<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 333-75453
AVALON CABLE OF MICHIGAN LLC
(Exact name of registrant as specified in its charter)
<TABLE>
<CAPTION>
<S> <C> <C>
Delaware 4813 13-4029981
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer Identification
incorporation or organization) Classification Code Number) No.)
<CAPTION>
AVALON CABLE OF NEW ENGLAND LLC
Delaware 4813 22-3556161
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer Identification
incorporation or organization) Classification Code Number) No.)
<CAPTION>
AVALON CABLE FINANCE, INC.
Delaware 4813 13-4029965
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer Identification
incorporation or organization) Classification Code Number) No.)
<CAPTION>
AVALON CABLE OF MICHIGAN, INC.
Pennsylvania 4813 23-2566891
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer Identification
incorporation or organization) Classification Code Number) No.)
</TABLE>
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
<PAGE>
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
PAGE NO.
Item 1. Financial Statements
Avalon Cable of Michigan LLC
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 ........................ 2
Consolidated Statement of Changes in Members' Interest for
the nine months ended September 30, 1999 ........................ 3
Consolidated Statement of Cash Flows for the nine months ended
September 30, 1999 .............................................. 4
Notes to Consolidated Financial Statements ...................... 5
Avalon Cable of New England LLC and Subsidiaries
Consolidated Balance Sheet as of December 31, 1998 and September
30, 1999 ........................................................ 9
Consolidated Statement of Operations for the three
and nine months ended September 30, 1999 and 1998 ............... 10
Consolidated Statement of Changes in Members' Interest for
the nine months ended September 30, 1999 ........................ 11
Consolidated Statement of Cash Flows for the nine months
ended September 30, 1999 and 1998 ............................... 12
Notes to Consolidated Financial Statements....................... 13
Avalon Cable Finance, Inc.
Balance Sheet as of December 31, 1998 and September 30, 1999 .... 16
Statement of Operations for the three and nine months
ended September 30, 1999 ........................................ 17
Statement of Changes in Shareholders' Equity for the nine
months ended September 30, 1999 ................................. 18
Statement of Cash Flows for the nine months ended September 30,
1999 ............................................................ 19
Notes to Financial Statements ................................... 20
Avalon Cable of Michigan, Inc. and Subsidiaries
Consolidated Balance Sheet as of December 31, 1998 and September
30, 1999 ........................................................ 22
Consolidated Statement of Operations for the three
and nine months ended September 30, 1999 and 1998................ 23
Consolidated Statement of Changes in Shareholders' Equity
for the nine months ended September 30, 1999..................... 24
Consolidated Statement of Cash Flows for the nine months
ended September 30, 1999 and 1998 ............................... 25
Notes to Consolidated Financial Statements ...................... 26
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations............................................. 31
PART II. OTHER INFORMATION
Item 1. Legal Proceedings................................................ 39
Item 2. Changes in Securities and Use of Proceeds........................ 39
Item 3. Defaults Upon Senior Securities.................................. 39
Item 4. Submission of Matters to a Vote of Security Holders.............. 39
Item 5. Other Information................................................ 39
Item 6. Exhibits and Reports on Form 8-K................................. 39
SIGNATURES....................................................... 40
<PAGE>
PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
AVALON CABLE OF MICHIGAN LLC
CONSOLIDATED BALANCE SHEET
(in thousands)
<TABLE>
<CAPTION>
December 31, September 30,
1998 1999
----------- ------------
(Unaudited)
<S> <C> <C>
Assets
Current assets
Cash $ 9,071 $ 1,765
Accounts receivable, net of allowance for doubtful accounts of $873 and $1,189 5,015 6,503
Prepayments and other current assets 459 708
Accounts receivable from related parties 371 8,528
Deferred income taxes 479 -
-------- --------
Total current assets 15,395 17,504
Property, plant and equipment, net 104,965 111,349
Intangible assets, net 427,125 425,125
Deferred charges and other assets 195 -
-------- --------
Total assets $547,680 $553,978
======== ========
Liabilities and Members' Interest
Current liabilities
Accounts payable and accrued expenses $ 10,194 $ 20,320
Advance billings and customer deposits 2,454 2,860
Accounts payable--affiliate 2,023 -
-------- --------
Total current liabilities 14,671 23,180
Long-term debt 290,875 329,652
Notes payable--affiliate 15,171 -
Deferred income taxes 1,841 -
Other long term liabilities - 951
-------- --------
Total liabilities 322,558 353,783
-------- --------
Commitments and contingencies (Note 7)
Minority Interest 13,855 -
-------- --------
Members' Interest
Members' capital 219,299 234,637
In-substance distribution of proceeds from Credit Facility which are reflected
in the financial statements of each of the three issuers - (11,700)
In-substance contribution representing payment of accrued interest on the Senior
Subordinated Notes and the Credit Facility which are reflected in the financial
statements of each of the three issuers - 6,524
Accumulated deficit (8,032) (29,266)
-------- --------
Total members' interest 211,267 200,195
-------- --------
Total liabilities and members' interest $547,680 $553,978
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
AVALON CABLE OF MICHIGAN LLC
CONSOLIDATED STATEMENT OF OPERATIONS
(in thousands)
<TABLE>
<CAPTION>
For the For the
Three Months Nine Months
Ended Ended
September 30, 1999 September 30, 1999
------------------ ------------------
(Unaudited) (Unaudited)
<S> <C> <C>
Revenue
Basic services $20,650 $ 58,715
Premium services 1,840 5,538
Other 2,426 7,074
------- --------
Total revenues 24,916 71,327
Operating expenses
Selling, general and administrative 3,678 11,849
Programming 6,680 19,501
Technical and operations 2,690 7,787
Depreciation and amortization 10,526 31,009
------- --------
Income (loss) from operations 1,342 1,181
Other income (expense)
Interest income 2 350
Interest expense (7,760) (24,127)
------- --------
Loss before income taxes (6,416) (22,596)
Benefit from income taxes - 1,362
------- --------
Net loss $(6,416) $(21,234)
======= ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
AVALON CABLE OF MICHIGAN LLC
CONSOLIDATED STATEMENT OF CHANGES IN MEMBERS' INTEREST
(in thousands except per share amounts)
<TABLE>
<CAPTION>
For the Nine Months Ended September 30, 1999 (unaudited)
--------------------------------------------------------------------------------
In Substance
In-substance contribution
distribution of representing payment of
