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MEDIACOM CAPITAL CORP - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
[November 09, 2012]

MEDIACOM CAPITAL CORP - 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 nine months ended, September 30, 2012 and 2011, and with our annual report on Form 10-K for the year ended December 31, 2011.

Overview We are a wholly-owned subsidiary of Mediacom Communications Corporation ("MCC"), the nation's eighth largest cable company based on the number of video customers. As of September 30, 2012, we served approximately 452,000 video customers, 408,000 HSD customers and 166,000 phone customers, aggregating 1.03 million primary service units ("PSUs").

Through our interactive broadband network, we provide our residential and commercial customers with a wide variety of products and services, including our primary services of video, high-speed data ("HSD") and phone, which we refer to as our "triple play bundle." We also provide network and transport services to medium and large sized businesses in our service areas, including cell tower backhaul for wireless telephone providers, and sell advertising time we receive under our programming license agreements to local, regional and national advertisers.


Our performance has been affected by general economic conditions and by the competition we face. We believe high unemployment levels and weakness in the housing sector and consumer spending have, in part, contributed to lower connect activity for all of our services and negatively impacted our residential customer and revenue growth. While we expect improvement as the economy recovers, a continuation or broadening of such effects may adversely impact our results of operations, cash flows and financial position.

Our residential video service principally competes with direct broadcast satellite ("DBS") providers, who offer video programming substantially similar to ours. For the past several years, DBS competitors have deployed aggressive marketing campaigns, including deeply discounted promotional packages, which we believe has contributed to video customer losses in our markets. Our programming costs, particularly for sports and local broadcast programming, have risen well in excess of the inflation rate in recent years, a trend we expect to continue.

Given these factors, we have generally limited our offering of discounted pricing for video-only customers, as we believe it has become uneconomic to offer a low-priced, low-margin video-only product in an attempt to match the competition's pricing. While the reduction of discounted pricing has positively impacted per-unit video revenues, we believe that it, along with weak economic conditions, has contributed to further video customer losses and, if such losses were to continue, we may experience future annual declines in video revenues. We expect to partially offset such declines through higher average unit pricing and greater penetration of our advanced video services, including video-on-demand ("VOD"), high-definition television ("HDTV") and digital video recorders ("DVRs").

Our residential HSD service competes primarily with local telephone companies, such as AT&T, CenturyLink, Frontier and Verizon. Such companies compete with our HSD product by offering digital subscriber line ("DSL") services. In our markets, widely-available DSL service is typically limited to downstream speeds ranging from 1.5Mbps to 3Mbps, compared to our downstream speeds ranging from 3Mbps to 105Mbps. We believe we will continue to increase HSD revenues through future growth in residential HSD customers and customers taking higher speed tiers.

Our residential phone service competes with local telephone companies that offer a product substantially similar to ours, and with cellular phone services offered by national wireless providers. We expect to face pricing pressure for our phone service, which may partially or fully offset greater revenues resulting from continuing growth of residential phone customers.

Certain local telephone companies, including AT&T and Verizon, have deployed fiber-based networks which allow for a triple play bundle that is comparable to ours. As of September 30, 2012, based on internal estimates, approximately 10% of our cable systems actively competed with these local telephone companies.

Our commercial video, HSD and phone services face similar competition to our comparable residential services. Historically, local telephone companies have been in a better position to offer HSD services to businesses, as their networks tend to be more developed in commercial areas. However, we have recently increased our efforts to offer and market a more complete array of products and services suited to businesses, and continue to extend our distribution network further into business districts in the cities and towns we serve. Our enterprise networks business faces competition from local telephone companies and other carriers, such as metro and regional fiber providers. We believe we will continue to increase business services revenues through increasing our commercial HSD, phone and, to a lesser extent, video customer base, and continued growth of our enterprise networks business, including fees for cell tower backhaul.

We face significant competition in our advertising business from a wide range of national, regional and local competitors. We compete for advertising revenues principally against local broadcast stations, national cable and broadcast networks, radio, newspapers, magazines, outdoor display and Internet companies.

Advertising revenues are sensitive to the political election cycle, and we believe advertising revenues will increase for the full year 2012, as this is an election year.

15 -------------------------------------------------------------------------------- Table of Contents Recent Developments New Financing On February 7, 2012, we issued 71/4% senior notes due February 2022 (the "71/4% Notes") in the aggregate principal amount of $250.0 million (the "financing").

