As filed with the Securities and Exchange Commission on July 9, 1997
==============================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
------------
FORM 10
GENERAL FORM FOR REGISTRATION OF SECURITIES
PURSUANT TO SECTION 12(b) OR 12(g) OF
THE SECURITIES EXCHANGE ACT OF 1934
------------
CABLE MICHIGAN, INC.
(Exact name of registrant as specified in its charter)
------------
PENNSYLVANIA 23-2566892
(State or other jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or organization)
105 Carnegie Center
Princeton, New Jersey
(Address of Principal 08540-6215
executive offices) (Zip Code)
609-734-3700
(Registrant's telephone number, including area code)
------------
Securities to be registered
pursuant to Section 12(b) of the Act: None
Title of each class Name of each exchange on which
to be so registered each class is to be registered
Securities to be registered
pursuant to Section 12(g) of the Act:
Common Stock, par value $1.00 per share
==============================================================================
Cable Michigan, Inc.
Information Included In Information Statement
And Incorporated In Form 10 By Reference
Cross-Reference Sheet Between Information Statement
And Items of Form 10
<TABLE>
Item Location In Information Statement
---- ---------------------------------
<S> <C> <C>
Item 1 Business......................................... Summary; Risk Factors; The Distribution;
Management's Discussion and Analysis of
Financial Condition and Results of Operations;
Business; Financial Statements
Item 2 Financial Information............................ Summary; Risk Factors; Pro Forma
Capitalization; Unaudited Pro Forma
Consolidated Financial Statements; Selected
Historical Consolidated Financial Data;
Management's Discussion and Analysis of
Financial Condition and Results of Operations;
Financial Statements
Item 3 Properties....................................... Business
Item 4 Security Ownership of Certain Beneficial
Owners and Management............................ Security Ownership of Certain Beneficial Owners
and Management
Item 5 Directors and Executive Officers................. Management
Item 6 Executive Compensation........................... Management; Security Ownership of Certain
Beneficial Owners and Management
Item 7 Certain Relationships and Related Transactions... Summary; Relationship Among the Company,
C-TEC and RCN; The Distribution
Item 8 Legal Proceedings................................ Business
Item 9 Market Price of and Dividends on the
Registrant's Common Equity and Related
Stockholder Matters.............................. Summary; Risk Factors; The Distribution;
Trading Market; Dividends; Security Ownership
of Certain Beneficial Owners and Management;
Description of Capital Stock
Item 10 Recent Sales of Unregistered Securities.......... Description of Capital Stock
Item 11 Description of Registrant's Securities to be
Registered....................................... Risk Factors; Description of Capital Stock;
Certain Statutory, Charter and Bylaw Provisions
Item 12 Indemnification of Directors and Officers........ Certain Statutory, Charter and Bylaw Provisions
Item 13 Financial Statements and Supplementary Data...... Summary; Management's Discussion and
Analysis of Financial Condition and Results of
Operations; Financial Statements
Item 14 Changes in and Disagreements with
Accountants on Accounting and Financial None
Disclosure.......................................
Item 15 Financial Statements and Exhibits
(a)Financial Statements.......................... See Index To Financial Statements
(b)Exhibits...................................... See Exhibit Index
</TABLE>
EXHIBIT INDEX
Exhibit
Number Description
- ------- -----------
2.1 Distribution Agreement among C-TEC Corporation, RCN Corporation
and the Registrant(*)
3.1 Amended and Restated Articles of Incorporation of the Registrant(*)
3.2 Amended and Restated Bylaws of the Registrant(*)
4.1 Credit Agreement dated July 1, 1997 between Cable Michigan, Inc.
and First Union National Bank, as agent(**)
10.1 Tax Sharing Agreement by and among C-TEC Corporation, RCN
Corporation and the Registrant(*)
21.1 Subsidiaries of the Registrant
27.1 Financial Data Schedule
(*) To be filed by amendment
(**) Exhibits and schedules which have not been filed with Exhibit 4.1 will
be provided to the Commission by the Registrant upon request
SIGNATURE
Pursuant to the requirements of Section 12 of the Securities
Exchange Act of 1934, the registrant has duly caused this registration
statement to be signed on its behalf by the undersigned, thereunto duly
authorized.
Cable Michigan, Inc.
By: /s/ Timothy J. Stoklosa
---------------------------------------
Name: Timothy J. Stoklosa
Title: Executive Vice President and
Chief Financial Officer
Date: July 9, 1997
<PAGE>
[C-TEC Corporation Letterhead]
, 1997
Dear Stockholder:
I am pleased to inform you that the Board of Directors of C-TEC Corporation has
conditionally approved two distributions to our common equity holders. One
distribution (the "RCN Distribution") involves the distribution of all the
outstanding shares of common stock of C-TEC's wholly owned subsidiary RCN
Corporation ("RCN"). Following the Distribution, RCN will own the following
C-TEC businesses: its competitive telecommunications services operations in
New York City and Boston (the "RCN Telecom Business"); its cable television
operations in New York, New Jersey and Pennsylvania; its 40% interest in
Megacable S.A. de C.V., Mexico's second largest cable operator; and its long
distance operations (other than the operations in certain areas of
Pennsylvania that will remain with C-TEC as described below).
The second distribution (the "Cable Michigan Distribution") involves the
distribution of all of the outstanding shares of common stock of C-TEC's wholly
owned subsidiary Cable Michigan, Inc. ("Cable Michigan"). Cable Michigan
operates cable television systems in the State of Michigan and will own a 62%
interest in Mercom, Inc., a publicly held Michigan cable television operator.
Both Distributions will be made to holders of record of C-TEC Common Stock
and C-TEC Class B Common Stock (collectively, the "C-TEC Common Equity") on
[____________], 1997. In the RCN Distribution, you will receive [___] shares
of RCN Common Stock for every [___] shares of C-TEC Common Equity you hold on
the record date. In the Cable Michigan Distribution, you will receive [___]
shares of Cable Michigan Common Stock for every [___] shares of C-TEC Common
Equity you hold on the record date. Shares of RCN Common Stock and Cable
Michigan Common Stock are expected to trade on the Nasdaq Stock Market under
the symbols "RCNC" and "CABL," respectively. Holders of C-TEC Common
Equity are not required to take any action to participate in the
Distributions.
In connection with the Distributions, C-TEC will change its name to
Commonwealth Telephone Enterprises, Inc. Following the Distributions,
Commonwealth Telephone Enterprises will own the following: Commonwealth
Telephone Company (C-TEC's rural LEC business); Commonwealth Communications
(C-TEC's communications engineering business); C-TEC's Pennsylvania CLEC
business; and C-TEC's long distance operations in certain areas of
Pennsylvania.
Your Board of Directors has concluded that the Distributions are in the best
interests of C-TEC, RCN, Cable Michigan and C-TEC's Common Equity holders
because the Distributions will, among other things, (i) permit C-TEC to raise
financing to fund the development of the RCN Telecom Business on more
advantageous economic terms than the other alternatives available, (ii)
facilitate possible future acquisitions and joint venture investments by RCN
and Cable Michigan and possible future offerings by RCN, (iii) allow the
management of each company to focus attention and financial resources on its
respective business and permit each company to offer employees incentives that
are more directly linked to the performance of its respective business, (iv)
facilitate the ability of each company to grow in both size and profitability;
and (v) permit investors and the financial markets to better understand and
evaluate C-TEC's various businesses.
The enclosed Information Statements explain the proposed RCN Distribution and
the proposed Cable Michigan Distribution in detail and provide important
financial and other information regarding RCN and Cable Michigan, respectively.
We urge you to read these Information Statements carefully. A stockholder vote
is not required in connection with the Distributions and, accordingly, your
proxy is not being sought.
Very truly yours,
David C. McCourt
Chairman and Chief
Executive Officer
Preliminary and Subject to Completion, Dated July 9, 1997
INFORMATION STATEMENT [LOGO]
CABLE MICHIGAN, INC.
COMMON STOCK
(par value $1.00 per share)
This Information Statement relates to the distribution (the
"Distribution") by C-TEC Corporation ("C-TEC") of 100% of the shares of common
stock, par value $1.00 per share (the "Company Common Stock"), of Cable
Michigan, Inc., a Pennsylvania corporation ("Cable Michigan" or the
"Company"), outstanding on the Distribution Date (as defined below) to holders
of C-TEC's common stock, par value $1.00 per share ("C-TEC Common Stock"), and
holders of C-TEC's Class B Common Stock, par value $1.00 per share ("C-TEC
Class B Common Stock" and together with the C-TEC Common Stock, the "C-TEC
Common Equity"). Such shares of Company Common Stock will represent all of
the Company Common Stock owned by C-TEC on the Distribution Date and will be
distributed by C-TEC to the holders of record of C-TEC Common Equity as of the
close of business on [ ] , 1997 (the "Record Date") on the basis
of [ ] shares of Company Common Stock for every [ ]
shares of C-TEC Common Equity held of record on the Record Date. No
consideration will be paid to C-TEC or the Company by C-TEC stockholders for
the shares of Company Common Stock received in the Distribution. Following
the Distribution, C-TEC will own no shares of Company Common Stock or other
securities of the Company. See "The Distribution."
The Distribution is currently expected to be effected on or
about [ ], 1997 (the date on which the Distribution is effected
being the "Distribution Date"). Certificates representing the shares of
Company Common Stock will be mailed on the Distribution Date or as soon
thereafter as practicable to holders of C-TEC Common Equity.
The Company operates cable television systems in the State of
Michigan. Prior to the time the Distribution is effected, C-TEC will engage
in a series of internal restructuring transactions that will include the
contribution of its 62% interest in Mercom, Inc., a Delaware corporation
("Mercom") and an operator of cable systems in the State of Michigan, to the
Company in accordance with the terms of the Distribution Agreement to be
entered into prior to the Distribution Date among C-TEC, the Company and RCN
Corporation, a Delaware corporation ("RCN"), the form of which is filed as an
exhibit to the Registration Statement on Form 10 (the "Form 10") filed under
the Securities Exchange Act of 1934, as amended (the "Exchange Act"), of which
this Information Statement is a part. See "The Distribution" and
"Relationship Among the Company, C-TEC and RCN."
Concurrently with the Distribution, C-TEC will distribute (the
"RCN Distribution," and collectively with the Distribution, the
"Distributions") to the holders of C-TEC Common Equity 100% of the shares of
common stock of C-TEC's wholly owned subsidiary RCN. Following the
Distribution, RCN will own and operate C-TEC's competitive telecommunications
services operations in New York City and Boston (the "RCN Telecom Business"),
its cable television operations in New York State, New Jersey and
Pennsylvania, certain of its long distance operations and its 40% interest in
Megacable, S.A. de C.V. (collectively, the "RCN Businesses"). The RCN
Distribution is described in a separate Information Statement that is being
provided to the holders of C-TEC Common Equity.
There has been no trading market for the Company Common Stock,
although it is expected that a "when-issued" trading market may develop on or
about the Record Date. Application will be made to list the Company Common
Stock on the Nasdaq Stock Market ("NASDAQ") under the symbol "CABL." See
"Trading Market."
In reviewing this Information Statement, stockholders should
carefully consider the matters described under the section entitled "Risk
Factors" on page 10.
------------
STOCKHOLDER APPROVAL IS NOT REQUIRED IN CONNECTION WITH THE DISTRIBUTION. WE
ARE NOT ASKING YOU FOR A PROXY AND YOU ARE REQUESTED NOT TO SEND US A PROXY.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS INFORMATION STATEMENT.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THIS INFORMATION STATEMENT DOES NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY ANY SECURITIES.
The date of this Information Statement is , 1997.
TABLE OF CONTENTS
Page
----
INTRODUCTION............................................................... 1
SUMMARY.................................................................... 2
RISK FACTORS............................................................... 10
THE DISTRIBUTION........................................................... 15
RELATIONSHIP AMONG THE COMPANY, C-TEC AND RCN.............................. 18
TRADING MARKET............................................................. 23
DIVIDENDS.................................................................. 24
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS...................... 25
PRO FORMA CAPITALIZATION................................................... 30
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA............................ 31
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.................................................. 32
DESCRIPTION OF THE CREDIT AGREEMENT........................................ 36
BUSINESS................................................................... 39
LEGISLATION AND REGULATION................................................. 48
MANAGEMENT................................................................. 54
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT............. 58
DESCRIPTION OF CAPITAL STOCK............................................... 61
CERTAIN STATUTORY, CHARTER AND BYLAW PROVISIONS............................ 62
INDEPENDENT AUDITORS....................................................... 66
ADDITIONAL INFORMATION..................................................... 66
INTRODUCTION
On [ ], 1997, the Board of Directors of C-TEC
declared a dividend payable to holders of record of C-TEC Common Equity at the
close of business on the Record Date of [ ] shares of Company
Common Stock for every [ ] shares of C-TEC Common Equity owned of
record on the Record Date. It is expected that certificates representing
shares of Company Common Stock will be mailed on the Distribution Date or as
soon thereafter as practicable to holders of C-TEC Common Equity.
Prior to the Distribution Date, approximately 62% of the common
stock of Mercom, Inc. will have been transferred by C-TEC to, and will be
owned by, the Company. As a result of the Distribution, 100% of the
outstanding shares of Company Common Stock will be distributed to holders of
C-TEC Common Equity. C-TEC will not own any securities of the Company
immediately after the Distribution.
C-TEC stockholders with inquiries relating to the Distribution
should contact First Union National Bank (the "Distribution Agent"), Corporate
Trust Client Operations -- NC1153, 1525 West W.T. Harris Boulevard, 3C3,
Charlotte, NC 28288-1153; or C-TEC Corporation, Valerie Haertel, Director of
Investor Relations, 105 Carnegie Center, Princeton, New Jersey 08540-6215.
The Distribution Agent's telephone number is 800-829-8432. C-TEC's telephone
number is (609) 734-3700. After the Distribution, stockholders of the Company
with inquiries relating to the Distribution should contact Cable Michigan,
Inc., 105 Carnegie Center, Princeton, New Jersey 08540-6215. The Company's
telephone number is (609) [ ].
No action is required by holders of C-TEC Common Equity in
order to receive the Company Common Stock to which they are entitled in the
Distribution.
SUMMARY
The following is a brief summary of the matters covered by this
Information Statement and is qualified in its entirety by the more detailed
information (including the financial statements and the notes thereto) included
elsewhere herein. Unless the context indicates otherwise, the "Company" or
"Cable Michigan" means Cable Michigan, Inc. and its subsidiaries (including
Mercom, Inc.) after giving effect to the Distribution.
The Company
Cable Michigan is a cable television operator in the State of
Michigan which, as of March 31, 1997, served approximately 200,000
subscribers. These figures include the approximately 41,000 subscribers served
by Mercom, Inc., a 62% owned subsidiary of the Company ("Mercom"). Except
where the context indicates otherwise, the terms the "Company" and "Cable
Michigan" mean the Company and its subsidiaries, including Mercom.
Clustered primarily around the Michigan communities of Grand
Rapids, Traverse City, Lapeer and Monroe (Mercom), the Company's systems serve
a total of approximately 400 municipalities in attractive suburban markets and
small towns. The Company has generated strong growth in new homes passed and
basic subscriber levels. From 1992 to 1996, compounded annual growth in basic
subscribers was 4.4%; during the same period, basic penetration rose from
58.4% to 60.6%. Growth in homes passed has primarily been the result of new
home construction and plant extensions.
The following table summarizes the development of the Company's
operations since December 31, 1992:
<TABLE>
<CAPTION>
As of December 31, As of March 31,
----------------------------------------------------------- -----------------
1992 1993 1994 1995 1996 1996 1997
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Homes Passed:
Wholly Owned Systems......... 226,384 235,188 244,622 250,747 261,441 253,290 263,652
Mercom Systems............... 59,988 61,730 63,721 65,449 65,998 65,449 66,329
Total...................... 286,372 296,918 308,343 316,196 327,439 318,739 329,981
Basic Subscribers:
Wholly Owned Systems......... 133,017 135,420 141,785 152,921 158,310 153,261 158,632
Mercom Systems............... 34,118 34,714 37,324 38,853 40,012 39,853 40,769
Total...................... 167,135 170,134 179,109 191,774 198,322 193,114 199,401
Basic Penetration:
Wholly Owned Systems......... 58.8% 57.6% 58.0% 61.0% 60.6% 60.5% 60.2%
Mercom Systems .............. 56.9% 56.2% 58.6% 59.4% 60.6% 60.9% 61.5%
All Systems................ 58.4% 57.3% 58.1% 60.7% 60.6% 60.6% 60.4%
Average Monthly Revenue per
Subscriber for Last Month
of the Period:(1)
Wholly Owned Systems......... $29.66 $29.64 $27.06 $31.59 $32.20 $32.83 $33.11
Mercom Systems............... $30.05 $29.70 $29.36 $30.41 $32.72 $33.63 $34.22
All Systems................ $29.74 $29.65 $27.53 $31.36 $32.30 $32.99 $33.34
</TABLE>
- ----------
(1) The revenue per subscriber calculation includes premium revenue for each
period.
Cable Michigan plans to emphasize high technical standards
and seeks to incorporate, when cost effective, technological advances that
enhance product quality and service. In particular, the Company plans to
upgrade the technical quality of its cable plant and to increase system
capacity for the delivery of additional programming and new services. The
Company has already deployed 402 miles of fiber optic cable as of March 31,
1997 and reduced the number of headends in its systems as part of its
commitment to improved service quality and platform development for new
technologies. The Company's strategic plan calls for a capital expenditure
program intended to result in over 90% of the Company's customers being
served by systems with a capacity of 550 MHz or 750 MHz by the end of 2001.
The Company's wholly owned systems are currently built to 300 - 450 MHz,
with the majority of the systems having a capacity of 300 - 330 MHz. These
systems include 53 headends, with two of these headends serving
approximately 63,500 subscribers. The Mercom systems in Michigan include 5
headends and are built to 400 - 450 MHz.
The Company derives the majority of its revenues from recurring
subscription services and generates additional revenues from non-subscription
services such as advertising, pay-per-view, installations and commissions from
electronic retailing. Monthly subscription rates and related charges vary
according to the type of service or equipment selected.
The Company's systems include the Mercom systems, which as of
March 31, 1997 served approximately 38,900 subscribers in Michigan and
approximately 1,900 subscribers in a planned development community in Port St.
Lucie, Florida. In July 1997 Mercom sold its Port St. Lucie, Florida system
to Adelphia Communications Corporation for $3,650,000. As the 62% owner of
Mercom, the Company accounts for all Mercom subscribers as Cable Michigan
subscribers. The Company and Mercom have entered into a Management Agreement
dated January 1, 1997 (the "Management Agreement") pursuant to which the
Company has been retained to operate and manage the cable television systems
of Mercom. In May 1997, C-TEC proposed to acquire the remaining 38% interest
in Mercom held by the public in exchange for 8.75% of the Company's common
stock. Mercom's Board of Directors formed a special committee composed of
directors unaffiliated with the Company to evaluate the proposal, but
discussions have been suspended pending completion of the Distribution. After
the Distribution is completed, the Company will reevaluate the previous
proposal and determine whether to resume discussions with the special
committee.
The Distribution
The following is a brief summary of certain terms of the
Distribution.
Distributing Company................ C-TEC Corporation. After the
Distribution, C-TEC will own no
shares of Company Common Stock.
Primary Purposes of the
Distribution..................... C-TEC has concluded that the
Distribution and the RCN
Distribution are in the best
interests of C-TEC, the Company, RCN
and the holders of C-TEC Common
Equity because the Distributions
will, among other things, (i) permit
C-TEC to raise equity or
equity-linked financing to fund the
development of the RCN Telecom
Business on more advantageous
economic terms than the other
alternatives available, (ii) allow
for the establishment of an employee
stock ownership plan for the
employees of RCN with stock that
correlates more closely to the
performance of the RCN Businesses,
(iii) facilitate possible future
acquisitions and joint venture
investments by the Company; (iv)
facilitate possible future equity or
equity-linked offerings by RCN; (v)
facilitate possible future
acquisitions and joint venture
investments by RCN; (vi) permit
investors and the financial markets
to better understand and evaluate
C-TEC's various businesses; (vii)
facilitate the ability of each
company to grow in both size and
profitability; (viii) allow the
management of each company to focus
attention and financial resources
on its respective business and (ix)
permit each company to offer
employees incentives that are more
directly linked to the performance
of its respective business. See
"The Distribution--Background to and
Reasons for the Distribution."
Securities to Be Distributed........ All of the outstanding shares of
Company Common Stock. Based on the
number of shares of C-TEC Common
Equity outstanding as of [
], 1997, it is estimated that
approximately [ ] shares of
Company Common Stock will be
distributed to holders of C-TEC
Common Equity in the Distribution.
After the Distribution, the Company
estimates that the Company Common
Stock will be held by approximately
[ ] stockholders of
record, although some of the shares
may be registered in nominee names
representing an additional number of
stockholders.
Distribution Ratio.................. [ ] shares of Company Common
Stock for every [ ] shares of
C-TEC Common Equity held of record
on the Record Date.
Record Date......................... [ ] , 1997 (4 p.m. New
York time).
Distribution Date................... [ ], 1997 (4 p.m. New York
time). Certificates representing
the shares of Company Common Stock
will be mailed on the Distribution
Date or as soon thereafter as
practicable.
Distribution Agent.................. Prior to the Distribution Date, the
Company will appoint First Union
National Bank to serve as
Distribution Agent in connection
with the Distribution.
Trading Market and Symbol........... There has been no trading market for
the Company Common Stock, although
it is expected that a "when-issued"
trading market may develop on or
about the Record Date. Application
will be made to list the Company
Common Stock on NASDAQ under the
symbol "CABL". See "Trading Market."
Tax Consequences.................... C-TEC has received a private letter
ruling from the Internal Revenue
Service to the effect that, among
other things, the Distributions will
qualify as tax-free distributions
for federal income tax purposes. It
is a condition precedent to C-TEC's
obligation to consummate the
Distributions that the letter ruling
not be withdrawn. See "The
Distribution--Certain Federal Income
Tax Consequences" for a more
detailed description of the federal
income tax consequences of the
Distribution.
Risk Factors........................ Stockholders should carefully consider
the matters discussed under the
section entitled "Risk Factors" in
this Information Statement.
No Fractional Shares................ No fractional shares of Company Common
Stock will be distributed. All
fractional share interests will be
aggregated and sold by the
Distribution Agent on behalf of
stockholders and the cash proceeds
distributed to those stockholders
otherwise entitled to a fractional
interest. See "The Distribution--
Description of the Distribution."
Relationship with C-TEC and RCN
after the Distribution........... In connection with the Distributions,
C-TEC, the Company and RCN will
enter into the Distribution
Agreement and the Tax Sharing
Agreement described under
"Relationship Among the Company,
C-TEC and RCN." These agreements
are not the result of arm's length
negotiations between unrelated
parties as the Company, C-TEC and
RCN have certain common officers and
directors. Nevertheless, the
transitional service arrangements
in such agreements are designed to
reflect arrangements that would have
been agreed upon by parties
negotiating at arm's length. See
"Relationship Among the Company,
C-TEC and RCN" and "Management--
Executive Officers and Directors."
Additional or modified agreements,
arrangements and transactions may be
entered into between the Company and
either or both of C-TEC and RCN
after the Distribution, which will be
negotiated at arm's length. Certain
persons who serve as executive
officers and directors of the
Company will also be officers and
directors of C-TEC and RCN following
the Distribution. See
"Management--Executive Officers and
Directors."
Change of Name by C-TEC............. In connection with the Distributions,
C-TEC will change its name to
Commonwealth Telephone Enterprises,
Inc..
Concurrent Distribution of the
Common Stock of RCN.............. Concurrently with the Distribution,
C-TEC will distribute to the holders
of C-TEC Common Equity 100% of the
shares of common stock of C-TEC's
wholly owned subsidiary RCN. The
RCN Distribution is described in a
separate Information Statement that
is being provided to the holders of
C-TEC Common Equity.
Organization of C-TEC's Historical Businesses Following the Distributions
Set forth below are charts illustrating the organization of the
historical businesses of C-TEC following the Distributions. (The charts are
not intended to set forth the corporate structure of any of the companies
comprising the various groups.)
Organization Chart
Summary Selected Historical Consolidated Financial Data
Prior to the Distribution Date, the Company has been operating
as part of C-TEC. The table below sets forth selected historical consolidated
financial data for the Company. The historical financial data presented below
reflect periods during which the Company did not operate as an independent
company and, accordingly, certain assumptions were made in preparing such
financial data. Therefore, such data may not reflect the results of
operations or the financial condition which would have resulted if the Company
had operated as a separate, independent company during such periods, and are
not necessarily indicative of the Company's future results of operation or
financial condition.
The selected historical consolidated financial data for the
years ended December 31, 1993 and 1992 and as of December 31, 1994, 1993 and
1992 are derived from the Company's unaudited historical consolidated financial
statements not included in this Information Statement. The selected
historical consolidated financial data of the Company for the years ended
December 31, 1996, 1995 and 1994 and as of December 31, 1996 and 1995 are
derived from and should be read in conjunction with the Company's audited
historical consolidated financial statements (the "Financial Statements")
included elsewhere in this Information Statement. The selected historical
consolidated financial data for the three month periods ended March 31, 1997
and 1996 and as of those dates are derived from and should be read in
conjunction with the Company's unaudited historical consolidated financial
statements included elsewhere in this Information Statement. In the opinion
of the Company's management, these three month consolidated historical
financial statements include all adjustments, consisting of normal recurring
adjustments, necessary for a fair statement of the results for the unaudited
interim periods. The results for such interim periods are not necessarily
indicative of the results for the full year. See "Management's Discussion and
Analysis of Financial Condition and Results of Operation" and the Financial
Statements. Earnings per share data are presented elsewhere in this
Information Statement on a pro forma basis only. See "Unaudited Pro Forma
Consolidated Financial Statements."
<TABLE>
<CAPTION>
Three Months Ended
March 31, Year Ended December 31,
------------------ ------------------------------------------------
(dollars in thousands)
1997 1996 1996 1995 1994 1993 1992
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Financial Data:
Statement of Operations Data:
Sales........................................ $19,557 $18,340 $76,187 $60,675 $49,141 $48,665 $43,860
Costs and expenses, excluding
depreciation and amortization.............. 11,360 10,343 44,091 34,749 28,543 28,655 28,142
Depreciation and amortization................ 7,922 7,829 31,427 25,154 28,685 32,697 31,720
------ ------ ------ ------ ------ ------ ------
Operating (loss) income...................... 275 168 669 772 (8,087) (12,687) (16,002)
Interest income.............................. 42 27 127 55 -- -- 44
Interest expense............................. (3,347) (4,018) (15,179) (15,973) (15,767) (15,960) (16,672)
Other (expense) income, net.................. (132) (68) (736) (363) (1,307) (461) (178)
(Benefit) provision for income taxes......... (1,090) (1,415) (5,712) (5,590) 52 (799) (11,019)
Minority interest in (income) of
consolidated entities...................... 277 328 1,151 (186) -- -- --
Equity in (loss) of unconsolidated entities.. -- -- -- (396) (1,013) (834) (840)
------ ------ ------ ------ ------ ------ ------
Net (Loss)................................... (1,795) (2,148) (8,256) (10,501) (26,226) (29,143) (22,629)
====== ====== ====== ====== ====== ====== ======
Balance Sheet Data:
Total assets................................. 141,253 164,709 149,200 172,759 116,972 147,286 162,088
Long-term liabilities........................ 14,663 16,992 15,680 17,430 -- -- --
Common shareholder's (deficit)............... (81,045) (75,515) (79,741) (73,757) (76,931) (60,419) (38,251)
</TABLE>
Summary Selected Pro Forma Financial Data
The following summary pro forma financial data include
adjustments to the historical statements of operations of the Company for the
three months ended March 31, 1997 and the year ended December 31, 1996 as if
the Distribution had occurred on January 1, 1996 and to the historical balance
sheet of the Company as of March 31, 1997 as if the Distribution had occurred
on March 31, 1997. Such adjustments result primarily from changes in the
capital structure of the Company. See "Unaudited Pro Forma Consolidated
Financial Statements" and the notes thereto. The following pro forma
financial data are provided for information purposes only and should not be
construed to be indicative of the Company's results of operations or financial
conditions had the Distribution occurred on the dates assumed, may not reflect
the results of operations or financial condition which would have resulted had
the Company been operated as a separate, independent Company during such
period, and are not necessarily indicative of the Company's future results of
operations or financial condition.
<TABLE>
<CAPTION>
Three Months
Ended Year Ended
March 31, December 31,
1997 1996
------------ ------------
(dollars in thousands)
<S> <C> <C>
Statement of Operations Data:
Sales.................................................... $ 19,557 $76,187
Cost and expenses, excluding depreciation
and amortization....................................... 11,360 44,091
Depreciation and amortization............................ 7,922 31,427
Operating income......................................... 275 669
Interest income.......................................... 42 127
Interest expense......................................... (2,441) (9,861)
Other expense, net....................................... (132) (736)
(Loss) before income taxes............................... (2,256) (9,801)
(Benefit) for income taxes............................... (773) (3,851)
(Loss) before minority interest.......................... (1,483) (5,950)
Minority interest in loss of consolidated entities....... 277 1,151
Net (loss)............................................... $ (1,206) $(4,799)
Balance Sheet Data:
Total assets............................................ $140,019 N/A
Total long-term debt (including current portion)........ 141,501 N/A
Shareholder's (deficit)................................. $(53,210) N/A
</TABLE>
RISK FACTORS
In addition to the other information contained in this
Information Statement, stockholders should carefully review the following
factors.
The Information Statement contains certain forward looking
statements regarding the Company's operations, economic performance and
financial condition, including, in particular, statements made as to plans to
upgrade systems and facilities. Such forward looking statements are subject
to known and unknown risks and uncertainties. Actual results could differ
materially from those currently anticipated due to a number of factors,
including those identified in this Section and elsewhere in this Information
Statement.
Factors Affecting Future Operations
The cable television industry may be affected by among other
things: (i) changes in government law and regulation; (ii) changes in the
competitive environment; (iii) changes in technology; (iv) franchise related
matters; (v) market conditions that may adversely affect the availability of
debt and equity financing; and (vi) general economic conditions. The cable
television industry is subject to extensive regulation on the federal, state
and local levels. No assurance can be given as to what future actions
Congress, the Federal Communications Commission ("FCC") or other regulatory
authorities may take or the effects thereof on the cable television industry
in general or on the Company in particular. See "Legislation and Regulation."
Recent and Anticipated Losses and Stockholders' Deficiency.
On a separate company basis, the Company has incurred aggregate
net losses from commencement of operations through March 31, 1997 of
approximately $140,206,980. At March 31, 1997, the Company's consolidated
stockholders' deficiency was approximately $81,045,000. The Company incurred
net losses of $22,629,000, $29,143,000, $26,226,000, $10,501,000 and
$8,256,000 for the years ended December 31, 1992, 1993, 1994, 1995 and 1996,
respectively. The net losses primarily reflect high levels of interest
expense and depreciation and amortization charges. The Company expects to
continue to incur additional net losses and there can be no assurance that the
Company's operations will become profitable.
Substantial Leverage
The Company will be substantially leveraged at the time of the
Distribution. At the time of the Distribution, the Company's aggregate debt
will be approximately $141,501,000. The extent of the Company's leverage may
have the following consequences: (i) limit the ability of the Company to
obtain necessary financing in the future for working capital, capital
expenditures, debt service requirements or other purposes, (ii) require that a
substantial portion of the Company's cash flows from operations be dedicated
to the payment of principal and interest on its indebtedness and therefore not
be available for other purposes; (iii) limit the Company's flexibility in
planning for, or reacting to, changes in its business; (iv) place the Company
at a competitive disadvantage vis a vis less leveraged competitors and (v)
render the Company more vulnerable in the event of a downturn in its business.
The Company anticipates that, in light of the amount of existing indebtedness,
it will continue to have substantial leverage for the foreseeable future.
Need for Substantial Capital Expenditures
The Company's business requires substantial investment on a
continuing basis to finance capital expenditures and related expenses for,
among other things, upgrades of the Company's cable plant (including the need
to make cable system upgrades mandated by franchise authorities) and the
servicing, repayment or refinancing of its indebtedness. The foregoing
upgrades are necessary to enable the Company to better position itself to
withstand potential competition, expand channel lineups (which would permit
the Company to increase revenue) and facilitate new services when economically
viable. There can be no assurance that the Company will have sufficient
capital to make these upgrades.
Rapid Technological Change
The cable television industry is subject to rapid and
significant changes in technology. The Company is upgrading the technical
quality of its cable plant and increasing network capacity for the delivery of
additional programming and, if economically viable, new services. There can
be no assurance, however, that existing, proposed or yet undeveloped
technologies will not become dominant in the future or otherwise render cable
television services less profitable or less viable.
Competition
Cable television systems face competition from alternative
methods of receiving and distributing television signals and from other
sources of news, information and entertainment such as off-air television
broadcast programming, newspapers, movie theaters, live sporting events,
interactive online computer services and home video products, including
videotape cassette recorders. The extent to which a cable television system
is competitive depends, in part, upon the cable system's ability to provide,
at a reasonable price to consumers, a greater variety of programming and other
services than are available off-air or through other alternative delivery
sources and upon superior technical performance and customer service.
The FCC and Congress have adopted policies providing a more
favorable operating environment for new and existing technologies that
provide, or have the potential to provide, substantial competition to cable
systems. These technologies include, among others, direct broadcast satellite
("DBS") service whereby signals are transmitted by satellite to receiving
facilities located on customer premises. The availability of reasonably priced
home satellite dish earth stations ("HSDs") enables individual households to
receive many of the satellite-delivered program services formerly available
only to cable subscribers. Furthermore, the 1992 Act contains provisions,
which the FCC has implemented with regulations, to enhance the ability of
cable competitors to purchase and make available to HSD owners certain
satellite-delivered cable programming at competitive costs. DBS providers
provide significant competition to cable service providers, including the
Company, and such competition will likely increase. See
"Business--Competition."
The 1996 Act makes it easier for local exchange telephone
companies ("LECs") and others to provide a wide variety of video services
competitive with services provided by cable systems and to provide cable
services directly to subscribers. Various LECs currently are providing video
services within and outside their telephone service areas through a variety of
distribution methods, including both the deployment of broadband wire
facilities and the use of wireless transmission facilities. The Company cannot
predict the likelihood of success of video service ventures by LECs or the
impact on the Company of such competitive ventures. Cable television systems
generally operate pursuant to franchises granted on a non-exclusive basis. The
1992 Act prohibits franchising authorities from unreasonably denying requests
for additional franchises and permits franchising authorities to operate cable
systems. Well-financed businesses from outside the cable industry (such as
the public utilities that own certain of the poles on which cable is attached)
may become competitors for franchises or providers of competing services.
Certain community-owned power companies have been exploring building new video
networks to compete with the Company within the areas where such companies
deliver power. Competition from other cable television operators exists in
some areas served by the Company. Currently, approximately 2% of homes passed
by the Company's systems have been overbuilt.
Cable operators face additional competition from private
satellite master antenna television ("SMATV") systems that serve condominiums,
apartment and office complexes and private residential developments. Cable
television systems also compete with wireless program distribution services
such as multipoint, multichannel distribution service ("MMDS") which use
low-power microwave frequencies to transmit video programming over-the-air to
subscribers. There are MMDS operators who are authorized to provide or are
providing broadcast and satellite programming to subscribers in areas served
by the Company's cable systems. The Company is unable to predict whether
wireless video services will have a material impact on its operations.
Other new technologies, including internet-based services, may
become competitive with services that cable television systems can offer.
Advances in communications technology as well as changes in the marketplace and
the regulatory and legislative environment are constantly occurring. Thus, it
is not possible to predict the effect that ongoing or future developments
might have on the cable television industry or on the operations of the
Company.
Franchises
The cable television systems owned or managed by the Company
are constructed and operated under fixed-term franchises or other types of
operating authorities (referred to collectively herein as "franchises") that
are generally non-exclusive and are granted by local governmental authorities.
These franchises typically contain many conditions, such as time limitations
on commencement and completion of construction, conditions of service,
including the number of channels, the provision of free service to schools and
certain other public institutions, and the maintenance of insurance and
indemnity bonds. The provisions of these local franchises are subject to
federal regulation. There can be no assurance that the Company will be able
to maintain its existing franchises on acceptable terms. Although the Company
does not believe that any of the existing arrangements will be canceled or
will not be renewed as needed in the near future, cancellation or non-renewal
of certain of such franchises could materially adversely affect the Company's
business in the affected area. See "Business--Franchises."
Ability to Procure Third Party Programming and Related Services
The Company's cable programming services are dependent upon
its ability to procure programming that is attractive to its customers at
reasonable commercial rates. The Company has entered into an arrangement
pursuant to which RCN will obtain third party programming for the Company's
systems. RCN generally purchases this programming at prices that are better
than the Company would be able to obtain independently. Programming
purchasers such as RCN generally pay a monthly fee per subscriber per channel.
Under the arrangement between the Company and RCN, RCN allocates a portion of
RCN's total programming cost to the Company based on the relative number of
subscribers served by the Company at an equal cost per subscriber unless
otherwise required under a particular programming agreement. The arrangement
is terminable by the Company upon 60 days notice and by RCN upon 1 year
advance notice. If the programming supply arrangement with RCN were
terminated, the Company's programming costs could increase significantly.
There can be no assurance that RCN will not terminate this programming
arrangement, that the Company will have access to programming services or that
management can secure rights to such programming on commercially acceptable
terms. The Company anticipates that the cost of obtaining programming will
rise in the future.
Reliance on RCN for Management and Other Services
The Company is dependent on RCN for the provision of management
and other services to the Company, including customer and billing services.
These services are terminable by either party upon 60 days' notice, provided
that RCN may not terminate customer service or billing service on less than
one year's notice. The termination of one or more of these services could
have a material adverse effect on the Company.
Dividend Policy
The Company anticipates that future revenues will be used
principally to support operations and finance growth of the business and,
thus, the Company does not intend to pay cash dividends on the Company Common
Stock in the foreseeable future. The payment of any cash dividends in the
future will be at the discretion of the Company's Board of Directors (the
"Company Board"). The declaration of any dividends and the amount thereof
will depend on a number of factors, including the Company's financial
condition, capital requirements, funds from operations, future business
prospects and such other factors as the Company Board may deem relevant. The
Credit Agreement (as defined below) into which the Company has entered
contains restrictions on the payment of dividends. See "Description of the
Credit Agreement" and "Dividends."
No Prior Market for Common Stock
Prior to the Distribution, there has been no public market for
the Company Common Stock, and there can be no assurance that an active trading
market will develop or be sustained in the future. The Company will apply for
listing of the Company Common Stock on NASDAQ. A condition to C-TEC's
obligation to consummate the Distributions is that the Company Common Stock to
be issued in the Distribution and the common stock of RCN to be distributed in
the RCN Distribution shall have been approved for listing on NASDAQ. There
can be no assurance as to the price at which the Company Common Stock will
trade. See "Trading Market."
There can be no assurance that the Company Common Stock will
not experience substantial price volatility, particularly as a result of
quarter to quarter variations in the actual or anticipated financial results
of the Company or other companies in the markets served by the Company. In
addition, the stock market has experienced extreme price and volume
fluctuations that have affected the market price of many telecommunications
stocks and that have often been unrelated or disproportionate to the operating
performance of individual companies. These and other factors may adversely
affect the market price of the Company Common Stock.
Control by Kiewit Telecom; Conflicts of Interest
Following the Distribution, Kiewit Telecom Holdings, Inc.
("Kiewit Telecom") will beneficially own approximately 48.5% of the Company
Common Stock. Consequently, Kiewit Telecom will effectively have the power to
elect a majority of the Company's directors and to determine the outcome of
substantially all matters to be decided by a vote of shareholders. The
control of the Company by Kiewit Telecom may tend to deter non-negotiated
tender offers or other efforts to obtain control of the Company and thereby
deprive shareholders of opportunities to sell shares at prices higher than
those prevailing in the market. Moreover, a disposition by Kiewit Telecom of
a significant portion of its Company Common Stock, or the perception that such
a disposition may occur, could affect the trading price of the Company Common
Stock and could affect the control of the Company. Kiewit Telecom is owned
90% by Kiewit Diversified Group, Inc. ("KDG") and 10% by David C. McCourt, the
Chairman and Chief Executive Officer of the Company. KDG is a wholly owned
subsidiary of Peter Kiewit Sons Inc.
After the Distribution, Kiewit Telecom will also effectively
control C-TEC and RCN. Certain of the officers and directors of the Company
will also be officers and directors of C-TEC and RCN. These relationships may
lead to conflicts of interest. Most of the Company's executive officers are
executive officers of RCN and devote a majority of their time and attention to
the business and affairs of RCN.
Possibility of Substantial Sales of Common Stock
The Distribution will involve the distribution of an aggregate
of approximately [ ] million shares of Company Common Stock to the holders
of C-TEC Common Equity. Approximately one-half of such shares would be
eligible for immediate resale in the public market. The Company is unable to
predict whether substantial amounts of Company Common Stock will be sold in
the open market in anticipation of, or following, the Distribution. Any sales
of substantial amounts of Company Common Stock in the public market, or the
perception that such sales might occur, whether as a result of the
Distribution or otherwise, could materially adversely affect the market price
of the Company Common Stock.
Anti-Takeover Effects of Certain Statutory, Charter, Bylaw and Contractual
Provisions
Several provisions of the Company's Articles of Incorporation
and Bylaws (as will be in effect as of the Distribution) and Pennsylvania law
could discourage potential acquisition proposals and could deter or delay
unsolicited changes in control of the Company, including provisions of the
Articles of Incorporation and Bylaws creating a classified Board of Directors,
limiting the stockholders' powers to remove directors, and prohibiting the
taking of action by written consent in lieu of a stockholders' meeting. In
addition, the Company Board has the authority, without further action by the
stockholders, to fix the rights and preferences of and to issue preferred
stock. The issuance of preferred stock could adversely affect the voting
power of the owners of Company Common Stock, including the loss of voting
control to some.
The Credit Agreement into which the Company has entered
includes as an event of default certain changes in control (as defined
therein) of the Company. See "Description of the Credit Agreement."
These provisions and others that could be adopted or entered
into in the future could discourage unsolicited acquisition proposals or delay
or prevent changes in control or management of the Company, including
transactions in which stockholders might otherwise receive a premium for their
shares over then current market prices. In addition, these provisions could
limit the ability of stockholders to approve transactions that they may deem
to be in their best interests. See "Description of Capital Stock" and
"Certain Statutory, Charter and Bylaw Provisions."
THE DISTRIBUTION
Background to and Reasons for the Distribution
C-TEC is a diversified, international telecommunications and
high technology company with interests in local telephone, video programming,
long distance telephone, communications engineering, and competitive telephone,
video and Internet services. In November 1995, C-TEC announced that it had
engaged Merrill Lynch & Co. to assist with evaluating strategic options for
its various business units with a view toward enhancing shareholder value.
Specifically, C-TEC announced that it would evaluate the advisability and
feasibility of separating or restructuring its local telephone business, its
cable television business and its various other communications businesses.
In March 1996, C-TEC announced that it intended to distribute
to its shareholders in a tax-free spin-off its Pennsylvania-based local
telephone operations, its communications engineering operations, and certain
other assets, and that following the spin-off, it intended to combine its
domestic cable television operations with a third party pursuant to a tax-free
stock-for-stock transaction (collectively, the "Prior Restructuring Plan").
Also in March 1996, in connection with and in order to facilitate the Prior
Restructuring Plan, C-TEC signed a definitive agreement (the "Stock Purchase
Agreement") for the sale to Kiewit Telecom of the following businesses
(collectively, the "Businesses Transferred Under Contractual Arrangement"):
(i) C-TEC International, Inc., a subsidiary that owns a 40% interest in
Megacable; (ii) TEC-Air, Inc., which owns a corporate jet aircraft; (iii)
C-TEC's long distance operations; and (iv) C-TEC's interest in the RCN Telecom
Business, (the "RCN Telecom Interest").
The Businesses Transferred Under Contractual Arrangement were
to be sold at two separate closings. In April 1996, at the first closing, RCN
sold the RCN Telecom Interest to Kiewit Telecom for $17.5 million in cash in
accordance with the Stock Purchase Agreement. In addition, C-TEC retained a
warrant to purchase approximately 6% of the equity of RCN Telecom (the "RCN
Warrant"). The second closing, involving the sale of the other Businesses
Transferred Under Contractual Arrangement (the "Other Businesses"), was
expected to take place in the second half of 1996 subject to certain
conditions. The purchase price for the Other Businesses was expected to be
approximately $106 million.
The Stock Purchase Agreement provided C-TEC an option, at its
election, to repurchase from Kiewit Telecom any or all of the Businesses
Transferred Under Contractual Arrangement, if C-TEC did not restructure its
domestic cable television and local telephone operations by January 1, 1997.
The Stock Purchase Agreement further provided that if C-TEC elected to
exercise its option to rescind the sale of the Businesses Transferred Under
Contractual Arrangement, it would have the right and the obligation to
purchase Kiewit Telecom's 80.1% interest in Freedom New York, L.L.C.
("Freedom") and all related rights and liabilities (collectively, the "Freedom
Interest"). The Stock Purchase Agreement provided that the repurchase price
for the RCN Interest and the purchase price for the Freedom Interest would be
equal to Kiewit Telecom's investment in those assets plus an amount to
compensate for forgone interest on the amount invested. In March 1996,
Freedom had acquired the wireless video services business of Liberty Cable
Television of New York.
In August 1996, in the wake of the newly issued rules under the
1996 Act, depressed cable stock prices and other changed circumstances, C-TEC
determined not to proceed with the Prior Restructuring Plan. Following that
determination, (i) C-TEC exercised its option under the Stock Purchase
Agreement to reacquire the RCN Interest and to acquire from Kiewit Telecom the
Freedom Interest and (ii) C-TEC and Kiewit Telecom agreed that the closing of
the purchase and sale of the Other Businesses would not be consummated. The
repurchase price for the RCN Interest was approximately $28 million and the
purchase price for the Freedom Interest was approximately $29 million. In
connection with the closing of those transactions, C-TEC acquired from Kiewit
Telecom a note issued by Freedom in connection with a loan from Kiewit Telecom
to Freedom. The purchase price for the note was approximately $1.5 million,
an amount equal to the accreted value of the note. Shortly after the closing
of these transactions, the RCN Warrant was canceled.
The Stock Purchase Agreement, the exercise of the repurchase
option and all of the related transactions were approved by a special
committee of the Board of Directors of C-TEC composed of directors
unaffiliated with Kiewit Telecom.
At the time C-TEC announced that it would not pursue the
Initial Restructuring Plan, it also announced that it would continue to
explore ways to increase its profitability and value including other possible
restructuring transactions. Following that announcement, and at the direction
of the C-TEC Board of Directors, management of C-TEC and Merrill Lynch
continued to analyze the structure and strategy of C-TEC and its business
groups. In the course of that analysis, management determined that two of the
primary goals to be achieved in any restructuring would be the following: (i)
facilitating the raising of capital necessary for the development of the RCN
Telecom Business and (ii) facilitating the creation of targeted equity-based
incentives for RCN employees. The C-TEC Board of Directors was updated by
management and provided direction to management as the analysis and the
restructuring plans developed.
