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MEDIACOM BROADBAND LLC - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS(Edgar Glimpses Via Acquire Media NewsEdge) The following discussion should be read in conjunction with our unaudited consolidated financial statements as of, and for the three and six months ended June 30, 2011 and 2010, and with our annual report on Form 10-K for the year ended December 31, 2010. Overview We are a wholly-owned subsidiary of Mediacom Communications Corporation ("MCC"). MCC is the nation's eighth largest cable company based on the number of customers who purchase one or more video services, also known as basic subscribers. Through our interactive broadband network, we provide our customers with a wide variety of advanced products and services, including video services such as video-on-demand, high-definition television ("HDTV") and digital video recorders ("DVRs"), high-speed data ("HSD") and phone service. We offer our primary services of video, HSD and phone, which we refer to as our "triple-play bundle," over a single communications platform, a significant advantage over most competitors in our service areas. As of June 30, 2011, we offered our triple-play bundle to approximately 97% of our estimated 1.52 million homes passed in seven states. As of the same date, we served approximately 634,000 basic subscribers, 415,000 digital video customers, 470,000 HSD customers and 177,000 phone customers, aggregating 1.28 million primary service units ("PSUs") and 1.70 million revenue generating units ("RGUs"). Our basic and digital video services compete principally with direct broadcast satellite ("DBS") companies, and we continue to face significant levels of price competition from these providers, who offer video programming substantially similar to ours. We compete with these providers by offering our triple-play bundle and interactive video services that are unavailable to DBS customers due to the limited two-way interactivity of DBS service. Our HSD service competes primarily with digital subscriber line ("DSL") services offered by local telephone companies; based upon the speeds we offer, we believe our HSD product is superior to comparable DSL offerings in our service areas. Our phone service mainly competes with substantially comparable phone services offered by local telephone companies and with cellular phone services offered by national wireless providers. We believe our customers prefer the cost savings of the bundled products and services we offer, as well as the convenience of having a single provider contact for ordering, provisioning, billing and customer care. Our ability to continue to grow our customer base and revenues depends on several factors, including the competition we face and general economic conditions. Continuing weak economic conditions for customers, and significant video price competition from DBS providers, have contributed to lower demand for our video, HSD and phone services, which has led to a reduction in basic subscribers and slower growth rates of digital, HSD and phone customers. A continuation or broadening of such effects may adversely impact our results of operations, cash flows and financial position. Recent Developments Going Private Transaction On November 12, 2010, MCC entered into an Agreement and Plan of Merger (the "Merger Agreement"), by and among MCC, JMC Communications LLC ("JMC") and Rocco B. Commisso, MCC's founder, Chairman and Chief Executive Officer, who was also the sole member and manager of JMC, for the purpose of taking MCC private (the "Going Private Transaction"). At a special meeting of stockholders on March 4, 2011, MCC's stockholders voted to adopt the Merger Agreement. On the same date, JMC was merged with and into MCC, with MCC continuing as the surviving corporation, a private company that is wholly-owned by Mr. Commisso (the "Merger"). As a result of the Merger, among other things, each share of MCC's common stock (other than shares held by Mr. Commisso and his affiliates) was converted into the right to receive promptly after the Merger $8.75 in cash. The Going Private Transaction required funding of approximately $381.5 million, including related transaction expenses, and was funded, in part, by capital distributions to MCC from us, consisting of $200.0 million of borrowings under our revolving credit facility and $45.0 million of cash on hand. The balance was funded by Mediacom LLC, another wholly-owned subsidiary of MCC. 15-------------------------------------------------------------------------------- Table of Contents Revenues, Costs and Expenses Video revenues primarily represent monthly subscription fees charged to customers for our core cable products and services (including basic and digital cable programming services, wire maintenance, equipment rental and services to