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MEDIACOM 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 92% of our estimated 1.29 million homes passed in twenty states. As of the same date, we served approximately 505,000 basic subscribers, 309,000 digital video customers, 385,000 HSD customers and 158,000 phone customers, aggregating 1.05 million primary service units ("PSUs") and 1.36 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 $100.0 million of borrowings under our revolving credit facility and $36.5 million of cash on hand. The balance was funded by Mediacom Broadband LLC, another wholly-owned subsidiary of MCC. 16-------------------------------------------------------------------------------- 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. 17-------------------------------------------------------------------------------- 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 $ 170,755 $ 163,739 $ 7,016 4.3 % Costs and expenses: Service costs (exclusive of depreciation and amortization) 74,455 73,243 1,212 1.7 % Selling, general and administrative expenses 28,652 27,322 1,330 4.9 % Management fee expense 2,847 3,046 (199 ) (6.5 %) Depreciation and amortization 29,341 27,309 2,032 7.4 % Operating income 35,460 32,819 2,641 8.0 % Interest expense, net (24,424 ) (23,585 ) (839 ) 3.6 % Loss on derivatives, net (8,830 ) (14,423 ) 5,593 (38.8 %) Loss on early extinguishment of debt - (1,234 ) 1,234 NM Investment income from affiliate 4,500 4,500 - NM Other expense, net (535 ) (666 ) 131 (19.7 %) Net income (loss) $ 6,171 $ (2,589 ) $ 8,760 NM OIBDA $ 64,801 $ 60,128 $ 4,673 7.8 % 18 -------------------------------------------------------------------------------- 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 $ 64,801 $ 60,128 $ 4,673 7.8 % Depreciation and amortization (29,341 ) (27,309 ) (2,032 ) 7.4 % Operating income $ 35,460 $ 32,819 $ 2,641 8.0 % 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 $ 102,382 $ 100,993 1,389 1.4 % HSD 48,493 43,849 4,644 10.6 % Phone 15,836 14,613 1,223 8.4 % Advertising 4,044 4,284 (240 ) (5.6 %) Total Revenues $ 170,755 $ 163,739 7,016 4.3 % June 30, Increase/ 2011 2010 (Decrease) % Change Basic subscribers 505,000 539,000 (34,000 ) (6.3 %) HSD customers 385,000 367,000 18,000 4.9 % Phone customers 158,000 149,000 9,000 6.0 % Primary Service Units (PSUs) 1,048,000 1,055,000 (7,000 ) (0.7 %) Digital customers 309,000 311,000 (2,000 ) (0.6 %) Revenue Generating Units (RGUs) 1,357,000 1,366,000 (9,000 ) (0.7 %) Average total monthly revenue per basic subscriber (1) $ 110.95 $ 100.61 $ 10.34 10.3 % Average total monthly revenue per PSU (2) $ 53.87 $ 51.88 $ 1.99 3.8 % (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 4.3%, primarily due to higher HSD and, to a lesser extent, video and phone revenues. Average total monthly revenue per basic subscriber increased 10.3% to $110.95, and average total monthly revenue per PSU increased 3.8% to $53.87. Video revenues rose 1.4%, 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 16,000 basic subscribers and 10,000 digital customers, as compared to a loss of 7,000 basic subscribers and an increase of 2,000 digital customers in the prior year period. As of June 30, 2011, we served 505,000 basic subscribers, or 39.1% of our estimated homes passed, and 309,000 digital customers, or 61.2% of our basic subscribers. As of June 30, 2011, 48.4% of our digital customers were taking our DVR and/or HDTV services, as compared to 41.4% as of the same date last year. 19-------------------------------------------------------------------------------- Table of Contents HSD revenues grew 10.6%, primarily due to a 4.9% 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 lost 1,000 HSD customers, as compared to an increase of 5,000 in the prior year period. As of June 30, 2011, we served 385,000 HSD customers, or 29.8% of our estimated homes passed. Phone revenues were 8.4% higher, principally due to a 6.0% increase in phone customers. During the three months ended June 30, 2011, there was no change in phone customers, as compared to an increase of 8,000 phone customers in the prior year period. As of June 30, 2011, we served 158,000 phone customers, or 13.3% of our estimated marketable phone homes. Advertising revenues were 5.6% lower, mainly due to lower levels of political advertising. Costs and Expenses Service costs grew 1.7%, primarily due to higher programming and field operating expenses, largely offset by lower phone service costs. Programming expenses were 3.6% higher, principally due to higher contractual rates and