On February 12, 1997, the C-TEC Board of Directors approved a
plan to restructure C-TEC (the "Restructuring"). Under the Restructuring,
C-TEC will be separated into three different, publicly traded companies
engaged, respectively, in the following businesses:
(i) the Cable Michigan Business, which will be owned by Cable Michigan
and will consist of C-TEC's Cable Michigan television business, including
C-TEC's 61.92% interest in Mercom, Inc.;
(ii) the RCN Businesses, which will be owned by RCN and will consist of
the RCN Telecom Business, C-TEC's New Jersey, New York (excluding New York
City) and Pennsylvania cable television operations, C-TEC's long distance
business (other than the portion of such business that consists of providing
long distance services to customers in the franchise area of Commonwealth
Telephone Company and in the Pennsylvania communities of Wilkes-Barre,
Scranton and Harrisburg (the "Commonwealth Service Territory Long Distance
Business")) and C-TEC International, which owns a 40% interest in Megacable
S.A. de C.V.; and
(iii) the Pennsylvania Telephone and Engineering Business, which will be
owned by C-TEC and will consist of C-TEC's Commonwealth Telephone Company
business (Pennsylvania rural LEC operations), C-TEC's CLEC operations,
Commonwealth Communications, Inc. (communications engineering) and the
Commonwealth Service Territory Long Distance Business.
The Restructuring will include the following transactions: (i)
the incurrence of certain indebtedness by C-TEC and certain of its
subsidiaries, (ii) an internal restructuring to segregate C-TEC's businesses
as set forth in the preceding paragraph, (iii) following such internal
restructuring, a distribution by C-TEC to its common equity holders of all of
the outstanding capital stock of the Company (referred to herein as the
"Distribution") and RCN (referred to herein as the "RCN Distribution") and
(iv) within one year of the Distributions, an equity or equity-linked
financing by C-TEC (the "Equity-Financing"). As part of the Restructuring,
C-TEC will be renamed Commonwealth Telephone Enterprises, Inc.
The C-TEC Board of Directors determined that the
Restructuring and the Distributions would be in the best interests of C-
TEC, the Company, RCN and the holders of the C-TEC Common Equity
because it will, among other things, (i) permit C-TEC to raise financing to
fund the development of the RCN Telecom Business on more advantageous
economic terms than the other alternatives available, (ii) facilitate
possible future acquisitions and joint venture investments by RCN and Cable
Michigan and possible future offerings by RCN; (iii) allow the management
of each company to focus attention and financial resources on its
respective business and permit each company to offer employees incentives
that are more directly linked to the performance of its respective
business; (iv) facilitate the ability of each company to grow in both size
and profitability; and (v) permit investors and the financial markets to
better understand and evaluate C-TEC's various businesses.
The February 12, 1997 approval of the Restructuring by the
C-TEC Board of Directors was subject to further action by the C-TEC Board of
Directors to determine and approve the record date for shareholders entitled to
participate in, and the distribution date for, the Distribution and the RCN
Distribution. On [ ], 1997, the C-TEC Board of Directors set the
record date as [ ], 1997, the distribution date as [ ],
1997, and the distribution ratios as [ ] shares of the Company's
Common Stock for every [ ] shares of C-TEC Common Equity held as of
the Record Date and [ ] shares of RCN Common Stock for every [
] shares of C-TEC Common Equity held as of the Record Date.
Description of the Distribution
The general terms and conditions relating to the Distribution
are set forth in the Distribution Agreement among C-TEC, RCN and the Company.
See "Relationship Among the Company, C-TEC and RCN--Terms of the Distribution
Agreement."
C-TEC will effect the Distribution on [__________], 1997 (the
"Distribution Date") by the delivery of the shares of Company Common Stock to
the Distribution Agent for distribution to the holders of record of C-TEC
Common Stock and C-TEC Class B Common Stock on [__________], 1997 (the "Record
Date"). The Distribution will be made on the basis of [_____] shares of
Company Common Stock for every [_____] shares of C-TEC Common Equity
outstanding on the Record Date. The actual total number of shares of Company
Common Stock to be distributed will depend on the number of shares of C-TEC
Common Equity outstanding on the Record Date. Based upon the number of shares
of C-TEC Common Equity outstanding on [__________], 1997, approximately
[_____] shares of Company Common Stock will be distributed to holders of C-TEC
Common Equity, which will constitute all of the shares of Company Common Stock
owned by C-TEC. As a result of the Distribution, 100% of the outstanding
shares of Company Common Stock will be distributed to holders of C-TEC Common
Equity. The shares of Company Common Stock will be fully paid and
nonassessable, and the holders thereof will not be entitled to preemptive
rights. See "Description of Capital Stock." Certificates representing the
shares of the Company Common Stock will be mailed on the Distribution Date or
as soon as practicable thereafter to holders of C-TEC Common Equity.
No certificates or scrip representing fractional shares of
Company Common Stock will be issued to holders of C-TEC Common Equity as part
of the Distribution. The Distribution Agent will aggregate fractional shares
into whole shares and sell them in the open market at then prevailing prices
on behalf of holders who otherwise would be entitled to receive fractional
share interests, and such persons will receive instead a cash payment in the
amount of their pro rata share of the total sale proceeds thereof. Proceeds
from sales of fractional shares will be paid by the Distribution Agent based
upon the average gross selling price per share of Company Common Stock of all
such sales. See "The Distribution--Certain Federal Income Tax Consequences."
Such sales are expected to be made as soon as practicable after the
Distribution Date. None of C-TEC , the Company or the Distribution Agent will
guarantee any minimum sale price for the fractional shares of Company Common
Stock, and no interest will be paid on the proceeds of such shares.
Concurrently with the Distribution, C-TEC will distribute to
the holders of C-TEC Common Equity 100% of the shares of common stock of
C-TEC's wholly owned subsidiary RCN. The RCN Distribution is described in a
separate Information Statement that is being provided to the holders of C-TEC
Common Equity.
Certain Federal Income Tax Consequences
The following is a summary of the material federal income tax
consequences of the Distribution to C-TEC and the holders of C-TEC Common
Equity ("Holders"). C-TEC has received a ruling from the Internal Revenue
Service to the effect that the Distribution will generally qualify as tax-
free to C-TEC and the Holders under Section 355 of the Internal Revenue
Code of 1986, as amended (the "Code") and accordingly, for federal income
tax purposes:
(i) Except as described below with respect to fractional shares, a
Holder will not recognize gain or loss as a result of the Distribution. Cash
received in lieu of a fractional share will be treated as received in
redemption of such fractional share. Gain or loss will be recognized to the
recipient Holder to the extent of the difference between the Holder's basis in
the fractional share and the amount received for the fractional share.
Provided the fractional share interest is held as a capital asset by the
recipient Holder, such gain or loss will constitute capital gain or loss.
(ii) A Holder will apportion its tax basis for its C-TEC Common Equity
among such C-TEC Common Equity, shares of common stock of RCN received in the
RCN Distribution, and the Company Common Stock received in the Distribution in
proportion to the relative fair market values of such C-TEC Common Equity,
common stock of RCN and Company Common Stock on the Distribution Date.
(iii) A Holder's holding period for the Company Common Stock received in
the Distribution will include the period during which such Holder held the
C-TEC Common Equity with respect to which the Distribution was made, provided
that such C-TEC Common Equity is held as a capital asset by such Holder as of
the Distribution Date.
(iv) Generally no gain or loss will be recognized to C-TEC as a
result of the Distribution, except, for example, to the extent of any
excess loss accounts or deferred intercompany gains.
Current Treasury regulations require each Holder who receives
Company Common Stock pursuant to the Distribution to attach to its federal
income tax return for the year in which the Distribution occurs a descriptive
statement concerning the Distribution. C-TEC (or the Company on its behalf)
will make available requisite information to each such Holder.
ALL HOLDERS SHOULD CONSULT THEIR OWN TAX ADVISERS REGARDING THE
PARTICULAR FEDERAL, FOREIGN, STATE AND LOCAL TAX CONSEQUENCES OF THE
DISTRIBUTION TO THEM.
For a description of agreements pursuant to which C-TEC, RCN
and the Company have provided for certain tax sharing and other tax matters,
see "Relationship Among the Company, C-TEC and RCN--Tax Sharing Agreement."
RELATIONSHIP AMONG THE COMPANY, C-TEC AND RCN
This section of the Information Statement describes certain
agreements among the Company, C-TEC and RCN that will govern certain of the
on-going relationships among C-TEC, RCN and the Company after the Distribution
and will provide for an orderly transition to the status of three separate,
independent companies. To the extent that they relate to the Distribution
Agreement or the Tax Sharing Agreement (collectively, the "Distribution
Documents"), the following descriptions describe the Distribution Documents as
they will be in effect as of the Distribution, do not purport to be complete
and are qualified in their entirety by reference to the Distribution
Documents, which are filed as exhibits to the Company's Registration Statement
on Form 10 (the "Company Form 10") filed with the Securities and Exchange
Commission (the "Commission") of which this Information Statement (the "Company
Information Statement") is a part and as exhibits to RCN's Registration
Statement on Form 10 (the "RCN Form 10") filed with the Commission of which
RCN's Information Statement (the "RCN Information Statement") is a part, and
are incorporated herein by reference. All stockholders should read the
Distribution Documents in their entirety.
The Distribution Documents will be entered into in connection
with the Distributions and are, therefore, not the result of arm's length
negotiation between unrelated parties as the Company, C-TEC and RCN have
certain common officers and directors. Nevertheless, the transitional service
arrangements in such agreements are designed to reflect arrangements that
would have been agreed upon by parties negotiating at arm's length.
Additional or modified agreements, arrangements and transactions may be
entered into between the Company and either or both of C-TEC and RCN after the
Distribution, which will be negotiated at arm's length.
Terms of Distribution Agreement
C-TEC, RCN and the Company will enter into a Distribution
Agreement (the "Distribution Agreement") prior to the Distributions, among
other things, to provide for the principal corporate transactions and certain
procedures for effecting the Distributions, to define certain aspects (other
than those with respect to taxes, which shall be governed by the Tax Sharing
Agreement) of the relationship among C-TEC, RCN and the Company after the
Distributions and to provide for the allocation of certain assets and
liabilities (other than those with respect to taxes, which shall be governed
by the Tax Sharing Agreement) among C-TEC, RCN and the Company.
Conditions to the Distribution
The Distribution Agreement provides that the Distributions are
subject to the following conditions being satisfied prior to or as of the
Distribution Date: (i) the Company Form 10 and the RCN Form 10 shall have
become effective under the Exchange Act; (ii) the Company Common Stock and the
common stock, par value $1.00 per share, of RCN (the "RCN Common Stock")
shall, in each case, have been approved for trading on NASDAQ, subject to
official notice of issuance; (iii) the Board of Directors of C-TEC shall be
satisfied that (A) both before and after giving effect to the Distributions,
C-TEC is not and would not be insolvent, (B) after giving effect to the
Distributions, C-TEC would be able to pay its liabilities as they mature and
become absolute, and C-TEC would not have unreasonably small capital with
which to engage in its business and (C) the Distributions will be permitted
under Section 1551 of the Pennsylvania Business Corporations Act; (iv) C-TEC's
Board of Directors shall have approved the Distributions and shall not have
abandoned, deferred or modified the Distributions at any time prior to the
Distribution Date; (v) (A) the Company's Board of Directors, as named in this
Information Statement, shall have been elected by C-TEC, as sole stockholder
of the Company, and the Company's Articles of Incorporation and Bylaws (each
as defined under "Description of Capital Stock" below) shall be in effect and
(B) RCN's Board of Directors, as named in the RCN Information Statement, shall
have been elected by C-TEC, as sole shareholder of RCN, and RCN's certificate
of incorporation and bylaws (each as defined under "Description of Capital
Stock" in the RCN Information Statement) shall be in effect; (vi) the Tax
Sharing Agreement shall have been duly executed and delivered by the parties
thereto; (vii) the private letter ruling issued by the Internal Revenue
Service as to the tax-free nature of the Distribution shall not have been
withdrawn; and (viii) the Internal Restructuring (as defined below) shall have
been consummated (it being understood that the consummation of the steps in
the Internal Restructuring that are permitted but not required are not a
condition to the Distribution).
As used herein, the term "Internal Restructuring" means the
series of transactions necessary to prepare for the Distributions and includes
certain borrowing transactions, the making of certain contributions to certain
C-TEC subsidiaries and the making of certain internal distributions by certain
C-TEC subsidiaries (the "Internal Distributions"). The Internal Distributions
are in each case subject to the condition that the Board of Directors of each
distributing company shall be satisfied that (A) both before and after giving
effect to the distribution, the distributing company is not and would not be
insolvent, (B) after giving effect to the distribution, the distributing
company would be able to pay its liabilities as they mature and become
absolute, and the distributing company would not have unreasonably small
capital with which to engage in its business and (C) the distribution will be
permitted under applicable state corporate law.
Indemnification
The Company, RCN and C-TEC have agreed to indemnify one another
against certain liabilities. RCN has agreed to indemnify C-TEC and its
subsidiaries at the time of the Distribution (collectively, the "C-TEC Group")
and the respective directors, officers, employees and Affiliates of each
Person in the C-TEC Group (collectively, the "C-TEC Indemnitees") and Cable
Michigan and its subsidiaries at the time of the Distribution (collectively,
the "Cable Michigan Group" or the "Company Group") and the respective
directors, officers, employees and Affiliates of each Person in the Cable
Michigan Group (collectively, the "Cable Michigan Indemnitees") from and
against any and all damage, loss, liability and expense ("Losses") incurred or
suffered by any of the C-TEC Indemnitees or the Cable Michigan Indemnitees,
respectively, (i) arising out of, or due to the failure of RCN or any of its
subsidiaries at the time of the Distribution (collectively, the "RCN Group")
to pay, perform or otherwise discharge any of the RCN Liabilities (as defined
below), (ii) arising out of the breach by any member of the RCN Group of any
obligation under the Distribution Agreement or any of the other Distribution
Documents and (iii) in the case of the C-TEC Indemnitees, arising out of the
provision by the C-TEC Group of the services described below to the RCN Group
except to the extent that such Losses result from the gross negligence or
willful misconduct of a C-TEC Indemnitee. "RCN Liabilities" refers to (i) all
liabilities of the RCN Group under the Distribution Agreement or any of the
other distribution documents, (ii) all other liabilities of the Company, RCN
or C-TEC (or their respective subsidiaries), except as specifically provided
in the Distribution Agreement or any of the other Distribution Documents and
whether arising before, on or after the Distribution Date, to the extent such
liabilities arise primarily from or relate primarily to the management or
conduct of the RCN Businesses prior to the effective time of the Distribution
(the liabilities in clauses (i) and (ii) collectively, the "True RCN
Liabilities") and (iii) 30% of the Shared Liabilities (as defined below).
The Company has agreed to indemnify the RCN Group and the
respective directors, officers, employees and Affiliates of each Person in the
RCN Group (collectively, the "RCN Indemnitees") and the C-TEC Indemnitees from
and against any and all Losses incurred or suffered by any of the RCN
Indemnitees or the C-TEC Indemnitees, respectively, (i) arising out of, or due
to the failure of any Person in the Cable Michigan Group to pay, perform or
otherwise discharge any of the Cable Michigan Liabilities (as defined below),
(ii) arising out of the breach by any member of the Cable Michigan Group of
any obligation under the Distribution Agreement or any of the other
distribution documents, (iii) in the case of the C-TEC Indemnitees, arising
out of the provision by the C-TEC Group of services to the Cable Michigan
Group except to the extent that such Losses result from the gross negligence
or willful misconduct of a C-TEC Indemnitee and (iv) in the case of the RCN
Indemnitees, arising out of the provision by RCN of the services described
below to the Cable Michigan Group except to the extent that such Losses result
from the gross negligence or willful misconduct of an RCN Indemnitee. "Cable
Michigan Liabilities" refers to (i) all liabilities of the Cable Michigan
Group under the Distribution Agreement or any of the other distribution
documents, (ii) all other liabilities of the Company, RCN or C-TEC (or their
respective subsidiaries), except as specifically provided in the Distribution
Agreement or any of the other Distribution Documents and whether arising
before, on or after the Distribution Date, to the extent such liabilities
arise primarily from or relate primarily to the management or conduct of the
business of the Cable Michigan Group prior to the effective time of the
Distribution (the liabilities in clauses (i) and (ii) collectively, the "True
Cable Michigan Liabilities") and (iii) 20% of the Shared Liabilities (as
defined below).
C-TEC has agreed to indemnify the Cable Michigan Indemnitees
and the RCN Indemnitees from and against any and all Losses incurred or
suffered by any of the Cable Michigan Indemnitees or the RCN Indemnitees,
respectively, (i) arising out of, or due to the failure of any Person in the
C-TEC Group to pay, perform or otherwise discharge any of the C-TEC
Liabilities (as defined below), (ii) arising out of the breach by any member
of the C-TEC Group of any obligation under the Distribution Agreement or any
of the other Distribution Documents and (iii) in the case of the RCN
Indemnitees, arising out of the provision by RCN of the services described
below to the C-TEC Group except to the extent that such Losses result from the
gross negligence or willful misconduct of an RCN Indemnitee. "C-TEC
Liabilities" refers to (i) all liabilities of the C-TEC Group under the
Distribution Agreement or any of the other distribution documents, (ii) all
other liabilities of the Company, RCN or C-TEC (or their respective
subsidiaries), except as specifically provided in the Distribution Agreement
or any of the other Distribution Documents and whether arising before, on or
after the Distribution Date, to the extent such liabilities arise primarily
from or relate primarily to the management or conduct of the business of the
C-TEC Group prior to the effective time of the Distribution (the liabilities
in clauses (i) and (ii) collectively, the "True C-TEC Liabilities") and (iii)
50% of the Shared Liabilities (as defined below).
"Shared Liability" means any liability (whether arising before,
on or after the Distribution Date) of the Company, RCN or C-TEC or their
respective subsidiaries which (i)(a) arises from or relates to the management
or conduct prior to the effective time of the Distribution of the businesses
of C-TEC and its subsidiaries or (b) is one of certain fees and expenses
incurred in connection with the Restructuring and (ii) is not a True C-TEC
Liability, a True RCN Liability or a True Company Liability.
The Company, RCN and C-TEC have also generally agreed to
indemnify each other and each other's affiliates and controlling persons from
certain liabilities under the securities laws in connection with the Company
Form 10 and this Information Statement and the RCN Form 10 and RCN Information
Statement. For information regarding indemnification for tax liabilities, see
"-- Tax Sharing Agreement."
The Company does not believe that any of the foregoing
indemnities will have a material adverse effect on the business, financial
condition or results of operations of the Company.
The Distribution Agreement also includes procedures for notice
and payment of indemnification claims and provides that the indemnifying party
may assume the defense of claims or suits brought by third parties for
non-Shared Liabilities and may participate in the defense of claims or suits
brought by third parties for Shared Liabilities. RCN is entitled to assume
the defense of claims or suits brought by third parties for Shared
Liabilities. Any indemnification paid under the foregoing indemnities is to
be paid net of the amount of any insurance or other amounts that would be
payable by any third party to the indemnified party in the absence of such
indemnity.
Employee Matters
Under the Distribution Agreement, Cable Michigan, RCN and C-TEC
agreed generally to assume employee benefits-related liabilities with respect
to its current and, in some cases, former employees. Each of Cable Michigan,
RCN and C-TEC also agreed to an allocation of employee-related liabilities
arising out of certain shared operations prior to the Distribution on the same
basis as Shared Liabilities are allocated.
Transitional Services and Other Arrangements
RCN has agreed to provide or cause to be provided to the C-TEC
Group certain specified services for a transitional period after the
Distribution. The transitional services to be provided are the following: (i)
accounting, (ii) payroll, (iii) management supervision, (iv) cash management,
(v) human resources and benefit plan administration, (vi) insurance
administration, (vii) legal, (viii) tax, (ix) internal audit and (x) other
miscellaneous administrative services. The fee per year for these services
will be 3.5% of the first $175 million of revenue of the C-TEC Group and 1.75%
of any additional revenue. Based on the C-TEC Group's revenue for 1996, the
fee for that year would have been $6,376,000.
RCN has also agreed to provide or cause to be provided to the
Cable Michigan Group certain specified services for a transitional period
after the Distribution. The transitional services to be provided are the
following: (i) customer service, (ii) marketing, (iii) accounting, (iv)
payroll, (v) management supervision, (vi) cash management, (vii) human
resources and benefit plan administration, (viii) insurance administration,
(ix) legal, (x) tax, (xi) internal audit, (xii) programming administration,
(xiii) billing, (xiv) monthly cable guides and (xv) other miscellaneous
administrative services. The fee per year for services (ii)-(xii) and (xv)
will be 4.0% of the revenues of the Cable Michigan Group plus a direct
allocation of certain consolidated cable administration functions. Based on
the Cable Michigan Group's revenue for 1996 and the allocation of certain
consolidated cable administrative functions, the charge for such services for
that year would have been $4,418,000. The direct charge for customer service
listed in item (i) along with the billing service listed in item (xiii) and
the cable guide service listed in item (xiv) will be a pro rata share (based
on subscribers) of the expenses incurred by RCN to provide such customer
service and to provide such billing and cable guide service for all relevant
members of the RCN Group and all relevant members of the Cable Michigan Group.
C-TEC has agreed to provide or cause to be provided to the RCN
Group and the Cable Michigan Group certain financial data processing services
for a transitional period after the Distribution. The fees for such services
will be an allocated portion (based on relative usage) of the cost incurred by
C-TEC to provide such financial data processing services to all three groups.
Based on this allocation arrangement, the fees for such services to the RCN
Group and the Cable Michigan Group would have been approximately $372,000 and
$69,000, respectively, for 1996.
The nature, scope and timing of the foregoing services are to
be substantially consistent with the nature, scope and timing of the service
provider's services prior to the Distribution, provided that the service
provider shall not be obligated to hire additional or replacement employees,
or increase the compensation of its existing employees, in order to provide
the services. The services are to commence on the Distribution Date and will
terminate upon 60 days notice by either the service provider or the relevant
service recipient, except that the billing, customer service and programming
administration services provided by RCN to Cable Michigan may not be
terminated by RCN on less than one year advance notice to Cable Michigan. A
service recipient may also terminate individual services by giving 60 days
notice to the applicable service provider.
In addition, RCN has agreed to obtain programming from third
party suppliers for Cable Michigan, the costs of which will be reimbursed to
RCN by Cable Michigan. In those circumstances where RCN purchases third party
programming on behalf of both the RCN Group and the Cable Michigan Group, such
costs will be shared by each Group on a pro rata basis based on each Group's
number of subscribers. Such programming arrangements are to commence on the
Distribution Date and will terminate upon 60 days notice by Cable Michigan or
on not less than one year advance notice by RCN to Cable Michigan.
Access to Information
Pursuant to the Distribution Agreement, each of the Company
Group, the RCN Group and the C-TEC Group will provide to each other Group all
records in its possession relating to such other Group or such other Group's
business and affairs immediately prior to or as soon as practicable following
the Distribution. If records relate to more than one Group, true and complete
copies will be provided to the other Group or Groups. After the Distribution,
each Group will also afford to each other Group and certain of such other
Group's agents reasonable access during normal business hours to all records
in its possession relating to such other Group's business and affairs as
reasonably required, including, for auditing, accounting, litigation,
disclosure and reporting purposes, subject to limited exceptions. Finally,
each Group will use its best efforts to make available to each other Group,
upon written request, its officers, directors, employees and representatives
as witnesses, and will otherwise cooperate with each other Group, in
connection with any proceeding arising out of the business or operations of
any Group prior to the Distribution. In each case, the provider of
information or witnesses under the above provisions is entitled to
reimbursement for reasonable expenses from the recipient of such information
or witnesses.
Except as otherwise provided in the Distribution Agreement,
each of the Company, RCN and C-TEC, and its respective directors, officers,
employees, agents, consultants and advisors will hold all information
concerning each other party or its affiliates in strict confidence.
Intercompany Accounts; Intellectual Property Rights and Licenses
Except as otherwise provided in the Tax Sharing Agreement or
the Distribution Agreement, all intercompany receivable, payable and loan
balances among the Company Group, the RCN Group and the C-TEC Group will be
settled prior to the Distribution by payment in full by the party or parties
owing any such obligation. The Distribution Agreement provides that all
arrangements and agreements between the parties will terminate as of the
Distribution Date other than the Distribution Documents and certain other
specified items, including certain arms-length commercial arrangements.
None of the Groups will have any right or license in or to any
technology, software, intellectual property, know-how or other proprietary
right owned, licensed or held for use by another Group.
Miscellaneous
Any dispute arising out of or in connection with the
Distribution Agreement will be submitted to arbitration in accordance with the
procedures described in the Agreement.
Tax Sharing Agreement
The Tax Sharing Agreement, by and among the Company, RCN and
C-TEC (the "Tax Sharing Agreement"), governs contingent tax liabilities and
benefits, tax contests and other tax matters with respect to tax returns filed
with respect to tax periods, in the case of the Company, ending or deemed to
end on or before the Distribution Date. Under the Tax Sharing Agreement,
Adjustments (as defined in the Tax Sharing Agreement) to taxes that are
clearly attributable to the Company Group, the RCN Group, or the C-TEC Group
will be borne solely by such group. Adjustments to all other tax liabilities
will be borne 50% by C-TEC, 20% by the Company and 30% by RCN.
Notwithstanding the above, if as a result of the acquisition of
all or a portion of the capital stock or assets of the Company, the
Distribution or the RCN Distribution fails to qualify as a tax-free
distribution under Section 355 of the Code, then the Company will be liable
for any and all increases in tax attributable thereto.
Notwithstanding the above, if as a result of the acquisition of
all or a portion of the capital stock or assets of RCN, the Distribution or
the RCN Distribution fails to qualify as a tax-free distribution under Section
355 of the Code, then RCN will be liable for any and all increases in tax
attributable thereto.
TRADING MARKET
There has been no trading market for the Company Common Stock,
and there can be no assurances as to the establishment or continuity of any
such market. However, it is expected that a "when-issued" trading market may
develop on or about the Record Date. The Company will apply for listing of
the Company Common Stock on NASDAQ under the symbol "CABL." It is a condition
to the obligation of C-TEC to consummate the Distributions that the Company
Common Stock to be issued in the Distribution and the common stock of RCN to
be distributed in the RCN Distribution shall have been approved for listing on
NASDAQ, subject to official notice of issuance. See "Relationship Among the
Company, C-TEC and RCN--Terms of Distribution Agreement."
Prices at which the Company Common Stock may trade prior to the
Distribution on a "when-issued" basis or after the Distribution cannot be
predicted. Prices at which trading in shares of Company Common Stock occurs
may fluctuate significantly. See "Risk Factors--No Prior Market for Common
Stock." The prices at which the Company Common Stock trades will be
determined by the marketplace and may be influenced by many factors,
including, among others, quarter to quarter variations in the actual or
anticipated financial results of the Company or other companies in the markets
served by the Company. In addition, the stock market has experienced extreme
price and volume fluctuations that have affected the market price of many
telecommunications stocks and that have often been unrelated or
disproportionate to the operating performance of individual companies. These
and other factors may adversely affect the market price of the Company Common
Stock.
The Company Common Stock received by holders of C-TEC Common
Equity pursuant to the Distribution will be freely transferable, except for
shares of such Company Common Stock received by any person who may be deemed
an "affiliate" of the Company within the meaning of Rule 144 ("Rule 144")
under the Securities Act of 1933, as amended (the "Securities Act"). Persons
who may be deemed to be affiliates of the Company after the Distribution
generally include individuals or entities that directly, or indirectly through
one or more intermediaries, control, are controlled by, or are under common
control with, the Company, and may include the directors and principal
executive officers of the Company as well as Kiewit Telecom, the principal
stockholder of the Company. Persons who are affiliates of the Company will be
permitted to sell their Company Common Stock received pursuant to the
Distribution only pursuant to an effective registration statement under the
Securities Act or pursuant to an exemption from registration under the
Securities Act, such as the exemption afforded by Rule 144.
The Company anticipates that options to purchase _____ shares
of Company Common Stock will be outstanding immediately following the
Distribution, which options will be granted pursuant to the Company's plans.
See "Management--Executive Compensation". Shares of Company Common Stock
issued upon exercise of such options will be registered on Form S-8 under the
Securities Act and will, therefore, be freely transferable, except by
affiliates as described above. Except for the shares of Company Common Stock
distributed in the Distribution and such stock options, no securities of the
Company will be outstanding as of or immediately following the Distribution.
The Company has not entered into any agreement or otherwise committed to
register any shares of Company Common Stock under the Securities Act for sale
by security holders. Except for the shares registered on this Registration
Statement in connection with the Distribution and common equity offered
pursuant to employee benefit plans, no common equity of the Company is being,
or has been publicly proposed to be, publicly registered or offered by the
Company.
DIVIDENDS
The Company anticipates that future revenues will be used
principally to support operations and finance growth of the business and,
thus, the Company does not intend to pay cash dividends on the Company Common
Stock in the foreseeable future. The payment of any cash dividends in the
future will be at the discretion of the Company Board. The declaration of any
dividends and the amount thereof will depend on a number of factors, including
the Company's financial condition, capital requirements, funds from
operations, future business prospects and such other factors as the Company
Board may deem relevant. The Credit Agreement into which the Company has
entered contains restrictions on the payment of dividends. See "Description
of the Credit Agreement."
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
Prior to the Distribution Date, the Company has been operated
as part of C-TEC. The following Unaudited Pro Forma Consolidated Statement of
Operations sets forth the historical statements of operations of the Company
for the year ended December 31, 1996, and the three months ended March 31,
1997 and as adjusted for the Distribution and the related transactions and
events described in the Notes thereto as if the Distribution and such
transactions and events had been consummated on January 1, 1996. The
following Unaudited Pro Forma Consolidated Balance Sheet sets forth the
historical balance sheet of the Company as of March 31, 1997, and as adjusted
for the Distribution and the related transactions and events described in the
Notes thereto as if the Distribution and such transactions and events had been
consummated on March 31, 1997.
Management believes that the assumptions used provide a
reasonable basis on which to present such Unaudited Pro Forma Condensed
Consolidated Financial Statements. The Unaudited Pro Forma Consolidated
Financial Statements should be read in conjunction with the historical
Financial Statements and Notes thereto included elsewhere in this Information
Statement and "Management's Discussion and Analysis of Financial Condition and
Results of Operations." The Unaudited Pro Forma Consolidated Financial
Statements are provided for information purposes only and should not be
construed to be indicative of the Company's results of operations or financial
condition had the Distribution and the transactions and events described above
been consummated on the dates assumed, may not reflect the results of
operations or financial condition which would have resulted had the Company
been operated as a separate, independent Company during such period, and are
not necessarily indicative of the Company's future results of operations or
financial condition.
Cable Michigan, Inc.
Unaudited Pro Forma Consolidated Statement of Operations
Year Ended December 31, 1996
($ in thousands, except per share
amounts and number of shares)
<TABLE>
<CAPTION>
Adjustments Pro Forma
for for
Historical Distribution Distribution
---------- ------------ ------------
<S> <C> <C> <C>
Sales....................................................... $76,187 $76,187
Cost and expenses, excluding depreciation and amortization.. 44,091 44,091
Depreciation and amortization............................... 31,427 31,427
------ ------
Operating income............................................ 669 669
Interest income............................................. 127 127
Interest expense............................................ (15,179) $13,952 (1)
(8,634) (2) (9,861)
Other expense, net.......................................... (736) (736)
------ ------ ------
(Loss) before income taxes.................................. (15,119) 5,318 (9,801)
(Benefit) for income taxes.................................. (5,712) 4,883 (1)
(3,022) (2) (3,851)
------ ------ ------
(Loss) before minority interest............................. (9,407) 3,457 (5,950)
Minority interest in loss of consolidated entities.......... 1,151 1,151
------ ------ ------
Net (loss).................................................. $(8,256) $ 3,457 $(4,799)
====== ====== ======
Unaudited pro forma net (loss) per common share............. $ [ ]
Weighted average number of common shares outstanding........ [ ] (3)
See accompanying notes to pro forma financial statements
</TABLE>
Cable Michigan, Inc.
Unaudited Pro Forma Consolidated Statement of Operations
Three Months Ended March 31, 1997
($ in thousands, except per share
amounts and number of shares)
<TABLE>
<CAPTION>
Adjustments Pro Forma
for for
Historical Distribution Distribution
---------- ------------ ------------
<S> <C> <C> <C>
Sales........................................................ $19,557 $19,557
Cost and expenses, excluding depreciation and amortization... 11,360 11,360
Depreciation and amortization................................ 7,922 7,922
------ ------
Operating income............................................. 275 275
Interest income.............................................. 42 42
Interest expense............................................. (3,347) $ 3,064 (1)
(2,158) (2) (2,441)
Other expense, net........................................... (132) (132)
------ ------ ------
(Loss) before income taxes................................... (3,162) 906 (2,256)
(Benefit) for income taxes................................... (1,090) 1,072 (1)
(755) (2) (773)
------ ------ ------
(Loss) before minority interest and equity in unconsolidated
entities..................................................... (2,072) 589 (1,483)
Minority interest in loss of consolidated entities........... 277 277
------ ------ ------
Net (loss)................................................... $(1,795) $ 589 $(1,206)
====== ====== ======
Unaudited pro forma net (loss) per common share.............. [ ]
Weighted average number of common shares outstanding (3)..... [ ] (3)
See accompanying notes to pro forma financial statements
</TABLE>
Cable Michigan, Inc.
Unaudited Pro Forma Consolidated Balance Sheet
March 31, 1997
($ in thousands)
<TABLE>
<CAPTION>
Adjustments Pro Forma
for for
Historical Distribution Distribution
---------- ------------ ------------
<S> <C> <C> <C>
ASSETS
Cash and temporary cash investments........................... $ 2,366 $110,000 (4)
(110,000) (5)
(818) (6) $ 1,548
Accounts receivable, net of reserve for doubtful accounts
of $657..................................................... 3,180 3,180
Prepayments and other......................................... 1,001 1,001
Accounts receivable - affiliates.............................. 1,234 (1,234) (7) --
Deferred income taxes......................................... 1,028 1,028
Property, plant and equipment, net of accumulation of
depreciation................................................... 75,335 75,335
Intangible assets, net........................................ 57,046 57,046
63 818 (6) 881
------- ------- -------
Deferred charges and other assets.............................
Total Assets................................................... $141,253 $ (1,234) $140,019
======= ======= =======
LIABILITIES AND SHAREHOLDER'S DEFICIT
Liabilities
Current maturities of long-term debt.......................... $1,838 $1,838
Accounts payable.............................................. 2,395 2,395
Advance billings and customer deposits........................ 2,196 2,196
Accrued taxes................................................. 168 168
Accrued interest.............................................. 15 15
Accrued expenses.............................................. 6,862 6,862
Accounts payable - affiliates................................. 5,256 $ (5,256) (7) --
Long-term debt................................................ 14,663 110,000 (4)
15,000 (8) 139,663
Notes payable - affiliates.................................... 148,813 (110,000) (5)
(38,813) (7) --
Deferred income taxes......................................... 25,673 25,673
------- ------- -------
Total liabilities............................................. 207,879 (29,069) 178,810
------- ------- -------
Minority Interest............................................. 14,419 14,419
Commitments and contingencies.................................
Common shareholder's deficit................................... (81,045) (15,000) (8)
42,835 (7) (53,210)
------- ------- -------
Total Liabilities and Shareholder's Deficit.................... $141,253 $ (1,234) $140,019
======= ======= =======
See accompanying notes to pro forma financial statements
</TABLE>
Cable Michigan, Inc.
Notes to Unaudited Pro Forma
Consolidated Financial Statements
(dollars in thousands)
The Unaudited Pro Forma Consolidated Statements of
Operations and Balance Sheet of Cable Michigan assume that the Company was
an autonomous entity rather than a wholly owned subsidiary of C-TEC at the
dates and for the periods shown. The Pro Forma adjustments, as described
below, are keyed to the corresponding amounts shown in the "Adjustments for
Distribution" column in the relevant statement.
(1) Adjustment to eliminate interest expense and related income
taxes on outstanding affiliate notes payable owned by the Company of
which $110,000 are assumed to be treated as repaid and the remaining
balance is assumed to be treated as a capital contribution to the
Company from the borrower.
(2) Adjustment to reflect interest expense and amortization of
debt issuance costs, and related income taxes, on new third party debt
of $125,000, which is assumed to be incurred (see (4) and (8)).
(3) The weighted average number of common shares outstanding
reflects the product of (i) the Distribution ratio times (ii) the
number of shares of Company Common Stock outstanding as of [
], 1997.
(4) Adjustment to reflect the assumed incurrence of new third
party debt of $110,000 by the Company.
(5) Adjustment to reflect the assumed partial payment of notes
payable-affiliate. The Company will incur new third party debt for the
purpose of repaying a portion of the total amount of outstanding
affiliate notes payable owed to a subsidiary of RCN.
(6) Adjustment to reflect debt issuance costs in connection
with the assumed incurrence of the new third party debt.
(7) Adjustment to reflect the assumed treatment of remaining
receivable and payable balances with affiliates as capital contributions
to (from) the respective affiliates.
(8) Adjustment to reflect the assumption of third-party debt of
C-TEC of $15,000 collateralized by the 62% interest in Mercom.
PRO FORMA CAPITALIZATION
Prior to the Distribution Date, the Company has been operated
as part of C-TEC. The following table sets forth the capitalization of the
Company as of March 31, 1997, and as adjusted to give effect to the
Distribution and the related transactions and events described in the notes
hereto and the Notes to the Unaudited Pro Forma Consolidated Balance Sheet
included in this Information Statement as if the Distribution and such
transactions and events had been consummated on March 31, 1997.
Management believes that the assumptions used provide a
reasonable basis on which to present such Pro Forma Capitalization. The Pro
Forma Capitalization table below should be read in conjunction with the
historical Financial Statements and Notes thereto included elsewhere in this
Information Statement, "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Unaudited Pro Forma Consolidated
Financial Statements." The Pro Forma Capitalization table below is provided
for information purposes only and should not be construed to be indicative of
the Company's capitalization or financial condition had the Distribution and
such related transactions and events been consummated on the date assumed, may
not reflect the capitalization or financial condition which would have
resulted had the Company been operated as a separate, independent Company
during such period, and are not necessarily indicative of the Company's future
capitalization or financial condition.
<TABLE>
<CAPTION>
March 31, 1997
($ in thousands)
---------------------------------
Pro Forma
Historical for Distribution
---------- ----------------
<S> <C> <C>
Long-term debt (including current portion)........... $ 16,501 $141,501
Notes payable - affiliates........................... 148,813 --
------- -------
Total indebtedness................................ 165,314 141,501
Common shareholder's deficit......................... (81,045) (53,210)
------- -------
Total capitalization.............................. $ 84,269 $ 88,291
======= =======
/TABLE>
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA
Prior to the Distribution Date, the Company has been
operated as part of C-TEC. The table below sets forth selected historical
consolidated financial data for the Company. The historical consolidated
financial data presented below reflect periods during which the Company did
not operate as an independent company and, accordingly, certain assumptions
were made in preparing such financial data. Therefore, such data may not
reflect the results of operations or the financial condition which would
have resulted if the Company had operated as a separate, independent
company during such periods, and are not necessarily indicative of the
Company's future results of operation or financial condition.
The selected historical consolidated financial data for the
years ended December 31, 1993 and 1992 and as of December 31, 1994, 1993 and
1992 are derived from the Company's unaudited historical consolidated financial
statements not included in this Information Statement. The selected
historical consolidated financial data of the Company for the years ended
December 31, 1996, 1995 and 1994 and as of December 31, 1996 and 1995 are
derived from and should be read in conjunction with the Company's audited
historical consolidated financial statements included elsewhere in this
Information Statement. The selected historical consolidated financial data for
the three month periods ended March 31, 1997 and 1996 and as of those dates
are derived from and should be read in conjunction with the Company's
unaudited historical consolidated financial statements included elsewhere in
this Information Statement. In the opinion of the Company's management, these
three month consolidated historical financial statements include all
adjustments, consisting of normal recurring adjustments, necessary for a fair
statement of the results for the unaudited interim periods. The results for
such interim periods are not necessarily indicative of the results for the
full year. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the Financial Statements. Earnings per share
data are presented elsewhere in this Information Statement on a pro forma
basis only. See "Unaudited Pro Forma Consolidated Financial Statements."
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended March
31, Year Ended December 31,
------------------------ ------------------------------------------------------
(dollars in thousands)
1997 1996 1996 1995 1994 1993 1992
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations Data:
Sales........................... $19,557 $18,340 $76,187 $60,675 $49,141 $48,665 $43,860
Costs and Expenses, excluding
depreciation and amortization. 11,360 10,343 44,091 34,749 28,543 28,655 28,142
Depreciation and amortization... 7,922 7,829 31,427 25,154 28,685 32,697 31,720
------ ------ ------ ------ ------ ------ ------
Operating income (loss)......... 275 168 669 772 (8,087) (12,687) (16,002)
Interest income................. 42 27 127 55 -- -- 44
Interest expense................ (3,347) (4,018) (15,179) (15,973) (15,767) (15,960) (16,672)
Other (expense)/income, net..... (132) (68) (736) (363) (1,307) (461) (178)
(Benefit) provision for income
taxes......................... (1,090) (1,415) (5,712) (5,590) 52 (799) (11,019)
Minority interest in (income)
loss of consolidated entities. 277 328 1,151 (186) -- -- --
Equity in (loss) of
unconsolidated entities.......... -- -- -- (396) (1,013) (834) (840)
------ ------ ------ ------ ------ ------ ------
Net (Loss)...................... (1,795) (2,148) (8,256) (10,501) (26,226) (29,143) (22,629)
====== ====== ====== ====== ====== ====== ======
Balance Sheet Data:
Total assets.................... 141,253 164,709 149,200 172,759 116,972 147,286 162,088
Long-term liabilities........... 14,663 16,992 15,680 17,430 -- -- --
Common shareholder's (deficit).. (81,045) (75,515) (79,741) (73,757) (76,931) (60,419) (38,251)
</TABLE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with
the Company's historical Consolidated Financial Statements and Unaudited
Pro Forma Consolidated Financial Statements and the Notes thereto included
elsewhere in this Information Statement.
General
Prior to the Distribution Date, the Company has been operated
as part of C-TEC. The historical financial information presented herein
reflects periods during which the Company did not operate as an independent
company and accordingly, certain assumptions were made in preparing such
financial information. Such information, therefore, may not necessarily
reflect the results of operations or the financial condition of the Company
which would have resulted had the Company been an independent, public Company
during the reporting periods, and are not necessarily indicative of the
Company's future operating results or financial condition. Dollar amounts
contained in the following section are in thousands.
Results of Operations
Three Months Ended March 31, 1997 Compared With Three Months
Ended v. March 31, 1996
For the three months ended March 31, 1997, operating income
before depreciation and amortization was $8,197 as compared to $7,997 for the
three months ended March 31, 1996. Sales increased 6.6% to $19,557 for the
three month period ended March 31, 1997 from $18,340 for the same period in
1996. Net loss was ($1,795) for the quarter ended March 31, 1997 as compared
to $(2,148) for the quarter ended March 31, 1996. The improvement is
principally due to lower interest expense in 1997 as compared to 1996.
Sales are primarily comprised of subscription fees for basic
service packages, premium and pay per view services and cable advertising
sales. For the three months ended March 31, 1997, sales were $19,557, an
increase of $1,217, or 6.6%, primarily due to higher basic service revenue
resulting from approximately 6,059 additional average monthly subscribers over
the same period in 1996 and the effects of rate increases during the first
quarter of 1997.
Cost and expenses, excluding depreciation and amortization, are
comprised of direct costs of providing services, primarily cable programming
and franchise costs, salaries and benefits, customer service costs, sales and
marketing costs and general and administrative expenses. For the three months
ended March 31, 1997, costs and expenses, excluding depreciation and
amortization, were $11,360, an increase of $1,017 or 9.8% as compared to the
quarter ended March 31, 1996. The increase is primarily due to higher basic
programming costs resulting from higher rates, additional channels and
increased subscribers.
Depreciation and amortization was $7,922 and $7,829 for the
three months ended March 31, 1997 and 1996, respectively.
Interest expense was $3,347 and $4,018 for the three months
ended March 31, 1997 and 1996, respectively. The decrease of $671 or 16.7% is
due primarily to lower average outstanding debt.
The Company's effective income tax rate was (37.8)% for the
quarter ended March 31, 1997 and (39.7)% for the quarter ended March 31, 1996.
The difference is primarily due to the effects of net operating loss
carryforwards.
Year Ended December 31, 1996 Compared With Year Ended December
31, 1995
For the year ended December 31, 1996, operating income before
depreciation and amortization was $32,096 as compared to $25,926 for the year
ended December 31, 1995. Sales increased 25.6% to $76,187 for 1996 from
$60,675 in 1995. For the year ended December 31, 1996, net loss was $(8,256)
as compared to a net loss of $(10,501) for 1995. The improvement in operating
income before depreciation and amortization of $6,170 was substantially offset
by higher depreciation and amortization of $6,273. Lower interest expense of
$794 and a higher minority share of Mercom's losses of $1,337 primarily
account for the decrease in the net loss of $2,245 in 1996 as compared to 1995.
Sales for 1996 were $76,187, an increase of $15,512 or 25.6%,
primarily as a result of the consolidation of Mercom for a full year in 1996
as compared to five months in 1995. Mercom accounts for $9,648 of the increase
in sales over the same period in 1995. On an annualized basis, Mercom's sales
increased approximately $1,600 or 11.7%, of which approximately $1,000 relates
to a rate increase implemented in February 1996 and approximately $500 relates
to 1,845 additional average subscribers per month in 1996 as compared to 1995.
The remaining $5,864 increase in consolidated sales is due primarily to an
increase in average subscribers of Cable Michigan of approximately 7,600 and
the effects of rate increases of approximately 12.1% in April 1995, which
affected 1996 results for a full year, and approximately 5% in February 1996.
On an annualized basis, the rate increases, excluding Mercom, provide
additional basic revenues of approximately $3,700, subject to final decision
by the FCC with respect to these rate increases, of which no assurances can be
given.
Costs and expenses, excluding depreciation and amortization,
were $44,091 for 1996, an increase of $9,342, or 26.9% as compared to 1995.
The increase is primarily due to the consolidation of the financial results of
Mercom for a full year in 1996 as compared to five months in 1995, as
discussed above. Mercom contributed $6,097 to the increase in costs and
expenses in 1996.
On an annualized basis, Mercom's costs and expenses, excluding
deprecation and amortization, increased approximately $1,200 or 13.5%.
Programming, franchise and other variable costs increased approximately $775.
This increase is directly related to costs associated with subscriber growth,
increased programming rates on existing channels and new basic channels added
during the year. Operating, marketing and other fixed system costs increased
by $423. This increase is primarily due to salaries and benefits, costs
associated with maintaining a larger subscriber base and a concentration on
customer service initiatives. The remaining increase in costs and expenses,
excluding depreciation and amortization, is primarily due to higher
programming expense of Cable Michigan due to license fee increases, subscriber
growth and channel additions.