proceeds from accrued interest on the
Credit Facility Senior Subordinated
which are notes and the Credit
reflected in Facility which are
the financial reflected in the
statements of financial statements Total
Members' each of the of each of the three Accumulated Members'
Capital three issuers issuers Deficit Interest
---------- --------------- ---------------------- ----------- ----------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1998 $219,299 - - $ (8,032) $211,267
Borrowings under the Credit
Facility by other issuers - (11,700) - - (11,700)
Payment of interest on Senior Subordinated
Notes and Credit Facility - 6,524 6,524
Contribution of Note Payable-Affiliate
to Parent 15,338 - - - 15,338
Net loss for the nine months
ended September 30, 1999 - - - (21,234) (21,234)
---------- ------------ ------------ --------- ---------
Balance, September 30, 1999 $234,637 $(11,700) $6,524 $(29,266) $200,195
========== ============ ============ ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
AVALON CABLE OF MICHIGAN LLC
CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
For the Nine
Months Ended
September 30,
1999
------------
(Unaudited)
<S> <C>
Cash flows from operating activities
Net loss $ (21,234)
Adjustments to reconcile net loss to net cash provided by operating
activities:
Depreciation and amortization 31,009
Net change in certain assets and liabilities, net of business acquisitions
Increase in accounts receivable (1,235)
Decrease in other assets, net -
Increase in prepayment and other current assets (46)
Increase in accounts payable and accrued expenses 10,066
Increase in deferred revenue 345
Increase in receivable--affiliate -
Decrease in payable--affiliate (10,180)
Decrease in deferred income taxes, net (1,362)
Increase in long-term liabilities 951
--------
Net cash provided by operating activities 8,314
--------
Cash flow from investing activities:
Additions to property, plant and equipment (11,686)
Payment for acquisitions, net (37,701)
--------
Net cash used in investing activities (49,387)
--------
Cash flow from financing activities:
Increase in note payable--affiliate 167
Proceeds from borrowings under the Credit Facility 33,600
--------
Net cash provided by financing activities 33,767
--------
Net decrease in cash (7,306)
Cash at beginning of the period 9,071
--------
Cash at end of the period $ 1,765
=======
Non-cash investing and financing activity:
In-substance distribution of proceeds from a portion of the
credit facility which are reflected in the financial statements
of each of the three issuers $(11,700)
=======
In-substance contribution representing payment of principal on the
Senior Subordinated Notes and Credit Facility which are reflected
in the financial statements of each of the issuers $ 6,524
=======
Assumption of note payable--affiliate by Parent representing additional
contribution to equity $15,338
=======
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
AVALON CABLE OF MICHIGAN LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands except per share data)
1. Description of Business
Avalon Cable of Michigan LLC (the "Company") was formed in October 1998,
pursuant to the laws of Delaware, as a wholly-owned subsidiary of Avalon Cable
LLC, for the purpose of acquiring, operating and developing cable television
systems in mid-sized suburban and exurban markets. The Company was formed to
facilitate the organization of Avalon Cable LLC and to operate the Michigan
cluster after the contemplated reorganization in March 1999 as discussed below.
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 June 2, 1998 (inception) of
Avalon Cable of Michigan, Inc. and the date of acquisition of the completed
acquisitions.
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 the 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 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
Avalon Cable of Michigan, Inc. in exchange for 100 shares of common stock.
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 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, the Company.
. The Company has become the operator of the Michigan cluster, replacing
Avalon Cable of Michigan, Inc.
<PAGE>
AVALON CABLE OF MICHIGAN LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands except per share data)
. The Company is an obligor on the Senior Subordinated Notes replacing
Avalon Cable of Michigan, Inc., and
. Avalon Cable of Michigan, Inc. is a guarantor of the obligations of the
Company under the Senior Subordinated Notes. Avalon Cable of Michigan,
Inc. does not have significant assets, other than its investment in
Avalon Cable LLC at September 30, 1999.
The Company provides cable services to various areas in the state of
Michigan. The Company'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. The Company'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.
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
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 then ended 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"), 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.
3. Merger
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 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 minority interests, $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 acquired the cable television systems of Nova
Cable for approximately $7,800, excluding transaction fees.
On March 26, 1999, the Company 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.
In October 1999, the Company acquired the assets of MV Cable for
approximately $800.
<PAGE>
AVALON CABLE OF MICHIGAN LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands except per share data)
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, or goodwill, was $11,041 and is being amortized using the
straight line method over 15 years.
4. Note Payable - Affiliate
In 1998, the Company received cash from Avalon Cable Finance, Inc., an
affiliated entity, to assist in the funding of certain acquisitions in exchange
for a promissory note. In April 1999, Avalon Cable LLC, the parent, assumed the
obligations outstanding under the note payable as an additional contribution to
equity in the Company.
5. Income Taxes
Upon the closure of the Mercom merger, Mercom was dissolved as a separate
taxable entity which resulted in a change in tax status from a taxable entity to
a nontaxable entity. As a result, the Company recognized a tax benefit of $1,362
in its results of operations and eliminated its deferred taxes, net in the
balance sheet.
6. In-substance distribution of proceeds from Credit Facility
The additional borrowings under the Credit Facility of $5,176 by Avalon
Cable of New England LLC, an affiliated entity under common control, are
reflected in the Company's financial statements as well as a charge to equity
representing an in-substance distribution of the proceeds from the Credit
Facility since all three of the co-issuers are severally and jointly liable for
this debt. The Company has accrued interest on the outstanding balance. When
Avalon Cable of New England LLC makes an interest payment, the Company will
reduce accrued interest payable and record an in-substance contribution to
equity.