fees charged by our programming vendors and, to a lesser extent, greater retransmission consent expenses, offset in part by a lower number of basic subscribers. Field operating costs rose 16.0%, largely as a result of higher vehicle fuel and insurance, electricity and fiber lease expenses, offset in part by a lower usage of outside contractors. Phone service costs fell 43.7%, substantially due to cost savings provided by our transition to an internal phone service platform. Service costs as a percentage of revenues were 43.6% and 44.7% for the three months ended June 30, 2011 and 2010, respectively. Selling, general and administrative expenses increased 4.9%, mainly a result of higher marketing and, to a lesser extent, bad debt expenses. Marketing expenses grew 10.2%, primarily due to increased employee and other expenses related to our business service marketing. Bad debt expense rose 11.9% largely due to a higher average balance of written off accounts and, to a lesser extent, greater collection expenses. Selling, general and administrative expenses as a percentage of revenues were 16.8% and 16.7% for the three months ended June 30, 2011 and 2010, respectively. Management fee expense was 6.5% 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 increased 7.4%, largely a result of the depreciation of new investments related to our internal phone service platform. OIBDA OIBDA rose 7.8%, primarily due to greater revenues and constrained growth in service costs. Operating Income Operating income increased 8.0%, as the growth in OIBDA was partly offset by higher depreciation and amortization. Interest Expense, Net Interest expense, net, increased 3.6%, mainly due to higher average outstanding balances under our bank credit facility (the "credit facility"), offset in part by a lower average cost of debt. 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 $1.3 billion, of which $600 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 $8.8 million and $14.4 million for the three months ended June 30, 2011 and 2010, respectively. 20 -------------------------------------------------------------------------------- Table of Contents Loss on Early Extinguishment of Debt Loss on early extinguishment of debt totaled $1.2 million for the three months ended June 30, 2010. This amount represented the write-off of certain deferred financing costs associated with prior financings that were repaid during the period. Investment Income from Affiliate Investment income from affiliate was $4.5 million for each of the three months ended June 30, 2011 and 2010. This amount represents the investment income on our $150.0 million preferred equity investment in Mediacom Broadband LLC. Other Expense, Net Other expense, net, was $0.5 million and $0.7 million for the three months ended June 30, 2011 and 2010, respectively. During the three months ended June 30, 2011, other expense, net, substantially consisted of revolving credit facility commitment fees. During the three months ended June 30, 2010, other expense, net, consisted of $0.6 million of revolving credit facility commitment fees and $0.1 million of other fees. Net Income (Loss) As a result of the factors described above, we recognized net income of $6.2 million for the three months ended June 30, 2011, compared to a net loss of $2.6 million for the three months ended June 30, 2010. 21-------------------------------------------------------------------------------- Table of Contents 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 $ 337,062 $ 323,639 $ 13,423 4.1 % Costs and expenses: Service costs (exclusive of depreciation and amortization) 151,016 144,503 6,513 4.5 % Selling, general and administrative expenses 56,193 53,736 2,457 4.6 % Management fee expense 5,928 6,015 (87 ) (1.4 %) Depreciation and amortization 58,573 54,210 4,363 8.0 % Operating income 65,352 65,175 177 0.3 % Interest expense, net (49,435 ) (45,430 ) (4,005 ) 8.8 % Loss on derivatives, net (1,128 ) (20,884 ) 19,756 NM Loss on early extinguishment of debt - (1,234 ) 1,234 NM Investment income from affiliate 9,000 9,000 - NM Other expense, net (1,091 ) (1,418 ) 327 (23.1 %) Net income $ 22,698 $ 5,209 $ 17,489 NM OIBDA $ 123,925 $ 119,385 $ 4,540 3.8 % 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 $ 123,925 $ 119,385 $ 4,540 3.8 % Depreciation and amortization (58,573 ) (54,210 ) (4,363 ) 8.0 % Operating income $ 65,352 $ 65,175 $ 177 0.3 % 22 -------------------------------------------------------------------------------- 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 $ 203,728 $ 199,905 $ 3,823 1.9 % HSD 95,085 86,731 8,354 9.6 % Phone 30,961 28,915 2,046 7.1 % Advertising 7,288 8,088 (800 ) (9.9 %) Total $ 337,062 $ 323,639 $ 13,423 4.1 % June 30, Increase 2011 2010 (Decrease) % Change Basic subscribers 505,000 539,000 (34,000 ) (6.3 %) HSD customers 385,000 367,000 18,000 4.9 % Phone customers 158,000 149,000 9,000 6.0 % Primary Service Units (PSUs) 1,048,000 1,055,000 (7,000 ) (0.7 %) Digital customers 309,000 311,000 (2,000 ) (0.6 %) Revenue Generating Units (RGUs) 1,357,000 1,366,000 (9,000 ) (0.7 %) Average total monthly revenue per basic subscriber $ 108.55 $ 99.25 $ 9.30 9.4 % Average total monthly revenue per PSU $ 53.15 $ 51.67 $ 1.48 2.9 % Revenues increased 4.1%, primarily due to higher HSD and, to a much lesser extent, video and phone revenues. Average total monthly revenue per basic subscriber increased 9.4% to $108.55, and average total monthly revenue per PSU increased 2.9% to $53.15. Video revenues were 1.9% 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 25,000 basic subscribers and 13,000 digital customers, as compared to a loss of 9,000 basic subscribers and an increase of 11,000 digital customers in the prior year period. HSD revenues grew 9.6%, primarily due to the increase in HSD customers and, to a lesser extent, greater revenues from our enterprise networks business. During the six months ended June 30, 2011, we gained 6,000 HSD customers, as compared to an increase of 17,000 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 1,000 phone customers, as compared to a gain of 14,000 phone customers in the prior year period. Advertising revenues fell 9.9%, primarily due to lower levels of automotive and political advertising. Costs and Expenses Service costs grew 4.5%, primarily due to higher programming and, to a lesser extent, field operating expenses, offset in part by lower phone service costs. Programming expenses increased 5.0%, 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 16.3%, largely as a result of higher vehicle fuel and repair, fiber lease and electricity costs, offset in part by a lower usage of outside contractors. Phone service costs fell 23.8%, substantially due to cost savings provided by our transition to an internal phone service platform. Service costs as a percentage of revenues were 44.8% and 44.6% for the six months ended June 30, 2011 and 2010, respectively. 23-------------------------------------------------------------------------------- Table of Contents Selling, general and administrative expenses increased 4.6%, mainly due to higher marketing and, to a lesser extent, bad debt expense. Marketing expenses grew 12.4%, primarily due to increased employee and other expenses related to our business service marketing. Bad debt expense rose 14.0% largely due to a higher average balance of written off accounts and, to a lesser extent, greater collection expenses. Selling, general and administrative expenses as a percentage of revenues were 16.7% and 16.6% for the six months ended June 30, 2011 and 2010, respectively. Management fee expense was 1.4% 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 8.0%, largely a result of the depreciation of new investments related to our internal phone service platform. OIBDA OIBDA grew 3.8%, primarily due to greater revenues, offset in part by higher service costs and, to a lesser extent, selling, general and administrative expenses. Operating Income Operating income increased 0.3%, as the growth in OIBDA was mostly offset by higher depreciation and amortization. Interest Expense, Net Interest expense, net, rose 8.8%, mainly due to higher average outstanding balances under our bank credit facility, offset in part by a lower average cost of debt. 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 $1.1 million and $20.9 million for the six months ended June 30, 2011 and 2010, respectively. Loss on Early Extinguishment of Debt Loss on early extinguishment of debt totaled $1.2 million for the six months ended June 30, 2010. This amount represented the write-off of certain deferred financing costs associated with prior financings that were repaid during the period. Other Expense, Net Other expense, net, was $1.1 million and $1.4 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 $1.0 million of revolving credit facility commitment fees and $0.1 million of other fees. During the six months ended June 30, 2010, other expense, net, consisted of $1.1 million of revolving credit facility commitment fees and $0.3 million of other fees. Net Income As a result of the factors described above, we recognized net income of $22.7 million for the six months ended June 30, 2011, compared to $5.2 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 $6.0 million during the remainder of 2011 and $12.0 million in each of the years ending December 31, 2012 through December 31, 2014, and $87.4 million of outstanding loans under our revolving credit facility, which expires December 31, 2014. As of June 30, 2011, our sources of liquidity included $8.6 million of cash on hand and $207.4 million 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. 