After giving effect to $5.0 million of financing costs, net proceeds of $245.0 million, together with borrowings under our revolving credit commitments, were used to repay the entire outstanding amount under Term Loan D under our bank credit facility (the "credit facility"). See Note 6 in our Notes to Consolidated Financial Statements.

Sale and Acquisition of Cable Systems, Net In May 2012, we sold a non-strategic cable system that served approximately 3,000 video and 1,200 HSD customers. We received proceeds of approximately $11.0 million, yielding a gain on sale of cable systems, net of $5.2 million which was recorded in our statements of operations for the nine months ended September 30, 2012. In June 2012, we acquired certain cable assets serving about 600 video, 400 HSD and 600 phone customers for approximately $1.2 million.

Revenues Video Video revenues primarily represent monthly subscription fees charged to our residential video customers, which vary according to the level of service and equipment taken, and revenue from the sale of VOD content and pay-per-view events. Video revenues also include installation, reconnection and wire maintenance fees, franchise and late payment fees, and other ancillary revenues.

HSD HSD revenues primarily represent monthly subscription fees charged to our residential HSD customers, which vary according to the level of HSD service taken.

Phone Phone revenues primarily represent monthly subscription fees charged to our residential phone customers for our phone service.

Business Services Business services revenues primarily represent monthly fees charged to our commercial video, HSD and phone customers, which vary according to the level of service taken, and fees charged to large sized businesses, including large wireless providers for cell tower backhaul requirements, for our scalable, fiber-based enterprise networks products and services.

Advertising Advertising revenues primarily represent revenues received from selling advertising time we receive under our programming license agreements to local, regional and national advertisers for the placement of commercials on channels offered on our video services.

Costs and Expenses Service Costs Service costs consist of the costs related to providing and maintaining services to our customers. Significant service costs are for: video programming; HSD service, including bandwidth connectivity; phone service, including leased circuits and long distance; our enterprise networks business; technical personnel who maintain our cable network, perform customer installation activities and provide customer support; our network operations center; utilities, including pole rental; and field operations, including outside contractors, vehicle fuel and maintenance and leased fiber for our regional fiber networks.

Programming costs, which are generally paid on a per video customer basis, have historically represented our single largest expense. In recent years, we have experienced substantial increases in the per-unit cost of our programming, which we believe will continue to grow due to the increasing contractural rates and retransmission consent fees demanded by large programmers and independent broadcasters. Our HSD and phone service costs fluctuate depending on the level of investments we make in our cable systems and the resulting operational efficiencies. In June 2011, we completed a transition to an internal phone service platform, which greatly reduced our phone service expenses. Our other service costs generally rise as a result of customer growth and inflationary cost increases for personnel, outside vendors 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. We anticipate that our service costs, with the exception of programming expenses, will remain fairly consistent as a percentage of our revenues.

16-------------------------------------------------------------------------------- Table of Contents Selling, General and Administrative Expenses Significant selling, general and administrative expenses are for: our call center, customer service, marketing, business services, support and administrative personnel; franchise fees and other taxes; bad debt; billing; marketing; advertising; and general office administration. These expenses generally rise due to customer growth and inflationary cost increases for personnel, outside vendors and other expenses. We anticipate that our selling, general and administrative expenses will remain fairly consistent as a percentage of our revenues.

Service costs and selling, general and administrative expenses exclude depreciation and amortization, which is presented separately.

Management Fee Expense Management fee expense reflects 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.

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 an indicator of operating performance, or to the statement of cash flows as a measure 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.

