<PAGE>
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark one)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF
1934.
For the quarterly period ended September 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to ________
Commission file number 333-75415
AVALON CABLE LLC
(Exact name of registrant as specified in its charter)
Delaware 4813 13-4029965
(State or other jurisdiction (Primary Standard (I.R.S. Employer
of incorporation or Industrial Classification Identification No.)
organization) Code Number)
AVALON CABLE HOLDINGS FINANCE, INC.
Delaware 4813 13-4029969
(State or other jurisdiction (Primary Standard (I.R.S. Employer
of incorporation or Industrial Classification Identification No.)
organization) Code Number)
AVALON CABLE OF MICHIGAN HOLDINGS, INC.
Delaware 4813 04-3423309
(State or other jurisdiction (Primary Standard (I.R.S. Employer
of incorporation or Industrial Classification Identification No.)
organization) Code Number)
AVALON CABLE OF MICHIGAN, INC.
Pennsylvania 4813 23-2566891
(State or other jurisdiction (Primary Standard (I.R.S. Employer
of incorporation or Industrial Classification Identification No.)
organization) Code Number)
800 Third Avenue, Suite 3100
New York, New York 10022
Telephone: (212) 421-0600
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 and (2) has been
subject to such filing requirements for the past 90 days. Yes No x
-- --
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
<PAGE>
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
<TABLE>
<CAPTION>
PAGE NO.
<S> <C> <C>
Item 1. Financial Statements
Avalon Cable LLC and Subsidiaries
Consolidated Balance Sheet as of December 31, 1998 and September 30,
1999................................................................ 1
Consolidated Statement of Operations for the three and nine
months ended September 30, 1999 and 1998............................ 2
Consolidated Statement of Changes in Members' Interest for the nine
months ended September 30, 1999 and 1998............................ 3
Consolidated Statement of Cash Flows for the nine months ended
September 30, 1999.................................................. 4
Notes to Consolidated Financial Statements.......................... 5
Avalon Cable of Michigan Holdings, Inc. and Subsidiaries
Consolidated Balance Sheet as of December 31, 1998 and September 30,
1999................................................................ 10
Consolidated Statement of Operations for the three and nine
month periods ended September 30, 1999 and 1998..................... 11
Consolidated Statement of Changes in Members' Interest for
the nine months ended September 30, 1999............................ 12
Consolidated Statement of Cash Flows for the nine-month periods
ended September 30, 1999 and 1998................................... 13
Notes to Consolidated Financial Statements.......................... 14
Avalon Cable of Michigan, Inc. and Subsidiaries
Consolidated Balance Sheet as of December 31, 1998 and September 30,
1999................................................................ 19
Consolidated Statement of Operations for the three and nine
month periods ended September 30, 1999 and 1998..................... 20
Consolidated Statement of Changes in Shareholders' Equity for
the nine months ended September 30, 1999............................ 21
Consolidated Statement of Cash Flows for the nine-month periods
ended September 30, 1999 and 1998................................... 22
Notes to Consolidated Financial Statements.......................... 23
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations............................................... 28
PART II. OTHER INFORMATION
Item 1. Legal Proceedings..................................................... 36
Item 2. Changes in Securities and Use of Proceeds............................. 36
Item 3. Defaults Upon Senior Securities....................................... 36
Item 4. Submission of Matters to a Vote of Security Holders................... 36
Item 5. Other Information..................................................... 36
Item 6. Exhibits and Reports on Form 8-K...................................... 36
SIGNATURES............................................................ 37
</TABLE>
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
AVALON CABLE LLC AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(In thousands)
<TABLE>
<CAPTION>
December 31, September 30,
1998 1999
-------- --------
(unaudited)
<S> <C> <C>
Assets
Current assets
Cash $ 9,288 $ 2,995
Subscriber receivables, net of allowance for doubtful accounts of $943 and $1,275 5,862 7,059
Accounts receivable--affiliate 124 --
Deferred income taxes 479 --
Prepaid expenses and other current assets 580 879
-------- --------
Total current assets 16,333 10,933
Property, plant and equipment, net 111,421 121,973
Intangible assets, net 462,117 468,855
Other assets 227 46
-------- --------
Total assets $590,098 $601,807
======== ========
Liabilities and Members' Interest
Current liabilities
Current portion of notes payable $ 20 $ 25
Accounts payable and accrued expenses 11,646 22,242
Accounts payable, net--affiliate 2,023 2,968
Deferred revenue 3,171 3,272
-------- --------
Total current liabilities 16,860 28,507
Note payable, net of current portion 402,949 451,827
Note payable--affiliate 3,341 --
Deferred income taxes 1,841 --
Other Liabilities 951
-------- --------
Total liabilities 424,991 481,285
-------- --------
Commitments and contingencies (Note 5)
Minority Interest 13,855 --
-------- --------
Members' Interest
Members' capital 166,630 166,630
Accumulated deficit (15,378) (46,108)
-------- --------
Total members' interest 151,252 120,522
-------- --------
Total liabilities and members' interest $590,098 $601,807
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
AVALON CABLE LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(In thousands)
<TABLE>
<CAPTION>
For the Three Months Ended For the Nine Months Ended
September 30, September 30, September 30, September 30,
1999 1998 1999 1998
----------- ---------- ---------- ----------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Revenue
Basic services $ 23,161 $1,992 $ 65,225 $2,123
Premium services 2,095 70 6,174 85
Other 3,172 153 8,799 161
-------- ------ -------- ------
Total revenues 28,428 2,215 80,198 2,369
Operating expenses
Selling, general and administrative 5,008 418 14,576 439
Programming 7,406 623 21,372 662
Technical and operations 3,262 198 9,171 216
Depreciation and amortization 11,478 602 33,574 654
-------- ------ -------- ------
Income from operations 1,274 374 1,505 398
Other income (expense)
Interest income 35 -- 743 --
Interest expense (11,094) (675) (34,340) (680)
-------- ------ -------- ------
Loss before income taxes (9,785) (301) (32,092) (282)
Benefit from income taxes -- -- 1,362 --
-------- ------ -------- ------
Net loss $ (9,785) $ (301) $(30,730) $ (282)
======== ====== ======== ======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
AVALON CABLE LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN MEMBERS' INTEREST
(In thousands, except share amounts)
<TABLE>
<CAPTION>
For the Nine Months Ended September 30, 1999 (unaudited)
--------------------------------------------------------------------------------
Class A Class B-1 Total
--------------------- ------------------------- Accumulated Members'
Units $ Units $ Deficit Interest
---------- ---------- ---------- ------------- ----------------- ----------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1998 45,000 $45,000 575,690 $121,630 $(15,378) $151,252
Net loss for the nine months ended
September 30, 1999 - - - - (30,730) (30,730)
------- ------- -------- -------- -------- --------
Balance, September 30, 1999 45,000 $45,000 575,690 $121,630 $(46,108) $120,522
======= ======= ======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
AVALON CABLE LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
For the Nine For the Nine
Months Ended Months Ended
September 30, September 30,
1998 1999
-------------- -------------
(Unaudited) (Unaudited)
<S> <C> <C>
Cash flows from operating activities
Net income (loss) $ (282) $(30,730)
Adjustments to reconcile net income (loss) to net cash provided by operating activities
Depreciation and amortization 654 33,574
Accretion of Senior Discount Notes -- 10,102
Net change in certain assets and liabilities, net of business acquisitions
Increase in subscriber receivables 100 (587)
Increase in accounts receivable, net-affiliate 124
Increase in prepaid expenses and other assets (24) (230)
Increase in accounts payable and accrued expenses 774 10,582
Increase in accounts payable, net--affiliate -- 684
Increase in deferred revenues 17 101
Increase in accrued interest 564
Increase in Long Term Liabilities 951
Decrease in deferred income taxes, net -- (1,362)
-------- --------
Net cash provided by operating activities 1,803 23,209
-------- --------
Cash flow from investing activities
Additions to property, plant and equipment (72) (15,009)
Change in restricted cash 500
Payment for acquisitions, net (38,426) (49,928)
-------- --------
Net cash used in investing activities (37,998) (64,937)
-------- --------
Cash flow from financing activities
Increase (decrease) in note payable--affiliate 2,841 (3,341)
Capital contribution 4,862 45,300
Proceeds from the issuance of the Credit Facility 29,600
Payment of deferred financing costs (470)
Proceeds from the issuance of notes payable 500 --
Payment of term loans and revolving credit facility -- (6,524)
-------- --------
Net cash provided by financing activities 37,333 35,435
-------- --------
Net increase (decrease) in cash 1,138 (6,293)
Cash at beginning of the period -- 9,288
-------- --------
Cash at end of the period $ 1,138 $ 2,995
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
AVALON CABLE, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands except per share data)
1. Description of Business
Avalon Cable LLC ("the Company"), and its wholly-owned subsidiaries Avalon
Cable Holdings Finance, Inc. ("Avalon Holdings Finance") and Avalon Cable of
Michigan LLC ("Avalon Michigan"), were formed in October 1998, pursuant to the
laws of the State of Delaware, as a wholly-owned subsidiary of Avalon Cable of
New England Holdings, Inc. ("Avalon New England Holdings").
On November 6, 1998, Avalon New England Holdings contributed its 100%
interest in Avalon Cable of New England LLC ("Avalon New England") to the
Company in exchange for a membership in the Company. This contribution was
between entities under common control and was accounted for similar to a
pooling-of-interests. Under the pooling-of-interests method, the results of
operations for the Company include the results of operations from the date of
inception (September 4, 1997) of Avalon New England. On November 6, 1998, the
Company received $63,000 from affiliated entities, which was comprised of (i) a
$45,000 capital contribution by Avalon Investors LLC ("Avalon Investors") and
(ii) an $18,000 promissory note from Avalon Cable Holdings LLC ("Avalon
Holdings"), which was used to make a $62,800 cash contribution to Avalon New
England.
The cash contribution received by Avalon New England was used to (i)
extinguish existing indebtedness of $29,600 and (ii) fund a $33,200 loan to
Avalon Cable Finance, Inc. which matures on December 31, 2001.
On December 10, 1998, the Company received a dividend distribution from
Avalon New England in the amount of $18,206, which was used by the Company to
pay off the promissory note payable to Avalon Holdings, plus accrued interest.
Avalon Cable of Michigan, Inc. was formed in June 1998, pursuant to the laws
of the state of Delaware, as a wholly-owned subsidiary of Avalon Cable of
Michigan Holdings, Inc. ("Michigan Holdings"). On June 3, 1998, Avalon Cable of
Michigan, Inc. entered into an Agreement and Plan of Merger (the "Agreement")
among Avalon Cable of Michigan, Inc., Michigan Holdings and Cable Michigan, Inc.
("Cable Michigan"), pursuant to which Avalon Cable of Michigan, Inc. will merge
into Cable Michigan and Cable Michigan will become a wholly-owned subsidiary of
Michigan Holdings (the "Merger"). As part of the Merger, the name of Cable
Michigan was changed to Avalon Cable of Michigan, Inc.