Depreciation and amortization was $31,427 in 1996, an increase
of $6,273, or 24.9% as compared to 1995. The increase is attributable to the
securing of a majority voting interest in Mercom in August 1995. Mercom's
financial results have been consolidated since that time resulting in an
increase in depreciation and amortization of approximately $5,800 for the
twelve months in 1996 as compared to the five months in 1995.
Interest expense was $15,179 in 1996, a decrease of
approximately $800, or 5% as compared to 1995, due to a combination of lower
average outstanding borrowings and lower average interest rates.
The Company acquired a majority voting interest in Mercom in
August 1995 pursuant to a common stock rights offering. Immediately prior to
the rights offering, the Company had a 43.63% interest in Mercom and accounted
for its investment under the equity method. Following the rights offering,
the Company has a 61.92% interest in Mercom and has consolidated Mercom in its
financial statements since August 1995. As a result, for 1995, minority
interest in the income of Mercom was $(186) while for 1996, minority interest
in the loss of Mercom was $1,151.
The Company's effective income tax rate was (34.7)% in 1995 and
(40.9)% in 1996. For an analysis of the change in income taxes, see the
reconciliation of the effective income tax rate in Note 5 to the Financial
Statements.
Year Ended December 31, 1995 Compared With Year Ended December
31, 1994
For the year ended December 31, 1995, operating income before
deprecation and amortization was $25,926 as compared to $20,598 for the year
ended December 31, 1994. Sales increased 23.5% to $60,675 for 1995 from
$49,141 in 1994. For the year ended December 31, 1995, net loss was $(10,501)
as compared to a net loss of $(26,226) for 1994. The higher operating income
before depreciation and amortization of $5,328, lower depreciation and
amortization of $3,531 and higher income tax benefits of $5,642 primarily
account for the decrease in the net loss of $15,725 in 1995 as compared to
1994.
Sales increased $11,534 or 23.5% primarily as a result of the
securing of a majority voting interest in Mercom in August 1995, whose
financial results are included in the consolidated results since that time.
The Company previously owned 43.63% of the voting stock of Mercom and
accounted for its investment under the equity method. Mercom accounts for
$5,922 of the increase in sales over the same period in 1994. On an
annualized basis, Mercom's sales increased approximately $1,000, or 7.8%
primarily due to approximately 2,300 average additional basic subscribers per
month, which generated approximately $600 of the increase, and a rate increase
in April, which generated approximately $300 of the increase. The remaining
$5,612 increase in consolidated sales is due primarily to an increase in
average subscribers of Cable Michigan of approximately 10,800 and the effect
of a rate increase of approximately 12.1% in April.
Costs and expenses, excluding depreciation and amortization,
were $34,749, an increase of $6,206 or 21.7% in 1995 as compared to 1994. The
increase is primarily due to the consolidation of Mercom since August 1995.
Mercom contributed $3,831 to the increase in costs and expenses in 1995. On
an annualized basis, Mercom's costs and expenses, excluding depreciation and
amortization, increased approximately $900, or 6.5%. Programming, franchise
and other variable costs increased $461. This increase is directly related to
costs associated with subscriber growth, increased programming rates on
existing channels and new basic channels added during 1995. Operating,
marketing, fixed and other general and administrative costs increased $412, or
8.6%, in 1995. The increase is primarily due to salaries and benefits, costs
associated with maintaining a larger subscriber base and a concentration on
customer service initiatives.
The remaining increase in costs and expenses, excluding
depreciation and amortization, is attributable to higher allocated corporate
management fees, higher customer service expense and higher programming
expense of Cable Michigan due to license fee increases, subscriber growth and
channel additions.
Depreciation and amortization for 1995 was $25,154, a decrease
of $3,531 due to the expiration of a noncompete agreement entered into in
connection with the acquisition of the Cable Michigan system, partially offset
by higher depreciation and amortization resulting from the consolidation of
Mercom since August 1995.
The Company's effective income tax rate was (0.2)% in 1994 and
(34.7)% in 1995. For an analysis of the change in income taxes, see the
reconciliation of the effective income tax rate in Note 5 to the 1996
consolidated financial statements.
Liquidity and Capital Resources
Pursuant to the restructuring, it is anticipated that the
Company will incur approximately $110,000 of newly issued third party debt for
the purpose of repaying a portion of the total amount of outstanding
intercompany notes payable owed to C-TEC Cable Systems, Inc., which is an RCN
business. C-TEC Cable Systems, Inc. will treat the remaining amount of
outstanding intercompany indebtedness of the Company as a capital contribution
to the Company. Also in connection with the restructuring, the Company will
assume approximately $15,000 of C-TEC indebtedness, which indebtedness will be
secured by the 62% interest in Mercom. Following the refinancing of its
intercompany debt with third party debt, the Company expects to have a ratio
of debt to operating income before depreciation and amortization of
approximately 4.3:1.0.
The Company has generated operating income before depreciation
and amortization of $32,096, $25,926 and $20,598 for the years ended December
31, 1996, 1995 and 1994, respectively. The Company expects to continue
generating positive cash flow which will be reinvested and which the Company
believes will be sufficient to fund its capital requirements and debt service.
See "Description of the Credit Agreement."
For the first quarter of 1997, the Company's net cash provided
by operating activities was $284 comprised primarily of a net loss of $1,795
adjusted by non-cash depreciation and amortization of $7,922, other non-cash
items totaling $(950) and working capital changes of $(5,384). Net cash used
in investing activities of $1,555 consisted primarily of additions to
property, plant and equipment of $1,450. Net cash provided by financing
activities of $340 consisted of a change in affiliate notes of $1,269
partially offset by redemption of long-term debt of $929.
For the year ended December 31, 1996, the Company generated
cash from operating activities of $27,817, comprised principally of a net loss
of $8,256 adjusted for non-cash depreciation and amortization of $31,427, other
non-cash items of $2,099 and working capital changes of $2,393. Net cash used
in investing activities was $9,215, comprised principally of capital
expenditures of $9,605. Net cash used in financing activities was $18,334,
comprised of a decrease in affiliate notes of $16,834 and principal payments
on long-term debt of $1,500.
DESCRIPTION OF THE CREDIT AGREEMENT
This section of the Information Statement describes the terms
and conditions of the Credit Agreement that the Company has in place. The
following description does not purport to be complete and is subject to, and
is qualified in its entirety by reference to, all of the provisions of the
Credit Agreement, which is filed as an exhibit to the Form 10 and is
incorporated herein by reference. Capitalized terms used in this Section and
not otherwise defined herein are used as defined in the Credit Agreement.
The Company has in place two secured credit facilities (the
"Credit Facilities") pursuant to a single credit agreement with a group of
lenders for which First Union National Bank acts as agent (the "Credit
Agreement"), which was effective as of July 1, 1997 (the "Closing Date"). The
first is a five-year revolving credit facility in the amount of $45 million
(the "Revolving Credit Facility"). The second is an eight-year term credit
facility in the amount of $100 million (the "Term Credit Facility").
Borrowings under the Credit Facilities are available for the following
purposes: (i) to refinance all existing indebtedness of the Company (including
intercompany indebtedness owed to C-TEC Cable Systems, Inc.), (ii) to finance
permitted acquisitions, and (iii) for capital expenditures, working capital
and general corporate purposes. Borrowings under the Credit Facilities are
subject to the conditions that there can be no default or event of default
under the Credit Agreement and that the representations and warranties of the
Company contained in the Credit Agreement must be true.
The interest rate on the Credit Facilities will be, at the
election of the Company, based on either a LIBOR or a Base Rate option (each
as defined in the Credit Agreement). In the case of the LIBOR option, the
interest rate will include a spread that varies, based on the Company's
Leverage Ratio (defined as the ratio of Total Debt at the last day of the most
recently ended fiscal quarter to Operating Cash Flow for the four fiscal
quarters then ended, each as defined in the Credit Agreement), from 62.5 basis
points to 137.5 basis points. In the case of the Base Rate option, the
interest rate will include a spread of 12.5 basis points if such ratio exceeds
4.75:1. In the case of the Revolving Credit Facility, a fee of 20 basis
points on the unused revolving commitment will accrue from the Closing Date
and will be payable quarterly in arrears. In the case of the Term Credit
Facility, a fee of 20 basis points on the unused term commitment will accrue
from the forty-sixth day after the Closing Date through the earlier of the
date on which the term commitment is fully drawn and the ninetieth day after
the Closing Date and will be payable ninety days after the Closing Date.
The Term Credit Facility is available in up to two
installments, and to the extent not borrowed during the ninety-day period
described above will cease to be available. The entire amount of the
Revolving Credit Facility is available to the Company until June 30, 2002
(subject to the discussion in the last paragraph of this section). Revolving
loans may be repaid and reborrowed from time to time.
The term loan must be repaid over six years in quarterly
installments, at the end of September, December, March and June of each year
from September 30, 1999 through June 30, 2005. The aggregate annual
installments payable on the term loan are as follows (assuming the entire $100
million is drawn, and if less then pro rata to the amounts given below):
1999 $ 5,000,000
2000 $11,250,000
2001 $13,750,000
2002 $16,250,000
2003 $20,000,000
2004 $22,500,000
2005 $11,250,000
The Company has the option to repay the term loan in whole or in part at any
time, without penalty, subject to customary "breakage" charges. Any amount of
the term loan that is repaid may not be reborrowed.
The Company is required to apply 100% of the net cash
proceeds realized from certain asset sales, certain payments under
insurance policies and certain incurrences of additional debt to repay the
revolving loans. Any excess amounts of such net cash proceeds not applied
to repay revolving loans are applied to reduce the scheduled installments
of the term loan on a pro rata basis.
All borrowings under the Credit Facilities will be pari passu,
and will be secured under a common collateral package including (i) a first
priority pledge by the Company of 100% of the stock in each other material
subsidiary created after the Closing Date; and (ii) if a holding company is
ever formed to hold the stock of the Company, a first priority pledge by such
holding company of the stock it owns of the Company. In addition, the Company
is subject to a negative pledge on the assets of the Company and a prohibition
on granting other negative pledges to other parties on the assets of the
Company and each of its subsidiaries. The stock and assets of Mercom are
excluded from the security arrangements. Mercom will not be treated as a
subsidiary of the Company until it is 100% owned by the Company.
The Credit Agreement contains customary covenants for
facilities of this nature, including covenants limiting debt, liens,
investments, consolidations, mergers, acquisitions and sales of assets,
payment of dividends and other distributions and transactions with affiliates.
The Credit Agreement requires the Company and its subsidiaries to maintain the
following financial ratios: (i) the ratio of Total Debt at any fiscal quarter
end to Operating Cash Flow for the trailing four fiscal quarters is not to
exceed 5.0:1 initially, adjusting over time to 4.0:1; (ii) the ratio of
Operating Cash Flow to Interest Expense for any four consecutive fiscal
quarters is not to fall below 2.75:1 for the first 3 years after the Closing
Date, adjusting to 3.00:1 thereafter; and (iii) the ratio of Operating Cash
Flow (minus certain capital expenditures, cash taxes and cash dividends) to
Fixed Charges (defined as scheduled principal payments and interest expense)
for any four consecutive quarters is not to fall below 1.05:1 for periods
ending on or after December 31, 1997.
The Credit Agreement also includes customary events of default.
Upon the occurrence of any event of default the lenders may accelerate the
outstanding loans and cancel any unborrowed commitment. These events of
default include payment and covenant defaults (subject in certain cases to a
grace period), misrepresentations, cross default to certain other debt,
bankruptcy, ERISA and judgment defaults and a change of control default. For
this purpose, "change of control" is defined to mean any time after the
Distribution Date that (A) Peter Kiewit Sons, Inc. ("PKS") shall cease to
hold, either directly or indirectly through one or more PKS entities, (1)
shares of the Company constituting at least thirty percent (30%) of the number
of outstanding common shares or at least thirty percent (30%) of the voting
power represented by the outstanding voting shares of the Company (in each
case, outstanding shares excluding shares issued after the Distribution Date
(i) for cash, (ii) in consideration for the acquisition of any investment or
property or the provision of services, (iii) upon the exercise of any warrant,
option, convertible security or similar instrument issued, after such date for
consideration described in clauses (i) and (ii) or (iv) in connection with an
employee stock option plan and similar benefit arrangement adopted after the
Distribution Date by the Company or any of its wholly owned subsidiaries), or
(B) any person (other than PKS or a PKS entity) or group of persons shall have
acquired in one or more series of transactions beneficial ownership of more
than fifty-one percent (51%) of the outstanding common stock or of the voting
power represented by the outstanding voting shares of the Company.
It is contemplated that prior to the Distribution Date the Company will
assume all obligations of C-TEC under a $15 million credit facility extended
by a separate group of lenders for which First Union National Bank also acts
as agent (the "$15 Million Facility"). The $15 Million Facility matures in a
single installment on June 30, 1999 and is secured by a first priority pledge
of all shares of Mercom owned by C-TEC. As described elsewhere in this
Information Statement, C-TEC proposes to contribute those shares to the
Company prior to the Distribution Date, subject to the lien securing the $15
Million Facility. Prior to the time that the $15 Million Facility has been
repaid (including periods prior to it being assumed by the Company), $15
million of the Revolving Credit Facility (or such lesser amount as is
outstanding under the $15 Million Facility) is not available to be borrowed by
the Company (the "Restricted Commitment"). If after the $15 Million Facility
is assumed by the Company it is not paid when due, or an other event of
default thereunder occurs, the Company must borrow the Restricted Commitment
(and the lenders are obligated to make such a revolving loan regardless of
whether any default under the Credit Facilities exists) and apply the proceeds
to repay the $15 Million Facility. Upon being assumed by the Company, the $15
Million Facility will have interest rate provisions, covenants and events of
default substantially the same as those in the Credit Agreement.
BUSINESS
Overview
Cable Michigan is a cable television operator in the State of
Michigan which, as of March 31, 1997, served approximately 200,000
subscribers. These figures include the approximately 41,000 subscribers served
by Mercom, a 62% owned subsidiary of the Company. Except where the context
indicates otherwise, the terms the "Company" and "Cable Michigan" mean the
Company and its subsidiaries, including Mercom.
Clustered primarily around the Michigan communities of Grand
Rapids, Traverse City, Lapeer and Monroe (Mercom), the Company's systems serve
a total of approximately 400 municipalities in attractive suburban markets and
small towns. The Company has generated strong growth in new homes passed and
basic subscriber levels. From 1992 to 1996, compounded annual growth in basic
subscribers was 4.4%; during the same period, basic penetration rose from
58.4% to 60.6%. Growth in homes passed has primarily been the result of new
home construction and plant extensions.
The following table summarizes the development of the Company's
operations since December 31, 1992:
<TABLE>
<CAPTION>
AS OF DECEMBER 31, AS OF MARCH 31,
----------------------------------------------------------- --------------------
1992 1993 1994 1995 1996 1996 1997
------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Homes Passed:
Wholly Owned Systems.... 226,384 235,188 244,622 250,747 261,441 253,290 263,652
Mercom Systems.......... 59,988 61,730 63,721 65,449 65,998 65,449 66,329
Total................ 286,372 296,918 308,343 316,196 327,439 318,739 329,981
Basic Subscribers:
Wholly Owned Systems.... 133,017 135,420 141,785 152,921 158,310 153,261 158,632
Mercom Systems.......... 34,118 34,714 37,324 38,853 40,012 39,853 40,769
Total................ 167,135 170,134 179,109 191,774 198,322 193,114 199,401
Basic Penetration:
Wholly Owned Systems.... 58.8% 57.6% 58.0% 61.0% 60.6% 60.5% 60.2%
Mercom Systems ......... 56.9% 56.2% 58.6% 59.4% 60.6% 60.9% 61.5%
All Systems.......... 58.4% 57.3% 58.1% 60.7% 60.6% 60.6% 60.4%
Average Monthly Revenue
per Subscriber for Last
Month of the Period:(1)
Wholly Owned Systems.... $29.66 $29.64 $27.06 $31.59 $32.20 $32.83 $33.11
Mercom Systems.......... $30.05 $29.70 $29.36 $30.41 $32.72 $33.63 $34.22
All Systems.......... $29.74 $29.65 $27.53 $31.36 $32.30 $32.99 $33.34
</TABLE>
- ----------
(1) The revenue per subscriber calculation includes premium revenue for each
period.
Cable Michigan plans to emphasize high technical standards and
seeks to incorporate, when cost effective, technological advances that
enhance product quality and service. In particular, the Company plans to
upgrade the technical quality of its cable plant and to increase system
capacity for the delivery of additional programming and new services. The
Company has already deployed 402 miles of fiber optic cable as of March 31,
1997 and reduced the number of headends in its systems as part of its
commitment to improved service quality and platform development for new
technologies. The Company's strategic plan calls for a capital expenditure
program intended to result in over 90% of the Company's customers being served
by systems with a capacity of 550 MHz or 750 MHz by the end of 2001. The
Company's wholly owned systems are currently built to 300 - 450 MHz, with the
majority of the systems having a capacity of 300 - 330 MHz. These systems
include 53 headends, with two of these headends serving approximately 63,500
subscribers. The Mercom systems in Michigan include 5 headends and are built
to 400 - 450 MHz.
The Company derives the majority of its revenues from recurring
subscription services and generates additional revenues from non-subscription
services such as advertising, pay-per-view, installations and commissions from
electronic retailing. Monthly subscription rates and related charges vary
according to the type of service or equipment selected.
The Company's systems include the Mercom systems, which as of
March 31, 1997 served approximately 38,900 subscribers in Michigan and
approximately 1,900 subscribers in a planned development community in Port St.
Lucie, Florida. In July 1997 Mercom sold its Port St. Lucie, Florida system
to Adelphia Communications Corporation for $3,650,000. As the 62% owner of
Mercom, the Company accounts for all Mercom subscribers as Cable Michigan
subscribers. The Company and Mercom have entered into a Management Agreement
pursuant to which the Company has been retained to operate and manage the
cable television systems of Mercom. In May 1997, C-TEC proposed to acquire
the remaining 38% interest in Mercom held by the public in exchange for 8.75%
of the Company's common stock. Mercom's Board of Directors formed a special
committee composed of directors unaffiliated with the Company to evaluate the
proposal, but discussions have been suspended pending completion of the
Distribution. After the Distribution is completed, the Company will
reevaluate the previous proposal and determine whether to resume discussions
with the special committee.
Cable Television Industry Overview
Cable television provides a wide variety of channels of
television programming, consisting primarily of video entertainment, sports
and news, as well as informational services, locally originated programming
and digital audio programming, to the homes of subscribers who pay a monthly
fee for the service. Television and radio signals are received by means of
off-air antennas, microwave relay systems and satellite earth stations and
then distributed, along with locally originated programs and ancillary
services, to subscribers' homes over networks of coaxial and fiber-optic
cables.
Cable television systems generally offer subscribers various
levels or "tiers" of cable services consisting of broadcast television signals
available off-air in any locality, television signals from so-called
"superstations" originating in distant cities such as WTBS from Atlanta and
WGN from Chicago, various satellite-delivered, non-broadcast channels (such as
ESPN, Inc. ("ESPN"), Cable News Network ("CNN"), the USA Network, and MTV:
Music Television ("MTV")), displays of information featuring news, weather and
stock market reports and programming originating locally in the systems (such
as public, educational and governmental access channels). Cable systems also
generally provide premium services to subscribers for an extra monthly charge.
These premium services include, for example, Home Box Office[Registered],
Cinemax[Registered], Showtime[Registered], The Movie Channel[Trademark] and
Encore[Registered], which generally offer, without commercial interruption,
feature motion pictures, live and taped sporting events, concerts and other
special features. A cable system may also offer pay-per-view services, which
permit a subscriber to order, for a separate fee, individual feature motion
pictures and special event programs.
Monthly service fees constitute the major source of revenue for
cable television systems. A subscriber to a cable television system generally
pays an initial connection charge and a fixed monthly fee for the cable
programming services received. The amount of the monthly service fee varies
from one area to another, and historically has been a function, in part, of
the number of channels and services included in the service package and the
cost of such services to the cable television system operator. Rates are
generally subject to regulation under the Cable Television Consumer Protection
and Competition Act of 1992 (the "1992 Act"). See "Legislation and Regulation."
Cable television operators have been able to generate other
sources of revenue. In most instances, a separate monthly fee for each
premium service and certain other specific programming is charged to
subscribers, with discounts generally available to subscribers receiving
multiple premium services. Operators have been able to generate additional
revenue through the sale of commercial spots and channel space to advertisers.
As with other forms of advertising, the cable television operator receives a
fee from the advertisers that is based on the programming service on which the
advertisements appear, the volume of advertising and the time of the day at
which it is broadcast. Advertising, as well as fees generated by home
shopping and pay-per-view, represent additional sources of revenue for cable
television systems. These services are not regulated under the 1992 Act.
Cable television operators have been taking steps to expand
their service offerings in order to generate additional revenue. These new
services include Internet and other data services. These new services require
high capacity networks, and as a result, many cable operators have been
upgrading their facilities in anticipation of offering these services.
Cable television systems are generally constructed and operated
under non-exclusive franchises granted by state or local governmental
authorities. Franchises typically contain many conditions, such as time
limitations on commencement or completion of construction; conditions of
service, including number of channels and provision of free services to
schools and other public institutions; and the maintenance of insurance and
indemnity bonds. Cable franchises are subject to the Cable Communications
Policy Act of 1984 (the "1984 Act"), the 1992 Act (together with the 1984 Act,
the "Cable Acts") and the Telecommunications Act of 1996 (the "1996 Act"), as
well as FCC, state and local regulations. See "Legislation and Regulation."
Franchises typically provide for periodic payment of fees to
franchising authorities which are negotiated in each franchise agreement.
These fees cannot exceed 5% of gross revenues and may be passed on to
subscribers. Franchises are generally not exclusive and are generally not
transferable without the consent of the governmental authority. Although
franchises are often renewed for companies that have provided adequate service
and have complied generally with franchise terms, in the future, renewals may
be more difficult as a result of the 1992 Act and may include less favorable
terms and conditions. Furthermore, governmental authorities may choose to award
additional franchises to competing companies at any time. See
"--Competition," "-- Franchises" and "Legislation and Regulation." In
addition, under the 1996 Act, certain providers of programming services may be
exempt from local franchising requirements.
Company Strategy
The Company intends to maintain and enhance the value of its
current cable television systems through upgrading their networks as
appropriate given the characteristics of the particular service area. The
Company also intends to institute new services as they are developed and
become economically viable. At this stage, the Company's highest priority is
to increase system capacity and improve system reliability and picture
quality. Such network improvements are necessary to enable the Company to
better withstand potential competition, expand channel lineups (which would
permit the Company to increase revenue) and facilitate new services when
economically viable. The Company's strategic plan calls for a capital
expenditure program intended to result in over 90% of the Company's customers
being served by systems with a capacity of 550 MHz or 750 MHz by the end of
2001. The Company's wholly owned systems are currently built to 300 - 450
MHz, with the majority of the systems having a capacity of 300 - 330 MHz, and
include 53 headends, with two of these headends serving approximately 63,500
subscribers. The Mercom systems in Michigan include 5 headends and are built
to 400 - 450 MHz.
The Company intends to evaluate and, if appropriate, pursue
potential acquisitions of cable television systems that are contiguous, or
otherwise in reasonable geographic proximity, to the Company's existing
systems. Increasing the size of the Company's clusters will enable the
Company to obtain operating efficiencies and may position the Company to
capitalize on new revenue and business opportunities as the telecommunications
industry evolves. Given the number of relatively small independently owned
systems located near the Company's systems, the Company believes that there
may be a number of attractive acquisition opportunities.
Capital expenditures for system extensions and upgrades, the
development of new services and the acquisition of additional cable television
systems are subject to the availability of cash generated from operations and
debt or equity financing. The capital resources needed to accomplish these
strategies are expected to be provided by cash flow from operations, the
Credit Agreement and, in the case of acquisitions, borrowings from other
sources. There can be no assurance that the capital resources necessary to
accomplish the Company's plans will be available on terms and conditions
acceptable to the Company, or at all. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations." In addition, the
Company may consider using equity as consideration for acquisitions in
appropriate cases.
The Clusters
The Company's systems are clustered in four main areas: Grand
Rapids, Traverse City, Lapeer and Monroe (Mercom). A brief description of
these clusters as of March 31, 1997 is set forth below.
<TABLE>
<CAPTION>
Grand Rapids Traverse City Lapeer Monroe
------------ ------------- ------ ------
<S> <C> <C> <C> <C>
Subscribers (approximate)......... 68,500 74,200 16,000 38,900
Penetration Rate.................. 59.7% 60.5% 61.0% 61.5%
Bandwidth Range................... 300-450MHz 300-450MHz 300-450MHz 400-450MHz
Aerial Miles...................... 1,608 1,891 457 1,127
Underground Miles................. 858 899 183 231
Total Miles....................... 2,466 2,790 640 1,358
Total Fiber Miles................. 68 334 0 0
Headends.......................... 20 28 5 5
</TABLE>
Mercom
The Company's systems include the Mercom systems, which as of
March 31, 1997 served approximately 38,900 subscribers in Michigan and
approximately 1,900 subscribers in a planned development community in Port St.
Lucie, Florida. In July 1997 Mercom sold its Port St. Lucie, Florida system
to Adelphia Communications Corporation for $3,650,000. C-TEC acquired an
interest in Mercom in 1990 and C-TEC Cable Systems was subsequently hired to
manage the Mercom systems by Mercom's Board of Directors on January 1, 1992.
In August 1995, C-TEC increased its ownership interest in Mercom to
approximately 62%. In May 1997, C-TEC proposed to acquire the 38% minority
stockholders' interest in Mercom in exchange for 8.75% of the common stock of
the Company, with the result that Mercom would become a wholly owned
subsidiary of the Company. Mercom's Board of Directors formed a special
committee composed of directors unaffiliated with the Company to evaluate the
proposal, but discussions have been suspended pending completion of the
Distribution. After the Distribution is completed, the Company will
reevaluate the previous proposal and determine whether to resume discussions
with the special committee.
The Company has entered into a Management Agreement with Mercom
dated January 1, 1997. Under the terms of the agreement, Mercom pays a
management fee equal to the greater of $500,000 or an amount equal to a
certain percentage of Mercom's annual revenue. The fee schedule ranges from
5% of revenue up to $10 million to 4% of revenue over $20 million. In
addition to the basic fee, the Company is also entitled to an annual incentive
fee based on increases in Mercom's operating cash flow. Based on Mercom's
financial performance in Michigan from April 1, 1996 through March 31, 1997,
the total management fee payable to the Company under the Management Agreement
would have been approximately $1,070,000. The term of the Management Agreement
is three years. The Management Agreement was approved by a committee of
Mercom's Board of Directors composed of directors unaffiliated with the
Company.
Service Offerings
The Company offers a variety of basic and pay cable programming
packages. Since 1993, the Company has divided its service into three levels:
Limited Basic Service, Expanded Basic Service and the Family Value Package.
The first level of service is referred to as Limited Basic. It
consists primarily of off-air broadcast networks, access channels and the home
shopping networks. Expanded Basic Service includes Limited Basic Service plus
certain channels regulated by the FCC as "Cable Programming Service" or "CPS"
tier channels. These include ESPN, USA Network, MTV, Lifetime and other
traditional cable channels.
The Family Value Package was created through the conversion of
some of its traditional cable channels such as CNN and Discovery and the
launch of new channels such as ESPN 2 and fX to form a new a la carte level.
Networks offered through the Family Value Package may be purchased
individually or as a group at a reduced rate.
Like many cable operators in the United States, over the last
four years the Company has modified its existing programming services,
equipment and rates in an effort to comply with changing FCC regulations. See
"Legislation and Regulation."
Monthly service rates include fees for Limited Basic Service,
Expanded Basic Service, the Family Value Package, and premium services. At
March 31, 1997, monthly residential subscriber rates were as follows: Limited
Basic Service rates ranged from $8.50 to $17.00; Expanded Basic Service rates
ranged from $6.70 to $13.75; Family Value Package rates ranged from $2.15 to
$7.69; and premium service rates ranged from $4.95 to $12.95 per service. In
addition, the Company earns revenues from pay-per-view programs and
advertising fees. Pay-per-view programs, which usually are either unique
sporting events or recently released movies, are available on many of the
Company's cable television systems. Subscribers are permitted to choose
individual movies for a set fee of $3.95 per movie and individual special
events for a set fee ranging from $6.95 to $49.95 or higher per event.
Related charges may include a nonrecurring installation fee that ranges from
$20.00 to $38.00; however, from time to time the Company has followed the
common industry practice of reducing the installation fee during promotional
periods. Commercial subscribers such as hotels, motels and hospitals are
charged a nonrecurring connection fee that usually covers the cost of
installation. Except under the terms of certain contracts with commercial
subscribers and residential apartment and condominium complexes, subscribers
are free to discontinue the service at any time without penalty, and most
terminations occur because a subscriber moves to another home or to another
city. For the year ended December 31, 1996, of the total subscriber fees
received by the Company's systems, Limited Basic Service, Expanded Basic
Service and Family Value Package fees accounted for approximately 75% of total
revenues, premium service fees accounted for approximately 10% of total
revenues, pay-per-view fees were approximately 2% of total revenues,
advertising fees were approximately 2% of total revenues and the remaining 11%
of total revenues came from equipment rentals, installation fees, home
shopping, franchise fees and program guide charges.
Programming and Suppliers
The Company has entered into an arrangement pursuant to which
RCN will provide third party programming to the Company's systems. RCN
generally purchases this programming at prices that are better than the Company
would be able to obtain independently. Programming purchasers such as RCN
generally pay a monthly fee per subscriber per channel. Under the arrangement
between the Company and RCN, RCN allocates a portion of RCN's total
programming cost to the Company based on the relative number of subscribers
served by the Company at an equal cost per subscriber unless otherwise
required under a particular programming agreement. The arrangement is
terminable by the Company upon 60 days notice and by RCN upon 1 year advance
notice.
Programming costs increase in the ordinary course of the
Company's business as a result of increases in the number of subscribers,
expansion of the number of channels provided to customers and contractual rate
increases from programming suppliers. The Company anticipates that
programming costs will increase, exceeding current levels, particularly for
sports programming. If the programming supply arrangement with RCN were
terminated, the Company's programming costs could increase significantly.
A wide range of national manufacturers are the primary sources
of supplies, equipment and materials utilized in the construction and upgrade
of the Company's cable television systems. The Company anticipates that its
programming and construction, rebuild and upgrade costs will be significant in
future periods. The amount of such costs will depend on numerous factors,
many of which are beyond the Company's control.
Advertising Revenues
Advertising accounts for 2% of the Company's revenues.
Advertising sales are handled primarily by Cable Time, an independent turnkey
ad sales contractor. Cable Time provides sales, billing, collection and
production services. It remits an agreed portion of its collected revenues to
the Company. In addition, the Company operates its own classified advertising
channel selling real estate and other products and services offered locally.
The Company's net advertising revenue for 1996 was $0.42 per subscriber per
month after compensation to Cable Time.
Marketing and Sales
The Company utilizes a variety of means to market premium and
basic service offerings. Marketing and sales have included door-to-door
sales, direct mail, telemarketing, incentive programs and print and broadcast
advertising. In addition to marketing efforts to attract new subscribers, the
Company conducts periodic campaigns to encourage customers to purchase
additional services.
Customer Service and Billing
The Company places a great deal of importance on customer
service. The Company has entered into an arrangement with RCN pursuant to
which RCN will handle calls by most Cable Michigan customers at RCN's 24-hour
centralized customer service facility in Dallas, Pennsylvania and administer
the customer billing function for the Company's subscribers. The Dallas
facility communicates with Cable Michigan's subscribers, field technicians and
field offices. Features include multiple 800 telephone numbers that allow a
customer service representative ("CSR") to identify the caller's location, an
automatic call distribution system to the next available CSR, Cable Data
computers with billing cycles, a centralized radio dispatch office to provide
two-way communication with the field technician's vehicles and alpha-numeric
pagers. Although the RCN facility handles the Company's customer service
calls and communications, the Company directly operates and manages its own
customer service field offices, technicians and vehicles. The Dallas facility
also maintains rate tables and subscriber base information that is provided to
CableData, which prepares and mails the customer bills for Cable Michigan.
The customer service and billing administration arrangement is terminable by
Cable Michigan on 60 days notice and by RCN on one year notice. Mercom
administers its own customer service function, primarily out of its office in
Monroe.
Franchises
The cable television systems owned or managed by the Company
are constructed and operated under fixed-term franchises or other types of
operating authorities (referred to collectively herein as "franchises") that
are generally non-exclusive and are granted by local governmental authorities.
These franchises typically contain many conditions, such as time limitations
on commencement and completion of construction, conditions of service,
including the number of channels, the provision of free service to schools and
certain other public institutions, and the maintenance of insurance and
indemnity bonds. The provisions of these local franchises are subject to
federal regulation.
The Company holds approximately 400 franchises. These
franchises provide for the payment of fees to the issuing authorities and
generally range from 3% to 5% of revenues. The 1984 Act prohibits franchising
authorities from imposing annual franchise fees in excess of 5% of gross
revenues and also permits the cable television system operator to seek
renegotiation and modification of franchise requirements if warranted by
changed circumstances.
The duration of the Company's outstanding franchises expire at
various points in time through the year 2019. The Company's ability to
provide cable television service is dependent to a large extent on its ability
to obtain and renew its franchises on acceptable terms. Virtually all of the
Company's cable franchises have been renewed or extended, generally at or
prior to their stated expirations and on acceptable terms. During 1996, the
Company completed negotiations with 42 communities resulting in franchise
renewals on terms which are acceptable to it. Some of the issues involved in
recent renewal negotiations include customer service standards, access
facilities and equipment, cable plant upgrade or replacement and shorter terms
of franchise agreements. Approximately 86 of the Company's franchises are
due for renewal within the next three years. No one franchise accounts for
more than 3% of the Company's total revenue.
Services Provided by RCN
Pursuant to the Distribution Agreement, RCN has agreed to
provide the Company with certain management, administrative and other
services, including: (i) customer service, (ii) marketing, (iii) accounting,
(iv) payroll, (v) management supervision, (vi) cash management, (vii) human
resources services and benefit plan administration, (viii) insurance
administration, (ix) legal, (x) tax, (xi) internal audit, (xii) programming
administration, (xiii) billing, (xiv) monthly cable guides and (xv) other
miscellaneous administrative services. See "- Customer Service and Billing"
and "--Programming and Suppliers."
The total fee for services (ii)-(xii) and (xiv) will be 4.0% of
revenues per year plus a direct allocation of certain consolidated cable
administration functions. The direct charge for customer service listed in
item (i) along with the billing service listed in item (xiii) and the cable
guide service listed in item (xiv) will be a pro rata share (based on
subscribers) of the expenses incurred by RCN to provide such services for RCN
and the Company.
These services are to commence on the Distribution Date and may
be terminated upon 60 days notice by either RCN or the Company, except that
the services listed as items (i), (xii) and (xiii) above may not be terminated
by RCN on less than one year advance notice to the Company.
Competition
Cable television systems face competition from alternative
methods of receiving and distributing television signals and from other
sources of news, information and entertainment such as off-air television
broadcast programming, newspapers, movie theaters, live sporting events,
interactive online computer services and home video products, including
videotape cassette recorders. The extent to which a cable television system
is competitive depends, in part, upon the cable system's ability to provide,
at a reasonable price to consumers, a greater variety of programming and other
services than are available off-air or through other alternative delivery
sources and upon superior technical performance and customer service. See
"Legislation and Regulation."
The FCC and Congress have adopted policies providing a more
favorable operating environment for new and existing technologies that
provide, or have the potential to provide, substantial competition to cable
systems. These technologies include, among others, DBS service whereby signals
are transmitted by satellite to receiving facilities located on customer
premises. The availability of reasonably-priced HSDs enables individual
households to receive many of the satellite-delivered program services
formerly available only to cable subscribers. Furthermore, the 1992 Act
contains provisions, which the FCC has implemented with regulations, to
enhance the ability of cable competitors to purchase and make available to HSD
owners certain satellite-delivered cable programming at competitive costs.
The 1996 Act and FCC regulations implementing that law preempt certain local
restrictions on the use of HSDs and roof-top antennae to receive satellite
programming and over-the-air broadcasting services. See "Legislation and
Regulation."
Programming is currently available to the owners of HSDs
through conventional, medium and high-powered satellites. DirecTv, Inc.,
which includes AT&T Corp. ("AT&T") as an investor, began offering nationwide
high-power direct broadcast satellite ("DBS") service in 1994 accompanied by
extensive marketing efforts. PRIMESTAR Partners, L.P. ("Primestar"), a
consortium comprised of cable operators, currently provides digital satellite
service including broadcast signals and pay-per-view service. The Primestar
partners recently announced an agreement to consolidate their DBS assets into
a new publicly traded company. Primestar's services may compete with the
services offered by the Company. Several other major companies, including
EchoStar Communications Corporation ("EchoStar") and American Sky Broadcasting
("ASkyB"), a joint venture between MCI Telecommunications Corporation ("MCI")
and The News Corporation Limited ("News Corp."), have begun offering or are
currently developing high-power DBS service. EchoStar has already commenced
its domestic DBS service and offers approximately 120 channels of video
programming. Recently announced plans for News Corp. to purchase an interest
in EchoStar are currently the subject of litigation between News Corp. and
EchoStar. Primestar, News Corp., MCI and ASkyB recently announced several
agreements in which News Corp., MCI and ASkyB will sell to Primestar two
satellites under construction and MCI will assign to Primestar an FCC DBS
license. The satellites to be sold to Primestar, when operational, are
expected to be capable of providing approximately 200 channels of DBS service
in the US. See "Business--Competition."
DBS systems are expected to use video compression technology to
increase the channel capacity of their systems to provide movies, broadcast
stations and other program services comparable to those of cable systems.
Digital satellite service ("DSS") offered by DBS systems currently has certain
advantages over cable systems with respect to programming capacity and digital
quality, as well as certain current disadvantages that include high up-front
customer equipment costs and a lack of local programming, local customer
service and equipment distribution. While DSS presents a competitive threat
to cable, the Company has implemented a program to increase its channel
capacity in many of its systems by upgrading its networks. These upgrades
will enable the Company to introduce new premium channels, pay-per-view
programming, interactive computer-based services and may enable these systems
to deliver digital video along with other communications services. These
upgrades, when combined with superior customer service and technical support,
will enhance the Company's ability to compete.
The 1996 Act makes it easier for LECs and others to provide a
wide variety of video services competitive with services provided by cable
systems and to provide cable services directly to subscribers. See
"Legislation and Regulation." Various LECs currently are providing video
services within and outside their telephone service areas through a variety of
distribution methods, including both the deployment of broadband wire
facilities and the use of wireless transmission facilities. Cable systems
could be placed at a competitive disadvantage if the delivery of video
services by LECs becomes widespread since LECs are not required, under certain
circumstances, to obtain local franchises to deliver such video services or to
comply with the variety of obligations imposed upon cable systems under such
franchises. See "Legislation and Regulation." Issues of cross-subsidization
by LECs of video and telephony services also pose strategic disadvantages for
cable operators seeking to compete with LECs which provide video services.
Ameritech has obtained cable television franchises in eastern Michigan and has
overbuilt some cable operators thereby creating a competitive environment. To
date, Ameritech has not applied for cable franchises where the Company
operates. The Company cannot predict the likelihood of success of video
service ventures by LECs or the impact on the Company of such competitive
ventures.
Cable television systems generally operate pursuant to
franchises granted on a non-exclusive basis. The 1992 Act prohibits
franchising authorities from unreasonably denying requests for additional
franchises and permits franchising authorities to operate cable systems. See
"Legislation and Regulation." Well-financed businesses from outside the cable
industry (such as the public utilities that own certain of the poles on which
cable is attached) may become competitors for franchises or providers of
competing services. Certain community-owned power companies have been
exploring building new video networks to compete with the Company within the
areas where such companies deliver power. See "Legislation and Regulation."
Competition from other cable television operators exists in some areas served
by the Company. Approximately 2% of homes passed have been overbuilt. The
Company believes that its systems are less likely to be overbuilt than those
of many other operators because of their location in more rural and less
populated areas.
Cable operators face additional competition from private SMATV
systems that serve condominiums, apartment and office complexes and private
residential developments. The 1996 Act broadens the definition of SMATV
systems not subject to regulation as a franchised cable communications
service. SMATV systems offer both improved reception of local television
stations and many of the same satellite-delivered programming services offered
by franchised cable communications systems. SMATV operators often enter into
exclusive agreements with building owners or homeowners' associations,
although some states have enacted laws to provide franchised cable systems
access to such private complexes, and the 1984 Act gives a franchised cable
operator the right to use existing compatible easements within its franchise
area under certain circumstances. These laws have been challenged in the
courts with varying results. In addition, some companies are developing and/or
offering packages of telephony, data and video services to these private
residential and commercial developments. The ability of the Company to compete
for subscribers in residential and commercial developments served by SMATV
operators is uncertain.
Cable television systems also compete with wireless program
distribution services such as MMDS which use low-power microwave frequencies
to transmit video programming over-the-air to subscribers. There are MMDS
operators who are authorized to provide or are providing broadcast and
satellite programming to subscribers in areas served by the Company's cable
systems. Additionally, the FCC recently adopted new regulations allocating
frequencies in the 28-GHz band for a new multichannel wireless video service
similar to MMDS. The Company is unable to predict whether wireless video
services will have a material impact on its operations.
Other new technologies, including Internet-based services, may
become competitive with services that cable television systems can offer. The
1996 Act directed the FCC to establish, and the FCC has adopted, regulations
and policies for the issuance of licenses for digital television ("DTV") to
incumbent television broadcast licensees. DTV is expected to deliver high
definition television pictures, multiple digital-quality program streams, as
well as CD-quality audio programming and advanced digital services, such as
data transfer or subscription video. The FCC also has authorized television
broadcast stations to transmit textual and graphic information useful both to
consumers and businesses. The FCC also permits commercial and non-commercial
FM stations to use their subcarrier frequencies to provide non-broadcast
services including data transmissions. The FCC established an over-the-air
Interactive Video and Data Service that will permit two-way interaction with
commercial and educational programming along with informational and data
services. LECs and other common carriers also provide facilities for the
transmission and distribution to homes and businesses of interactive
computer-based services, including the Internet, as well as data and other
non-video services. The FCC has conducted spectrum auctions for licenses to
provide personal communications services ("PCS"). PCS will enable license
holders, including cable operators, to provide voice and data services.
Advances in communications technology as well as changes in the
marketplace and the regulatory and legislative environment are constantly
occurring. Thus, it is not possible to predict the effect that ongoing or
future developments might have on the cable television industry or on the
operations of the Company.
Property
The principal physical assets of a cable television system
consist of a central receiving apparatus, distribution equipment, cables,
converters, electronics, vehicles, origination equipment and local business
offices. The Company owns or leases the receiving and distribution equipment
of each system and owns or leases parcels of real property for the receiving
sites and local business offices. The physical components of cable television
systems require maintenance and periodic upgrading and rebuilding to keep pace
with technological advances. The Company's management believes that
substantially all of its physical assets are in good operating condition.
Employees
As of March 31, 1997 the Company had a total of approximately
226 employees. The Company believes that its relationships with its employees
are good.
Legal Proceedings
On May 13, 1997, Mercom shareholder Moise Katz filed a
purported class action suit on behalf of Mercom's public shareholders against
Mercom and C-TEC, among others. Plaintiff alleges that the proposal to
exchange the approximately 38% of Mercom common stock that is publicly held
for 8.75% of the common stock of the Company undervalues Mercom's shares and
is therefore unlawful. The Company believes this lawsuit is without merit
and intends to vigorously defend itself in this action.
The Company is not party to any litigation which, in the
opinion of the Company's management, will have a material adverse effect on
the Company's financial position, results of operations or liquidity.
LEGISLATION AND REGULATION
The Cable Communications Policy Act of 1984 (the "1984 Act"),
the Cable Television Consumer Protection and Competition Act of 1992 (the
"1992 Act") and the Telecommunications Act of 1996 (the "1996 Act") amended
the Communications Act of 1934 (as amended, the "Communications Act") and
established a national policy to guide the development and regulation of cable
systems. Principal responsibility for implementing the policies of the
Communications Act relating to cable television is allocated between the FCC
and state agencies or local franchising authorities. The following is a
summary of federal laws and regulations materially affecting the growth and
operation of the cable television industry and a description of certain state
and local laws.
The 1992 Act authorized rate regulation for cable television
services and equipment in communities that are not subject to "effective
competition," as defined by federal law. Basic cable service and equipment is
subject to regulation by local franchising authorities that choose to become
certified by the FCC to regulate rates. Such local regulation occurs with
oversight by the FCC, which has prescribed detailed criteria for the
regulation of basic services. The 1992 Act also requires the FCC to resolve
complaints about rates for cable programming services tiers ("CPST") (other
than programming offered on a per channel or per program basis, which is not
subject to rate regulation) and to reduce any such rates found to be
unreasonable. The 1996 Act provides for rate deregulation of CPSTs by March
1999.
The 1996 Act deregulates rates for CPSTs in March 1999 for
large Multiple System Operators ("MSOs") and immediately for certain small
operators. The 1996 Act also modifies the uniform rate provisions of the 1992
Act by prohibiting regulation of non-predatory, bulk discount rates offered to
subscribers in commercial residential developments and permits regulated
equipment rates to be computed by aggregating costs of broad categories of
equipment at the franchise, system, regional or company level. The 1996 Act
eliminates the right of individual subscribers to file rate complaints with
the FCC concerning CPSTs and permits franchising authorities to file CPST rate
complaints with the FCC only after having received multiple subscriber
complaints. The FCC is required to issue a final order within 90 days after
receipt of a CPST rate complaint filed by any franchising authority.
FCC regulations, which became effective in September 1993,
govern rates that may be charged to subscribers for basic cable service and
certain CPSTs (together, the "Regulated Services"). The FCC uses a benchmark
methodology as the principal method of regulating rates for Regulated
Services. Cable operators are also permitted to justify rates using various
cost-of-service methodologies. In 1994, the FCC's benchmark regulations
required operators to implement rate reductions for Regulated Services of up
to 17% of the rates for such services in effect on September 30, 1992,
adjusted for inflation and changes in programming costs, equipment costs and
certain operating costs. The FCC has also adopted comprehensive and
restrictive regulations allowing operators to modify their regulated rates on
a quarterly or annual basis using various methodologies that account for
changes in the number of regulated channels, inflation and increases in
certain external costs, such as franchise and other governmental fees,
copyright and retransmission consent fees, taxes, programming costs and the
cost of franchise-related obligations. The Company cannot predict whether the
FCC will modify these "going forward" regulations in the future.
Franchising authorities are empowered to regulate the rates
charged for additional outlets and for the installation, lease and sale of
equipment used by subscribers to receive the basic cable service tier, such as
converter boxes and remote control units. The FCC's rules require franchising
authorities to regulate these rates on the basis of actual cost plus a
reasonable profit, as defined by the FCC. Cable operators required to reduce
rates may also be required to refund overcharges with interest.