<PAGE>
AVALON CABLE OF MICHIGAN LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands except per share data)
7. Commitment 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 also 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.
8. 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 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
indentures pursuant to which the Senior Subordinated Notes (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 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 NEW ENGLAND LLC AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(in thousands)
<TABLE>
<CAPTION>
December 31, September 30,
1998 1999
------------ -------------
(Unaudited)
<S> <C> <C>
Assets
Current assets
Cash $ 217 $ 1,324
Subscriber receivables, less allowance for doubtful accounts of $7 and $91 847 556
Prepaid expenses and other current assets 121 148
--------- ---------
Total current assets 1,185 2,028
Property, plant and equipment, net 6,310 10,363
Note receivable--affiliate 15,171 -
Intangible assets, net 37,225 44,713
--------- ---------
Total assets $ 59,891 $ 57,104
========= =========
Liabilities and Members' Interest
Current liabilities
Current portion of long-term debt $ 20 $ 25
Accounts payable and accrued expenses 908 3,913
Accounts payable, net--affiliate 281 7,354
Deferred revenue 717 412
Accrued interest 4,605 4,774
--------- ---------
Total current liabilities 6,531 16,478
Long-term debt 291,455 330,231
Notes payable--affiliate 3,341 -
--------- ---------
Total liabilities 301,327 346,709
Commitments and contingencies (Note 7)
Members' Interest
Members' capital 67,662 71,003
In-substance distribution of proceeds from Senior Subordinated Notes and a
portion of the Credit Facility which are reflected in the financial
statements of each of the three issuers (284,405) (318,005)
In-substance contribution representing payment of accrued interest on the
Senior Subordinated Notes and the Credit Facility which are reflected in
the financial statements of each of the three issuers - 19,830
Accumulated deficit (24,693) (62,433)
--------- ---------
Total members' interest (241,436) (289,605)
Total liabilities and members' interest $ 59,891 $ 57,104
========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
AVALON CABLE OF NEW ENGLAND 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)
Revenue
<S> <C> <C> <C> <C>
Basic services $ 2,512 $1,992 $ 6,512 $2,123
Premium services 227 70 608 85
Other 773 153 1,750 161
------- ------ -------- ------
Total revenues 3,512 2,215 8,870 2,369
Operating expenses
Selling, general and administrative 809 418 2,018 439
Programming 725 623 1,870 662
Technical and operations 550 198 1,385 215
Depreciation and amortization 942 602 2,536 655
------- ------ -------- ------
Income from operations 486 374 1,061 398
Other income (expense)
Interest income - - 167 -
Interest expense (7,284) (675) (23,631) (680)
------- ------ -------- ------
Net loss $(6,798) $ (301) $(22,403) $ (282)
------- ------ -------- ------
======= ====== ======== ======
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
<PAGE>
AVALON CABLE OF NEW ENGLAND LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN MEMBERS' INTEREST
(in thousands)
<TABLE>
<CAPTION>
For the Nine Months Ended September 30, 1999 (unaudited)
--------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
In-substance In-substance
distribution of contribution
proceeds from representing payment of
Senior Subordinated accrued interest on the
Notes and a portion Senior Subordinated
of the Credit Notes and the Credit
Facility which are Facility which are
reflected in the reflected in the
financial financial statements of Total
Members' statements of each each of the three Accumulated Members'
Capital of the three issuers issuers Deficit Interest
------- -------------------- ---------------------- ----------- ----------
Balance,
<S> <C> <C> <C> <C> <C>
December 31, 1998 $67,662 $(284,405) $ - $(24,693) $(241,436)
Cancellation of note payable to
Parent 3,341 - - - 3,341
Additional borrowings
under Credit Facility
by other issuers - (33,600) - - (33,600)
Payment of interest
on Senior Subordinated
Notes and Credit Facility - - 19,830 - 19,830
Contribution of note
receivable from affiliate
to Parent representing
dividend - - - (15,337) (15,337)
Net loss for the
nine months ended
September 30, 1999 - - - (22,403) (22,403)
------- --------- ------- -------- ---------
Balance,
September 30, 1999 $71,003 $(318,005) $19,830 $(62,433) $(289,605)
======= ========= ======= ======== =========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements
<PAGE>
AVALON CABLE OF NEW ENGLAND 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)
Cash flows from operating activities
<S> <C> <C>
Net income (loss) $ (282) $(22,403)
Adjustments to reconcile net income (loss) to net cash provided by operating activities
Amortization of deferred financing costs 19
Depreciation and amortization 655 2,536
Changes in operating assets and liabilities
Decrease in subscriber and other receivables 100 649
Increase in prepaid expenses and other assets (24) (146)
Increase in accounts payable and accrued expenses 754 3,053
Increase in accounts payable, net--affiliate 7,072
Increase in accrued interest 564 19,998
Decrease in deferred revenue 17 (505)
Increase in note receivable (167)
-------- --------
Net cash provided by operating activities 1,803 10,087
-------- --------
Cash flows from investing activities
Payments for acquisition (38,426) (12,780)
Change in restricted cash 500 -
Capital expenditures (72) (1,376)
-------- --------
Net cash used in investing activities (37,998) (14,156)
-------- --------
Cash flows from financing activities
Proceeds from the issuance of long-term debt 29,600 11,700
Capital contribution 4,862 -
Net proceeds from issuance of related party notes payable 2,841 -
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 5,176
-------- --------
Net increase in cash 1,138 1,107
Cash at beginning of the period 217
-------- --------
Cash at end of the period $ 1,138 $ 1,324
======== ========
Non-cash investing and financing activities:
Cancellation of note payable--affiliate $ - $ 3,341
======== ========
Additional in-substance distribution of proceeds from borrowings on the
Credit Facility related to Avalon Michigan borrowings reflected in
the financial statements of each of the issuers $ - $(33,600)
======== ========
Payment of accrued interest on the Senior Subordinated Notes and the
Credit Facility related to Avalon Michigan borrowings reflected in
the financial statements of each of the issuers $ - $ 14,742
======== ========
Contribution of note receivable--affiliate to Parent representing dividend $ - $(15,337)
======== ========
Cash paid during the period for interest $ 96,530 $ -
======== ========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements
<PAGE>
AVALON CABLE OF NEW ENGLAND LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands except per share data)
1. Description of Business
Avalon Cable of New England LLC (the "Company") was formed in Delaware in
September 1997, and is a wholly-owned subsidiary of Avalon Cable LLC (the
"Parent").