commercial establishments), pay-per-view charges, installation, reconnection and late payment fees, franchise fees and other ancillary revenues. HSD revenues primarily represent monthly fees charged to customers (including small to medium sized commercial establishments) for our HSD products and services and equipment rental fees, as well as fees charged to large-sized businesses for our scalable, fiber-based enterprise network products and services. Phone revenues primarily represent monthly fees charged to customers (including small to medium sized commercial establishments) for our phone service. Advertising revenues represent the sale of advertising placed on our video services. As a result of competition and weak economic conditions, we have lost video customers in the past and our video revenues may decline in the foreseeable future if this trend continues. We believe this loss of revenue will be mostly offset through greater penetration of our advanced video services. We also expect to continue to expand our penetration of our HSD and phone services, which we believe will result in further growth in HSD and phone revenues. However, weak economic conditions, intense competition and, specific to phone, wireless substitution, may adversely affect future growth in HSD and phone customers. Advertising revenues are generally sensitive to the political election cycle, and we believe advertising revenues may decline in 2011, as 2010 was an election year. Service costs consist of the direct costs related to providing and maintaining services to our customers. Significant service costs include: programming expenses; HSD costs, including costs of bandwidth connectivity and customer provisioning and costs related to our enterprise networks business and our network operations center; phone service costs, including delivery and other expenses; employee costs, including wages and other expenses for technical personnel who maintain our cable network, perform customer installation activities and provide customer support; and field operating costs, including the use of outside contractors, and vehicle, utility and pole rental expenses. These costs generally rise as a result of contractual increases in video programming rates, customer growth and inflationary cost increases for personnel, outside vendor and other expenses. Personnel and related support costs may increase as the percentage of expenses that we capitalize declines due to lower levels of new service installations. Our service costs may fluctuate depending on the level of investments we make in our cable systems, and the resulting operational efficiencies. In 2011, we completed a transition to an internal phone service platform, which greatly reduced our phone service expenses. We anticipate that our service costs, with the exception of programming expenses, will remain fairly consistent as a percentage of our revenues. Video programming expenses, which are generally paid on a per subscriber basis, have historically been our largest single expense item. In recent years, we have experienced substantial increases in the cost of our programming, particularly sports and local broadcast programming, well in excess of the inflation rate or the change in the consumer price index. We believe that these expenses will continue to grow, due to the increasing demands of sports and other large programmers for contract renewals and television broadcast station owners for retransmission consent fees, including certain large programmers who also own major market television broadcast stations. While such growth in programming expenses can be partially offset by rate increases, we expect our video gross margins may continue to decline if increases in programming costs outpace any growth in video revenues. Significant selling, general and administrative expenses include: wages and related expenses for our call center, customer service and support and administrative personnel; franchise fees and other taxes; bad debt expense; billing costs; advertising and marketing expenses; and general office administration costs. These expenses generally rise due to customer growth and inflationary cost increases for employees and other expenses. We anticipate that our selling, general and administrative expenses should remain fairly consistent as a percentage of our revenues. Management fee expenses reflect compensation paid to MCC for the performance of services it provides our operating subsidiaries in accordance with management agreements between MCC and our operating subsidiaries. Use of Non-GAAP Financial Measures "OIBDA" is not a financial measure calculated in accordance with generally accepted accounting principles ("GAAP") in the United States. We define OIBDA as operating income before depreciation and amortization. OIBDA has inherent limitations as discussed below. 