<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 June 30, 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 June 30, 1998.
Common Stock 6,899,417
<PAGE>
CABLE MICHIGAN, INC.
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Statements of
Operations-Quarters and Six Months Ended
June 30, 1998 and 1997
Condensed Consolidated Balance Sheets-
June 30, 1998 and December 31, 1997
Condensed Consolidated Statements of
Cash Flows-Six Months Ended June 30,
1998 and 1997
Notes to Condensed Consolidated Financial
Statements
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
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 Data)
(Unaudited)
<TABLE>
<CAPTION>
Quarter Ended Six Months Ended
June 30, June 30,
------------------------------ -----------------------------
1998 1997 1998 1997
-------------- -------------- ------------ ------------
<S> <C> <C> <C> <C>
Sales $ 22,311 $ 20,674 $ 43,045 $ 40,230
Costs and expenses, excluding management fees
and depreciation and amortization 12,264 11,082 23,955 21,699
Management fees 899 809 1,727 1,552
Depreciation and amortization 8,276 7,974 16,484 15,896
Non-recurring charges 4,196 - 4,196 -
-------------- -------------- ------------ ------------
Operating (loss) income (3,324) 809 (3,317) 1,083
Interest income 168 37 417 79
Interest expense (2,348) (3,546) (4,768) (6,893)
Other (expense), net (316) (189) (605) (320)
-------------- -------------- ------------ ------------
(Loss) before income taxes (5,820) (2,889) (8,273) (6,051)
(Benefit) for income taxes (300) (1,281) (1,106) (2,371)
-------------- -------------- ------------ ------------
(Loss) before minority interest (5,520) (1,608) (7,167) (3,680)
Minority interest in
loss of consolidated entity 377 150 623 427
-------------- -------------- ------------ ------------
Net (loss) $ (5,143) $ (1,458) $ (6,544) $ (3,253)
============== ============== ============ ============
Basic and diluted (loss) per average common share:
Net (loss) $ (0.75) $ (0.21) $ (0.95) $ (0.47)
============== ============== ============ ============
Weighted average shares outstanding 6,896,508 6,870,942 6,886,081 6,869,909
</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>
June 30, December 31,
1998 1997
------------- --------------
<S> <C> <C>
ASSETS
Cash and temporary cash investments $ 10,782 $ 17,219
Accounts receivable, net of reserve for
doubtful accounts of $591 at June 30, 1998
and $546 at December 31, 1997 4,369 3,644
Prepayments and other 407 663
Accounts receivable from related parties 32 166
Deferred income taxes 743 1,006
Property, plant and equipment, net of accumulated
depreciation of $101,292 at June 30, 1998
and $94,174 at December 31, 1997 76,385 73,836
Intangible assets, net of accumulated amortization
of $103,620 at June 30, 1998 and $95,821
at December 31, 1997 37,489 45,260
Deferred charges and other assets 717 803
------------- --------------
Total assets $ 130,924 $ 142,597
============= ==============
LIABILITIES AND SHAREHOLDERS' DEFICIT
Liabilities:
Accounts payable $ 10,270 $ 5,564
Advance billings and customer deposits 2,494 2,242
Accrued taxes 123 167
Accrued cable programming expense 2,947 2,720
Accrued litigation costs 1,450 1,450
Accrued expenses 2,360 2,928
Accounts payable to related parties 1,878 1,560
Long-term debt 135,000 143,000
Deferred income taxes 20,306 22,197
------------- -------------
Total liabilities 176,828 181,828
Minority interest 14,019 14,643
Commitments and contingencies
Preferred Stock - -
Common shareholders' deficit:
Common stock 6,899 6,871
Additional paid-in capital 466 -
Deficit (67,288) (60,745)
------------- -------------
Total common shareholders' deficit (59,923) (53,874)
------------- -------------
Total liabilities and shareholders' deficit $ 130,924 $ 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>
For the Six Months Ended
June 30,
-------------------------------
1998 1997
------------- ------------
<S> <C> <C>
NET CASH PROVIDED BY OPERATING ACTIVITIES $ 12,516 $ 11,082
------------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to property, plant and equipment (11,408) (4,503)
Other 145 (57)
------------- ------------
Net cash used in investing activities (11,263) (4,560)
------------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Change in affiliates notes - (5,219)
Repayment of long-term debt (8,000) (1,367)
Proceeds from the exercise of stock options 222 -
Payments made for debt financing costs 88 -
------------ ------------
Net cash used in financing activities (7,690) (6,586)
------------ ------------
Net decrease in cash and temporary cash investments (6,437) (64)
Total cash and temporary cash investments at beginning of year 17,219 3,297
------------ ------------
Total cash and temporary cash investments at June 30, $ 10,782 $ 3,233
============ ============
Supplemental disclosures of cash flow information
Cash paid during the periods for:
Interest (net of amounts capitalized) $ 4,769 $ 6,984
============ ============
Income taxes $ 431 $ 23
============ ============
</TABLE>
See accompanying notes to Condensed Consolidated Financial Statements.