The Company commenced operations in May 1998 and provides cable television
service to the western New England area. The Company's cable television 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. The Company's
cable television systems also provide premium television services to their
customers for an extra monthly charge. Customers generally pay initial
connection charges and fixed monthly fees for cable programming and premium
television services, which constitute the principle sources of revenue for the
Company.
In the first quarter of 1999, the Company formed Avalon.com LLC
("Avalon.com"), a wholly-owned subsidiary. Avalon.com plans to provide internet
services to customers in the New England and Michigan cable areas served by the
Company and Avalon Cable of Michigan LLC, a wholly-owned subsidiary of the
Parent.
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 subsidiary Avalon.com LLC which was formed on
January 21,1999.
These condensed financial statements should be read in conjunction with the
Company's audited financial statements at December 31, 1998 and the 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 necessary
to present fairly the financial information included therein.
3. Acquisitions
The Company through its wholly-owned subsidiary, Avalon.com LLC, acquired
Novagate Communication Corporation ("Novagate") for a purchase price of $2,900
on March 11, 1999 and Traverse Internet ("Traverse") for $2,400 on April 1,
1999.
The Company acquired the New York Cable assets of Taconic Technologies
Corporation for $8,200 on July 1, 1999.
The acquisitions have been accounted for as purchases and the results of
Novagate and Traverse have been included in the accompanying financial
statements since the date of the acquisitions. 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, or goodwill, was $5,300 and is being amortized using
the straight line method over 15 years.
<PAGE>
AVALON CABLE OF NEW ENGLAND LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands except per share data)
4. Note receivable--affiliate
In 1998, the Company loaned cash to Avalon Cable of Finance, Inc., an
affiliated entity, to assist in the funding of certain acquisitions by
affiliated entities in exchange for a promissory note. In April 1999, the
Company contributed the balance outstanding on the note receivable to its Parent
in the form of a dividend.
5. Note payable--affiliate
In 1998, the Company received $3,341 from Avalon Cable Holdings LLC, an
affiliated company under common control, to fund certain acquisitions. In
consideration for this amount, the Company executed a note payable to Avalon
Cable Holdings LLC. In March 1999, pursuant to a plan of reorganization by the
Company and affiliated companies under common control, the note payable was
cancelled in exchange for equity in the Company.
6. In-substance distribution of proceeds from the Senior Subordinated Notes
and Credit Facility and In-substance contribution from payment of accrued
interest
The additional borrowings under the Credit Facility of $33,600 by Avalon
Cable of Michigan LLC, an affiliated entity under common control, are reflected
in the Company's financial statements as well as a charge to equity representing
an in-substance distribution of the proceeds from the Credit Facility since all
three of the issuers are severally and jointly liable for this debt. The Company
has accrued interest on the outstanding balance.
The payment of interest by Avalon Cable of Michigan LLC of $19,830 is
reflected in the Company's financial statements as a reduction of the accrued
interest as well as a credit to equity representing an in-substance contribution
to equity.
7. Commitments and Contingencies
Legal Matters
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.
From time to time, the Company is also involved with claims that arise in
the normal course of business. In the opinion of management, the ultimate
liability with respect to these claims will not have a material adverse effect
on the operations, cash flows or financial position of the Company.
8. 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. We expect to consummate this transaction in the fourth quarter of
1999.
<PAGE>
This agreement, if closed, would constitute a change in control under the
Indenture pursuant to which the Senior Subordinated Notes (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 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 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 FINANCE, INC.
BALANCE SHEET
(in thousands except share amounts)
December 31, September 30,
1998 1999
------------- --------------
(Unaudited)
Assets
Deferred financing costs $ 6,421 $ 5,639
Note receivable--affiliate 15,171 --
-------- --------
Total assets $ 21,592 $ 5,639
======== ========
Liabilities and Stockholder's Equity
Current liabilities:
Accrued interest $ 4,484 $ 7,529
-------- --------
Total current liabilities 4,484 7,529
Long-term debt 290,875 329,651
Note payable--affiliate 15,171 --
-------- --------
Total liabilities 310,530 337,180
-------- --------
Stockholder's equity:
Common stock, par value of $.01;
authorized 1,000 shares;
issued 100 shares
In-substance distribution of
proceeds from Senior
Subordinated Notes and Credit
Facility which are reflected
in the financial statements
of each of the three issuers (284,405) (329,705)
In-substance contribution
representing payment of accrued
interest on the Senior
Subordinated Notes and the
Credit Facility which are
reflected in the financial
statements of each of the
three issuers - 26,353
Accumulated deficit (4,533) (28,189)
-------- --------
Total stockholder's equity (288,938) (331,541)
-------- --------
Total liabilities and
stockholder's equity $ 21,592 $ 5,639
======== ========
The accompanying notes are an integral part of these
consolidated financial statements.
<PAGE>
AVALON CABLE FINANCE, INC.
STATEMENT OF OPERATIONS
(in thousands except per share data)
For the For the
Three Months Nine Months
Ended Ended
September 30, 1999 September 30, 1999
------------------ ------------------
(Unaudited) (Unaudited)
Revenues $ - $ -
Operating expenses - -
------------------ ------------------
Income from operations - -
------------------ ------------------
Other income (expense):
Interest income - 167
Interest expense (7,392) (23,823)
------------------ ------------------
Net loss $(7,392) $(23,656)
================== ==================
The accompanying notes are an integral part of these
consolidated financial statements.
<PAGE>
AVALON CABLE FINANCE, INC.
