<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 March 31, 1998
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) 734-3737
(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 March 31, 1998.
Common Stock 6,894,342
<PAGE>
CABLE MICHIGAN, INC.
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Statements of
Operations-Quarters Ended
March 31, 1998 and 1997
Condensed Consolidated Balance Sheets-
March 31, 1998 and December 31, 1997
Condensed Consolidated Statements of
Cash Flows-Quarters Ended March 31,
1998 and 1997
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
<PAGE>
PART I. 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
March 31,
------------------------
1998 1997
---------- ----------
<S> <C> <C>
Sales $ 20,734 $ 19,556
Costs and expenses, excluding management fees
and depreciation and amortization 11,691 10,617
Management fees 828 743
Depreciation and amortization 8,208 7,922
---------- ----------
Operating income 7 274
Interest income 249 42
Interest expense (2,420) (3,347)
Other (expense), net (289) (131)
---------- ----------
(Loss) before income taxes (2,453) (3,162)
(Benefit) for income taxes (806) (1,090)
---------- ----------
(Loss) before minority interest (1,647) (2,072)
Minority interest in
loss of consolidated entity 246 277
---------- ----------
Net (loss) $ (1,401) $ (1,795)
========== ==========
Basic and Diluted (loss) per average common share:
Net (loss) $ (0.20) $ (0.26)
========== ==========
Weighted average shares outstanding 6,875,654 6,868,864
</TABLE>
See accompanying notes to Condensed Consolidated Financial Statements.
<PAGE>
CABLE MICHIGAN, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
(Unaudited)
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
--------- ------------
<S> <C> <C>
ASSETS
Cash and temporary cash investments $ 10,324 $ 17,219
Accounts receivable, net of reserve for
doubtful accounts of $589 at March 31, 1998
and $541 at December 31, 1997 3,201 3,644
Prepayments and other 834 663
Accounts receivable from related parties 301 166
Deferred income taxes 989 1,006
Property, plant and equipment, net of accumulated
depreciation of $97,813 at March 31, 1998 and
$94,174 at December 31, 1997 75,255 73,836
Intangible assets, net 41,378 45,260
Deferred charges and other assets 754 803
-------- --------
Total assets $133,036 $142,597
======== ========
LIABILITIES AND SHAREHOLDERS' DEFICIT
Liabilities:
Accounts payable $ 6,447 $ 5,564
Advance billings and customer deposits 2,340 2,242
Accrued taxes 282 167
Accrued cable programming expense 3,050 2,720
Accrued litigation costs 1,450 1,450
Accrued expenses 1,798 2,928
Accounts payable to related parties 2,125 1,560
Long-term debt 135,000 143,000
Deferred income taxes 21,074 22,197
------- -------
Total liabilities 173,566 181,828
Minority interest 14,398 14,643
Commitments and contingencies
Preferred Stock -- --
Common shareholders' deficit:
Common stock 6,894 6,871
Additional paid-in capital 324 -
Deficit (62,146) (60,745)
-------- --------
Total common shareholders' deficit (54,928) (53,874)
-------- --------
Total liabilities and shareholders' deficit $133,036 $142,597
======== ========
</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>
Quarter Ended
March 31,
------------------
1998 1997
------- -------
<S> <C> <C>
NET CASH PROVIDED BY OPERATING ACTIVITIES $ 6,595 $ 284
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to property, plant and equipment (5,653) (1,450)
Other (92) (105)
------- -------
Net cash used in investing activities (5,745) (1,555)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES
Change in affiliates notes - 1,269
Redemption of long-term debt (8,000) (929)
Proceeds from the exercise of stock options 205 -
Payments made for debt financing costs 50 -
------- -------
Net cash (used in) provided by financing activities (7,745) 340
------- -------
Net decrease in cash and
temporary cash investments (6,895) (931)
Total cash and temporary cash investments at beginning
of year 17,219 3,297
------- -------
Total cash and temporary cash investments at March 31, $10,324 $ 2,366
======= =======
Supplemental disclosures of cash flow information
Cash paid during the periods for:
Interest (net of amounts capitalized) $ 2,435 $ 3,406
======= =======
Income taxes $ 65 $ -
======= =======
</TABLE>
See accompanying notes to Condensed Consolidated Financial Statements.
<PAGE>
CABLE MICHIGAN, INC. AND SUBSIDIARIES
NOTES TO CONDENSED 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-K/A,
for the fiscal year ended December 31, 1997.
