Depreciation and amortization |
10,805 | 15.2 | % | 10,312 | 13.6 | % | 32,451 | 15.6 | % | 31,476 | 14.0 | % | ||||||||||||||||
Income from operations |
16,901 | 21,764 | 48,318 | 61,307 | ||||||||||||||||||||||||
Other Income (expenses): |
||||||||||||||||||||||||||||
Gain from derivative instruments |
1,454 | | 997 | 1,821 | ||||||||||||||||||||||||
Loss on extinguishment of debt |
| | | (4,619 | ) | |||||||||||||||||||||||
Interest expense |
(11,717 | ) | (10,858 | ) | (36,278 | ) | (30,028 | ) | ||||||||||||||||||||
Net income |
$ | 6,638 | $ | 10,906 | $ | 13,037 | $ | 28,481 | ||||||||||||||||||||
15
Table of Contents
Three Months Ended September 30, 2009 Compared to Three Months Ended September 30, 2008.
Revenue for the three months ended September 30, 2009 was $75.6 million as compared to $71.1 million for the three months ended September 30, 2008, an increase of $4.5 million or 6.3%. This increase was mainly the result of (i) a $0.6 million increase in video revenue resulting from increased digital subscriber levels, along with increased usage of Digital Video Recorders and high definition converters; (ii) an increase in high-speed data revenue of $1.4 million or 11.6% from continued marketing focus for this service offering driving HSD subscriber growth; (iii) a $1.4 million increase in telephone revenue generated by increases in subscriber levels and (iv) a $1.2 million increase in commercial revenue as we continue to expand our non-residential customer base through targeted marketing efforts. We expect revenues to continue to increase as we see subscriber growth in our high-speed data and telephone service offerings, while video subscriber levels stabilize.
Operating expenses for the three months ended September 30, 2009 were $33.3 million as compared to $33.1 million for the same period in 2008. The $0.2 million increase was mainly the result of increased programming costs in conjunction with annual contractual increases, coupled with increased HSD and telephony direct costs driven by higher subscriber levels and usage totaling $1.4 million, offset in part by a $0.6 million reduction in health insurance costs driven by slightly lower headcount and employee claim levels, as well as general reductions in other operating costs due to managements efforts to reduce discretionary spending. We expect operating expenses to continue to increase as growth in total revenue generating units will result in increased direct expenses, while technical and customer support levels should remain relatively stable.
Selling, general and administrative expenses for the three months ended September 30, 2009 were $10.2 million as compared to $10.3 million for the three months ended September 30, 2008, a decrease of $0.1 million. This decrease resulted mainly from a decrease in marketing spending due to overall slow gross subscriber connect activity. We expect to see relatively moderate growth in selling, general and administrative expenses as we increase marketing spending to drive subscriber growth trends.
Depreciation of property and equipment and amortization expense was $10.3 million for the three months ended September 30, 2009, compared with $10.8 million for the same period in 2008, a decrease of $0.5 million. This decrease is the result of lower levels of capital expenditures in recent years moderating depreciation expense.
Income from operations for the three months ended September 30, 2009 was $21.8 million as compared to $16.9 million for the same period in 2008 for the reasons described above.
The marking-to-market of the interest rate swap agreements resulted in the recognition of $1.5 million in other income for the three months ended September 30, 2008. As no swaps were in place during the three months ended September 30, 2009, there was no charge for this corresponding period.
Interest expense, including amortization of debt financing costs, for the three months ended September 30, 2009 was $10.9 million as compared to $11.7 million for the three months ended September 30, 2008. This decrease was primarily attributable to lower market interest rates.
As a result of the factors described above, the net income was $10.9 million for the three months ended September 30, 2009 as compared to $6.6 million for the three months ended September 30, 2008.
Nine Months Ended September 30, 2009 Compared to Nine Months Ended September 30, 2008
Revenue for the nine months ended September 30, 2009 was $224.6 million as compared to $207.7 million for the nine months ended September 30, 2008, an increase of $16.9 million or 8.1%. This increase was mainly the result of a (i) $3.5 million
16
Table of Contents
increase in video revenue from increased digital subscriber levels, along with increased usage of Digital Video Recorders and high definition converters; (ii) a $4.9 million or 14.1% increase in high-speed data revenue resulting from continued marketing focus for this service offering driving HSD subscriber growth; (iii) a $4.8 million increase in telephone revenue generated by this service offering through subscriber growth and (iv) a $3.5 million increase in commercial revenue as we continue to expand our non-residential customer base through targeted marketing efforts.