In accordance with the terms of the Agreement, each share of common stock,
par value of $1.00 per share ("common stock"), of Cable Michigan outstanding
prior to the effective time of the Merger (other than treasury stock, shares
owned by Michigan 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.
In conjunction with the acquisition of Cable Michigan, Avalon Cable of
Michigan, Inc. acquired Cable Michigan's 62% ownership interest in Mercom, Inc.
("Mercom").
On November 6, 1998, Avalon Cable of Michigan, Inc. completed its Merger.
The total consideration payable in conjunction with the Merger, including fees
and expenses is $431,629, including repayment of all existing Cable Michigan
indebtedness and accrued interest of $135,205. Subsequent to the Merger, the
arrangements with RCN and CTE for certain support services were terminated. The
Agreement also permitted Avalon Cable of Michigan, Inc. to agree to acquire the
remaining shares of Mercom that it did not own.
Michigan Holdings contributed $137,375 in cash to Avalon Cable of Michigan,
Inc., which was used to consummate the Merger. On November 5, 1998, Michigan
Holdings received $105,000 in cash in exchange for promissory notes to lenders
(the "Bridge Agreement"). On November 6, 1998, Michigan Holdings contributed the
proceeds received from the Bridge Agreement and an additional $35,000 in cash to
<PAGE>
Avalon Cable of Michigan, Inc. in exchange for 100 shares of common stock.
On March 26, 1999, the Company completed a series of transactions to
facilitate certain aspects of its financing between affiliated companies under
common control. As a result of these transactions:
AVALON CABLE, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands except per share data)
. Avalon Cable of Michigan Inc. contributed its assets and liabilities,
excluding deferred tax liabilities, net to the Company in exchange for
an approximate 88% voting interest in the Company, which then
transferred those assets and liabilities to its wholly-owned subsidiary
Avalon Michigan;
. Avalon Michigan now operates the Michigan cluster, replacing Avalon
Cable of Michigan, Inc;
. Avalon Cable of Michigan Holdings, Inc. ceased to be an obligor on the
senior discount notes and together with Avalon Cable of Michigan,
Inc. became a guarantor of the obligations of the Company under the
senior discount notes;
. Avalon Michigan became an additional obligor on the Senior Subordinated
Notes replacing Avalon Cable of Michigan, Inc.; and
. Avalon Cable of Michigan, Inc. ceased to be an obligor on the Senior
Subordinated Notes and the credit facility and became a guarantor of the
obligations of Avalon Michigan under the Senior Subordinated Notes and
the credit facility.
As a result of the reorganization between entities under common control, the
Company accounted for the reorganization similar to a pooling-of-interests.
Under the pooling-of-interests method, the results of operations for the Company
include the results of operations from the date of inception (September 4, 1998)
of Avalon New England and the date of acquisition of the completed acquisitions.
Avalon New England and Avalon Michigan provide cable service to the western
New England area and the state of Michigan, respectively. Avalon New England
and Avalon Michigan's cable systems offer customer packages of basic and premium
cable programming services which are offered at a per channel charge or are
packaged together to form a tier of services offered at a discount from the
combined channel rate. Avalon New England and Avalon Michigan's cable systems
also provide premium cable services to their customers for an extra monthly
charge. Customers generally pay initial connection charges and fixed monthly
fees for cable programming and premium cable services, which constitute the
principle sources of revenue for Avalon New England and Avalon Michigan.
Avalon Holdings Finance was formed for the sole purpose of facilitating
financings associated with the acquisitions of various cable operating
companies. Avalon Holdings Finance conducts no other activities.
2. Basis of Presentation
Pursuant to the rules and regulations of the Securities and Exchange
Commission, certain financial information has been condensed and certain
footnote disclosures have been omitted. Such information and disclosures are
normally included in financial statements prepared in accordance with generally
accepted accounting principles.
The consolidated financial statements herein include the accounts of the
Company and its wholly-owned subsidiaries.
These condensed financial statements should be read in conjunction with the
Company's audited financial statements as of December 31, 1998 and notes thereto
as included in the Company's Registration Statement on Form S-4 filed with the
<PAGE>
Securities and Exchange Commission ("SEC") and declared effective with the SEC
on July 22, 1999.
The financial statements as of September 30,1999 and for the three and nine
month periods ended September 30,1999 and 1998 are unaudited; however, in the
opinion of management, such statements include all adjustments (consisting
solely of normal and recurring adjustments except for the acquisition of Cross
Country Cable, LLC ("Cross Country"), Nova Cablevision, Inc., Nova Cablevision
VI, L.P. and Nova Cablevision VII, L.P. ("Nova Cable"), Novagate Communication
Corporation ("Novagate"), Traverse Internet, R/Com. L.C., Taconic Technology
Corporation ("Taconic"), the Mercom merger and the contribution of assets and
liabilities by Avalon Cable of Michigan, Inc.) necessary to present fairly the
financial information included therein.
AVALON CABLE, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands except per share data)
3. Merger and Acquisitions
The Merger agreement between Michigan Holdings and Avalon Cable of Michigan,
Inc. permitted Avalon Cable of Michigan, Inc. to agree to acquire the 1,822,810
shares (approximately 38% of the outstanding stock) of Mercom that it did not
own (the "Mercom Acquisition"). On September 10, 1998 Avalon Cable of Michigan,
Inc. and Mercom entered into a definitive agreement (the "Mercom Merger
Agreement") providing for the acquisition by Avalon Cable of Michigan, Inc. of
all of such shares at a price of $12.00 per share. Avalon Cable of Michigan,
Inc. completed this acquisition in March 1999. The total estimated consideration
paid in conjunction with the Mercom Acquisition, excluding fees and expenses was
$21,900. The purchase price was allocated as follows: approximately $13,800 to
the elimination of minority interest, $1,170 to property, plant and equipment,
$6,700 to cable franchises and the excess of consideration paid over the fair
market value of the net assets acquired, or goodwill, of $240.
In March 1999, Avalon Cable of Michigan, Inc. acquired the cable television
systems of Nova Cable for approximately $7,800, excluding transaction fees.
On January 21, 1999, the Company through its subsidiary, Avalon New England,
acquired Novagate for a purchase price of $2,900.
On March 26, 1999, the Company through its subsidiary, Avalon Michigan,
acquired the assets of R/Com, L.C., for a total purchase price of approximately
$450.
In January 1999, the Company acquired all of the issued and outstanding
common Stock of Cross Country for a purchase price of approximately $2,500,
excluding transaction fees.
On April 1, 1999, the Company, through its subsidiary, Avalon New England,
acquired Traverse Internet for $2,400.
The acquisitions have been accounted for as purchases and the results of the
companies acquired have been included in the accompanying financial statements
since their acquisition dates. Accordingly, the consideration was allocated to
the net assets based on their respective fair market values. The excess of the
consideration paid over the estimated fair market values of the net assets
acquired was $12,940 and is being amortized using the straight line method over
15 years.
In July 1999, Avalon New England purchased all of the cable systems of
Taconic Technology Corporation for approximately $8,525 (excluding transaction
fees).
4. Income Taxes
Upon the closure of the Mercom merger, Mercom was dissolved as a separate
taxable entity which resulted in a changed in tax status from a taxable entity
to a nontaxable entity. As a result, the Company recognized a tax benefit of
<PAGE>
$1,362 in its results of operations and eliminated its deferred taxes, net in
the balance sheet.
5. Commitments and Contingencies
In connection with the acquisition of Mercom, former shareholders of Mercom
holding approximately 731,894 Mercom common shares or approximately 15.3% of all
outstanding Mercom common shares gave notice of their election to exercise
appraisal rights as provided by Delaware law. On July 2, 1999, former
shareholders of Mercom holding 535,501 shares of Mercom common stock filed a
petition for appraisal of stock in the Court of Chancery in the State of
Delaware. With respect to 209,893 of the total number of shares for which the
Company received notice, the Company received the notice of election from
beneficial holders of Mercom common shares and not from holders of record. The
Company believes that the notice with respect to the 209,893 shares did not
comply with Delaware law and is ineffective. The Company cannot predict at this
time the effect of the elections to exercise appraisal rights on the Company
since the Company does not know the extent to which these former shareholders
will continue to pursue appraisal
AVALON CABLE, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands except per share data)
rights under Delaware law or choose to abandon these efforts and accept the
consideration payable in the Mercom merger. If these former shareholders
continue to pursue their appraisal rights and if a Delaware court were to find
that the fair value of the Mercom common shares, exclusive of any element of
value arising from our acquisition of Mercom, exceeded $12.00 per share, the
Company would have to pay the additional amount for each Mercom common share to
the appraisal subject to the appraisal proceedings together with a fair rate of
interest. The Company could be ordered by the Delaware court to pay reasonable
attorney's fees and the fees and expenses of experts for the shareholders. In
addition, the Company would have to pay their own litigation costs. The Company
has already provided for the consideration of $12.00 per Mercom common share due
under the terms of our merger with Mercom with respect to these shares but has
not provided for any additional amounts or costs. The Company can provide no
assurance as to what a Delaware court would find in any appraisal proceeding or
when this matter will be resolved. Accordingly, the Company cannot assure you
that the ultimate outcome would not have a material adverse effect on the
Company.
The Company is subject to the provisions of the Cable Television Consumer
Protection and Competition Act of 1992, as amended, and the Telecommunications
Act of 1996. The Company has either settled challenges or accrued for
anticipated exposures related to rate regulation; however, there is no assurance
that there will not be further additional challenges to its rates.
In the normal course of business, there are various legal proceedings
outstanding. In the opinion of management, these proceedings will not have a
material adverse effect on the financial condition or results of operations of
the Company.
6. Pending Merger
In May 1999, the Company signed an agreement with Charter Communications,
Inc. ("Charter Communications") under which Charter Communications agreed to
purchase Avalon Cable LLC's cable television systems and assume some of their
debt. The acquisition by Charter Communication is subject to regulatory
approvals. The Company expects to consummate this transaction in the fourth
quarter of 1999.
This agreement, if closed, would constitute a change in control under the
Indenture pursuant to which the Senior Subordinated Notes and the Senior
Discount Notes (collectively, the "Notes") were issued. The Indenture provides
that upon the occurrence of a change of control of the Company (a "Change of
Control") each holder of the Notes has the right to require the Company to
<PAGE>
purchase all or any part (equal to $1,000 or an integral multiple thereof) of
such holder's Notes at an offer price in cash equal to 101% of the aggregate
principal amount thereon (or 101% of the accreted value for the Senior Discount
Notes as of the date of purchase if prior to the full accretion date) plus
accrued and unpaid interest and Liquidated Damages (as defined in the Indenture)
thereof, if any, to the date of purchase.
