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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 10-Q

 

 

Quarterly Report Pursuant to Section 13 or 15(d)

of the Securities Exchange Act of 1934

For the quarterly period ended September 30, 2013

Commission File Numbers: 333-72440

333-82124-02

 

 

Mediacom Broadband LLC

Mediacom Broadband Corporation*

(Exact names of Registrants as specified in their charters)

 

 

 

Delaware		06-1615412
Delaware		06-1630167
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification Numbers)

1 Mediacom Way

Mediacom Park, NY 10918

(Address of principal executive offices)

(845) 443-2600

(Registrants’ telephone number)

 

 

Indicate by check mark whether the Registrants (1) have filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrants were required to file such reports), and (2) have been subject to such filing requirements for the past 90 days.    x  Yes    ¨  No

Indicate by check mark whether the Registrants have submitted electronically and posted on their corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the Registrants were required to submit and post such files).    x  Yes    ¨  No

Indicate by check mark whether the Registrants are large accelerated filers, accelerated filers, non-accelerated filers or smaller reporting companies. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filers		¨		Accelerated filers		¨
Non-accelerated filers		x		Smaller reporting companies		¨

Indicate by check mark whether the Registrants are shell companies (as defined in Rule 12b-2 of the Exchange Act).    ¨  Yes    x  No

Indicate the number of shares outstanding of the Registrants’ common stock: Not Applicable

 

*	Mediacom Broadband Corporation meets the conditions set forth in General Instruction H (1) (a) and (b) of Form 10-Q and is therefore filing this form with the reduced disclosure format.

 

 

 

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MEDIACOM BROADBAND LLC AND SUBSIDIARIES

FORM 10-Q

FOR THE PERIOD ENDED SEPTEMBER 30, 2013

TABLE OF CONTENTS

 

		Page
PART I
Item 1. Financial Statements			4
Consolidated Balance Sheets (unaudited) September 30, 2013 and December 31, 2012			4
Consolidated Statements of Operations (unaudited) Three and Nine Months Ended September 30, 2013 and 2012			5
Consolidated Statements of Cash Flows (unaudited) Nine Months Ended September 30, 2013 and 2012			6
Notes to Consolidated Financial Statements (unaudited)			7
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			13
Item 3. Quantitative and Qualitative Disclosures about Market Risk			24
Item 4. Controls and Procedures			24
PART II
Item 1. Legal Proceedings			25
Item 1A. Risk Factors			25
Item 6. Exhibits			25
Signatures			26

This Quarterly Report on Form 10-Q is for the three and nine months ended September 30, 2013. Any statement contained in a prior periodic report shall be deemed to be modified or superseded for purposes of this Quarterly Report to the extent that a statement herein modifies or supersedes such statement. The Securities and Exchange Commission allows us to “incorporate by reference” information that we file with them, which means that we can disclose important information by referring you directly to those documents. Information incorporated by reference is considered to be part of this Quarterly Report.

Mediacom Broadband LLC is a Delaware limited liability company and a wholly-owned subsidiary of Mediacom Communications Corporation, a Delaware corporation. Mediacom Broadband Corporation is a Delaware corporation and a wholly-owned subsidiary of Mediacom Broadband LLC. Mediacom Broadband Corporation was formed for the sole purpose of acting as co-issuer with Mediacom Broadband LLC of debt securities and does not conduct operations of its own.

References in this Quarterly Report to “we,” “us,” or “our” are to Mediacom Broadband LLC and its direct and indirect subsidiaries (including Mediacom Broadband Corporation), unless the context specifies or requires otherwise. References in this Quarterly Report to “Mediacom” or “MCC” are to Mediacom Communications Corporation.

 

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Cautionary Statement Regarding Forward-Looking Statements

You should carefully review the information contained in this Quarterly Report and in other reports or documents that we file from time to time with the SEC.

In this Quarterly Report, we state our beliefs of future events and of our future financial performance. In some cases, you can identify those so-called “forward-looking statements” by words such as “anticipates,” “believes,” “continue,” “could,” “estimates,” “expects,” “intends,” “may,” “plans,” “potential,” “predicts,” “should” or “will,” or the negative of those and other comparable words. These forward-looking statements are not guarantees of future performance or results, and are subject to risks and uncertainties that could cause actual results to differ materially from historical results or those we anticipate as a result of various factors, many of which are beyond our control. Factors that may cause such differences to occur include, but are not limited to:

 

•

increased levels of competition for residential and business customers from existing competitors, including direct broadcast satellite operators, local telephone companies and other cable providers, and from more recent competition, including wireless communications companies and over-the-top video providers;

 

•

lower demand for our residential and business services products and services, which may result from increased competition, weakened economic conditions or other factors;

 

•

greater than anticipated increases in programming costs and other delivery expenses related to our products and services;

 

•

our ability to successfully introduce new products and services to meet customer demands and preferences;

 

•

our ability to secure hardware, software and operational support for the delivery of products and services to consumers;

 

•

disruptions or failures of our network and information systems, including those caused by “cyber attacks,” natural disasters or other material events outside our control;

 

•

our reliance on certain intellectual property rights, and not infringing on the intellectual property rights of others;

 

•

our ability to generate sufficient cash flows from operations to meet our debt service obligations;

 

•

our ability to refinance future debt maturities or provide future funding for general corporate purposes and potential strategic transactions, on favorable terms, if at all;

 

•

changes in assumptions underlying our critical accounting policies;

 

•

changes in legislative and regulatory matters that may cause us to incur additional costs and expenses; and

 

•

other risks and uncertainties discussed in this Quarterly Report, our Annual Report on Form 10-K for the year ended December 31, 2012 and other reports or documents that we file from time to time with the SEC.

Statements included in this Quarterly Report are based upon information known to us as of the date that this Quarterly Report is filed with the SEC, and we assume no obligation to update or alter our forward-looking statements made in this Quarterly Report, whether as a result of new information, future events or otherwise, except as required by applicable federal securities laws.

 

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PART I

 

ITEM 1.

FINANCIAL STATEMENTS

MEDIACOM BROADBAND LLC AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Dollars in thousands)

(Unaudited)

 

		September 30,				December 31,
		2013				2012
ASSETS
CURRENT ASSETS
Cash		$	13,575			$	11,796
Accounts receivable, net of allowance for doubtful accounts of $3,146 and $2,883			60,661				58,544
Accounts receivable - affiliates			1,217				—
Prepaid expenses and other current assets			12,193				9,743
Total current assets			87,646				80,083
Property, plant and equipment, net of accumulated depreciation of $1,332,253 and $1,228,186			804,036				804,462
Franchise rights			1,176,908				1,176,908
Goodwill			195,945				195,945
Subscriber lists, net of accumulated amortization of $39,747 and $39,744			—				3
Other assets, net of accumulated amortization of $19,837 and $16,809			28,107				27,183
Total assets		$	2,292,642			$	2,284,584
LIABILITIES, PREFERRED MEMBERS’ INTEREST AND MEMBER’S DEFICIT
CURRENT LIABILITIES
Accounts payable, accrued expenses and other current liabilities		$	168,358			$	166,458
Deferred revenue			35,461				34,559
Current portion of long-term debt			16,000				16,000
Total current liabilities			219,819				217,017
Long-term debt, less current portion			1,908,000				1,943,000
Other non-current liabilities			16,310				33,890
Total liabilities			2,144,129				2,193,907
Commitments and contingencies (Note 10)
PREFERRED MEMBERS’ INTEREST (Note 7)			150,000				150,000
MEMBER’S DEFICIT
Capital contributions			72,330				86,112
Accumulated deficit			(73,817	)			(145,435	)
Total member’s deficit			(1,487	)			(59,323	)
Total liabilities, preferred members’ interest and member’s deficit		$	2,292,642			$	2,284,584

The accompanying notes to the unaudited financial statements are an integral part of these statements.