16-------------------------------------------------------------------------------- Table of Contents OIBDA is one of the primary measures used by management to evaluate our performance and to forecast future results. We believe OIBDA is useful for investors because it enables them to assess our performance in a manner similar to the methods used by management, and provides a measure that can be used to analyze, value and compare the companies in the cable industry. A limitation of OIBDA, however, is that it excludes depreciation and amortization, which represents the periodic costs of certain capitalized tangible and intangible assets used in generating revenues in our business. Management uses a separate process to budget, measure and evaluate capital expenditures. In addition, OIBDA may not be comparable to similarly titled measures used by other companies, which may have different depreciation and amortization policies. OIBDA should not be regarded as an alternative to operating income or net income (loss) as indicators of operating performance, or to the statement of cash flows as measures of liquidity, nor should it be considered in isolation or as a substitute for financial measures prepared in accordance with GAAP. We believe that operating income is the most directly comparable GAAP financial measure to OIBDA. In our Annual Report on Form 10-K for the year ended December 31, 2010, we have presented OIBDA as adjusted for non-cash stock based compensation, or "Adjusted OIBDA." As a result of the Going Private Transaction, such compensation plans have been terminated, and we believe OIBDA is the most appropriate measure to evaluate our performance and forecast future results. Actual Results of Operations Three Months Ended June 30, 2011 compared to Three Months Ended June 30, 2010 The table below sets forth our consolidated statements of operations and OIBDA for the three months ended June 30, 2011 and 2010 (dollars in thousands and percentage changes that are not meaningful are marked NM): Three Months Ended June 30, 2011 2010 $ Change % Change Revenues $ 219,758 $ 213,270 $ 6,488 3.0 % Costs and expenses: Service costs (exclusive of depreciation and amortization) 89,125 88,461 664 0.8 % Selling, general and administrative expenses 43,052 41,782 1,270 3.0 % Management fee expense 3,663 3,968 (305 ) (7.7 %) Depreciation and amortization 35,876 31,790 4,086 12.9 % Operating income 48,042 47,269 773 1.6 % Interest expense, net (28,228 ) (28,365 ) 137 (0.5 %) Loss on derivatives, net (11,577 ) (14,629 ) 3,052 NM Other expense, net (374 ) (468 ) 94 (20.1 %) Net income $ 7,863 $ 3,807 $ 4,056 NM OIBDA $ 83,918 $ 79,059 $ 4,859 6.1 % 17 -------------------------------------------------------------------------------- Table of Contents The table below represents a reconciliation of OIBDA to operating income, which is the most directly comparable GAAP measure (dollars in thousands): Three Months Ended June 30, 2011 2010 $ Change % Change OIBDA $ 83,918 $ 79,059 $ 4,859 6.1 % Depreciation and amortization (35,876 ) (31,790 ) (4,086 ) 12.9 % Operating income $ 48,042 $ 47,269 $ 773 1.6 % RevenuesThe tables below set forth our revenues and selected subscriber, customer and average monthly revenue statistics as of, and for the three months ended, June 30, 2011 and 2010 (dollars in thousands, except per subscriber data): Three Months Ended June 30, 2011 2010 $ Change % Change Video $ 131,297 $ 131,166 $ 131 0.1 % HSD 59,166 53,476 5,690 10.6 % Phone 17,175 16,191 984 6.1 % Advertising 12,120 12,437 (317 ) (2.5 %) Total $ 219,758 $ 213,270 $ 6,488 3.0 % June 30, Increase 2011 2010 (Decrease) % Change Basic subscribers 634,000 677,000 (43,000 ) (6.4 %) HSD customers 470,000 447,000 23,000 5.1 % Phone customers 177,000 168,000 9,000 5.4 % Primary Service Units (PSUs) 1,281,000 1,292,000 (11,000 ) (0.9 %) Digital customers 415,000 394,000 21,000 5.3 % Revenue Generating Units (RGUs) 1,696,000 1,686,000 10,000 0.6 % Average total monthly revenue per basic subscriber (1) $ 113.75 $ 104.16 $ 9.59 9.2 % Average total monthly revenue per PSU (2) $ 56.81 $ 55.09 $ 1.72 3.1 % (1) Represents average total monthly revenues for the period divided by average basic subscribers for such period. (2) Represents average total monthly revenues for the period divided by average PSUs for such period. Revenues increased 3.0%, largely as a result of greater HSD revenues. Average total monthly revenue per basic subscriber increased 9.2% to $113.75, and average total monthly revenue per PSU increased 3.1% to $56.81. Video revenues were essentially flat, as lower levels of discounted pricing and, to a lesser extent, higher penetration of our advanced video services and greater revenues from customer fees were mostly offset by a lower number of basic subscribers. During the three months ended June 30, 2011, we lost 20,000 