STATEMENT OF CHANGES IN SHAREHOLDER'S EQUITY
(in thousands except per share data)
<TABLE>
<CAPTION>
For the Nine Months Ended September 30, 1999 (Unaudited)
------------------------------------------------------------------------------------------------
In-substance
contribution
In-substance representing
distribution payment of
of proceeds accrued interest
from Senior on the Senior
Subordinated Subordinated
Notes and notes and the
Credit Facility Credit Facility
which are which are
reflected in reflected in the
the financial financial
Common statements of statements of Total
Shares Common each of the each of the Accumulated Members'
Outstanding Stock three issuers three issuers Deficit Interest
----------- -------- -------------- ------------------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1998 100 - $(284,405) - $(4,533) $(288,938)
Additional borrowings under
Credit Facility by other
issuers - - (45,300) - - (45,300)
Payment of interest on
on Senior Subordinated
Notes and Credit Facility - - - 26,353 - 26,353
Net loss for the nine months
ended September 30, 1999 - - - - (23,656) (23,656)
- ----------------------------------------------------------------------------------------------------------------------------------
Balance, September 30, 1999 100 $ - $(329,705) $ 26,353 $ (28,189) $ (331,541)
==================================================================================================================================
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
<PAGE>
AVALON CABLE FINANCE, INC.
STATEMENT OF CASH FLOWS
(in thousands)
For the Nine
Months Ended
September 30,
1999
-------------
(Unaudited)
Cash flows from operating activities
Net loss $(23,656)
Amortization of deferred financing costs 782
Adjustments to reconcile net loss to net cash
provided by operating activities:
Change in accrued interest 22,874
Change in note payable--affiliate 167
Change in note receivable--affiliate (167)
Net cash provided by operating activities -
Increase in cash -
Cash, beginning of the period -
--------
Cash, end of the period $ -
========
Non-cash investing and financing activities:
In-substance distribution of proceeds
from Senior Subordinated Notes and
Credit Facility which are reflected
in the financial statements of each
of the issuers $ 45,300
========
In-substance contribution representing payment
of principal on the Senior
Subordinated Notes and Credit Facility which
are reflected in the financial $ 6,524
statements of each of the issuers ========
In-substance contribution representing payment
of interest on the Senior
Subordinated Notes and Credit Facility which
are reflected in the financial statements
of each of the issuers $ 19,829
========
Exchange of note receivable and note payable
with parent $ 15,338
========
The accompanying notes are an integral part of these
consolidated financial statements.
<PAGE>
AVALON CABLE FINANCE, INC.
NOTES TO FINANCIAL STATEMENTS
(in thousands except per share data)
1. Description of Business
Avalon Cable Finance, Inc. (the "Company") was formed in October 1998,
pursuant to the laws of Delaware, as a wholly-owned subsidiary of Avalon Cable
Holdings Finance, Inc., for the sole purpose of facilitating financings
associated with the acquisitions of various cable television companies. The
Company 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 at 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 then ended are unaudited; however, in the opinion of
management, such statements include all adjustments necessary to present fairly
the financial information included therein.
3. In-substance distribution of proceeds form the Senior Subordinated Notes
and Credit Facility and In-substance contribution from payment of accrued
interest
The additional new borrowings under the Credit Facility of $33,600 by
Avalon Cable of Michigan LLC and $11,700 by Avalon Cable of New England LLC,
affiliated entities under common control, are reflected in the Company's
financial statements as well as a charge to equity representing an in-substance
distribution of the proceeds from the Credit Facility since all three of the
issuers are severally and jointly liable for this debt. The Company has accrued
interest on the outstanding balance.
The payment of interest by Avalon Cable of Michigan LLC of $19,830 is
reflected in the Company's financial statements as a reduction of the accrued
interest as well as credit to equity representing an in-substance contribution
to equity.
4. Note receivable and note payable with affiliates
In 1998, the Company received cash from Avalon Cable of New England LLC, an
affiliated entity, in exchange for a promissory note. The Company then loaned
the cash to Avalon Cable of Michigan LLC, an affiliated entity, to assist in the
funding of certain acquisitions. In April 1999, Avalon Cable LLC, the parent,
assumed the note payable of Avalon Cable of Michigan LLC and the note receivable
from Avalon Cable of New England LLC and then exchanged the note receivable and
note payable assumed with the Company effectively canceling the receivable and
payable amongst the related parties.
<PAGE>
5. 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 (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 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 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.
<PAGE>
AVALON CABLE OF MICHIGAN, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(In thousands)
December 31, September 30,
1998 1999
------------ ------------
(Unaudited)
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
======== ========
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 -- -- -- (15,112) (15,112)
------------ ------- ----------- -------- --------
Balance, September 30, 1999 100 $-- $35,000 $(24,030) $ 10,970
============ ======= =========== ======== ========
</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)
For the Nine For the Nine
Months Ended Months Ended
September 30, September 30,
1998 1999
------------- ------------
(Unaudited) (Unaudited)
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) --
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
======== ========
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
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");
<PAGE>
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
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
<PAGE>
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
The activity in minority interest for the nine months ended
September 30, 1999 is as follows:
<TABLE>
<CAPTION>
Avalon
Cable
Mercom LLC Total
-------- -------- --------
<S> <C> <C> <C>
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
======== ======== ========
</TABLE>
<PAGE>
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.
<PAGE>
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>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
- -------------------------------------------------------------------------------
of Operations.
- -------------
Results of Operations
Overview
- --------
The following historical results of operations overview of Avalon Cable of
Michigan LLC, Avalon Cable of New England LLC 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 no operations
for Avalon Cable of Michigan LLC in 1998 and there were minimal results of
operations for Avalon Cable of New England LLC for the three and nine months
ended June 30, 1998 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 of Michigan LLC
- ----------------------------
On March 26, 1999, as part of the reorganization, Avalon Cable of Michigan
LLC received the assets and liabilities of Avalon Cable of Michigan, Inc. Both
companies are under common control. As a result, this contribution was accounted
for similar to a pooling-of-interests.
