<PAGE>
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, 1997
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition periods from to
Commission file number 0-22821
CABLE MICHIGAN, INC.
(Exact name of registrant as specified in its charter)
Pennsylvania 23-2566891
(State of other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
105 Carnegie Center
Princeton, New Jersey 08540
(Address of principal executive offices)
(Zip Code)
(609) 734-3700
(Registrant's telephone number, including area code)
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirement for the past 90 days.
YES X NO
Indicate the number of shares outstanding of each of the issuer's classes of
common stock ($1.00 par value), as of October 31, 1997.
Common Stock 6,871,165
1
<PAGE>
CABLE MICHIGAN, INC.
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Statements of
Operations-Quarters and Nine Months Ended
September 30, 1997 and 1996
Condensed Consolidated Balance Sheets-
September 30, 1997 and December 31, 1996
Condensed Consolidated Statements of
Cash Flows-Nine Months Ended September 30,
1997 and 1996
Notes to Condensed Consolidated Financial
Statements
Item 2. Management's Discussion and Analysis of
Results of Operations and Financial
Condition
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
SIGNATURE
2
<PAGE>
PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CABLE MICHIGAN, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
(Dollars in Thousands Except Per Share Amounts)
(Unaudited)
<TABLE>
<CAPTION>
QUARTER ENDED NINE MONTHS ENDED
September 30 September 30
-------------------------- ------------------------
1997 1996 1997 1996
<S> <C> <C> <C> <C>
SALES $ 20,682 $ 19,544 $ 60,912 $ 56,889
COSTS & EXPENSES, EXCLUDING MANAGEMENT FEES
AND DEPRECIATION AND AMORTIZATION 11,395 10,541 33,093 30,706
MANAGEMENT FEES 1,348 760 2,901 2,430
DEPRECIATION AND AMORTIZATION 8,056 7,877 23,952 23,590
-------- -------- -------- --------
OPERATING INCOME (LOSS) (117) 366 966 163
INTEREST INCOME 52 30 131 85
INTEREST EXPENSE (2,367) (3,573) (9,260) (11,447)
GAIN ON SALE OF FLORIDA CABLE SYSTEM 2,571 -- 2,571 --
OTHER INCOME (EXPENSE), NET (152) (481) (472) (747)
-------- -------- -------- --------
(LOSS) BEFORE INCOME TAXES (13) (3,658) (6,064) (11,946)
(BENEFIT) FOR INCOME TAXES (615) (1,367) (2,986) (4,423)
-------- -------- -------- --------
INCOME (LOSS) BEFORE MINORITY INTEREST 602 (2,291) (3,078) (7,523)
MINORITY INTEREST IN (INCOME)
LOSS OF CONSOLIDATED ENTITY (600) 281 (173) 890
-------- -------- -------- --------
NET INCOME (LOSS) $ 2 $ (2,010) $ (3,251) $ (6,633)
======== ======== ======== ========
</TABLE>
See accompanying notes to Condensed Consolidated Financial Statements
<PAGE>
PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (Continued)
CABLE MICHIGAN, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
(Dollars in Thousands Except Per Share Amounts)
(Unaudited)
<TABLE>
<CAPTION>
Quarter Ended Nine Months Ended
September 30 September 30
------------------------------ --------------------------------
1997 1996 1997 1996
<S> <C> <C> <C> <C>
EARNINGS (LOSS) PER AVERAGE COMMON SHARE
NET INCOME (LOSS) TO SHAREHOLDERS - $(0.29) $(0.47) $(0.97)
=============== ============== ============== ===============
AVERAGE SHARES OUTSTANDING 6,871,142 6,861,542 6,870,325 6,861,292
</TABLE>
<PAGE>
CABLE MICHIGAN, INC AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(Dollars in Thousands)
(Unaudited)
<TABLE>
<CAPTION>
September 30 December 31
1997 1996
---------------------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and temporary cash investments $8,004 $3,297
Accounts receivable, net of reserve for
doubtful accounts of $517 at
September 30, 1997 and $579 in 1996 3,443 3,884
Prepayments and other 900 518
Accounts receivable from related parties 5,244 1,716
Deferred income taxes 977 974
Property, Plant and Equipment 165,132 158,117
Accumulated depreciation 91,207 80,325
---------------------------
Net Property, Plant and Equipment 73,925 77,792
Intangible assets, net 49,156 60,956
Deferred charges and other assets 738 63
---------------------------
Total assets $142,387 $149,200
---------------------------
LIABILITIES AND SHAREHOLDERS' DEFICIT
LIABILITIES:
Current maturities of long-term debt - $1,750
Accounts payable 3,945 3,337
Advance billings & customer deposits 2,238 2,113
Accrued cable programming expense 1,603 1,811
Accrued litigation costs 1,450 2,150
Accrued expenses 2,351 3,320