basic subscribers and 6,000 digital customers, as compared to a loss of 11,000 basic subscribers and an increase of 4,000 digital customers in the prior year period. As of June 30, 2011, we served 634,000 basic subscribers, or 41.7% of our estimated homes passed, and 415,000 digital customers, or 65.5% of our basic subscribers. As of June 30, 2011, 46.9% of our digital customers were taking our DVR and/or HDTV services, as compared to 42.8% as of the same date last year. 18 -------------------------------------------------------------------------------- Table of Contents HSD revenues grew 10.6%, primarily due to a 5.1% increase in HSD customers and, to a lesser extent, greater revenues from equipment rentals and our enterprise networks business. During the three months ended June 30, 2011, we gained 1,000 HSD customers, as compared to an increase of 5,000 in the prior year period. As of June 30, 2011, we served 470,000 HSD customers, or 30.9% of our estimated homes passed. Phone revenues were 6.1% higher, principally due to a 5.4% increase in phone customers. During the three months ended June 30, 2011, we gained 2,000 phone customers, as compared to a gain of 9,000 phone customers in the prior year period. As of June 30, 2011, we served 177,000 phone customers, or 12.0% of our estimated marketable phone homes. Advertising revenues fell 2.5%, mainly due to lower levels of political advertising. Costs and Expenses Service costs increased 0.8%, primarily due to higher programming and, to a lesser extent, field operating expenses, largely offset by lower phone service costs. Programming expenses grew 4.0%, principally due to higher contractual rates and fees charged by our programming vendors, offset in part by a lower number of basic subscribers. Field operating costs rose 18.2%, largely as a result of greater vehicle fuel, equipment maintenance and repair, and electricity costs. Phone service costs fell 55.1%, substantially due to cost savings provided by our transition to an internal phone service platform. Service costs as a percentage of revenues were 40.6% and 41.5% for the three months ended June 30, 2011 and 2010, respectively. Selling, general and administrative expenses increased 3.0%, principally as a result of higher marketing costs. Marketing expenses grew 15.5%, primarily due to increased employee and other expenses related to our business service marketing. Selling, general and administrative expenses as a percentage of revenues were 19.6% for each of the three months ended June 30, 2011 and 2010. Management fee expense was 7.7% lower, reflecting lower overhead charges at MCC. Management fee expense as a percentage of revenues were 1.7% and 1.9% for the three months ended June 30, 2011 and 2010, respectively. Depreciation and amortization rose 12.9%, largely a result of the depreciation of new investments related to our internal phone service platform. OIBDA OIBDA grew 6.1%, primarily due to greater revenues and constrained growth in service costs. Operating Income Operating income was 1.6% higher, principally due to the growth in OIBDA, mostly offset by higher depreciation and amortization. Interest Expense, Net Interest expense, net, decreased 0.5%, as a lower average cost of debt was mostly offset by higher average outstanding balances under our bank credit facility (the "credit facility"). Loss on Derivatives, Net As of June 30, 2011, we had interest rate exchange agreements, or interest rate swaps, with an aggregate notional amount of $1.6 billion, of which $900 million are forward-starting interest rate swaps. These interest rate swaps have not been designated as hedges for accounting purposes, and the changes in their mark-to-market values are derived primarily from changes in market interest rates and the decrease in their time to maturity. As a result of the quarterly mark-to-market valuation of these interest rate swaps based upon information provided by our counterparties, we recorded a net loss on derivatives of $11.6 million and $14.6 million for the three months ended June 30, 2011 and 2010, respectively. 19 -------------------------------------------------------------------------------- Table of Contents Other Expense, Net Other expense, net, was $0.4 million and $0.5 million for the three months ended June 30, 2011 and 2010, respectively. During the three months ended June 30, 2011, other expense, net, consisted of $0.3 million of revolving credit facility commitment fees and $0.1 million of other fees. During the three months ended June 30, 2010, other expense, net, substantially consisted of revolving credit facility commitment fees. Net Income As a result of the factors described above, we recognized net income of $7.9 million for the three months ended June 30, 2011, compared to $3.8 million for the three months ended June 30, 2010. Actual Results of