 

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MEDIACOM BROADBAND LLC AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(Dollars in thousands)

(Unaudited)

 

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2013				2012				2013				2012
Revenues		$	231,252			$	223,865			$	686,698			$	668,949
Costs and expenses:
Service costs (exclusive of depreciation and amortization)			91,786				89,176				276,956				270,078
Selling, general and administrative expenses			47,762				45,964				138,244				134,010
Management fee expense			4,300				3,450				12,300				10,535
Depreciation and amortization			39,018				37,645				117,176				112,746
Operating income			48,386				47,630				142,022				141,580
Interest expense, net			(23,155	)			(29,904	)			(72,691	)			(86,346	)
Gain (loss) on derivatives, net			3,945				(6	)			17,565				1,060
Loss on early extinguishment of debt			—				(2,376	)			(832	)			(2,376	)
Other expense, net			(435	)			(458	)			(947	)			(1,111	)
Net income		$	28,741			$	14,886			$	85,117			$	52,807
Dividend to preferred members (Note 7)			4,500				4,500				13,500				13,500
Net income applicable to member		$	24,241			$	10,386			$	71,617			$	39,307

The accompanying notes to the unaudited financial statements are an integral part of these statements.

 

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MEDIACOM BROADBAND LLC AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in thousands)

(Unaudited)

 

		Nine Months Ended
		September 30,
		2013				2012
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income		$	85,117			$	52,807
Adjustments to reconcile net income to net cash flows provided by operating activities:
Depreciation and amortization			117,176				112,746
Gain on derivatives, net			(17,565	)			(1,060	)
Loss on early extinguishment of debt			832				501
Amortization of deferred financing costs			4,048				3,746
Changes in assets and liabilities, net of effects from acquisitions:
Accounts receivable, net			(2,117	)			3,810
Accounts receivable - affiliates			(1,217	)			(1,278	)
Prepaid expenses and other assets			(2,982	)			(3,621	)
Accounts payable, accrued expenses and other current liabilities			2,513				4,850
Deferred revenue			902				1,073
Other non-current liabilities			(25	)			(78	)
Net cash flows provided by operating activities		$	186,682			$	173,496
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures		$	(116,735	)		$	(116,001	)
Change in accrued property, plant and equipment			747				(5,513	)
Net cash flows used in investing activities		$	(115,988	)		$	(121,514	)
CASH FLOWS FROM FINANCING ACTIVITIES:
New borrowings of bank debt		$	773,000			$	373,000
Repayment of bank debt			(808,000	)			(329,500	)
Issuance of senior notes			—				300,000
Redemption of senior notes			—				(74,846	)
Dividend payments on preferred members’ interest			(13,500	)			(13,500	)
Capital contributions from parent (Note 8)			—				18,500
Capital distributions to parent (Note 8)			(14,040	)			(112,125	)
Financing costs			(5,284	)			(12,955	)
Other financing activities			(1,091	)			851
Net cash flows (used in) provided by financing activities		$	(68,915	)		$	149,425
Net change in cash			1,779				201,407
CASH, beginning of period			11,796				11,730
CASH, end of period		$	13,575			$	213,137
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for interest, net of amounts capitalized		$	65,641			$	71,224

The accompanying notes to the unaudited financial statements are an integral part of these statements.

 

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MEDIACOM BROADBAND LLC AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. ORGANIZATION

Basis of Preparation of Unaudited Consolidated Financial Statements

Mediacom Broadband LLC (“Mediacom Broadband,” and collectively with its subsidiaries, “we,” “our” or “us”) is a Delaware limited liability company wholly-owned by Mediacom Communications Corporation (“MCC”). MCC is involved in the acquisition and operation of cable systems serving smaller cities and towns in the United States, and its cable systems are owned and operated through our operating subsidiaries and those of Mediacom LLC, a New York limited liability company wholly-owned by MCC. As limited liability companies, we and Mediacom LLC are not subject to income taxes and, as such, are included in the consolidated federal and state income tax returns of MCC, which is a C corporation.

Our principal operating subsidiaries conduct all of our consolidated operations and own substantially all of our consolidated assets. Our operating subsidiaries are separate and distinct legal entities and have no obligation, contingent or otherwise, to make funds available to us.

We have prepared these unaudited consolidated financial statements in accordance with the rules and regulations of the Securities and Exchange Commission (the “SEC”). In the opinion of management, such statements include all adjustments, consisting of normal recurring accruals and adjustments, necessary for a fair presentation of our consolidated results of operations and financial position for the interim periods presented. The accounting policies followed during such interim periods reported are in conformity with generally accepted accounting principles in the United States of America and are consistent with those applied during annual periods. For a summary of our accounting policies and other information, refer to our Annual Report on Form 10-K for the year ended December 31, 2012. The results of operations for the interim periods are not necessarily indicative of the results that might be expected for future interim periods or for the full year ending December 31, 2013.

Mediacom Broadband Corporation (“Broadband Corporation”), a Delaware corporation wholly-owned by us, co-issued, jointly and severally with us, public debt securities. Broadband Corporation has no operations, revenues or cash flows and has no assets, liabilities or stockholders’ equity on its balance sheet, other than a one-hundred dollar receivable from an affiliate and the same dollar amount of common stock. Therefore, separate financial statements have not been presented for this entity.

Franchise fees imposed by local governmental authorities are collected on a monthly basis from our customers and are periodically remitted to the local governmental authorities. Because franchise fees are our obligation, we present them on a gross basis with a corresponding operating expense. Franchise fees reported on a gross basis amounted to approximately $6.0 million and $6.1 million for the three months ended September 30, 2013 and 2012, respectively, and approximately $18.0 million and $18.4 million for the nine months ended September 30, 2013 and 2012, respectively.

Reclassifications

Certain reclassifications have been made to prior year amounts to conform to the current year presentation.

2. RECENT ACCOUNTING PRONOUNCEMENTS

In July 2012, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No. 2012-02 (“ASU 2012-02”) Testing Indefinite-Lived Intangible Assets for Impairment. ASU 2012-02 expands the guidance in Accountings Standard Update No. 2011-08 (“ASU 2011-08”) Intangibles – Goodwill and Other to include indefinite-lived intangible assets other than goodwill. We adopted this ASU on December 1, 2012. ASU 2012-02 did not have a material impact on our financial statements or related disclosures.

In January 2013, the FASB issued Accounting Standards Update No. 2013-01 (“ASU 2013-01”), Balance Sheet (Topic 210). ASU 2013-01 contains amendments to balance sheet guidance. The amendments clarify the scope of ASU 2011-11 and apply to derivatives accounted for in accordance with Topic 815, Derivatives and Hedging. An entity is required to apply the amendments for fiscal years beginning on or after January 1, 2013, and interim periods within those annual periods. An entity should provide the required disclosures retrospectively for all comparative periods presented. The effective date is the same as the effective date of ASU 2011-11. We adopted ASU 2013-01 on January 1, 2013. ASU 2013-01 did not have a material impact on our financial statements or related disclosures.