Accounts payable to related parties 5,313 9,861
Long-term debt 140,000 15,680
Notes payable - affiliates - 147,567
Deferred income taxes 23,464 26,656
---------------------------
Total liabilities 180,364 214,245
Minority interest 14,869 14,696
Commitments and Contingencies
Common shareholders' deficit (52,846) (79,741)
---------------------------
Total Liabilities and Shareholders' Deficit $142,387 $149,200
===========================
</TABLE>
See accompanying notes to Condensed Consolidated Financial Statements
<PAGE>
CABLE MICHIGAN, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Dollars in Thousands)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30
1997 1996
<S> <C> <C>
NET CASH PROVIDED BY OPERATING ACTIVITIES $ 7,337 $ 28,568
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to property, plant & equipment (9,520) (6,331)
Proceeds from sale of Florida cable operations 3,496 --
Other 160 186
--------- ---------
Net cash used in investing activities (5,864) (6,145)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Change in affiliates notes (116,836) (24,059)
Issuance of Long-term Debt 125,000 --
Redemption of long-term debt (17,430) (1,125)
Transfers from CTE 12,500 --
--------- ---------
Net cash provided by (used in) financing activities 3,234 (25,184)
--------- ---------
Net increase (decrease) in cash and
temporary cash investments 4,707 (2,761)
Total cash and temporary cash investments at beginning of year 3,297 3,029
--------- ---------
Total cash and temporary cash investments at September 30, $ 8,004 $ 268
========= =========
Supplemental disclosures of cash flow information
Cash paid during the periods for:
Interest (net of amounts capitalized) $ 9,364 $ 11,667
========= =========
Income taxes 23 29
========= =========
</TABLE>
See accompanying notes to Condensed Consolidated Financial Statements
Supplemental Schedule of Non-Cash Financing and Investing Activities:
In September 1997, in connection with the transfer of CTE's investment in
Mercom to the Company, the Company assumed CTE's $15,000 Term Credit Facility.
<PAGE>
CABLE MICHIGAN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Thousands of Dollars, except per share amounts)
1. The Condensed Consolidated Financial Statements included herein have been
prepared by the Company, without audit, pursuant to the rules and regulations of
the Securities and Exchange Commission. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations. However, in the opinion of the
Management of the Company, the Condensed Consolidated Financial Statements
include all adjustments, consisting only of normal recurring adjustments,
necessary to present fairly the financial information. The Condensed
Consolidated Financial Statements should be read in conjunction with the
financial statements and notes thereto included in the Company's Form 10
Information Statement, the date of which is September 5, 1997.
2. Cable Michigan, Inc. is an operator of cable television systems in the
state of Michigan, and its operations include a 62% ownership interest in
Mercom, Inc. Prior to September 30, 1997, the Company was operated as part of
C-TEC. On September 30, 1997, C-TEC distributed 100% of the outstanding shares
of common stock of its wholly-owned subsidiaries, RCN Corporation ("RCN") and
Cable Michigan, Inc. ("Cable Michigan") to holders of record of C-TEC's Common
Stock and C-TEC's Class B Common Stock as of the close of business on September
19, 1997 ("the Distribution") in accordance with the terms of a Distribution
Agreement dated September 5, 1997 among the Company, RCN and C-TEC. The Company,
C-TEC and RCN have entered into certain agreements providing for the
Distribution, and governing various ongoing relationships between the three
companies, including a distribution agreement and a tax sharing agreement. As
part of C-TEC's restructuring, C-TEC Corporation changed its name to
Commonwealth Telephone Enterprises, Inc.
The historical financial information presented herein reflects periods
during which the Company did not operate as an independent company and
accordingly, certain assumptions were made in preparing such financial
information. Such information, therefore, may not necessarily reflect the
results of operations or the financial condition of the Company which would have
resulted had the Company been an independent, public company during the
reporting periods, and are not necessarily indicative of the Company's future
operating results or financial condition.