On November 6, 1998, Cable Michigan, Inc. ("Cable Michigan") merged with
and into Avalon Cable of Michigan, Inc. and Avalon Cable of Michigan, Inc.
commenced its operations. Therefore, the financial results for Cable Michigan
for the period from November 6, 1998 to December 31, 1998 are reflected in the
financial data for Avalon Cable of Michigan LLC. As part of this transaction,
Avalon Cable of Michigan, Inc. acquired Cable Michigan's 62% ownership interest
in Mercom.
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, 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 of Michigan LLC under the senior subordinated notes.
It does not have significant assets, other than its investment in
Avalon Cable LLC.
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 $24.9 million,
an increase of $0.7 million, or 3%, as compared to revenues of $24.2 million for
the three months ended June 30,1999. This increase is primarily related to a
system wide 8% rate increase effective in May on the tiered levels of service
not including limited basic service and the full quarter effect of additional
revenues resulting from seasonal subscribers.
<PAGE>
Selling, general and administrative expenses were $3.7 million for the
three months ended September 30, 1999, a decrease of $0.8 million, or 18%, as
compared to $4.5 million for the three months ended June 30, 1999. This
decrease was primarily related to costs savings and marketing expense
reimbursements related to the launch of several channels.
Programming expenses were $6.7 million for the three months ended
September 30, 1999, an increase of $0.1 million, or 2%, as compared to $6.6
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 $2.7 million for the three months ended September
30,1999, an increase of $0.1 million, or 4%, as compared to $2.6 million for the
three months ended June 30, 1999. This increase was primarily related to the
increased costs associated with servicing of the additional subscribers.
Depreciation and amortization expense were $10.5 million for the three
months ended September 30, 1999, an increase of $0.1 million, or 1%, as compared
to $10.4 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.
Operating income was $1.3 million for the three months ended September 30,
1999, an increase of $1.2 million or 12%, as compared to the operating income of
$0.1 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
the operating expenses as discussed above.
Interest expense, net was $7.8 million for the three months ended
September 30, 1999, no change as compared to $7.8 million for the three months
ended June 30, 1999.
Net loss was $6.4 million for the three months ended September 30, 1999, a
decrease of $1.3 million, or 17%, compared to a net loss of $7.7 million for the
three months ended June 30, 1999. This increase was primarily due to the higher
revenues offset by increases in the operating expenses as discussed above.
Avalon Cable of New England LLC
- -------------------------------
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 $3.5 million,
an increase of $0.5 million, or 17%, as compared to revenues of $3.0 million for
the three months ended June 30,1999. This increase was primarily related to the
acquisition of the cable assets of Taconic Technology Corporation(Taconic)in
July 1999.
Selling, general and administrative expenses were $0.8 million for the
three months ended September 30, 1999, no change as compared to $0.8 million for
the three months ended June 30, 1999.
Programming expenses were $0.7 million for the three months ended
June 30, 1999, an increase of $0.1 million or 17% as compared to $0.6 million
for the three months ended June 30,1999. This increase was primarily related to
the acquisition of Taconic.
Technical expenses were $0.6 million for the three months ended September
30,1999, an increase of $0.1, or 20%, as compared to $0.5 million for the three
months ended June 30, 1999. This increase was primarily related to the
additional costs associated with the Taconic acquisition.
Operating income was $0.5 million for the three months ended
September 30, 1999, an increase of $0.2 million or 67% as compared to $0.3
million for the three months ended June 30, 1999. This increase was primarily
related to the acquisition of Taconic.
<PAGE>
Interest expense, net was $7.3 million for the three months ended
September 30, 1999, a decrease of $0.5 million, or 6%, compared to $7.8 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 $6.8 million for the three months ended September 30, 1999, a
decrease of $0.7 million, or 9%, compared to a net loss of $7.5 million for the
three months ended June 30, 1999. This decrease was primarily a result of higher
revenues offset by higher operating costs associated with the acquisition of
Taconic.
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 are 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
Nova Cablevision and 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. is 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
their 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
10,000 seasonal subscribers beginning service throughout the quarter; a system
wide 8% rate increase on the tiered levels of service not including limited
basic service that was effective in May; and the full quarter effect of
additional revenues resulting from the following acquisitions: Traverse Internet
(acquired April 1, 1999), Novagate (acquired March 1, 1999), Nova Cable
(acquired March 1, 1999) and R/Com, L.C. (acquired March 26, 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.
<PAGE>
Programming expenses were $7.4 million for the three months ended
June 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 additional operating costs resulting from the Nova Cable and R/Com, L.C.
acquisitions.
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 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 2%, as compared
to $11.3 million for the three months ended June 30, 1999. This increase was
primarily due to the full quarter effect of depreciation and amortization costs
associated with the acquisitions made during the first and second quarters of
1999.
Interest expense, net was $11.1 million for the three months ended
September 30, 1999, no change 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 $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 second quarter compared to the first quarter. The
higher tax benefit recognized in the first quarter resulted primarily from a
write-off of deferred taxes of approximately $1.4 million relating to Mercom,
Inc. for the change in tax status.
Liquidity and Capital Resources
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 the
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 for ongoing maintenance and replacement and
. approximately $15 million for installations and extensions to the
related cable plant required as a result of 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 bandwidth capacity of 450 MHz or greater
and approximately 85% will have a bandwidth capacity of 550 MHz or greater.
<PAGE>
Our financing at the time we completed the acquisition of Cable Michigan
consisted of the credit facility, the bridge credit facility, the subordinated
bridge facility and a 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 subordinated note offering and the
senior discount note offering were used principally to repay approximately:
. $125.0 million of borrowings under the credit facility,
. $105.0 million of borrowings under the bridge credit facility and
. $18.0 million of borrowings 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 $327.4 million ,
$327.9 million and $327.4 million of senior indebtedness outstanding,
respectively.
Under the credit facility at September 30, 1999, the issuers have:
. a $30.0 million revolving credit facility with $18.5 million
available, 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.