 

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In February 2013, the FASB issued Accounting Standards Update No. 2013-02 (“ASU 2013-02”), Comprehensive Income (Topic 220). This ASU contains amendments to the guidance surrounding accumulated other comprehensive income. The amendments do not change the current requirements for reporting net income or other comprehensive income in financial statements. However, the amendments require an entity to provide information about the amounts reclassified out of accumulated other comprehensive income by component. In addition, an entity is required to present, either on the face of the statement where net income is presented or in the notes, significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income but only if the amount reclassified is required under U.S. GAAP to be reclassified to net income in its entirety in the same reporting period. For other amounts that are not required under U.S. GAAP to be reclassified in their entirety to net income, an entity is required to cross-reference to other disclosures required under U.S. GAAP that provide additional detail about those amounts. For public entities, ASU 2013-02 was effective prospectively for reporting periods beginning after December 15, 2012. We adopted ASU 2013-02 on January 1, 2013. ASU 2013-02 did not have an impact on our financial statements or related disclosures.

3. FAIR VALUE

The tables below set forth our financial assets and liabilities measured at fair value on a recurring basis using a market-based approach at September 30, 2013. These assets and liabilities have been categorized according to the three-level fair value hierarchy established by ASC 820, which prioritizes the inputs used in measuring fair value, as follows:

 

•

Level 1 — Quoted market prices in active markets for identical assets or liabilities.

 

•

Level 2 — Observable market based inputs or unobservable inputs that are corroborated by market data.

 

•

Level 3 — Unobservable inputs that are not corroborated by market data.

As of September 30, 2013, our interest rate exchange agreement liabilities, net, were valued at $39.5 million using Level 2 inputs, as follows (dollars in thousands):

 

		Fair Value as of September 30, 2013
		Level 1				Level 2				Level 3				Total
Assets
Interest rate exchange agreements		$	—			$	—			$	—			$	—
Liabilities
Interest rate exchange agreements		$	—			$	39,491			$	—			$	39,491
Interest rate exchange agreements - liabilities, net		$	—			$	39,491			$	—			$	39,491

As of December 31, 2012, our interest rate exchange agreement liabilities, net, were valued at $57.1 million using Level 2 inputs, as follows (dollars in thousands):

 

		Fair Value as of December 31, 2012
		Level 1				Level 2				Level 3				Total
Assets
Interest rate exchange agreements		$	—			$	—			$	—			$	—
Liabilities
Interest rate exchange agreements		$	—			$	57,057			$	—			$	57,057
Interest rate exchange agreements - liabilities, net		$	—			$	57,057			$	—			$	57,057

 

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The fair value of our interest rate exchange agreements is the estimated amount that we would receive or pay to terminate such agreements, taking into account projected interest rates, based on quoted LIBOR futures, and the remaining time to maturities. While our interest rate exchange agreements are subject to contractual terms that provide for the net settlement of transactions with counterparties, we do not offset assets and liabilities under these agreements for financial statement presentation purposes, and assets and liabilities are reported on a gross basis. Based upon the mark-to-market valuation of these interest rate exchange agreements, all of our interest rate exchange agreements were in a liability position as of September 30, 2013 and December 31, 2012, and therefore no assets were recorded on our consolidated balance sheets. As of both September 30, 2013 and December 31, 2012, based on such mark-to-market valuations, we recorded an accumulated current liability in “accounts payable, accrued expenses and other current liabilities” of $24.2 million and, as of the same dates, an accumulated long-term liability in “other non-current liabilities” of $15.3 million and $32.9 million, respectively.

As a result of the mark-to-market valuations on these interest rate exchange agreements, we recorded a net gain on derivatives of $3.9 million and a net loss on derivatives of less than $0.1 million for the three months ended September 30, 2013 and 2012, respectively, and a net gain on derivatives of $17.6 million and $1.1 million for the nine months ended September 30, 2013, 2012, respectively.

4. PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment consisted of the following (dollars in thousands):

 

		September 30,				December 31,
		2013				2012
Cable systems, equipment and subscriber devices		$	2,010,639			$	1,914,933
Furniture, fixtures and office equipment			44,534				44,206
Vehicles			39,784				39,624
Buildings and leasehold improvements			33,193				28,833
Land and land improvements			8,139				5,052
Property, plant and equipment, gross		$	2,136,289			$	2,032,648
Accumulated depreciation			(1,332,253	)			(1,228,186	)
Property, plant and equipment, net		$	804,036			$	804,462

5. ACCOUNTS PAYABLE, ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES

Accounts payable, accrued expenses and other current liabilities consisted of the following (dollars in thousands):

 

		September 30,				December 31,
		2013				2012
Accounts payable - non-affiliates		$	33,580			$	32,433
Accrued programming costs			27,049				23,270
Liabilities under interest rate exchange agreements			24,224				24,234
Accrued payroll and benefits			17,289				17,828
Accrued taxes and fees			16,734				18,301
Accrued interest			10,787				7,580
Accrued service costs			9,638				7,954
Advance subscriber payments			8,934				9,141
Accrued property, plant and equipment			7,537				6,790
Bank overdrafts (1)			3,231				4,581
Accrued telecommunications costs			691				1,774
Accounts payable - affiliates			—				4,417
Other accrued expenses			8,664				8,155
Accounts payable, accrued expenses and other current liabilities		$	168,358			$	166,458

 

(1)

Bank overdrafts represent outstanding checks in excess of funds on deposit at our disbursement accounts. We transfer funds from our depository accounts to our disbursement accounts upon daily notification of checks presented for payment. Changes in bank overdrafts are reported in “other financing activities” in our Consolidated Statements of Cash Flows.

 

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6. DEBT

As of September 30, 2013 and December 31, 2012, our debt consisted of (dollars in thousands):

 

		September 30,				December 31,
		2013				2012
Bank credit facility		$	1,624,000			$	1,659,000
6 3⁄8% senior notes due 2023			300,000				300,000
Total debt		$	1,924,000			$	1,959,000
Less: current portion			16,000				16,000
Total long-term debt		$	1,908,000			$	1,943,000

Bank Credit Facility

As of September 30, 2013, we maintained a $1.759 billion bank credit facility (the “credit facility”), comprising:

 

•

$216.0 million of revolving credit commitments, which expire on December 31, 2016; if we do not refinance the existing Term Loan D under the credit facility prior to July 31, 2014, our existing revolving credit commitments will expire, and any amounts outstanding would then become due on such date;

 

•

$746.0 million of outstanding Term Loan D borrowings, which mature on January 31, 2015;

 

•

$198.0 million of outstanding Term Loan G borrowings, which mature on January 20, 2020; and

 

•

$598.5 million of outstanding Term Loan H borrowings, which mature on January 29, 2021.

As of September 30, 2013, we had $123.6 million of unused revolving credit commitments, all of which were available to be borrowed and used for general corporate purposes, after giving effect to $81.5 million of outstanding loans and $10.9 million of letters of credit issued thereunder to various parties as collateral.

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, 2013, the credit agreement governing the credit facility (the “credit agreement”) required us to maintain a total leverage ratio (as defined in the credit agreement) of no more than 5.5 to 1.0 and an interest coverage ratio (as defined in the credit agreement) of no less than 1.75 to 1.0. The total maximum leverage ratio will be reduced to 5.0 to 1.0 April 1, 2014. As of September 30, 2013, we were in compliance with all covenants under the credit agreement, including a total leverage ratio of 4.5 to 1.0 and an interest coverage ratio of 3.0 to 1.0.