3. In connection with and prior to the Distribution, the Company Board adopted
the Cable Michigan, Inc. 1997 Equity Incentive Plan ("the 1997 Plan"), designed
to provide equity-based compensation opportunities to key employees when
shareholders of the Company have received a corresponding benefit through
appreciation in the value of Cable Michigan Common Stock. The following is a
summary of the 1997 Plan.
The 1997 Plan contemplates the issuance of incentive stock options within
the meaning of Section 422 of the Code, as well as stock options that are not
designated as incentive stock options, performance-based stock options, stock
appreciation rights, performance share units, restricted stock, phantom stock
units and other stock-based awards (collectively, "Awards"). The 1997 Plan also
provides that no individual may be granted Awards representing more than 50,000
shares of Cable Michigan Common Stock in any one year .
All employees and outside consultants to the Company and any of its
subsidiaries and all Directors of the Company who are not also employees of the
Company are eligible to receive discretionary Awards under the 1997 Plan.
3
<PAGE>
Unless earlier terminated by the Company Board, the 1997 Plan will expire on
the 10th anniversary of the Distribution. The Company Board or the Committee
may, at any time, or from time to time, amend or suspend and, if suspended,
reinstate, the 1997 Plan in whole or in part.
In connection with the Distribution, each Commonwealth Telephone
Enterprises, Inc. ("CTE") outstanding option was adjusted so that, following the
Distribution, each holder thereof holds options to purchase shares of CTE Common
Stock, RCN Corporation Common Stock and Cable Michigan Common Stock. The number
of shares subject to, and the exercise price of, such resulting options was
adjusted to take into account the Distribution and the CTE 2 for 3 reverse stock
split to ensure that the aggregate intrinsic value of the resulting CTE, RCN and
Cable Michigan options immediately after the Distribution was equal to the
aggregate intrinsic value of the CTE options immediately prior to the
Distribution.
At September 30, 1997, under the 1997 Plan, there are approximately 380,000
options outstanding with exercise prices ranging from $7.47 to $10.06.
4. In July 1997, Mercom, Inc., in which the Company has a 62% ownership
interest, sold its cable system in Port St. Lucie, Florida, consisting of
approximately 1,900 subscribers, to Adelphia Communications Corporation for cash
of $3,496. The Company realized a gain of $2,571 on the transaction.
5. The Company has in place two secured credit facilities (the "Credit
Facilities") pursuant to a single credit agreement with a group of lenders for
which First Union National Bank acts as agent (the "Credit Agreement"), which
was effective as of July 1, 1997. The first is a five-year revolving credit
facility in the amount of $65 million (the "Revolving Credit Facility"). The
second is an eight-year term credit facility in the amount of $100 million (the
"Term Credit Facility").
The interest rate on the Credit Facilities will be, at the election of the
Company, based on either a LIBOR or a Base Rate option (6.60% at September
30)(each as defined in the Credit Agreement).
The entire amount of the Term Credit Facility has been drawn and as of
September 30, 1997, $100 million of the principal was outstanding thereunder.
The entire amount of the Revolving Credit Facility is available to the Company
until June 30, 2002. As of September 30, 1997, $25 million of principal was
outstanding thereunder. Revolving loans may be repaid and reborrowed from time
to time.
The term loan must be repaid over six years in quarterly installments, at
the end of September, December, March and June of each year from September 30,
1999 through June 30, 2005. Interest only is due through June 1999. The credit
agreement is principally secured by the stock of certain cable subsidiaries.
The credit agreement contains restrictive covenants which generally require
the Company to maintain certain debt to cash flow and interest coverage ratios
and place certain limitations on additional debt and investments. The Company
does not believe that these covenants will materially restrict its activities.
Prior to the Distribution Date, the Company assumed all obligations of CTE
under a $15 million credit facility extended by a separate group of lenders for
which First Union National Bank also acts as agent (the "$15 Million Facility").
The $15 Million Facility matures in a single installment on June 30, 1999 and is
secured by a first priority pledge of all shares of Mercom owned by the Company.