17 -------------------------------------------------------------------------------- Table of Contents Actual Results of Operations Three Months Ended September 30, 2012 compared to Three Months Ended September 30, 2011 The table below sets forth our consolidated statements of operations and OIBDA for the three months ended September 30, 2012 and 2011 (dollars in thousands and percentage changes that are not meaningful are marked NM): Three Months Ended September 30, 2012 2011 $ Change % Change Revenues $ 170,554 $ 170,586 $ (32 ) (0.0 %) Costs and expenses: Service costs (exclusive of depreciation and amortization) 74,662 73,636 1,026 1.4 % Selling, general and administrative expenses 29,539 29,601 (62 ) (0.2 %) Management fee expense 2,650 2,644 6 0.2 % Depreciation and amortization 28,653 29,506 (853 ) (2.9 %) Operating income 35,050 35,199 (149 ) (0.4 %) Interest expense, net (23,752 ) (24,193 ) 441 (1.8 %) Loss on derivatives, net (61 ) (16,983 ) 16,922 NM Investment income from affiliate 4,500 4,500 - NM Other expense, net (653 ) (504 ) (149 ) NM Net income $ 15,084 $ (1,981 ) $ 17,065 NM OIBDA $ 63,703 $ 64,705 $ (1,002 ) (1.5 %) 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 September 30, 2012 2011 $ Change % Change OIBDA $ 63,703 $ 64,705 $ (1,002 ) (1.5 %) Depreciation and amortization (28,653 ) (29,506 ) 853 (2.9 %) Operating income $ 35,050 $ 35,199 $ (149 ) (0.4 %) 18 -------------------------------------------------------------------------------- Table of Contents Revenues The tables below set forth our revenues and selected customer and average monthly revenue statistics as of, and for the three months ended, September 30, 2012 and 2011 (dollars in thousands, except per customer and per unit data): Three Months Ended September 30, 2012 2011 $ Change % Change Video $ 89,149 $ 94,293 $ (5,144 ) (5.5 %) HSD 46,667 44,202 2,465 5.6 % Phone 15,502 15,623 (121 ) (0.8 %) Business services 14,938 12,481 2,457 19.7 % Advertising 4,298 3,987 311 7.8 % Total $ 170,554 $ 170,586 $ (32 ) (0.0 %) September 30, Increase/ 2012 2011 (Decrease) % Change Video customers 452,000 488,000 (36,000 ) (7.4 %) HSD customers 408,000 383,000 25,000 6.5 % Phone customers 166,000 159,000 7,000 4.4 % Primary service units (PSUs) 1,026,000 1,030,000 (4,000 ) (0.4 %) Digital customers 299,000 300,000 (1,000 ) (0.3 %) Revenue generating units 1,325,000 1,330,000 (5,000 ) (0.4 %) Average total monthly revenue per video customer (1) $ 124.95 $ 114.53 $ 10.42 9.1 % Average total monthly revenue per PSU (2) $ 55.38 $ 54.73 $ 0.65 1.2 % (1) Represents average total monthly revenues for the period divided by average video customers for such period.

(2) Represents average total monthly revenues for the period divided by average PSUs for such period.

Revenues were essentially unchanged from the prior year period, as lower video revenues were mostly offset by greater HSD and business services revenues.

Average total monthly revenue per video customer increased 9.1% to $124.95, and average total monthly revenue per PSU increased 1.2% to $55.38.

Video revenues declined 5.5%, mainly due to residential video customer losses, offset in part by higher unit pricing. During the three months ended September 30, 2012, we lost 6,000 video customers, compared to 17,000 in the prior year period. As of September 30, 2012, we served 452,000 video customers, or 34.8% of our estimated homes passed. As of the same date, 66.2% of our video customers were digital customers, and 52.7% of our digital customers were taking our DVR and/or HDTV services.

HSD revenues grew 5.6%, principally due to a greater residential HSD customer base and, to a lesser extent, higher unit pricing. During the three months ended September 30, 2012, we gained 7,000 HSD customers, compared to a loss of 2,000 in the prior year period. As of September 30, 2012, we served 408,000 HSD customers, or 31.4% of our estimated homes passed.

Phone revenues were 0.8% lower, largely a result of lower unit pricing, mostly offset by a greater residential phone customer base. During the three months ended September 30, 2012, we lost 2,000 phone customers, compared to an increase of 1,000 in the prior year period. As of September 30, 2012, we served 166,000 phone customers, or 12.8% of our estimated homes passed.

Business services revenues rose 19.7%, primarily due to an increase in commercial HSD and phone customers and, to a lesser extent, greater revenues from our enterprise networks business.

Advertising revenues increased 7.8%, principally due to greater levels of automotive and political advertising.

Costs and Expenses Service costs increased 1.4%, primarily due to greater field operating and employee expenses, offset in part by lower HSD service, utilities and programming costs. Field operating costs were 17.0% higher, largely as a result of a greater use of outside contractors and, to a lesser extent, increased fiber lease and equipment maintenance expenses, offset in part by lower vehicle fuel costs. Employee costs grew 7.9%, primarily due to greater staffing levels. HSD service costs decreased 12.4%, principally due to lower connectivity costs.