Under the FCC's standard cost of service analysis, a cable
operator can demonstrate that existing rates for Regulated Services are
reasonable using the FCC's cost-of-service rate regulations which require,
among other things, the exclusion from the rate base of 34% of system
acquisition costs related to intangible and tangible assets used to provide
Regulated Services. The FCC's cost-of-service regulations contain a rebuttable
presumption of an industry-wide 11.25% after tax rate of return on an
operator's allowable rate base, but the FCC has initiated a further rule
making in which it proposes to use an operator's actual debt cost and capital
structure to determine an operator's cost of capital or rate of return.
There are currently CPST rate complaints pending against rates
in numerous communities served by the Company in Michigan. In addition, in
many of the communities where the Company provides cable service, local
franchising authorities have become certified to regulate rates for basic
service.
The FCC has issued decisions requiring rate reductions for
certain of the CPSTs of the Company, based on, among other things, the finding
that the Company does not qualify for small system rate relief under the 1996
Act. The FCC staff issued a ruling that the Company does not qualify as a
"small system operator" because all affiliated companies served more than
400,000 subscribers (due to C-TEC's investment in Mexican cable systems). The
Company has challenged those decisions on the basis that it should qualify as
"small cable operators" under the 1996 Act and the FCC's rules, or, in the
alternative, that its rates are justified under the FCC's standard price
caps/going forward methodology in any event.
"Anti-Buy Through" Provisions
The 1992 Act requires cable systems to permit subscribers to
purchase video programming offered by the operator on a per channel or a per
program basis without the necessity of subscribing to any tier of service,
other than the basic cable service tier, unless technological limitations
prevent the system from doing so. There is a statutory exemption for cable
systems that do not have the technological capability to offer programming in
the manner required by the statute. This exemption is available until a system
obtains such capability, but not later than December 2002. The FCC may waive
such time periods. The Company expects that its systems will be in compliance
with this requirement by the December 2002 deadline.
Must Carry/Retransmission Consent
The 1992 Act contains broadcast signal carriage requirements
that allow local commercial television broadcast stations to elect once every
three years to require a cable system to carry the station ("must-carry"),
subject to certain exceptions, or to withhold consent and negotiate the terms
of carriage ("retransmission consent"). A cable system generally is required
to devote up to one-third of its activated channel capacity for the carriage
of local commercial television stations whether pursuant to the mandatory
carriage or retransmission consent requirements of the 1992 Act. Local
non-commercial television stations are also given mandatory carriage rights;
however, such stations are not given the option to negotiate retransmission
consent for the carriage of their signals by cable systems. Additionally,
cable systems are required to obtain retransmission consent for all "distant"
commercial television stations (except for certain commercial
satellite-delivered independent "superstations"), commercial radio stations
and low-power television stations carried by such systems. In March 1997, the
U.S. Supreme Court affirmed a three-judge district court decision upholding
the constitutional validity of the 1992 Act's mandatory signal carriage
requirements.
The FCC recently issued rules establishing standards for DTV.
Among other provisions, the FCC's rules require television stations to
simulcast their NTSC and DTV signals for a period of years. During this
simulcast period, it is unclear whether must-carry rules will apply to DTV
signals.
The FCC will conduct a rule making in the future to consider
the requirements, if any, for mandatory carriage of DTV signals. The Company
cannot predict the ultimate outcome of such a rule making or the impact of new
carriage requirements on the Company or its business.
Access Channels
The Communications Act permits franchising authorities to
require cable operators to set aside certain channels for public, educational
and governmental ("PEG") access programming. The 1984 Act also requires a
cable system with 36 or more channels to designate a portion of its channel
capacity for commercial leased access by third parties to provide programming
that may compete with services offered by the cable operator. The FCC has
adopted rules regulating: (i) the maximum reasonable rate a cable operator may
charge for commercial use of the designated channel capacity; (ii) the terms
and conditions for commercial use of such channels; and (iii) the procedures
for the expedited resolution of disputes concerning rates or commercial use of
the designated channel capacity. The U.S. Supreme Court recently held parts of
the 1992 Act regulating "indecent" programming on PEG access channels to be
unconstitutional, but upheld the statutory right of cable operators to
prohibit or limit the provision of "indecent" programming on commercial leased
access channels.
Franchise Procedures
The 1984 Act affirms the right of franchising authorities
(state or local, depending on the practice in individual states) to award one
or more franchises within their jurisdictions and prohibits non-grandfathered
cable systems from operating without a franchise in such jurisdictions. The
1992 Act encourages competition with existing cable systems by (i) allowing
municipalities to operate their own cable systems without franchises; (ii)
preventing franchising authorities from granting exclusive franchises or from
unreasonably refusing to award additional franchises covering an existing
cable system's service area; and (iii) prohibiting (with limited exceptions)
the common ownership of cable systems and co-located MMDS or SMATV systems. In
January, 1995, the FCC relaxed its restrictions on ownership of SMATV systems
to permit a cable operator to acquire SMATV systems in the operator's existing
franchise area so long as the programming services provided through the SMATV
system are offered according to the terms and conditions of the cable
operator's local franchise agreement. The 1996 Act provides that the
cable/SMATV and cable/MMDS cross-ownership rules do not apply in any franchise
area where the operator faces "effective competition" as defined by federal
law.
The Communications Act also provides that in granting or
renewing franchises, local authorities may establish requirements for
cable-related facilities and equipment, but not for video programming or
information services other than in broad categories. The Communications Act
limits the payment of franchise fees to 5% of revenues derived from cable
operations and permits the cable operator to obtain modification of franchise
requirements by the franchise authority or judicial action if warranted by
changed circumstances. The Company's franchises typically provide for periodic
payment of fees to franchising authorities of 3% to 5% of "revenues" (as
defined by each franchise agreement), which fees may be passed on to
subscribers. The 1996 Act generally prohibits franchising authorities from (i)
imposing requirements in the cable franchising process that require, prohibit
or restrict the provision of telecommunications services by an operator, (ii)
imposing franchise fees on revenues derived by the operator from providing
telecommunications services over its cable system, or (iii) restricting an
operator's use of any type of subscriber equipment or transmission technology.
The Communications Act contains renewal procedures designed to
protect incumbent franchisees against arbitrary denials of renewal.
Franchising authorities may seek to impose new and more onerous requirements,
such as significant upgrades in facilities and services or increased franchise
fees, as a condition of renewal. Similarly, if a franchising authority's
consent is required for the purchase or sale of a cable system or franchise,
the franchising authority may attempt to impose more burdensome or onerous
franchise requirements in connection with a request for such consent.
Historically, franchises have been renewed for cable operators that have
provided satisfactory services and have complied with the terms of their
franchises. The Company believes that it has generally met the terms of its
franchises and has provided quality levels of service. As such, the Company
anticipates that its future franchise renewal prospects generally will be
favorable.
Various courts have considered whether franchising authorities
have the legal right to limit franchise awards to a single cable operator and
to impose certain substantive franchise requirements (e.g., access channels,
universal service and other technical requirements). These decisions have been
somewhat inconsistent and, until the U.S. Supreme Court rules definitively on
the scope of cable operators' First Amendment protections, the legality of the
franchising process generally and of various specific franchise requirements
is likely to be in a state of flux.
Ownership Limitations
Pursuant to the 1992 Act, the FCC adopted rules prescribing
national subscriber limits and limits on the number of channels that can be
occupied on a cable system by a video programmer in which the operator has an
attributable interest. The effectiveness of these FCC horizontal ownership
limits has been stayed because a federal district court found the statutory
limitation to be unconstitutional. An appeal of that decision has been
consolidated with appeals challenging the FCC's regulatory ownership
restrictions and is pending. The 1996 Act eliminates the statutory prohibition
on the common ownership, operation or control of a cable system and a
television broadcast station in the same service area and directs the FCC to
review its broadcast/cable ownership restrictions to determine if they are
necessary in the public interest. Pursuant to the mandate of the 1996 Act, the
FCC eliminated its regulatory restriction on cross-ownership of cable systems
and national broadcasting networks.
LEC Ownership of Cable Systems
The 1996 Act makes far-reaching changes in the regulation of
LECs that provide cable services. The 1996 Act eliminates the requirement that
LECs obtain FCC approval under Section 214 of the Communications Act before
providing video services in their telephone service areas and removes the
statutory telephone company/cable television cross-ownership prohibition,
thereby allowing LECs to offer video services in their telephone service
areas. LECs may provide service as traditional, franchised cable operators or
they may opt to provide their programming over unfranchised "open video
systems," subject to certain conditions, including, but not limited to,
setting aside up to two-thirds of their channel capacity for use by
unaffiliated program distributors. The 1996 Act also prohibits a LEC from
acquiring an existing cable system in its telephone service area except in
limited circumstances. The 1996 Act removes barriers to entry into the local
telephone exchange market by preempting state and local laws that restrict
competition and by requiring all LECs to provide nondiscriminatory access and
interconnection to potential competitors, such as cable operators, wireless
telecommunications providers and long distance companies.
The FCC adopted regulations implementing the 1996 Act
requirement that LECs open their telephone networks to competition by
providing competitors interconnection, access to unbundled network elements
and retail services at wholesale rates. Numerous parties have appealed these
regulations. The appeals have been consolidated and will be reviewed by the
U.S. Court of Appeals for the Eighth Circuit, which has stayed the FCC's
pricing and nondiscrimination regulations. The ultimate outcome of these rule
makings, and the ultimate impact of the 1996 Act or any final regulations
adopted pursuant to the new law on the Company or its businesses cannot be
determined at this time.
Pole Attachment
The Communications Act requires the FCC to regulate the rates,
terms and conditions imposed by public utilities for cable systems' use of
utility pole and conduit space unless state authorities can demonstrate that
they adequately regulate pole attachment rates. In the absence of state
regulation, the FCC administers pole attachment rates on a formula basis. In
some cases, utility companies have increased pole attachment fees for cable
systems that have installed fiber optic cables and that are using such cables
for the distribution of non-video services. The FCC concluded that, in the
absence of state regulation, it has jurisdiction to determine whether utility
companies have justified their demand for additional rental fees and that the
Communications Act does not permit disparate rates based on the type of
service provided over the equipment attached to the utility's pole. The 1996
Act and the FCC's implementing regulations modify the current pole attachment
provisions of the Communications Act by immediately permitting certain
providers of telecommunications services to rely upon the protections of the
current law and by requiring that utilities provide cable systems and
telecommunications carriers with nondiscriminatory access to any pole, conduit
or right-of-way controlled by the utility. Additionally, within two years of
enactment of the 1996 Act, the FCC is required to adopt new regulations to
govern the charges for pole attachments used by companies providing
telecommunications services, including cable operators. These new pole
attachment rate regulations will become effective five years after enactment
of the 1996 Act, and any increase in attachment rates resulting from the FCC's
new regulations will be phased in equal annual increments over a period of
five years beginning on the effective date of the new FCC regulations. The
ultimate outcome of these rulemakings and the ultimate impact of any revised
FCC rate formula or of any new pole attachment rate regulations on the Company
or its businesses cannot be determined at this time.
Other Statutory Provisions
The 1992 Act, the 1996 Act and FCC regulations preclude any
satellite video programmer affiliated with a cable company, or with a common
carrier providing video programming directly to its subscribers, from favoring
an affiliated company over competitors and require such programmers to sell
their programming to other multichannel video distributors. These provisions
limit the ability of program suppliers affiliated with cable companies or with
common carriers providing satellite delivered video programming directly to
their subscribers to offer exclusive programming arrangements to their
affiliates. The 1992 Act requires operators to block fully both the video and
audio portion of sexually explicit or indecent programming on channels that
are primarily dedicated to sexually oriented programming or alternatively to
carry such programming only at "safe harbor" time, periods currently defined
by the FCC as the hours between 10 p.m. and 6 a.m. Several adult-oriented
cable programmers have challenged the constitutionality of this statutory
provision, but the U.S. Supreme Court recently refused to overturn a lower
court's denial of a preliminary injunction motion seeking to enjoin the
enforcement of this law. The FCC's regulations implementing this statutory
provision are now in effect. The 1996 Act also contains provisions regulating
the content of video programming and computer services. Specifically, the new
law prohibits the use of computer services to transmit "indecent" material to
minors. The U.S. Supreme Court has ruled that the provisions relating to the
regulation of indecent material are unconstitutional. In accordance with the
1996 Act, the television industry recently adopted a voluntary ratings system
for violent and indecent video programming. The 1996 Act also requires all new
television sets to contain a so-called "V-chip" capable of blocking all
programs with a given rating. The Communications Act also includes provisions,
among others, concerning horizontal and vertical ownership of cable systems,
customer service, subscriber privacy, marketing practices, equal employment
opportunity, obscene or indecent programming, regulation of technical
standards and equipment compatibility.
The 1996 Act modifies the existing statutory provisions
governing cable system technical standards, equipment compatibility,
subscriber notice requirements and program access, permits certain operators
to include losses incurred prior to September 1992 in setting regulated rates
and repeals the three-year anti-trafficking prohibition adopted in the 1992
Act. FCC regulations implementing the 1996 Act preempt certain local
restrictions on satellite and over-the-air antenna reception of video
programming services, including zoning, land-use or building regulations, or
any private covenant, homeowners' association rule or similar restriction on
property within the exclusive use or control of the antenna user.
Other FCC Regulations
The FCC has numerous rule making proceedings pending that will
implement various provisions of the 1996 Act; it also has adopted regulations
implementing various provisions of the 1992 Act and the 1996 Act that are the
subject of petitions requesting reconsideration of various aspects of its rule
making proceedings. In addition to the FCC regulations noted above, there are
other FCC regulations covering such areas as equal employment opportunity,
syndicated program exclusivity, network program non-duplication, registration
of cable systems, maintenance of various records and public inspection files,
microwave frequency usage, lockbox availability, sponsorship identification,
antenna structure notification, tower marking and lighting, carriage of local
sports broadcast programming, application of rules governing political
broadcasts, limitations on advertising contained in non-broadcast children's
programming, consumer protection and customer service, ownership of home
wiring, indecent programming, programmer access to cable systems, programming
agreements, technical standards, consumer electronics equipment compatibility
and closed captioning. The FCC has the authority to enforce its regulations
through the imposition of substantial fines, the issuance of cease and desist
orders and/or the imposition of other administrative sanctions, such as the
revocation of FCC licenses needed to operate certain transmission facilities
often used in connection with cable operations.
Other bills and administrative proposals pertaining to cable
television have previously been introduced in Congress or considered by other
governmental bodies over the past several years. It is probable that there
will be legislative proposals in the future by Congress and other governmental
bodies relating to the regulation of communications services.
Copyright
Cable television systems are subject to federal compulsory
copyright licensing covering the retransmission of television and radio
broadcast signals. In exchange for filing certain reports and contributing a
percentage of their basic revenues to a federal copyright royalty pool, cable
operators can obtain blanket licenses to retransmit the copyrighted material
on broadcast signals. The nature and amount of future payments for broadcast
signal carriage cannot be predicted at this time. The possible simplification,
modification or elimination of the compulsory copyright license is the subject
of continuing legislative review. The elimination or substantial modification
of the cable compulsory license could adversely affect the Company's ability
to obtain suitable programming and could substantially increase the cost of
programming available for distribution to the Company's subscribers. The
Company cannot predict the outcome of this legislative activity.
Cable operators distribute programming and advertising that use
music controlled by the two major music performing rights organizations, ASCAP
and BMI. In October 1989, the special rate court of the U.S. District Court
for the Southern District of New York imposed interim rates on the cable
industry's use of ASCAP-controlled music. The same federal district court
recently established a special rate court for BMI. BMI and cable industry
representatives recently concluded negotiations for a standard licensing
agreement covering the performance of BMI music contained in advertising and
other information inserted by operators into cable programming and on certain
local access and origination channels carried on cable systems. ASCAP and cable
industry representatives have met to discuss the development of a standard
licensing agreement covering ASCAP-controlled music in local origination and
access channels and pay-per-view programming. Although the Company cannot
predict the ultimate outcome of these industry negotiations or the amount of
any license fees it may be required to pay for past and future use of
ASCAP-controlled music, it does not believe such license fees will be
significant to the Company's financial position, results of operations or
liquidity.
State and Local Regulation
Because a cable television system uses local streets and
rights-of-way, cable systems are subject to state and local regulation,
typically imposed through the franchising process. Cable television systems
generally are operated pursuant to non-exclusive franchises, permits or
licenses granted by a municipality or other state or local government entity.
Franchises generally are granted for fixed terms and in many cases are
terminable if the franchisee fails to comply with material provisions. The
terms and conditions of franchises vary materially from jurisdiction to
jurisdiction. Each franchise generally contains provisions governing cable
service rates, franchise fees, franchise term, system construction and
maintenance obligations, system channel capacity, design and technical
performance, customer service standards, franchise renewal, sale or transfer
of the franchise, territory of the franchisee, indemnification of the
franchising authority, use and occupancy of public streets and types of cable
services provided. A number of states subject cable television systems to the
jurisdiction of centralized state governmental agencies, some of which impose
regulation of a character similar to that of a public utility. Attempts in
other states to regulate cable television systems are continuing and can be
expected to increase. At this time, the state of Michigan does not regulate
rates on behalf of its municipalities. State and local franchising
jurisdiction is not unlimited, however, and must be exercised consistently
with federal law. The 1992 Act immunizes franchising authorities from monetary
damage awards arising from regulation of cable systems or decisions made on
franchise grants, renewals, transfers and amendments.
The foregoing does not purport to describe all present and
proposed federal, state, and local regulations and legislation affecting the
cable industry. Other existing federal regulations, copyright licensing, and,
in many jurisdictions, state and local franchise requirements, are currently
the subject of judicial proceedings, legislative hearings and administrative
proposals which could change, in varying degrees, the manner in which cable
television systems operate. Neither the outcome of these proceedings nor their
impact upon the cable television industry or the Company can be predicted at
this time.
MANAGEMENT
Structure of the Company's Board of Directors
The Company will amend its Articles of Incorporation prior to
the Distribution to provide for a classified board of directors. The Cable
Michigan Board of Directors will be divided into three classes of directors
and will consist of 8 directors. The term of office of Class I Directors will
expire at the 1998 annual meeting, the term of office of Class II Directors
will expire at the 1999 annual meeting and the term of office of Class III
Directors will expire at the 2000 annual meeting. At each annual meeting of
stockholders held after the Distribution, a class of directors will be elected
for a three year term to replace the class whose term has then expired. See
"Certain Statutory, Charter and Bylaw Provisions."
The Company's Board of Directors will establish an executive
committee which will, among other things, have all the powers of the Company
Board in the management of the business and affairs of the Company at all times
when the Company Board is not in session.
The Company's Board of Directors will establish a compensation
committee which will make recommendations to the Company Board on matters
related to employee compensation and plans concerning the orderly succession
of officers and key management personnel.
The Company's Board of Directors will also establish an audit
committee which will, among other things, consider the overall scope and
approach of the annual audit and recommendations from the audit performed by
the independent accountants; recommend the appointment of the independent
accountants; consider significant accounting methods adopted or proposed to be
adopted; and consider procedures for internal controls.
Executive Officers and Directors
The following table sets forth certain information as of May 1,
1997, concerning the directors and executive officers of Cable Michigan who
will be serving in office as of the Distribution Date:
<TABLE>
<CAPTION>
Name Age Position
- -------------------- --- ---------------------------------------------------------
<S> <C> <C>
David C. McCourt 40 Director (Class III) Chairman and Chief Executive Officer
Mark Haverkate 42 Director (Class II) President and Chief Operating Officer
John J. Gdovin 39 Executive Vice President of Operations
Raymond B. Ostroski 42 Director (Class I), Executive Vice President, General
Counsel
Timothy J. Stoklosa 36 Director (Class III) Executive Vice President, Chief
Financial Officer
Bruce C. Godfrey 41 Director (Class I)
David C. Mitchell 55 Director (Class II)
Daniel Knowles 67 Director (Class I)
Frank Henry 63 Director (Class III)
</TABLE>
David C. McCourt will serve as Chairman of the Company as of
the Distribution. Mr. McCourt will also serve as Chairman and Chief Executive
Officer of RCN as of the Distribution. In addition, he will remain Chairman
of C-TEC, a position he has held since October 1993. Mr. McCourt has also
been President and Chief Executive Officer, as well as a director, of Kiewit
Telecom. He has also been Chairman and Chief Executive Officer of Mercom
since October 1993, President and a director of Metropolitan Fiber
Systems/McCourt, Inc., a subsidiary of MFS Telecom, Inc., since 1988, a
director of Cable Satellite Public Affairs Network ("C-SPAN") since June 1995,
and a director of Worldcom, Inc. since December 1996.
Mark Haverkate will be the President and Chief Executive
Officer and a director of the Company as of the Distribution. Mr. Haverkate
will also serve as Executive Vice President of Business Development of RCN as
of the Distribution. He has also been the President of RCN Development since
June 1997 and the Executive Vice President of Business Development at C-TEC
since May 1997. Previously, he was President for Business Operations at
RCN Telecom Services, Inc. from November 1996 to June 1997, Executive Vice
President of RCN Telecom Services, Inc. from August 1996 to November 1996,
Executive Vice President of C-TEC's Cable Television Group from July 1995
to August 1996, Executive Vice President of Development for C-TEC from
February 1995 to July 1995, Executive Vice President for Development at
Mercom from November 1995 to February 1996, Vice President of Development
for C-TEC from December 1993 to February 1995, Vice President of
Development at Mercom from December 1993 to February 1995, Vice President
of C-TEC's Cable Television Group from October 1989 to December 1993,
Director of Acquisitions and Development for C-TEC from July 1988 to
October 1989 and Corporate Marketing Manager for the Cable Television Group
from May 1981 to July 1988.
John J. Gdovin will be Executive Vice President of Operations
of the Company as of the Distribution. Mr. Gdovin has also been Executive
Vice President of C-TEC's Cable Television Group since August 1996, Senior
Vice President of RCN Telecom Services, Inc. since February 1997 and Executive
Vice President of Mercom since August 1996. Mr. Gdovin will continue in these
positions after the Distribution. Previously, Mr. Gdovin was Vice President
of C-TEC's Cable Television Group from August 1995 to August 1996, Director of
Operations of C-TEC's Cable Television Group from February 1992 to August 1995
and Director of Marketing and Business Administration of C-TEC's Cable
Television Group from May 1991 to February 1992.
Raymond B. Ostroski will be the Executive Vice President
and General Counsel and a director of the Company as of the Distribution.
Mr. Ostroski has been Executive Vice President and General Counsel of C-
TEC since February 1995, Corporate Secretary of C-TEC since October 1989, a
director of Mercom since May 1994 and Executive Vice President and General
Counsel of Mercom since February 1995. Mr. Ostroski was also Vice
President and General Counsel of C-TEC from December 1990 to February 1995,
Vice President and General Counsel of Mercom from December 1991 to February
1995, Corporate Secretary of Mercom from December 1991 to December 1994,
Corporate Counsel of C-TEC from August 1988 to December 1990, Assistant
Corporate Secretary of C-TEC from April 1986 to October 1989 and Associate
Counsel of C-TEC from August 1985 to August 1988.
Timothy J. Stoklosa will be the Executive Vice President and
Chief Financial Officer and a director of the Company as of the Distribution.
Mr. Stoklosa has also been Senior Vice President of Finance of C-TEC since
February 1997, Treasurer of C-TEC since August 1994 and Vice President and
Treasurer of Mercom since October 1996. Mr. Stoklosa will continue in these
positions after the Distribution. Previously, Mr. Stoklosa was Vice President
of Finance of C-TEC from May 1995 to February 1997, Manager of Mergers and
Acquisitions at Peter Kiewit Sons', Inc. from October 1991 to August 1994 and
Senior Financial Analyst of Corporate Development at Citizens Utilities Co.
from February 1990 to October 1991.
Bruce C. Godfrey will be a director of the Company as of the
Distribution. Mr. Godfrey will also be Executive Vice President and Chief
Financial Officer and a director of RCN as of the Distribution, as well as
continue in his current positions at C-TEC. Mr. Godfrey has been a director
of C-TEC since November 1996 and has been Executive Vice President and Chief
Financial Officer of C-TEC since April 1994. Mr Godfrey has also been
Executive Vice President and Chief Financial Officer of Mercom since April
1994 and a Director of Mercom since May 1994. Mr. Godfrey was also Senior
Vice President and Principal of Daniels and Associates from January 1984-April
1994.
David C. Mitchell will be a director of the Company as of the
Distribution. Mr. Mitchell will also remain a director of C-TEC, a position
he has held since 1993. Mr. Mitchell served as President of Rochester
Telephone Corporation's Telephone Group as well as Corporate Executive Vice
President and Director of Rochester Telephone Corporation. Since 1963, Mr.
Mitchell held various positions throughout that company, encompassing virtually
all disciplines of the company.
Daniel E. Knowles will be a director of the Company as of
the Distribution. Mr. Knowles will remain a director of C-TEC, a position
he has held since 1995. Mr. Knowles has been Personnel Consultant of
Cambridge Human Resources since 1989. He served as President of Personnel
and Administration, Grumman Corporation from 1963 to 1989.
Frank M. Henry will be a director of the Company as of the
Distribution. Mr. Henry will remain a director of C-TEC, a position he has
held since 1980. Mr. Henry has been Chairman, Frank Martz Coach Company
since 1995 and President, Frank Martz Coach Company from 1964 to 1995. He
has also been President, Gold Line, Inc. since 1975 and is a member of the
Board of Directors of First Union Corporation.
Executive Compensation
The executive officers who will be providing executive officer
services to Cable Michigan after the Distribution (collectively, the "Named
Executive Officers") are:
David C. McCourt, Chairman of the Board
Mark Haverkate, President and Chief Executive Officer
Timothy J. Stoklosa, Chief Financial Officer
Raymond B. Ostroski, Executive Vice President and General Counsel
John J. Gdovin, Executive Vice President of Operations
The Named Executive Officers will be compensated by RCN, and
will not receive any compensation from Cable Michigan other than pursuant to
stock options, as noted below.
Option Grants, Stock Related Plans. No stock options were
granted by C-TEC during the fiscal ending December 31, 1996, to any Named
Executive Officer. In addition to the adjusted C-TEC options described
below, the Company anticipates that, in connection with the Distribution,
the Company will adopt one or more compensation plans relating to Cable
Michigan Common Stock and that additional stock options relating to Cable
Michigan Common Stock will be granted to certain executive officers and key
employees. See "Cable Michigan Stock Plans".
The following table sets forth the fiscal year-end value of
unexercised options covering C-TEC Common Stock held by each Named Executive
Officer.
Aggregate Option Exercises in Last Fiscal Year and
Fiscal Year-End C-TEC Option Values(1)
<TABLE>
<CAPTION>
Number of Securities Underlying
Unexercised Options at Value of Unexercised In-the-Money
December 31, 1996(2) Options at December 31, 1996(2)(3)
----------------------------------- -----------------------------------
Exercisable (#) Unexercisable (#) Exercisable($) Unexercisable($)
--------------- ----------------- -------------- ----------------
<S> <C> <C> <C> <C>
David C. McCourt......... 150,000 350,000 $331,250 $887,500
Mark Haverkate........... 17,000 43,000 4,813 19,250
Timothy J. Stoklosa...... 5,000 10,000 7,688 13,250
Raymond B. Ostroski...... 21,000 49,000 10,500 42,000
John J. Gdovin........... 4,000 6,000 7,000 10,500
</TABLE>
- ----------
(1) No C-TEC stock options were exercised by the Chief Executive Officer or
any Named Executive Officer during the fiscal year ended December 31,
1996.
(2) Denominated in shares of C-TEC Common Stock.
(3) The fair market value of C-TEC Common Stock at December 31, 1996 was
$24.25 per share.
Cable Michigan Stock Plans
[Disclosure regarding new Cable Michigan stock-related plans
and pre-Distribution grants -- to come.]
Effect of Distribution on Equity-Related Benefits
In connection with the Distribution, each C-TEC option held by
the Named Executive Officers and certain other executive officers who after
the Distribution will be performing services for each of C-TEC, RCN and Cable
Michigan, will be adjusted so that following the Distribution each such
executive officer will hold options to purchase shares of C-TEC Common Stock,
RCN Common Stock and Cable Michigan Common Stock, respectively. The number of
shares subject to, and the exercise price of, such options will be adjusted to
take into account the Distribution and to ensure that the aggregate intrinsic
value of the resulting RCN, Cable Michigan and C-TEC options immediately after
the Distribution is equal to the aggregate intrinsic value of the C-TEC options
immediately prior to the Distribution. The exercise price and number of
shares of C-TEC options held by each person who after the Distribution will be
performing services for only one of C-TEC, RCN or Cable Michigan will relate
only to the common stock of that person's employer and will be adjusted to
reflect the Distribution and to ensure that the aggregate intrinsic value of
the resulting C-TEC, RCN or Cable Michigan options immediately after the
Distribution, as the case may be, are equal to the related C-TEC options
immediately prior to the Distribution. Shares of restricted C-TEC Common
Stock awarded under the C-TEC Executive Stock Purchase Plan ("ESPP") and share
units awarded under the ESPP that relate to C-TEC Common Stock will be
adjusted in an equitable manner in connection with the Distribution. See Note
(4) to "Security Ownership of Certain Beneficial Owners and Management."
Pension Benefits
C-TEC completed a comprehensive study of its employee benefit
plans in 1996. As a result of this study, effective after December 31, 1996,
in general, employees other than those of the C-TEC Group no longer accrue
benefits under the C-TEC defined benefit pension plan, but became fully vested
in their benefit accrued through that date. Such benefits, for the Chief
Executive Officer and the Named Executive Officers affected by this event,
computed as the present value at July 31, 1997 (the expected payout date) of a
life annuity beginning at age 65, are as follows: Mr. McCourt, $11,679; Mr.
Haverkate, $41,894; Mr. Stoklosa, $4,093; Mr. Ostroski, $32,363 and Mr.
Gdovin, $28,528.
Directors' Compensation
Non-employee Directors of the Company will receive an annual
retainer of $6,000 and will be paid $500 for each board meeting attended. The
Committee Chairmen and other committee members will be paid $1,000 and $500,
respectively, for each committee meeting attended.
Compensation Committee Interlocks and Insider Participation
The Company does not currently have a Compensation Committee.
Prior to the Distribution, compensation was determined by the C-TEC Board.
Following the Distribution, the Company expects to establish a Compensation
Committee, all the members of which will be non-employee directors.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
All of the outstanding shares of Company Common Stock are, and
will be prior to the Distribution, held beneficially and of record by C-TEC.
Set forth in the table below is information as of May 31, 1997 (or as of the
dates specified in the explanatory footnote in the case of one of the
five-percent stockholders) with respect to the number of shares of C-TEC
Common Stock and C-TEC Class B Common Stock beneficially owned by (i) each
person or entity known by the Company to own more than five percent of the
outstanding C-TEC Common Stock or of the outstanding C-TEC Class B Common
Stock, (ii) each director of the Company, (iii) each of the Named Executive
Officers of the Company and (iv) all directors and officers of the Company as
a group. Also set forth below are the number of shares of Company Common
Stock that each such person or entity would own immediately after the
Distribution on a pro forma basis. To the Company's knowledge, unless
otherwise indicated, each person or entity has sole voting and investment
power with respect to the shares set forth opposite the person's or entity's
name.
<TABLE>
<CAPTION>
COMPANY COMMON
C-TEC CLASS B STOCK
C-TEC COMMON STOCK(1) COMMON STOCK PRO FORMA
------------------------------------------------------------------------------------------
Number of Number of Number of
Shares Percent of Shares Percent of Shares Percent of
Beneficially Outstanding Beneficially Outstanding Beneficially Outstanding
Name of Beneficial Owner Owned Shares(2) Owned Shares Owned Shares(3)
------------------------ ------------ ----------- ------------ ----------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
Directors and Named Executive
Officers
Bruce C. Godfrey............... 19,702 (4) * 0 *
Mark Haverkate................. 22,540 (4) * 400 *
David C. McCourt............... 42,544 (4)(5) * 6,000 *
Raymond B. Ostroski............ 8,249 (4) * 1,000 *
Timothy J. Stoklosa............ 428 (4) * 0 *
John J. Gdovin................. 6,948 (4) * 0 *
David C. Mitchell.............. 2,697 * 0 *
Daniel Knowles................. 908 * 0 *
Frank Henry.................... 41,448 * 23,097 *
All Directors and Executive
Officers as a Group (9 persons) 145,464 * 30,497 *
5% Stockholders
Kiewit Telecom
Holdings, Inc. (6)............ 8,226,262 41.5% 5,094,223 67.0%
Mario J. Gabelli Group(7)...... 1,576,037 7.94% 681,195 11.4%
- ----------
* Less than 1% of outstanding shares.
(1) The C-TEC Class B Common Stock is convertible at the option of the holder
into shares of C-TEC Common Stock on a one-for-one basis at any time and
from time to time. The C-TEC Common Stock column has been prepared
assuming that no shares of C-TEC Class B Common Stock are converted into
C-TEC Common Stock.
(2) Includes forfeitable C-TEC Matching Shares, but excludes Share Units.
(3) Includes shares of Company Common Stock acquired in respect of Matching
Shares, but excludes Cable Michigan Share Units.
(4) Under the ESPP, participating executive officers who forgo current
compensation are credited with C-TEC "Share Units", the value of which
is based on the value of a share of C-TEC Common Stock. ESPP
participants who elect to receive Share Units in lieu of current
compensation are also credited with restricted Matching Shares, which
vest over a period of 3 years from the grant date, subject to continued
employment. Matching Shares, unless forfeited, have voting and
dividend rights. In connection with the Distribution, Share Units and
Matching Shares will be adjusted in an equitable manner. The table
below shows in respect of each executive officer the number of shares
of C-TEC Common Stock and C-TEC Class B Common Stock purchased
outright, Share Units relating to C-TEC Common Stock acquired by each
such executive officer in lieu of current compensation, and the
forfeitable Matching Shares of C-TEC Common Stock held by each such
executive officer:
</TABLE>
<TABLE>
<CAPTION>
Total Shares
Purchased
Share Units Acquired Total Shares and Acquired
Shares Purchased Under the ESPP in Lieu Purchased Restricted and Restricted
Outright of Current Compensation and Acquired Matching Shares Matching Shares
---------------- ----------------------- ------------ --------------- ---------------
<S> <C> <C> <C> <C> <C>
Bruce C. Godfrey........... 5,756 6,973 12,729 6,973 19,702
Mark Haverkate............. 15,314 3,813 19,127 3,813 22,940
David C. McCourt........... 14,636 16,959 31,595 16,959 48,554
Raymond B. Ostroski........ 4,375 2,437 6,812 2,437 9,249
John J. Gdovin............. 2,708 2,120 4,828 2,120 6,948
</TABLE>
(5) Includes 225 shares of C-TEC Common Stock which are owned by Mr. McCourt's
wife. Mr. McCourt disclaims beneficial ownership of such Shares.
(6) Kiewit Telecom is owned 90% by Kiewit Diversified Group, Inc. and 10% by
David C. McCourt, Chairman and Chief Executive Officer of C-TEC and
RCN. Kiewit Diversified Group, Inc. is a wholly-owned subsidiary of
PKS. Prior to the Distribution, Kiewit Telecom will convert a number
of the shares of C-TEC Class B Common Stock it owns into C-TEC Common
Stock so that it will be entitled to cast less than 50% of the votes
that all shares of C-TEC Common Equity are entitled to cast on matters
presented to the C-TEC shareholders. The address for Kiewit Telecom,
Kiewit Diversified Group and PKS is 1000 Kiewit Plaza, Omaha, Nebraska
18131.
(7) Based on information obtained from Schedule 13Ds and amendments
thereto for the C-TEC Common Stock and the C-TEC Class B Stock filed
through March 31, 1997, with the Securities and Exchange Commission
(the "SEC") by Mario J. Gabelli, together with GAMCO Investors, Inc.,
Gabelli Funds, Inc., Gabelli Performance Partnership, L.P., Gabelli
International Limited, Gabelli International II Limited and Gabelli &
Company, Inc., each of whose address is One Corporate Center, Rye, New
York 10580-1434.
Mercom
Set forth below is certain information regarding the beneficial
ownership of Common Stock of Mercom, a subsidiary of the Company, as of May
31, 1997, by each director, the named executive officers and by all persons,
as a group, who will be directors or executive officers of the Company as of
the Distribution. Each director or executive officer has sole investment and
voting power over the shares listed opposite his name except as set forth in
the footnotes hereto:
Number of
Shares
Beneficially Percent
Name of Beneficial Owner Owned of Class
------------------------ ------------ --------
Bruce C. Godfrey.................................. -- --
Mark Haverkate.................................... 1,000 *
David C. McCourt.................................. 50,000 (1) 1.69
Raymond B. Ostroski............................... 4,000 *
Timothy J. Stoklosa............................... -- --
John J. Gdovin.................................... --
David C. Mitchell................................. -- --
Daniel Knowles.................................... -- --
Frank Henry....................................... -- --
All Directors and Executive Officers as a
Group (9 persons)............................... 5,000 *
- ----------
* Less than 1% of the outstanding of the class.
(1) Includes 50,000 shares which are owned by Mr. McCourt's wife.
Peter Kiewit Sons' Inc.
Set forth below is certain information regarding the beneficial
ownership of equity securities of PKS as of May 31, 1997, by each director,
the executive officers and by all persons, as a group, who will be directors or
executive officers of the Company as of the Distribution, of Class B
Construction & Mining Group Nonvoting Restricted Redeemable Convertible
Exchangeable Common Stock (none of which is owned by management), Class C
Construction and Mining Group Restricted Redeemable Convertible Exchangeable
Common Stock ("Class C"), and Class D Diversified Group Convertible
Exchangeable Common Stock ("Class D").
<TABLE>
<CAPTION>
Number of Percent of Number of Percent of
Class C Class C Class D Class D
Name of Beneficial Owner Shares Shares Shares Shares
------------------------ --------- ---------- --------- ----------
<S> <C> <C> <C> <C>
Bruce C. Godfrey................................ -- -- -- --
Mark Haverkate.................................. -- --
David C. McCourt................................ -- -- 1,500 *
Raymond B. Ostroski............................. -- -- -- --
Timothy J. Stoklosa............................. -- -- 431 *
John J. Gdovin.................................. -- -- -- --
David C. Mitchell............................... -- -- -- --
Daniel Knowles.................................. -- -- -- --
Frank Henry..................................... -- -- -- --
All Directors and Executive Officers as a
Group (9 persons)............................. -- -- 1,931 *
- ----------
* Less than 1% of the outstanding of the class.
</TABLE>
DESCRIPTION OF CAPITAL STOCK
The following description of the capital stock of the Company
is based upon the Company's Amended and Restated Articles of Incorporation
(the "Articles of Incorporation") and its Amended and Restated Bylaws (the
"Bylaws") which are to be in effect as of the Distribution, and by applicable
provisions of law. The following description is qualified in its entirety by
reference to such Articles of Incorporation and Bylaws, which are filed as
exhibits to the Form 10.
The Company's Articles of Incorporation authorizes the issuance
of 100 million shares of Company Common Stock, par value $1.00 per share, and
25 million shares of preferred stock par value $1.00 per share (the "Company
Preferred Stock").
Company Common Stock
Subject to the rights of the holders of any Company Preferred
Stock which may be outstanding, each holder of Company Common Stock on the
applicable record date is entitled to receive such dividends as may be declared
by the Company Board out of funds legally available therefor, and, in the
event of liquidation, to share pro rata in any distribution of the Company's
assets after payment or providing for the payment of liabilities and the
liquidation preference of any outstanding Company Preferred Stock. Each
holder of Company Common Stock is entitled to one vote for each share held of
record on the applicable record date on all matters presented to a vote of
stockholders, including the election of directors. Holders of Company Common
Stock have no cumulative voting rights or preemptive rights to purchase or
subscribe for any stock or other securities and there are no conversion rights
or redemption or sinking fund provisions with respect to such stock. Based on
the number of shares of C-TEC Common Equity outstanding on [__________], 1997
and the distribution ratio of [_____] shares of Company Common Stock for every
[_____] shares of C-TEC Common Equity, it is anticipated that there will be
approximately [_____] shares of Company Common Stock outstanding upon
consummation of the Distribution.
The shares of the Company Common Stock distributed in the
Distribution will be fully paid and nonassessable. The Company's Articles of
Incorporation contains no restrictions on the alienability of the Company
Common Stock. For further information on the securities laws restrictions, if
any, on transferability of the Company Common Stock, see "Trading Market."
Except as disclosed in the section entitled "Certain Statutory, Charter and
Bylaw Provisions," no provision of the Articles of Incorporation or Bylaws and
no provision of any agreement or plan involving the Company is in effect that
would discriminate against any existing or prospective holder of such
securities as a result of such security holder owning a substantial amount of
securities.
Preferred Stock
Under the Articles of Incorporation, the Company Board will
have the authority to create one or more series of preferred stock, to issue
shares of preferred stock in such series up to the maximum number of shares of
preferred stock authorized, and to determine the preferences, rights,
privileges and restrictions of any series, including the dividend rights,
voting rights, rights and terms of redemption, liquidation preferences, the
number of shares constituting any such series and the designation of such
series. The authorized shares of Company Preferred Stock, as well as
authorized but unissued shares of Company Common Stock, will be available for
issuance without further action by the Company's stockholders, unless
stockholder action is required by applicable law or by the rules of a stock
exchange or quotation system on which any series of the Company's stock may
then be listed or quoted. No shares of Company Preferred Stock will be issued
in connection with the Distribution.
Registrar and Transfer Agent
First Union National Bank will serve as the Registrar and
Transfer Agent for the Company Common Stock.
CERTAIN STATUTORY, CHARTER AND BYLAW PROVISIONS
Certain provisions of the Pennsylvania Business Corporation Law
("PBCL"), the Articles of Incorporation and Bylaws of the Company summarized
in the following paragraphs may be deemed to have an anti-takeover effect and
may delay, defer or prevent a tender offer or takeover attempt that a
stockholder might consider in its best interest, including those attempts that
might result in a premium over the market price for the shares held by
stockholders. The following is a summary of certain of these provisions. The
Articles of Incorporation and the Bylaws are filed as exhibits to the Form 10,
and the following summary is qualified in its entirety by reference to such
documents.
Charter and Bylaw Provisions
Classified Board of Directors; Removal of Directors. The
Articles of Incorporation and the Bylaws provide for the Company Board to be
divided into three classes of directors. The term of office of the first
class expires at the 1998 annual meeting, the term of office of the second
class expires at the 1999 annual meeting, and the term of office of the third
class expires at the 2000 annual meeting. At each annual meeting held
thereafter, a class of directors will be elected to replace the class whose
term has then expired. As a result, approximately one-third of the members of
the Company Board will be elected each year and, except as described above,
each of the directors serves a staggered three-year term. See
"Management--Executive Officers and Directors." Moreover, as is permitted
under the Pennsylvania Business Corporation Law only in the case of a
corporation having a classified board, the Articles of Incorporation and the
Bylaws provide that directors may be removed only for cause.
These provisions could prevent a stockholder (or group of
stockholders) having majority voting power from obtaining control of the
Company Board until the second annual stockholders' meeting following the date
the acquiror obtains such voting power. Accordingly, these provisions could
have the effect of discouraging a potential acquiror from making a tender
offer or otherwise attempting to obtain control of the Company.
Stockholder Action by Written Consent; Special Meetings. The
Articles of Incorporation and the Bylaws provide that no action required or
permitted to be taken at an annual or special meeting of stockholders may be
taken without a meeting, and that no action may be taken by the written
consent of stockholders in lieu of a meeting. The Articles of Incorporation
also provides that special meetings of the Company's stockholders may be
called only by the Company Board, the Chairman of the Company Board or the
Chief Executive Officer of the Company. These provisions may make it more
difficult for stockholders to take action opposed by the Board.
Advance Notice Provisions. The Bylaws establish an advance
written notice procedure for stockholders seeking to nominate candidates for
election as directors at an annual meeting of stockholders or to bring
business before an annual meeting of stockholders of the Company. The Bylaws
provide that only persons who are nominated by or at the direction of the
Company Board, or by a stockholder who has given timely written notice to the
Secretary of the Company prior to the meeting at which directors are to be
elected, will be eligible for election as directors of the Company. The
Bylaws also provide that at any meeting of stockholders only such business may
be conducted as has been brought before the meeting by or at the direction of
the Company Board or, in the case of an annual meeting of stockholders, by a
stockholder who has given timely written notice to the Secretary of the
Company of such stockholder's intention to bring such business before such
meeting. Under the Bylaws, for any such stockholder notice to be timely, such
notice must be received at the principal executive offices of the Company in
writing not less than 60 days nor more than 90 days prior to the meeting;
provided, however, that in the event that less than 70 days' notice or prior
public disclosure of the date of the meeting is given or made to stockholders,
notice by the stockholder must be received not later than the close of
business on the 10th day following the day on which such notice or public
disclosure was given or made. Under the Bylaws, a stockholder's notice must
also contain certain information specified in the Bylaws. These provisions
may preclude or deter some stockholders from bringing matters before, or
making nominations for directors at, an annual meeting.
Preferred Stock. Under the Articles of Incorporation, the
Company Board will have the authority, without further stockholder approval,
to amend the Articles of Incorporation by resolution or resolutions to create
one or more series of preferred stock, to issue shares of preferred stock in
such series up to the maximum number of shares of preferred stock authorized,
and to determine the preferences, rights, privileges and restrictions of any
series, including the dividend rights, voting rights, rights and terms of
redemption, liquidation preferences, the number of shares constituting any
such series and the designation of such series. Pursuant to this authority,
the Company Board could create and issue a series of preferred stock with
rights, privileges or restrictions having the effect of discriminating against
an existing or prospective holder of such securities as a result of such
security holder beneficially owning or commencing a tender offer for a
substantial amount of Company Common Stock. One of the effects of authorized
but unissued and unreserved shares of capital stock may be to render more
difficult or discourage an attempt by a potential acquiror to obtain control
of the Company by means of a merger, tender offer, proxy contest or otherwise,
and thereby protect the continuity of the Company's management. The issuance
of such shares of capital stock may have the effect of delaying, deferring or
preventing a change in control of the Company without any further action by
the stockholders of the Company.
Amendment of Certain Charter and Bylaw Provisions. The
Articles of Incorporation provide that the Company Board may adopt, amend or
repeal any provision of the Bylaws. The Articles of Incorporation and the
Bylaws also provide that Bylaw provisions may be adopted, amended or repealed
by the affirmative vote of stockholders holding not less than 66 2/3 percent
of the total number of votes entitled to be cast in the election of directors.
Any amendment, modification or repeal of the provisions of the
Articles of Incorporation relating to the election and removal of directors,
the right to call special meetings, the prohibition on action by written
consent, amendment of the Bylaws and the limitation of liability and
indemnification of officers and directors will require approval by the
affirmative vote of stockholders holding at least 66 2/3 percent of the total
number of votes entitled to vote generally in the election of directors.
Certain Provisions of the Pennsylvania Business Corporation Law
The Company is governed by a set of interrelated provisions
of the PBCL which are designed to support the validity of actions taken by
the Company Board in response to takeover bids, including specifically the
Board's authority to "accept, reject or take no action" with respect to a
takeover bid, and permitting the unfavorable disparate treatment of a
takeover bidder. Another provision of the PBCL gives the directors broad
discretion in considering the best interests of the corporation, including
a provision which permits the Board, in taking any action, to consider
various corporate interests, including employees, suppliers, clients and
communities in which the corporation is located, the short and long-term
interests of the corporation, and the resources, intent and conduct of any
person seeking to acquire control of the corporation. These provisions may
have the effect of making more difficult and thereby discouraging attempts
to acquire control of the Company in a transaction that the Board
determines not to be in the best interests of the Company.