On May 29, 2013, the entire outstanding amount of $583.5 million under Term Loan F of the credit facility was repaid with proceeds from the issuance of a new term loan. See “Term Loan H” below. We recorded a loss on early extinguishment of $0.8 million for the nine months ended September 30, 2013, which represented the write-off of certain unamortized deferred financing costs.

Term Loan H

On May 29, 2013, our operating subsidiaries entered into an incremental facility agreement under the credit agreement that provided for a new term loan in the principal amount of $600.0 million (“Term Loan H”), and borrowed the full amount of such term loan on the same date. Net proceeds from Term Loan H of $594.8 million, after giving effect to financing costs of $5.2 million, were used to repay all outstanding borrowings under Term Loan F under the credit facility, to pay related fees and expenses, and for general corporate purposes.

Borrowings under Term Loan H bear interest at a floating rate or rates equal to, at our discretion, the London Interbank Offered Rate (“LIBOR”) plus a margin of 2.50%, subject to a minimum LIBOR of 0.75%, or the Prime Rate plus a margin of 1.50%, subject to a minimum Prime Rate of 0.75%. Term Loan H matures on January 29, 2021 and, since September 30, 2013, has been subject to quarterly principal reductions of $1.5 million, representing 0.25% of the original principal amount, with a final payment at maturity of $555.0 million, representing 92.5% of the original principal amount.

The credit agreement included certain amendments to a number of terms and conditions, including covenants relating to restricted payments, excess cash recapture, asset sales and acquisitions that would only become effective upon the approval of these amendments by the requisite lenders in the credit facility. As of May 29, 2013, all revolving credit, Term Loan G and Term Loan H lenders had approved such amendments, and, pursuant to the terms of the credit agreement, all amendments requiring approval by the Majority Lenders (as defined in the credit agreement) became effective on that date. On August 2, 2013, we entered into an amended and restated credit agreement that replaced the prior credit agreement in its entirety and reflects the approval of all such amendments.

 

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Interest Rate Exchange Agreements

We use interest rate exchange agreements (which we refer to as “interest rate swaps”) with various banks to fix the variable portion of borrowings under the credit facility. We believe this reduces the potential volatility in our interest expense that would otherwise result from changes in market interest rates. Our interest rate swaps have not been designated as hedges for accounting purposes, and have been accounted for on a mark-to-market basis as of, and for the three and nine months ended, September 30, 2013 and 2012. As of September 30, 2013:

 

•

We had current interest rate swaps that fixed the variable portion of $800 million of borrowings under the credit facility at a rate of 3.3% of which $600 million and $200 million expire during the years ending December 31, 2014 and 2015, respectively; and

 

•

We had forward-starting interest rate swaps that will fix the variable portion of $300 million of borrowings under the credit facility at a rate of 2.6% for a one year period commencing December 2014.

As of September 30, 2013, the weighted average interest rate on outstanding borrowings under the credit facility, including the effect of our interest rate swaps, was 4.2%.

Senior Notes

As of September 30, 2013, we had $300 million of outstanding senior notes, all of which comprised our 6 ³/₈% senior notes due April 2023. Our senior notes are unsecured obligations, and the indenture governing our senior notes (the “indenture”) limits the incurrence of additional indebtedness based upon a maximum debt to operating cash flow ratio (as defined in the indenture) of 8.5 to 1.0. As of September 30, 2013, we were in compliance with all covenants under the indenture, including a debt to operating cash flow ratio of 5.5 to 1.0.

Other Assets

Other assets, net, primarily include financing costs and original issue discount incurred to raise debt, which are deferred and amortized as interest expense over the expected term of such financings. Original issue discount, as recorded in other assets, net, was $8.6 million and $10.0 million as of September 30, 2013 and December 31, 2012, respectively.

Debt Ratings

MCC’s corporate credit rating is B1, with a stable outlook, by Moody’s, and B+, with a positive outlook, by Standard and Poor’s. Our senior unsecured credit rating is B3, with a stable outlook, by Moody’s, and B-, with a positive outlook, by Standard and Poor’s.

There are no covenants, events of default, borrowing conditions or other terms in the credit agreement or indenture that are based on changes in our credit rating assigned by any rating agency.

Fair Value

As of September 30, 2013 and December 31, 2012, the fair values of our senior notes and outstanding debt under the credit facility (which were calculated based upon market prices of such issuances in an active market when available) were as follows (dollars in thousands):

 

		September 30, 2013				December 31, 2012
6 3⁄8% senior notes due 2023		$	301,500			$	307,500
Bank credit facility		$	1,606,573			$	1,666,265

7. PREFERRED MEMBERS’ INTEREST

In July 2001, we received a $150 million preferred membership investment from Mediacom LLC. The preferred membership interest has a 12% annual dividend, payable quarterly in cash. We paid $4.5 million in cash dividends on the preferred membership interest during each of the three months ended September 30, 2013 and 2012, and $13.5 million during each of the nine months ended September 30, 2013 and 2012.

 

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8. MEMBER’S DEFICIT

As a wholly-owned subsidiary of MCC, our business affairs, including our financing decisions, are directed by MCC.

Capital contributions from parent and capital distributions to parent are reported on a gross basis in the Consolidated Statements of Cash Flows. We made capital distributions to parent in cash of $14.0 million and $112.1 million during the nine months ended September 30, 2013 and 2012, respectively, and received capital contributions from parent in cash of $18.5 million during the nine months ended September 30, 2012.

9. RELATED PARTY TRANSACTIONS

MCC manages us pursuant to a management agreement with our operating subsidiaries. Under such agreements, MCC has full and exclusive authority to manage our day to day operations and conduct our business. We remain responsible for all expenses and liabilities relating to the construction, development, operation, maintenance, repair and ownership of our systems. As compensation for the performance of its services, subject to certain restrictions, MCC is entitled to receive management fees in an amount not to exceed 4.0% of the annual gross operating revenues of our operating subsidiaries. MCC is also entitled to the reimbursement of all expenses necessarily incurred in its capacity as manager. MCC charged us management fees of $4.3 million and $3.5 million for the three months ended September 30, 2013 and 2012, respectively, and $12.3 million and $10.5 million for the nine months ended September 30, 2013 and 2012, respectively.

Mediacom LLC, a wholly-owned subsidiary of MCC, is a preferred equity investor in us. See Note 7.

Accounts receivable – affiliates and accounts payable – affiliates represent amounts due from, or amounts due to, MCC or its subsidiaries (other than us), are reported on a net basis for financial statement presentation purposes. As of September 30, 2013 and December 31, 2012, there were net balances recorded in accounts receivable – affiliates of $1.2 million and accounts payable – affiliates of $4.4 million, respectively.

10. COMMITMENTS AND CONTINGENCIES

Legal Proceedings

We are involved in various legal actions arising in the ordinary course of business. In the opinion of management, the ultimate disposition of these matters will not have a material adverse effect on our consolidated financial position, results of operations, cash flows or business.

11. GOODWILL AND OTHER INTANGIBLE ASSETS

In accordance with ASC 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 have evaluated the qualitative factors surrounding our Mediacom Broadband reporting unit as of October 1, 2012, 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 2013, 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, 2013.

 

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ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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, 2013 and 2012, and with our annual report on Form 10-K for the year ended December 31, 2012.

Overview

We are a wholly-owned subsidiary of Mediacom Communications Corporation (“MCC”), the nation’s eighth largest cable company based on the number of customers who purchase one or more video services, also known as video customers. As of September 30, 2013, we served approximately 535,000 video customers, 529,000 high-speed data (“HSD”) customers and 204,000 phone customers, aggregating 1.27 million primary service units (“PSUs”).