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 Avalon Cable LLC, Avalon Cable
Finance, Avalon Cable Holdings and Avalon Cable of New England Holdings, Inc.
The credit facility is secured by substantially all of the assets of the issuers
in which a security interest may be granted.
The issuers are wholly-owned subsidiaries of the holding companies. The
holding companies have no significant assets other than their investment in the
issuers. The primary source of funds for the holding companies, including funds
required to make payments of interest on the senior discount notes, will be
dividends and other advances and transfers from the issuers. The issuers'
ability to make dividends and other advances and transfers 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 discount 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 subordinated notes,
and the senior discount note indenture contain financial and other covenants
that restrict, among other things, the ability of the issuers and certain of
their affiliates:
. to incur additional indebtedness,
. incur liens,
<PAGE>
. 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.
Subject to the following paragraph, we believe that cash generated from
operations and borrowings expected to be available under the credit facility
will be sufficient to meet the issuers' debt service, capital expenditure and
working capital requirements for the foreseeable future. We will require
additional financing if our plans materially change in an 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 old notes and the new 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. 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 be waived. The consummation of
the Charter Communications transaction would also constitute a change of control
under the indenture of the governing notes. As a result, the issuers will be
required to offer to repurchase the 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 notes from holders
upon a change of control will depend upon the number of holders that accept the
issuers' offer to repurchase such notes. To the extent that the issuers have
insufficient funds to repurchase all of the notes for which their offers to
repurchase the notes are accepted by holders, (1) the issuers must borrow funds
to repurchase such 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 notes for which offers were accepted would constitute an event of default
under the indenture.
Quantitative and Qualitative Disclosures About Market Risk
The issuers believe their market risk exposure with regard to their
financial instruments is limited to changes in 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 rate would increase interest expense
approximately $0.35 million for a quarter for each issuer.
<PAGE>
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 for 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 require remediation and testing. Those items
relate to our telephone router and New England headend. We anticipate that the
remediation for these items will be completed by October 1999. In addition, we
are contacting 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.
Supplemental Combined Historical Financial Information
Set forth below is supplemental historical information for Avalon Cable of
Michigan LLC, Avalon Cable of New England LLC and Avalon Cable Finance, Inc.,
the issuers, on a combined basis. This information does not reflect the
financial position, results of operations or cash flows of any of the individual
issuers or the guarantor. This information is provided as supplemental
information only and is not intended as a substitute for the financial
information presented for any of the individual issuers or the guarantor.
The combined information is presented because of the terms of the indenture
governing the senior subordinated notes. The indenture requires that the issuers
provide to the noteholders all information on a combined basis. The financial
information required includes quarterly and annual financial statements, on a
combined basis, substantially equivalent to financial statements that would have
been included in Forms 10-Q and 10-K filed with the Commission if the issuers
were required to file such financial information, including a management's
discussion and analysis. The supplemental combined information presented below
would be included in the financial information delivered to noteholders in
compliance with this covenant for the periods covered. The combined information
is also relevant to noteholders in determining compliance with the restrictive
covenants imposed on the issuers by the indenture. The principal covenants
include:
. Restrictions on Incurrence of Indebtedness. The indenture prohibits
any of the issuers from incurring indebtedness, other than
specifically permitted indebtedness, unless the issuers would have, on
a combined basis, a leverage ratio below specified levels after
giving pro forma effect to the incurrence of such debt and the use of
the related proceeds. For such purpose, the leverage ratio is
determined by dividing the combined indebtedness of the issuers by the
combined cash flow of the issuers, in each case as determined in
accordance wit the indenture. Similarly, the specifically permitted
debt includes loans among the issuers. Also, the dollar amounts
permitted for certain classes of permitted debt were determined based
on an evaluation of combined data for the issuers rather than data
relating to any one issuer.
. Restrictions on Dividends and Other Restricted Payments. The indenture
prohibits the issuers from paying dividends and making other
restricted payments, other than specifically permitted payments.
Restricted payments by any issuer are permitted, however, based on a
formula which uses the combined cash flow and combined interest
expense of all the issuers.
. Limitations on Mergers, Consolidations and Sales of Assets. The
covenant restricting mergers, consolidations and similar transactions
applies only to transactions that involve all or substantially all of
the assets of the issuers on a combined basis. This covenant does not
prohibit transactions that involve one issuer so long as that issuer
does not hold substantially all of the assets of the issuers on a
combined basis.
. Change of Control Offer. A change of control which gives rise to the
obligation to make a change of control offer is based on the combined
assets of the issuers rather than on the assets of any particular
issuer.
The supplemental historical financial information has been derived from the
historical financial statements for each issuer as included elsewhere herein.
The operation results for the nine months ended September 30, 1999 are not
necessarily indicative of results to be expected for the year ending December
31, 1999.
You should read the information in this table in conjunction with
"Management's Discussion and Analysis of Financial Condition--Results of
Operations" section of this document and the financial statements and related
notes thereto which you can find elsewhere in this document.
<TABLE>
<CAPTION>
Avalon Avalon
Michigan New Avalon Historical
LLC England Finance Eliminations Combined
--------------- -------------- --------------- --------------- -------------
<S> <C> <C> <C> <C> <C>
Statement of operations data
Revenues $ 71,327 $ 8,870 $ - $ 80,197
Operating expenses 37,745 5,098 - 42,843
Corporate overhead 1,392 175 - 1,567
Depreciation and amortization 31,009 2,536 - 33,545
Non-recurring expenses - - - -
--------------- -------------- --------------- -------------- -------------
Operating (loss) income 1,181 1,061 - 2,242
Interest (expense), net (23,777) (23,464) (23,656) 47,312 (a) (23,585)
Other (expense) income, net 1,362 - - 1,362
--------------- -------------- --------------- -------------- -------------
Net loss $ (21,234) $ (22,403) $ (23,656) $ 47,312 $ (19,981)
=============== ============== =============== ============== =============
Balance sheet data (end of period)
Total assets $ 553,978 $ 57,104 $ 5,639 $ (11,278) (a) $ 605,443
Long-term debt (excluding current portion) 329,652 330,231 329,651 659,302 (a) 1,648,836
Net (deficit) equity 200,195 (289,605) (331,541) 663,082 (a) 242,131
Cash flow data
Cash flow from operating activities $ 8,314 $ 10,187 $ - $ 18,501
Cash flow from investing activities (49,387) (14,156) - (63,543)
Cash flow from financing activities 33,767 5,176 - 38,943
Other financial data
EBITDA (5) $ 33,552 $ 3,597 $ - $ 37,149
Adjusted EBITDA (5) - - - 38,424
Adjusted EBITDA margin (6) - - - -
Ratio of debt to adjusted EBITDA (7) - - - -
Capital expenditures 11,686 12,780 - 24,466
</TABLE>
(a) To eliminate the senior subordinated notes, credit facility, interest
expense, and associated deferred financing costs that are treated as an in-
substance distribution of proceeds from the senior subordinated notes and
credit facility which are reflected in the financial statements of Avalon
Michigan LLC, Avalon New England and Avalon Finance.