This agreement, if closed, would represent a Change of Control which, on the
closing date, constitutes an event of default under the Credit Facility giving
the lender the right to terminate the credit commitment and declare all amounts
outstanding immediately due and payable. Charter Communications has agreed to
repay all amounts due under the Credit Facility or cause all events of default
under the Credit Facility arising from the Change of Control to be waived.
<PAGE>
AVALON CABLE OF MICHIGAN HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(In thousands)
<TABLE>
<CAPTION>
December 31, September 30,
1998 1999
-------- --------
(Unaudited)
<S> <C> <C>
Assets
Current assets
Cash $ 9,288 $ 2,995
Accounts receivable, net of allowance for doubtful accounts of $943 and $1,275 5,862 7,564
Prepayments and other current assets 1,388 1,586
Accounts receivable from related parties 124 --
Deferred income taxes 377 --
-------- --------
Total current assets 17,039 12,145
Property, plant and equipment, net 111,421 121,973
Intangible assets, net 462,117 468,856
Deferred charges and other assets 1,302 1,121
-------- --------
Total assets $591,879 $604,095
======== ========
Liabilities and Shareholders' Equity
Current liabilities
Current portion of notes payable $ 20 $ 25
Accounts payable and accrued expenses 11,646 22,242
Advance billings and customer deposits 3,171 3,272
Accounts payable--affiliate 2,023 3,160
-------- --------
Total current liabilities 16,860 28,699
Long-term debt 402,949 452,778
Notes payable--affiliate 3,341 --
Deferred income taxes 80,811 67,136
-------- --------
Total liabilities 503,961 548,613
-------- --------
Commitments and contingencies (Note 5)
Minority Interest 61,836 44,512
-------- --------
Stockholders' equity
Common stock -- --
Additional paid-in capital 35,000 35,000
Accumulated deficit (8,918) (24,030)
-------- --------
Total stockholders' equity 26,082 10,970
-------- --------
Total liabilities and shareholders' equity $591,879 $604,095
======== ========
</TABLE>
<PAGE>
AVALON CABLE OF MICHIGAN HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(In thousands)
<TABLE>
<CAPTION>
For the Three Months Ended For the Nine Months Ended
September 30, September 30, September 30, September 30,
1999 1998 1999 1998
-------- ------ -------- ------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Revenue
Basic services $ 23,161 $1,992 $ 65,225 $2,123
Premium services 2,095 70 6,174 85
Other 3,173 153 8,799 161
-------- ------ -------- ------
Total revenues 28,429 2,215 80,198 2,369
Operating expenses
Selling, general and administrative 4,986 418 14,765 439
Programming 7,406 623 21,372 662
Technical and operations 3,262 198 9,171 216
Depreciation and amortization 11,478 602 33,574 654
-------- ------ -------- ------
Income from operations 1,297 374 1,316 398
Other income (expense)
Interest income 35 -- 743 --
Interest expense (11,094) (675) (34,340) (680)
-------- ------ -------- ------
Loss before income taxes (9,762) (301) (32,281) (282)
Benefit from income taxes 3,521 -- 13,700 --
-------- ------ -------- ------
Loss before minority interest (6,241) (301) (18,581) (282)
Minority interest in loss of consolidated entity 1,115 -- 3,469 --
-------- ------ -------- ------
Net loss $ (5,126) $ (301) $(15,112) $ (282)
======== ====== ======== ======
</TABLE>
<PAGE>
AVALON CABLE OF MICHIGAN HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
(In thousands, except share amounts)
<TABLE>
<CAPTION>
For the Nine Months Ended September 30, 1999 (unaudited)
-------------------------------------------------------------
Common Additional Total
Shares Common Paid-In Accumulated Shareholders'
Outstanding Stock Capital Deficit Equity
------------- ---------- ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1998 100 $ -- $35,000 $ (8,918) $ 26,082
Net loss for the nine months
ended September 30, 1999 -- -- -- (15,112) (15,112)
------ -------- -------- --------- ---------
Balance, September 30, 1999 100 $ -- $35,000 $(24,030) $ 10,970
====== ======== ======== ========= ========
</TABLE>
<PAGE>
AVALON CABLE OF MICHIGAN HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
For the Nine For the Nine
Months Ended Months Ended
September 30, September 30,
1998 1999
------------ ------------
(Unaudited) (Unaudited)
<S> <C> <C>
Cash flows from operating activities
Net income (loss) $ (282) $(15,112)
Adjustments to reconcile net income (loss) to net cash provided by operating activities
Depreciation and amortization 654 33,574
Accretion of Senior Discount Notes -- 10,102
Decrease in minority interest -- (3,469)
Net change in certain assets and liabilities, net of business acquisitions
Decrease (increase) in subscriber receivables 100 (1,092)
Decrease in accounts receivables -- 124
Increase in prepayment and other assets (24) (129)
Increase in accounts payable and accrued expenses 774 10,582
Increase in deferred revenue 17 101
Increase in accounts payable, net--affiliate -- 876
Increase in accrued interest 564 --
Increase in long-term debt -- 951
Decrease in deferred income taxes, net -- (13,298)
-------- --------
Net cash provided by operating activities 1,803 23,210
-------- --------
Cash flow from investing activities
Additions to property, plant and equipment (72) (15,009)
Change in restricted cash 500 --
Payment for acquisitions, net (38,426) (49,929)
-------- --------
Net cash used in investing activities (37,998) (64,938)
-------- --------
Cash flow from financing activities
Increase (decrease) in note payable--affiliate 2,841 (3,341)
Capital contribution 4,862 --
Proceeds from the issuance of the Credit Facility 29,600 45,300
Payment of deferred financing costs (470) --
Proceeds from the issuance of notes payable 500 --
Payment of term loans and revolving credit facility -- (6,524)
-------- --------
Net cash provided by financing activities 37,333 35,435
-------- --------
Net increase (decrease) in cash 1,138 (6,293)
Cash at beginning of the period -- 9,288
-------- --------
Cash at end of the period $ 1,138 $ 2,995
======== ========
</TABLE>
The accompanying notes are an integral part off these consolidated financial
statements.
<PAGE>
AVALON CABLE OF MICHIGAN HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands except per share data)
1. Description of Business
Avalon Cable of Michigan Holdings, Inc. ("the Company") was formed in June
1998, pursuant to the laws of the state of Delaware. Avalon Cable of Michigan
Inc. ("Avalon Michigan") was formed in June 1998, pursuant to the laws of the
state of Delaware as a wholly-owned subsidiary of the Company. On June 3, 1998,
Avalon Michigan entered into an Agreement and Plan of Merger (the "Agreement")
among the Company, Cable Michigan, Inc. ("Cable Michigan") and Avalon Michigan,
pursuant to which Avalon Michigan will merge into Cable Michigan and Cable
Michigan will become a wholly-owned subsidiary of the Company (the "Merger").
In accordance with the terms of the Agreement, each share of common stock,
par value $1.00 per share ("common stock"), of Cable Michigan outstanding prior
to the effective time of the Merger (other than treasury stock, shares owned by
the Company 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.
In conjunction with the acquisition of Cable Michigan, Avalon Michigan
acquired Cable Michigan's 62% ownership interest in Mercom, Inc. ("Mercom").
On November 6, 1998, Avalon Michigan completed its merger into and with
Cable Michigan. The total consideration paid in conjunction with the Merger,
including fees and expenses was $431,629, including repayment of all existing
Cable Michigan indebtedness and accrued interest of $135,205. The Agreement also
permitted Avalon Michigan to agree to acquire the remaining shares of Mercom
that it did not own.
The Company contributed $137,375 in cash to Avalon Michigan, which was used
to consummate the Merger. On November 5, 1998, the Company received $105,000 in
cash in exchange for promissory notes to lenders (the "Bridge Agreement"). On
November 6, 1998, the Company contributed the proceeds received from the Bridge
Agreement and an additional $35,000 in cash to Avalon Michigan in exchange for
100 shares of common stock.
On November 6, 1998, Avalon Cable of New England Holdings, Inc. contributed
its 100% interest in Avalon Cable of New England LLC ("Avalon New England") to
Avalon Cable LLC in exchange for a membership interest in Avalon Cable LLC. This
contribution was between entities under common control and was accounted for
similar to a pooling-of-interests. Under this pooling-of-interests method, the
results of operations for the Company include the results of operations from the
date of inception (September 4, 1997) of Avalon New England. On November 6,
1998, Avalon Cable LLC received $63,000 from affiliated entities, which was
comprised of (i) a $45,000 capital contribution by Avalon Investors, LLC
("Avalon Investors") and (ii) a $18,000 promissory note from Avalon Cable
Holdings LLC ("Avalon Holdings"), which was used to make a $62,800 cash
contribution to Avalon New England.
The cash contribution received by Avalon New England was used to (i)
extinguish existing indebtedness of $29,600 and (ii) fund a $33,200 loan to
Avalon Cable Finance, Inc. which matures on December 31, 2001.
On December 10, 1998, Avalon Cable LLC received a dividend distribution from
Avalon New England in the amount of $18,206, which was used by Avalon Cable LLC
to pay off the promissory note payable to Avalon Holdings, plus accrued
interest.
On March 26, 1999, after the acquisition of Mercom, the Company completed a
series of transactions to facilitate certain aspects of its financing between
affiliated entities under common control. As a result of these transactions:
<PAGE>
. The Company contributed the Senior Discount Notes and associated debt
finance costs to Avalon Cable LLC and became a guarantor of the Senior
Discount Notes;
AVALON CABLE OF MICHIGAN HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands except per share data)
. Avalon Michigan contributed its assets and liabilities, excluding
deferred tax liabilities, net to Avalon Cable LLC in exchange for an
approximate 88% voting interest in Avalon Cable LLC. Avalon Cable LLC
contributed these assets and liabilities, excluding the Senior Discount
Notes and associated debt finance costs, to its wholly-owned subsidiary,
Avalon Cable of Michigan LLC;
. Avalon Cable of Michigan LLC has become the operator of the Michigan
cluster replacing Avalon Michigan;
. Avalon Cable of Michigan LLC is an obligor on the Senior Subordinated
Notes replacing Avalon Michigan; and
. Avalon Michigan is a guarantor of the obligations of Avalon Cable of
Michigan LLC under the Senior Subordinated Notes. Avalon Michigan does
not have significant assets, other than its 88% investment in Avalon
Cable LLC at September 30, 1999.
As a result of this reorganization between entities under common control,
the Company accounted for the reorganization similar to a pooling-of-interests.
Under the pooling-of-interests method, the results of operations include the
results of operations from the earliest date that a member becomes a part of the
control group by inception or acquisition. For the Company, the results of
operations are from the date of inception (September 4, 1997) for Avalon New
England, a wholly-owned subsidiary of Avalon Cable LLC.
The Company has a majority interest in Avalon Cable LLC. Avalon Cable LLC
wholly owns Avalon Cable Holdings Finance, Inc., Avalon New England and Avalon
Cable of Michigan LLC.