We provide our residential and commercial customers with a wide variety of products and services, including our primary services of video, HSD and phone. We also provide network and transport services to medium and large sized businesses, governments, and educational institutions in our service areas, including cell tower backhaul for wireless telephone providers, and sell advertising time to local, regional and national advertisers. 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.

We expect we will continue to increase revenues through growth in our residential and business services. Residential revenues are expected to increase as a result of HSD and phone customer growth and contributions from more customers taking higher HSD speed tiers and our advanced video services. Business services revenues are expected to grow through HSD and phone sales to small-to-medium sized companies and greater sales of cell tower backhaul and large enterprise class services. We believe the slower than expected economic recovery in the United States has contributed to lower sales and connect activity for residential services and negatively impacted customer and revenue growth. A continuation or worsening of such trends may adversely impact our results of operations, cash flows and financial position.

Our 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 used aggressive marketing campaigns, including deeply discounted promotional packages, and offered to consumers more advanced equipment and exclusive sports programming, which we believe have contributed to video customer losses in our markets. At the same time, our video programming costs on a per-unit basis 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. We believe such reduction of discounted pricing for video-only customers, along with the slower than expected economic recovery noted above, have contributed to video customer losses. While we expect to mostly offset such declines through higher average unit pricing and greater penetration of our advanced video services, if such losses were to continue, we may experience future declines in video revenues.

Our HSD service competes primarily with digital subscriber line (“DSL”) services offered by local telephone companies or local exchange carriers (“LECs”). Based upon the speeds we offer, we believe our HSD product is generally superior to DSL offerings in our service areas. As consumers’ bandwidth requirements have dramatically increased in the past few years, a trend we expect to continue, we believe our ability to offer a HSD product today with speeds of up to 105Mbps gives us a competitive advantage compared to the DSL service offered by the local telephone companies. We expect to continue to grow HSD revenues through residential customer growth and more customers taking higher HSD speed tiers.

Our phone service mainly competes with substantially comparable phone services offered by local telephone companies and cellular phone services offered by national wireless providers. We believe we will grow phone revenues through residential phone customer growth, which may be mostly offset by unit pricing pressure.

Our business services of video, HSD and phone, and network and transport solutions, including the fast-growing cell tower backhaul business, largely compete with LECs in our service areas. Developments and advancements in products and services by new, emerging companies may intensify competition. We have experienced strong growth rates of business services revenues in the past several years, which we believe will continue.

We face significant competition in the advertising business from a wide range of national, regional and local competitors, including local broadcast stations, national cable and broadcast networks, radio, newspapers, magazines, outdoor display and Internet companies. We expect our advertising revenues to decline in 2013 relative to 2012 due to the strong contributions of political advertising in 2012 during a national election year.

 

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For the three and nine months ended September 30, 2013, video programming represented our single largest expense, and we expect the rate of growth in programming costs per video customer to continue to increase in 2013 at a similar rate to our experience in 2012. In recent years, we have experienced substantial increases in video programming costs per video customer, particularly for 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 contractual demands of large programmers, who each own or control a significant number of popular cable networks, including sports programming, and increasing retransmission consent fees charged by large television broadcast station groups, 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 will continue to decline if increases in programming costs outpace any growth in video revenues.

Recent Developments

On May 29, 2013, we issued a new term loan in the aggregate principal amount of $600 million under our existing bank credit facility (the “credit facility”), and used the proceeds to repay an existing term loan, to pay related fees and expenses, and for general corporate purposes. See “Liquidity and Capital Resources — Capital Structure — Term Loan H” below and Note 6 in our Notes to Consolidated Financial Statements.

Revenues

Video

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

Phone

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

Business Services

Business services revenues primarily represent monthly fees charged to commercial video, HSD and phone customers, which vary according to the level of service taken, and fees charged to large businesses, including revenues from cell tower backhaul and enterprise class services.

Advertising

Advertising revenues primarily represent revenues received from selling advertising time we receive under 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 comprise: video programming; HSD service, including bandwidth connectivity; phone service, including leased circuits and long distance; our enterprise networks business, including leased access; technical personnel who maintain the cable network, perform customer installation activities and provide customer support; network operations center; utilities, including pole rental; and field operations, including outside contractors, vehicle fuel and maintenance and leased fiber for 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 programming, which we believe will continue to grow due to the increasing contractual rates and retransmission consent fees demanded by large programmers and independent broadcasters.

 

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Our HSD and phone service costs fluctuate depending on the level of investments we make in our cable systems and the resulting operational efficiencies. 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 service costs, with the exception of programming expenses, will remain fairly consistent as a percentage of our revenues.

Selling, General and Administrative Expenses

Significant selling, general and administrative expenses comprise: 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 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 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.

 

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Actual Results of Operations

Three Months Ended September 30, 2013 compared to Three Months Ended September 30, 2012

The table below sets forth our consolidated statements of operations and OIBDA for the three months ended September 30, 2013 and 2012 (dollars in thousands and percentage changes that are not meaningful are marked NM):

 

		Three Months Ended
		September 30,
		2013				2012				$ Change				% Change
Revenues		$	231,252			$	223,865			$	7,387				3.3	%
Costs and expenses:
Service costs (exclusive of depreciation and amortization)			91,786				89,176				2,610				2.9	%
Selling, general and administrative expenses			47,762				45,964				1,798				3.9	%
Management fee expense			4,300				3,450				850				24.6	%
Depreciation and amortization			39,018				37,645				1,373				3.6	%
Operating income			48,386				47,630				756				1.6	%
Interest expense, net			(23,155	)			(29,904	)			6,749				(22.6	%)
Gain (loss) on derivatives, net			3,945				(6	)			3,951				NM
Loss on early extinguishment of debt			—				(2,376	)			2,376				NM
Other expense, net			(435	)			(458	)			23				(5.0	%)
Net income		$	28,741			$	14,886			$	13,855				93.1	%
OIBDA		$	87,404			$	85,275			$	2,129				2.5	%

The table below represents a reconciliation of OIBDA to operating income, which we believe is the most directly comparable GAAP measure (dollars in thousands):

 

		Three Months Ended
		September 30,
		2013				2012				$ Change				% Change
OIBDA		$	87,404			$	85,275			$	2,129				2.5	%
Depreciation and amortization			(39,018	)			(37,645	)			(1,373	)			3.6	%
Operating income		$	48,386			$	47,630			$	756				1.6	%

 

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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, 2013 and 2012 (dollars in thousands, except per customer and per unit data):

 

		Three Months Ended
		September 30,
		2013				2012				$ Change				% Change
Video		$	114,547			$	114,519			$	28				0.0	%
HSD			62,140				56,250				5,890				10.5	%
Phone			16,331				16,962				(631	)			(3.7	%)
Business services			26,283				21,634				4,649				21.5	%
Advertising			11,951				14,500				(2,549	)			(17.6	%)
Total		$	231,252			$	223,865			$	7,387				3.3	%
		Three Months Ended
		September 30,								Increase/
		2013				2012				(Decrease)				% Change
Video customers			535,000				567,000				(32,000	)			(5.6	%)
HSD customers			529,000				501,000				28,000				5.6	%
Phone customers			204,000				189,000				15,000				7.9	%
Primary service units (PSUs)			1,268,000				1,257,000				11,000				0.9	%
Average total monthly revenue per video customer (1)		$	142.22			$	130.23			$	11.99				9.2	%
Average total monthly revenue per PSU (2)		$	60.60			$	59.18			$	1.42				2.4	%

 

(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 increased 3.3%, primarily due to greater HSD and business services revenues, offset in part by lower advertising revenues. Average total monthly revenue per video customer rose 9.2% to $142.22, and average total monthly revenue per PSU gained 2.4% to $60.60.