Utilities expenses declined 6.3%, primarily due to a reduction in electric utility and pole rental expenses. Programming costs 19-------------------------------------------------------------------------------- Table of Contents decreased 0.5%, mainly due to a lower video customer base, mostly offset by higher contractual rates charged by our programming vendors and greater retransmission consent fees. Service costs as a percentage of revenues were 43.8% and 43.2% for the three months ended September 30, 2012 and 2011, respectively.

Selling, general and administrative expenses decreased 0.2%, mainly due to lower employee costs, taxes and fees and bad debt expense, mostly offset by higher marketing costs. Employee costs declined 2.5%, reflecting reduced levels of administrative and call center headcount, offset in part by greater business services marketing staffing levels. Taxes and fees decreased 5.9%, mainly due to a decline in property taxes and franchise fees. Bad debt fell 6.3%, primarily due to a lower number of written-off accounts. Marketing costs increased 15.0%, primarily due to greater spending on internet and direct mail advertising.

Selling, general and administrative expenses as a percentage of revenues were 17.3% and 17.4% for the three months ended September 30, 2012 and 2011, respectively.

Management fee expense was 0.2% higher, reflecting increased overhead costs charged by MCC. Management fee expense as a percentage of revenues was 1.6% and 1.5% for the three months ended September 30, 2012 and 2011, respectively.

Depreciation and amortization decreased 2.9%, largely as a result of certain assets becoming fully depreciated, mostly offset by the depreciation of shorter-lived customer premise equipment and certain investments related to our internal phone service platform.

OIBDA OIBDA declined 1.5%, primarily due to the increase in service costs.

Operating Income Operating income was 0.4% lower due to the decline in depreciation and amortization and, to a lesser extent, the decline in OIBDA.

Interest Expense, Net Interest expense, net, decreased 1.8%, due to lower average outstanding indebtedness, mostly offset by a higher average cost of debt.

Loss on Derivatives, Net As of September 30, 2012, we had interest rate exchange agreements (which we refer to as "interest rate swaps") with an aggregate notional amount of $1.3 billion, of which $600 million were 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 changes to the mark-to-market valuation of these interest rate swaps, based upon information provided by our counterparties, we recorded a net loss on derivatives of $0.1 million for the three months ended September 30, 2012, compared to a net loss on derivatives of $17.0 million for the three months ended September 30, 2011.

Investment Income from Affiliate Investment income from affiliate was $4.5 million for each of the three months ended September 30, 2012 and 2011. This amount represents the investment income on our $150.0 million preferred equity investment in Mediacom Broadband. See Note 8 in our Notes to Consolidated Financial Statements.

Other Expense, Net Other expense, net, was $0.7 million and $0.5 million for the three months ended September 30, 2012 and 2011, respectively. During the three months ended September 30, 2012, other expense, net, consisted of $0.4 million of revolving credit facility commitment fees and $0.3 million of other fees. During the three months ended September 30, 2011, other expense, net, consisted of $0.4 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 $15.1 million for the three months ended September 30, 2012, compared to a net loss of $2.0 million for the three months ended September 30, 2011.