The Company has elected to opt-out of certain antitakeover
provisions of the PBCL, including (i) a provision conditioning the approval of
certain transactions on the affirmative vote of the shareholders entitled to
cast at least a majority of the votes that all shareholders, other than the
"interested shareholder" (defined generally here as a shareholder who is a
party to the transaction or who is treated differently from other
shareholders), are entitled to cast with respect to the transaction, subject
to certain exceptions, (ii) provisions concerning a "control-share
acquisition" in which the voting rights of certain shareholders of the
corporation (specifically, a shareholder who acquires 20%, 33 1/3% or 50% or
more of the voting power of the corporation) are conditioned upon the consent
of a majority vote at a meeting of the independent shareholders of the
corporation after disclosure by such shareholder of certain information, and
with respect to which such shareholder is effectively deprived of voting
rights if consent is not obtained; (iii) provisions pursuant to which any
profit realized by a "controlling person or group," generally defined as a 20%
beneficial owner, from the disposition of any equity securities within
twenty-four months prior to, and eighteen months succeeding, the acquisition
of such control is recoverable by the corporation; (iv) provisions pursuant to
which severance payments are to be made by the corporation to any eligible
employee of a covered corporation whose employment is terminated, other than
for willful misconduct, within ninety days before, or twenty-four months
after, a control-share acquisition; and (iv) provisions pursuant to which any
holder of voting shares of a registered corporation who objects to a "control
transaction" (generally defined as the acquisition by a person or group (the
"controlling person or group") that would entitle the holders thereof to cast
at least 20% of the votes that all shareholders would be entitled to cast in
an election of the directors of the corporation) is entitled to make a written
demand on the controlling person or group for payment of the fair value of the
voting shares of the corporation held by the shareholder.
Under the PBCL, a corporation is also prohibited, subject to
certain exceptions, from engaging in any business combination with an
interested shareholder (generally defined in Pennsylvania as a beneficial
owner of 20% or more of the corporation's voting shares) unless (i) the
shareholder became interested after the date the board of directors approved
the business combination, (ii) the board of directors approved the transaction
which resulted in the shareholder becoming an interested shareholder prior to
the occurrence of such transaction, (iii) no earlier than three months after
the date the shareholder became interested, and its beneficial ownership
amounted to 80% of the corporation's voting shares, the business combination
is approved by a majority of the non-interested shareholders and it meets
certain other conditions concerning the amount of consideration, (iv) at any
time after the date the shareholder became interested, the business
combination is approved by unanimous vote of the shareholders, (v) no earlier
than five years after the date the shareholder became interested, the business
combination is approved by a majority of the non-interested shareholders, or
(vi) no earlier than five years after the date the shareholder became
interested, the business combination is approved by a majority of all
shareholders and meets certain conditions concerning the amount of
consideration. The Company has elected not to opt out of this provision. The
restrictions imposed by this provision will apply to the Company. Prior to
the Distribution, however, the Company Board will approve of Kiewit Telecom
becoming an interested shareholder and, consequently, this provision would not
apply to any business combination with Kiewit Telecom.
Liability and Indemnification of Directors and Officers
Certain provisions of the Pennsylvania Business Corporation Law
and the Company's Articles of Incorporation and Bylaws relate to the
limitation of liability and indemnification of directors and officers of the
Company. These various provisions are described below.
The Articles of Incorporation provides that the Company's
directors are not personally liable to the Company or its stockholders for
monetary damages for breach of their fiduciary duties as a director to the
fullest extent permitted by Pennsylvania law. Under existing Pennsylvania
law, directors cannot be relieved of personal liability for (i) breach of such
director's duties of care and good faith to the company if such breach or
omission constitutes self-dealing, willful misconduct or recklessness, (ii)
violation of criminal statutes, or (iii) nonpayment of federal, state or local
taxes. This exculpation provision may have the effect of reducing the
likelihood of derivative litigation against directors and may discourage or
deter stockholders or the Company from bringing a lawsuit against directors of
the Company for breach of their fiduciary duties as directors. However, the
provision does not affect the availability of equitable remedies such as an
injunction or rescission.
The Articles of Incorporation also provides that each person
who was or is a party or is threatened to be made a party to any threatened,
pending or completed action or proceeding, whether civil, criminal,
administrative or investigative, by reason of the fact that such person is or
was a director or officer of the Company or is or was serving at the request
of the Company as a director or officer of another domestic or foreign
corporation for profit or not-for-profit, partnership, joint venture, trust or
other enterprise, shall be indemnified and held harmless by the Corporation to
the fullest extent permitted by Pennsylvania Law. This right to
indemnification shall also include the right to be paid by the Company the
expenses incurred in connection with any such proceeding in advance of its
final disposition to the fullest extent authorized by Pennsylvania Law. This
right to indemnification shall be a contract right. The Company may, by
action of the Company Board, provide indemnification to such of the employees
and agents of the Company to such extent and to such effect as the Company
Board determines to be appropriate and authorized by Pennsylvania law.
The Company intends to purchase and maintain insurance on
behalf of any person who is or was a director, officer, employee or agent of
the Company, or is or was serving at the request of the Company as a director,
officer, employee or agent of another corporation, partnership, joint venture,
trust, employee benefit plan or other enterprise against any liability
asserted against him or her and incurred by him or her in any such capacity, or
arising out of his or her status as such, whether or not the Company would
have the power or the obligation to indemnify him or her against such
liability under the provisions of the Company's Articles of Incorporation.
INDEPENDENT AUDITORS
The Company Board has appointed Coopers & Lybrand L.L.P. as the
Company's independent accountants to audit the Company's financial statements
for fiscal year 1997. Coopers & Lybrand L.L.P. has served as C-TEC's auditors
throughout the periods covered by the financial statements included in this
Information Statement.
ADDITIONAL INFORMATION
The Company has filed the Form 10 with the Commission under the
Exchange Act with respect to the shares of Company Common Stock being received
by C-TEC stockholders in the Distribution. This Information Statement does
not contain all of the information set forth in the Form 10 and the exhibits
and schedules thereto, to which reference is hereby made. For additional
information, reference is made to the Form 10 and the exhibits thereto, which
are on file at the offices of the Commission and may be inspected and copied
as set forth below.
The Form 10 and the exhibits thereto filed by the Company with
the Commission may be inspected and copied at the public reference facilities
maintained by the Commission at Room 1024, 450 Fifth Street, N.W., Washington,
DC 20549, as well as at the Regional Offices of the Commission at Northwest
Atrium Center, 500 West Madison, Suite 1400, Chicago, Illinois 60661, and 7
World Trade Center, 13th floor, New York, New York 10048. Copies of such
information can be obtained by mail from the Public Reference Branch of the
Commission at 450 Fifth Street, N.W., Washington, DC 20549 at prescribed
rates. Such material may also be accessed electronically by means of the
Commission's home page on the Internet at http://www.sec.gov.
<PAGE>
CABLE MICHIGAN, INC.
INDEX TO FINANCIAL STATEMENTS
Report of Independent Accountants
Consolidated Balance Sheets at December 31, 1996 and 1995
Consolidated Statements of Operations for the three years ended December 31,
1996
Consolidated Statements of Cash Flows for the three years ended December 31,
1996
Consolidated Statements of Changes in Stockholder's Equity for the three years
ended December 31, 1996
Notes to Consolidated Financial Statements
Consolidated Balance Sheets as of March 31, 1997 (unaudited)
Consolidated Statements of Operations for the Three Months Ended March 31,
1997 and 1996 (unaudited)
Condensed Consolidated Statements of Cash Flows for the Three Months Ended
March 31, 1997 and 1996 (unaudited)
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholder of Cable Michigan, Inc.:
We have audited the consolidated financial statements of Cable Michigan,
Inc. and Subsidiaries (the "Company") at December 31, 1996 and 1995 and for
each of the three years in the period ended December 31, 1996, listed in
the index on page __ of this Form 10. These financial statements are the
responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Cable Michigan,
Inc. and Subsidiaries at December 31, 1996 and 1995, and the consolidated
results of their operations, changes in their stockholder's equity and their
cash flows for each of the three years in the period ended December 31, 1996,
in conformity with generally accepted accounting principles.
Coopers & Lybrand L.L.P.
2400 Eleven Penn Center
Philadelphia, PA 19103
June 30, 1997
CABLE MICHIGAN, INC.
CONSOLIDATED BALANCE SHEETS
(Thousands of Dollars)
December 31, 1996 1995
- -----------------------------------------------------------------------------
ASSETS
Cash and temporary cash investments $3,297 $3,029
Accounts receivable, net of reserve for
doubtful accounts of $579 in 1996 and
$496 in 1995 3,884 3,502
Prepayments and other 518 570
Accounts receivable - affiliates 1,716 2,282
Deferred income taxes 974 2,354
Property, plant and equipment,
net of accumulation of depreciation 77,792 84,310
Intangible assets, net 60,956 76,650
Deferred charges and other assets 63 62
- -----------------------------------------------------------------------------
Total Assets $149,200 $172,759
- -----------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDER'S DEFICIT
Liabilities
Current maturities of long-term debt $1,750 $1,500
Accounts payable 3,337 1,973
Advance billings and customer deposits 2,113 1,916
Accrued taxes 228 327
Accrued interest 104 123
Accrued expenses 6,949 7,405
Accounts payable - affiliates 9,861 8,570
Long-term debt 15,680 17,430
Notes payable - affiliates 147,567 164,377
Deferred income taxes 26,656 27,048
- -----------------------------------------------------------------------------
Total liabilities 214,245 230,669
Minority interest 14,696 15,847
Commitments and contingencies
Common shareholder's deficit (79,741) (73,757)
- -----------------------------------------------------------------------------
Total Liabilities and Shareholder's Equity $149,200 $172,759
- -----------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
<TABLE>
<CAPTION>
CABLE MICHIGAN, INC.
CONSOLIDATED STATEMENTS OF
OPERATIONS
(Thousands of Dollars Except Per Share Amounts)
For the Years Ended December 31,
1996 1995 1994
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Sales $76,187 $60,675 $49,141
Costs and expenses, excluding
depreciation and amortization 44,091 34,749 28,543
Depreciation and amortization 31,427 25,154 28,685
- -----------------------------------------------------------------------------------------
Operating Income (Loss) 669 772 (8,087)
- -----------------------------------------------------------------------------------------
Interest income 127 55 -
Interest expense (15,179) (15,973) (15,767)
Other expense, net (736) (363) (1,307)
- -----------------------------------------------------------------------------------------
(Loss) Before Income Taxes (15,119) (15,509) (25,161)
(Benefit) provision for income taxes (5,712) (5,590) 52
- -----------------------------------------------------------------------------------------
(Loss) Before Minority Interest
and Equity in Unconsolidated Entity (9,407) (9,919) (25,213)
- -----------------------------------------------------------------------------------------
Equity in (loss) of unconsolidated entity - (396) (1,013)
Minority interest in (income) loss
of consolidated entity 1,151 (186) -
- -----------------------------------------------------------------------------------------
Net (Loss) $(8,256) $(10,501) $(26,226)
=========================================================================================
Unaudited pro forma net (loss) per common share ($.30) - -
</TABLE>
See accompanying notes to consolidated financial statements.
<TABLE>
<CAPTION>
CABLE MICHIGAN, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Thousands of Dollars) For the Years Ended December 31,
----------------------------------------
1996 1995 1994
----------------------------------------
<S> <C> <C> <C>
Cash Flows from Operating Activities
Net (loss) $(8,256) $(10,501) $(26,226)
Gain on pension curtailment/settlement (855) - -
Depreciation and amortization 31,427 25,154 28,685
Deferred income taxes and investment tax credits, net 988 (4,853) 14,102
Provision for losses on accounts receivable 843 747 590
Equity in loss of unconsolidated entities - 396 1,013
(Decrease) increase in minority interest (1,151) 186 -
Other non-cash items 2,274 2,147 1,015
Net change in certain assets and liabilities, net of
acquisitions of businesses:
Accounts receivable and unbilled revenues (1,226) (1,208) (649)
Accounts payable 1,365 (1,682) 1,784
Accrued expenses 125 (495) 919
Accrued taxes (99) (9,020) 8,725
Accounts receivable - affiliates 567 499 (2,473)
Accounts payable - affiliates 1,314 (1,082) 1,979
Other, net 347 19 148
Other 154 4 (23)
----------------------------------------
Net cash provided by operating activities 27,817 311 29,589
----------------------------------------
Cash Flows from Investing Activities
Additions to property, plant and equipment (9,605) (11,207) (8,678)
Acquisitions, net of cash acquired - (2,445) -
Other 390 307 (317)
----------------------------------------
Net cash used in investing activities (9,215) (13,345) (8,995)
----------------------------------------
Cash Flows from Financing Activities
Redemption of long-term debt (1,500) (5,763) -
Proceeds from the issuance of common stock - 8,256 -
Transfers from (to) C-TEC, net - 4,615 -
Change in affiliate notes, net (16,834) 7,885 (19,786)
----------------------------------------
Net cash (used in) provided by financing activities (18,334) 14,993 (19,786)
----------------------------------------
Net increase in cash and temporary cash investments 268 1,959 808
Cash and temporary cash investments at beginning of year 3,029 1,070 262
----------------------------------------
Cash and temporary cash investments at end of year $3,297 $3,029 $1,070
========================================
</TABLE>
CABLE MICHIGAN, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Thousands of Dollars)
For the Years Ended December 31,
--------------------------------
1996 1995 1994
--------------------------------
Supplemental disclosures of cash flow
information cash paid during the year for:
Interest $15,199 $15,849 $15,768
Income taxes $ 29 $ - $ 10
Supplemental Schedule of Non-cash Investing and Financing Activities:
In 1995, C-TEC acquired an additional 18.29% of the outstanding Common Stock
of Mercom, Inc. for cash of $6,912. The acquisition, along with the Company's
previous investment of 43.63% of Mercom's outstanding Common Stock, was
accounted for as a purchase. A summary of the acquisition is as follows:
Capital contribution by stockholder $ 6,912
Liabilities assumed 38,054
Deferred tax liability incurred 16,044
Reduction of equity-method investment 2,511
Minority interest recognized 15,680
-------
Fair value of assets acquired $ 79,201
=======
See accompanying notes to consolidated financial statements.
Cable Michigan, Inc.
Consolidated Statements of Changes in Shareholder's Equity
For the Years Ended December 31, 1996, 1995 and 1994
(Dollars in Thousands, Except Per Share Data)
Shareholder's
Common Net
Stock Investment Total
------- ------------- ---------
Balance, December 31, 1993 $ 1 $ (60,420) $ (60,419)
Net (Loss) (26,226) (26,226)
Transfers from (to) C-TEC 9,713 9,713
------- --------- ---------
Balance, December 31, 1994 1 (76,933) (76,932)
Net (Loss) (10,501) (10,501)
Transfers from (to) C-TEC 13,676 13,676
------- --------- ---------
Balance, December 31, 1995 1 (73,758) (73,757)
Net (Loss) (8,256) (8,256)
Transfers from (to) C-TEC 2,272 2,272
------- --------- ---------
Balance, December 31, 1996 $ 1 $ (79,742) $ (79,741)
======= ========= =========
See accompanying notes to consolidated financial statements
CABLE MICHIGAN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars In Thousands Except Per Share Data)
1. BACKGROUND AND BASIS OF PRESENTATION
Cable Michigan, Inc. ("Cable Michigan") is currently a wholly owned
subsidiary of C-TEC Cable Systems, Inc., which is a wholly owned subsidiary
of C-TEC Corporation ("C-TEC"). Mercom, Inc. ("Mercom") is currently a
majority owned subsidiary of C-TEC. Cable Michigan owns, operates and
manages cable television systems which provide basic, premium and pay-per-
view programming services to subscribers in Michigan. Mercom, Inc. is a
cable television operator in the Michigan area which provides basic,
premium and pay-per-view cable programming services to subscribers in three
cable systems in southern Michigan and, through 1996, one cable system in
Port St. Lucie, Florida (Note 15.) On February 13, 1997, C-TEC announced
its intention to separate its operations along business lines into three
separate, publicly traded companies (the "restructuring"). C-TEC also
announced its intention to distribute to its shareholders by December
31,1997, subject to certain conditions, all of its interest in Cable
Michigan and Mercom (collectively, the "Company"). The consolidated
financial statements of the Company include the accounts of Cable Michigan
and Mercom which, prior to their planned distribution to the Company
pursuant to the restructuring, were consolidated with C-TEC. Pursuant to a
common stock rights offering, C-TEC, through a wholly-owned subsidiary,
acquired majority voting control of Mercom, Inc. ("Mercom") through the
exercise of stock rights and oversubscription privileges. Immediately
prior to the rights offering, C-TEC owned 43.63% of the outstanding common
stock of Mercom. C-TEC purchased a total of 1,920,000 shares of common
stock through the rights offering for an aggregate consideration of $6,912.
The rights offering concluded on August 10, 1995. Following the purchase,
C-TEC owns 61.92% of the outstanding common stock of Mercom and accordingly
has consolidated Mercom in its financial statements since August 1995.
Prior to the rights offering, C-TEC accounted for its 43.63% ownership
interest under the equity method of accounting. The acquisition has been
accounted for as a purchase. Mercom has been consolidated with the Company
since August 1995 and is reflected under the equity method of accounting
for periods prior to August 1995.
The following unaudited pro forma summary presents information as if the
acquisition of Mercom had occurred at the beginning of 1995. The pro forma
information is provided for informational purposes only. It is based on
historical information and does not necessarily reflect the actual results
that would have occurred nor is it necessarily indicative of future results of
operations of the consolidated entities.
Year Ended December 31,
-----------------------
1995
----
Unaudited
Sales........................................... $68,781
(Loss) from continuing operations............... ($11,641)
Net (loss)...................................... ($11,641)
Pro Forma Earnings Per Share:
(Loss) from continuing operations............... ($.42)
Net (loss)...................................... ($.42)
The consolidated financial statements have been prepared using the
historical basis of assets and liabilities and historical results of
operations. All material intercompany transactions and balances have been
eliminated.
The Company has historically depended upon C-TEC for substantial support
services such as finance, cash management, legal, human resources,
insurance and risk management. C-TEC allocates the cost for these services
pro rata among its businesses primarily based on assets; contribution to
consolidated earnings before interest, depreciation, amortization, and
income taxes; and number of employees. In the opinion of management, the
method of allocating these costs is reasonable; however, the costs of these
services charged to the Company are not necessarily indicative of the costs
that would have been incurred if the Company had performed these functions.
The financial information included herein may not necessarily reflect
the consolidated results of operations, financial position, and cash flows of
the Company in the future or what they would have been had it been a separate,
stand-alone entity during the periods presented.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates - The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
Cash and Temporary Cash Investments - For purposes of reporting cash
flows, the Company considers all highly liquid investments purchased with an
original maturity of three months or less to be temporary cash investments.
Temporary cash investments are stated at cost, which approximates market.
Property, Plant and Equipment and Depreciation - Property, plant and
equipment reflects the original cost of acquisition or construction, including
payroll and related costs such as taxes, pensions and other fringe benefits,
and certain general administrative costs.
Depreciation on cable plant is provided on the straight-line method
based on the useful lives of the various classes of depreciable property. The
average estimated lives of depreciable cable plant are:
Buildings......................................... 10 to 45 years
Cable Television Distribution Equipment........... 8 to 22.5 years
Vehicles.......................................... 5 years
Other Equipment .................................. 4 to 12 years
Maintenance and repair costs are charged to expense as incurred. Major
replacements and betterments are capitalized. Gain or loss is recognized on
retirements and dispositions.
Intangible Assets - Intangible assets are amortized on a straight-line
basis over the expected period of benefit ranging from 5 to 19.3 years.
Accounting for Impairments - In 1995, the Company adopted the
provisions of Statement of Financial Accounting Standards No. 121 -
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to be Disposed of " ("SFAS 121").
SFAS 121 establishes accounting standards for the impairment of
long-lived assets, certain identifiable intangibles, and goodwill related to
those assets to be held and used and for long-lived assets and certain
identifiable intangibles to be disposed of.
SFAS 121 requires that long-lived assets and certain identifiable
intangibles to be held and used by an entity be reviewed for impairment
whenever events or changes in circumstances indicate that the carrying
amount of an asset may not be recoverable. In performing the review for
recoverability, the Company estimates the net future cash flows expected
net to result from the use of the asset and its eventual disposition. If
the sum of the expected net future cash flows (undiscounted and without
interest charges) is less than the carrying amount of the asset, an
impairment loss is recognized. Measurement of an impairment loss for long-
lived assets and identifiable intangibles expected to be held and used is
based on the fair value of the asset.
SFAS 121 generally requires that long-lived assets and certain identifiable
intangibles to be disposed of be reported at the lower of carrying amount
or fair value less cost to sell.
No impairment losses have been recognized by the Company pursuant to
SFAS 121.
Revenue Recognition - Revenues from cable programming services are
recorded in the month the service is provided.
Advertising Expense - Advertising costs are expensed as incurred.
Advertising expense charged to operations was $514, $574 and $753 in 1996,
1995 and 1994, respectively.
Income Taxes - C-TEC and its subsidiaries report income for federal tax
purposes on a consolidated basis. Mercom files a separate consolidated
federal income tax return. Income tax expense is allocated to subsidiaries on
a separate return basis except that C-TEC's cable subsidiaries receive benefit
for the utilization of net operating losses and investment tax credits
included in the consolidated tax return even if such losses and credits could
not have been used on a separate return basis. The Company accounts for
income taxes using Statement of Financial Accounting Standards No. 109 -
"Accounting for Income Taxes". The statement requires the use of an asset and
liability approach for financial accounting and reporting for income taxes.
The asset and liability approach requires the recognition of deferred tax
assets and liabilities for the expected future tax consequences of temporary
differences between financial reporting basis and tax basis of assets and
liabilities. If it is more likely than not that some portion or all of a
deferred tax asset will not be realized, a valuation allowance is recognized.
Investment tax credits ("ITC") for the Company have been deferred in
prior years and are being amortized over the average lives of the applicable
property.
Earnings (Loss) per share - Cable Michigan has 1,000 shares of common stock
outstanding, all of which are owned by C-TEC Cable Systems, Inc., a wholly
owned subsidiary of C-TEC. Mercom has 4,787,060 shares of common stock
outstanding, 2,964,250 of which are owned by C-TEC. In connection with the
restructuring, the Company will effect an additional issuance of shares.
At December 31, 1996, C-TEC has approximately 27,474,000 shares of common
equity outstanding. The unaudited pro forma earnings (loss) per common
share was calculated by dividing the 1996 net income/loss by the 27,474,000
shares of common equity outstanding, based upon an assumed distribution of
one share of Company common equity for each share of C-TEC common equity
owned. Such distribution ratio is subject to final determination.
3. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following at December 31:
1996 1995
---- ----
Cable plant $149,438 $141,965
Buildings and land 2,802 2,697
Furniture, fixtures and vehicles 5,073 4,662
Other 804 421
------- -------
Total property, plant and equipment 158,117 149,745
Less accumulated depreciation (80,325) (65,435)
------- -------
Net $ 77,792 $ 84,310
======= =======
Depreciation expense was $15,728, $12,115 and $9,163 for the years ended
December 31, 1996, 1995 and 1994 respectively.
4. INTANGIBLE ASSETS
Intangible assets consist of the following at December 31:
1996 1995
---- ----
Franchises 5.0-19.3 years $ 91,547 $ 91,766
Subscriber lists 6.0-19.3 years 43,083 43,199
Noncompete agreements 5 years 117 70,813
Goodwill 6.9-10 years 5,564 5,704
Other 5.0-19.3 years 923 1,578
------- -------
Total 141,234 213,060
Less accumulated amortization (80,278) (136,410)
------- -------
Net $ 60,956 $ 76,650
======= =======
Amortization expense charged to operations in 1996, 1995 and 1994 was
$15,699, $13,039 and $19,522, respectively.
During 1996, Cable Michigan removed from its balance sheet noncompete
agreements which had an original cost of $70,696 and which were fully
amortized.
5. INCOME TAXES
The income tax provision (benefit) in the accompanying consolidated financial
statements of operations is comprised of the following:
1996 1995 1994
Current
Federal $ (6,700) $ (737) $(14,050)
State 0 0 0
------- ------ -------
Total current (6,700) (737) (14,050)
------- ------ -------
Deferred
Federal 988 (4,853) 14,102
State 0 0 0
------- ------ -------
Total deferred 988 (4,853) 14,102
------- ------ -------
Total (benefit) provision for income taxes $ (5,712) $(5,590) $ 52
======= ====== =======
The tax provision of Cable Michigan has been calculated on the separate
return basis. An amount of $8,697 of tax benefits realized by Cable Michigan
as a result of its inclusion in C-TEC's consolidated tax return, which would
not have been realized on a separate return basis, has been credited to
stockholder's equity as a capital contribution.
The benefit for income taxes is different from the amounts computed by
applying the U.S. statutory federal tax rate of 35%. The differences are as
follows:
1996 1995 1994
(Loss) before (benefit) provision
for income taxes $(15,119) $(15,509) $(25,161)
======= ====== ======
Federal tax provision at statutory rates $ (5,307) $ (5,434) $ (8,806)
State income taxes 0 0 0
Goodwill 175 176 139
Increase (decrease) in valuation allowance (518) (255) 0
IRS Audit Adjustment 0 (132) 0
Adjustment to prior year amortization 0 28 0
Net operating losses reclassed 0 0 8,697
Other, net (62) 27 22
------- ------ -------
(Benefit) provision for income taxes $ (5,712) $ (5,590) $ 52
======= ====== ======
In 1995, C-TEC Corporation, the parent company, received official notification
of final settlement from the Internal Revenue Service relating to the
examination of C-TEC's consolidated federal income tax returns for 1989, 1990
and 1991. The most significant adjustment relates to the disallowance of the
claimed amortization of certain intangible assets. As a result of this
disallowance, Cable Michigan's taxes payable for prior years increased
approximately $4,000, net operating loss carryforwards were reduced by
approximately $24,000 and AMT credits were increased by approximately $5,000.
Additionally, interest of $900 was payable. The amount accrued in previous
years was sufficient to satisfy the above adjustment. No additional accrual
during 1995 was required.
Mercom, which files a separate consolidated income tax return, has the
following net operating losses available:
Tax Net
Operating Expiration
Year Losses Date
---- --------- ----------
1990 $2,537 2005
1991 $3,220 2006
1992 $1,628 2007
1995 $2,713 2010
In the past, Mercom was liable for Federal Alternative Minimum Tax (AMT). At
December 31, 1996, the cumulative minimum tax credits are $39. This amount
can be carried forward indefinitely to reduce regular tax liabilities that
exceed AMT in future years.
Temporary differences that give rise to a significant portion of deferred tax
assets and liabilities at December 31 are as follows:
1996 1995
---- ----
NOL carryforwards $ 3,532 $ 3,629
Alternative minimum tax credits 39 5,001
Reserves 828 1,166
Other, net 158 157
------- -------
Total deferred assets 4,557 9,953
------- -------
Property, plant and equipment (15,354) (16,270)
Intangible assets (13,623) (16,597)
------- -------
Total deferred liabilities (28,977) (32,867)
------- -------
Sub total (24,420) (22,914)
Valuation allowance (1,262) (1,780)
------- -------
Total deferred taxes $(25,682) $(24,694)
======= =======
A valuation allowance has been provided for the portion of deferred tax
assets which, in the opinion of management, is uncertain as to their
realization. The net change in valuation allowance was a decrease of $518
in 1996.
6. DEBT
Debt consists of the following:
December 31
-----------
1996 1995
---- ----
Term Credit Agreement $17,430 $18,930
Due within year (1,750) (1,500)
------ ------
Total long-term debt $15,680 $17,430
====== ======
Mercom entered into a $25,000 Credit Agreement (the "Credit Agreement)"
with a bank in November 1989. The Credit Agreement was amended in April 1990
to provide borrowings up to $27,000. The Credit Agreement was further amended
in December 1992, December 1993, December 1994 and March 1995 to restructure
the mandatory repayments due at December 31, 1992, December 31, 1993, December
31, 1994 and March 31, 1995, respectively. On August 16, 1995, Mercom
amended and restated the Credit Agreement.
The amended and restated Credit Agreement consists of a 7.5-year amortizing
term loan with a final maturity of December 31, 2002 (the "Term Credit
Agreement). In addition, Mercom entered into a 364-day revolving credit
facility of $2,000 with an initial maturity of August 14, 1996 (the
"Revolving Credit Agreement") which has been amended and extended to August
12, 1997.
Under the terms of the agreement, the Company also made scheduled principal
payments of $346 in each of the third and fourth quarters of 1995 and $375
in each of the four quarters of 1996.
Mercom is required to repay the remaining indebtedness under the Term
Credit Agreement in equal quarterly installments aggregating the following
amounts for each year ending December 31, 1997 through 200l:
Aggregate
Year Amounts
---- ---------
1997 $1,750
1998 $2,100
1999 $2,600
2000 $3,750
200l $4,300
The Term Credit Agreement and the Revolving Credit Agreement (the "Credit
Agreements") are collateralized by both a pledge of the stock of Mercom's
subsidiaries and a first lien on certain assets of Mercom and its
subsidiaries including inventory, equipment and receivables.
The Credit Agreements contain certain restrictive covenants, including the
maintenance of a specified debt to cash flow ratio, an interest coverage
ratio and restrictions on the payments of dividends. In addition, Mercom
may be required to amortize additional debt to the extent it generates
excess cash flow. The requirement for such additional amortization at
December 31, 1996 of approximately $492 was due and paid by March 31, 1997.
At December 31, 1996, Mercom was in compliance with all covenants
associated with its Credit Agreements. As noted, the Revolving Credit
Agreement provides for revolving credit borrowings up to $2,000 as of
December 31, 1996 and 1995. A fee of 3/8% per annum is required on the
unused portion of the available commitment. The Company had no borrowings
under this agreement as of December 31, 1996 and 1995.
The weighted average effective interest rates for all debt at December
31, 1996 and 1995 were 6.5% and 7.0%, respectively. Interest is paid based on
Prime, LIBOR or CD rates, depending on the type of loan and terms of the
agreement.
Mercom's estimated capital expenditures for 1997 to upgrade a portion of
its plant will require Mercom to restructure its debt. The Company and C-TEC
are currently determining the best alternative for such funding.
7. COMMON STOCK RIGHTS OFFERING
On August 10, 1995, Mercom completed the issuance of 2,393,530 shares of
common stock through a rights offering, resulting in net proceeds, after
deducting issuance costs, of approximately $8,200. Shareholders of record at
the close of business on July 20,1995 were entitled to one non-transferable
right for every share of common stock held. Right holders were able to
purchase for a price of $3.60 per share, one share of common stock for each
right held.
Mercom utilized a portion of the proceeds received from the rights offering
to repay $5,070 of outstanding indebtedness to its lender and repay $2,287
of outstanding indebtedness to C-TEC under two demand notes. The remaining
proceeds were used for general corporate purposes, including capital
expenditures.
8. PENSIONS AND EMPLOYEE BENEFITS
Cable Michigan's financial statements reflect the costs experienced for its
employees and retirees while included in the C-TEC plans.
Through December 31, 1996, substantially all employees of Cable Michigan
are included in a trusteed noncontributory defined benefit pension plan,
maintained by C-TEC. Upon retirement, employees are provided a monthly
pension based on length of service and compensation. C-TEC funds pension
costs to the extent necessary to meet the minimum funding requirements of
ERISA.
The information that follows relates to the entire C-TEC noncontributory
defined benefit plan. The components of C-TEC's pension cost are as
follows:
1996 1995 1994
---- ---- ----
Benefits earned during the year $ 2,365 $ 1,656 $ 1,685
(service cost)
Interest cost on projected benefit obligation 3,412 3,083 2,734
Actual return on plan assets (3,880) (12,897) 5,635
Other components - net (1,456) 8,482 (10,744)
------ ------- -------
Net periodic pension cost (credit) $ 441 $ 324 $ (690)
====== ======= =======
The following assumptions were used in the determination of the consolidated
projected benefit obligation and net periodic pension cost (credit):
December 31, 1996 1995 1994
---- ---- ----
Discount rate 7.5% 7.0% 8.0%
Expected long-term rate of return on plan assets 8.0% 8.0% 8.0%
Weighted average long-term rate of
compensation increases 6.0% 6.0% 6.0%
Cable Michigan's allocable share of the consolidated net periodic pension cost
(credit), based on its proportionate share of consolidated annualized salaries
as of the valuation date, was approximately $10, $3 and $(21) for 1996, 1995,
and 1994, respectively. These amounts are reflected in operating expenses.
In connection with the restructuring, C-TEC completed a comprehensive study of
its employee benefit plans in 1996. As a result of this study, effective
December 31, 1996, in general, employees of Cable Michigan will no longer
accrue benefits under the defined benefit pension plan and will become fully
vested in their benefit accrued through that date. C-TEC notified affected
participants in December 1996. In December 1996, C-TEC allocated pension plan
assets of $6,984 and the related liabilities to a separate plan for employees
who no longer accrue benefits after December 31, 1996 (the "curtailed plan").
C-TEC anticipates that the majority of such liabilities will be settled by
lump sum distributions. The allocation of assets and liabilities resulted in
a curtailment/settlement gain of $4,292. Cable Michigan's allocable share of
this gain was $855. This gain results primarily from the reduction of the
related projected benefit obligation. C-TEC's curtailed plan has assets in
excess of the projected benefit obligation. Such excess amounted to $3,917
which, along with unrecognized items of $1,148 resulted in prepaid pension
cost of $2,769.
The following table sets forth the plans' funded status and amounts recognized
in C-TEC's balance sheet at December 31:
1996 1995
---- ----
Plan assets at fair value $ 55,325 $ 60,108
Actuarial present value of
benefit obligations:
Accumulated benefit obligations:
Vested 32,372 34,152
Nonvested 1,704 2,104
------- -------
Total 34,076 36,256
Effect of increases in compensation 6,042 8,687
------- -------
Plan assets in excess of
projected benefit obligation 15,207 15,165
Unrecognized transition asset (3,463) (4,432)
Unrecognized prior service cost 2,438 2,969
Unrecognized net gain (11,215) (10,133)
------- -------
Prepaid pension cost $ 2,967 $ 3,569
======= =======
C-TEC's pension plan has assets in excess of the accumulated benefit
obligations. Plan assets include equity, fixed income securities and pooled
funds under management by an insurance company. Plan assets include common
stock of C-TEC with a fair value of approximately $5,835 and $11,195 at
December 31, 1996 and 1995, respectively.
C-TEC sponsors a 401(k) savings plan covering substantially all employees of
Cable Michigan who are not covered by collective bargaining agreements.
Additionally, Mercom adopted a 40l(k) savings plan on January 1, 1995 covering
substantially all employees. Contributions made by the Company to the
401(k) plans are based on a specific percentage of employee contributions.
Contributions charged to expense were $128, $107 and $66 in 1996, 1995 and
1994, respectively.
The Company provides certain postemployment benefits to former or inactive
employees who are not retirees. These benefits are primarily short-term
disability salary continuance. The Company accounts for these benefits under
Statement of Financial Accounting Standards No. 112 - "Employers' Accounting
for Postemployment Benefits" ("SFAS 112"). SFAS 112 requires accrual of the
cost of postemployment benefits over employees' service lives. C-TEC uses the
services of an enrolled actuary to calculate the expense. C-TEC allocates the
cost of these benefits to the Company based on the Company's proportionate
share of consolidated annualized salaries. The Company reimburses C-TEC for
its allocable share of the consolidated postemployment benefit cost. The net
periodic postemployment benefit cost was approximately $100, $98 and $23 in
1996, 1995 and 1994, respectively.
9. COMMITMENTS AND CONTINGENCIES
a. Total rental expense, primarily for office space and pole rental, was
$984, $998 and $963 for 1996, 1995 and 1994, respectively. At December 31,
1996, rental commitments under noncancelable leases, excluding annual pole
rental commitments of approximately $792 that are expected to continue
indefinitely, are as follows:
Year Aggregate Amounts
---- -----------------
1997 $173
1998 $147
1999 $117
2000 $ 96
2001 $ 39
Thereafter $305
b. Communications and Cablevision, Inc., ("CCV"), a subsidiary of Mercom,
was a party to a lawsuit commenced in 1988 in the Circuit Court of the
County of Ottawa, Michigan relating to the termination of Kenneth E. Lahey
as President of CCV. Mr. Lahey asserted that as a result of such
termination, he was entitled to an amount equal to the fair value of 10
percent of the outstanding shares of CCV stock (the "Lahey Interest"). On
April 19, 1995, Mercom entered into a settlement agreement with Mr. Lahey
whereby it agreed to pay Mr. Lahey $4,300 over a four year time frame.
Mercom paid Mr. Lahey $100, $1,400 and $700 in April and June 1995 and
June 1996, respectively. The remaining $2,100 will be paid in equal
installments over a three year period beginning with the payment due on or
before July 1, 1997.
c. 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. The 1996 and 1994 statements of operations include charges
aggregating approximately $833 and $1,092 relating to cable rate regulation
liabilities. Such charges were not significant in 1995.
d. The Company had various purchase commitments at December 31, 1996
related to its 1997 construction budget.
e. 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.
f. The Company has agreed to indemnify RCN and C-TEC and their
respective subsidiaries against any and all liabilities which arise
primarily from or relate primarily to the management or conduct of the
business of the Company prior to the effective time of the Distribution.
The Company has also agreed to indemnify RCN and C-TEC and their
respective subsidiaries against 20% of any liability which arises from or
relates to the management or conduct prior to the effective time of the
Distribution of the businesses of C-TEC and its subsidiaries and which is
not a true C-TEC liability, a true RCN liability or a true Company
Liability.
This Tax Sharing Agreement, by and among the Company, RCN and C-TEC (the
"Tax Sharing Agreement"), governs contingent tax liabilities and benefits,
tax contests and other tax matters with respect to tax returns filed with
respect to tax periods, in the case of the Company, ending or deemed to end
on or before the Distribution Date. Under the Tax Sharing Agreement,
Adjustments (as defined in the Tax Sharing Agreement) to taxes that are
clearly attributable to the Company Group, the RCN Group, or the C-TEC
Group will be borne solely by such group. Adjustments to all other tax
liabilities will be borne 50% by C-TEC 20% by the Company and 30% by RCN.
Notwithstanding the above, if as a result of the acquisition of all or a
portion of the Capital stock or assets of the Company, the Distribution
fails to qualify as a tax-free distribution under Section 355 of the
Code, then the Company will be liable for any and all increases in tax
attributable thereto.
10. AFFILIATE AND RELATED PARTY TRANSACTIONS:
The Company has the following transactions with affiliates during the
years ended December 31, 1996, 1995 and 1994:
1996 1995 1994
---- ---- ----
Corporate office costs allocated to the Company $ 3,498 $ 3,302 $ 1,562
Interest expense on affiliate notes 13,952 15,318 15,768
Royalty fees charged by C-TEC 585 486 494
Charges for engineering services 296 2,169 8
Other affiliate expenses 189 153 83
In addition, in the first quarter of 1995, C-TEC loaned $887 to Mercom
to enable it to make a principal payment on its Credit Agreement of $887
scheduled for March 31, 1995. C-TEC also loaned Mercom $1,400 in June 1995
to meet its scheduled payment under the Lahey settlement agreement (Note 9).
Mercom paid interest in 1995 of $39 to C-TEC in connection with these two
demand notes. These demand notes were repaid in August 1995.
At December 31, 1996 and 1995, the Company has accounts receivable from
affiliates of $1,716 and $2,282 respectively, for these transactions. At
December 31, 1996 and 1995, the Company has accounts payable to affiliates
of $9,861 and $8,570 respectively, for these transactions.
The Company has notes payable to C-TEC of $147,567 and $164,377 at December
31, 1996 and 1995, respectively, primarily related to the acquisition of
the Michigan cable operations and its subsequent operations.
11. STOCK EXCHANGE LISTING
Mercom's Common Stock was traded on the Nasdaq Stock Market ("NASDAQ") from
May 1989 through February 1992. Its Common Stock was delisted from NASDAQ
in February 1992 because the Company did not meet NASDAQ's minimum capital
surplus requirements. Currently, Mercom's Common Stock is quoted on the
National Quotation Bureau, Inc. and the OTC Bulletin Board which is owned
and operated by The Nasdaq Stock Market, Inc.
12. OFF BALANCE SHEET RISK AND CONCENTRATION OF CREDIT RISK
The Company places its cash and temporary investments with high credit
quality financial institutions. The Company also periodically evaluates the
creditworthiness of the institutions with which it invests. The Company does,
however, maintain unsecured cash and temporary cash investment balances in
excess of federally insured limits.
Concentrations of credit risk with risk to receivables are limited due
to large customer base primarily throughout Michigan and Florida.
13. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments for which it is practicable to
estimate that value:
a. The fair value of the revolving credit agreement is considered to be
equal to carrying value since the debt re-prices at least every six months
and the Company believes that its credit risk has not changed from the time
the floating rate debt was borrowed and therefore, would obtain similar
rates in the current market
b. The fair value of the cash and temporary cash investments approximates
fair value because of the short maturity of these instruments.
The estimated fair value of the Company's financial instruments are as
follows at December 31:
1996 1995
---- ----
Carrying Fair Carrying Fair
Amount Value Amount Value
-------- ----- -------- -----
Financial assets:
Cash and temporary cash investments $ 3,297 $ 3,297 $ 3,029 $ 3,029
Financial liabilities:
Floating rate long-term debt:
Term Credit Agreement $17,430 $17,430 $18,930 $18,930
14. QUARTERLY INFORMATION (Unaudited)
The Company estimated the following quarterly data based on assumptions
which it believes are reasonable. The quarterly data may differ from
quarterly data subsequently presented in interim financial statements.
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
1996
- ----
Sales $18,340 $19,004 $19,544 $19,299
Operating income before
depreciation and amortization 7,997 7,512 8,243 8,344
Operating income (loss) $ 168 $ (372) $ 367 $ 506
First Second Third Fourth
1995 Quarter Quarter Quarter Quarter
- ---- ------- ------- ------- -------
Sales $12,764 $13,710 $16,427 $17,774
Operating income before
depreciation and amortization 5,145 6,341 6,705 7,735
Operating income (loss) $ 32 $ 1,030 $ 159 $ (449)
15. SUBSEQUENT EVENTS
a) In July 1997, Mercom sold its cable system in Port St. Lucie, Florida
for $3,650. The Company expects to realize a gain on the sale.
b) C-TEC expects to borrow $15,000 under a two-year term loan secured by
the stock of Mercom owned by C-TEC. It is anticipated that the Company
will assume this loan in connection with the restructuring and the
contribution of the Mercom stock to the Company. Until this loan is
repaid, the amount available under the $ ? credit facility will be limited
to $ .
Effective July 1, 1997, the Company has in place two secured credit
facilities (the "Credit Facilities") pursuant to a single credit agreement
with a group of lenders for which First Union National Bank acts as agent
(the "Credit Agreement"). The first is a five-year revolving credit
facility in the amount of $45 million (the "Revolving Credit Facility").
The second is an eight-year term credit facility in the amount of $100
million (the "Term Credit Facility"). Borrowings under the Credit
Facilities are available for the following purposes: (i) to refinance all
existing indebtedness of the Company (including intercompany indebtedness
owed to C-TEC Cable Systems, Inc.), (ii) to finance permitted acquisitions,
and (iii) for capital expenditures, working capital and general corporate
purposes. Borrowings under the Credit Facilities are subject to the
conditions that there can be no default or event of default under the
Credit Agreement and that the representations and warranties of the Company
contained in the Credit Agreement must be true.
The interest rate on the Credit Facilities will be, at the election of the
Company, based on either a LIBOR or a Base Rate option (each as defined in
the Credit Agreement).
The Term Credit Facility is available in up to two installments, and to the
extent not borrowed during the ninety-day period following July 1, 1997
will cease to be available. The entire amount of the Revolving Credit
Facility is available to the Company until June 30, 2002 (subject to the
discussion in the last paragraph of this section). Revolving loans may be
repaid and reborrowed from time to time.
The term loan must be repaid over six years in quarterly installments, at
the end of September, December, March and June of each year from September
30, 1999 through June 30, 2005. The aggregate annual installments payable
on the term loan are as follows (assuming the entire $100 million is drawn,
and if less then pro rata to the amounts given below):
1999 $ 5,000,000
2000 $ 11,250,000
2001 $ 13,750,000
2002 $ 16,250,000
2003 $ 20,000,000
2004 $ 22,500,000
2005 $ 11,250,000
The Company has the option to repay the term loan in whole or in part at
any time, without penalty, subject to customary "breakage" charges. Any
amount of the term loan that is repaid may not be reborrowed.
The Company is required to apply 100% of the net cash proceeds realized
from certain asset sales, certain payments under insurance policies and
certain incurrences of additional debt to repay the revolving loans. Any
excess amounts of such net cash proceeds not applied to repay revolving
loans are applied to reduce the scheduled installments of the term loan on
a pro rata basis.
All borrowings under the Credit Facilities will be pari passu, and will be
secured under a common collateral package including (i) a first priority
pledge by the Company of 100% of the stock in each other material
subsidiary created after the Closing Date; and (ii) if a holding company is
ever formed to hold the stock of the Company, a first priority pledge by
such holding company of the stock it owns of the Company. In addition, the
Company is subject to a negative pledge on the assets of the Company and a
prohibition on granting other negative pledges to other parties on the
assets of the Company and each of its subsidiaries. The stock and assets of
Mercom are excluded from the security arrangements. Mercom will not be
treated as a subsidiary of the Company until it is 100% owned by the
Company.
The Credit Agreement contains customary covenants for facilities of this
nature, including covenants limiting debt, liens, investments,
consolidations, mergers, acquisitions and sales of assets, payment of
dividends and other distributions and transactions with affiliates and
requires the Company to maintain certain financial ratios.
CABLE MICHIGAN, INC.
CONSOLIDATED BALANCE SHEETS
(Thousands of Dollars)
(UNAUDITED)
March 31, 1997
- ----------------------------------------------------------------
ASSETS
Cash and temporary cash investments $2,366
Accounts receivable, net of reserve for
doubtful accounts of $657 3,180
Prepayments and other 1,001
Accounts Receivable - affiliates 1,234
Deferred income taxes 1,028
Property, Plant and Equipment,
net of accumulation of depreciation 75,335
Intangible Assets, Net 57,046
Deferred Charges and Other Assets 63
- ----------------------------------------------------------------
Total Assets $141,253
- ----------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' DEFICIT
Liabilities
Current maturities of long-term debt $1,838
Accounts payable 2,395
Advance billings and customer deposits 2,196
Accrued taxes 168
Accrued interest 15
Accrued expenses 6,862
Accounts payable - affiliates 5,256
Long-term Debt 14,663
Notes Payable - affiliates 148,813
Deferred Income Taxes 25,673
- ----------------------------------------------------------------
Total liabilities 207,879
Minority Interest 14,419
Commitments and Contingencies
Common Shareholders' Deficit (81,045)
- ----------------------------------------------------------------
Total Liabilities and Shareholders' Equity $141,253
- ----------------------------------------------------------------
CABLE MICHIGAN, INC.