Avalon Cable of Michigan LLC and Avalon New England provide cable services
to various areas in Michigan and New England, respectively. Avalon New England
and Avalon Cable of Michigan LLC's cable systems offer customer packages for
basic cable programming services which are offered at a per channel charge or
packaged together to form a tier of services offered at a discount from the
combined channel rate. Avalon New England and Avalon Cable of Michigan LLC's
cable systems also provide premium cable services to their customers for an
extra monthly charge. Customers generally pay initial connection charges and
fixed monthly fees for cable programming and premium cable services, which
constitute the principal sources of revenue for the Company.
Avalon Cable Holdings Finance, Inc. was formed for the sole purpose of
facilitating financings associated with the acquisition of various cable
operating companies. Avalon Cable Holdings Finance, Inc. conducts no other
activities.
2. Basis of Presentation
Pursuant to the rules and regulations of the Securities and Exchange
Commission, certain financial information has been condensed and certain
footnote disclosures have been omitted. Such information and disclosures are
normally included in financial statements prepared in accordance with generally
accepted accounting principles.
These condensed financial statements should be read in conjunction with the
<PAGE>
Company's audited financial statements as of December 31, 1998 and notes thereto
as included in the Company's Registration Statement on Form S-4 filed with the
Securities and Exchange Commission ("SEC") and declared effective with the SEC
on July 22, 1999.
The financial statements as of September 30,1999 and for the three and nine
month periods ended September 30, 1999 and 1998 are unaudited; however, in the
opinion of management, such statements include all adjustments (consisting
solely of normal and recurring adjustments except for the acquisition of Cross
Country Cable, LLC ("Cross Country"), Nova Cablevision, Inc., Nova Cablevision
VI, L.P. and Nova
AVALON CABLE OF MICHIGAN HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands except per share data)
Cablevision VII, L.P. ("Nova Cable"), Novagate Communication Corporation
("Novagate"), Traverse Internet, R/Com, L.C., Taconic Technology Corporation
("Taconic"), the Mercom merger and the contribution of assets and liabilities by
Avalon Michigan) necessary to present fairly the financial information included
therein.
3. Merger and Acquisitions
The Merger agreement between the Company and Avalon Michigan permitted
Avalon Michigan to agree to acquire the 1,822,810 shares (approximately 38% of
the outstanding stock) of Mercom that it did not own (the "Mercom Acquisition").
On September 10, 1998, Avalon Michigan and Mercom entered into a definitive
agreement (the "Mercom Merger Agreement") providing for the acquisition by
Avalon Michigan of all of such shares at a price of $12.00 per share. Avalon
Michigan completed this acquisition in March 1999. The total estimated
consideration payable in conjunction with the Mercom Acquisition, excluding fees
and expenses was $21,900. The purchase price was allocated as follows:
approximately $13,800 to the elimination of minority interest, $1,170 to
property, plant and equipment, $6,700 to cable franchises and the excess of
consideration paid over the fair market value of the net assets acquired, or
goodwill, of $240.
In March 1999, Avalon Cable of Michigan Inc. acquired the cable television
systems of Nova Cable for approximately $7,800, excluding transaction fees.
On January 21, 1999, the Company through its subsidiary, Avalon New England,
acquired Novagate for a purchase price of $2,900.
On March 26, 1999, the Company through its subsidiary, Avalon Cable of
Michigan, LLC, acquired the assets of R/Com, L.C., for a total purchase price of
approximately $450.
In January 1999, the Company acquired all of the issued and outstanding
common stock of Cross Country for a purchase price of approximately $2,500,
excluding transaction fees.
On April 1, 1999, the Company, through its subsidiary, Avalon New England,
acquired Traverse Internet for $2,400.
The acquisitions have been accounted for as purchases and the results of the
companies acquired have been included in the accompanying financial statements
since their acquisition dates. Accordingly, the consideration was allocated to
the net assets based on their respective fair market values. The excess of the
consideration paid over the estimated fair market values of the net assets
acquired was $12,940 and is being amortized using the straight line method over
15 years.
In July 1999, Avalon New England purchased all of the cable systems of
Taconic Technology Corporation for approximately $8,525 (excluding transaction
fees).
<PAGE>
4. Minority Interest
The activity in minority interest for the nine months ended September 30, 1999
is as follows:
Avalon
Cable
Mercom LLC Total
-------- -------- --------
Balance at December 31, 1998 $ 13,855 $47,981 $ 61,836
Purchase of the minority interest of Mercom (13,855) -- (13,855)
Loss allocated to minority interest -- (3,469) (3,469)
-------- -------- --------
$ 44,512 $ 44,512
======== ======== =======
AVALON CABLE OF MICHIGAN HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands except per share data)
5. Commitments and Contingencies
In connection with the acquisition of Mercom, former shareholders of Mercom
holding approximately 731,894 Mercom common shares or approximately 15.3% of all
outstanding Mercom common shares gave notice of their election to exercise
appraisal rights as provided by Delaware law. On July 2, 1999, former
shareholders of Mercom holding 535,501 shares of Mercom common stock filed a
petition for appraisal of stock in the Court of Chancery in the State of
Delaware. With respect to 209,893 of the total number of shares for which the
Company received notice, the Company received the notice of election from
beneficial holders of Mercom common shares and not from holders of record. The
Company believes that the notice with respect to the 209,893 shares did not
comply with Delaware law and is ineffective. The Company cannot predict at this
time the effect of the elections to exercise appraisal rights on the Company
since the Company does not know the extent to which these former shareholders
will continue to pursue appraisal rights under Delaware law or choose to abandon
these efforts and accept the consideration payable in the Mercom merger. If
these former shareholders continue to pursue their appraisal rights and if a
Delaware court were to find that the fair value of the Mercom common shares,
exclusive of any element of value arising from our acquisition of Mercom,
exceeded $12.00 per share, the Company would have to pay the additional amount
for each Mercom common share subject to the appraisal proceedings together with
a fair rate of interest. The Company could be ordered by the Delaware court also
to pay reasonable attorney's fees and the fees and expenses of experts for the
shareholders. In addition, the Company would have to pay their own litigation
costs. The Company has already provided for the consideration of $12.00 per
Mercom common share due under the terms of our merger with Mercom with respect
to these shares but has not provided for any additional amounts or costs. The
Company can provide no assurance as to what a Delaware court would find in any
appraisal proceeding or when this matter will be resolved. Accordingly, the
Company cannot assure you that the ultimate outcome would not have a material
adverse effect on the Company.
The Company is subject to the provisions of the Cable Television Consumer
Protection and Competition Act of 1992, as amended, and the Telecommunications
Act of 1996. The Company has either settled challenges or accrued for
anticipated exposures related to rate regulation; however, there is no assurance
that there will not be further additional challenges to its rates.
In the normal course of business, there are various legal proceedings
outstanding. In the opinion of management, these proceedings will not have a
<PAGE>
material adverse effect on the financial condition or results of operations of
the Company.
6. Pending Merger
In May 1999, the Company signed an agreement with Charter Communications,
Inc. ("Charter Communications") under which Charter Communications agreed to
purchase the Company's cable television systems and assume some of their debt.
The acquisition by Charter Communications is subject to regulatory approvals.
The Company expects to consummate this transaction in the fourth quarter of
1999.
This agreement, if closed, would constitute a change in control under the
indentures pursuant to which the Senior Subordinated Notes and the Senior
Discount Notes (collectively, the "Notes") were issued. The Indentures provide
that upon the occurrence of a change of control (a "Change of Control") each
holder of the Notes has the right to require the Company to purchase all or any
part (equal to $1,000 or an integral multiple thereof) of such holder's Notes at
an offer price in cash equal to 101% of the aggregate principal amount thereon
(or 101% of the accreted value for the Senior Discount Notes as of the date of
purchase if prior to the full accretion date) plus accrued and unpaid interest
and Liquidated Damages (as defined in the Indentures) thereof, if any, to the
date of purchase.
This agreement, if closed, would represent a Change of Control which, on the
closing date, constitutes an event of default under the Credit Facility giving
the lender the right to terminate the credit commitment and declare all amounts
outstanding immediately due and payable. Charter Communications has agreed to
repay all amounts due under the Credit Facility or cause all events of default
under the Credit Facility arising from the Change of Control to be waived.