Operating expenses for the nine months ended September 30, 2009 were $101.1 million as compared to $96.2 million for the same period in 2008. The $4.9 million or 5.1% increase was mainly the result of increased programming costs in conjunction with annual contractual increases, coupled with the incurrence of higher levels direct costs associated with our continued expansion of high speed data and cable telephony services totaling $5.7 million, offset in part by a $0.9 million decrease in health insurance costs driven by slightly lower headcount and employee claim levels.
Selling, general and administrative expenses for the nine months ended September 30, 2009 were $30.7 million for both the nine months ended September 30, 2009 and 2008. Underlying this flat trend is a moderate decrease in marketing spending of $0.4 million, offset by a $0.3 million increase in bad debt expense which trends with revenue growth, along with decreases in other general expense items due to conscious efforts to control costs.
Depreciation of property and equipment and amortization expense was $31.5 million for the nine months ended September 30, 2009, compared with $32.5 million for the same period in 2008, a decrease of $1.0 million. This decrease is the result of lower levels of capital expenditures in recent years moderating depreciation expense.
Income from operations for the nine months ended September 30, 2009 was $61.3 million as compared to $48.3 million for the same period in 2008 for the reasons described above.
The marking-to-market of the interest rate swap agreements resulted in the recognition of $1.8 million in other income for the nine months ended September 30, 2009 as compared to $1.0 million for the nine months ended September 30, 2008 due to fluctuations in market interest rates, as well as the lapsing of the underlying swap contracts in March 2009.
Interest expense, including amortization of debt financing costs, for the nine months ended September 30, 2009 was $30.0 million as compared to $36.3 million for the nine months ended September 30, 2008. This $6.3 million decrease was primarily attributable lower market interest rates.
The Company recognized a loss of $4.6 million related to costs incurred in conjunction with the June 8, 2009 amendment to the Senior Credit Agreement as defined in Note 8.
As a result of the factors described above, the net income was $28.5 million for the nine months ended September 30, 2009 as compared to a net income of $13.0 million for the nine months ended September 30, 2008.
Liquidity and Capital Resources
The Companys primary source of liquidity is cash flow from operations. We also have available funds under our revolving credit facility, subject to certain conditions. Our primary liquidity requirements will be for debt service, capital expenditures and working capital.
In connection with the acquisition of the Systems, we have incurred substantial amounts of debt, including amounts outstanding under our senior credit facility and our 9.375% Senior Subordinated Notes. Interest payments on this indebtedness will significantly reduce our cash flows from operations. As of September 30, 2009, the Company has total debt outstanding of $598.4 million (including capital lease obligations).
We have a $509.0 million Senior Credit Facility, consisting of a $67.5 million Revolver and a $441.5 million Term Loan. At September 30, 2009, none of the Revolver was outstanding, with $67.5 million of unused senior credit commitments under the revolving credit facility. The Revolver shall be paid such that the amount outstanding shall not exceed $40.0 million from March 1, 2010 until the termination date of March 1, 2012. We will be able to prepay revolving credit loans and reborrow amounts that are repaid, up to the amount of the revolving credit commitment then in effect, subject to customary conditions.
The Extended Term Loans mature on June 2013, and the remaining outstanding Term Loan debt of $118.8 million matures in September 2011.
The Senior Credit Facility contains certain restrictive financial covenants that, among other things, require the Company to maintain certain debt service coverage, interest coverage, fixed charge coverage, leverage ratios and a certain level of EBITDA and places certain limitations on additional debt and investments. The Senior Credit Facility contains conditions precedent to borrowing, events of default (including change of control) and covenants customary for facilities of this nature. The Senior Credit Facility is collateralized by substantially all of the assets of the Company and its Subsidiaries.
17
Table of Contents
The Company can make no assurances that it will be able to satisfy and comply with the covenants under the Senior Credit Facility. The Companys ability to maintain its liquidity and maintain compliance with its covenants under the Senior Credit Facility is dependent upon its ability to successfully execute its current business plan. The Company can make no assurances, however, that its business will generate sufficient cash flow from operations or that existing available cash or future borrowings will be available to it under the Senior Credit Facility in an amount sufficient to enable it to pay its indebtedness or to fund its other liquidity needs.