CONSOLIDATED STATEMENTS OF
OPERATIONS
(Thousands of Dollars Except Per Share Amounts)
UNAUDITED
For the Period Ended March 31,
1997 1996
- ----------------------------------------------------------------------------
Sales $19,557 $18,340
Costs and Expenses, excluding
depreciation and amortization 11,360 10,343
Depreciation and amortization 7,922 7,829
- ----------------------------------------------------------------------------
Operating Income 275 168
- ----------------------------------------------------------------------------
Interest income 42 27
Interest expense (3,347) (4,018)
Other expense, net (132) (68)
- ----------------------------------------------------------------------------
(Loss) Before Income Taxes (3,162) (3,891)
(Benefit) for income taxes (1,090) (1,415)
- ----------------------------------------------------------------------------
(Loss) Before Minority Interest (2,072) (2,476)
Minority interest in loss of
consolidated entity 277 328
- ----------------------------------------------------------------------------
Net (Loss) ($1,795) ($2,148)
============================================================================
Unaudited pro forma net (loss) per common share ($.07) ($.08)
CABLE MICHIGAN, INC.
CONDENSED CONSOLIDATED STATEMENTS
OF CASH FLOWS
(Thousands of Dollars)
(UNAUDITED)
For the Period Ended March 31,
1997 1996
- ----------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES $284 $12,418
- ----------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to property, plant & equipment (1,450) (2,076)
Other (105) (243)
- ----------------------------------------------------------------------------
Net cash used in investing activities (1,555) (2,319)
- ----------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Redemption of long-term debt (929) (375)
Change in affiliate notes, net 1,269 (10,859)
- ----------------------------------------------------------------------------
Net cash provided by (used in) financing activities 340 (11,234)
- ----------------------------------------------------------------------------
Net (Decrease) in Cash and
Temporary Cash Investments (931) (1,135)
Cash and Temporary Cash Investments at
Beginning of Year 3,297 3,029
- ----------------------------------------------------------------------------
Cash and Temporary Cash Investments at
March 31 $2,366 $1,894
<PAGE>
==============================================================================
CREDIT AGREEMENT
dated as of June 30, 1997,
by and among
CABLE MICHIGAN, INC.
as Borrower,
the Lenders referred to herein,
and
FIRST UNION NATIONAL BANK,
as Administrative Agent
==============================================================================
TABLE OF CONTENTS
PAGE
ARTICLE I DEFINITIONS........................................-1-
SECTION 1.1 Definitions........................................-1-
SECTION 1.2 General...........................................-14-
SECTION 1.3 Other Definitions and Provisions..................-15-
ARTICLE II REVOLVING CREDIT FACILITY.........................-15-
SECTION 2.1 Revolving Credit Loans............................-15-
SECTION 2.2 Procedure for Advances of Loans...................-15-
SECTION 2.3 Repayment of Loans................................-16-
SECTION 2.4 Revolving Credit Notes............................-18-
SECTION 2.5 Permanent Reduction of the Revolving Credit
Commitment........................................-18-
SECTION 2.6 Termination of Revolving Credit Facility..........-18-
ARTICLE III TERM LOAN FACILITY................................-18-
SECTION 3.1 Term Loan.........................................-18-
SECTION 3.2 Procedure for Advance of Term Loan................-19-
SECTION 3.3 Repayment of Term Loan............................-19-
SECTION 3.4 Optional Prepayments of Term Loan.................-20-
SECTION 3.5 Mandatory Prepayments of Term Loans...............-21-
SECTION 3.6 Term Notes........................................-21-
ARTICLE IV GENERAL LOAN PROVISIONS...........................-21-
SECTION 4.1 Interest..........................................-21-
SECTION 4.2 Notice and Manner of Conversion or Continuation of
Loans.............................................-23-
SECTION 4.3 Fees..............................................-24-
SECTION 4.4 Manner of Payment.................................-24-
SECTION 4.5 Crediting of Payments and Proceeds................-25-
SECTION 4.6 Adjustments.......................................-25-
SECTION 4.7 Nature of Obligations of Lenders Regarding Loans;
Assumption by the Administrative Agent............-25-
SECTION 4.8 Changed Circumstances.............................-26-
SECTION 4.9 Indemnity.........................................-28-
SECTION 4.10 Capital Requirements..............................-29-
SECTION 4.11 Taxes.............................................-29-
SECTION 4.12 Change in Lending Office; Replacement Lenders.....-31-
ARTICLE V CLOSING; CONDITIONS OF CLOSING AND
BORROWING.........................................-32-
SECTION 5.1 Closing...........................................-32-
SECTION 5.2 Conditions to Closing and Initial Loans...........-32-
SECTION 5.3 Conditions to All Loans...........................-35-
ARTICLE VI REPRESENTATIONS AND WARRANTIES OF THE
BORROWER..........................................-35-
SECTION 6.1 Representations and Warranties....................-35-
SECTION 6.2 Survival of Representations and Warranties, Etc...-43-
ARTICLE VII FINANCIAL INFORMATION AND NOTICES.................-43-
SECTION 7.1 Financial Statements and Projections..............-43-
SECTION 7.2 Officer's Compliance Certificate..................-44-
SECTION 7.3 Accountants' Certificate..........................-44-
SECTION 7.4 Other Reports.....................................-44-
SECTION 7.5 Notice of Litigation and Other Matters............-45-
SECTION 7.6 Accuracy of Information...........................-46-
ARTICLE VIII AFFIRMATIVE COVENANTS.............................-46-
SECTION 8.1 Preservation of Corporate Existence and Related
Matters...........................................-46-
SECTION 8.2 Maintenance of Property...........................-46-
SECTION 8.3 Insurance.........................................-47-
SECTION 8.4 Accounting Methods and Financial Records..........-47-
SECTION 8.5 Payment and Performance of Obligations............-47-
SECTION 8.6 Compliance With Laws and Approvals................-47-
SECTION 8.7 Environmental Laws................................-47-
SECTION 8.8 Compliance with ERISA.............................-48-
SECTION 8.9 Compliance With Agreements........................-48-
SECTION 8.10 Additional Subsidiaries; Collateral...............-48-
SECTION 8.11 Conduct of Business...............................-49-
SECTION 8.12 Visits and Inspections............................-49-
ARTICLE IX FINANCIAL COVENANTS...............................-49-
SECTION 9.1. Leverage Ratio....................................-49-
SECTION 9.2. Interest Coverage Ratio...........................-50-
SECTION 9.3. Adjusted Fixed Charge Coverage Ratio..............-50-
ARTICLE X NEGATIVE COVENANTS................................-50-
SECTION 10.1 Limitations on Debt...............................-50-
SECTION 10.2 Limitations on Liens..............................-51-
SECTION 10.3 Limitations on Loans, Advances, Investments and
Acquisitions......................................-52-
SECTION 10.4 Limitations on Mergers and Liquidation............-53-
SECTION 10.5 Limitations on Sale of Assets.....................-53-
SECTION 10.6 Limitations on Dividends and Distributions........-54-
SECTION 10.7 Limitations on Exchange and Issuance of Capital
Stock.............................................-54-
SECTION 10.8 Transactions with Affiliates......................-55-
SECTION 10.9 Certain Accounting Changes........................-55-
SECTION 10.10 Restrictive Agreements............................-55-
ARTICLE XI DEFAULT AND REMEDIES..............................-56-
SECTION 11.1 Events of Default.................................-56-
SECTION 11.2 Remedies..........................................-60-
SECTION 11.3 Rights and Remedies Cumulative; Non-Waiver; etc...-60-
ARTICLE XII THE ADMINISTRATIVE AGENT..........................-61-
SECTION 12.1 Appointment.......................................-61-
SECTION 12.2 Delegation of Duties..............................-61-
SECTION 12.3 Exculpatory Provisions............................-61-
SECTION 12.4 Reliance by the Administrative Agent..............-62-
SECTION 12.5 Notice of Default.................................-62-
SECTION 12.6 Non-Reliance on the Administrative Agent and Other
Lenders...........................................-62-
SECTION 12.7 Indemnification...................................-63-
SECTION 12.8 The Administrative Agent in Its Individual
Capacity..........................................-63-
SECTION 12.9 Resignation of the Administrative Agent; Successor
Administrative Agent..............................-64-
ARTICLE XIII MISCELLANEOUS.....................................-64-
SECTION 13.1 Notices...........................................-64-
SECTION 13.2 Expenses; Indemnity...............................-65-
SECTION 13.3 Set-off...........................................-66-
SECTION 13.4 Governing Law.....................................-66-
SECTION 13.5 Consent to Jurisdiction...........................-66-
SECTION 13.6 Binding Arbitration; Waiver of Jury Trial.........-67-
SECTION 13.7 Reversal of Payments..............................-68-
SECTION 13.8 Injunctive Relief.................................-68-
SECTION 13.9 Accounting Matters................................-68-
SECTION 13.10 Successors and Assigns; Participations............-68-
SECTION 13.11 Amendments, Waivers and Consents..................-71-
SECTION 13.12 Performance of Duties.............................-72-
SECTION 13.13 All Powers Coupled with Interest..................-72-
SECTION 13.14 Survival of Indemnities...........................-72-
SECTION 13.15 Titles and Captions...............................-72-
SECTION 13.16 Severability of Provisions........................-72-
SECTION 13.17 Counterparts......................................-72-
SECTION 13.18 Term of Agreement.................................-73-
EXHIBITS
Exhibit A - Form of Revolving Credit Note
Exhibit B - Form of Term Loan Note
Exhibit C-1 - Form of Notice of Revolving Credit Borrowing
Exhibit C-2 - Form of Notice of Term Loan Borrowing
Exhibit D - Form of Notice of Payment
Exhibit E - Form of Notice of Conversion/Continuation
Exhibit F - Form of Officer's Certificate
Exhibit G - Form of Assignment and Acceptance
Exhibit H - Form of Notice of Account Designation
Exhibit I - Form of Pledge Agreement
Exhibit J - Form of Assumption Agreement
SCHEDULES
Schedule 1.1(a) - Lenders and Commitments
Schedule 1.1(b) - Plan of Reorganization
Schedule 6.1(a) - Jurisdictions of Organization and
Qualification
Schedule 6.1(b) - Subsidiaries and Capitalization
Schedule 6.1(i) - ERISA Plans
Schedule 6.1(l) - Material Contracts
Schedule 6.1(m) - Labor and Collective Bargaining Agreements
Schedule 6.1(s) - Debt and Guaranty Obligations
Schedule 6.1(t) - Litigation
Schedule 6.1(u) - FCC Licenses, PUC Authorizations and CATV Franchises
Schedule 10.2 - Existing Liens
Schedule 10.3 - Existing Loans, Advances and Investments
CREDIT AGREEMENT, dated as of the 30th day of June, 1997, by and
among CABLE MICHIGAN, INC. (the "Borrower"), the Lenders who are or may
become a party to this Agreement, and FIRST UNION NATIONAL BANK, as
Administrative Agent for the Lenders.
STATEMENT OF PURPOSE
The Borrower has requested, and the Lenders have agreed, to extend
certain credit facilities to the Borrower on the terms and conditions of this
Agreement.
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged by the parties hereto, such
parties hereby agree as follows:
ARTICLE I
DEFINITIONS
SECTION 1.1 Definitions. The following terms when used in this
Agreement shall have the meanings assigned to them below:
"Adjusted Operating Cash Flow" means, with respect to any Person for any
period, the total of the following for such period calculated in accordance
with GAAP: (a) Operating Cash Flow less (b) the sum of (i) cash taxes, (ii)
cash dividends and other distributions and redemptions paid with respect to
capital stock and (iii) Specified Capital Expenditures.
"Administrative Agent" means First Union in its capacity as
Administrative Agent hereunder, and any successor thereto appointed pursuant
to Section 12.9.
"Administrative Agent's Office" means the office of the Administrative
Agent specified in or determined in accordance with the provisions of Section
13.1.
"Affiliate" means, with respect to any Person, any other Person (other
than a Subsidiary) which directly or indirectly through one or more
intermediaries, controls, or is controlled by, or is under common control
with, such first Person or any of its Subsidiaries. The term "control" means
(a) the power to vote ten percent (10%) or more of the securities or other
equity interests of a Person having ordinary voting power, or (b) the
possession, directly or indirectly, of any other power to direct or cause the
direction of the management and policies of a Person, whether through
ownership of voting securities, by contract or otherwise.
"Aggregate Commitment" means the aggregate amount of the Lenders'
Commitments hereunder, as such amount may be reduced or modified at any time
or from time to time pursuant to the terms hereof. On the Closing Date, the
Aggregate Commitment shall be $145,000,000.
"Agreement" means this Credit Agreement, as amended, restated or
otherwise modified from time to time.
"Applicable Law" means all applicable provisions of constitutions,
statutes, laws, rules, treaties, regulations and orders of all Governmental
Authorities and all orders and decrees of all courts and arbitrators.
"Applicable Margin" shall have the meaning assigned thereto in Section
4.1(c).
"Assignment and Acceptance" shall have the meaning assigned thereto in
Section 13.10.
"Assumption Agreement" means any Assumption Agreement executed by a
Subsidiary of a Borrower pursuant to Section 8.10 in favor of the
Administrative Agent for the ratable benefit of the Administrative Agent and
Lenders and substantially in the form of Exhibit J, as amended, restated or
otherwise modified.
"Base Rate" means, at any time, the higher of (a) the Prime Rate or (b)
the Federal Funds Rate plus 1/2 of 1%; each change in the Base Rate shall take
effect simultaneously with the corresponding change or changes in the Prime
Rate or the Federal Funds Rate.
"Base Rate Loan" means any Loan bearing interest at a rate based upon
the Base Rate as provided in Section 4.1(a).
"Borrower" means CCSM in its capacity as borrower hereunder.
"Borrower Pledge Agreement" means any pledge agreement executed by the
Borrower (and any other applicable Person) in favor of the Administrative
Agent for the ratable benefit of itself and the other Lenders with respect to
the capital stock or other ownership interests of any Material Subsidiary of
CCSM, substantially in the form of Exhibit I, as amended, restated or
otherwise modified.
"Business Day" means (a) for all purposes other than as set forth in
clause (b) below, any day other than a Saturday, Sunday or legal holiday on
which banks in Charlotte, North Carolina and New York, New York, are open for
the conduct of their commercial banking business, and (b) with respect to all
notices and determinations in connection with, and payments of principal and
interest on, any LIBOR Rate Loan, any day that is a Business Day described in
clause (a) and that is also a day for trading by and between banks in Dollar
deposits in the London interbank market.
"Cable New York" means C-TEC Cable Systems of New York, Inc. and its
successors.
"Cable Systems" means C-TEC Cable Systems, Inc. and its successors.
"Cable Systems Credit Facility" means the credit agreement of even date
by and among Cable Systems, ComVideo and Cable New York, as borrowers, First
Union, as administrative agent, and the lenders party thereto, as amended,
restated or otherwise modified.
"Cable Systems Holdings" means the ultimate holding company which, as a
result of the Reorganization, holds, directly or indirectly through one or
more of its Wholly-Owned Subsidiaries, all of the outstanding shares of
capital stock of Cable Systems.
"Capital Asset" means, with respect to any Person, any asset that
should, in accordance with GAAP, be classified and accounted for as a capital
asset on a balance sheet of such Person.
"Capital Expenditures" means, with respect to any Person for any period,
the aggregate cost of all Capital Assets acquired by such Person (other than
Capital Assets acquired in accordance with the terms hereof with the proceeds
from casualty insurance or condemnations) during such period determined in
accordance with GAAP.
"Capital Lease" means, with respect to any Person, any lease of any
property that should, in accordance with GAAP, be classified and accounted for
as a capital lease on a balance sheet of such Person.
"CATV Franchise" means any franchise, easement or other authorization
granted by any Governmental Authority pursuant to which a Person has the right
or license to operate a CATV System and any Applicable Law or other document
setting forth all or part of the terms of any such franchise, easement or
other authorization.
"CATV System" means any cable distribution system which receives audio,
video, digital, other broadcast signals or information or telecommunications
by cable, optical, antennae, microwave or satellite transmission and which
amplifies and transmits such signals to Persons who receive such signals.
"CCSM" means Cable Michigan, Inc., and its successors.
"C-TEC" means C-TEC Corporation, and its successors.
"C-TEC Credit Facility" means the credit agreement of even date by and
among C-TEC, as borrower, First Union, as administrative agent, and the
lenders party thereto, as amended restated or otherwise modified.
"Change in Control" shall have the meaning assigned thereto in Section
11.1(h).
"Closing Date" means the date of this Agreement or such later Business
Day upon which each condition described in Section 5.2 shall be satisfied or
waived in all respects in a manner acceptable to the Administrative Agent, in
its sole discretion.
"Code" means the Internal Revenue Code of 1986, and the rules and
regulations thereunder, each as amended or supplemented from time to time.
"Combined" means, when used in reference to financial statements or
financial statement items of any Person, such statements or items on a
combined basis in accordance with applicable principles of combination under
GAAP.
"Commitment" means, as to any Lender, the sum of such Lender's Revolving
Credit Commitment and Term Loan Commitment.
"Commitment Percentage" means, as to any Lender at any time, the ratio
of (a) the amount of the Commitment of such Lender to (b) the Aggregate
Commitment of all of the Lenders.
"ComVideo" means ComVideo Systems, Inc. and its successors.
"Consolidated" means, when used with reference to financial statements
or financial statement items of any Person, such statements or items on a
consolidated basis in accordance with applicable principles of consolidation
under GAAP.
"Credit Facility" means the collective reference to the Revolving Credit
Facility and the Term Loan Facility.
"Debt" means, with respect to any Person at any date and without
duplication, the sum of the following calculated in accordance with GAAP: (a)
all liabilities, obligations and indebtedness for borrowed money including but
not limited to obligations evidenced by bonds, debentures, notes or other
similar instruments of any such Person, (b) all obligations to pay the
deferred purchase price of property or services of any such Person, except
trade payables arising in the ordinary course of business not more than ninety
(90) days past due, (c) all obligations of any such Person as lessee under
Capital Leases, (d) all Debt of any other Person secured by a Lien on any
asset of any such Person, (e) all Guaranty Obligations of any such Person, (f)
all obligations, contingent or otherwise, of any such person relative to the
face amount of letters of credit, whether drawn or not drawn, and banker's
acceptances issued for the account of any such person and (g) all obligations
incurred by any such Person pursuant to Hedging Agreements.
"Default" means any of the events specified in Section 11.1 which with
the passage of time, the giving of notice or both, would constitute an Event
of Default.
"Disqualified Stock" means any capital stock of a Person that by its
terms (a) has any scheduled interest or dividend payment, (b) upon the passage
of time or occurrence of any event has any redemption or similar payment due,
(c) is required to be redeemed or repurchased at the option of any holder or
otherwise or (d) is convertible into Debt or is convertible to another
security which contains any such terms.
"Dollars" or "$" means, unless otherwise qualified, dollars in lawful
currency of the United States.
"Eligible Assignee" means, with respect to any assignment of the rights,
interest and obligations of a Lender hereunder, a Person that is at the time
of such assignment (a) a commercial bank organized or licensed under the laws
of the United States or any state thereof, having combined capital and surplus
in excess of $500,000,000, (b) a finance company, insurance company or other
financial institution which in the ordinary course of business extends credit
of the type extended hereunder and that has total assets in excess of
$1,000,000,000, (c) already a Lender hereunder (whether as an original party
to this Agreement or as the assignee of another Lender), (d) the successor
(whether by transfer of assets, merger or otherwise) to all or substantially
all of the commercial lending business of the assigning Lender, or (e) any
other Person that has been approved in writing as an Eligible Assignee by
Cable Systems and the Administrative Agent.
"Employee Benefit Plan" means any employee benefit plan within the
meaning of Section 3(3) of ERISA which (a) is maintained for employees of any
Borrower or any ERISA Affiliate or (b) has at any time within the preceding
six years been maintained for the employees of any Borrower or any current or
former ERISA Affiliate.
"Environmental Laws" means any and all federal, state and local laws,
statutes, ordinances, rules, regulations, permits, licenses, approvals and
orders of courts or Governmental Authorities, relating to the protection of
human health or the environment, including, but not limited to, requirements
pertaining to the manufacture, processing, distribution, use, treatment,
storage, disposal, transportation, handling, reporting, licensing, permitting,
investigation or remediation of Hazardous Materials.
"ERISA" means the Employee Retirement Income Security Act of 1974, and
the rules and regulations thereunder, each as amended or modified from time to
time.
"ERISA Affiliate" means any Person who together with any Borrower is
treated as a single employer within the meaning of Section 414(b), (c), (m) or
(o) of the Code or Section 4001(b) of ERISA.
"Eurodollar Reserve Percentage" means, for any day, the percentage
(expressed as a decimal and rounded upwards, if necessary, to the next higher
1/100th of 1%) which is in effect for such day as prescribed by the Federal
Reserve Board (or any successor) for determining the maximum reserve
requirement (including without limitation any basic, supplemental or emergency
reserves) in respect of Eurocurrency liabilities or any similar category of
liabilities for any Lender.
"Event of Default" means any of the events specified in Section 11.1,
provided that any requirement for passage of time, giving of notice, or both,
has been satisfied.
"FCC" means the Federal Communications Commission or any successor
Governmental Authority.
"FCC License" means any license, permit, consent, certificate of
compliance, franchise, approval, waiver or authorization granted or issued by
the FCC.
"FDIC" means the Federal Deposit Insurance Corporation, or any successor
thereto.
"Federal Funds Rate" means the rate per annum (rounded upwards, if
necessary, to the next higher 1/100th of 1%) representing the daily effective
federal funds rate as quoted by the Administrative Agent and confirmed in
Federal Reserve Board Statistical Release H.15 (519) or any successor or
substitute publication selected by the Administrative Agent. If, for any
reason, such rate is not available, then "Federal Funds Rate" shall mean a
daily rate which is determined, in the opinion of the Administrative Agent, to
be the rate at which federal funds are being offered for sale in the national
federal funds market at 9:00 a.m. (Charlotte time). Rates for weekends or
holidays shall be the same as the rate for the most immediate preceding
Business Day.
"$15 Million Facility" means a credit facility for up to $15,000,000 in
favor of C-TEC with a maturity of no more than two years, secured by a pledge
of the capital stock of Mercom owned by C-TEC, which facility will be assumed
by the Borrower as part of the Mercom Contribution.
"First Union" means First Union National Bank, a national banking
association, and its successors.
"Fiscal Year" means the fiscal year of the Borrower and its Subsidiaries
ending on December 31.
"Fixed Charges" means, with respect to any Person for any period, the
sum of the following for such period calculated in accordance with GAAP: (a)
Interest Expense plus (b) scheduled principal payments with respect to Debt
(regardless of whether such amounts were actually paid).
"GAAP" means generally accepted accounting principles, as recognized by
the American Institute of Certified Public Accountants and the Financial
Accounting Standards Board, consistently applied and maintained on a
consistent basis throughout the period indicated and consistent with prior
financial practice (except for changes in such practice with which the
Borrowers' independent certified public accountants have concurred).
"Governmental Approvals" means all authorizations, consents, approvals,
licenses and exemptions of, registrations and filings with, and reports to,
all Governmental Authorities, including without limitation any FCC License,
PUC Authorization or CATV Franchise.
"Governmental Authority" means any nation, province, state or political
subdivision thereof, and any government or any Person exercising executive,
legislative, regulatory or administrative functions of or pertaining to
government, and any corporation or other entity owned or controlled, through
stock or capital ownership or otherwise, by any of the foregoing, including
without limitation the FCC and any PUC.
"Guaranty Obligation" means, with respect to any Person, without
duplication, any obligation, contingent or otherwise, of any such Person
pursuant to which such Person has directly or indirectly guaranteed any Debt
of any other Person and, without limiting the generality of the foregoing, any
obligation, direct or indirect, contingent or otherwise, of any such Person
(a) to purchase or pay (or advance or supply funds for the purchase or payment
of) such Debt (whether arising by virtue of partnership arrangements, by
agreement to keep well, to purchase assets, goods, securities or services, to
take-or-pay, or to maintain financial statement condition or otherwise) or (b)
entered into for the purpose of assuring in any other manner the obligee of
such Debt of the payment thereof or to protect such obligee against loss in
respect thereof (in whole or in part); provided, that the term Guaranty
Obligation shall not include endorsements for collection or deposit in the
ordinary course of business.
"Hazardous Materials" means any substances or materials (a) which are or
become defined as hazardous wastes, hazardous substances, pollutants,
contaminants, chemical substances or mixtures or toxic substances under any
applicable Environmental Law, (b) which are toxic, explosive, corrosive,
flammable, infectious, radioactive, carcinogenic, mutagenic or otherwise
harmful to human health or the environment and are or become regulated by any
applicable Environmental Law, (c) the presence of which require remediation
under any Environmental Law or common law, (d) the discharge or emission or
release of which requires a permit or license under any Environmental Law or
other Governmental Approval, (e) which are materials consisting of underground
or aboveground storage tanks, whether empty, filled or partially filled with
any substance or (f) which contain asbestos, polychlorinated biphenyls, urea
formaldehyde foam insulation, petroleum hydrocarbons, petroleum derived
substances or waste, crude oil, nuclear fuel, natural gas or synthetic gas.
"Hedging Agreement" means any agreement with respect to an interest rate
swap, collar, cap, floor or a forward rate agreement or other agreement
regarding the hedging of interest rate risk exposure executed in connection
with hedging the interest rate exposure of the Borrower under this Agreement,
and any confirming letter executed pursuant to such hedging agreement, all as
amended, restated or otherwise modified.
"Interest Expense" means, with respect to any Person for any period, the
interest expense as determined for such period in accordance with GAAP.
"Interest Period" shall have the meaning assigned thereto in Section
4.1(b).
"Lender" means each Person executing this Agreement as a Lender set
forth on the signature pages hereto and each Person that hereafter becomes a
party to this Agreement as a Lender pursuant to Section 13.10.
"Lending Office" means, with respect to any Lender, the office of such
Lender maintaining such Lender's Commitment Percentage of the Loans.
"Leverage Ratio" means as of any date of determination, the ratio as of
such date determined in accordance with Section 9.1.
"LIBOR" means the rate for deposits in Dollars for a period equal to the
Interest Period selected which appears on the Telerate Page 3750 at
approximately 11:00 a.m. London time, two (2) Business Days prior to the
commencement of the applicable Interest Period. If, for any reason, such rate
is not available, then "LIBOR" shall mean the rate per annum at which, as
determined by the Administrative Agent, Dollars in the amount of $5,000,000
are being offered to leading banks at approximately 11:00 a.m. London time,
two (2) Business Days prior to the commencement of the applicable Interest
Period for settlement in immediately available funds by leading banks in the
London interbank market for a period equal to the Interest Period selected.
"LIBOR Rate" means a rate per annum (rounded upwards, if necessary, to
the next higher 1/100th of 1%) determined by the Administrative Agent pursuant
to the following formula:
LIBOR Rate = LIBOR
----------------------------------
1.00-Eurodollar Reserve Percentage
"LIBOR Rate Loan" means any Loan bearing interest at a rate based upon
the LIBOR Rate as provided in Section 4.1(a).
"Lien" means, with respect to any asset, any mortgage, lien, pledge,
charge, security interest or encumbrance of any kind in respect of such asset.
For the purposes of this Agreement, a Person shall be deemed to own subject to
a Lien any asset which it has acquired or holds subject to the interest of a
vendor or lessor under any conditional sale agreement, Capital Lease or other
title retention agreement relating to such asset.
"Loan" means any loan made to any Borrower pursuant to Section 2.1 or
Section 3.1, and all such Loans collectively as the context requires.
"Loan Documents" means, collectively, this Agreement, the Notes, any
Hedging Agreement executed by any Lender, the Pledge Agreements (but only as
of and after the date a Pledge Agreement is executed and delivered as required
by this Agreement) and each other document referenced in Article V or
otherwise required to be delivered by or on behalf of the Borrower pursuant to
this Agreement, all as may be amended, restated or otherwise modified.
"Material Adverse Effect" means a material adverse effect on the
business, operations or financial condition of the Borrower and its
Subsidiaries, taken as a whole, or the ability of the Borrower to perform its
obligations under the Loan Documents to which it is a party.
"Material Contract" means any written contract or other agreement of the
Borrower or any of its Subsidiaries (other than one evidencing Debt, providing
for the acquisition or construction of Capital Assets or the making of any
Investment (including by way of merger) permitted by Section 10.3 (and, if
applicable, Section 10.4)) involving monetary liability of any such Person in
an amount in excess of $3,000,000 per annum.
"Material Subsidiary" means any Subsidiary of the Borrower that owns
assets in excess of $250,000.
"Mercom" means Mercom, Inc. and its successors.
"Mercom Credit Facility" means the Amended and Restated Term Credit
Agreement and Revolving Credit Agreement dated August 16, 1995 among Mercom
and Morgan Guaranty Trust Company of New York, together with any extension,
amendment, replacement, restatement, modification, renewal or refinancing
thereof (whether or not the principal amount available or outstanding
thereunder is increased).
"Multiemployer Plan" means a "multiemployer plan" as defined in Section
4001(a)(3) of ERISA to which any Borrower or any ERISA Affiliate is making, or
is accruing an obligation to make, contributions within the preceding six
years.
"Net Cash Proceeds" means, as applicable with respect to any Person, (a)
with respect to any sale, trade or other disposition of assets, the gross cash
proceeds received by such Person from such sale less the sum of (i) all income
taxes and other taxes assessed by a Governmental Authority as a result of such
sale and any other reasonable fees and expenses incurred in connection
therewith and (ii) the principal amount of, premium, if any, and interest on
any Debt secured by a Lien on the asset (or a portion thereof) sold, which
Debt is required to be and is repaid in connection with such sale, (b) with
respect to any issuance of Debt, the gross cash proceeds received by such
Person therefrom less all legal, underwriting and other reasonable fees and
expenses incurred in connection therewith and the amount thereof applied to
repay existing Debt permitted by Section 10.1 and (c) with respect to any
payment under an insurance policy or in connection with a condemnation
proceeding, the amount of cash proceeds received by such Person from an
insurance company or Governmental Authority net of all reasonable expenses of
collection.
"Net Income" means, with respect to any Person for any period, the net
income (or loss) of such Person for such period determined in accordance with
GAAP; provided, that there shall be excluded from net income the income of any
Person (other than a Wholly-Owned Subsidiary) in which such Person has an
ownership interest, except to the extent received in cash by such Person.
"Notes" means the Revolving Credit Notes and Term Notes.
"Notice of Account Designation" shall have the meaning assigned thereto
in Section 2.2(b).
"Notice of Conversion/Continuation" shall have the meaning assigned
thereto in Section 4.2.
"Notice of Payment" shall have the meaning assigned thereto in Section
2.3(d).
"Notice of Revolving Credit Borrowing" shall have the meaning assigned
thereto in Section 2.2(a).
"Notice of Term Loan Borrowing" shall have the meaning assigned thereto
in Section 3.2(a).
"Obligations" means, in each case, whether now in existence or hereafter
arising: (a) the principal of and interest on (including interest accruing
after the filing of any bankruptcy or similar petition) the Revolving Credit
Loans, (b) the principal and interest on (including interest accruing after
the filing of any bankruptcy or similar petition) the Term Loans and (c) all
other fees and commissions (including attorney's fees), charges, indebtedness,
loans, liabilities, financial accommodations, obligations, covenants and
duties owing by the Borrower to the Lenders or the Administrative Agent, of
every kind, nature and description, direct or indirect, absolute or
contingent, due or to become due, contractual or tortious, liquidated or
unliquidated, and whether or not evidenced by any note, and whether or not for
the payment of money under or in respect of this Agreement, any Note, any
Hedging Agreement with a Lender or Affiliate thereof or any of the other Loan
Documents.
"Officer's Compliance Certificate" shall have the meaning assigned
thereto in Section 7.2.
"Operating Cash Flow" means, with respect to any Person for any period,
the following, calculated without duplication for such period in accordance
with GAAP: (a) Net Income, plus (b) to the extent deducted in determining Net
Income, (i) income and franchise taxes, (ii) Interest Expense and (iii)
depreciation, amortization (including amortization of goodwill and other
intangibles) and other non-cash charges, minus (c) to the extent included in
determining Net Income, any items of extraordinary, unusual or non-recurring
gain or loss (together with any related provision for taxes on such gain).
For any acquisition or sale by such Person during any period of calculation,
the definition of Operating Cash Flow shall be adjusted on a pro forma basis
in a manner reasonably satisfactory to the Administrative Agent to give effect
to such acquisition or sale as if such acquisition or sale occurred on the
first day of such period.
"Other Taxes" shall have the meaning assigned thereto in Section 4.11(c).
"Parent Pledge Agreement" means the pledge agreement executed by each
Person that owns any capital stock or other ownership interests of the
Borrower in accordance with Section 8.10(b) in favor of the Administrative
Agent for the ratable benefit of itself and the other Lenders, substantially
in the form of Exhibit I, as amended, restated or otherwise modified.
"PBGC" means the Pension Benefit Guaranty Corporation or any successor
agency.
"Pension Plan" means any Employee Benefit Plan, other than a
Multiemployer Plan, which is subject to the provisions of Title IV of ERISA or
Section 412 of the Code and which (a) is maintained for employees of any
Borrower or any ERISA Affiliates or (b) has at any time within the preceding
six years been maintained for the employees of any Borrower or any of their
current or former ERISA Affiliates.
"Person" means an individual, corporation, partnership, limited
liability company, limited liability partnership, association, trust, business
trust, joint venture, joint stock company, pool, syndicate, sole
proprietorship, unincorporated organization, Governmental Authority or any
other form of entity or group thereof.
"Pledge Agreements" means the Borrower Pledge Agreement and the Parent
Pledge Agreement.
"Prime Rate" means, at any time, the rate of interest per annum publicly
announced from time to time by First Union as its prime rate. Each change in
the Prime Rate shall be effective as of the opening of business on the day
such change in the Prime Rate occurs. The parties hereto acknowledge that the
rate announced publicly by First Union as its Prime Rate is an index or base
rate and shall not necessarily be its lowest or best rate charged to its
customers or other banks.
"PUC" means any state regulatory agency or body that exercises
jurisdiction over the rates or services or the acquisition, construction or
operation of any CATV System or any person who owns, constructs or operates
any CATV System, in each case by reason of the nature or type of the business
subject to regulation and not pursuant to laws and regulations of general
applicability to Persons conducting business in said state.
"PUC Authorization" means any license, permit, consent, certificate of
compliance, franchise, approval, waiver or authorization granted or issued by
a PUC.
"Rebuild Capital Expenditures" means, with respect to any Person for any
period, Capital Expenditures used to replace, add or retool components
necessary to consolidate facilities, to increase bandwidth or channel
capacity, to provision new services, to improve existing services, or to test
and measure services, networks or bandwidth.
"Register" shall have the meaning assigned thereto in Section 13.10(d).
"Reorganization" means the reorganization described in Schedule 1.1(b),
as such Schedule may be supplemented or otherwise amended with the prior
written approval of the Required Lenders.
"Required Lenders" means, at any date, any combination of holders of at
least fifty-one percent (51%) of the aggregate unpaid principal amount of the
Notes, or if no amounts are outstanding under the Notes, any combination of
Lenders whose Commitment Percentages aggregate at least fifty-one percent
(51%).
"Revolving Credit Commitment" means (a) as to any Lender, the obligation
of such Lender to make the Revolving Credit Loans to the account of the
Borrower hereunder in an aggregate principal amount not to exceed the amount
set forth opposite such Lender's name on Schedule 1.1(a), as such amounts may
be reduced or modified at any time or from time to time pursuant to the terms
hereof and (b) as to all Lenders, the aggregate commitment of all Lenders to
make Revolving Credit Loans. The Revolving Credit Commitment of all Lenders
as of the Closing Date shall be Forty-Five Million Dollars ($45,000,000).
"Revolving Credit Facility" means the revolving credit facility
established pursuant to Article II hereof.
"Revolving Credit Loans" means each of the revolving credit loans to be
made to the Borrower pursuant to Section 2.1.
"Revolving Credit Notes" means the revolving credit notes made by the
Borrower payable to the order of each Lender, substantially in the form of
Exhibit A, evidencing the Debt incurred by the Borrower pursuant to the
Revolving Credit Facility, and any amendments and modifications thereto, any
substitutes therefor, and any replacements, restatements, renewals or
extension thereof, in whole or in part.
"Revolving Credit Termination Date" means the earliest of the dates
referred to in Section 2.6.
"Security Documents" means the collective reference to the Pledge
Agreements and each other agreement or writing pursuant to which the Borrower
or any of its Subsidiaries pledges or grants a security interest in any
property or assets securing the Obligations or any such Person guaranties the
payment and/or performance of the Obligations.
"Solvent" means, as to the Borrower and its Subsidiaries on a particular
date, that such Persons, taken as a whole, (a) have capital sufficient to
carry on their business and transactions and all business and transactions in
which they are about to engage and are able to pay their debts as they mature,
(b) own property having a value, both at fair valuation and at present fair
saleable value, greater than the amount required to pay their probable
liabilities (including contingencies), and (c) do not believe that they will
incur debts or liabilities beyond their ability to pay such debts or
liabilities as they mature.
"Specified Capital Expenditures" means, with respect to any Person for
any period, all Capital Expenditures less all Rebuild Capital Expenditures (if
any) in an amount not to exceed the following, in each case for such Person
for such period:
Period Rebuild Capital Expenditures
------ ----------------------------
Each fiscal quarter in Fiscal Year 1997 $4,250,000 per quarter
Each fiscal quarter in Fiscal Year 1998 $4,500,000 per quarter
Each fiscal quarter in Fiscal Year 1999 $4,250,000 per quarter
Each fiscal quarter in Fiscal Year 2000 $2,500,000 per quarter
Each fiscal quarter in Fiscal Year 2001 $1,250,000 per quarter
;provided, that the maximum amount of Rebuild Capital Expenditures permitted
to be made by such Person in the first fiscal quarter in any Fiscal Year as
set forth in the above table shall be increased by the amount of Rebuild
Capital Expenditures that such Person was permitted to make in the immediately
preceding Fiscal Year and did not expend in such Fiscal Year (without giving
affect to any carry-over amounts from any prior Fiscal Year); provided,
further, that such permitted carry-over amount shall not exceed twenty percent
(20%) of the maximum Rebuild Capital Expenditures for such immediately
preceding Fiscal Year as set forth in the above table.
"Subsidiary" means as to any Person, any corporation, partnership or
other entity of which more than fifty percent (50%) of the outstanding capital
stock or other ownership interests having ordinary voting power to elect a
majority of the board of directors or other managers of such corporation,
partnership or other entity is at the time, directly or indirectly, owned by or
the management is otherwise controlled by such Person (irrespective of
whether, at the time, capital stock of any other class or classes of such
corporation shall have or might have voting power by reason of the happening
of any contingency); provided, that until such time as the Mercom Transaction
is completed or the Borrower otherwise acquires one hundred percent (100%) of
the outstanding capital stock of Mercom, Mercom shall not be treated as a
Subsidiary of the Borrower under this Agreement. Unless otherwise qualified,
references to "Subsidiary" or "Subsidiaries" herein shall refer to those of
the Borrower.
"Taxes" shall have the meaning assigned thereto in Section 4.11(a).
"Termination Event" means: (a) a "Reportable Event" described in
Section 4043 of ERISA (as to which the thirty (30) day notice requirement has
not been waived by the PBGC), or (b) the withdrawal of any Borrower or any
ERISA Affiliate from a Pension Plan during a plan year in which it was a
"substantial employer" as defined in Section 4001(a)(2) of ERISA, or (c) the
filing of a notice of intent to terminate a Pension Plan under Section 4041(c)
of ERISA, or (d) the institution of proceedings under Section 4042 of ERISA to
terminate, or the appointment of a trustee with respect to, any Pension Plan
by the PBGC, or (e) any other event or condition which would reasonably
constitute grounds under Section 4042(a) of ERISA for the termination of, or
the appointment of a trustee to administer, any Pension Plan, or (f) the
partial or complete withdrawal of any Borrower or any ERISA Affiliate from a
Multiemployer Plan, or (g) the imposition of a Lien pursuant to Section 412 of
the Code or Section 302 of ERISA, or (h) any event or condition which results
in the reorganization or insolvency of a Multiemployer Plan under Sections
4241 or 4245 of ERISA, or (i) any event or condition which results in the
termination of a Multiemployer Plan under Section 4041A of ERISA or the
institution by PBGC of proceedings to terminate a Multiemployer Plan under
Section 4042 of ERISA.
"Term Loan" means the term loan to be made to the Borrower pursuant to
Section 3.1.
"Term Loan Commitment" means (a) as to any Lender, the obligation of
such Lender to make the Term Loan to the account of the Borrower hereunder in
an aggregate principal amount not to exceed the amount set forth opposite such
Lender's name on Schedule 1.1(a), as such amount may be reduced or modified at
any time or from time to time pursuant to the terms hereof and (b) as to all
Lenders, the aggregate commitment of all Lenders to make the Term Loan. The
Term Loan Commitment of all Lenders as of the Closing Date shall be One Hundred
Million Dollars ($100,000,000).
"Term Loan Facility" means the term loan facility established pursuant
to Article III hereof.
"Term Loan Maturity Date" means June 30, 2005.
"Term Notes" means the Term Notes made by the Borrower payable to the
order of each of the Lenders, substantially in the form of Exhibit B hereto,
evidencing the Debt incurred by the Borrower pursuant to the Term Loan
Facility, and any amendments, modifications and supplements thereto, any
substitutes therefor, and any replacements, restatements, renewals or
extensions thereof, in whole or in part.
"Total Debt" means, with respect to any Person at any date and without
duplication, the sum of the following calculated in accordance with GAAP: (a)
all liabilities, obligations and indebtedness for borrowed money including but
not limited to obligations evidenced by bonds, debentures, notes or other
similar instruments of any such Person, (b) all obligations to pay the
deferred purchase price of property or services of any such Person, except
trade payables arising in the ordinary course of business not more than ninety
(90) days past due, (c) all obligations of any such Person as lessee under
Capital Leases and (d) all Guaranty Obligations of any such Person.
"United States" means the United States of America.
"Wholly-Owned" means, with respect to a Subsidiary, a Subsidiary all of
the shares of capital stock or other ownership interests of which are,
directly or indirectly, owned or controlled by any Person and/or one or more
of its Wholly-Owned Subsidiaries.
SECTION 1.2 General. Unless otherwise specified, a reference in
this Agreement to a particular section, subsection, Schedule or Exhibit is a
reference to that section, subsection, Schedule or Exhibit of this Agreement.
Wherever from the context it appears appropriate, each term stated in either
the singular or plural shall include the singular and plural, and pronouns
stated in the masculine, feminine or neuter gender shall include the
masculine, the feminine and the neuter. Any reference herein to "Charlotte
time" shall refer to the applicable time of day in Charlotte, North Carolina.
Unless expressly specified otherwise, any references to the "transactions
contemplated by this Agreement" or the "transactions contemplated hereby" (or
similar references) shall not be a reference to the Reorganization. Unless
expressly specified otherwise, capitalized terms defined in Schedule 1.1(b)
are used herein with the meanings assigned to such terms in such Schedule.
SECTION 1.3 Other Definitions and Provisions.
(a) Use of Capitalized Terms. Unless otherwise defined therein, all
capitalized terms defined in this Agreement shall have the defined meanings
when used in this Agreement, the Notes and the other Loan Documents or any
certificate, report or other document made or delivered pursuant to this
Agreement.
(b) Miscellaneous. The words "hereof", "herein" and "hereunder" and
words of similar import when used in this Agreement shall refer to this
Agreement as a whole and not to any particular provision of this Agreement.
ARTICLE II
REVOLVING CREDIT FACILITY
SECTION 2.1 Revolving Credit Loans. Subject to the terms and
conditions of this Agreement, each Lender severally agrees to make Revolving
Credit Loans to the Borrower from time to time from the Closing Date through
the Revolving Credit Termination Date as requested by the Borrower in
accordance with the terms of Section 2.2; provided, that (a) the aggregate
principal amount of all outstanding Revolving Credit Loans (after giving
effect to any amount requested) shall not exceed the Revolving Credit
Commitment of all Lenders and (b) the principal amount of outstanding
Revolving Credit Loans from any Lender to the Borrower shall not at any time
exceed such Lender's Revolving Credit Commitment. Each Loan by a Lender shall
be in a principal amount equal to such Lender's Commitment Percentage of the
aggregate principal amount of Revolving Credit Loans requested on such
occasion. Subject to the terms and conditions hereof, the Borrower may
borrow, repay and reborrow Revolving Credit Loans hereunder until the
Revolving Credit Termination Date.
SECTION 2.2 Procedure for Advances of Loans.
(a) Requests for Borrowing. The Borrower shall give the
Administrative Agent irrevocable prior written notice in the form attached
hereto as Exhibit C-1 (a "Notice of Revolving Credit Borrowing") not later
than 11:00 a.m. (Charlotte time) (i) on the same Business Day as each Base
Rate Loan and (ii) at least three (3) Business Days before each LIBOR Rate
Loan, of its intention to borrow, specifying (A) the date of such borrowing,
which shall be a Business Day, (B) the amount of such borrowing, which shall
be in an aggregate principal amount of $2,000,000 or a whole multiple of
$500,000 in excess thereof, (C) whether the Loans are to be LIBOR Rate Loans
or Base Rate Loans (provided that LIBOR Rate Loans shall not be available
until three (3) Business Days after the Closing Date) and (D) in the case of a
LIBOR Rate Loan, the duration of the initial Interest Period applicable
thereto. Notices received after 11:00 a.m. (Charlotte time) shall be deemed
received on the next Business Day. The Administrative Agent shall promptly
notify the Lenders of each Notice of Borrowing.
(b) Disbursement of Loans. Not later than 2:00 p.m. (Charlotte time)
on the proposed borrowing date, each Lender will make available to the
Administrative Agent, for the account of the Borrower, at the office of the
Administrative Agent in funds immediately available to the Administrative
Agent, such Lender's Commitment Percentage of the Revolving Credit Loans to be
made on such borrowing date. The Borrower hereby irrevocably authorizes the
Administrative Agent to disburse the proceeds of the borrowing requested
pursuant to this Section 2.2 in immediately available funds by crediting or
wiring such proceeds to the deposit account of the Borrower identified in the
most recent Notice of Account Designation substantially in the form of Exhibit
H (a "Notice of Account Designation") delivered by the Borrower to the
Administrative Agent or as may be otherwise agreed upon by the Borrower and
the Administrative Agent from time to time. Subject to Section 4.7 hereof,
the Administrative Agent shall not be obligated to disburse the portion of the
proceeds of any Revolving Credit Loan requested pursuant to this Section 2.2
to the extent that any Lender has not made available to the Administrative
Agent its Commitment Percentage of such Revolving Credit Loan.
SECTION 2.3 Repayment of Loans.