NOTES TO SUPPLEMENTAL FINANCIAL INFORMATION
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999
(DOLLARS IN THOUSANDS)
(1) EBITDA represents net income before depreciation and amortization, interest
income (expense), net, and income taxes. Adjusted EBITDA represents EBITDA,
adjusted for the elimination of non-recurring expenses, non-recurring costs
and net cost reductions arising from acquisitions as set forth in the
definition of "Leverage Ratio" in the indenture governing the Senior
Subordinated notes. This definition is used in determining compliance with
the debt incurrence covenant in the indenture. However, neither EBITDA nor
Adjusted EBITDA is intended to be a performance measure that should be
regarded as an alternative to, or more meaningful than, either operating
income or net income as an indicator of operating performance or cash flows
as a measure of liquidity, as determined in accordance with generally
accepted accounting principles. EBITDA and Adjusted EBITDA, as computed by
management, are not necessarily comparable to similarly titled amounts of
other companies. See the financial statements, including statements of cash
flows, included elsewhere herein.
The following table reflects the calculation of Adjusted EBITDA:
EBITDA....................................................... $38,511
-------
Adjustments:
Non-recurring expenses (a)............................... (663)
Adjustment to reflect EBITDA for acquisitions for the
full period (b)......................................... 576
-------
Total adjustments.................................... (87)
-------
Adjusted EBITDA.......................................... $38,424
=======
----------
(a) For the nine months ended September 30, 1999, these amounts reflect a
non-recurring insurance adjustment of $80 associated with the May 1998
storm in Grand Rapids, offset by marketing reimbursements of $743.
(b) Represents pro forma effect of all acquisitions as if owned for the
full period from January 1, 1999 to September 30, 1999. Adjustment
includes EBITDA for the period from January 1, 1999 to acquisition date
for acquisitions completed by Avalon Michigan LLC and Avalon New
England and includes Nova Cable (acquired March 1, 1999), Cross Country
(acquired January 15, 1999), R/Com L.C. (acquired March 26,1999),
Taconic Technology Corporation (acquired July 1, 1999), Novagate
(acquired March 1, 1999) and Traverse Internet (acquired April 1,
1999.)
(2) Represents Adjusted EBITDA as a percentage of revenues.
(3) Represents total debt outstanding divided by an amount equal to Adjusted
EBITDA for the nine months ended September 30, 1999, adjusted for a full
year as specified in the indenture for the senior subordinated notes in
determining compliance with the debt incurrence covenant.
<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
<MULTIPLIER> 1,000
<NAME> Avalon Cable of Michigan LLC
<CIK> 0001082695
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 1,765
<SECURITIES> 0
<RECEIVABLES> 6,503
<ALLOWANCES> 1,189
<INVENTORY> 0
<CURRENT-ASSETS> 17,504
<PP&E> 111,349
<DEPRECIATION> 9,436
<TOTAL-ASSETS> 553,978
<CURRENT-LIABILITIES> 23,180
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 200,195
<TOTAL-LIABILITY-AND-EQUITY> 553,978
<SALES> 71,327
<TOTAL-REVENUES> 71,327
<CGS> 0
<TOTAL-COSTS> 70,146
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 861
<INTEREST-EXPENSE> (24,127)
<INCOME-PRETAX> (22,596)
<INCOME-TAX> (1,362)
<INCOME-CONTINUING> (21,234)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (21,234)
<EPS-BASIC> 0.00
<EPS-DILUTED> 0.00
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<NAME> Avalon Cable of New England LLC
<CIK> 0001082694
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 1,324
<SECURITIES> 0
<RECEIVABLES> 556
<ALLOWANCES> 91
<INVENTORY> 0
<CURRENT-ASSETS> 2,028
<PP&E> 10,363
<DEPRECIATION> 949
<TOTAL-ASSETS> 57,104
<CURRENT-LIABILITIES> 16,478
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 289,605
<TOTAL-LIABILITY-AND-EQUITY> 57,104
<SALES> 8,870
<TOTAL-REVENUES> 8,870
<CGS> 0
<TOTAL-COSTS> 7,809
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 14
<INTEREST-EXPENSE> 23,631
<INCOME-PRETAX> (22,403)
<INCOME-TAX> 0
<INCOME-CONTINUING> (22,403)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (22,403)
<EPS-BASIC> 0.00
<EPS-DILUTED> 0.00
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<NAME> Avalon Cable Finance, Inc.
<CIK> 0001082698
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 5,639
<CURRENT-LIABILITIES> 7,529
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> (331,541)
<TOTAL-LIABILITY-AND-EQUITY> 5,639
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 23,823
<INCOME-PRETAX> (23,656)
<INCOME-TAX> 0
<INCOME-CONTINUING> (23,656)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (23,656)
<EPS-BASIC> 0.00
<EPS-DILUTED> 0.00
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<NAME> Avalon Cable of Michigan, Inc.
<CIK> 0001041855
<PERIOD-TYPE> 6-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>