<PAGE>
CABLE MICHIGAN, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Per Share Data)
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, for
the fiscal year ended December 31, 1997, together with any amendment thereto.
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. At June 30, 1998, under the Cable Michigan, Inc. 1997 Equity
Incentive Plan, approximately 396,000 options were outstanding with exercise
prices ranging from $7.87 to $31.25. During the first six months of 1998,
approximately 47,000 options were granted, approximately 24,000 options were
exercised yielding proceeds of $222 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. The Court advised the parties that a special hearing has been
tentatively scheduled for August 31, 1998.
<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 quarter and six months ended June
30, 1998 and had a dilutive effect if the Company had income from continuing
operations is 262,370 and 242,189, respectively.
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 June 30, Six Months Ended June 30,
----------------------- -------------------------
1998 1997 1998 1997
---------- --------- ---------- ----------
<S> <C> <C> <C> <C>
Net (loss) $ (5,143) $ (1,458) $ (6,544) $ (3,253)
Basic earnings per average common share:
Weighted average shares outstanding 6,896,508 6,870,942 6,886,081 6,869,909
(Loss) per average common share (0.75) (0.21) (0.95) (0.47)
Diluted earnings per average common share:
Weighted average shares outstanding 6,896,508 6,870,942 6,886,081 6,869,909
Dilutive shares resulting from stock options - - - -
--------- --------- --------- ----------
6,896,508 6,870,942 6,886,081 6,869,909
========= ========= ========= ==========
(Loss) per average common share $ (0.75) $ (0.21) $ (0.95) $ (0.47)
</TABLE>
6. The provision for income taxes at June 30, 1998 differs from the amount
computed by applying the United States statutory federal tax rate due to
non-deductible expenses associated with the potential merger of the Company.
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.
8. On June 3, 1998, Cable Michigan entered into an Agreement and Plan of
Merger (the "Agreement") among the Company, Avalon Cable of Michigan Holdings
Inc. ("Avalon Holdings") and Avalon Cable of Michigan Inc. ("Avalon Sub"),
pursuant to which Avalon Sub will merge into the Company and the Company will
become a wholly owned subsidiary of Avalon Holdings (the "Merger").
In accordance with the terms of the Agreement, each share of common stock, par
value $1.00 per share ("Common Stock"), of the Company outstanding prior to the
effective time of the Merger (other than treasury stock, shares owned by Avalon
Holdings or its subsidiaries, or shares as to which dissenters' rights have been
exercised) shall be converted into the right to receive $40.50 in cash (the
"Merger Consideration"), subject to certain possible closing adjustments. The
Merger is subject to customary conditions, including the approval of the
Company's shareholders and the receipt of required regulatory approvals. There
can be no assurances that any transaction will be consummated.
Pursuant to a Voting Agreement, dated as of June 3, 1998 (the "Voting
Agreement"), Level 3 Telecom Holdings Inc. ("LTTH"), which owns approximately
48% of the shares of Common Stock of the Company, has agreed, among other
things, to vote all its shares of Common Stock in favor of the Agreement at any
meeting of the stockholders of the Company.