20-------------------------------------------------------------------------------- Table of Contents Actual Results of Operations Nine Months Ended September 30, 2012 compared to Nine Months Ended September 30, 2011 The table below sets forth our consolidated statements of operations and OIBDA for the nine months ended September 30, 2012 and 2011 (dollars in thousands and percentage changes that are not meaningful are marked NM): Nine Months Ended September 30, 2012 2011 $ Change % Change Revenues $ 509,905 $ 507,648 $ 2,257 0.4 % Costs and expenses: Service costs (exclusive of depreciation and amortization) 222,871 224,651 (1,780 ) (0.8 %) Selling, general and administrative expenses 85,530 85,795 (265 ) (0.3 %) Management fee expense 8,985 8,573 412 4.8 % Depreciation and amortization 86,729 88,214 (1,485 ) (1.7 %) Operating income 105,790 100,415 5,375 5.4 % Interest expense, net (72,256 ) (73,627 ) 1,371 (1.9 %) Gain (loss) on derivatives, net 441 (18,110 ) 18,551 NM Gain on sale of cable systems, net 5,202 - 5,202 NM Loss on early extinguishment of debt (6,468 ) - (6,468 ) NM Investment income from affiliate 13,500 13,500 - NM Other expense, net (1,551 ) (1,597 ) 46 (2.9 %) Net income $ 44,658 $ 20,581 $ 24,077 117.0 % OIBDA $ 192,519 $ 188,629 $ 3,890 2.1 % The table below represents a reconciliation of OIBDA to operating income, which is the most directly comparable GAAP measure (dollars in thousands): Nine Months Ended September 30, 2012 2011 $ Change % Change OIBDA $ 192,519 $ 188,629 $ 3,890 2.1 % Depreciation and amortization (86,729 ) (88,214 ) 1,485 (1.7 %) Operating income $ 105,790 $ 100,415 $ 5,375 5.4 % Revenues The table below sets forth our revenues for the nine months ended, September 30, 2012 and 2011 (dollars in thousands): Nine Months Ended September 30, 2012 2011 $ Change % Change Video $ 271,261 $ 286,840 $ (15,579 ) (5.4 %) HSD 139,113 128,303 10,810 8.4 % Phone 45,731 45,619 112 0.2 % Business services 41,878 35,611 6,267 17.6 % Advertising 11,922 11,275 647 5.7 % Total $ 509,905 $ 507,648 $ 2,257 0.4 % Revenues increased 0.4%, primarily due to greater HSD revenues and, to a lesser extent, business services revenues, mostly offset by lower video revenues.

Average total monthly revenue per video customer increased 10.5% to $122.50, and average total monthly revenue per PSU increased 3.2% to $55.52.

Video revenues declined 5.4%, mainly due to residential video customer losses, offset in part by higher unit pricing. During the nine months ended September 30, 2012, we lost 18,600 video customers, excluding the net effect of an acquisition and a disposition, compared to 42,000 in the prior year period.

21 -------------------------------------------------------------------------------- Table of Contents HSD revenues grew 8.4%, largely as a result of higher unit pricing and, to a lesser extent, a greater residential HSD customer base. During the nine months ended September 30, 2012, we gained 25,800 HSD customers, excluding the net effect of an acquisition and a disposition, compared to an increase of 4,000 in the prior year period.

Phone revenues were 0.2% higher, as higher unit pricing was mostly offset by a lower residential phone customer base. During the nine months ended September 30, 2012, we gained 6,400 phone customers, excluding the effect of an acquisition, compared to an increase of 2,000 in the prior year period.

Business services revenues rose 17.6%, primarily due to an increase in commercial HSD and phone customers and, to a lesser extent, greater revenues from our enterprise networks business.

Advertising revenues grew 5.7%, principally due to increased levels of political and automotive advertising.

Costs and Expenses Service costs declined 0.8%, primarily due to lower phone and, to a lesser extent, HSD service costs and programming expenses, offset in part by greater field operating and employee costs. Phone service costs fell 25.1%, substantially due to cost savings resulting from our transition from a third-party provider to an internal phone service platform. HSD service costs decreased 16.7%, principally due to lower connectivity costs, offset in part by higher bandwidth and maintenance expenses. Programming expenses declined 0.7%, largely as a result of a lower video customer base, mostly offset by higher contractual rates charged by our programming vendors and greater retransmission consent fees. Field operating costs grew 14.9%, largely as a result of a greater use of outside contractors and, to a lesser extent, higher fiber lease expenses and cable location costs, offset in part by a reduction in vehicle fuel expenses. Employee costs increased 4.7%, principally due to greater staffing levels. Service costs as a percentage of revenues were 43.7% and 44.3% for the nine months ended September 30, 2012 and 2011, respectively.

Selling, general and administrative expenses decreased 0.3%, mainly due to lower bad debt expense and taxes and fees, mostly offset by higher marketing costs.

Bad debt fell 10.4%, principally due to a lower number of written off accounts.

Taxes and fees decreased 5.5%, mainly due to a decline in franchise fees and property taxes. Marketing costs rose 14.2%, primarily due to greater spending on printed mail and internet advertising and costs related to our rebranding.

Selling, general and administrative expenses as a percentage of revenues were 16.8% and 16.9% for the nine months ended September 30, 2012 and 2011, respectively.

Management fee expense was 4.8% higher, reflecting greater overhead charges costs charged by MCC. Management fee expense as a percentage of revenues was 1.8% and 1.7% for the nine months ended September 30, 2012 and 2011, respectively.

Depreciation and amortization decreased 1.7%, largely as a result of certain assets becoming fully depreciated, mostly offset by the depreciation of investments in shorter-lived customer premise equipment and our internal phone service platform.