Operations Six Months Ended June 30, 2011 compared to Six Months Ended June 30, 2010 The table below sets forth our consolidated statements of operations and OIBDA for the six months ended June 30, 2011 and 2010 (dollars in thousands and percentage changes that are not meaningful are marked NM): Six Months Ended June 30, 2011 2010 $ Change % Change Revenues $ 435,415 $ 422,048 $ 13,367 3.2 % Costs and expenses: Service costs (exclusive of depreciation and amortization) 179,111 174,820 4,291 2.5 % Selling, general and administrative expenses 85,246 81,741 3,505 4.3 % Management fee expense 7,660 7,843 (183 ) (2.3 %) Depreciation and amortization 71,089 62,659 8,430 13.5 % Operating income 92,309 94,985 (2,676 ) (2.8 %) Interest expense, net (55,652 ) (56,200 ) 548 (1.0 %) Loss on derivatives, net (4,205 ) (19,876 ) 15,671 NM Other expense, net (1,182 ) (955 ) (227 ) 23.8 % Net income $ 31,270 $ 17,954 $ 13,316 NM OIBDA $ 163,398 $ 157,644 $ 5,754 3.6 % The table below represents a reconciliation of OIBDA to operating income, which is the most directly comparable GAAP measure (dollars in thousands): Six Months Ended June 30, 2011 2010 $ Change % Change OIBDA $ 163,398 $ 157,644 $ 5,754 3.6 % Depreciation and amortization (71,089 ) (62,659 ) (8,430 ) 13.5 % Operating income $ 92,309 $ 94,985 $ (2,676 ) (2.8 %) 20 -------------------------------------------------------------------------------- Table of Contents Revenues The tables below set forth our revenues and selected subscriber, customer and average monthly revenue statistics as of, and for the six months ended, June 30, 2011 and 2010 (dollars in thousands, except per subscriber data): Six Months Ended June 30, 2011 2010 $ Change % Change Video $ 262,246 $ 261,226 $ 1,020 0.4 % HSD 115,448 105,915 9,533 9.0 % Phone 34,445 32,150 2,295 7.1 % Advertising 23,274 22,757 517 2.3 % Total $ 435,413 $ 422,048 $ 13,365 3.2 % June 30, Increase 2011 2010 (Decrease) % Change Basic subscribers 634,000 677,000 (43,000 ) (6.4 %) HSD customers 470,000 447,000 23,000 5.1 % Phone customers 177,000 168,000 9,000 5.4 % Primary Service Units (PSUs) 1,281,000 1,292,000 (11,000 ) (0.9 %) Digital customers 415,000 394,000 21,000 5.3 % Revenue Generating Units (RGUs) 1,696,000 1,686,000 10,000 0.6 % Average total monthly revenue per basic subscriber $ 111.90 $ 102.91 $ 8.99 8.7 % Average total monthly revenue per PSU $ 56.30 $ 54.91 $ 1.39 2.5 % Revenues increased 3.2%, primarily due to higher HSD and, to a much lesser extent, phone revenues. Average total monthly revenue per basic subscriber increased 8.7% to $111.90. Video revenues were 0.4% higher, as lower levels of discounted pricing and, to a lesser extent, greater revenues from customer fees and increased penetration of our advanced video services were mostly offset by a lower number of basic subscribers. During the six months ended June 30, 2011, we lost 29,000 basic subscribers and gained 6,000 digital customers, as compared to a loss of 13,000 basic subscribers and an increase of 16,000 digital customers in the prior year period. HSD revenues grew 9.0%, primarily due to the increase in HSD customers and, to a lesser extent, greater revenues from equipment rentals and our enterprise networks business. During the six months ended June 30, 2011, we gained 11,000 HSD customers, as compared to an increase of 19,000 in the prior year period. Phone revenues rose 7.1%, principally due to the increase in phone customers. During the six months ended June 30, 2011, we gained 2,000 phone customers, as compared to a gain of 16,000 phone customers in the prior year period. Advertising revenues increased 2.3%, primarily due to higher levels of automotive advertising. Costs and Expenses Service costs grew 2.5%, primarily due to higher programming and, to a lesser extent, field operating expenses, largely offset by lower phone service costs. Programming expenses increased 4.9%, principally due to higher contractual rates and fees charged by our programming vendors, offset in part by a lower number of basic subscribers. Field operating costs rose 18.2%, largely as a result of higher vehicle fuel and repair, fiber lease and electricity costs, and a greater usage of outside contractors. Phone service costs fell 44.3%, substantially due to cost savings provided by our transition to an internal phone service platform. Service costs as a percentage of revenues were 41.1% and 41.4% for the six months ended June 30, 2011 and 2010, respectively. 