<PAGE>
AVALON CABLE OF MICHIGAN, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(In thousands)
<TABLE>
<CAPTION>
December 31, September 30,
1998 1999
----------- ------------
(Unaudited)
<S> <C> <C>
Assets
Current assets
Cash $ 9,288 $ 2,995
Accounts receivable, net of allowance for doubtful accounts of $943 and $1,275 5,862 7,564
Prepayments and other current assets 1,388 1,586
Accounts receivable from related parties 124 --
Deferred income taxes 377 --
-------- --------
Total current assets 17,039 12,145
Property, plant and equipment, net 111,421 121,973
Intangible assets, net 462,117 468,856
Deferred charges and other assets 1,302 1,121
-------- --------
Total assets $591,879 $604,095
======== ========
Liabilities and Shareholders' Equity
Current liabilities
Current portion of notes payable $ 20 $ 25
Accounts payable and accrued expenses 11,646 22,242
Advance billings and customer deposits 3,171 3,272
Accounts payable--affiliate 2,023 3,160
-------- --------
Total current liabilities 16,860 28,699
Long-term debt 402,949 452,778
Notes payable--affiliate 3,341 --
Deferred income taxes 80,811 67,136
-------- --------
Total liabilities 503,961 548,613
-------- --------
Commitments and contingencies (Note 5)
Minority Interest 61,836 44,512
-------- --------
Shareholders' equity
Common stock -- --
Additional paid-in capital 35,000 35,000
Accumulated deficit (8,918) (24,030)
-------- --------
Total shareholders' equity 26,082 10,970
-------- --------
Total liabilities and shareholders' equity $591,879 $604,095
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
AVALON CABLE OF MICHIGAN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(In thousands)
<TABLE>
<CAPTION>
For the Three Months Ended For the Nine Months Ended
September 30, September 30, September 30, September 30,
1999 1998 1999 1998
-------- ------ -------- ------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Revenue
Basic services $ 23,161 $1,992 $ 65,225 $2,123
Premium services 2,095 70 6,174 85
Other 3,173 153 8,799 161
-------- ------ -------- ------
Total revenues 28,429 2,215 80,198 2,369
Operating expenses
Selling, general and administrative 4,986 418 14,765 439
Programming 7,406 623 21,372 662
Technical and operations 3,262 198 9,171 216
Depreciation and amortization 11,478 602 33,574 654
-------- ------ -------- ------
Income from operations 1,297 374 1,316 398
Other income (expense)
Interest income 35 -- 743 --
Interest expense (11,094) (675) (34,340) (680)
-------- ------ -------- ------
Loss before income taxes (9,762) (301) (32,281) (282)
Benefit from income taxes 3,521 -- 13,700 --
-------- ------ -------- ------
Loss before minority interest (6,241) (301) (18,581) (282)
Minority interest in loss of consolidated entity 1,115 -- 3,469 --
-------- ------ -------- ------
Net loss $ (5,126) $ (301) $(15,112) $ (282)
======== ====== ======== ======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
AVALON CABLE OF MICHIGAN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
(In thousands, except share amounts)
<TABLE>
<CAPTION>
For the Nine Months Ended September 30, 1999 (Unaudited)
----------------------------------------------------------------
Common Additional Total
Shares Common Paid-In Accumulated Shareholders'
Outstanding Stock Capital Deficit Equity
------------ ------- ----------- -------------- ------------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1998 100 $-- $35,000 $ (8,918) $ 26,082
Net loss for the nine months ended
September 30, 1999 -- -- -- (15,437) (15,437)
------------ ------- ----------- --------- ---------
Balance, September 30, 1999 100 $-- $35,000 $(24,355) $ 10,645
============ ======= =========== ========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
AVALON CABLE OF MICHIGAN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
For the Nine For the Nine
Months Ended Months Ended
September 30, September 30,
1998 1999
------------ ------------
(Unaudited) (Unaudited)
<S> <C> <C>
Cash flows from operating activities
Net income (loss) $ (282) $(15,437)
Adjustments to reconcile net income (loss) to net cash provided by operating activities
Depreciation and amortization 654 33,574
Accretion of Senior Discount Notes -- 10,102
Decrease in minority interest -- (3,144)
Net change in certain assets and liabilities, net of business acquisitions
Decrease (increase) in subscriber receivables 100 (1,092)
Decrease in accounts receivables -- 124
Increase in prepayment and other assets (24) (129)
Increase in accounts payable and accrued expenses 774 10,582
Increase in deferred revenue 17 101
Increase in accounts payable, net--affiliate -- 876
Increase in accrued interest 564 --
Increase in long-term debt -- 951
Decrease in deferred income taxes, net -- (13,298)
-------- --------
Net cash provided by operating activities 1,803 23,210
-------- --------
Cash flow from investing activities
Additions to property, plant and equipment (72) (15,009)
Change in restricted cash 500 --
Payment for acquisitions, net (38,426) (49,929)
-------- --------
Net cash used in investing activities (37,998) (64,938)
-------- --------
Cash flow from financing activities
Increase (decrease) in note payable--affiliate 2,841 (3,341)
Capital contribution 4,862 --
Proceeds from the issuance of the Credit Facility 29,600 45,300
Payment of deferred financing costs (470) --
Payment of term loans and revolving credit facility -- (6,524)
Proceeds from the issuance of notes payable 500 --
-------- --------
Net cash provided by financing activities 37,333 35,435
-------- --------
Net increase (decrease) in cash 1,138 (6,293)
Cash at beginning of the period -- 9,288
-------- --------
Cash at end of the period $ 1,138 $ 2,995
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
AVALON CABLE OF MICHIGAN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands except per share data)
1. Description of Business
Avalon Cable of Michigan, Inc. (the "Company") was formed in June 1998,
pursuant to the laws of the state of Delaware, as a wholly-owned subsidiary of
Avalon Cable of Michigan Holdings, Inc. ("Michigan Holdings"). On June 3, 1998,
the Company entered into an Agreement and Plan of Merger (the "Agreement") among
the Company, Michigan Holdings and Cable Michigan, Inc. ("Cable Michigan"),
pursuant to which the Company will merge into Cable Michigan and Cable Michigan
will become a wholly-owned subsidiary of Michigan Holdings (the "Merger"). As
part of the Merger, the name of Cable Michigan was changed to Avalon Cable of
Michigan, Inc.
In accordance with the terms of the Agreement, each share of common stock,
par value $1.00 per share ("common stock"), of Cable Michigan outstanding prior
to the effective time of the Merger (other than treasury stock, shares owned by
the Company 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.
In conjunction with the acquisition of Cable Michigan, the Company acquired
Cable Michigan's 62% ownership interest in Mercom, Inc. ("Mercom").
On November 6, 1998, the Company completed its merger. The total
consideration paid in conjunction with the Merger, including fees and expenses
is $431,629, including repayment of all existing Cable Michigan indebtedness and
accrued interest of $135,205. The Agreement also permitted the Company to agree
to acquire the remaining shares of Mercom that it did not own.
Michigan Holdings contributed $137,375 in cash to the Company, which was
used to consummate the Merger. On November 5, 1998, Michigan Holdings received
$105,000 in cash in exchange for promissory notes to lenders (the "Bridge
Agreement"). On November 6, 1998, Michigan Holdings contributed the proceeds
received from the Bridge Agreement and an additional $35,000 in cash to the
Company in exchange for 100 shares of common stock.
On November 6, 1998, Avalon Cable of New England Holdings, Inc. contributed
its 100% interest in Avalon Cable of New England LLC ("Avalon New England") to
Avalon Cable LLC in exchange for a membership interest in Avalon Cable LLC. This
contribution was between entities under common control and was accounted for
similar to a pooling-of-interests. Under this pooling-of-interests method, the
results of operations for Avalon Cable LLC include the results of operations
from the date of inception (September 4, 1997) of Avalon New England. On
November 6, 1998, Avalon Cable LLC received $63,000 from affiliated entities,
which was comprised of (i) a $45,000 capital contribution by Avalon Investors,
LLC ("Avalon Investors") and (ii) a $18,000 promissory note from Avalon Cable
Holdings LLC ("Avalon Holdings"), which was used to make a $62,800 cash
contribution to Avalon New England.
The cash contribution received by Avalon New England was used to (i)
extinguish existing indebtedness of $29,600 and (ii) fund a $33,200 loan to
Avalon Cable Finance, Inc. which matures on December 31, 2001.
On December 10, 1998, Avalon Cable LLC received a dividend distribution from
Avalon New England in the amount of $18,206, which was used by Avalon Cable LLC
to pay off the promissory note payable to Avalon Holdings, plus accrued
interest.
On March 26,1999, after the acquisition of Mercom, (as described in Note 3)
the Company completed a series of transactions to facilitate certain aspects of
its financing between affiliated companies under common control. As a result of
<PAGE>
these transactions:
. The Company contributed its assets and liabilities excluding deferred tax
liabilities, net to Avalon Cable LLC in exchange for an approximate 88%
voting interest in Avalon Cable LLC. Avalon Cable LLC contributed these
assets and liabilities to its wholly-owned subsidiary, Avalon Cable of
Michigan LLC ("Avalon Michigan LLC");
AVALON CABLE OF MICHIGAN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands except per share data)
. Avalon Michigan LLC has become the operator of the Michigan cluster,
replacing the Company;
. Avalon Michigan LLC is an obligor on the Senior Subordinated Notes
replacing the Company;
. The Company became a guarantor of the obligations of Avalon Michigan LLC
under the Senior Subordinated Notes.
. Michigan Holdings contributed the Senior Discount Notes to the Company who
then contributed the notes to Avalon Cable LLC. Both the Company and
Michigan Holdings became guarantors of the Senior Discount Notes. The
Company does not have significant assets other than its investment in
Avalon Cable LLC at September 30, 1999.
As a result of this reorganization between entities under common control,
the Company accounted for the reorganization similar to a pooling-of-interests.
Under the pooling-of-interests method, the results of operations include the
results of operations from the earliest date that a member becomes a part of the
control group by inception or acquisition. For the Company, the results of
operations are from the date of inception (September 4, 1997) for Avalon New
England, a wholly-owned subsidiary of Avalon Cable LLC.
The Company has a majority interest in Avalon Cable LLC. Avalon Cable LLC
wholly owns Avalon Cable Holdings Finance, Inc. ("Avalon Holdings Finance"),
Avalon New England and Avalon Michigan LLC.
Avalon Michigan LLC and Avalon New England provide cable services to various
areas in the state of Michigan and the New England area, respectively. Avalon
New England and Avalon Michigan LLC's cable systems offer customer packages for
basic cable programming services which are offered at a per channel charge or
packaged together to form a tier of services offered at a discount from the
combined channel rate. Avalon New England and Avalon Michigan LLC's cable
systems also provide premium cable services to their customers for an extra
monthly charge. Customers generally pay initial connection charges and fixed
monthly fees for cable programming and premium cable services, which constitute
the principle sources of revenue for the Company.
Avalon Holdings Finance was formed for the sole purpose of facilitating
financings associated with the acquisitions of various cable operating
companies. Avalon Holdings Finance conducts no other activities.
2. Basis of Presentation
Pursuant to the rules and regulations of the Securities and Exchange
Commission, certain financial information has been condensed and certain
footnote disclosures have been omitted. Such information and disclosures are
normally included in financial statements prepared in accordance with generally
accepted accounting principles.
These condensed financial statements should be read in conjunction with the
Company's audited financial statements as of December 31, 1998 and notes thereto
<PAGE>
as included in the Company's Registration Statement on Form S-4 filed with the
Securities and Exchange Commission ("SEC") and declared effective with the SEC
on July 22, 1999.
The financial statements as of September 30,1999 and for the three and nine
month periods ended September 30, 1999 and 1998 are unaudited; however, in the
opinion of management, such statements include all adjustments (consisting
solely of normal and recurring adjustments except for the acquisition of Cross
Country Cable, LLC ("Cross Country"), Nova Cablevision, Inc., Nova Cablevision
VI, L.P. and Nova Cablevision VII, L.P. ("Nova Cable"), Novagate Communication
Corporation
AVALON CABLE OF MICHIGAN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands except per share data)
("Novagate"), Traverse Internet, R/Com. L.C., Taconic Technology Corporation
("Taconic"), the Mercom Merger and the contribution of assets and liabilities by
the Company) necessary to present fairly the financial information included
therein.
3. Merger and Acquisitions
The Merger agreement between Michigan Holdings and the Company permitted the
Company to agree to acquire the 1,822,810 shares (approximately 38% of the
outstanding stock) of Mercom that it did not own (the "Mercom Acquisition"). On
September 10, 1998 the Company and Mercom entered into a definitive agreement
(the "Mercom Merger Agreement") providing for the acquisition by the Company of
all of such shares at a price of $12.00 per share. The Company completed this
acquisition in March 1999. The total estimated consideration payable in
conjunction with the Mercom Acquisition, excluding fees and expenses was
$21,900. The purchase price was allocated as follows: approximately $13,800 to
the elimination of minority interest, $1,170 to property, plant and equipment,
$6,700 to cable franchises and the excess of consideration paid over the fair
market value of the net assets acquired, or goodwill, of $240.
In March 1999, the Company, through its subsidiary, Avalon Michigan LLC,
acquired the cable television systems of Nova Cable for approximately $7,800,
excluding transaction fees.
On January 21, 1999, the Company, through its subsidiary, Avalon New
England, acquired Novagate for a purchase price of $2,900.
On March 26, 1999, the Company, through its subsidiary, Avalon Michigan LLC,
acquired the assets of R/Com, L.C., for a total purchase price of approximately
$450.