On June 4, 1998, the Company made a proposal to the Board of Directors of
Mercom, Inc. ("Mercom"), a publicly held company in which the Company holds a
62% interest, to acquire the outstanding shares of Mercom that the Company does
not already own at a price of $11.00 per share. Mercom has established a special
committee composed of independent directors to evaluate the proposal. On August
12, 1998, the Company increased the offer price for the Mercom shares to $12.00
per share.
As a result of this potential merger, the Company has accrued costs of $4,196
which are included in accounts payable in the Company's Condensed Consolidated
Balance Sheet at June 30, 1998.
9. In June, 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard No. 133 ("SFAS 133"). This statement,
which establishes accounting and reporting standards for derivative instruments
and for hedging activities, is effective for the first quarter of fiscal years
beginning after June 15, 1999. The Company does not currently have any items
subject to disclosure pursuant to SFAS 133.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
(Dollars in Thousands, Except Per Share Data)
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 for the fiscal year ended December 31, 1997 together with
any amendment thereto.
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 June 30, 1998 Compared With Three Months Ended June 30, 1997.
For the three months ended June 30, 1998, operating income before
depreciation and amortization, management fees and non-recurring charges was
$10,047 as compared to $9,592 for the three months ended June 30, 1997. Sales
increased 7.9% to $22,311 for the three month period ended June 30, 1998 from
$20,674 for the same period in 1997. Net loss was $5,143 for the three months
ended June 30, 1998 as compared to a loss of $1,458 for the same period in 1997.
The improvement in operating income before depreciation and amortization,
management fees and non-recurring charges of $455 is substantially offset by an
increase in depreciation and amortization of $302. Non-recurring charges of
$4,196 representing investment banking and legal costs associated with the
pending merger of the Company and a lower benefit for income taxes, partially
offset by higher interest income and lower interest expense, primarily account
for the increase in the net loss of $3,685 for the three months ended June 30,
1998 compared to the same period in 1997.
<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 June 30, 1998, sales were $22,311, an increase of $1,637 or
7.9% as compared to the same period in 1997, primarily due to higher basic
revenue resulting from approximately 4,629 additional average subscribers
over the same period in 1997 and a rate increase in May.
Costs and expenses, excluding depreciation and amortization, management fees
and non-recurring charges 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 June 30, 1998, costs and expenses,
excluding depreciation and amortization, management fees and non-recurring
charges were $12,264 an increase of $1,182 or 10.7% as compared to the three
months ended June 30, 1997. The increase is primarily due to higher basic
programming costs including increased rates and additional subscribers.
Non-recurring charges of $4,196 represent investment banking and legal costs
associated with the pending merger of the Company. These costs are included in
accounts payable in the Company's Condensed Consolidated Balance Sheet at June
30, 1998.
Depreciation and amortization was $8,276 for the three months ended
June 30, 1998, an increase of $302 or 3.8% 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 income was $168 at June 30, 1998 compared with $37 for the same
period in 1997, representing an increase of $131, primarily due to higher
average cash balances.
Interest expense was $2,348 and $3,546 for the three months ended
June 30, 1998 and 1997, respectively, representing a decrease of $1,198 or
33.8%. As a result of the refinancing of debt, in connection with the
restructuring, interest rates decreased.
The Company's effective income tax rate was (5.5%) for the three months ended
June 30, 1998 and (46.8%) for the three months ended June 30, 1997. The
difference is attributable to non-deductible expenses associated with the
potential merger of the Company.
Six Months Ended June 30, 1998 Compared With Six Months Ended June 30, 1997.
For the six months ended June 30, 1998, operating income before
depreciation and amortization, management fees and non-recurring charges was
$19,090 as compared to $18,531 for the six months ended June 30, 1997.