21-------------------------------------------------------------------------------- Table of Contents Selling, general and administrative expenses increased 4.3%, principally due to higher marketing costs. Marketing expenses grew 17.2%, primarily due to increased employee and other expenses related to our business service marketing. Selling, general and administrative expenses as a percentage of revenues were 19.6% and 19.4% for the six months ended June 30, 2011 and 2010, respectively. Management fee expense was 2.3% lower, reflecting lower overhead charges at MCC. Management fee expense as a percentage of revenues were 1.8% and 1.9% for the six months ended June 30, 2011 and 2010, respectively. Depreciation and amortization rose 13.5%, largely a result of the depreciation of new investments related to our internal phone service platform. OIBDA OIBDA increased 3.6%, primarily due to greater revenues, offset in part by higher service costs and selling, general and administrative expenses. Operating Income Operating income declined 2.8%, principally due to higher depreciation and amortization, offset in part by the increase in OIBDA. Interest Expense, Net Interest expense, net, decreased 1.0%, as a lower average cost of debt was mostly offset by higher average outstanding balances under our credit facility. Loss on Derivatives, Net As a result of changes to the mark-to-market valuation of our interest rate exchange agreements, we recorded a net loss on derivatives of $4.2 million and $19.9 million for the six months ended June 30, 2011 and 2010, respectively. Other Expense, Net Other expense, net, was $1.2 million and $1.0 million for the six months ended June 30, 2011 and 2010, respectively. During the six months ended June 30, 2011, other expense, net, consisted of $0.8 million of revolving credit facility commitment fees and $0.4 million of other fees. During the six months ended June 30, 2010, other expense, net, consisted of $0.8 million of revolving credit facility commitment fees and $0.2 million of other fees. Net Income As a result of the factors described above, we recognized net income of $31.3 million for the six months ended June 30, 2011, compared to $18.0 million in the prior year period. Liquidity and Capital Resources Overview Our net cash flows provided by operating activities are primarily used to fund network investments to accommodate customer growth and the further deployment of our advanced products and services, as well as scheduled repayments of our external financing and contributions to MCC. Our liquidity needs in the foreseeable future include, as of June 30, 2011, scheduled term loan amortization of $7.0 million during the remainder of 2011 and $14.0 million in each of the years ending December 31, 2012 through December 31, 2014, and $176.6 million of outstanding loans under our revolving credit facility, which expires December 31, 2012. We expect to extend the maturity of our revolving credit facility prior to its expiration and refinance the outstanding loans thereunder. As of June 30, 2011, our sources of liquidity included $9.5 million of cash on hand and $244.1 of unused and available lines under our revolving credit facility. We believe that cash generated by us, and available to us through our borrowing capacity under the revolving credit facility, will meet our anticipated capital and liquidity needs for the foreseeable future. 22-------------------------------------------------------------------------------- Table of Contents In the longer term, specifically 2015 and beyond, we do not expect to generate sufficient net cash flows from operations to fund our maturing term loans and senior notes. If we are unable to obtain sufficient future financing on similar terms as we currently experience, or at all, we may need to take other actions to conserve or raise capital that we would not take otherwise. However, we have accessed the debt markets for significant amounts of capital in the past, and expect to continue to be able to access these markets in the future as necessary. Net Cash Flows Provided by Operating Activities Net cash flows provided by operating activities were $128.7 million for the six months ended June 30, 2011, primarily due to OIBDA of $163.4 million and, to a much lesser extent, the $20.0 million net change in our operating assets and liabilities, offset in part by interest expense of $55.7 million. The net change in our operating assets and liabilities was largely a result of an increase in accounts payable, accrued expenses and other current liabilities of $13.0 million, a decrease in accounts receivable from affiliates of $8.3 million and, to a lesser extent, a decrease in deferred revenue of $1.4 million, offset in part by an increase in accounts receivable, net, of $2.5 million. Net cash flows provided by operating activities were $131.9 million for the six months ended June 30, 2010, primarily due to OIBDA of $157.6 million and, to a much lesser extent, the $29.2 million net change in operating assets and liabilities, offset in part by interest expense of $56.2 million. The net change in operating assets and liabilities was largely due to a decrease in accounts receivable from affiliates of $39.7 million, offset in part