In January 1999, the Company, through its subsidiary Avalon Michigan LLC,
acquired all of the issued and outstanding common stock of Cross Country for a
purchase price of approximately $2,500, excluding transaction fees.
On April 1, 1999, the Company, through its subsidiary, Avalon New England,
acquired Traverse Internet for $2,400.
The acquisitions have been accounted for as purchases and the results of the
companies acquired have been included in the accompanying financial statements
since their acquisition dates. Accordingly, the consideration was allocated to
the net assets based on their respective fair market values. The excess of the
consideration paid over the estimated fair market values of the net assets
acquired was $12,940 and is being amortized using the straight line method over
15 years.
In July 1999, Avalon New England purchased all of the cable systems of
Taconic Technology Corporation for approximately $8,525 (excluding transaction
fees).
4. Minority Interest
<PAGE>
The activity in minority interest for the nine months ended September 30, 1999
is as follows:
Avalon
Cable
Mercom LLC Total
-------- -------- --------
Balance at December 30, 1999 $ 13,855 $47,981 $ 61,836
Purchase of the minority interest of Mercom (13,855) -- (13,855)
Loss allocated to minority interest -- (3,469) (3,469)
-------- -------- --------
$ -- 44,512 44,512
======== ======== ========
AVALON CABLE OF MICHIGAN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands except per share data)
5. Commitments and Contingencies
In connection with the acquisition of Mercom, former shareholders of Mercom
holding approximately 731,894 Mercom common shares or approximately 15.3% of all
outstanding Mercom common shares gave notice of their election to exercise
appraisal rights as provided by Delaware law. On July 2, 1999, former
shareholders of Mercom holding 535,501 shares of Mercom common stock filed a
petition for appraisal of stock in the Court of Chancery in the State of
Delaware. With respect to 209,893 of the total number of shares for which the
Company received notice, the Company received the notice of election from
beneficial holders of Mercom common shares and not from holders of record. The
Company believes that the notice with respect to the 209,893 shares did not
comply with Delaware law and is ineffective. The Company cannot predict at this
time the effect of the elections to exercise appraisal rights on the Company
since the Company does not know the extent to which these former shareholders
will continue to pursue appraisal rights under Delaware law or choose to abandon
these efforts and accept the consideration payable in the Mercom merger. If
these former shareholders continue to pursue their appraisal rights and if a
Delaware court were to find that the fair value of the Mercom common shares,
exclusive of any element of value arising from our acquisition of Mercom,
exceeded $12.00 per share, the Company would have to pay the additional amount
for each Mercom common share subject to the appraisal proceedings together with
a fair rate of interest. The Company could be ordered by the Delaware court also
to pay reasonable attorney's fees and the fees and expenses of experts for the
shareholders. In addition, the Company would have to pay their own litigation
costs. The Company has already provided for the consideration of $12.00 per
Mercom common share due under the terms of our merger with Mercom with respect
to these shares but has not provided for any additional amounts or costs. The
Company can provide no assurance as to what a Delaware court would find in any
appraisal proceeding or when this matter will be resolved. Accordingly, the
Company cannot assure you that the ultimate outcome would not have a material
adverse effect on the Company.
The Company is subject to the provisions of the Cable Television Consumer
Protection and Competition Act of 1992, as amended, and the Telecommunications
Act of 1996. The Company has either settled challenges or accrued for
anticipated exposures related to rate regulation; however, there is no assurance
that there will not be further additional challenges to its rates.
In the normal course of business, there are various legal proceedings
outstanding. In the opinion of management, these proceedings will not have a
material adverse effect on the financial condition or results of operations of
the Company.
6. Pending Merger
<PAGE>
In May 1999, the Company signed an agreement with Charter Communications,
Inc. ("Charter Communications") under which Charter Communications agreed to
purchase the Company's cable television systems and assume some of their debt.
The acquisition by Charter Communications is subject to regulatory approvals.
The Company expects to consummate this transaction in the fourth quarter of
1999.
This agreement, if closed, would constitute a change in control under the
indentures pursuant to which the Senior Subordinated Notes and the Senior
Discount Notes (collectively, the "Notes") were issued. The Indentures provide
that upon the occurrence of a change of control (a "Change of Control") each
holder of the Notes has the right to require the Company to purchase all or any
part (equal to $1,000 or an integral multiple thereof) of such holder's Notes at
an offer price in cash equal to 101% of the aggregate principal amount thereon
(or 101% of the accreted value for the Senior Discount Notes as of the date of
purchase if prior to the full accretion date) plus accrued and unpaid interest
and Liquidated Damages (as defined in the Indentures) thereof, if any, to the
date of purchase.
This agreement, if closed, would represent a Change of Control which, on the
closing date, constitutes an event of default under the Credit Facility giving
the lender the right to terminate the credit commitment and declare all amounts
outstanding immediately due and payable. Charter Communications has agreed to
repay all amounts due under the Credit Facility or cause all events of default
under the Credit Facility arising from the Change of Control to be waived.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
- -------------------------------------------------------------------------------
of Operations.
--------------
Results of Operations
Overview
- --------
The following historical results of operations of Avalon Cable LLC, Avalon
Cable of Michigan Holdings, Inc., and Avalon Cable of Michigan, Inc. refer to
their results of operations for the three months ended September 30, 1999
compared to the three months ended June 30, 1999. There were minimal results of
operations during the three and nine month periods ended September 30, 1998 for
Avalon Cable LLC, Avalon Cable of Michigan Holdings, Inc., and Avalon Cable of
Michigan, Inc. due to an acquisition closing late in the second quarter of 1998.
As such, comparison of the current period results with the corresponding period
in the prior year is not meaningful.
Avalon Cable LLC
- ----------------
In the first quarter of 1999, Avalon Cable of New England LLC, a wholly-owned
subsidiary of Avalon Cable LLC, formed Avalon.com, LLC, a wholly-owned
subsidiary. Avalon.com, LLC plans to provide internet services to customers in
the New England and Michigan cable areas served by Avalon Cable of New England
LLC and Avalon Cable of Michigan LLC, wholly-owned subsidiaries of Avalon Cable
LLC.
On March 26, 1999, after the acquisition of Mercom, Inc., Avalon Cable LLC
and its affiliates completed a series of transactions to facilitate certain
aspects of its financing. As a result of these transactions:
. Avalon Cable of Michigan, Inc. contributed its assets and liabilities
excluding deferred tax liabilities, net to Avalon Cable LLC in exchange for
an approximate 88% voting interest in Avalon Cable LLC. Avalon Cable LLC
contributed these assets and liabilities to its wholly-owned subsidiary,
Avalon Cable of Michigan LLC.
. Avalon Cable of Michigan Holdings, Inc. contributed the senior discount
notes and associated deferred financing costs to Avalon Cable of Michigan,
Inc., who in turn contributed the senior discount notes and deferred
financing costs to Avalon Cable LLC.
. The reorganization was among entities under common control and was
accounted for similar to a pooling-of-interests.
Three months ended September 30, 1999 compared to the three months ended June
30, 1999
Revenues for the three months ended September 30, 1999 were $28.4 million, an
increase of $1.2 million, or 4%, as compared to revenues of $27.2 million for
the three months ended June 30, 1999. This increase is primarily related to a
system-wide 8% rate increase on the tiered levels of service, not including
limited basic service, that was effective in May; the full quarter effect of
additional revenues resulting from the seasonal subscribers; and the acquisition
of the cable assets of Taconic Technology Corporation ("Taconic") on July 1,
1999.
Selling, general and administrative expenses were $5.0 million for the three
months ended September 30, 1999, a decrease of $0.3 million, or 5%, as compared
to $5.3 million for the three months ended June 30, 1999. This decrease was
primarily related to cost savings and marketing expense reimbursements relating
to the launch of several channels.
Programming expenses were $7.4 million for the three months ended September 30,
1999, an increase of $0.3 million, or 4%, as compared to $7.1 million for the
<PAGE>
three months ended June 30, 1999. This increase was primarily related to the
increased cost associated with the servicing of the additional subscribers as
discussed above, during the three months ended September 30, 1999.
Technical expenses were $3.3 million for the three months ended September 30,
1999, an increase of $0.2 million, or 6%, as compared to $3.1 million for the
three months ended June 30, 1999. This increase was primarily due to normal
operating costs associated with servicing of the additional subscribers.
Operating income before depreciation and amortization and non-recurring
expenses was $12.8 million for the three months ended September 30, 1999, an
increase of $1.2 million, or 10%, as compared to $11.6 million for the three
months ended June 30, 1999. This increase was primarily due to the increase in
revenues for the quarter offset by increases in selling, general and
administrative expenses, programming expenses and technical expenses as
discussed above.
Depreciation and amortization expense were $11.5 million for the three months
ended September 30, 1999, an increase of $0.2 million, or 2%, as compared to
$11.3 million for the three months ended June 30, 1999. This increase was
primarily due to the effect of depreciation and amortization costs associated
with capital spending and acquisitions made during 1999.
Interest expense, net was $11.0 million for the three months ended September
30, 1999, a decrease of $0.1 million, or 0%, compared to $11.1 million for the
three months ended June 30, 1999. This decrease was primarily related to lower
interest rates on the variable rate debt.
Net loss was $9.8 million for the three months ended September 30, 1999, a
decrease of $1.0 million, or 9%, compared to a net loss of $10.8 million for
the three months ended June 30, 1999. This increase was primarily due to
increased revenue offset by the increased cost associated with the Taconic
acquisition and costs associated with servicing of the additional subscribers.
Avalon Cable of Michigan Holdings, Inc.
- ---------------------------------------
On November 6, 1998, Cable Michigan, Inc. merged with and into Avalon Cable
of Michigan, Inc., a wholly-owned subsidiary of Avalon Cable of Michigan
Holdings, Inc. and Avalon Cable of Michigan, Inc. commenced its operations.
Therefore, the financial and other data for Cable Michigan, Inc. for the period
from November 6, 1998 to December 31, 1998 is reflected in the financial and
other data for Avalon Cable of Michigan Holdings, Inc.
On March 26, 1999, Avalon Cable of Michigan, Inc. acquired the remaining
minority interest in Mercom for approximately $21.9 million. During the first
quarter, Avalon Cable of Michigan, Inc. also acquired the cable television
systems of Nova Cablevision and Cross Country Cable for $10.7 million in the
aggregate.
In March 1999, after the acquisition of Mercom, Inc., Avalon Cable of
Michigan, Inc. and its affiliates completed a series of transactions to
facilitate certain aspects of its financing. As a result of these transactions:
. Avalon Cable of Michigan, Inc. contributed its assets and liabilities
excluding deferred tax liabilities, net to Avalon Cable LLC in exchange for
an approximate 88% voting interest in Avalon Cable LLC. Avalon Cable LLC
contributed these assets and liabilities to its wholly-owned subsidiary,
Avalon Cable of Michigan LLC.