Sales increased 7.0% to $43,045 for the six month period ended June 30, 1998
from $40,230 for the same period in 1997. Net loss was $6,544 for the six
months ended June 30, 1998 as compared to a loss of $3,253 for the same period
in 1997. The improvement in operating income before depreciation and
amortization, management fees and non-recurring charges of $559 is offset by
an increase in depreciation and amortization of $588. Non-recurring charges of
$4196 and a lower benefit for income taxes partially offset by higher interest
income and lower interest expense primarily account for the increase in the
net loss of $3,291 for the six months ended June 30, 1998 compared to the same
period in 1997.
<PAGE>
For the six months ended June 30, 1998, sales were $43,045, an increase of
$2,815 or 7.0% as compared to the same period in 1997, primarily due to higher
basic revenue resulting from approximately 5,137 additional average subscribers
over the same period in 1997 and a rate increase in May.
For the six months ended June 30, 1998, costs and expenses, excluding
depreciation and amortization, management fees and non-recurring charges were
$23,955 an increase of $2,256 or 10.4% as compared to the six months ended
June 30, 1997. The increase is primarily due to higher basic programming costs
including increased rates.
Non-recurring charges of $4,196 represent investment banking and legal costs
associated with the pending merger of the Company.
Depreciation and amortization was $16,484 for the six months ended
June 30, 1998, an increase of $588 or 3.7% 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 income was $417 at June 30, 1998 compared with $79 for the same
period in 1997, representing an increase of $338, primarily due to higher
average cash balances.
Interest expense was $4,768 and $6,893 for the six months ended
June 30, 1998 and 1997, respectively, representing a decrease of $2,125 or
30.8%. As a result of the refinancing of debt, in connection with the
restructuring, interest rates decreased.
The Company's effective income tax rate was (14.5%) for the six months ended
June 30, 1998 and (42.2%) for the six months ended June 30, 1997. The
difference is attributable to non-deductible expenses associated with the
potential merger of the Company.
Liquidity and Capital Resources
The Company has generated operating income before depreciation and amortization,
management fees and non-recurring charges of $19,090 and $18,531 for the six
months ended June 30, 1998, and 1997, respectively. 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 June 30, 1998.
<PAGE>
For the six months ended June 30, 1998, the Company's net cash provided by
operating activities was $12,516 comprised primarily of net loss of $(6,544)
adjusted by non-cash depreciation and amortization of $16,484, other non-cash
items totaling $(1,840) and working capital changes of $4,145. Net cash used in
investing activities of $11,263 consisted primarily of additions to property,
plant and equipment of $11,408. Net cash used in financing activities of $7,690
consisted primarily of redemption of long-term debt of $8,000, partially
offset by proceeds from the exercise of stock options of $222.
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").
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 cable programming service
tier 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 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.
In the second quarter of 1998, the FCC adopted and released Orders stating that
the rates charged by the Company for its two cable programming service tiers,
effective through January 31, 1998 are reasonable. The Company was adequately
reserved for these rate contingencies; this settlement did not negatively impact
results of operations.
Pending Merger
On June 3, 1998, Cable Michigan entered into an Agreement and Plan of Merger
(the "Agreement") among the Company, Avalon Cable of Michigan Holdings Inc.
("Avalon Holdings") and Avalon Cable of Michigan Inc. ("Avalon Sub"), pursuant
to which Avalon Sub will merge into the Company and the Company will become a
wholly owned subsidiary of Avalon Holdings (the "Merger").
In accordance with the terms of the Agreement, each share of common stock, par
value $1.00 per share ("Common Stock"), of the Company outstanding prior to the
effective time of the Merger (other than treasury stock, shares owned by Avalon
Holdings or its subsidiaries, or shares as to which dissenters' rights have been
exercised) shall be converted into the right to receive $40.50 in cash (the
"Merger Consideration"), subject to certain possible closing adjustments. The
Merger is subject to customary conditions, including the approval of the
Company's shareholders and the receipt of required regulatory approvals. There
can be no assurances that any transaction will be consummated.