Video revenues were essentially flat, as greater revenues per video customer were mostly offset by a lower residential video customer base. During the three months ended September 30, 2013, we lost 14,000 video customers, compared to 12,000 in the prior year period. As of September 30, 2013, we served 535,000 video customers, or 35.8% of our estimated homes passed. As of the same date, 60.7% of our video customers were digital customers, and 39.2% of our digital customers were taking our DVR service.

HSD revenues grew 10.5%, largely as a result of greater revenue per HSD customer and, to a lesser extent, a larger residential HSD customer base. During the three months ended September 30, 2013, we gained 4,000 HSD customers, compared to 8,000 in the prior year period. As of September 30, 2013, we served 529,000 HSD customers, or 35.4% of our estimated homes passed.

Phone revenues declined 3.7%, principally due to lower revenue per phone customer. During the three months ended September 30, 2013, we gained 2,000 phone customers, compared to a loss of 4,000 in the prior year period. As of September 30, 2013, we served 204,000 phone customers, or 13.6% of our estimated homes passed.

Business services revenues rose 21.5%, mainly due to customer growth in commercial HSD, phone and enterprise class services, primarily related to cell tower backhaul.

Advertising revenues fell 17.6%, principally due to less political advertising compared to the prior year period.

Costs and Expenses

Service costs increased 2.9%, principally due to greater programming and, to a much lesser extent, field operating costs. Programming costs grew 3.0%, mainly due to greater retransmission consent fees and, to a lesser extent, higher contractual rates charged by our programming vendors, largely offset by a lower video customer base. Field operating costs increased 5.9%, primarily due to greater fiber lease and equipment repair and maintenance expenses, offset in part by lower outside contractor usage. Service costs as a percentage of revenues were 39.7% and 39.8% for the three months ended September 30, 2013 and 2012, respectively.

 

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Selling, general and administrative expenses were 3.9% higher, primarily due to greater marketing costs and bad debt expense. Marketing costs were 12.8% higher, mainly due to greater costs associated with online advertising and, to a lesser extent, third-party commissions, offset in part by lower volume of direct mail marketing. Bad debt expense rose 18.9%, principally due to the aging of certain customer accounts. Selling, general and administrative expenses as a percentage of revenues were 20.7% and 20.5% for the three months ended September 30, 2013 and 2012, respectively.

Management fee expense grew 24.6%, reflecting higher fees charged by MCC. Management fee expense as a percentage of revenues was 1.9% and 1.5% for the three months ended September 30, 2013 and 2012, respectively.

Depreciation and amortization was 3.6% higher, largely as a result of depreciation of customer premise equipment and investments in HSD bandwidth expansion and our business services.

OIBDA

OIBDA grew 2.5%, as the increase in revenues was offset in part by greater service costs and selling, general and administrative expenses.

Operating Income

Operating income rose 1.6%, as the growth in OIBDA was mostly offset by higher depreciation and amortization.

Interest Expense, Net

Interest expense, net, fell 22.6%, principally due to a lower average cost of debt and, to a lesser extent, lower average outstanding indebtedness during the period.

Gain (Loss) on Derivatives, Net

As of September 30, 2013, we had interest rate exchange agreements (which we refer to as “interest rate swaps”) with an aggregate notional amount of $1.1 billion, of which $300 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 gain on derivatives of $3.9 million and a net loss on derivatives of less than $0.1 million for the three months ended September 30, 2013 and 2012, respectively.

Loss on Early Extinguishment of Debt

Loss on early extinguishment of debt totaled $2.4 million for the three months ended September 30, 2012, which represented the write-off of certain unamortized deferred financing costs as a result of the repayment of certain senior notes.

Other Expense, Net

Other expense, net, was $0.4 million and $0.5 million for the three months ended September 30, 2013 and 2012, respectively. During the three months ended September 30, 2013, other expense, net, consisted of $0.3 million of revolving credit commitment fees and $0.1 million of other fees. During the three months ended September 30, 2012, other expense, net, consisted of $0.3 million of revolving credit commitment fees and $0.2 million of other fees.

Net Income

As a result of the factors described above, we recognized net income of $28.7 million and $14.9 million for the three months ended September 30, 2013 and 2012, respectively.

 

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Nine Months Ended September 30, 2013 compared to Nine Months Ended September 30, 2012

The table below sets forth our consolidated statements of operations and OIBDA for the nine months ended September 30, 2013 and 2012 (dollars in thousands and percentage changes that are not meaningful are marked NM):

 

		Nine Months Ended
		September 30,
		2013				2012				$ Change				% Change
Revenues		$	686,698			$	668,949			$	17,749				2.7	%
Costs and expenses:
Service costs (exclusive of depreciation and amortization)			276,956				270,078				6,878				2.5	%
Selling, general and administrative expenses			138,244				134,010				4,234				3.2	%
Management fee expense			12,300				10,535				1,765				16.8	%
Depreciation and amortization			117,176				112,746				4,430				3.9	%
Operating income			142,022				141,580				442				0.3	%
Interest expense, net			(72,691	)			(86,346	)			13,655				(15.8	%)
Gain on derivatives, net			17,565				1,060				16,505				NM
Loss on early extinguishment of debt			(832	)			(2,376	)			1,544				NM
Other expense, net			(947	)			(1,111	)			164				(14.8	%)
Net income		$	85,117			$	52,807			$	32,310				61.2	%
OIBDA		$	259,198			$	254,326			$	4,872				1.9	%

The table below represents a reconciliation of OIBDA to operating income, which we believe is the most directly comparable GAAP measure (dollars in thousands):

 

		Nine Months Ended
		September 30,
		2013				2012				$ Change				% Change
OIBDA			259,198				254,326				4,872				1.9	%
Depreciation and amortization			(117,176	)			(112,746	)			(4,430	)			3.9	%
Operating Income		$	142,022			$	141,580			$	442				0.3	%

 

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Revenues

The tables below set forth our revenues and selected customer and average monthly revenue statistics as of, and for the nine months ended, September 30, 2013 and 2012 (dollars in thousands, except per customer and per unit data):

 

		Nine Months Ended
		September 30,
		2013				2012				$ Change				% Change
Video		$	343,460			$	350,112			$	(6,652	)			(1.9	%)
HSD			184,343				168,349				15,994				9.5	%
Phone			49,566				50,124				(558	)			(1.1	%)
Business services			74,018				61,342				12,676				20.7	%
Advertising			35,311				39,022				(3,711	)			(9.5	%)
Total		$	686,698			$	668,949			$	17,749				2.7	%

Revenues increased 2.7%, primarily due to greater HSD and business services revenues, offset in part by lower video revenues. Average total monthly revenue per video customer rose 9.2% to $139.62, and average total monthly revenue per PSU gained 1.8% to $60.53.

Video revenues declined 1.9%, primarily due to a lower residential video customer base, offset in part by greater revenue per video customer. During the nine months ended September 30, 2013, we lost 23,000 video customers, compared to 29,000 in the prior year period.

HSD revenues grew 9.5%, principally due to greater revenue per HSD customer and a larger residential HSD customer base. During the nine months ended September 30, 2013, we gained 24,000 HSD customers, compared to 33,000 in the prior year period.