We expect to incur capital expenditures in 2009 at a level lower than that of 2008 as we have substantially completed the deployment of all major product offerings, including high-speed data, telephone and video on demand services to the majority of our systems. We expect subsequent year capital expenditure levels to remain relatively consistent, reflecting more maintenance and discretionary capital spending.
We believe that the cash generated from operations will be sufficient to meet our debt service, capital expenditures and working capital requirements for the foreseeable future. Subject to restrictions on our Senior Credit Facility and the indenture governing our Senior Subordinated Notes, we may incur more debt for working capital, capital expenditures, acquisitions and for other purposes. In addition, we may require additional financing if our plans materially change in an adverse manner or prove to be materially inaccurate. There can be no assurance that such financing, if permitted under the terms of our debt agreement, will be available on terms acceptable to us or at all.
Contractual Obligations
The following table sets forth our long-term contractual cash obligations as of September 30, 2009 (dollars in thousands):
Years Ending December 31, | |||||||||||||||||||||
Total | Remainder of 2009 |
2010 | 2011 | 2012 | 2013 | Thereafter | |||||||||||||||
Senior secured credit facilities |
$ | 441,492 | $ | 1,132 | $ | 33,157 | $ | 91,323 | $ | 3,316 | $ | 312,564 | $ | | |||||||
6% Seller Note |
6,845 | 6,845 | | | | | | ||||||||||||||
9 3/8% Senior Subordinated Notes due 2014 |
150,000 | | | | | | 150,000 | ||||||||||||||
Cash interest |
143,902 | 9,856 | 38,730 | 36,586 | 35,300 | 22,844 | 586 | ||||||||||||||
Capitalized leases (including interest) |
56 | 56 | | | | | | ||||||||||||||
Operating leases |
2,131 | 164 | 611 | 543 | 325 | 240 | 248 | ||||||||||||||
Total cash contractual obligations |
$ | 744,426 | $ | 18,053 | $ | 72,498 | $ | 128,452 | $ | 38,941 | $ | 335,648 | $ | 150,834 | |||||||
Cash Flows
Cash provided by operations increased to $59.3 million for the nine months ended September 30, 2009 as compared to $38.9 million for the same period in 2008. This is mainly the result of the increase in the Companys Net Income as discussed above.
Cash used in investing activities decreased to $21.5 million for the nine months ended September 30, 2009 from $29.2 million for the same period in 2008. This decrease is the result of capital expenditures decreasing to a level consistent with a maintenance mode of operating, with higher percentages of spending on customer premise equipment and additional infrastructure costs associated with subscriber levels as opposed to major rebuild and product launch projects.
Off-Balance Sheet Arrangements
We do not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.
Critical Accounting Policies and Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make certain estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenue and
18
Table of Contents
expenses during the reported period. In making these estimates and assumptions, management employs critical accounting policies. Our critical accounting policies and estimates are discussed in our Annual Report on Form 10-K for the year ended December 31, 2008.
Inflation and Changing Prices
Our costs and expenses will be subject to inflation and price fluctuations. We do not expect that such changes are likely to have a material effect on our results of operations.
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk
We are exposed to certain market risks as part of our ongoing business operations. Primary exposure will include changes in interest rates as borrowings under our senior secured credit facilities bear interest at floating rates based on LIBOR or the base rate, in each case plus an applicable borrowing margin. We manage our interest rate risk by balancing the amount of fixed-rate and floating-rate debt. For fixed-rate debt, interest rate changes do not affect earnings or cash flows. Conversely, for floating-rate debt, interest rate changes generally impact our earnings and cash flows, assuming other factors are held constant.