. Avalon Cable of Michigan Holdings, Inc. contributed the senior discount
notes and associated deferred financing costs to Avalon Cable of Michigan,
Inc., who in turn contributed the senior discount notes and deferred
financing costs to Avalon Cable LLC.
. Each of Avalon Cable of Michigan Holdings, Inc. and Avalon Cable of
Michigan, Inc. became a guarantor of the obligations of Avalon Cable LLC
under the senior discount notes. Avalon Cable of Michigan Holdings, Inc.
and Avalon Cable of Michigan, Inc. does not have significant assets, other
than their investments in Avalon Cable of Michigan, Inc. and
<PAGE>
Avalon Cable LLC, respectively.
. The reorganization was among entities under common control and was
accounted for similar to a pooling-of-interests.
Three months ended September 30, 1999 compared to the three months ended June
30, 1999
Revenues for the three months ended September 30, 1999 were $28.4 million, an
increase of $1.2 million, or 4%, as compared to revenues of $27.2 million for
the three months ended June 30, 1999. This increase is primarily related to a
system-wide 8% rate increase on the tiered levels of service, not including
limited basic service, that was effective in May; the full quarter effect of
additional revenues resulting from the seasonal subscribers; and the acquisition
of the cable assets of Taconic Technology Corporation ("Taconic") on July 1,
1999.
Selling, general and administrative expenses were $5.0 million for the three
months ended September 30, 1999, a decrease of $0.3 million, or 5%, as compared
to $5.3 million for the three months ended June 30, 1999. This decrease was
primarily related to cost savings and marketing expense reimbursements
relating to the launch of several channels.
Programming expenses were $7.4 million for the three months ended September 30,
1999, an increase of $0.3 million, or 4%, as compared to $7.1 million for the
three months ended June 30, 1999. This increase was primarily related to the
increased cost associated with the servicing of the additional subscribers as
discussed above, during the three months ended September 30, 1999.
Technical expenses were $3.3 million for the three months ended September 30,
1999, an increase of $0.2 million, or 6%, as compared to $3.1 million for the
three months ended June 30, 1999. This increase was primarily due to normal
operating costs and costs associated with servicing of the additional
subscribers.
Operating income before depreciation and amortization and non-recurring
expenses was $12.8 million for the three months ended September 30, 1999, an
increase of $1.3 million, or 11%, as compared to $11.6 million for the three
months ended June 30, 1999. This increase was primarily due to the increase in
revenues for the quarter offset by changes in selling, general and
administrative expenses, programming expenses and technical expenses as
discussed above.
Depreciation and amortization expense were $11.5 million for the three months
ended September 30, 1999, an increase of $0.2 million, or 1%, as compared to
$11.3 million for the three months ended June 30, 1999. This increase was
primarily due to the effect of depreciation and amortization costs associated
with capital spending made during 1999.
Interest expense, net was $11.0 million for the three months ended September
30, 1999, no change as compared to $11.1 million for the three months ended
June 30, 1999. This decrease was primarily related to lower interest rates on
the variable rate debt.
Net loss was $5.5 million for the three months ended September 30, 1999, an
increase of $0.1 million, or 2%, compared to a net loss of $5.6 million for the
three months ended June 30, 1999. This increase was primarily due to the decline
in tax benefit recognized in the quarter offset by a year-to-date adjustment in
interest expense.
Avalon Cable of Michigan, Inc
- -----------------------------
On November 6, 1998, Cable Michigan merged with and into Avalon Cable of
Michigan, Inc. and Avalon Cable of Michigan, Inc. commenced its operations.
Therefore, the financial and other data for Cable Michigan for the period
November 6, 1998 to December 31, 1998 is reflected in the financial and other
data for Avalon Cable of Michigan, Inc.
On March 26, 1999 Avalon Cable of Michigan, Inc. acquired the remaining
minority interest of Mercom for approximately $21.9 million. During the quarter,
Avalon Cable of Michigan, Inc. also acquired the cable television systems of
<PAGE>
Nova Cablevision and Cross Country Cable, LLC ("Cross Country Cable") for $10.7
million.
In March 1999, after the acquisition of Mercom, Inc., Avalon Cable of
Michigan, Inc. and its affiliates completed a series of transactions to
facilitate certain aspects of its financing. As a result of these transactions:
. Avalon Cable of Michigan, Inc. contributed its assets and liabilities
excluding deferred tax liabilities, net, to Avalon Cable LLC in exchange
for an approximate 88% voting interest in Avalon Cable LLC. Avalon Cable
LLC contributed these assets and liabilities to its wholly-owned
subsidiary, Avalon Cable of Michigan LLC.
. Avalon Cable of Michigan, Inc. became a guarantor of the obligations of
Avalon Cable LLC under the senior discount notes and a guarantor of Avalon
Cable of Michigan LLC's obligation under the senior subordinated notes and
the credit facility. Avalon Cable of Michigan, Inc. does not have
significant assets, other than its investments in Avalon Cable LLC.
. The reorganization was among entities under common control and was
accounted for similar to a pooling-of-interests.
Three months ended September 30, 1999 compared to the three months ended June
30, 1999
Revenues for the three months ended September 30, 1999 were $28.4 million, an
increase of $1.2 million, or 4%, as compared to revenues of $27.2 million for
the three months ended June 30, 1999. This increase is primarily related to a
system-wide 8% rate increase on the tiered levels of service, not including
limited basic service, that was effective in May; the full quarter effect of
additional revenues resulting from the seasonal subscribers; and the acquisition
of the cable assets of Taconic Technology Corporation ("Taconic") on July 1,
1999.
Selling, general and administrative expenses were $5.0 million for the three
months ended September 30, 1999, a decrease of $0.3 million, or 5%, as compared
to $5.3 million for the three months ended June 30, 1999. This decrease was
primarily related to cost savings and marketing expense reimbursements relating
to the launch of several channels .
Programming expenses were $7.4 million for the three months ended September 30,
1999, an increase of $0.3 million, or 4%, as compared to $7.1 million for the
three months ended June 30, 1999. This increase was primarily related to the
increased cost associated with the servicing of the additional subscribers as
discussed above, during the three months ended September 30, 1999.
Technical expenses were $3.3 million for the three months ended September 30,
1999, an increase of $0.2 million, or 6%, as compared to $3.1 million for the
three months ended June 30, 1999. This increase was primarily due to normal
operating costs associated with servicing of the additional subscribers.
Operating income before depreciation and amortization and non-recurring
expenses was $12.8 million for the three months ended September 30, 1999, an
increase of $1.3 million, or 11%, as compared to $11.5 million for the three
months ended June 30, 1999. This increase was primarily due to the increase in
revenues for the quarter offset by changes in selling, general and
administrative expenses, programming expenses and technical expenses as
discussed above.
Depreciation and amortization expense were $11.5 million for the three months
ended September 30, 1999, an increase of $0.2 million, or 1%, as compared to
$11.3 million for the three months ended June 30, 1999. This increase was
primarily due to the effect of depreciation and amortization costs associated
with capital spending made during 1999.
Interest expense, net was $11.0 million for the three months ended September
30, 1999 no change as compared to $11.1 million for the three months ended June
30, 1999. This decrease was primarily related to lower interest rates on the
variable rate debt.
<PAGE>
Net loss was $5.5 million for the three months ended September 30, 1999, an
increase of $0.1 million, or 2%, compared to a net loss of $5.6 million for the
three months ended June 30, 1999. This increase was primarily due to the decline
in tax benefit recognized in the quarter offset by a year-to-date adjustment in
interest expense.
Liquidity and Capital Resource
The cable television business generally requires substantial capital for the
construction, expansion, upgrade and maintenance of the delivery system. In
addition, we have pursued and will continue to pursue a business strategy that
includes selective acquisitions. We have funded our acquisitions, capital
expenditures and working capital requirements to date through a combination of
secured and unsecured borrowings and equity contributions. We intend to use
amounts available under the credit facility, future debt and equity financings
and internally generated funds to finance our working capital requirements,
capital expenditures and future acquisitions.
Over the next five years, we intend to spend approximately $76 million to
upgrade our existing systems. These capital expenditures are expected to consist
of:
. approximately $45 million to upgrade the bandwidth capacity of these
systems and to employ additional fiber in the related cable plant,
. approximately $16 million in ongoing maintenance and replacement and
. approximately $15 million for installations and extensions to the cable
plant required as a result of the growth in our subscriber base.
Upon the completion of our planned upgrades, virtually all of the cable plant
included in these systems will have a band width capacity of 450 MHz or greater
and approximately 85% will have a bandwidth capacity of 550MHz or greater.
Our financing at the time we completed the acquisition of Cable Michigan,
Inc. consisted of the credit facility, the bridge credit facility, the
subordinated bridge facility and the new equity investment of approximately
$80.0 million. We used the funds obtained in the initial financing to consummate
the merger with Cable Michigan, Inc., to refinance existing Cable Michigan, Inc.
indebtedness and existing Avalon Cable of New England LLC indebtedness and to
pay fees and expenses. The net proceeds of the Senior Discount Note offering and
the subordinated note offering were used principally to repay approximately:
. $125.0 million of borrowings under the credit facility,
. $105.0 million of borrowings by the issuers under the bridge credit
facility and
. $18.0 million of borrowings by the issuer under the subordinated bridge
facility, together in each case with accrued interest.
After giving effect to the foregoing, the bridge credit facility was paid in
full and terminated and there were no amounts outstanding under the subordinated
bridge facility.
At September 30, 1999, Avalon Cable of Michigan LLC, Avalon Cable of New
England LLC and Avalon Cable Finance, Inc. had approximately $329.7 million,
$330.2 million and $329.7 million of senior indebtedness outstanding,
respectively.
Under the credit facility, the issuers' operating subsidiaries currently
have:
. a $30.0 million revolving credit facility with $18.5 million available
at September 30,1999, and
. senior term loan facilities consisting of a $120.9 million, term loan
facility which matures on October 31, 2005 and a $170.0 million term
loan facility which matures on October 31, 2006.
<PAGE>
No additional borrowings may be made under the senior term loan facilities.
Borrowings under the revolving credit facility are available for working capital
purposes, capital expenditures and pending and future acquisitions. The
revolving credit facility terminates, and all amounts outstanding thereunder are
payable, on October 31, 2005. In addition, the credit facility provides for up
to $75.0 million in an uncommitted acquisition facility. Borrowings under the
credit facility are guaranteed by each of the issuers, Avalon Cable and Avalon
Cable of New England Holdings, Inc. The credit facility is secured by
substantially all of the assets of the issuers' operating subsidiaries in which
a security interest may be granted.
The senior subordinated notes were issued in an aggregate principal amount
of $150.0 million and will mature on December 1, 2008. The senior subordinated
notes are general unsecured obligations of the issuers' operating subsidiaries
and are subordinated in right of payment to all of their current and future
senior indebtedness, including indebtedness under the credit facility. Interest
on the senior subordinated notes accrues at the rate of 9 3/8% per annum and is
payable semi-annually in arrears on June 1 and December 1 of each year, to
holders of record on the immediately preceding May 15 and November 15.