2. Cable Michigan, Inc. ("Cable Michigan") is an operator of cable television
systems in the state of Michigan, and its operations include a 62% ownership
interest in Mercom, Inc. ("Mercom"). Prior to September 30, 1997, the Company
was operated as part of C-TEC Corporation ("C-TEC"). In connection with the
Distribution, C-TEC changed its name to Commonwealth Telephone Enterprises, Inc.
("CTE").
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. As of March 31, 1998, under the Cable Michigan, Inc. 1997 Equity Incentive
Plan, approximately 351,000 options were outstanding with exercise prices
ranging from $7.47 to $10.06. During the first quarter of 1998, approximately
22,000 options were exercised yielding proceeds of $205 and approximately 7,000
options were canceled.
4. On September 30, 1997, the Yee Family Trusts, as holders of CTE's Preferred
Stock, Series A and Preferred Stock, Series B, filed an action against the
Company, RCN and CTE in the Superior Court of New Jersey. The complaint alleges
that CTE's distribution of the Common Stock of RCN and Cable Michigan in
connection with the Distribution constituted a fraudulent conveyance. The
Plaintiffs further allege breaches of contract and fiduciary duties in
connection with the Distribution. On December 1, 1997, the complaint was amended
to allege that CTE's distribution of the Common Stock of RCN and Cable Michigan
was an unlawful distribution in violation of Pa. C.S. 1551(b)(2). The plaintiffs
have asked the Court to set aside the alleged fraudulent conveyance and are
seeking unspecified monetary damages alleged to be in excess of $52,000. The
Company believes that this lawsuit is without merit and is contesting the action
vigorously. On January 9, 1998, the defendants, including RCN filed a Motion to
Dismiss, or in the Alternative, for Summary Judgement (the "Motion"). Response
and Reply Briefs have also been filed. At this writing, the Court has not
scheduled oral argument on the motion.
<PAGE>
5. Basic earnings (loss) per share is computed based on net income (loss)
divided by the weighted average number of shares of common stock outstanding
during the period.
Diluted earnings (loss) per share is computed based on net income (loss) divided
by the weighted average number of shares of common stock outstanding during the
period after giving effect to convertible securities considered to be dilutive
common stock equivalents. The conversion of stock options during periods in
which the Company incurs a loss from continuing operations is not assumed since
the effect is anti-dilutive. The number of stock options which would have been
converted in the first quarter of 1998 and had a dilutive effect if the Company
had income from continuing operations is 222,008.
For periods prior to October 1, 1997, during which the Company was a wholly-
owned subsidiary of C-TEC, earnings (loss) per share was calculated by dividing
net income (loss) by one-fourth the average common shares of C-TEC outstanding,
based upon a distribution ratio of one share of Company common stock for each
four shares of C-TEC common equity owned.
The following table is a reconciliation of the numerators and denominators of
the basic and diluted per share computations:
<TABLE>
<CAPTION>
Quarter Ended March 31,
-----------------------
1998 1997
---------- ----------
<S> <C> <C>
Net (loss) $ (1,401) $ (1,795)
Basic earnings per average common share:
Weighted average shares outstanding 6,875,654 6,868,864
(Loss) per average common share (.20) (.26)
Diluted earnings per average common share:
Weighted average shares outstanding 6,875,654 6,868,864
Dilutive shares resulting from stock options - -
---------- ----------
6,875,654 6,868,864
========== ==========
(Loss) per average common share $ (.20) $ (.26)
</TABLE>
6. The provision for income taxes at March 31, 1998 approximates the amount
computed by applying the United States statutory federal tax rate.
7. In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard No. 130-"Reporting Comprehensive
Income" ("SFAS 130"). This statement, which establishes standards for reporting
and disclosure of comprehensive income, is effective for interim and annual
periods beginning after December 15, 1997. The Company does not currently have
any material items subject to disclosure pursuant to SFAS 130.
<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 included in the
Company's Form 10-K/A for the fiscal year ended December 31, 1997.
GENERAL
Cable Michigan, Inc. ("Cable Michigan") 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 Corporation ("C-TEC").
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 March 31, 1998 Compared With Three Months Ended March 31,
- ----------------------------------------------------------------------------
1997.