Phone revenues decreased 1.1%, mainly due to lower revenue per phone customer, mostly offset by a larger residential phone customer base,. During the nine months ended September 30, 2013, we gained 14,000 phone customers, compared to 9,000 in the prior year period.

Business services revenues rose 20.7%, mainly due to customer growth in commercial HSD, and phone and enterprise class services, primarily related to cell tower backhaul.

Advertising revenues fell 9.5%, principally due to less political advertising compared to the prior year period, offset in part by greater revenues from local automotive advertising.

Costs and Expenses

Service costs increased 2.5%, principally due to higher programming and, to a lesser extent, field operating costs. Programming costs increased 2.6%, mainly due to greater retransmission consent fees and, to a lesser extent, higher contractual rates charged by our programming vendors, largely offset by a lower video customer base. Field operating costs grew 7.9%, largely due to greater fiber lease expenses, vehicle and equipment maintenance and repair costs and, to a lesser extent, the comparison to the prior year period relating to insurance claims, offset in part by lower outside contractor usage. Service costs as a percentage of revenues were 40.3% and 40.4% for the nine months ended September 30, 2013 and 2012, respectively.

Selling, general and administrative expenses were 3.2% higher, largely as a result of greater marketing, administrative, customer service employee and bad debt expense. Marketing expenses were 5.9% higher, mainly due to greater spending on online advertising, offset in part by lower volume of direct mail marketing. Administrative expenses rose 43.6%, principally due to higher legal fees. Customer service employee costs were 4.7% higher, primarily due to higher sales commissions and increased staffing. Bad debt expense increased 5.4%, principally due to the aging of certain customer accounts. Selling, general and administrative expenses as a percentage of revenues were 20.1% and 20.0% for the nine months ended September 30, 2013 and 2012, respectively.

Management fee expense grew 16.8%, reflecting higher fees charged by MCC. Management fee expense as a percentage of revenues was 1.8% and 1.6% for the nine months ended September 30, 2013 and 2012, respectively.

Depreciation and amortization increased 3.9%, largely as a result of depreciation of customer premise equipment and investments in HSD bandwidth expansion and our business services.

 

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OIBDA

OIBDA grew 1.9%, as the increase in revenues was offset in part by greater service costs and, to a lesser extent, selling, general and administrative expenses and management fee expense.

Operating Income

Operating income increased 0.3%, as higher depreciation and amortization was mostly offset by the growth in OIBDA.

Interest Expense, Net

Interest expense, net, fell 15.8%, principally due to a lower average cost of debt and, to a much lesser extent, lower average outstanding indebtedness during the period.

Gain 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 $17.6 million and $1.1 million for the nine months ended September 30, 2013 and 2012, respectively.

Loss on Early Extinguishment of Debt

Loss on early extinguishment of debt totaled $0.8 million for the nine months ended September 30, 2013, which represented the write-off of certain unamortized deferred financing costs as a result of the repayment of certain term loans. Loss on early extinguishment of debt totaled $2.4 million for the nine months ended September 30, 2012, which represented the write-off of certain unamortized deferred financing costs as a result of the repayment of certain senior notes.

Other Expense, Net

Other expense, net, was $0.9 million and $1.1 million for the nine months ended September 30, 2013 and 2012, respectively. During the nine months ended September 30, 2013, other expense, net, consisted of $0.7 million of revolving credit commitment fees and $0.2 million of other fees. During the nine months ended September 30, 2012, other expense, net, consisted of $0.7 million of revolving credit commitment fees and $0.4 million of other fees.

Net Income

As a result of the factors described above, we recognized net income of $85.1 million and $52.8 million for the nine months ended September 30, 2013 and 2012, respectively.

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, 2013, our near-term liquidity requirements included scheduled term loan principal reductions of $4.0 million during the remainder of 2013 and $16.0 million during the year ending December 31, 2014. As of the same date, our sources of liquidity included $13.6 million of cash and $123.6 million of unused and available revolving credit commitments.

As of September 30, 2013, the existing Term Loan D under the credit facility had an outstanding balance of $746.0 million and a scheduled maturity of January 31, 2015. If we do not refinance Term Loan D prior to July 31, 2014, our existing revolving credit commitments (the “revolver”) will expire, and any amounts outstanding thereunder would become due on such date, As of September 30, 2013, there were $81.5 million of outstanding loans under the revolver. We believe that cash generated by, or available to, us will be sufficient to repay such balances under the revolver prior to that date, if necessary, and meet our other anticipated capital and liquidity needs through the year ending December 31, 2014.

If we were unable to obtain financing on acceptable terms, or at all, to refinance Term Loan D prior to its scheduled maturity of January 31, 2015, we would need to take other actions to conserve or raise capital that we would not take otherwise. We have accessed the debt markets for significant amounts of capital in the past, and while there are no assurances we can do so, we expect to access these markets to refinance Term Loan D prior to July 31, 2014.

 

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Net Cash Flows Provided by Operating Activities

Net cash flows provided by operating activities were $186.7 million for the nine months ended September 30, 2013, primarily due to OIBDA of $259.2 million, offset in part by interest expense of $72.7 million and the $2.9 million net change in our operating assets and liabilities. The net change in our operating assets and liabilities was primarily due to increases in prepaid expenses and other assets of $3.0 million, in accounts receivable, net, of $2.1 million and in accounts receivable from affiliates of $1.2 million, offset in part by an increase in accounts payable, accrued expenses and other current liabilities of $2.5 million and a decline in deferred revenue of $0.9 million.

Net cash flows provided by operating activities were $173.5 million for the nine months ended September 30, 2012, primarily due to OIBDA of $254.3 million and the $4.8 million change in our operating assets and liabilities, offset in part by interest expense of $86.3 million. The net change in our operating assets and liabilities was primarily due to an increase in accounts payable, accrued expenses and other current liabilities of $4.9 million, a decrease in accounts receivable, net, of $3.8 million and a decline in deferred revenue of $1.1 million, offset in part by an increase in prepaid expenses and other assets of $3.6 million and an increase in accounts receivable from affiliates of $1.3 million.

Net Cash Flows Used in Investing Activities

Capital expenditures continue to be our primary use of capital resources and comprise substantially all of our net cash flows used in investing activities.

Net cash flows used in investing activities were $116.0 million for the nine months ended September 30, 2013, comprising $116.7 million of capital expenditures, slightly offset by a net change in accrued property, plant and equipment of $0.7 million.

Net cash flows used in investing activities were $121.5 million for the nine months ended September 30, 2012, comprising $116.0 million of capital expenditures and a net change in accrued property, plant and equipment of $5.5 million.

The $0.7 million increase in capital expenditures largely reflected costs associated with the purchase of a building in one of our service areas and an increase in outlays for customer premise equipment, mostly offset by a reduction in outlays for HSD bandwidth expansion, the all-digital video platform and fiber network redundancy.

Net Cash Flows (Used in) Provided by Financing Activities

Net cash flows used in financing activities were $68.9 million for the nine months ended September 30, 2013, comprising net repayments of $35.0 million under the credit facility, $14.0 million of capital distributions to our parent, MCC, $13.5 million of dividend payments on preferred members’ interest, $5.3 million of financing costs and $1.1 million of other financing activities. See “Term Loan H” below and Note 6 in our Notes to Consolidated Financial Statements.

Net cash flows provided by financing activities were $149.4 million for the nine months ended September 30, 2012, comprising $300.0 million issuance of new senior notes, net borrowings of $43.5 million under the credit facility, capital contributions from our parent, MCC, of $18.5 million and other financing activities of $0.9 million, offset in part by capital distributions to our parent, MCC, of $112.1 million, a $74.8 million purchase of senior notes, dividend payments on preferred members’ interest of $13.5 million and financing costs of $13.0 million.