OIBDA OIBDA increased 2.1%, primarily due to greater revenues and lower service costs.

Operating Income Operating income grew 5.4% due to the growth in OIBDA and, to a lesser extent, lower depreciation and amortization.

Interest Expense, Net Interest expense, net, decreased 1.9%, primarily due to lower average outstanding indebtedness.

Gain (Loss) on Derivatives, Net As a result of changes to the mark-to-market valuation of our interest rate swaps, based upon information provided by our counterparties, we recorded a net gain on derivatives of $0.4 million for the nine months ended September 30, 2012, compared to a net loss on derivatives of $18.1 million for the nine months ended September 30, 2011.

Gain on Sale of Cable Systems, Net We recorded a gain on sale of cable systems, net of $5.2 million in our statements of operations for the nine months ended September 30, 2012.

Loss on Early Extinguishment of Debt Loss on early extinguishment of debt totaled $6.5 million for the nine months ended September 30, 2012. This amount represents the write-off of deferred financing costs as a result of the repayment of Term Loan D under the credit facility.

22 -------------------------------------------------------------------------------- Table of Contents Investment Income from Affiliate Investment income from affiliate was $13.5 million for each of the nine months ended September 30, 2012 and 2011. This amount represents the investment income on our $150.0 million preferred equity investment in Mediacom Broadband. See Note 8 in our Notes to Consolidated Financial Statements.

Other Expense, Net Other expense, net, was $1.6 million for each the nine months ended September 30, 2012 and 2011. During the nine months ended September 30, 2012, other expense, net, consisted of $1.0 million of revolving credit facility commitment fees and $0.6 million of other fees. During the nine months ended September 30, 2011, other expense, net, consisted of $1.4 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 $44.7 million for the nine months ended September 30, 2012, compared to $20.6 million for the nine months ended September 30, 2011.

Liquidity and Capital Resources Our net cash flows provided by operating activities are primarily used to fund investments in the capacity and reliability of our network and the further expansion of our products and services, as well as scheduled repayments of our indebtedness and periodic contributions to MCC. As of September 30, 2012, our near-term liquidity requirements included scheduled term loan amortization of $2.3 million during the remainder of 2012 and $9.0 million in each of the years ending December 31, 2013 and 2014.

As of September 30, 2012, our sources of liquidity included $20.7 million of cash and $215.7 million of unused and available commitments under our revolving credit commitments (the "revolver"). As of the same date, after giving effect to a $96.0 million capital distribution to our parent, MCC, made on October 15, 2012 (the "capital distribution"), our sources of liquidity would have included $10.0 million of cash and $130.4 million of unused and available commitments under the revolver. For more information regarding the capital distribution, see Note 13 in our Notes to Consolidated Financial Statements. We believe that cash generated by or available to us will meet our anticipated capital and liquidity needs for the foreseeable future.

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 $119.9 million for the nine months ended September 30, 2012, primarily due to OIBDA of $192.5 million and, to a much lesser extent, investment income from affiliate of $13.5 million, offset in part by interest expense of $72.3 million and, to a lesser extent, the $14.9 million net change in our operating assets and liabilities. The net change in our operating assets and liabilities was primarily due to an increase in accounts receivable, net, of $12.1 million and an increase in prepaid expenses and other assets of $4.9 million, offset in part by an increase in accounts payable, accrued expenses and other current liabilities of $1.2 million and an increase in deferred revenue of $1.0 million.

Net cash flows provided by operating activities were $112.9 million for the nine months ended September 30, 2011, primarily due to OIBDA of $188.6 million and, to a much lesser extent, investment income from affiliate of $13.5 million, offset in part by interest expense of $73.6 million and, to a much lesser extent, the net change in operating assets and liabilities of $16.9 million. The net change in operating assets and liabilities was largely the result of a net decline in accounts payable, accrued expenses and other current liabilities of $14.6 million, which included a $29.5 million reduction in accounts payable to affiliate, and a decrease in accounts receivable, net, of $2.6 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 $72.4 million for the nine months ended September 30, 2012, compared to $65.7 million in the prior year period. The $6.7 million increase in net cash flows used in investing activities was primarily due to a $8.9 million redemption of restricted cash and cash equivalents in the prior year period and, to a lesser extent, a $5.2 million increase in capital expenditures, a $2.5 million decrease in accrued plant, property and equipment and a $1.2 million acquisition of certain cable assets, offset by $11.0 million of proceeds from the sale of cable systems. The growth in capital expenditures largely reflects spending on the expansion of our fiber network and customer premise equipment, offset in part by reduced outlays for investments in our phone service platform.