4
<PAGE>
6. The Yee Family Trusts, as holders of CTE's Preferred Stock, Series A and
Preferred Stock, Series B, have recently commenced an action against the
Company, RCN Corporation and CTE in the Superior Court of New Jersey. The
complaint alleges that CTE's restructuring constitutes a fraudulent conveyance
and alleges breaches of contract and fiduciary duties in connection with the
restructuring. The plaintiffs are seeking to set aside the alleged fraudulent
conveyance and unspecified monetary damages. The Company believes this lawsuit
is without merit and intends to contest this action vigorously.
7. The Company is provided management and other services by RCN Corporation.
These services include, but are not limited to, customer service, billing and
programming services.
In addition, in connection with the Distribution, the Company has agreed to
purchase from RCN and CTE certain specified services for a transitional period
after the Distribution. Depending on the type of service to be provided, the
fees for such services will be based on, among other things, a portion of the
Company's revenues or an allocated portion (based on relative usage) of the cost
incurred by RCN or CTE to provide such service.
8. In March 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 128 "Earnings Per Share." This
Statement establishes standards for computing and presenting earnings per share
(EPS) and applies to entities with publicly held common stock or potential
common stock. This Statement is effective for financial statements issued after
December 31, 1997, earlier application is not permitted. This Statement
requires restatement of all prior-period EPS data presented. The Company is
currently evaluating the impact, if any, adoption of SFAS No. 128 will have on
its financial statements.
9. On September 29, 1997, Cable Michigan, Inc. (the parent company) assumed
all of the bank's interest in Mercom's Term Credit Agreement. Immediately after
the purchase of the Term Credit Agreement by Cable Michigan, the Note Payable
was amended and restated.
The Note Payable contains the same pricing and security provisions as were
previously in place with the Term Credit Agreement. The amendments to the Note
Payable provides for less restrictive financial covenants and the elimination of
mandatory principal repayments through December 31, 2002. In addition, the
change of control default provision in the agreement was eliminated.
The amendments made to the Note Payable provide increased borrowing capacity
for Mercom as Mercom continues to invest in the upgrade of its facilities. The
Note Payable is significantly less restrictive to its liquidity and operations
than its prior structure. For the foreseeable future, Mercom believes its cash
on hand and cash expected to be generated from operations will be sufficient to
service its debt under its Note Payable and to make the capital expenditures
necessary to remain competitive. In addition, Cable Michigan, Inc. has the
credit ability to lend additional funds, up to an aggregate of $20 million, to
Mercom to meet additional investment and liquidity needs.
The Note Payable from Mercom to Cable Michigan, Inc. matures with a balloon
payment on December 31, 2002. The Note Payable contains restrictive covenants,
including the maintenance of a specified debt to cash flow ratio and an interest
coverage ratio. At September 30, 1997, Mercom was in compliance with all
covenants associated with the Note Payable. The Note is eliminated in the
Company's consolidated balance sheet.
5
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (Thousands of Dollars, except per share amounts)
The Private Securities Litigation Reform Act of 1995 provides a "safe harbor"
for forward-looking statements. Certain information included in this Quarterly
Report is forward-looking, such as information relating to the effects of future
regulations and competition. Such forward looking information involves important
risks and uncertainties that could significantly affect expected results in the
future differently from those expressed in any forward-looking statements made
by, or on behalf of, the Company. These risks and uncertainties include, but are
not limited to, uncertainties relating to economic conditions, acquisitions and
divestitures, government and regulatory policies, the pricing and availability
of equipment, materials, inventories and programming, technological
developments, franchise related matters, market conditions that may adversely
affect the availability of debt and equity financing and changes in the
competitive environment in which the Company operates.
The following discussion should be read in conjunction with the attached
condensed consolidated financial statements and notes thereto, and with the
Company's audited financial statements and notes thereto for the year ended
December 31, 1996.
General
Cable Michigan, Inc. is an operator of cable television systems in the state of
Michigan, and its operations include a 62% ownership interest in Mercom, Inc.
Prior to September 30, 1997, the Company was operated as part of C-TEC. On
September 30, 1997, C-TEC distributed 100% of the outstanding shares of common
stock of its wholly-owned subsidiaries, RCN Corporation ("RCN") and Cable
Michigan, Inc. ("Cable Michigan") to holders of record of C-TEC's Common Stock
and C-TEC's Class B Common Stock as of the close of business on September 19,
1997 ("the Distribution") in accordance with the terms of a Distribution
Agreement dated September 5, 1997 among the Company, RCN and C-TEC. The Company,
C-TEC and RCN have entered into certain agreements providing for the
Distribution, and governing various ongoing relationships between the three
companies, including a distribution agreement and a tax sharing agreement. As
part of C-TEC's restructuring, C-TEC Corporation changed its name to
Commonwealth Telephone Enterprises, Inc.