(a) Repayment on Revolving Credit Termination Date. The Borrower
shall repay the outstanding principal amount of all Revolving Credit Loans in
full, together with all accrued but unpaid interest thereon, on the Revolving
Credit Termination Date.
(b) Mandatory Repayment of Excess Revolving Credit Loans. If at any
time the outstanding principal amount of all Revolving Credit Loans exceeds
the Revolving Credit Commitment, the Borrower shall repay immediately upon
notice from the Administrative Agent, by payment to the Administrative Agent
for the account of the Lenders, the Revolving Credit Loans in an amount equal
to such excess.
(c) Other Mandatory Repayments.
(i) Sale of Assets. The Borrower shall make mandatory principal
payments of the Revolving Credit Loans in amounts equal to 100% of the
aggregate Net Cash Proceeds in excess of $2,000,000 received after the date
hereof by the Borrower or any of its Subsidiaries from any sale, trade or
other disposition of assets permitted by Section 10.5(e); provided, that (A)
such payment shall be made only at such time as such Net Cash Proceeds
required to be paid but not previously applied equal $250,000 or any whole
multiple thereof (at which time the entire unapplied amount shall be paid) and
(B) unless (1) any Default in the payment of any interest or fees under this
Agreement or any Event of Default has occurred and is continuing at the time
of such sale, trade or disposition or (2) such Net Cash Proceeds result from a
sale of capital stock or other equity interest of a Subsidiary of the
Borrower, no such payment shall be required if and to the extent such Net Cash
Proceeds are reinvested in the business of the Borrower and its Subsidiaries
within one hundred eighty (180) days after such sale, trade or disposition.
(ii) Insurance. The Borrower shall make mandatory principal
payments of the Revolving Credit Loans in amounts equal to 100% of the Net
Cash Proceeds received by the Borrower or any of its Subsidiaries from any
insurance policy if such Net Cash Proceeds (i) exceed $500,000 in the
aggregate for any loss or series of related losses and (ii) are not reinvested
in the business of the Borrower and its Subsidiaries within one hundred eighty
(180) days of receipt; provided, that if any Default in the payment of any
interest or fees under this Agreement or any Event of Default has occurred and
is continuing at the time of such receipt, the Borrower shall not have the
option to make any such reinvestment and shall make such mandatory payment in
accordance with paragraph (iv) of this Section 2.3(c).
(iii) Issuance of Debt. The Borrower shall make mandatory
principal payments of the Revolving Credit Loans in amounts equal to 100% of
the Net Cash Proceeds from the issuance of any Debt of the Borrower or any of
its Subsidiaries incurred after the Closing Date (other than any Loans
hereunder or Debt of the character described in Section 10.1(e)), if after the
issuance of such Debt, the Leverage Ratio exceeds 3.5 to 1.0. (For purposes
of determining the Leverage Ratio with respect to this Section 2.3(c)(iii),
Total Debt of the Borrower and its Subsidiaries shall be calculated on each
date the Borrower or any of its Subsidiaries receives any such Net Cash
Proceeds.)
(iv) Notice; Manner of Payments. Upon the occurrence of any
event triggering the repayment requirement under this Section 2.3(c), the
Borrower shall give prompt written notice of such event and the amount of the
corresponding prepayment to the Administrative Agent and upon receipt of such
notice, the Administrative Agent shall promptly so notify the Lenders. Each
mandatory prepayment required under Section 2.3(c) shall be made within three
(3) Business Days of such event and shall be applied as follows: (i) first,
to repay the outstanding principal amount of Revolving Credit Loans and (ii)
second, if any Net Cash Proceeds remain after the repayment specified in the
preceding clause, to prepay the Term Loan in accordance with Section 3.3.
(d) Optional Repayments. The Borrower may at any time and from time
to time repay the Revolving Credit Loans, in whole or in part, upon at least
three (3) Business Days' irrevocable notice to the Administrative Agent with
respect to LIBOR Rate Loans and one (1) Business Day irrevocable notice with
respect to Base Rate Loans, in the form attached hereto as Exhibit D (a
"Notice of Payment") specifying the date and amount of repayment and whether
the repayment is of LIBOR Rate Loans, Base Rate Loans, or a combination
thereof, and, if of a combination thereof, the amount allocable to each. Upon
receipt of such notice, the Administrative Agent shall promptly notify each
Lender. If any such notice is given, the amount specified in such notice
shall be due and payable on the date set forth in such notice. Partial
repayments shall be in an aggregate amount of $2,000,000 or a whole multiple
of $500,000 in excess thereof with respect to Base Rate Loans, and $2,000,000
or a whole multiple of $500,000 in excess thereof with respect to LIBOR Rate
Loans. All optional prepayments under this Section shall first be applied to
the outstanding principal balance of the Revolving Credit Loans, then, to the
extent of any excess, to the Term Loans in accordance with Section 3.5.
(e) Limitation on Repayment of LIBOR Rate Loans. Any repayment of any
LIBOR Rate Loan under this Section 2.3 on any day other than on the last day
of the Interest Period applicable thereto shall be accompanied by any amount
required to be paid pursuant to Section 4.9.
SECTION 2.4 Revolving Credit Notes. Each Lender's Revolving
Credit Loans and the obligation of the Borrower to repay such Revolving Credit
Loans shall be evidenced by a Revolving Credit Note payable to the order of
such Lender. Each Revolving Credit Note shall bear interest on the unpaid
principal amount thereof at the applicable interest rate per annum specified
in Section 4.1.
SECTION 2.5 Permanent Reduction of the Revolving Credit
Commitment.
(a) The Borrower shall have the right at any time and from time to
time, upon at least five (5) Business Days prior written notice to the
Administrative Agent, to permanently reduce, in whole at any time or in part
from time to time, without premium or penalty, the Revolving Credit Commitment
in an aggregate principal amount not less than $2,000,000 or any whole
multiple of $500,000 in excess thereof.
(b) Each permanent reduction permitted pursuant to this Section 2.5
shall be accompanied by a payment of principal sufficient to reduce the
aggregate principal amount of Revolving Credit Loans to the Revolving Credit
Commitment as so reduced. Any reduction of the Aggregate Commitment to zero
shall be accompanied by payment of all outstanding Obligations payable with
respect to the Revolving Credit Facility and, if such reduction is permanent,
termination of the Revolving Credit Commitment and Revolving Credit Facility.
If the reduction of the Revolving Credit Commitment requires the repayment of
any LIBOR Rate Loan, such reduction may be made only on the last day of the
then current Interest Period applicable thereto unless such repayment is
accompanied by any amount required to be paid pursuant to Section 4.9 hereof.
SECTION 2.6 Termination of Revolving Credit Facility. The
Revolving Credit Facility shall terminate on the earliest of (a) June 30,
2002, (b) the date of termination of the Commitments in whole by the Borrower
pursuant to Section 2.5(a), and (c) the date of termination of the Commitments
in whole by the Administrative Agent on behalf of the Lenders pursuant to
Section 11.2(a).
SECTION 2.7 $15 Million Facility. (a) For so long as any amount
remains outstanding under the $15 Million Facility, the Borrower shall not
give a Notice of Revolving Credit Borrowing if, after giving effect thereto
and any concurrent transactions (including a concurrent repayment of the $15
Million Facility with the proceeds of such a borrowing) the aggregate
principal amount of the Revolving Credit Loans would exceed (i) the Revolving
Credit Commitment of all Lenders minus (ii) the outstanding principal amount
of the $15 Million Facility; provided, that, notwithstanding the foregoing,
the Borrower may give a Notice of Revolving Credit Borrowing for the sole
purpose of paying a dividend pursuant to Section 10.6(c) (which shall be
treated as having been given pursuant to Section 2.7(b).
(b) The Borrower agrees that, after it has assumed all of the
obligations under the $15 Million Facility, if
(i) the Distributions do not take place by December 31,
1997;
(ii) the $15 Million Facility matures and is not repaid
from other funds; or
(iii) an event of default under the $15 Million Facility
occurs,
it will give a Notice of Revolving Credit Borrowing solely for the
purpose of obtaining moneys to be applied, and which shall be applied solely,
to the payment of all outstanding obligations under the $15 Million Facility,
provided, that such Notice of Revolving Credit Borrowing (and any
representations and warranties deemed made in connection therewith or with the
related borrowing) may be qualified to the extent the Borrower is unable to
make the statements required therein without such qualification. Such Notice
of Revolving Credit Borrowing shall equal the amount of the outstanding
obligations under the $15 Million Facility without regard to the minimum
increments set forth in Section 2.2(a) and shall be given notwithstanding the
existence or creation of any Default or Event of Default. The obligation of
the Lenders to fund a Revolving Credit Loan pursuant to a Notice of Revolving
Credit Borrowing given pursuant to this Section 2.7(b) is absolute and
unconditional and shall not be affected by the existence of any Default or
Event of Default or any other circumstance whatsoever; provided, that if prior
to the funding of a Revolving Credit Loan pursuant to Notice of Revolving
Credit Borrowing given pursuant to this Section 2.7(b), one of the events
described in Section 11.1(i) or (j) shall have occurred and all of the
obligations under the $15 Million Facility have been assumed by the Borrower,
each such Lender will, on the date the applicable Revolving Credit Loan would
have been made, purchase an undivided participating interest in the $15
Million Facility in an amount equal to its Commitment Percentage of the
aggregate amount outstanding under the $15 Million Facility.
ARTICLE III
TERM LOAN FACILITY
SECTION 3.1 Term Loan. Subject to the terms and conditions of
this Agreement, each Lender severally agrees to make a Term Loan to the
Borrower on or within ninety (90) days after the Closing Date. The Term Loan
shall be funded by the Lenders in no more than two single advances during such
ninety (90) day period and each such advance shall be funded by each Lender in
a principal amount equal to such Lender's Commitment Percentage of the
aggregate principal amount of the advance requested by the Borrower. The
aggregate principal amount of the Term Loan requested by the Borrower during
such ninety (90) day period shall not exceed the total Term Loan Commitment.
The Term Loan Commitment shall expire on the 90th day after the Closing Date
if not funded on or prior to such date in accordance with its terms.
SECTION 3.2 Procedure for Advance of Term Loan.
(a) Requests for Borrowing. In connection with each advance of the
Term Loan pursuant to Section 3.1, the Borrower shall give the Administrative
Agent irrevocable prior written notice in the form attached hereto as Exhibit
C-2 (a "Notice of Term Loan Borrowing") not later than 11:00 a.m. (Charlotte
time) (i) on the same Business Day as a Base Rate Loan and (ii) at least three
(3) Business Days before a LIBOR Rate Loan, of its intention to borrow,
specifying (A) the date of such borrowing, which shall be a Business Day, (B)
the amount of such borrowing, (C) whether the Loan is to be a LIBOR Rate Loan
or Base Rate Loan or a combination thereof (provided that LIBOR Rate Loans
shall not be available until three (3) Business Days after the Closing Date)
and the amounts allocable to each (which amounts shall correspond to the
minimum amounts set forth in Section 2.2(a)), and (D) in the case of a LIBOR
Rate Loan, the duration of the initial Interest Period applicable thereto.
Notices received after 11:00 a.m. (Charlotte time) shall be deemed received on
the next Business Day. The Administrative Agent shall promptly notify the
Lenders of receipt of the Notice of Term Loan of Borrowing.
(b) Disbursement of Loans. Not later than 2:00 p.m. (Charlotte time)
on the proposed borrowing date, each Lender will make available to the
Administrative Agent, for the account of the Borrower, at the office of the
Administrative Agent in funds immediately available to the Administrative
Agent, such Lender's Commitment Percentage of the Term Loan requested pursuant
to Section 3.2(a). The Borrower hereby irrevocably authorizes the
Administrative Agent to disburse the proceeds of the borrowing requested
pursuant to Section 3.2(a) in immediately available funds by crediting or
wiring such proceeds to the deposit account of the Borrower identified in the
most recent Notice of Account Designation delivered by the Borrower to the
Administrative Agent or as may be otherwise agreed upon by the Borrower and
the Administrative Agent from time to time. Subject to Section 4.7 hereof,
the Administrative Agent shall not be obligated to disburse the portion of the
proceeds of the Term Loans requested pursuant to Section 3.2(a) to the extent
that any Lender has not made available to the Administrative Agent its
Commitment Percentage of such Term Loan.
SECTION 3.3 Repayment of Term Loan. The Borrower shall repay the
aggregate outstanding principal amount of the Term Loan in consecutive
quarterly installments on the last day of each March, June, September and
December commencing September 30, 1999, in an amount equal to the product of
(a) the principal balance of the Term Loan outstanding on the earlier of (i)
the date when the outstanding Term Loan equals the total Term Loan Commitment
and (ii) the date ninety (90) days after the Closing Date times (b) the
applicable percentage set forth below:
Payment Date Principal Installment
------------ ---------------------
September 30, 1999 2.500%
December 31, 1999 2.500%
March 31, 2000 2.500%
June 30, 2000 2.500%
September 30, 2000 3.125%
December 31, 2000 3.125%
March 31, 2001 3.125%
June 30, 2001 3.125%
September 30, 2001 3.750%
December 31, 2001 3.750%
March 31, 2002 3.750%
June 30, 2002 3.750%
September 30, 2002 4.375%
December 31, 2002 4.375%
March 31, 2003 4.375%
June 30, 2003 4.375%
September 30, 2003 5.625%
December 31, 2003 5.625%
March 31, 2004 5.625%
June 30, 2004 5.625%
September 30, 2004 5.625%
December 31, 2004 5.625%
March 31, 2005 5.625%
June 30, 2005 5.625%
If not sooner paid, the Term Loan shall be paid in full, together with accrued
interest thereon and all other outstanding Obligations, on the Term Loan
Maturity Date.
SECTION 3.4 Optional Prepayments of Term Loan. The Borrower shall
have the right at any time and from time to time, upon at least three (3)
Business Days prior written notice to the Administrative Agent, to prepay the
Term Loan in whole or in part without premium or penalty except as provided
below; provided that any such prepayments shall first be applied to repay the
outstanding principal balance of the Revolving Credit Loans prior to any
prepayments of the Term Loan. Each optional prepayment of the Term Loan
hereunder shall be in an aggregate principal amount of at least $2,000,000 or
any whole multiple of $500,000 in excess thereof, shall be applied to the
outstanding principal installments of the Term Loan on a pro rata basis and be
accompanied by any payment required under Section 4.9.
SECTION 3.5 Mandatory Prepayments of Term Loans. If at any time
(a) no Revolving Credit Loans are then outstanding and any event requiring
mandatory repayment specified in Section 2.3(c) shall occur or (b) any amounts
remain after any repayment of Revolving Credit Loans pursuant to Section
2.3(c), then such amount not required to repay the Revolving Credit Loans will
be used to reduce on a pro rata basis the remaining scheduled principal
installments of the Term Loans and shall be accompanied by any amount required
under Section 4.9.
SECTION 3.6 Term Notes. Each Lender's Term Loan and the
obligation of the Borrower to repay such Term Loan shall be evidenced by a
Term Note payable to the order of such Lender. Each Term Note shall bear
interest on the unpaid principal amount thereof at the applicable interest
rate per annum specified in Section 4.1.
ARTICLE IV
GENERAL LOAN PROVISIONS
SECTION 4.1 Interest.
(a) Interest Rate Options. Subject to the provisions of this Section
4.1, at the election of the Borrower, the aggregate principal balance of the
Loans or any portion thereof shall bear interest at the Base Rate or the LIBOR
Rate plus, in each case, the Applicable Margin as set forth below (provided
that the LIBOR Rate shall not be available until three (3) Business Days after
the Closing Date). The Borrower shall select the rate of interest and
Interest Period, if any, applicable to any Loan at the time a Notice of
Revolving Credit Borrowing is given pursuant to Section 2.2 or Notice of Term
Loan Borrowing is given pursuant to Section 3.2 or at the time a Notice of
Conversion/Continuation is given pursuant to Section 4.2. Each Loan or
portion thereof bearing interest based on the Base Rate shall be a "Base Rate
Loan" and each Loan or portion thereof bearing interest based on the LIBOR
Rate shall be a "LIBOR Rate Loan". Any Loan or any portion thereof as to
which the Borrower have not duly specified an interest rate as provided herein
shall be deemed a Base Rate Loan.
(b) Interest Periods. In connection with each LIBOR Rate Loan, the
Borrower, by giving notice at the times described in Section 4.1(a), shall
elect an interest period (each, an "Interest Period") to be applicable to such
Loan, which Interest Period shall be a period of one (1), two (2), three (3),
or six (6) months with respect to each LIBOR Rate Loan; provided that:
(i) the Interest Period shall commence on the date of
advance of or conversion to any LIBOR Rate Loan and, in the case of
immediately successive Interest Periods, each successive Interest Period shall
commence on the date on which the next preceding Interest Period expires;
(ii) if any Interest Period would otherwise expire on a day
that is not a Business Day, such Interest Period shall expire on the next
succeeding Business Day; provided, that if any Interest Period with respect to
a LIBOR Rate Loan would otherwise expire on a day that is not a Business Day
but is a day of the month after which no further Business Day occurs in such
month, such Interest Period shall expire on the next preceding Business Day;
(iii) any Interest Period with respect to a LIBOR Rate Loan
that begins on the last Business Day of a calendar month (or on a day for
which there is no numerically corresponding day in the calendar month at the
end of such Interest Period) shall end on the last Business Day of the
relevant calendar month at the end of such Interest Period;
(iv) no Interest Period shall extend beyond the Revolving
Credit Termination Date or the Term Loan Maturity Date, as applicable, and no
interest period shall be selected by the Borrower which would result in the
repayment of any LIBOR Rate Loan pursuant to Section 3.3 prior to the end of
an Interest Period; and
(v) there shall be no more than ten (10) Interest Periods
outstanding at any time.
(c) Applicable Margin. The Applicable Margin provided for in Section
4.1(a) with respect to the Loans (the "Applicable Margin") shall (i) on the
Closing Date equal the percentages set forth in the certificate delivered
pursuant to Section 5.2(d)(iv) and (ii) for each fiscal quarter thereafter be
determined by reference to the Leverage Ratio as of the end of the fiscal
quarter immediately preceding the delivery of the applicable Officer's
Compliance Certificate as follows:
Applicable Margin Per Annum
Leverage Ratio Base Rate + LIBOR Rate +
-------------- ---------------------------
>4.75x .125% 1.375%
>4.25 < 4.75x 0.00% 1.125%
-
>3.50 < 4.25x 0.00% .875%
-
< 3.50x 0.00% .625%
-
Adjustments, if any, in the Applicable Margin shall be made by the
Administrative Agent on the fifth (5th) Business Day after receipt by the
Administrative Agent of quarterly financial statements for the Borrower and
its Subsidiaries and the accompanying Officer's Compliance Certificate setting
forth the Leverage Ratio of the Borrower and its Subsidiaries as of the most
recent fiscal quarter end. Subject to Section 4.1(d), in the event the
Borrower fails to deliver such financial statements and certificate within the
time required by Section 7.2 hereof, the Applicable Margin shall be the
highest Applicable Margin set forth above until the delivery of such financial
statements and certificate.
(d) Default Rate. Upon the occurrence and during the continuance of
an Event of Default, (i) the Borrower shall no longer have the option to
request LIBOR Rate Loans, (ii) all outstanding LIBOR Rate Loans which are past
due shall bear interest at a rate per annum two percent (2%) in excess of the
rate then applicable to LIBOR Rate Loans until the end of the applicable
Interest Period and thereafter at a rate equal to two percent (2%) in excess
of the rate then applicable to Base Rate Loans, and (iii) all outstanding Base
Rate Loans which are past due shall bear interest at a rate per annum equal to
two percent (2%) in excess of the rate then applicable to Base Rate Loans.
(e) Interest Payment and Computation. Interest on each Base Rate Loan
shall be payable in arrears on the last Business Day of each calendar quarter
commencing September 30, 1997; and interest on each LIBOR Rate Loan shall be
payable on the last day of each Interest Period applicable thereto, and if
such Interest Period extends over three (3) months, at the end of each three
(3) month interval during such Interest Period. Interest for all Base Rate
Loans provided hereunder and all fees shall be computed on the basis of a
365-day year or 366-day year, as applicable, and assessed for the actual
number of days elapsed. All interest for LIBOR Rate Loans provided hereunder
shall be computed on the basis of a 360-day year and assessed for the actual
number of days elapsed.
(f) Maximum Rate. In no contingency or event whatsoever shall the
aggregate of all amounts deemed interest hereunder or under any of the Notes
charged or collected pursuant to the terms of this Agreement or pursuant to
any of the Notes exceed the highest rate permissible under any Applicable Law
which a court of competent jurisdiction shall, in a final determination, deem
applicable hereto. In the event that such a court determines that the Lenders
have charged or received interest hereunder in excess of the highest
applicable rate, the rate in effect hereunder shall automatically be reduced
to the maximum rate permitted by Applicable Law and the Lenders shall at the
Administrative Agent's option promptly refund to the Borrower any interest
received by the Lenders in excess of the maximum lawful rate or shall apply
such excess to the principal balance of the Obligations. It is the intent
hereof that the Borrower not pay or contract to pay, and that neither the
Administrative Agent nor any Lender receive or contract to receive, directly
or indirectly in any manner whatsoever, interest in excess of that which may
be paid by the Borrower under Applicable Law.
SECTION 4.2 Notice and Manner of Conversion or Continuation of
Loans. Provided that no Event of Default has occurred and is then continuing,
the Borrower shall have the option to (a) convert at any time all or any
portion of its outstanding Base Rate Loans in a principal amount equal to
$2,000,000 or any whole multiple of $500,000 in excess thereof into one or
more LIBOR Rate Loans or (b) upon the expiration of any Interest Period, (i)
convert all or any part of its outstanding LIBOR Rate Loans in a principal
amount equal to $2,000,000 or a whole multiple of $500,000 in excess thereof
into Base Rate Loans or (ii) continue such LIBOR Rate Loans as LIBOR Rate
Loans. Whenever the Borrower desires to convert or continue Loans as provided
above, the Borrower shall give the Administrative Agent irrevocable prior
written notice in the form attached as Exhibit E (a "Notice of Conversion/
Continuation") not later than 11:00 a.m. (Charlotte time) three (3) Business
Days before the day on which a proposed conversion or continuation of such
Loan is to be effective specifying (A) the Loans to be converted or continued,
and, in the case of any LIBOR Rate Loan to be converted or continued, the last
day of the Interest Period therefor, (B) the effective date of such conversion
or continuation (which shall be a Business Day), (C) the principal amount of
such Loans to be converted or continued, and (D) the Interest Period to be
applicable to such converted or continued LIBOR Rate Loan. The Administrative
Agent shall promptly notify the Lenders of such Notice of
Conversion/Continuation.
SECTION 4.3 Fees.
(a) Revolving Credit Commitment Fee. Commencing on the Closing Date,
the Borrower shall pay to the Administrative Agent, for the account of the
Lenders, a non-refundable commitment fee at a rate per annum equal to .20% on
the average daily unused portion of the Revolving Credit Commitment. The
commitment fee shall be payable in arrears on the last Business Day of each
calendar quarter during the term of this Agreement commencing September 30,
1997, and on the Revolving Credit Termination Date. Such commitment fee shall
be distributed by the Administrative Agent to the Lenders pro rata in
accordance with the Lenders' respective Commitment Percentages.
(b) Term Loan Commitment Fee. The Borrower shall pay to the
Administrative Agent, for the account of the Lenders, a non-refundable
commitment fee at a rate per annum equal to .20% of the average daily unused
portion of the Term Loan Commitment for the period commencing on the
forty-sixth day after the Closing Date through the earlier of (i) the date when
the outstanding Term Loan equals the total Term Loan Commitment and (ii) the
date ninety (90) days after the Closing Date. Such commitment fee shall be
due and payable on the date ninety (90) days after the Closing Date and shall
be distributed by the Administrative Agent to the Lenders pro rata in
accordance with the Lenders' respective Commitment Percentages.
(c) Administrative Agent's and Other Fees. In order to compensate the
Administrative Agent for structuring and syndicating the Loans and for its
obligations hereunder, the Borrower agrees to pay to the Administrative Agent,
for its account, the fees set forth in the separate fee letter agreement
executed by the Borrower and the Administrative Agent dated April 18, 1997.
SECTION 4.4 Manner of Payment. Each payment by the Borrower on
account of the principal of or interest on the Loans or of any fee, commission
or other amounts payable to the Lenders under this Agreement or any Note shall
be made not later than 1:00 p.m. (Charlotte time) on the date specified for
payment under this Agreement to the Administrative Agent at the Administrative
Agent's Office for the account of the Lenders (other than as set forth below)
pro rata in accordance with their respective Commitment Percentages, in
Dollars, in immediately available funds and shall be made without any set-off,
counterclaim or deduction whatsoever. Any payment received after such time
but before 2:00 p.m. (Charlotte time) on such day shall be deemed a payment on
such date for the purposes of Section 11.1, but for all other purposes shall
be deemed to have been made on the next succeeding Business Day. Any payment
received after 2:00 p.m. (Charlotte time) shall be deemed to have been made on
the next succeeding Business Day for all purposes. Upon receipt by the
Administrative Agent of each such payment, the Administrative Agent shall
distribute to each Lender at its address for notices set forth herein its pro
rata share of such payment in accordance with such Lender's Commitment
Percentage and shall wire advice of the amount of such credit to each Lender.
Each payment to the Administrative Agent of Administrative Agent's fees or
expenses shall be made for the account of the Administrative Agent and any
amount payable to any Lender under Sections 4.8, 4.9, 4.10, 4.11 or 13.2 shall
be paid to the Administrative Agent for the account of the applicable Lender.
SECTION 4.5 Crediting of Payments and Proceeds. In the event that
the Borrower shall fail to pay any of the Obligations when due and the
Obligations have been accelerated pursuant to Section 11.2, all payments
received by the Lenders upon the Notes and the other Obligations and all net
proceeds from the enforcement of the Obligations shall be applied first to all
expenses then due and payable by the Borrower hereunder, then to all indemnity
obligations then due and payable by the Borrower hereunder, then to all
Administrative Agent's fees then due and payable, then to all commitment and
other fees and commissions then due and payable, then to accrued and unpaid
interest on the Notes (pro rata in accordance with all such amounts due) and
then to the principal amount of the Notes, in that order.
SECTION 4.6 Adjustments. If any Lender (a "Benefitted Lender")
shall at any time receive any payment of all or part of its Loans, or interest
thereon, or if any Lender shall at any time receive any collateral in respect
to its Loans (whether voluntarily or involuntarily, by set-off or otherwise)
in a greater proportion than any such payment to and collateral received by
any other Lender, if any, in respect of such other Lender's Loans, or interest
thereon, such Benefitted Lender shall purchase for cash from the other Lenders
such portion of each such other Lender's Loans, or shall provide such other
Lenders with the benefits of any such collateral, or the proceeds thereof, as
shall be necessary to cause such Benefitted Lender to share the excess payment
or benefits of such collateral or proceeds ratably with each of the Lenders;
provided, that if all or any portion of such excess payment or benefits is
thereafter recovered from such Benefitted Lender, such purchase shall be
rescinded, and the purchase price and benefits returned to the extent of such
recovery, but without interest. The Borrower agrees that, to the fullest
extent allowed by law, each Lender so purchasing a portion of another Lender's
Loans may exercise all rights of payment (including, without limitation,
rights of set-off) with respect to such portion as fully as if such Lender
were the direct holder of such portion.
SECTION 4.7 Nature of Obligations of Lenders Regarding Loans;
Assumption by the Administrative Agent. The obligations of the Lenders under
this Agreement to make the Loans are several and are not joint or joint and
several. Unless the Administrative Agent shall have received notice from a
Lender prior to a proposed borrowing date that such Lender will not make
available to the Administrative Agent such Lender's ratable portion of the
amount to be borrowed on such date (which notice shall not release such Lender
of its obligations hereunder), the Administrative Agent may assume that such
Lender has made such portion available to the Administrative Agent on the
proposed borrowing date in accordance with Section 2.2(b) and 3.2(b) and the
Administrative Agent may, in reliance upon such assumption, make available to
the Borrower on such date a corresponding amount. If such amount is made
available to the Administrative Agent on a date after such borrowing date,
such Lender shall pay to the Administrative Agent on demand an amount, until
paid, equal to the product of (a) the amount of such Lender's Commitment
Percentage of such borrowing, times (b) the daily average Federal Funds Rate
during such period as determined by the Administrative Agent, times (c) a
fraction the numerator of which is the number of days that elapse from and
including such borrowing date to the date on which such Lender's Commitment
Percentage of such borrowing shall have become immediately available to the
Administrative Agent and the denominator of which is 360. A certificate of
the Administrative Agent with respect to any amounts owing under this Section
shall be conclusive, absent manifest error. If such Lender's Commitment
Percentage of such borrowing is not made available to the Administrative Agent
by such Lender within three (3) Business Days of such borrowing date, the
Administrative Agent shall be entitled to recover such amount made available
by the Administrative Agent with interest thereon at the rate per annum
applicable to Base Rate Loans hereunder, on demand, from the Borrower. The
failure of any Lender to make its Commitment Percentage of any Loan available
shall not relieve it or any other Lender of its obligation, if any, hereunder
to make its Commitment Percentage of such Loan available on such borrowing
date, but no Lender shall be responsible for the failure of any other Lender
to make its Commitment Percentage of such Loan available on the borrowing date.
SECTION 4.8 Changed Circumstances.
(a) Circumstances Affecting LIBOR Rate Availability. If with respect
to any Interest Period:
(i) at least three (3) Lenders (or in any event the Required
lenders) advise the Administrative Agent that, by reason of
circumstances affecting the foreign exchange and interbank markets
generally, deposits in eurodollars, in the applicable amounts are not
being quoted via Telerate Page 3750 or offered to such Lenders for such
Interest Period, or
(ii) at least three (3) Lenders (or in any event the Required
Lenders) advise the Administrative Agent that the LIBOR Rate as
determined by the Administrative Agent will not adequately and fairly
reflect the cost to such Lenders of funding their LIBOR Rate Loans for
such Interest Period,
then the Administrative Agent shall forthwith give prompt written notice
thereof to the Borrower and the Lenders. Thereafter, until the Administrative
Agent notifies the Borrower that such circumstances no longer exist, the
obligation of the Lenders to make LIBOR Rate Loans and the right of the
Borrower to convert any Loan to or continue any Loan as a LIBOR Rate Loan shall
be suspended, and the Borrower shall repay in full (or cause to be repaid in
full) the then outstanding principal amount of each such LIBOR Rate Loans
together with accrued interest thereon, on the last day of the then current
Interest Period applicable to such LIBOR Rate Loan or convert the then
outstanding principal amount of each such LIBOR Rate Loan to a Base Rate Loan
as of the last day of such Interest Period. Unless the Borrower notifies the
Administrative Agent at least two Business Days before the date of any
affected borrowing or conversion or continuation specified in any applicable
Notice of Revolving Credit Borrowing, Notice of Term Loan Borrowing or Notice
of Conversion/Continuation that they elect not to borrow or convert or
continue Loans on the date specified therein, the Lenders shall make, convert
or continue the Loans in the amount specified by the Borrower in the
applicable notice, but such Loans shall be made, converted or continued as
Base Rate Loans instead of LIBOR Rate Loans.
(b) Laws Affecting LIBOR Rate Availability. If, after the date
hereof, the introduction of, or any change in, any Applicable Law or any
change in the interpretation or administration thereof by any Governmental
Authority, central bank or comparable agency charged with the interpretation
or administration thereof, or compliance by any Lender (or any of their
respective Lending Offices) with any request or directive (whether or not
having the force of law) of any such Authority, central bank or comparable
agency, shall make it unlawful or impossible for any of the Lenders (or any of
their respective Lending Offices) to honor its obligations hereunder to make
or maintain any LIBOR Rate Loan, such Lender shall promptly give notice
thereof to the Administrative Agent and the Administrative Agent shall
promptly give notice to the Borrower and the other Lenders. Thereafter, until
such Lender notifies the Administrative Agent and the Borrower that such
circumstances no longer exist, (i) the obligation of such Lender to make LIBOR
Rate Loans, convert Base Rate Loans into LIBOR Rate Loans or continue LIBOR
Rate Loans as LIBOR Rate Loans shall be suspended, and (ii) each LIBOR Rate
Loan of such Lender then outstanding shall be converted to a Base Rate Loan
either (A) on the last day of the then current Interest Period if such Lender
may lawfully continue to maintain and fund such Loan as a LIBOR Rate Loan to
such day or (B) immediately if such Lender shall determine that it may not
lawfully continue to maintain and fund such Loan as a LIBOR Rate Loan to such
day.
(c) Increased Costs. If, after the date hereof, the introduction of,
or any change in, any Applicable Law, or in the interpretation or
administration thereof by any Governmental Authority, central bank or
comparable agency charged with the interpretation or administration thereof,
or compliance by any of the Lenders (or any of their respective Lending
Offices) with any request or directive (whether or not having the force of
law) of such Authority, central bank or comparable agency:
(i) shall subject any of the Lenders (or any of their
respective Lending Offices) to any tax, duty or other charge with respect to
any Note or shall change the basis of taxation of payments to any of the
Lenders (or any of their respective Lending Offices) of the principal of or
interest on any Note or any other amounts due under this Agreement in respect
thereof (except for changes in the rate of tax on the overall net income of
any of the Lenders or any of their respective Lending Offices imposed by the
jurisdiction in which such Lender is organized or is or should be qualified to
do business or such Lending Office is located); or
(ii) shall impose, modify or deem applicable any reserve
(including, without limitation, any imposed by the Board of Governors of the
Federal Reserve System), special deposit, insurance or capital or similar
requirement against assets of, deposits with or for the account of, or credit
extended by any of the Lenders (or any of their respective Lending Offices),
other than any such amount included in the calculation of Eurodollar Reserve
Percentage, or shall impose on any of the Lenders (or any of their respective
Lending Offices) or the foreign exchange and interbank markets any other
condition affecting any Note;
and the result of any of the foregoing is to increase the costs to any of the
Lenders of maintaining any LIBOR Rate Loan or to reduce the yield or amount of
any sum received or receivable by any of the Lenders under this Agreement or
under the Notes in respect of a LIBOR Rate Loan, then such Lender shall
promptly notify the Administrative Agent, and the Administrative Agent shall
promptly notify the Borrower of such fact and demand compensation therefor
and, within fifteen (15) days after such notice by the Administrative Agent,
the Borrower shall pay to such Lender such additional amount or amounts as
will compensate such Lender or Lenders for such increased cost or reduction.
Each Lender will promptly notify the Administrative Agent of any event of
which it has knowledge which will entitle such Lender to compensation pursuant
to this Section 4.8(c) and after receipt of such notice, the Administrative
Agent will promptly notify the Borrower of such event; provided, that neither
any Lender nor the Administrative Agent shall incur any liability whatsoever
to any other Lender or the Borrower in the event it fails to do so. The
amount of such compensation shall be determined, in the applicable Lender's
sole discretion, based upon the assumption that such Lender funded its
Commitment Percentage of the LIBOR Rate Loans in the London interbank market,
as applicable, and using any reasonable attribution or averaging methods which
such Lender deems appropriate and practical. A certificate of such Lender
setting forth the basis for determining such amount or amounts necessary to
compensate such Lender shall be forwarded to the Borrower through the
Administrative Agent and shall be conclusively presumed to be correct save for
clearly demonstrable error.
(d) The Borrower shall not be required to compensate a Lender for any
increased costs pursuant to this Section 4.8 incurred by such Lender more than
90 days prior to its request to the Administrative Agent for such compensation.
SECTION 4.9 Indemnity. The Borrower hereby indemnifies each of
the Lenders against any reasonable loss or expense (excluding any loss of
margin over the LIBOR Rate for the period after any such payment or conversion
or failure to borrow, prepay or convert) which may arise or be attributable to
each Lender's obtaining, liquidating or employing deposits or other funds
acquired to effect, fund or maintain any Loan (a) as a consequence of any
failure by the Borrower to make any payment when due of any amount due
hereunder in connection with a LIBOR Rate Loan, (b) due to any failure of the
Borrower to borrow on a date specified therefor in a Notice of Borrowing or
Notice of Continuation/Conversion or (c) due to any payment, prepayment or
conversion of any LIBOR Rate Loan on a date other than the last day of the
Interest Period therefor. The amount of such loss or expense shall be
determined, in good faith but otherwise in the applicable Lender's sole
discretion, based upon the assumption that such Lender funded its Commitment
Percentage of the LIBOR Rate Loans in the London interbank market, and using
any reasonable attribution or averaging methods which such Lender deems
appropriate and practical. A certificate of such Lender setting forth the
basis for determining such amount or amounts necessary to compensate such
Lender shall be forwarded to the Borrower through the Administrative Agent and
shall be conclusively presumed to be correct save for clearly demonstrable
error.
SECTION 4.10 Capital Requirements. If, after the date hereof,
either (a) the introduction of, or any change in, or in the interpretation of,
any Applicable Law or (b) compliance with any guideline or request from any
central bank or comparable agency or other Governmental Authority (whether or
not having the force of law), has or would have the effect of reducing the
rate of return on the capital of, or has affected or would affect the amount of
capital required to be maintained by, any Lender or any corporation
controlling such Lender as a consequence of, or with reference to the
Commitments and other commitments of this type, below the rate which the
Lender or such other corporation could have achieved but for such
introduction, change or compliance, then within five (5) Business Days after
written demand by any such Lender, the Borrower shall pay to such Lender from
time to time as specified in a reasonably detailed calculation by such Lender
additional amounts sufficient to compensate such Lender or other corporation
for such reduction. A certificate as to such amounts submitted to the
Borrower and the Administrative Agent by such Lender, shall, in the absence of
clearly demonstrable error, be presumed to be correct and binding for all
purposes. The Borrower will not be required to compensate a Lender for any
increased amounts to this Section 4.10 incurred by such Lender more than 90
days prior to its request to the Borrower for such compensation.
SECTION 4.11 Taxes.
(a) Payments Free and Clear. Any and all payments by the Borrower
hereunder or under the Notes shall be made free and clear of and without
deduction for any and all present or future taxes, levies, imposts,
deductions, charges or withholding, and all liabilities with respect thereto
excluding (i) taxes imposed on or measured by the overall net income of any
Lender or its Lending Office or the Administrative Agent or the Administrative
Agent's Office, as the case may be, and all franchise or similar taxes
measured by capital or net worth of such Lender or its Lending Office or the
Administrative Agent or the Administrative Agent's Office, as the case may be,
in each case imposed: (A) by the jurisdiction under the laws of which such
Lender or the Administrative Agent, as the case may be, is organized, or in
which its principal executive office is located, (B) by the jurisdiction in
which the Lending Office of such Lender or the Administrative Agent's Office,
as applicable, is located or (C) solely by reason of such Lender or the
Administrative Agent, as the case may be, doing business in the jurisdiction
imposing such tax, other than as a result of this Agreement or any Note or any
transaction contemplated hereby and (ii) in the case of each Lender, any
United States withholding tax imposed on such payments but only to the extent
that such Lender is subject to United States withholding tax at the time such
Lender first becomes a party to this Agreement (all such non-excluded taxes,
levies, imposts, deductions, charges, withholdings and liabilities being
hereinafter referred to as "Taxes"). If the Borrower shall be required by law
to deduct any Taxes from or in respect of any sum payable hereunder or under
any Note or to any Lender or the Administrative Agent, (A) the sum payable
shall be increased as may be necessary so that after making all required
deductions (including deductions applicable to additional sums payable under
this Section 4.11) such Lender or the Administrative Agent (as the case may
be) receives an amount equal to the amount such party would have received had
no such deductions been made, (B) the Borrower shall make such deductions, (C)
the Borrower shall pay the full amount deducted to the relevant taxing
authority or other authority in accordance with applicable law, and (D) the
Borrower shall deliver to the Administrative Agent evidence of such payment to
the relevant taxing authority or other authority in the manner provided in
Section 4.11(e).
(b) Refunds. If the Borrower pays any additional amount under Section
4.11 (a "Tax Payment") and any Lender or Affiliate thereof effectively obtains
a refund of tax or credit against tax by reason of the Tax Payment (a "Tax
Credit") and such Tax Credit is, in the reasonable judgement of such Lender or
Affiliate, attributable to such Tax Payment, then such Lender, after actual
receipt of such Tax Credit or actual receipt of the benefits thereof, shall
promptly reimburse the Borrower for such amount as such Lender shall
reasonably determine to be the proportion of the Tax Credit as would leave the
Borrower (after that reimbursement) in no better or worse position than it
would have been if the Tax Payment had not been required; provided, that no
Lender shall be required to make any reimbursement if it reasonably believes
the making of such reimbursement would cause it to lose the benefit of the Tax
Credit or would adversely affect in any other respect its tax position.
Subject to the other terms hereof, any claim by a Lender for a Tax Credit
shall be made in a manner, order and amount as such Lender determines in its
sole and absolute discretion. Except to the extent necessary to evaluate any
Tax Credit, no Lender shall be obligated to disclose information regarding its
tax affairs or computations to the Borrower, it being understood and agreed
that in no event shall any Lender be required to disclose information
regarding its tax position that it deems to be confidential (other than with
respect to the Tax Credit).
(c) Stamp and Other Taxes. In addition to the Taxes described in
Section 4.11(a), the Borrower shall pay any present or future stamp,
registration, recordation or documentary taxes or any other similar fees or
charges or excise or property taxes, levies of the United States or any state
or political subdivision thereof or any applicable foreign jurisdiction which
arise from any payment made hereunder or from the execution, delivery or
registration of, or otherwise with respect to, this Agreement, the Loans, the
other Loan Documents, or the perfection of any rights or security interest in
respect thereto (hereinafter referred to as "Other Taxes").
(d) Indemnity. The Borrower shall indemnify each Lender and the
Administrative Agent for the full amount of Taxes and Other Taxes (including,
without limitation, any Taxes and Other Taxes imposed by any jurisdiction on
amounts payable under this Section 4.11) paid by such Lender or the
Administrative Agent (as the case may be) and any liability (including
penalties, interest and expenses) arising therefrom or with respect thereto.
Such indemnification shall be made within thirty (30) days from the date such
Lender or the Administrative Agent (as the case may be) makes written demand
therefor.
(e) Evidence of Payment. Within thirty (30) days after the date of
any payment of Taxes or Other Taxes, the Borrower shall furnish to the
Administrative Agent, at its address referred to in Section 13.1, the original
or a certified copy of a receipt evidencing payment thereof or other evidence
of payment satisfactory to the Administrative Agent.
(f) Delivery of Tax Forms. Each Lender organized under the laws of a
jurisdiction other than the United States or any state thereof shall deliver
to the Borrower, with a copy to the Administrative Agent, on the Closing Date
or concurrently with the delivery of the relevant Assignment and Acceptance,
as applicable, (i) two United States Internal Revenue Service Forms 4224 or
Forms 1001, as applicable (or successor forms) properly completed and
certifying in each case that such Lender is entitled to a complete exemption
from withholding or deduction for or on account of any United States federal
income taxes, and (ii) an Internal Revenue Service Form W-8 or W-9 or
successor applicable form, as the case may be, to establish an exemption from
United States backup withholding taxes. Each such Lender further agrees to
deliver to the Borrower, with a copy to the Administrative Agent, a Form 1001
or 4224 and Form W-8 or W-9, or successor applicable forms or manner of
certification, as the case may be, on or before the date that any such form
expires or becomes obsolete or after the occurrence of any event requiring a
change in the most recent form previously delivered by it to the Borrower,
certifying in the case of a Form 1001 or 4224 that such Lender is entitled to
receive payments under this Agreement without deduction or withholding of any
United States federal income taxes (unless in any such case an event
(including without limitation any change in treaty, law or regulation) has
occurred prior to the date on which any such delivery would otherwise be
required which renders such forms inapplicable or the exemption to which such
forms relate unavailable and such Lender notifies the Borrower and the
Administrative Agent that it is not entitled to receive payments without
deduction or withholding of United States federal income taxes) and, in the
case of a Form W-8 or W-9, establishing an exemption from United States backup
withholding tax.
(g) Survival. Without prejudice to the survival of any other
agreement of the Borrower hereunder, the agreements and obligations of the
Borrower contained in this Section 4.11 shall survive the payment in full of
the Obligations and the termination of the Commitments.
SECTION 4.12 Change of Lending Office; Replacement Lenders. (a)
Each Lender agrees that on the occurrence of any event giving rise to the
operation of Sections 4.8(b), 4.8(c), 4.10, 4.11(a) or 4.11(c) with respect to
such Lender, it will, if requested by the Borrower, use reasonable efforts
(subject to overall policy considerations of such Lender) to designate another
Lending Office for any Loans affected by such event; provided, that such
designation is made on such terms that such Lender and its Lending Office
suffer no economic, legal or regulatory disadvantage, with the object of
avoiding the consequence of the event giving rise to the operation of such
Section. Nothing in this Section 4.12(a) shall affect or postpone any of the
obligations of the Borrower or the rights of any Lender provided in Sections
4.8, 4.10 or 4.11.
(b) At any time within one hundred eighty (180) days after any payment
by the Borrower of any amount pursuant to or by reason of the operation of
Sections 4.8(b), 4.8(c), 4.10, 4.11(a) or 4.11(c), the Borrower, by writing
addressed to the Administrative Agent and each Lender that requested the
payment of such amount, may nominate or propose an Eligible Assignee that is
willing to become the assignee of the Commitment and other obligations of such
Lender (a "Replacement Lender") pursuant to Section 13.10(b), and within
fifteen (15) Business Days after receipt of such proposal from the Borrower,
each such Lender shall execute and deliver to the Administrative Agent an
Assignment and Acceptance of its entire Commitment in favor of the proposed
Replacement Lender in accordance with Section 13.10(b) unless, prior to the
expiration of such period, the Administrative Agent shall have notified the
Borrower and such Lender that the proposed Replacement Lender is not
reasonably acceptable to the Administrative Agent; provided, that in no event
will (i) any Lender be required to enter into an Assignment and Acceptance at
a price less than par plus accrued interest and prorated fees and other costs
due hereunder to the effective date thereof, (ii) either of the Administrative
Agent or Lenders be obligated to assist the Borrower in identifying any
Eligible Assignees that are willing to become such a Replacement Lender or
(iii) any such assignment be required if consummation conflicts with any
Applicable Law. The assignment fee payable to the Administrative Agent in
connection with any such assignment pursuant to Section 13.10(b) shall be for
the account of the Borrower.
SECTION 4.13 Use of Proceeds. The Borrower shall use the proceeds
of the Loans (a) to repay in full all Debt of the Borrower not otherwise
permitted under this Agreement, (b) to make the Michigan Intercompany
Repayment, (c) to finance acquisitions by the Borrower permitted by this
Agreement and (d) for Capital Expenditures, working capital and general
corporate purposes of the Borrower.
ARTICLE V
CLOSING; CONDITIONS OF CLOSING AND BORROWING
SECTION 5.1 Closing. The closing shall take place at the
offices of Kennedy Covington Lobdell & Hickman, L.L.P. at 10:00 a.m. on June
30, 1997, or at such other place or on such other date as the Administrative
Agent and the Borrower shall mutually agree.