24 -------------------------------------------------------------------------------- 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 $79.3 million for the six months ended June 30, 2011, primarily due to OIBDA of $123.9 million, mostly offset by interest expense of $49.4 million and, to a much lesser extent, the net change in operating assets and liabilities of $5.1 million. The net change in operating assets and liabilities was largely a result of an increase in accounts receivable, net of $5.5 million, and to a lesser extent, an increase in prepaid expenses and other assets of $1.8 million, offset by a increase in deferred revenue of $1.6 million. Net cash flows provided by operating activities were $38.7 million for the six months ended June 30, 2010, primarily due to OIBDA of $119.4 million, offset in part by interest expense of $45.4 million and the net change in operating assets and liabilities of $44.6 million. The net change in operating assets and liabilities was substantially due to a decrease in accounts payable, accrued expenses and other current liabilities of $43.8 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 $37.9 million for the six months ended June 30, 2011, as compared to $49.8 million in the prior year period. The $11.9 million decline in net cash flows used in investing activities was due to an $8.9 million redemption of restricted cash and cash equivalents and, to a lesser extent, a $3.0 million reduction in capital spending. The decrease in capital spending largely reflects reduced outlays for investments in our phone service platform and customer premise equipment, offset by scalable infrastructure for our HSD service. Net Cash Flows (Used in) Provided By Financing Activities Net cash flows used in financing activities were $54.8 million for the six months ended June 30, 2011, primarily due to capital distributions to MCC of $136.5 million, offset in part by net borrowings of $81.4 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 provided by financing activities were $11.4 million for the six months ended June 30, 2010, primarily due to capital contributions from MCC of $45.0 million and, to a lesser extent, net borrowings of debt of $15.0 million offset in part by capital distributions to parent of $37.0 million, financing costs of $6.9 million and other financing activities, principally book overdrafts, of $4.7 million. Capital Structure As of June 30, 2011, our outstanding total indebtedness was $1.600 billion, of which approximately 65.6% was at fixed interest rates or subject to interest rate protection. During the six months ended June 30, 2011, we paid cash interest of $48.3 million, net of capitalized interest. 25-------------------------------------------------------------------------------- Table of Contents Bank Credit Facility As of June 30, 2011, we had a $1.467 billion credit facility, of which $1.250 billion was outstanding. As of the same date, we had $207.4 million of unused lines under our $304.2 million revolving credit facility, after giving effect to $87.4 million of outstanding loans and $9.4 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 in the amounts of $79.0 million and $225.2 million on September 30, 2011 and December 31, 2014, respectively. 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 2.9%. As of the same date, we also had $600 million of forward starting interest rate swaps with a weighted average fixed rate of approximately 3.0%. 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 4.9% and 5.2%, respectively. Senior Notes As of June 30, 2011, we had $350.0 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. 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. 26-------------------------------------------------------------------------------- Table of Contents 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 LLC. 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 LLC 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. 27-------------------------------------------------------------------------------- Table of Contents |