The following table estimates the changes to cash flow from operations if interest rates were to fluctuate by 100 or 50 basis points, or BPS (where 100 basis points represents one percentage point), for a twelve-month period after giving effect to the interest rate swap agreements described below:
Interest rate decrease | No change to interest rate |
Interest rate increase | |||||||||||||
100 BPS | 50 BPS | 50 BPS | 100 BPS | ||||||||||||
(dollars in thousands) | |||||||||||||||
Senior credit facilities |
$ | 17,207 | $ | 19,645 | $ | 22,082 | $ | 24,519 | $ | 26,957 | |||||
9.375% senior subordinated notes due 2014 |
14,063 | 14,063 | 14,063 | 14,063 | 14,063 | ||||||||||
$ | 31,270 | $ | 33,708 | $ | 36,145 | $ | 38,582 | $ | 41,020 | ||||||
We use derivative instruments to manage our exposure to interest rate risks. Our objective for holding derivatives is to minimize the risks using the most effective methods to eliminate or reduce the impacts of these exposures. We use interest rate swap agreements, not designated as hedging instruments under the authoritative guidance associated with accounting for derivative instruments and hedging activities, in connection with our variable rate senior credit facility. We do not use derivative financial instruments for speculative or trading purposes.
At December 31, 2008, we had in effect four interest rate swaps with three separate commercial banks, with a total notional amount of $225.0 million with a term of two years beginning March 2007 at a fixed rate of 5.08%. These interest rate swap agreements require us to pay a fixed rate and receive a floating rate thereby creating fixed rate debt. The difference to be paid or received on the swaps are accrued as an adjustment to interest expense. We are exposed to credit loss in the event of nonperformance by the counterparty. The net fair value of the interest rate swap agreements, which represents the cash we would receive or pay to settle the agreements, was a liability of approximately $1.8 million at December 31, 2008. These agreements ended in March 2009.
ITEM 4T. Controls and Procedures
The Companys management, with the participation of the Companys chief executive officer and chief financial officer, evaluated the effectiveness of the Companys disclosure controls and procedures as of September 30, 2009. The term disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SECs rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the companys management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation of the Companys disclosure controls and procedures as of September 30, 2009 the Companys chief executive officer and chief financial officer concluded that, as of such date, the Companys disclosure controls and procedures were effective at the reasonable assurance level.
19
Table of Contents
There was no change in the internal control over financial reporting that occurred during the period ended September 30, 2009 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
PART 2. OTHER INFORMATION
In the normal course of business, the Company is party to various claims and legal proceedings. The Company records a reserve for these matters when an adverse outcome is probable and they can reasonably estimate its potential liability. Although the ultimate outcome of these matters is currently not determinable, the Company does not believe that the resolution of these matters in a manner adverse to their interest will have a material effect upon their financial condition, results of operations or cash flows for an interim or annual period.
For a more detailed explanation of the factors affecting our business, please refer to the Risk Factors section in Item 1A of our 2008 Form 10-K.
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
ITEM 3. Defaults upon Senior Securities
None.
ITEM 4. Submission of Matters to a Vote of Security Holders
None.
None.
(a) |
Exhibits | |||
10.29 | Amended and Restated Executive Employment Agreement, dated as of September 1, 2009, by and between Atlantic Broadband Management, LLC and David J. Keefe. | |||
10.30 | Amended and Restated Executive Employment Agreement, dated as of September 1, 2009, by and between Atlantic Broadband Management, LLC and Edward T. Holleran. | |||
10.31 | Amended and Restated Executive Employment Agreement, dated as of September 1, 2009, by and between Atlantic Broadband Management, LLC and Patrick Bratton. | |||
10.32 | Amended and Restated Executive Employment Agreement, dated as of September 1, 2009, by and between Atlantic Broadband Management, LLC and Almis Kuolas. | |||
10.33 | Amended and Restated Executive Employment Agreement, dated as of September 1, 2009, by and between Atlantic Broadband Management, LLC and Chris Daly. | |||
10.34 | Amended and Restated Executive Employment Agreement, dated as of September 1, 2009, by and between Atlantic Broadband Management, LLC and Richard Shea. | |||
31.1 | Certification of David J. Keefe pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |||
31.2 | Certification of Patrick Bratton pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |||
32.1 | Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 Chief Executive Officer. | |||
32.2 | Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 Chief Financial Officer. |
20
Table of Contents
Pursuant to the requirements of Section 13 or 15(d) of the Securities and Exchange Act of 1934 the registrant has duly caused this Form 10-Q to be signed on its behalf by the undersigned, thereunto duly authorized on November 12, 2009.
Atlantic Broadband Finance, LLC |
/S/ DAVID J. KEEFE |
David J. Keefe |
Chief Executive Officer and Director |
/S/ PATRICK BRATTON |
Patrick Bratton |
Chief Financial Officer |
21