The issuers believe their market risk exposure with regard to their financial
instruments is limited to changes in the interest rates in the United States.
Based upon the composition of the issuers' variable rate debt outstanding at
September 30, 1999 which is the credit facility, a hypothetical 100 basis point
increase in interest rates would increase interest expense by approximately
$0.35 million for a quarter for each issuer.
The issuers are holding companies with no significant assets other than
their investment in their operating subsidiaries. The primary source of funds to
the issuers will be dividends and other advances and transfers from their
operation subsidiaries. The ability of the issuers' operating subsidiaries to
make dividends and other advances and transfers of funds, including funds
required to pay interest on the senior discount notes when due, is subject to
certain restrictions under the credit facility, the indenture governing the
senior subordinated notes and other agreements to which the issuers become a
party. A payment default under the indenture governing the senior subordinated
notes would constitute an event of default under the credit facility, and could
result in the acceleration of the indebtedness thereunder.
The credit facility, the indenture governing the senior discount notes, and
the senior subordinated note indenture contain financial and other covenants
that restrict, among other things, the ability of the issuers and their
operating subsidiaries and certain of their affiliates:
. to incur additional indebtedness,
. incur liens,
. pay dividends or make certain other restricted payments,
. consummate certain asset sales,
. enter into certain transactions with affiliates,
. merge or consolidate with any other person or
. sell, assign, transfer, lease, convey or otherwise dispose of all or
substantially all of our assets.
Such limitations, together with our highly leveraged nature, could limit the
corporate and operating activities of the issuers in the future, including the
implementation of our growth strategy.
We believe that cash generated from operations and borrowings expected to be
available under the credit facility will be sufficient to meet our debt service,
capital expenditure and working capital requirements for the foreseeable future.
We will require additional financing if our plans materially change in an
<PAGE>
adverse manner or prove to be materially inaccurate, or if we engage in any
significant acquisitions. We cannot assure you that this financing, if permitted
under the terms of the indenture governing the senior discount notes or other
then applicable agreements, will be available on terms acceptable to us or at
all.
We have signed an agreement with Charter Communications, Inc.("Charter
Communications") under which Charter Communications agreed to purchase for cash
all of the equity interests in our company and assume and repay our outstanding
debt. The completion of this transaction would cause an event of default under
our credit facility. Our agreement with Charter Communications requires that it
either pay all amounts due under the credit facility at the time the acquisition
is completed or cause the event of default arising from its acquisition to be
waived. The consummation of the Charter Communications transaction would also
constitute a change of control under the indenture of the senior discount notes.
As a result, the issuers will be required to offer to repurchase the senior
discount notes from each holder at an offer price in cash equal to 101% of the
aggregate principal amount thereof plus accrued and unpaid interest and
liquidated damages thereon to the date of purchase. The amount of cash that the
issuers will need to repurchase the senior discount notes from holders upon a
change of control will depend upon the number of holders that accept the
issuers' offer to repurchase such senior discount notes. To the extent that the
issuers have insufficient funds to repurchase all of the senior discount notes
for which their offers to repurchase the senior discount notes are accepted by
holders, (1) the issuers must borrow funds to repurchase such senior
discount notes and/or (2) Charter Communications will need to contribute equity
to the issuers. Charter Communications has represented to us in the documents
providing for the acquisition of our company that it will have sufficient funds
to consummate the transaction and pay related fees and expenses. They have
further represented that the payment of such amounts is not dependent upon the
consummation of an initial public offering of equity securities or any offering
of debt securities by it or any of its affiliates. We do not know, however,
Charter Communications' plans for financing its acquisition of our company and
Charter Communications is not obligated to make any equity contributions to the
issuers. The issuers' failure to repurchase all of the senior discount notes for
which offers were accepted would constitute an event of default under the
indenture.
Year 2000 Information and Readiness Discussion
We have financial, administrative and operational systems. In July 1999, we
completed the process of reviewing our existing systems. We are currently in the
process of reviewing the systems employed by third party service providers
(including billing services) in order to analyze the extent, if any, to
which we face a "Year 2000" problem (a problem that is expected to arise with
respect to computer programs that use only two digits to identify a year in the
date field and which were designed and developed without considering the impact
of the upcoming change in the century).
In particular, in July 1999, we completed a review and survey of all
information technology and non-information technology equipment and software to
discover items that may not be Year 2000 compliant. The results of review and
survey identified two items that required remediation and testing. Those items
relate to our telephone router and New England headend. We have completed the
necessary repairs for these items. In addition, we have contacted each material
third party vendor of products and services used by our company in writing in
order to determine the Year 2000 status of the products and services provided by
such vendors. To date, our third party vendors have indicated that all material
products and services are Year 2000 compliant.
Our most reasonable likely worst case Year 2000 scenario involves the
complete failure of our third party billing and customer support system. Such a
scenario is, however, highly unlikely given that our billing and customer
support systems are relatively new and that our vendors provide readily
available Year 2000 upgrades and/or system replacement packages. In the unlikely
event that our third party billing, customer support and addressable control
<PAGE>
systems failed, we could rely on our extensive microfiche back-up records. We
intend to update our microfiche records on a regular basis prior to December
1999.
To date, we have incurred approximately $0.1 million in expenses relating to
our Year 2000 compliance review. We anticipate that we will incur less than $0.1
million of additional Year 2000 compliance expenses prior to January 2000.
We believe that any "Year 2000" problem, if it arises in the future, should
not be material to our liquidity, financial position or results of operations;
however, there can be no assurance as to the extent of any such liabilities.
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
Legal Proceedings
In connection with the acquisition of Mercom, former shareholders of Mercom
holding approximately 731,894 Mercom common shares or approximately 15.3% of all
outstanding Mercom common shares gave notice of their election to exercise
appraisal rights as provided by Delaware law. On July 2, 1999, former
shareholders of Mercom holding 535,501 shares of Mercom common stock filed a
petition for appraisal of stock in the Court of Chancery in the State of
Delaware seeking the fair value of their shares of Mercom common stock, together
with interest, all costs of the proceeding, including reasonable attorneys' fees
and expenses of experts, including an award pursuant to section 262(j) of the
General Corporation Law of the State of Delaware, and such other relief as the
Court deems just, proper and equitable. With respect to 209,893 of the total
number of shares for which we received notice, we received the notice of
election from beneficial holders of Mercom common shares and not from holders of
record. We believe that the notice with respect to the 209,893 shares did not
comply with Delaware law and is ineffective. We cannot predict at this time the
effect of these elections or the results of any appraisal proceedings on us
since we do not know the extent to which these former shareholders will continue
to pursue appraisal rights under Delaware law or choose to abandon these efforts
and accept the consideration payable in the Mercom merger. If these former
shareholders continue to pursue their appraisal rights and if a Delaware court
were to find that the fair value of the Mercom common shares, exclusive of any
element of value arising from our acquisition of Mercom, exceeded $12.00 per
share, we would have to pay the additional amount for each Mercom common share
subject to the appraisal proceedings together with a fair rate of interest. In
addition, we would have to pay our own litigation costs. We have already
provided for the consideration of $12.00 per Mercom share due under the terms of
our merger with Mercom with respect to these shares but have not provided for
any additional amounts or costs. We can provide no assurance as to what a
Delaware court would find in any appraisal proceeding or when this matter will
be resolved. Accordingly, we cannot assure you that the ultimate outcome would
not have a material adverse effect on us.
Item 2. Changes in Securities and Use of Proceeds.
- --------------------------------------------------
NONE
Item 3. Defaults Upon Senior Securities.
- ----------------------------------------
NONE
Item 4. Submission of Matters to a Vote of Security Holders.
- ------------------------------------------------------------
NONE
Item 5. Other Information.
- --------------------------
NONE
Item 6. Exhibits and Reports on Form 8-K.
- -----------------------------------------
NONE
<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.
Avalon Cable LLC
---------------------------
(Registrant)
Date November 12, 1999 /s/ Joel C. Cohen
----------------- ---------------------------
(Signature)
Date November 12, 1999 /s/ Peter Polimino
----------------- ---------------------------
(Signature)
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<CIK> 0001082692
<NAME> AVALON CABLE LLC
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 2,995
<SECURITIES> 0
<RECEIVABLES> 7,059
<ALLOWANCES> 1,275
<INVENTORY> 0
<CURRENT-ASSETS> 10,933
<PP&E> 121,973
<DEPRECIATION> 10,396
<TOTAL-ASSETS> 601,807
<CURRENT-LIABILITIES> 28,507
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 120,522
<TOTAL-LIABILITY-AND-EQUITY> 601,807
<SALES> 80,198
<TOTAL-REVENUES> 80,198
<CGS> 0
<TOTAL-COSTS> 78,693
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 875
<INTEREST-EXPENSE> 34,340
<INCOME-PRETAX> (32,092)
<INCOME-TAX> (1,362)
<INCOME-CONTINUING> (30,730)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (30,730)
<EPS-BASIC> 0.00
<EPS-DILUTED> 0.00
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<CIK> 0001063700
<NAME> AVALON CABLE OF MICHIGAN HOLDINGS, INC.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 2,995
<SECURITIES> 0
<RECEIVABLES> 7,564
<ALLOWANCES> 1,275
<INVENTORY> 0
<CURRENT-ASSETS> 12,145
<PP&E> 121,973
<DEPRECIATION> 10,396
<TOTAL-ASSETS> 604,095
<CURRENT-LIABILITIES> 31,715
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 7,629
<TOTAL-LIABILITY-AND-EQUITY> 604,095
<SALES> 80,198
<TOTAL-REVENUES> 80,198
<CGS> 0
<TOTAL-COSTS> 78,882
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 875
<INTEREST-EXPENSE> 34,340
<INCOME-PRETAX> (32,281)
<INCOME-TAX> (10,684)
<INCOME-CONTINUING> (21,597)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (18,453)
<EPS-BASIC> 0.00
<EPS-DILUTED> 0.00
</TABLE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<CIK> 00001041855
<NAME> AVALON CABLE OF MICHIGAN, INC.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 2,995
<SECURITIES> 0
<RECEIVABLES> 7,564
<ALLOWANCES> 1,275
<INVENTORY> 0
<CURRENT-ASSETS> 12,145
<PP&E> 121,973
<DEPRECIATION> 10,396
<TOTAL-ASSETS> 604,095
<CURRENT-LIABILITIES> 31,715
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 7,629
<TOTAL-LIABILITY-AND-EQUITY> 604,095
<SALES> 80,198
<TOTAL-REVENUES> 80,198
<CGS> 0
<TOTAL-COSTS> 78,882
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 875
<INTEREST-EXPENSE> 34,340
<INCOME-PRETAX> (32,281)
<INCOME-TAX> (10,684)
<INCOME-CONTINUING> (21,579)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (18,453)
<EPS-BASIC> 0.00
<EPS-DILUTED> 0.00
</TABLE>