The historical financial information presented herein reflects periods during
which the Company did not operate as an independent company and accordingly,
certain assumptions were made in preparing such financial information. Such
information, therefore, may not necessarily reflect the results of operations or
the financial condition of the Company which would have resulted had the Company
been an independent, public company during the reporting periods, and are not
necessarily indicative of the Company's future operating results or financial
condition.
Results of Operations
Three Months Ended September 30, 1997 Compared With Three Months Ended
- ----------------------------------------------------------------------
September 30, 1996.
- ------------------
For the three months ended September 30, 1997, operating income before
depreciation and amortization was $7,939 as compared to $8,243 for the three
months ended September 30, 1996. Sales increased 5.8% to $20,682 for the three
month period ended September 30, 1997 from $19,544 for the same period in 1996.
Net income was $2 for the three months ended September 30, 1997 as compared to a
loss of $(2,010) for the three months ended September 30, 1996. The improvement
is principally due to lower interest expense of $1,206 in 1997 as compared to
1996 and a gain on the sale of the Port St. Lucie cable operations of Mercom,
Inc. ("Mercom") in which the Company has a 62% ownership interest, partially
offset by a lower benefit for income taxes.
6
<PAGE>
Sales are primarily comprised of subscription fees for basic service packages,
premium and pay per view services and cable advertising sales. For the three
months ended September 30, 1997, sales were $20,682, an increase of $1,138 or
5.8% primarily due to higher basic service revenue resulting from approximately
5,060 additional average monthly subscribers over the same period in 1996 and
the effects of rate increases during the first quarter of 1997.
Costs and expenses, excluding depreciation and amortization, are comprised of
direct costs of providing services, primarily cable programming and franchise
costs, salaries and benefits, customer service costs, sales and marketing costs
and general and administrative expenses. For the three months ended September
30, 1997, costs and expenses, excluding depreciation and amortization and
management fees, were $11,395, an increase of $854 or 8.1% as compared to the
three months ended September 30, 1996. The increase is primarily due to higher
basic programming costs resulting from higher rates, additional channels,
increased subscribers and due to increased payroll and benefits.
Management fees increased $588 or 77.4% to $1,348 from $760 primarily due to
costs associated with the spin-off of the Company from CTE. In the future, the
Company's management fees to RCN are expected to decline. Such fees will be 4%
of the Company's sales based on the provisions of the Distribution Agreement.
Depreciation and amortization was $8,056 and $7,877 for the three months ended
September 30, 1997 and 1996, respectively, an increase of $179 or 2.3%.
Interest expense was $2,367 and $3,573 for the three months ended September 30,
1997 and 1996, respectively. The decrease of $1,206 or 33.8% is due primarily
to lower notes payable to affiliates.
For the three months ended September 30, 1997, the Company realized a gain of
$2,571 on the sale of the Port St. Lucie cable operations of Mercom which also
resulted in an increase in the minority share of Mercom's income.
The Company's effective income tax rate was (100%) for the three months ended
September 30, 1997 and (40.5%) for the three months ended September 30, 1996.
The difference is primarily due to the reversal of certain valuation allowances
for net operating loss carryforwards in 1997 based on the expected utilization
of such net operating loss carryforwards as a result of the increase in net
income.
For the Nine Months Ended September 30, 1997 Compared with Nine Months Ended
- ----------------------------------------------------------------------------
September 30, 1996.
- ------------------
For the nine months ended September 30, 1997, operating income before
depreciation and amortization was $24,918 as compared to $23,753 for the nine
months ended September 30, 1996. Sales increased 7.1% to $60,912 for the nine
month period ended September 30, 1997 from $56,889 for the same period in 1996.
Net loss was ($3,251) for the nine months ended September 30, 1997 as compared
to ($6,633) for the nine months ended September 30, 1996. The improvement is
primarily due to lower interest expense of $2,187 in 1997 as compared to 1996,
a gain of $2,571 on the sale of the Port St. Lucie cable operations of Mercom,
and higher operating income before depreciation and amortization of $1,165,
partially offset by a lower benefit for income taxes.