23 -------------------------------------------------------------------------------- Table of Contents Net Cash Flows Used in Financing Activities Net cash flows used in financing activities were $39.2 million for the nine months ended September 30, 2012, principally due to net repayments of $376.0 million under the credit facility and, to a much lesser extent, capital distributions to MCC of $18.0 million and financing costs of $5.0 million, mostly offset by the $250.0 million issuance of new senior notes and $111.0 million of capital contributions from MCC. On October 15, 2012, we made a capital distribution to MCC of $96.0 million. See Note 13 in our Notes to Consolidated Financial Statements.

Net cash flows used in financing activities were $58.0 million for the nine months ended September 30, 2011, primarily due to capital distributions to MCC of $141.2 million, offset in part by net borrowings of $84.0 million under the credit facility. The capital distributions to MCC included a distribution to partially fund the Going Private Transaction. See Note 7 in our Notes to Consolidated Financial Statements.

Capital Structure As of September 30, 2012, our total indebtedness was $1.457 billion, of which approximately 89% was at fixed interest rates or subject to interest rate protection. During the nine months ended September 30, 2012, we paid cash interest of $72.7 million, net of capitalized interest.

Bank Credit Facility As of September 30, 2012, we maintained a $1.082 billion bank credit facility, comprising $857.0 million of term loans with maturities ranging from January 2015 to October 2017, and a $225.2 million revolver, which is scheduled to expire on December 31, 2014. As of the same date, we had no outstanding balance under the revolver and $215.7 million of unused commitments, all of which were available to be borrowed and used for general corporate purposes, after giving effect to $9.5 million of letters of credit issued thereunder to various parties as collateral. As of September 30, 2012, after giving effect to the $96.0 million capital distribution to MCC, we would have had $130.4 million of unused commitments under the revolver, all of which were available to be borrowed and used for general corporate purposes, after giving effect to $85.3 million of outstanding loans and $9.5 million of letters of credit.

The credit facility is collateralized by our ownership interests in our operating subsidiaries, and is guaranteed by us on a limited recourse basis to the extent of such ownership interests. As of September 30, 2012, the credit agreement governing the credit facility required us to maintain a total leverage ratio (as defined) of no more than 5.5 to 1.0 and an interest coverage ratio (as defined) of no less than 2.0 to 1.0. The total leverage ratio covenant was reduced to 5.0 to 1.0 on October 1, 2012.

Interest Rate Exchange Agreements We use interest exchange agreements (which we refer to as "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 September 30, 2012, 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 3.0%. As of the same date, we also had $600 million of forward starting interest rate swaps with a weighted average fixed rate of approximately 2.9%.

Including the effects of these interest rate swaps, the average interest rates on outstanding debt under the credit facility as of September 30, 2012 and 2011 were 4.7% and 4.8%, respectively.

Senior Notes As of September 30, 2012, we had $600.0 million of outstanding senior notes, of which $350.0 million and $250.0 million mature in August 2019 and February 2022, respectively. Our senior notes are unsecured obligations, and the indenture governing our senior notes limits the incurrence of additional indebtedness based upon a maximum debt to operating cash flow ratio (as defined) of 8.5 to 1.0. See Note 6 in our Notes to Consolidated Financial Statements.

Covenant Compliance and Debt Ratings For all periods through September 30, 2012, 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. MCC's corporate credit rating is B1, with a stable outlook, by Moody's, and B+, with a stable outlook, by Standard and Poor's. Our senior unsecured 24 -------------------------------------------------------------------------------- Table of Contents credit rating is B3 by Moody's, with a stable outlook, and B-, with a stable outlook, by Standard and Poor's. We cannot assure you that Moody's and Standard and Poor's will maintain their ratings on MCC and us. A negative change to these 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.

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, 2011 and our quarterly report on Form 10-Q for the quarterly period ended March 31, 2012.

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, 2011.

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.

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, which has 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 nine months of 2012, we have determined that there has been no triggering event under ASC 350, and as such, no interim impairment test was required as of September 30, 2012.

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 customers.

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.

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