by an increase in accounts receivable, net, of $5.4 million and an increase in prepaid expenses and other assets of $4.6 million. Net Cash Flows Used in Investing Activities Capital expenditures continue to be our primary use of capital resources and the majority of our net cash flows used in investing activities. Net cash flows used in investing activities were $67.3 million for the six months ended June 30, 2011, as compared to $68.6 million in the prior year period. The $1.3 million decline in net cash flows used in investing activities was due to a $6.2 million redemption of restricted cash and cash equivalents, offset in part by a $4.9 million increase in capital spending. The increase in capital expenditures largely reflects investments in scalable infrastructure for our HSD service and, to a lesser extent, greater spending related to our business services and vehicle purchases, offset in part by reduced outlays for investments in our phone service platform. Net Cash Flows Used in Financing Activities Net cash flows used in financing activities were $85.1 million for the six months ended June 30, 2011, primarily due to capital distributions to MCC of $245.0 million, offset in part by net borrowings of $169.6 million under the credit facility. The capital distributions to MCC partially funded the Going Private Transaction (see "- Recent Developments - Going Private Transaction" above). Net cash flows used in financing activities were $58.0 million for the six months ended June 30, 2010, principally due to capital distributions to MCC of $48.0 million and, to a lesser extent, financing costs of $9.6 million, a dividend payment on preferred members' interest of $9.0 million and other financing activities, principally book overdrafts, of $8.4 million. Such financing activities were partially offset by net borrowings of debt of $17.0 million. Capital Structure As of June 30, 2011, our outstanding total indebtedness was $2.035 billion, of which approximately 59.0% was at fixed interest rates or subject to interest rate protection. During the six months ended June 30, 2011, we paid cash interest of $54.0 million, net of capitalized interest. Bank Credit Facility As of June 30, 2011, we had a $1.788 billion credit facility, of which $1.535 billion was outstanding. As of the same date, we had $244.1 million of unused lines under our $430.3 million revolving credit facility, after giving effect to $176.6 million of outstanding loans and $9.6 million of letters of credit issued to various parties as collateral. As of the same date, based on the terms and conditions of our debt arrangements, all of our unused revolving credit lines were available to be borrowed and used for general corporate purposes. Our revolving credit commitments are scheduled to expire on December 31, 2012. 23 -------------------------------------------------------------------------------- Table of Contents We use interest rate exchange agreements, or interest rate swaps, in order to fix the variable portion of debt under the credit facility to reduce the potential volatility in our interest expense that would otherwise result from changes in market interest rates. As of June 30, 2011, we had interest rate swaps with various banks pursuant to which the rate on $700 million of floating rate debt was fixed at a weighted average rate of 3.2%. As of the same date, we also had $900 million of forward starting interest rate swaps with a weighted average fixed rate of approximately 3.3%. Including the effects of such interest rate swaps, the average interest rates on outstanding debt under the credit facility as of June 30, 2011 and 2010 were 4.3% and 5.0%, respectively. Senior Notes As of June 30, 2011, we had $500.0 million of outstanding senior notes. Covenant Compliance and Debt Ratings For all periods through June 30, 2011, we were in compliance with all of the covenants under the credit facility and senior note arrangements. We do not believe that we will have any difficulty complying with any of the applicable covenants in the near future. Our future access to the debt markets and the terms and conditions we receive are influenced by our debt ratings. Our corporate credit ratings are B1, with a stable outlook, by Moody's, and B+, with a stable outlook, by Standard and Poor's. Any future downgrade to our credit ratings could result in higher interest rates on future debt issuance than we currently experience, or adversely impact our ability to raise additional funds. However, there are no covenants, events of default, borrowing conditions or other terms in the credit facility or senior note arrangements that are based on changes in our credit rating assigned by any rating agency. Contractual Obligations and Commercial Commitments There have been no material changes to our contractual obligations and commercial commitments as previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2010. Critical Accounting Policies The preparation of our financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. Periodically, we evaluate our estimates, including those related to doubtful accounts, long-lived assets, capitalized costs and accruals. We base our estimates on historical experience and on various other assumptions that we believe are reasonable. Actual results may differ from these estimates under different assumptions or conditions. We believe that the application of the critical accounting policies requires significant judgments and estimates on the part of management. For a summary of our critical accounting policies, please refer to our annual report on Form 10-K for the year ended December 31, 2010. 24 -------------------------------------------------------------------------------- Table of Contents Goodwill and Other Intangible Assets In accordance with the Financial Accounting Standards Board's Accounting Standards Codification No. 350 Intangibles - Goodwill and Other ("ASC 350"), the amortization of goodwill and indefinite-lived intangible assets is prohibited and requires such assets to be tested annually for impairment, or more frequently if impairment indicators arise. We have determined that our cable franchise rights and goodwill are indefinite-lived assets and therefore not amortizable. We directly assess the value of cable franchise rights for impairment under ASC 350 by utilizing a discounted cash flow methodology. In performing an impairment test in accordance with ASC 350, we make assumptions, such as future cash flow expectations, unit growth, competition, industry outlook, capital expenditures, and other future benefits related to cable franchise rights, which are consistent with the expectations of buyers and sellers of cable systems in determining fair value. If the determined fair value of our cable franchise rights is less than the carrying amount on the financial statements, an impairment charge would be recognized for the difference between the fair value and the carrying value of such assets. Goodwill impairment is determined using a two-step process. The first step compares the fair value of a reporting unit with our carrying amount, including goodwill. If the fair value of a reporting unit exceeds our carrying amount, goodwill of the reporting unit is considered not impaired and the second step is unnecessary. If the carrying amount of a reporting unit exceeds our fair value, the second step is performed to measure the amount of impairment loss, if any. The second step compares the implied fair value of the reporting unit's goodwill, calculated using the residual method, with the carrying amount of that goodwill. If the carrying amount of the goodwill exceeds the implied fair value, the excess is recognized as an impairment loss. We have determined that we have one reporting unit for the purpose of applying ASC 350, Mediacom Broadband. Our most recently completed annual impairment test was conducted as of October 1, 2010, and we will be conducting our next annual impairment test as of October 1, 2011. In accordance with Accounting Standards Update 2010-28 ("ASU 2010-28") - When to Perform Step 2 of the Goodwill Impairment Test for Reporting Units with Zero or Negative Carrying Amounts (a consensus of the FASB Emerging Issues Task Force), we have evaluated the qualitative factors surrounding our Mediacom Broadband reporting unit with its negative equity carrying value. We do not believe that it is "more likely than not" that a goodwill impairment exists. As such, we have not performed Step 2 of the goodwill impairment test. The economic conditions currently affecting the U.S. economy and the long-term impact on the fundamentals of our business may have a negative impact on the fair values of the assets in our reporting units. This may result in the recognition of an impairment loss in the future. Because we believe there has not been a meaningful change in the long-term fundamentals of our business during the first six months of 2011, we have determined that there has been no triggering event under ASC 350, and as such, no interim impairment test was required as of June 30, 2011. Inflation and Changing Prices Our costs and expenses are subject to inflation and price fluctuations. Such changes in costs and expenses can generally be passed through to subscribers. Programming costs have historically increased at rates in excess of inflation and are expected to continue to do so. We believe that under the Federal Communications Commission's existing cable rate regulations we may increase rates for cable television services to more than cover any increases in programming. However, competitive conditions and other factors in the marketplace may limit our ability to increase our rates. |