Capital Structure

As of September 30, 2013, our total indebtedness was $1.924 billion, of which 57% was at fixed interest rates or subject to interest rate protection. During the nine months ended September 30, 2013, we paid cash interest of $65.6 million, net of capitalized interest.

Bank Credit Facility

As of September 30, 2013, we maintained a $1.759 billion credit facility, comprising $1.543 billion of term loans with maturities ranging from January 2015 to January 2021, and $216.0 million of revolving credit commitments which are scheduled to expire on December 31, 2016. As of the same date, we had $123.6 million of unused revolving credit commitments, all of which were available to be borrowed and used for general corporate purposes, after giving effect to $81.5 million of outstanding loans and $10.9 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, 2013, the credit agreement governing the credit facility (the “credit agreement”) required us to maintain a total leverage ratio (as defined in the credit agreement) of no more than 5.5 to 1.0 and an interest coverage ratio (as defined in the credit agreement) of no less than 1.75 to 1.0. The maximum total leverage will be reduced to 5.0 to 1.0 on April 1, 2014. As of September 30, 2013, we were in compliance with all covenants under the credit agreement, including a total leverage ratio of 4.5 to 1.0 and an interest coverage ratio of 3.0 to 1.0.

 

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Term Loan H

On May 29, 2013, our operating subsidiaries entered into an incremental facility agreement under the credit agreement that provided for a new term loan in the principal amount of $600.0 million (“Term Loan H”). Net proceeds from Term Loan H of $594.8 million, after giving effect to financing costs of $5.2 million, were used to repay all outstanding borrowings under Term Loan F under the credit facility, to pay related fees and expenses, and for general corporate purposes.

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, 2013, we had interest rate swaps that fix the variable portion of $800 million of borrowings under the credit facility at a rate of 3.3%, of which $600 million and $200 million expire during the years ending December 31, 2014 and 2015, respectively. As of the same date, we also had forward starting interest rate swaps that will fix the variable portion of $300 million of borrowings under the credit facility at a rate of 2.6% for a one year period commencing in December 2014.

As of September 30, 2013, the weighted average interest rate on outstanding borrowings under the credit facility, including the effect of our interest rate swaps, was 4.2%.

Senior Notes

As of September 30, 2013, we had $300 million of outstanding senior notes, all of which mature in April 2023. Our senior notes are unsecured obligations, and the indenture governing our senior notes (the “indenture”) limits the incurrence of additional indebtedness based upon a maximum debt to operating cash flow ratio (as defined in the indenture) of 8.5 to 1.0. As of September 30, 2013, we were in compliance with all covenants under the indenture, including a debt to operating cash flow ratio of 5.5 to 1.0.

Covenant Compliance and Debt Ratings

For all periods through September 30, 2013, 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 positive outlook, by Standard and Poor’s. Our senior unsecured credit rating is B3 by Moody’s, with a stable outlook, and B-, with a positive 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, 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, 2012.

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.

 

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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), and ASU 2011-08 — Intangibles — Goodwill and Other (Topic 350), we have evaluated the qualitative factors surrounding our Mediacom Broadband 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 2013, 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, 2013.

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.

 

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

There have been no significant changes to the information required under this Item from what was disclosed in Item 7A of our Annual Report on Form 10-K for the year ended December 31, 2012.

 

ITEM 4.

CONTROLS AND PROCEDURES

Mediacom Broadband LLC

Under the supervision and with the participation of the management of Mediacom Broadband LLC, including Mediacom Broadband LLC’s Chief Executive Officer and Chief Financial Officer, Mediacom Broadband LLC evaluated the effectiveness of Mediacom Broadband LLC’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) as of the end of the period covered by this report. Based upon that evaluation, Mediacom Broadband LLC’s Chief Executive Officer and Chief Financial Officer concluded that Mediacom Broadband LLC’s disclosure controls and procedures were effective as of September 30, 2013.

There has not been any change in Mediacom Broadband LLC’s internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the quarter ended September 30, 2013 that has materially affected, or is reasonably likely to materially affect, Mediacom Broadband LLC’s internal control over financial reporting.

 

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Mediacom Broadband Corporation

Under the supervision and with the participation of the management of Mediacom Broadband Corporation, including Mediacom Broadband Corporation’s Chief Executive Officer and Chief Financial Officer, Mediacom Broadband Corporation evaluated the effectiveness of Mediacom Broadband Corporation’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) as of the end of the period covered by this report. Based upon that evaluation, Mediacom Broadband Corporation’s Chief Executive Officer and Chief Financial Officer concluded that Mediacom Broadband Corporation’s disclosure controls and procedures were effective as of September 30, 2013.

There has not been any change in Mediacom Broadband Corporation’s internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the quarter ended September 30, 2013 that has materially affected, or is reasonably likely to materially affect, Mediacom Broadband Corporation’s internal control over financial reporting.

PART II

 

ITEM 1.

LEGAL PROCEEDINGS

See Note 10 in our Notes to Consolidated Financial Statements.

 

ITEM 1A.

RISK FACTORS

There have been no material changes in our risk factors from those disclosed in our Annual Report on Form 10-K for the year ended December 31, 2012.

 

ITEM 6.

EXHIBITS

 

Exhibit Number		Exhibit Description
31.1		Rule 15d-14(a) Certifications of Mediacom Broadband LLC
31.2		Rule 15d-14(a) Certifications of Mediacom Broadband Corporation
32.1		Section 1350 Certifications of Mediacom Broadband LLC
32.2		Section 1350 Certifications of Mediacom Broadband Corporation
101		The following is financial information from Mediacom Broadband LLC’s and Mediacom Broadband Corporation’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2013, formatted in eXtensible Business Reporting Language (XBRL): (i) Consolidated Balance Sheets at September 30, 2013 and December 31, 2012, (ii) Consolidated Statements of Operations for the three and nine months ended September 30, 2013 and 2012, (iii) Consolidated Statements of Cash Flows for the nine months ended September 30, 2013 and 2012, (iv) Notes to Consolidated Financial Statements

 

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

				MEDIACOM BROADBAND LLC
November 8, 2013				By:		/s/ Mark E. Stephan
						Mark E. Stephan
						Executive Vice President and Chief Financial Officer

 

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

				MEDIACOM BROADBAND CORPORATION
November 8, 2013				By:		/s/ Mark E. Stephan
						Mark E. Stephan
						Executive Vice President and Chief Financial Officer

 

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EXHIBIT INDEX

 

Exhibit Number		Exhibit Description
31.1		Rule 15d-14(a) Certifications of Mediacom Broadband LLC
31.2		Rule 15d-14(a) Certifications of Mediacom Broadband Corporation
32.1		Section 1350 Certifications of Mediacom Broadband LLC
32.2		Section 1350 Certifications of Mediacom Broadband Corporation
101		The following is financial information from Mediacom Broadband LLC’s and Mediacom Broadband Corporation’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2013, formatted in eXtensible Business Reporting Language (XBRL): (i) Consolidated Balance Sheets at September 30, 2013 and December 31, 2012, (ii) Consolidated Statements of Operations for the three and nine months ended September 30, 2013 and 2012, (iii) Consolidated Statements of Cash Flows for the nine months ended September 30, 2013 and 2012, (iv) Notes to Consolidated Financial Statements

 

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