Pursuant to a Voting Agreement, dated as of June 3, 1998 (the "Voting
Agreement"), Level 3 Telecom Holdings Inc. ("LTTH"), which owns approximately
48% of the shares of Common Stock of the Company, has agreed, among other
things, to vote all its shares of Common Stock in favor of the Agreement at any
meeting of the stockholders of the Company.
On June 4, 1998, the Company made a proposal to the Board of Directors of
Mercom, Inc. ("Mercom"), a publicly held company in which the Company holds a
62% interest, to acquire the outstanding shares of Mercom that the Company does
not already own at a price of $11.00 per share. Mercom has established a special
committee composed of independent directors to evaluate the proposal. On August
12, 1998, the Company increased the offer price for the Mercom shares to $12.00
per share.
<PAGE>
PART II. OTHER INFORMATION
----------------------------------
Item 1. Legal Proceedings
The information required under Item 1 of Part II is included in Note 4 to
the Financial Statements set forth in Part I hereof and is specifically
incorporated herein by reference thereto.
Item 6. Exhibits and Reports on Form 8-K
(a.) Exhibits
(27) Financial Data Schedule
(b.) Reports on Form 8-K
On June 16, 1998 the Company filed an 8-K. On June 3, 1998, Cable Michigan
entered into an Agreement and Plan of Merger (the "Agreement") among the
Company, Avalon Cable of Michigan Holdings Inc. ("Avalon Holdings") and
Avalon Cable of Michigan Inc. ("Avalon Sub"), pursuant to which Avalon Sub
will merge into the Company and the Company will become a wholly owned
subsidiary of Avalon Holdings (the "Merger").
In accordance with the terms of the Agreement, each share of common stock,
par value $1.00 per share ("Common Stock"), of the Company outstanding
prior to the effective time of the Merger (other than treasury stock,
shares owned by Avalon Holdings or its subsidiaries, or shares as to which
dissenters' rights have been exercised) shall be converted into the right
to receive $40.50 in cash (the "Merger Consideration"), subject to certain
possible closing adjustments. The Merger is subject to customary
conditions, including the approval of the Company's shareholders and the
receipt of required regulatory approvals. There can be no assurances that
any transaction will be consummated.
Pursuant to a Voting Agreement, dated as of June 3, 1998 (the "Voting
Agreement"), Level 3 Telecom Holdings Inc. ("LTTH"), which owns
approximately 48% of the shares of Common Stock of the Company, has
agreed, among other things, to vote all its shares of Common Stock in
favor of the Agreement at any meeting of the stockholders of the Company.
On June 4, 1998, the Company made a proposal to the Board of Directors of
Mercom, Inc. ("Mercom"), a publicly held company in which the Company
holds a 62% interest, to acquire the outstanding shares of Mercom that the
Company does not already own at a price of $11.00 per share. Mercom has
established a special committee composed of independent directors to
evaluate the proposal.
The preceding descriptions of agreements and events are qualified in their
entirety by reference to the descriptions included in the abovementioned
Form 8-K (and the exhibits thereto) filed on June 16, 1998.
Subsequent to the filing of the Form 8-K, on August 12, 1998, the Company
increased the offer price for the Mercom shares to $12.00 per share.
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: August 14, 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 SIX MONTHS ENDED JUNE 30, 1998 AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 10,782
<SECURITIES> 0
<RECEIVABLES> 4,960
<ALLOWANCES> 591
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 177,677
<DEPRECIATION> 101,292
<TOTAL-ASSETS> 130,924
<CURRENT-LIABILITIES> 0
<BONDS> 135,000
0
0
<COMMON> 6899
<OTHER-SE> (66,822)
<TOTAL-LIABILITY-AND-EQUITY> 130,924
<SALES> 0
<TOTAL-REVENUES> 43,045
<CGS> 0
<TOTAL-COSTS> 42,166
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 410
<INTEREST-EXPENSE> 4,768
<INCOME-PRETAX> (8,273)
<INCOME-TAX> (1,106)
<INCOME-CONTINUING> (6,544)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (6,544)
<EPS-PRIMARY> (0.95)
<EPS-DILUTED> (0.95)
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