- ----
For the three months ended March 31, 1998, operating income before depreciation,
amortization and management fees was $9,043 as compared to $8,939 for the three
months ended March 31, 1997. Sales increased 6.0% to $20,734 for the three month
period ended March 31, 1998 from $19,556 for the same period in 1997. Net loss
was $1,401 for the three months ended March 31, 1998 as compared to a loss of
$1,795 for the same period in 1997. The improvement in operating income before
depreciation and amortization and management fees of $104 is offset by an
increase in depreciation and amortization of $286. Higher interest income and
lower interest expense, partially offset by a lower benefit for income taxes
primarily account for the decrease in the net loss of $394 for the three months
ended March 31, 1998 compared to the same period in 1997.
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 March 31, 1998, sales were $20,734, an increase of $1,178 or 6.0%
as compared to the same period in 1997, primarily due to higher basic revenue
resulting from approximately 5,645 additional average subscribers over the same
period in 1997 and marketing launch incentives.
<PAGE>
Costs and expenses, excluding depreciation, amortization and management
fees, 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 March 31, 1998, costs and expenses, excluding depreciation
and amortization and management fees, were $11,691 an increase of $1,074 or
10.1% as compared to the three months ended March 31, 1997. The increase is
primarily due to higher basic programming costs resulting from increased rates
and license fees.
Depreciation and amortization was $8,208 for the three months ended March 31,
1998, an increase of $286 or 3.6% as compared to the same period in 1997. The
increase is primarily due to a significant increase in capital expenditures
as compared to the same period in 1997.
Interest expense was $2,420 and $3,347 for the three months ended March 31, 1998
and 1997, respectively, resulting in a decrease of $927 or 27.7%. As a result of
refinancing of debt, in connection with the restructuring, interest rates
decreased approximately 300 basis points.
Interest income was $249 at March 31, 1998 compared with $42 for the same period
in 1997 resulting in an increase of $207 primarily due to higher average cash
balances.
The Company's effective income tax rate was (36.5%) for the three months ended
March 31, 1998 and (37.8%) for the three months ended March 31, 1997.
LIQUIDITY AND CAPITAL RESOURCES
The Company has generated operating income before depreciation and amortization
and management fees of $9,043 and $8,939 for the three months ended March 31,
1998, and 1997, 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
expects that system upgrades, plant expansion and maintenance necessary to
remain competitive and offer expanded services, such as data and digital
services will require capital significantly in excess of historical levels. 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 $30,000 of credit availability under its Revolving Credit Facility
at March 31, 1998.
For the three months ending March 31, 1998, the Company's net cash provided by
operating activities was $6,595 comprised primarily of net loss of $(1,401)
adjusted by non-cash depreciation and amortization of $8,208, other non-cash
items totaling $(1,135) and working capital changes of $781. Net cash used in
investing activities of $5,745 consisted primarily of additions to property,
plant and equipment of $5,653. Net cash used in financing activities of $7,745
consisted primarily of redemption of long-term debt of $8,000, partially offset
by proceeds from the exercise of stock options of $205.
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 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").
<PAGE>
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.
<PAGE>
PART II. OTHER INFORMATION
-------- -----------------
Item 6. Exhibits and Reports on Form 8-K
(a.) Exhibits
(27) Financial Data Schedule
(b.) Reports on Form 8-K
No reports on Form 8-K were filed during the first quarter of
1998.
<PAGE>
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: May 15, 1998 Cable Michigan, Inc.
/s/ Timothy J. Stoklosa
-----------------------
Timothy J. Stoklosa
Senior Vice President and
Chief Financial Officer
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FINANCIAL
STATEMENTS AS OF AND FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 10,324
<SECURITIES> 0
<RECEIVABLES> 3,790
<ALLOWANCES> 589
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 173,068
<DEPRECIATION> 97,813
<TOTAL-ASSETS> 133,036
<CURRENT-LIABILITIES> 0
<BONDS> 135,000
0
0
<COMMON> 6,894
<OTHER-SE> (61,822)
<TOTAL-LIABILITY-AND-EQUITY> 133,036
<SALES> 0
<TOTAL-REVENUES> 20,734
<CGS> 0
<TOTAL-COSTS> 20,727
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 216
<INTEREST-EXPENSE> 2,420
<INCOME-PRETAX> (2,453)
<INCOME-TAX> (806)
<INCOME-CONTINUING> (1,401)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,401)
<EPS-PRIMARY> (0.20)
<EPS-DILUTED> (0.20)
</TABLE>