For the nine months ended September 30, 1997, sales were $60,912, an increase of
$4,023 primarily due to higher basic revenue resulting from approximately 6,035
additional average monthly subscribers over the same period in 1996 and the
effects of rate increases during the first quarter of 1997.
Management fees increased $471, or 19.4% primarily due to costs associated
with the spin-off of the Company from CTE.
For the nine months ended September 30, 1997, costs and expenses excluding
depreciation and amortization and management fees, were $33,093, an increase of
$2,387 or 7.8% as compared to the nine months ended September 30, 1996. The
increase is primarily due to higher basic programming costs resulting from
higher rates, additional channels and increased subscribers and due to increased
payroll and benefits.
Depreciation and amortization expense for the nine months ended September 30,
1997 and 1996 was $23,952 and $23,590, respectively, an increase of $362 or
1.5%.
7
<PAGE>
Interest expense was $9,260 and $11,447 for the nine months ended September 30,
1997 and 1996, respectively. The decrease of $2,187 or 19.1% was primarily due
to lower notes payable to affiliates.
For the nine months ended September 30, 1997, the Company realized a gain of
$2,571 on the sale of the Port St. Lucie cable operations of Mercom which also
resulted in an increase in the minority share of Mercom's income.
The Company's effective income tax rate was (47.9%) for the nine months ended
September 30, 1997 and (40%) for the nine months ended September 30, 1996. The
difference is primarily due to the reversal of certain valuation allowances for
net operating loss carry forwards in 1997 based on the expected utilization of
such net operating loss carry forwards as a result of the increase in net
income.
Liquidity and Capital Resources
The Company incurred $125,000 of newly issued third party debt and repaid
approximately $110,000 of the total amount of outstanding intercompany notes
payable owed to C-TEC Cable Systems, Inc., which is an RCN business. The
remaining amount of outstanding intercompany indebtedness of the Company of
approximately $30,731 was treated as a capital contribution to the Company. In
addition, the Company assumed approximately $15,000 of CTE indebtedness, which
is secured by the 62% interest in Mercom in connection with CTE's contribution
of its investment in Mercom to the Company. Mercom also repaid its remaining
indebtedness of approximately $14,000 under its Term Credit Agreement in
September 1997 and Cable Michigan, Inc. (the parent company) assumed all of the
bank's interest in Mercom's Term Credit Agreement (approximately $14,000).
Immediately after the purchase of the Term Credit Agreement by Cable Michigan,
Inc., the Note Payable was amended and restated (See Note 9).
The Company has generated operating income before depreciation and amortization
of $32,096, $25,926 and $20,598 for the years ended December 31, 1996, 1995 and
1994, respectively. The Company expects to continue generating positive cash
flow which will be reinvested and which the Company believes will be sufficient
to fund its capital requirements and debt service. The Company estimates that
its capital requirements for planned system upgrades over the three year period
through 1999 will be approximately $52.6 million. The Company currently
anticipates that capital expenditures in respect of system upgrades will be
approximately $1,500 during the fourth quarter 1997, approximately $22,600
during 1998 and approximately $17,500 during 1999. The Company believes that
cash flow generated by operations, cash balances on hand and, if necessary,
borrowings, will enable the Company to fund its capital expenditure requirements
and to make scheduled payments of principal and interest on indebtedness, but
there can be no assurances in that regard. The company has $40,000 of credit
availability under its Revolving Credit Facility at September 30, 1997.
For the first nine months of 1997, the Company's net cash provided by operating
activities was $7,337 comprised primarily of a net loss of $3,251 adjusted by
non-cash depreciation and amortization of $23,952, other non-cash items totaling
($4,910) and working capital changes of ($9,167). Net cash used in investing
activities of $5,864 consisted primarily of additions to property, plant and
equipment of $9,520 partially offset by proceeds from the sale of Port St. Lucie
of $3,496. Net cash provided by financing activities of $3,234 consisted of the
issuance of long-term debt of $125,000, substantially offset by a change in
affiliate notes of ($116,836), redemption of long-term debt of $17,430 and
transfers from CTE of $125,000.
Regulatory Issues
No assurances can be given at this time that the following regulatory matters
will not have a material adverse effect on the Company's business and results of
operations in the future. Also, no assurance can
8
<PAGE>
be given as to what other future actions Congress, the Federal Communications
Commission ("FCC") or other regulatory authorities may take or the effects
thereof on the Company.
Telecommunications Act of 1996
The Telecommunications Act of 1996 (the "1996 Act") is intended to stimulate
growth and competition in virtually every component of the communications
industry. The 1996 Act established a framework for deregulation and calls for
state regulators and the FCC to work out the specific implementation process.
Companies are permitted to combine historically separate lines of business into
one, and provide that combined service in markets of their own choice. In
addition, there will be relief from the earnings restrictions and price controls
that have governed the local telephone business for many years and were imposed
on the cable industry in 1992 by the Cable Television Consumer Protection and
Competition Act of 1992 (the "1992 Act").
The rate regulation provisions of the 1992 Act have not had a materially adverse
effect on the Company's financial condition and results of operations. With the
passage of the 1996 Act , all cable systems rates are deregulated as effective
competition enters the franchise area, or by March 31, 1999, whichever comes
first. The Company anticipates that certain provisions of the 1992 Act that do
not relate to rate regulation, such as the provisions relating to retransmission
consent and customer service standards, will reduce the future operating margins
of the Company.
Over the last several years, the Company has received complaints related to its
FCC rate filings. Although the Company believes that its rates are justified,
according to the rules and regulations established by the FCC, the Company
believes that it has adequately reserved for any exposures related to these
rate proceedings.
9
<PAGE>
PART II. OTHER INFORMATION
- ---------------------------
Item 6. Exhibits and Reports on Form 8-K
(a.) Exhibits
(27) Financial Data Schedule
(97) Assignment and Assumption Agreement dated September 29,
1997 by and between Registrant and Morgan Guaranty Trust
Company of New York is incorporated herein by reference
to Exhibit 10.10 of Form 10-Q of Mercom, Inc. for the
period ended September 30, 1997 (Commission File No.
0-17750)
(98) Amended and Restated Credit Agreement dated September 29,
1997, to Credit Agreement dated as of November 26, 1989
and further amended and restated as of August 16, 1995 by
and between Mercom, Inc. and Registrant is incorporated
herein by reference to Exhibit 10.11 of Form 10-Q of
Mercom, Inc. for the period ended September 30, 1997
(Commission File No. 0-17750)
(99) Assumption Agreement dated September 30, 1997 by and
among C-Tec Corporation, the Registrant and First Union
Bank.
(b.) Reports on Form 8-K
No reports on Form 8-K were filed during the third quarter of
1997.
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.
Date: November 14, 1997 Cable Michigan, Inc.
/s/ Timothy J. Stoklosa
-------------------------------------
Timothy J. Stoklosa
Senior Vice President and
Chief Financial Officer
10
<PAGE>
EXHIBIT 99
ASSUMPTION AGREEMENT
--------------------
THIS ASSUMPTION AGREEMENT, dated as of the 30th day of September, 1997
(the "Agreement"), at 11:50 a.m. to the Credit Agreement referred to below is
entered into by and among C-TEC CORPORATION, a corporation organized under the
laws of New Jersey ("C-TEC"), CABLE MICHIGAN, INC. ("CCSM"), a corporation
organized under the laws of Pennsylvania, and FIRST UNION NATIONAL BANK, a
national banking association, as Administrative Agent (the "Administrative
Agent").
Statement of Purpose
--------------------
C-TEC Corporation, the Lenders and Administrative Agent are parties to
the $15,000,000 Credit Agreement dated as of June 30, 1997 (as supplemented
hereby and as further amended, restated or otherwise modified, the "Credit
Agreement").
Pursuant to Section 2.6 of the Credit Agreement and in connection with
the Mercom Contribution, CCSM is required to execute, among other documents,
an assumption agreement in order to become the Borrower under the Credit
Agreement.
NOW THEREFORE, in consideration of the premises and other good and
valuable consideration, the parties hereto hereby agree as follows:
1.01 Assumption by CCSM. Pursuant to Section 2.6 of the Credit
------------------
Agreement, CCSM hereby irrevocably and unconditionally assumes all Obligations,
whether now or hereafter outstanding, and agrees that it is the Borrower under
the Credit Agreement as if a signatory thereof on the Closing Date. CCSM shall
comply with and be subject to and have the benefit of all of the terms,
conditions, covenants, agreements and obligations set forth therein. CCSM hereby
agrees that each reference to the "Borrower" in the Credit Agreement and other
Loan Documents shall be a reference to CCSM. CCSM acknowledges that it has
received a copy of the Credit Agreement and that it has read and understands the
terms thereof.
2.01 Effectiveness. This Agreement shall become effective as of the
-------------
time indicated above upon receipt by the Administrative Agent of (i) an
originally executed Note for each Lender executed by CCSM in exchange for the
Notes issued thereto by C-TEC Corporation, (ii) an originally executed
counterpart hereof, (iii) favorable legal opinions addressed to the
Administrative Agent and Lenders in form and substance satisfactory thereto with
respect to the validity and binding effect of this Assumption Agreement, (iv) a
supplement to the Mercom Pledge Agreement executed by CCSM to confirm the pledge
thereby of the stock of Mercom owned by CCSM and (v) such other documents and
closing certificates as may be reasonably requested by the Administrative Agent
consistent with the terms of Article IV of the Credit Agreement to confirm that
CCSM is the Borrower under the Credit Agreement.
<PAGE>
3.01 General Provisions.
------------------
(a) Representation and Warranties. CCSM hereby represents and
-----------------------------
warrants that as of the date hereof there are no claims or offsets against or
defenses or counterclaims to its obligations under the Credit Agreement or any
other Loan Document.
(b) Limited Effect. Except as supplemented hereby, the Credit
--------------
Agreement and each other Loan Document shall continue to be, and shall remain,
in full force and effect. This Agreement shall not be deemed (i) to be a waiver
of, or consent to, or a modification or amendment of, any other term or
condition of the Credit Agreement or (ii) to prejudice any right or rights which
the Agent or Lenders may now have or may have in the future under or in
connection with the Credit Agreement or the Loan Documents or any of the
instruments or agreements referred to therein, as the same may be amended or
modified from time to time.
(c) Costs and Expenses. CCSM hereby agrees to pay or reimburse the
------------------
Administrative Agent for all of its reasonable and customary out-of-pocket costs
and expenses incurred in connection with the preparation, negotiation and
execution of this Agreement including, without limitation, the reasonable fees
and disbursements of counsel.
(d) Counterparts. This Agreement may be executed by one or more of
------------
the parties hereto in any number of separate counterparts and all of said
counterparts taken together shall be deemed to constitute one and the same
instrument.
(e) Definitions. All capitalized terms used and not defined herein
-----------
shall have the meanings given thereto in the Credit Agreement.
(f) Governing Law. THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED
-------------
AND INTERPRETED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NORTH CAROLINA,
WITHOUT REFERENCE TO THE CONFLICTS OR CHOICE OF LAW PRINCIPLES THEREOF.
IN WITNESS WHEREOF the undersigned hereby causes this Agreement to be
executed and delivered as of the date first above written.
C-TEC Corporation
/s/ Timothy J. Stoklosa
---------------------------------
Timothy J. Stoklosa
Senior Vice President
and Treasurer
Cable Michigan, Inc.
/s/ Timothy J. Stoklosa
----------------------------------
Timothy J. Stoklosa
Senior Vice President
and Chief Financial Officer
First Union National Bank, as
Administrative Agent
/s/ Bruce W. Loftin
----------------------------------
Bruce W. Loftin
Senior Vice President
2
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND> THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
FINANCIAL STATEMENTS AS OF AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 8,004
<SECURITIES> 0
<RECEIVABLES> 3,960
<ALLOWANCES> 517
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 165,132
<DEPRECIATION> 91,207
<TOTAL-ASSETS> 142,387
<CURRENT-LIABILITIES> 0
<BONDS> 140,000
0
0
<COMMON> 6,871
<OTHER-SE> (59,717)
<TOTAL-LIABILITY-AND-EQUITY> 142,387
<SALES> 0
<TOTAL-REVENUES> 60,912
<CGS> 0
<TOTAL-COSTS> 59,946
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 577
<INTEREST-EXPENSE> 9,260
<INCOME-PRETAX> (6,064)
<INCOME-TAX> (2,986)
<INCOME-CONTINUING> (3,251)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,251)
<EPS-PRIMARY> (.47)
<EPS-DILUTED> (.47)
</TABLE>