SECTION 5.2 Conditions to Closing and Initial Loans. The
obligation of the Lenders to close this Agreement and to make the initial
Loans is subject to the satisfaction of each of the following conditions:
(a) Executed Loan Documents. This Agreement, the Notes and the other
Loan Documents shall have been duly authorized, executed and delivered to the
Administrative Agent by the parties thereto, shall be in full force and effect
and no Default or Event of Default shall exist, and the Borrower shall have
delivered original counterparts thereof to the Administrative Agent.
(b) Closing Certificates; etc.
(i) Officers's Certificate. The Administrative Agent
shall have received a certificate from the chief executive officer or chief
financial officer of the Borrower in form and substance satisfactory to the
Administrative Agent, to the effect that all representations and warranties of
the Borrower contained in this Agreement and the other Loan Documents are
true, correct and complete; that the Borrower is not in violation of any of the
covenants contained in this Agreement and the other Loan Documents; that,
after giving effect to the transactions contemplated by this Agreement, no
Default or Event of Default has occurred and is continuing; and that the
Borrower has satisfied each of the closing conditions.
(ii) Certificate of Secretary. The Administrative Agent
shall have received a certificate of the secretary or assistant secretary of
the Borrower certifying that attached thereto is a true and complete copy of
the articles of incorporation of the Borrower and all amendments thereto,
certified as of a recent date by the appropriate Governmental Authority in the
applicable jurisdiction; that attached thereto is a true and complete copy of
the bylaws of the Borrower, as in effect on the date of such certification;
that attached thereto is a true and complete copy of resolutions duly adopted
by the Board of Directors of the Borrower authorizing the borrowings
contemplated hereunder and the execution, delivery and performance of this
Agreement and the other Loan Documents to which the Borrower is a party; and
as to the incumbency and genuineness of the signature of each officer of the
Borrower executing Loan Documents to which it is a party.
(iii) Certificates of Good Standing. The Administrative
Agent shall have received long-form certificates as of a recent date of the
good standing of the Borrower under the laws of its jurisdiction of
organization and a certificate of the relevant taxing authorities of such
jurisdiction certifying that the Borrower has filed required tax returns with
respect to any franchise taxes and owes no delinquent franchise taxes.
(iv) Opinions of Counsel. The Administrative Agent shall
have received favorable opinions of counsel to the Borrower addressed to the
Administrative Agent and the Lenders (A) with respect to the Borrower, the
Loan Documents and such other matters as the Lenders shall request and (B)
with respect to FCC and other regulatory matters, each in form and substance
satisfactory to the Administrative Agent.
(v) Insurance. The Administrative Agent shall have
received a certificate of insurance in form and substance satisfactory to the
Administrative Agent.
(c) Collateral; Lien Search. The Borrower shall have delivered the
results of a Lien search against the Borrower under the Uniform Commercial
Code as in effect in the Secretary of State's office in each state where their
chief executive offices are located, indicating that their assets are free and
clear of any Lien except for the Liens permitted by Section 10.2.
(d) Consents; Defaults.
(i) Governmental and Third Party Approvals. All necessary
approvals, authorizations and consents, if any be required, of any Person and
of all Governmental Authorities and courts having jurisdiction with respect to
the transactions contemplated by this Agreement and the other Loan Documents
shall have been obtained.
(ii) No Injunction, Etc. No action, proceeding,
investigation, regulation or legislation shall have been instituted,
threatened or proposed before any Governmental Authority to enjoin, restrain,
or prohibit, or to obtain substantial damages in respect of, or which is
related to or arises out of this Agreement or the other Loan Documents or the
consummation of the transactions contemplated hereby or thereby, or which in
the Administrative Agent's good faith determination could reasonably be
expected to have a Material Adverse Effect.
(e) Financial Matters.
(i) Financial Statements. The Administrative Agent shall
have received the financial statements described in Section 6.1(n).
(ii) Financial Condition Certificate. The Borrower shall
have delivered to the Administrative Agent a certificate, in form and
substance satisfactory to the Administrative Agent, and certified as accurate
by the chief executive officer or chief financial officer of the Borrower,
that (A) the Borrower and its Subsidiaries, taken as a whole, are Solvent, (B)
the Borrower's payables are current and not past due, (C) attached thereto is
a pro forma balance sheet of the Borrower and its Subsidiaries setting forth
on a pro forma basis the financial condition of the Borrower and its
Subsidiaries on a Consolidated basis as of that date, reflecting a pro forma
basis the effect of the transactions contemplated herein, including all fees
and expenses in connection therewith, and evidencing compliance on a pro forma
basis with the covenants contained in Article IX hereof, (D) attached thereto
are the financial projections (including without limitation pro forma budgets
for Capital Expenditures) previously delivered to the Administrative Agent
representing the good faith opinions of the Borrower and senior management
thereof as to the projected results contained therein and (E) attached thereto
is a calculation of the Applicable Margin pursuant to Section 4.1(c).
(iii) Payment at Closing; Fee Letters. There shall have
been paid by the Borrower to the Administrative Agent and the Lenders the fees
set forth or referenced in Section 4.3 and any other accrued and unpaid fees
or commissions due hereunder (including, without limitation, legal fees and
expenses), and to any other Person such amount as may be due thereto in
connection with the transactions contemplated hereby, including all taxes,
fees and other charges in connection with the execution, delivery, recording,
filing and registration of any of the Loan Documents.
(f) Miscellaneous.
(i) Notices of Borrowing. The Administrative Agent shall
have received a Notice of Revolving Credit Borrowing and Notice of Term Loan
Borrowing from the Borrower in accordance with Section 2.2(a) and Section 3.2
with respect to any Loans to be made on the Closing Date, and a Notice of
Account Designation specifying the account or accounts to which the proceeds
of any loans made after the Closing Date are to be disbursed.
(ii) Proceedings and Documents. All opinions, certificates
and other instruments and all proceedings in connection with the transactions
contemplated by this Agreement shall be satisfactory in form and substance to
the Lenders. The Lenders shall have received copies of all other instruments
and other evidence as the Administrative Agent may reasonably request, in form
and substance satisfactory to the Lenders, with respect to the transactions
contemplated by this Agreement and the taking of all actions in connection
therewith.
(iii) Due Diligence and Other Documents. The Borrower shall
have delivered to the Administrative Agent such other documents, certificates
and opinions as the Administrative Agent reasonably requests certified by a
secretary or assistant secretary of the Borrower as a true and correct copy
thereof.
SECTION 5.3 Conditions to All Loans. The obligations of the
Lenders to make any Loan is subject to the satisfaction of the following
conditions precedent on the relevant borrowing date:
(a) Continuation of Representations and Warranties. The
representations and warranties contained in Article VI shall be true and
correct on and as of such borrowing date with the same effect as if made on
and as of such date (except where such representation or warranty is
specifically made as of an earlier date in which case it shall remain true and
correct as of such earlier date); provided, that the Borrower may qualify any
representation and warranty made in connection with any Notice of Revolving
Credit Borrowing given pursuant to Section 2.7(b).
(b) No Existing Default. No Default or Event of Default shall
have occurred and be continuing hereunder on the borrowing date with respect
to such Loan or after giving effect to the Loans to be made on such date,
provided, that this Section 5.3(b) shall not apply with respect to any Loan
refunding and terminating the $15 Million Facility.
ARTICLE VI
REPRESENTATIONS AND WARRANTIES OF THE BORROWER
SECTION 6.1 Representations and Warranties. To induce the
Administrative Agent to enter into this Agreement and the Lenders to make the
Loans, the Borrower hereby represents and warrants to the Administrative Agent
and Lenders that:
(a) Organization; Power; Qualification. Each of the Borrower and its
Subsidiaries is duly organized, validly existing and in good standing under
the laws of the jurisdiction of its incorporation or formation, has the power
and authority to own its properties and to carry on its business as now being
and hereafter proposed to be conducted and is duly qualified and authorized to
do business in each jurisdiction in which the character of its properties or
the nature of its business requires such qualification and authorization,
except where the failure to obtain such qualification and authorization could
not reasonably be expected to have a Material Adverse Effect. The
jurisdictions in which the Borrower and its Subsidiaries are organized and
qualified to do business on the date hereof are described on Schedule 6.1(a).
(b) Ownership. Each Subsidiary of the Borrower on the date hereof is
listed on Schedule 6.1(b). The capitalization of the Borrower and its
Subsidiaries on the date hereof consists of the number of shares, authorized,
issued and outstanding, of such classes and series, with or without par value,
described on Schedule 6.1(b). All outstanding shares have been duly
authorized and validly issued and are fully paid and nonassessable. The
shareholders of the Subsidiaries and the number of shares owned by each on the
date hereof are described on Schedule 6.1(b). As of the date hereof, there
are no outstanding stock purchase warrants, subscriptions, options,
securities, instruments or other rights of any type or nature whatsoever,
which are convertible into, exchangeable for or otherwise provide for or
permit the issuance of capital stock of the Borrower or its Subsidiaries,
except as described on Schedule 6.1(b).
(c) Authorization of Agreement, Loan Documents and Borrowing. Each of
the Borrower and its Subsidiaries has the right, power and authority and has
taken all necessary corporate and other action to authorize the execution,
delivery and performance of this Agreement and each of the other Loan
Documents to which it is a party in accordance with their respective terms.
This Agreement and each of the other Loan Documents have been duly executed
and delivered by the duly authorized officers of the Borrower and each of its
Subsidiaries party thereto, and each such document constitutes the legal,
valid and binding obligation of the Borrower and its Subsidiaries party
thereto, enforceable in accordance with its terms, except as such enforcement
may be limited by bankruptcy, insolvency, reorganization, moratorium or
similar state or federal laws from time to time in effect which affect the
enforcement of creditors' rights in general and the availability of equitable
remedies.
(d) Compliance of Agreement, Loan Documents and Borrowing with Laws,
Etc. The execution, delivery and performance by the Borrower and its
Subsidiaries of the Loan Documents to which each such Person is a party, in
accordance with their respective terms, the borrowings hereunder and the
transactions contemplated hereby do not and will not, by the passage of time,
the giving of notice or otherwise, (i) require any Governmental Approval or
violate any Applicable Law relating to the Borrower or any of its Subsidiaries
(except as contemplated with respect to Section 19 of each Pledge Agreement),
(ii) conflict with, result in a breach of or constitute a default under the
articles of incorporation, bylaws or other organizational documents of the
Borrower or any of its Subsidiaries or any indenture, agreement or other
instrument to which such Person is a party or by which any of its properties
may be bound or any Governmental Approval relating to such Person, or (iii)
result in or require the creation or imposition of any Lien upon or with
respect to any property now owned or hereafter acquired by such Person other
than Liens arising under the Loan Documents.
(e) Compliance with Law; Governmental Approvals. Each of the Borrower
and its Subsidiaries (i) has all Governmental Approvals required by any
Applicable Law for it to conduct its business, each of which is in full force
and effect, is final and not subject to review on appeal and is not the
subject of any pending or, to the best of its knowledge, threatened attack by
direct or collateral proceeding, and (ii) is in compliance with each
Governmental Approval applicable to it and in compliance with all other
Applicable Laws relating to it or any of its respective properties, except in
each case with respect to subclauses (i) and (ii) where the failure to do so
could not reasonably be expected to have a Material Adverse Effect.
(f) Tax Returns and Payments. Each of the Borrower and its
Subsidiaries has duly filed or caused to be filed all federal, state, local
and other tax returns required by Applicable Law to be filed, and has paid, or
made adequate provision for the payment of, all federal, state, local and
other taxes, assessments and governmental charges or levies upon it and its
property, income, profits and assets which are due and payable, except where
the failure to so file or cause to be filed such return or pay such taxes
could not reasonably be expected to have a Material Adverse Effect. No
Governmental Authority has asserted any Lien or other claim against the
Borrower or any of its Subsidiaries with respect to unpaid taxes which has not
been discharged or resolved; provided, that the Borrower or such Subsidiary
may contest such Lien or other claim in good faith so long as adequate
reserves are maintained in accordance with GAAP. The charges, accruals and
reserves on the books of the Borrower and any of its Subsidiaries in respect
of federal, state, local and other taxes for all Fiscal Years and portions
thereof since the organization of the Borrower and any of its Subsidiaries are
in the judgment of the Borrower adequate.
(g) Intellectual Property Matters. Except where the failure to own or
possess such intellectual property rights could not reasonably be expected to
have a Material Adverse Effect, each of the Borrower and its Subsidiaries owns
or possesses rights to use all franchises, licenses, copyrights, copyright
applications, patents, patent rights or licenses, patent applications,
trademarks, trademark rights, trade names, trade name rights, copyrights and
rights with respect to the foregoing which are required to conduct its
business. Except to the extent any revocation, termination or infringement
could not reasonably be expected to have a Material Adverse Effect, no event
has occurred which permits, or after notice or lapse of time or both would
permit, the revocation or termination of any such rights, and neither the
Borrower nor any of its Subsidiaries is liable to any Person for infringement
under Applicable Law with respect to any such rights as a result of its
business operations.
(h) Environmental Matters. Except for matters that could not
reasonably be expected to have a Material Adverse Effect:
(i) The properties and operations of the Borrower and its
Subsidiaries are in compliance, and to the best of their knowledge have been
in compliance, with all applicable Environmental Laws;
(ii) Neither the Borrower nor any of its Subsidiaries has
received any notice of violation, alleged violation, non-compliance, liability
or potential liability regarding environmental matters or compliance with
Environmental Laws with regard to any of their properties or the operations
conducted in connection therewith, nor does the Borrower or any of its
Subsidiaries have knowledge or reason to believe that any such notice will be
received or is being threatened;
(iii) Hazardous Materials have not been transported or
disposed by the Borrower and its Subsidiaries in violation of, or in a manner
or to a location which could reasonably be expected to give rise to liability
under, Environmental Laws, nor have any Hazardous Materials been generated,
treated, stored or disposed of at, on or under any of such properties in
violation of, or in a manner that could reasonably be expected to give rise to
liability under, any applicable Environmental Laws;
(iv) No judicial proceedings or governmental or
administrative action is pending, or, to the knowledge of the Borrower,
threatened, under any Environmental Law to which the Borrower or any of its
Subsidiaries is named as a party with respect to such properties or operations
conducted in connection therewith, nor are there any consent decrees or other
decrees, consent orders, administrative orders or other orders, or other
administrative or judicial requirements outstanding under any Environmental
Law with respect to such properties or such operations; and
(v) None of the Borrower or its Subsidiaries have
released, and to the best of the Borrower's knowledge, there is no threat of
release by the Borrower or any of its Subsidiaries, of Hazardous Materials at
or from such properties, in violation of or in amounts or in a manner that
could reasonably be expected to give rise to liability under Environmental
Laws.
(i) ERISA.
(i) As of the date hereof, neither the Borrower nor any
ERISA Affiliate maintains or contributes to, or has any obligation under, any
Employee Benefit Plans other than those identified on Schedule 6.1(i);
(ii) The Borrower and each ERISA Affiliate are in
compliance with all applicable provisions of ERISA and the regulations and
published interpretations thereunder with respect to all Employee Benefit
Plans except for any required amendments for which the remedial amendment
period as defined in Section 401(b) of the Code has not yet expired. Each
Employee Benefit Plan that is intended to be qualified under Section 401(a) of
the Code has been determined by the Internal Revenue Service to be so
qualified, and each trust related to such plan has been determined to be
exempt under Section 501(a) of the Code. No liability has been incurred by
the Borrower or any ERISA Affiliate which remains unsatisfied for any taxes or
penalties with respect to any Employee Benefit Plan or any Multiemployer Plan;
(iii) No Pension Plan has been terminated under Sections
4041(e) or 4042 of ERISA, nor has any accumulated funding deficiency (as
defined in Section 412 of the Code) been incurred (without regard to any
waiver granted under Section 412 of the Code), nor has any funding waiver from
the Internal Revenue Service been received or requested with respect to any
Pension Plan, nor has the Borrower or any ERISA Affiliate failed to make any
contributions or to pay any amounts due and owing as required by Section 412
of the Code, Section 302 of ERISA or the terms of any Pension Plan prior to
the due dates of such contributions under Section 412 of the Code or Section
302 of ERISA, nor has there been any event requiring any disclosure under
Section 4041(c)(3)(C) or 4063(a) of ERISA with respect to any Pension Plan;
(iv) Neither the Borrower nor any ERISA Affiliate has: (A)
engaged in a nonexempt prohibited transaction described in Section 406 of the
ERISA or Section 4975 of the Code, (B) incurred any liability to the PBGC
which remains outstanding other than the payment of premiums and there are no
premium payments which are due and unpaid, (C) failed to make a required
contribution or payment to a Multiemployer Plan, or (D) failed to make a
required installment or other required payment under Section 412 of the Code;
(v) No Termination Event has occurred or is reasonably
expected to occur; and
(vi) No proceeding, claim, lawsuit and/or investigation is
existing or, to the best knowledge of the Borrower after due inquiry,
threatened concerning or involving any (A) employee welfare benefit plan (as
defined in Section 3(1) of ERISA) currently maintained or contributed to by
the Borrower or any ERISA Affiliate, (B) Pension Plan or (C) Multiemployer
Plan.
(j) Margin Stock. Neither the Borrower nor any of its Subsidiaries is
engaged principally or as one of its activities in the business of extending
credit for the purpose of "purchasing" or "carrying" any "margin stock" (as
each such term is defined or used in Regulations G and U of the Board of
Governors of the Federal Reserve System). No part of the proceeds of any of
the Loans or Letters of Credit will be used for purchasing or carrying margin
stock or for any purpose which violates, or which would be inconsistent with,
the provisions of Regulation G, T, U or X of such Board of Governors.
(k) Government Regulation. Neither the Borrower nor any of its
Subsidiaries is an "investment company" or a company "controlled" by an
"investment company" (as each such term is defined or used in the Investment
Company Act of 1940, as amended) and neither the Borrower nor any of its
Subsidiaries is, or after giving effect to any Loan will be, subject to
regulation under the Public Utility Holding Company Act of 1935 or the
Interstate Commerce Act, each as amended.
(l) Material Contracts. Schedule 6.1(l) sets forth a complete and
accurate list of all Material Contracts of the Borrower and its Subsidiaries
in effect as of the Closing Date not listed on any other Schedule hereto;
other than as set forth in Schedule 6.1(l), each such Material Contract is, as
of the date hereof, in full force and effect in accordance with the terms
thereof. the Borrower and its Subsidiaries have delivered to the
Administrative Agent a true and complete copy of each Material Contract
requested thereby and required to be listed on Schedule 6.1(l).
(m) Employee Relations. As of the date hereof, each of the Borrower
and any of its Subsidiaries has a stable work force in place and is not,
except as set forth on Schedule 6.1(m), party to any collective bargaining
agreement nor has any labor union been recognized as the representative of its
employees. As of the date hereof, the Borrower knows of no pending,
threatened or contemplated strikes, work stoppage or other collective labor
disputes involving its employees or those of its Subsidiaries.
(n) Financial Statements. The (i) unaudited Consolidated balance
sheet of the Borrower and its Subsidiaries as of March 31, 1997 and the
related statements of income and retained earnings and cash flows for the
fiscal period then ended and (ii) audited Consolidated balance sheet of the
Borrower and its Subsidiaries as of December 31, 1996 and related statements
of revenue and retained earnings, copies of which have been furnished to the
Administrative Agent and each Lender, are in all material respects complete
and correct and fairly present the assets, liabilities and financial position
of the Borrower and its Subsidiaries as at such dates, and the results of the
operations and changes of financial position for the periods then ended. All
such financial statements, including the related schedules and notes thereto,
have been prepared in accordance with GAAP (except that such unaudited
statements may not contain notes required by GAAP). The Borrower and its
Subsidiaries have no Debt, obligation or other unusual forward or long-term
commitment which is not fairly reflected in the foregoing financial statements
or in the notes thereto.
(o) No Material Adverse Change. Since December 31, 1996, there has
been no material adverse change in the properties, business, operations, or
financial condition of the Borrower and its Subsidiaries and no event has
occurred or condition arisen that could reasonably be expected to have a
Material Adverse Effect; provided, that the consummation of the Reorganization
shall not constitute such a material adverse change or Material Adverse
Effect.
(p) Solvency. As of the Closing Date and after giving effect to each
Loan made hereunder, the Borrower and its Subsidiaries, taken as a whole, will
be Solvent.
(q) Titles to Properties. Each of the Borrower and its Subsidiaries
has such title to the real property owned by it as is necessary or desirable
to the conduct of its business and valid and legal title to all of its
personal property and assets, including, but not limited to, those reflected
on the balance sheets of the Borrower and its Subsidiaries delivered pursuant
to Section 6.1(o), except those which have been disposed of by the Borrower
and its Subsidiaries subsequent to such date which dispositions have been in
the ordinary course of business or as otherwise expressly permitted hereunder,
and except where the failure to obtain such titles could not reasonably be
expected to have a Material Adverse Effect.
(r) Liens. None of the properties and assets of the Borrower or any
of its Subsidiaries is subject to any Lien, except Liens permitted pursuant to
Section 10.2.
(s) Debt and Guaranty Obligations. Schedule 6.1(s) is a complete and
correct listing of all Debt of the Borrower and its Subsidiaries in excess of
$1,000,000, as of the date hereof.
(t) Litigation. Except as set forth on Schedule 6.1(t), there are no
actions, suits or proceedings pending nor, to the knowledge of the Borrower,
threatened against or in any other way relating adversely to or affecting the
Borrower or any of its Subsidiaries or any of their respective properties in
any court or before any arbitrator of any kind or before or by any
Governmental Authority that could reasonably be expected to have a Material
Adverse Effect.
(u) FCC and PUC Regulatory Matters.
(i) Schedule 6.1(u) hereto sets forth, as of the date hereof, a
true and complete list of the following information for each FCC License, PUC
Authorization and CATV Franchise issued to the Borrower or any of its
Subsidiaries: (A) for all FCC Licenses and PUC Authorizations, the name of
the licensee, the type of service and the expiration dates; and (B) for each
CATV Franchise, the geographic area covered by such CATV Franchise, the
services that may be provided thereunder and the expiration date, if any.
Such FCC Licenses, PUC Authorizations and CATV Franchises constitute all of
the Governmental Approvals required to be issued by the FCC and any PUC under
Applicable Law for the Borrower and its Subsidiaries to own and operate their
respective CATV Systems and other business operations, as of the date hereof.
(ii) Compliance. Except for matters that could not reasonably be
expected to have a Material Adverse Effect, (A) neither the Borrower nor any
of its Subsidiaries is in material violation of any duty or obligation
required by the Communications Act of 1934, as amended, or any FCC or PUC law,
rule or regulation applicable to the operation of any portion of any of its
business operations or CATV Systems; (B) the FCC Licenses, PUC Authorizations
and CATV Franchises specified on Schedule 6.1(u) hereto are valid and in full
force and effect without conditions except for such conditions as are
generally applicable to holders of such Governmental Approvals; (C) no event
has occurred and is continuing which could reasonably be expected to (1)
result in the imposition of a material forfeiture or the revocation,
termination or adverse modification of any FCC License, PUC Authorization or
CATV Franchise of the Borrower or any of its Subsidiaries, (2) materially and
adversely affect any rights of the Borrower or any of its Subsidiaries
thereunder or (3) cause a material disruption of the Borrower's or any
Subsidiary's ownership or operation of its CATV Systems; and (D) the Borrower
has no reason to believe and has no knowledge that the FCC Licenses, PUC
Authorizations or any CATV Franchise thereof or of its Subsidiaries will not
be renewed in the ordinary course.
(iii) Condition of Systems. Except for matters that could not
reasonably be expected to have a Material Adverse Effect, (A) all of the CATV
Systems owned, leased, managed or operated by the Borrower and its
Subsidiaries are in good repair, working order and condition and are and will
be in compliance with all terms and conditions of the FCC Licenses, PUC
Authorizations and CATV Franchises thereof and all standards or rules imposed
by Applicable Law and any Governmental Authority or as imposed under any
agreements with telephone companies and customers; and (B) there is not issued
or outstanding or, to the best knowledge of the Borrower, threatened, any
notice of any hearing, violation or complaint against the Borrower or any of
its Subsidiaries with respect to the operation of any portion of its CATV
Systems or other business operations.
(iv) Fees. Except where the failure to pay such fees and charges
could not reasonably be expected to have a Material Adverse Effect, the
Borrower and each of its Subsidiaries has paid all franchise, license or other
fees and charges which have become due pursuant to any Governmental Approval
in respect of its CATV Systems and business operations and has made
appropriate provision as is required by GAAP for any such fees and charges
which have accrued.
(v) Absence of Defaults. No event has occurred or is continuing which
constitutes a Default or an Event of Default, or which constitutes, or which
with the passage of time or giving of notice or both would constitute, a
default by the Borrower or any of its Subsidiaries under any Material Contract
or judgment, decree or order (except where such default could not reasonably
be expected to have a Material Adverse Effect) by which the Borrower or any of
its Subsidiaries or any of their respective properties may be bound; provided,
that the representation and warranty in this clause (v) shall not be incorrect
solely on account of any such event relating to a Material Contract if the
Borrower or any of its Subsidiaries is contesting the claimed default in good
faith so long as adequate reserves are maintained in accordance with GAAP.
(w) Accuracy and Completeness of Information. All written
information, reports and other papers and data produced by or on behalf of the
Borrower or any of its Subsidiaries and furnished to the Lenders (other than
any projections) were, at the time the same were so furnished, complete and
correct in all respects to the extent necessary to give the recipient a true
and accurate knowledge of the subject matter. No document furnished or
written statement made to the Administrative Agent or the Lenders by the
Borrower or any of its Subsidiaries in connection with the negotiation,
preparation or execution of this Agreement or any of the Loan Documents
contains or will contain any untrue statement of a fact material to the
credit-worthiness of the Borrower or any of its Subsidiaries or omits or will
omit to state a fact necessary in order to make the statements contained
therein not misleading. All projections provided by or on behalf of the
Borrower to the Administrative Agent and Lenders hereunder constitute good
faith estimates based on reasonable assumptions of senior management of the
Borrower as of the date delivered. The Borrower is not aware of any facts
which they have not disclosed in writing to the Administrative Agent having a
Material Adverse Effect, or insofar as the Borrower can now foresee, could
reasonably be expected to have a Material Adverse Effect.
SECTION 6.2 Survival of Representations and Warranties, Etc. All
representations and warranties set forth in this Article VI and all
representations and warranties contained in any certificate, or any of the
Loan Documents (including but not limited to any such representation or
warranty made in or in connection with any amendment thereto) shall constitute
representations and warranties made under this Agreement. All representations
and warranties made under this Agreement shall survive the Closing Date and
shall not be waived by the execution and delivery of this Agreement, any
investigation made by or on behalf of the Lenders or any borrowing hereunder.
ARTICLE VII
FINANCIAL INFORMATION AND NOTICES
Until all principal and interest on the Loans and all fees hereunder
have been paid in full and the Commitments terminated, unless consent has been
obtained in the manner set forth in Section 13.11 hereof, the Borrower will
furnish or cause to be furnished to the Administrative Agent and to the
Lenders at their respective addresses as set forth on Schedule 1.1(a), or such
other office as may be designated by the Administrative Agent and Lenders from
time to time:
SECTION 7.1 Financial Statements and Projections.
(a) Quarterly Financial Statements. As soon as practicable and in any
event within forty-five (45) days after the end of each fiscal quarter, an
unaudited Consolidated and consolidating balance sheet of the Borrower and its
Subsidiaries as of the close of such fiscal quarter and unaudited Consolidated
and consolidating statements of income, retained earnings and cash flows for
the fiscal quarter then ended and that portion of the Fiscal Year then ended,
all in reasonable detail setting forth in comparative form the corresponding
figures for the preceding Fiscal Year and prepared by the Borrower in
accordance with GAAP and, if applicable, containing disclosure of the effect
on the financial position or results of operations of any change in the
application of accounting principles and practices during the period, and
certified by the chief financial officer of the Borrower to present fairly in
all material respects the financial condition of the Borrower and its
Subsidiaries as of their respective dates and the results of operations of the
Borrower and its Subsidiaries for the respective periods then ended, subject
to normal year end adjustments.
(b) Annual Financial Statements. As soon as practicable and in any
event within ninety (90) days after the end of each Fiscal Year, an audited
Consolidated and consolidating balance sheet of the Borrower and its
Subsidiaries as of the close of such Fiscal Year and audited Consolidated and
consolidating statements of income, retained earnings and cash flows for the
Fiscal Year then ended, including the notes thereto, all in reasonable detail
setting forth in comparative form the corresponding figures for the preceding
Fiscal Year and prepared by an independent certified public accounting firm of
recognized national standing in accordance with GAAP and accompanied by a
report thereon by such certified public accountants that is not qualified with
respect to scope limitations imposed by the Borrower or any of its Subsidiaries
or with respect to accounting principles followed by the Borrower or any of
its Subsidiaries not in accordance with GAAP.
(c) Annual Budget. As soon as practicable and in any event within
forty-five (45) days after the beginning of each Fiscal Year, a budget of the
Borrower and its Subsidiaries for such Fiscal Year, as approved by the board
of directors of the Borrower and substantially similar in form and scope as
the budget for the 1997 Fiscal Year delivered to the Administrative Agent
prior to closing.
SECTION 7.2 Officer's Compliance Certificate. At each time
financial statements are delivered pursuant to Sections 7.1 (a) or (b), a
certificate of the chief financial officer or the treasurer of the Borrower in
the form of Exhibit E attached hereto (an "Officer's Compliance Certificate").
SECTION 7.3 Accountants' Certificate. At each time financial
statements are delivered pursuant to Section 7.1(b), a certificate of the
independent public accountants certifying such financial statements addressed
to the Administrative Agent for the benefit of the Lenders:
(a) stating that in making the examination necessary for the
certification of such financial statements, they obtained no knowledge of any
Default or Event of Default or, if such is not the case, specifying such
Default or Event of Default and its nature and period of existence; and
(b) confirming the calculations of the Borrower and its Subsidiaries
required to establish whether or not such Persons are in compliance with the
financial covenants set forth in Article IX hereof as at the end of each
respective period.
SECTION 7.4 Other Reports.
(a) Promptly upon receipt thereof, copies of all reports, if any,
submitted to any Borrower or its Board of Directors by its independent public
accountants in connection with their auditing function, including, without
limitation, any management report and any management responses thereto;
(b) As soon as available and in any event within forty-five (45) days
after the end of the Fiscal Year of the Borrower, an updated Schedule 6.1(u)
accompanied by a report identifying any FCC License, PUC Authorization or CATV
Franchise lost, surrendered or canceled during such period, and within ten
(10) Business Days after the receipt by the Borrower or any of its
Subsidiaries of notice that any FCC License, PUC Authorization or CATV
Franchise has been lost or canceled, copies of any such notice accompanied by
a report describing the measures undertaken by either the Borrower or any of
its Subsidiaries to prevent such loss or cancellation (and the anticipated
impact, if any, that such loss or cancellation will have upon the business of
either the Borrower or any of its Subsidiaries); and
(c) Such other information regarding the operations, business affairs
and financial condition of the Borrower or any of its Subsidiaries as the
Administrative Agent, at the request of any Lender, may reasonably request.
SECTION 7.5 Notice of Litigation and Other Matters. Prompt (but
in no event later than ten (10) days after an officer of the Borrower obtains
knowledge thereof) telephonic and written notice of:
(a) the commencement of all proceedings and investigations by or
before any Governmental Authority and all actions and proceedings in any court
or before any arbitrator against or involving the Borrower or any of its
Subsidiaries or any of their respective properties, assets or businesses which
in such case could reasonably be expected to have a Material Adverse Effect;
(b) any notice of any violation received by the Borrower or any of its
Subsidiaries from any Governmental Authority including, without limitation,
any notice of violation of Environmental Laws which in any such case could
reasonably be expected to have a Material Adverse Effect;
(c) any labor controversy that has resulted in, or threatens to result
in, a strike or other work action against the Borrower or any of its
Subsidiaries, where such labor controversy could reasonably be expected to
have a Material Adverse Effect;
(d) any attachment, judgment, lien, levy or order exceeding $250,000
that may be assessed against or threatened against the Borrower or any of its
Subsidiaries;
(e) any Default or Event of Default, or any event which constitutes or
which with the passage of time or giving of notice or both would constitute a
default under any Material Contract unless such default could not reasonably
be expected to have a Material Adverse Effect; provided, that the failure to
give notice with respect to any such event relating to a Material Contract
shall not constitute a Default or Event of Default hereunder if the Borrower
or any of its Subsidiaries is contesting the claimed default in good faith so
long as adequate reserves are maintained in accordance with GAAP; and
(f) (i) any unfavorable determination letter from the Internal Revenue
Service regarding the qualification of an Employee Benefit Plan under Section
401(a) of the Code (along with a copy thereof), (ii) all notices received by
any Borrower or any ERISA Affiliate of the PBGC's intent to terminate any
Pension Plan or to have a trustee appointed to administer any Pension Plan,
(iii) all notices received by any Borrower or any ERISA Affiliate from a
Multiemployer Plan sponsor concerning the imposition or amount of withdrawal
liability pursuant to Section 4202 of ERISA and (iv) the Borrower obtaining
knowledge or reason to know that any Borrower or any ERISA Affiliate has filed
or intends to file a notice of intent to terminate any Pension Plan under a
distress termination within the meaning of Section 4041(c) of ERISA.
SECTION 7.6 Accuracy of Information. All written information,
reports, statements and other papers and data furnished by or on behalf of the
Borrower to the Administrative Agent or any Lender whether pursuant to this
Article VII or any other provision of this Agreement, or any of the Security
Documents, shall, at the time the same is so furnished, comply with Section
6.1(w).
ARTICLE VIII
AFFIRMATIVE COVENANTS
Until all of the principal and interest on the Loans and all fees
hereunder have been paid in full and the Commitments terminated, unless
consent has been obtained in the manner provided for in Section 13.11, the
Borrower will, and will cause each of its Subsidiaries to:
SECTION 8.1 Preservation of Corporate Existence and Related
Matters. Except as permitted by Section 10.4, preserve and maintain its
separate corporate existence and all rights, franchises, licenses and
privileges necessary to the conduct of its business, and qualify and remain
qualified as a foreign corporation and authorized to do business in each
jurisdiction, except where the failure to qualify and remain qualified as a
foreign corporation could not reasonably be expected to have a Material
Adverse Effect.
SECTION 8.2 Maintenance of Property. Protect and preserve all
properties useful in and material to its business, including copyrights,
patents, trade names and trademarks; maintain in good working order and
condition all buildings, equipment and other tangible real and personal
property; and from time to time make or cause to be made all renewals,
replacements and additions to such property necessary for the conduct of its
business, so that the business carried on in connection therewith may be
properly and advantageously conducted at all times; provided, that the
consummation of the Reorganization shall not constitute a violation of this
Section.
SECTION 8.3 Insurance. Maintain insurance with financially sound
and reputable insurance companies against such risks and in such amounts as
are customarily maintained by similar businesses and as may be required by
Applicable Law, and on the Closing Date and from time to time thereafter
deliver to the Administrative Agent upon its request a detailed list of the
insurance then in effect, stating the names of the insurance companies, the
amounts and rates of the insurance, the dates of the expiration thereof and
the properties and risks covered thereby.
SECTION 8.4 Accounting Methods and Financial Records. Maintain a
system of accounting, and keep such books, records and accounts (which shall
be true and complete in all material respects) as may be required or as may be
necessary to permit the preparation of financial statements in accordance with
GAAP and in compliance with the regulations of any Governmental Authority
having jurisdiction over it or any of its properties.
SECTION 8.5 Payment and Performance of Obligations. Pay and
perform all Obligations under this Agreement and the other Loan Documents, and
pay or perform (a) all taxes, assessments and other governmental charges that
may be levied or assessed upon it or any of its property, and (b) all other
indebtedness, obligations and liabilities in accordance with customary trade
practices, except, in each case, when any failure to pay or perform could not
reasonably be expected to have a Material Adverse Effect; provided, that the
Borrower or any of its Subsidiaries may contest any item described in this
Section 8.5 in good faith so long as adequate reserves are maintained with
respect thereto in accordance with GAAP.
SECTION 8.6 Compliance With Laws and Approvals. Observe and
remain in compliance with all Applicable Laws and maintain in full force and
effect all Governmental Approvals, in each case applicable to the conduct of
its business, except where failure to comply with Applicable Laws or maintain
Government Approvals could not reasonably be expected to have a Material
Adverse Effect.
SECTION 8.7 Environmental Laws. In addition to and without
limiting the generality of Section 8.6, (a) comply with, and ensure such
compliance by all tenants and subtenants, if any, with, all applicable
Environmental Laws and obtain and comply with and maintain, and ensure that
all tenants and subtenants obtain and comply with and maintain, any and all
licenses, approvals, notifications, registrations or permits required by
applicable Environmental Laws, (b) conduct and complete all investigations,
studies, sampling and testing, and all remedial, removal and other actions
required under Environmental Laws, and promptly comply with all lawful orders
and directives of any Governmental Authority regarding Environmental Laws,
except where failure to so comply, obtain, maintain, conduct or complete such
actions under such clauses (a) and (b) could not reasonably be expected to
have a Material Adverse Effect, and (c) defend, indemnify and hold harmless
the Administrative Agent and the Lenders, and their respective parents,
Subsidiaries, Affiliates, employees, agents, officers and directors, from and
against any claims, demands, penalties, fines, liabilities, settlements,
damages, costs and expenses of whatever kind or nature known or unknown,
contingent or otherwise, arising out of, or in any way relating to the
violation of, noncompliance with or liability under any Environmental Laws
applicable to the operations of the Borrower or its Subsidiaries, or any
orders, requirements or demands of Governmental Authorities related thereto,
including, without limitation, reasonable attorney's and consultant's fees,
investigation and laboratory fees, response costs, court costs and litigation
expenses, except to the extent that any of the foregoing directly result from
the gross negligence or willful misconduct of the party seeking
indemnification therefor.
SECTION 8.8 Compliance with ERISA. In addition to and without
limiting the generality of Section 8.6, (a) comply with all applicable
material provisions of ERISA and the regulations and published interpretations
thereunder with respect to all Employee Benefit Plans, (b) not take any action
or fail to take action the result of which could be a liability to the PBGC
or to a Multiemployer Plan, (c) not participate in any prohibited transaction
that could result in any material civil penalty under ERISA or tax under the
Code, (d) operate each Employee Benefit Plan in such a manner that will not
incur any material tax liability under Section 4980B of the Code or any
material liability to any qualified beneficiary as defined in Section 4980B of
the Code and (e) furnish to the Administrative Agent upon the Administrative
Agent's request such additional information about any Employee Benefit Plan as
may be reasonably requested by the Administrative Agent.
SECTION 8.9 Compliance With Agreements. Comply in all respects
with each term, condition and provision of all leases, agreements and other
instruments entered into in the conduct of its business including, without
limitation, any Material Contract, except where failure to so comply could not
reasonably be expected to have a Material Adverse Effect; provided, that no
such failure relating to a Material Contract or other lease, agreement or
instrument shall constitute a Default or Event of Default hereunder if the
Borrower or any of its Subsidiaries is contesting the claimed default in good
faith so long as adequate reserves are maintained in accordance with GAAP.
SECTION 8.10 Additional Subsidiaries; Collateral. (a) Prior to
such time as any Subsidiary of the Borrower created or acquired after the
Closing Date (other than Mercom) becomes a Material Subsidiary, cause to be
executed and delivered to the Administrative Agent (i) a duly executed
Borrower Pledge Agreement or supplement thereto substantially in the form
attached as Exhibit A to the Borrower Pledge Agreement, with such changes as
the Administrative Agent shall reasonably request, such that all of the
capital stock or other equity interests of such Subsidiary owned by the
Borrower is pledged to the Administrative Agent for the ratable benefit of
itself and the Lenders and (ii) favorable legal opinions addressed to the
Administrative Agent and Lenders in form and substance reasonably satisfactory
thereto with respect to such Security Document and such other documents and
closing certificates as may be reasonably requested by the Administrative
Agent consistent with the terms of Article V in order to confirm that such
Material Subsidiary's stock or equity interest has been pledged under a Pledge
Agreement.
(b) If in connection with the Reorganization or otherwise at any
time after the Spinoff Date (as defined in Section 10.1(h)) the Borrower or
its outstanding shares of capital stock are the subject of a transaction to
create a holding company (the "Parent") for the Borrower, whereby the holders
of the existing shares of capital stock of the Borrower become stockholders of
the Parent and the Parent becomes the holder of greater than fifty percent
(50%) of the outstanding shares of capital stock of the Borrower, cause to be
executed and delivered to the Administrative Agent (i) a Parent Pledge
Agreement duly executed by the Parent, and (ii) favorable legal opinions
addressed to the Administrative Agent and Lenders in form and substance
reasonably satisfactory thereto with respect to such Pledge Agreement and such
other documents and closing certificates as may be reasonably requested by the
Administrative Agent consistent with the terms of Article V in order to
confirm that all of the Borrower's capital stock owned by the Parent has been
pledged under such Pledge Agreement.
SECTION 8.11 Conduct of Business. Engage only in the operation of
its CATV Systems and any other businesses conducted on the Closing Date and in
lines of business directly related thereto.
SECTION 8.12 Visits and Inspections. Permit representatives of the
Administrative Agent or any Lender, from time to time and, upon reasonable
notice during normal business hours, at its own expense (except the Borrower
shall pay all such expenses when an Event of Default shall have occurred and
be continuing), to visit and inspect its properties; inspect, audit and make
extracts from its books, records and files, including, but not limited to,
management letters prepared by independent accountants; and discuss with its
principal officers, and its independent accountants, its business, assets,
liabilities, financial condition, results of operations and business prospects.
ARTICLE IX
FINANCIAL COVENANTS
Until all of the principal and interest on the Loans and fees hereunder
have been paid in full and the Commitments terminated, unless consent has been
obtained in the manner set forth in Section 13.11 hereof, the Borrower and its
Subsidiaries on a Consolidated basis will not:
SECTION 9.1. Leverage Ratio. As of the end of each fiscal quarter
during the applicable period set forth below, permit the ratio (the "Leverage
Ratio") of (a) Total Debt of the Borrower and its Subsidiaries as of such
fiscal quarter end to (b) Operating Cash Flow of the Borrower and its
Subsidiaries for the four fiscal quarter period ending on such fiscal quarter
end, to exceed the corresponding ratio set forth below:
Period Ratio
------ -----
Closing to 9/30/98 5.00 to 1.00
10/01/98 to 9/30/99 4.50 to 1.00
10/01/99 to 3/31/00 4.25 to 1.00
4/01/00 and thereafter 4.00 to 1.00
SECTION 9.2. Interest Coverage Ratio. As of the end of each fiscal
quarter during the applicable period set forth below, permit the ratio of (a)
Operating Cash Flow of the Borrower and its Subsidiaries for the four
fiscal quarter period ending on such fiscal quarter end to (b) Interest
Expense of the Borrower and its Subsidiaries for the four fiscal quarter
period ending on such fiscal quarter end, to be less than the corresponding
ratio set forth below:
Period Ratio
------ -----
Closing Date - 6/30/00 2.75 to 1.00
7/1/00 and thereafter 3.00 to 1.00
SECTION 9.3. Adjusted Fixed Charge Coverage Ratio. As of the end of
each fiscal quarter ending on and after December 31, 1997, permit the ratio of
(a) Adjusted Operating Cash Flow for the Borrower and its Subsidiaries for the
four fiscal quarter period ending on such fiscal quarter end to (b) Fixed
Charges of the Borrower and its Subsidiaries for the four fiscal quarter
period ending on such fiscal quarter end, to be less than 1.05 to 1.00.
ARTICLE X
NEGATIVE COVENANTS
Until all of the principal and interest on the Loans and all fees
hereunder have been paid in full and the Commitments terminated, unless
consent has been obtained in the manner set forth in Section 13.11 hereof, the
Borrower will not and will not permit any of its Subsidiaries to:
SECTION 10.1 Limitations on Debt. Create, incur, assume or suffer
to exist any Debt except:
(a) the Obligations;
(b) Debt incurred in connection with a Hedging Agreement (a copy of
which shall be delivered to the Administrative Agent by the Borrower promptly
after execution thereof);
(c) Debt existing on the Closing Date, as set forth on Schedule 6.1(s)
in the case of Debt in excess of $1,000,000, and any Debt secured by an asset
which asset is transferred to the Borrower or any Designated Subsidiary as
part of the Intergroup Asset Transfers and the renewal and refinancing (but
not the increase) of any of the foregoing;
(d) Debt of the Borrower and its Subsidiaries incurred in connection
with Capital Leases, purchase money Debt of the Borrower and its Subsidiaries
and other Debt in an aggregate amount not to exceed $15,000,000 on any date of
determination (which may be secured to the extent permitted by Sections
10.2(g) and 10.2(h));
(e) Debt of a Subsidiary payable solely to the Borrower and Debt of
the Borrower payable solely to a Subsidiary;
(f) the Mercom Credit Facility, at any time that Mercom is a
Subsidiary under this Agreement; and
(g) after the assumption thereof by the Borrower, Debt under the $15
Million Facility.
SECTION 10.2 Limitations on Liens. Create, incur, assume or suffer
to exist, any Lien on or with respect to any of its assets or properties
(including without limitation shares of capital stock or other ownership
interests), real or personal, whether now owned or hereafter acquired, except:
(a) Liens for taxes, assessments and other governmental charges or
levies (excluding any Lien imposed pursuant to any of the provisions of ERISA
or Environmental Laws) not yet due or as to which the period of grace (not to
exceed thirty (30) days), if any, related thereto has not expired;
(b) the claims of materialmen, mechanics, carriers, warehousemen,
processors or landlords for labor, materials, supplies or rentals incurred in
the ordinary course of business, (i) which are not overdue for a period of
more than thirty (30) days or (ii) which are being contested in good faith and
by appropriate proceedings;
(c) Liens consisting of deposits or pledges made in the ordinary
course of business in connection with, or to secure payment of, obligations
under workers' compensation, unemployment insurance or similar legislation;
(d) Liens constituting encumbrances in the nature of zoning
restrictions, easements and rights or restrictions of record on the use of
real property, which in the aggregate are not substantial in amount and which
do not, in any case, detract from the value of such property or impair the use
thereof in the ordinary conduct of business;
(e) Liens of the Administrative Agent for the benefit of the
Administrative Agent and the Lenders;
(f) Liens not otherwise permitted by this Section 10.2 and in
existence on the Closing Date and described on Schedule 10.2, any Liens with
respect to Debt permitted by Section 10.1(c) which Liens encumber assets
transferred to the Borrower or any of its Subsidiaries as part of the
Intergroup Asset Transfers and any Liens on any refinanced Debt permitted by
Section 10.1(c);
(g) (i) Liens evidencing the interest of the lessor under any Capital
Lease permitted by Section 10.1(d); and (ii) Liens securing purchase money
Debt permitted under Section 10.1(d); provided, that (A) such Liens shall be
within ninety (90) days after the acquisition of the related asset, (B) such
Liens do not at any time encumber any property other than the property
financed by such Debt, (C) the amount of Debt secured thereby is not increased
and (iv) the principal amount of Debt secured by any such Lien shall at no
time exceed seventy percent (70%) of the original purchase price of such
property at the time it was acquired;
(h) other Liens securing Debt otherwise permitted under Section 10.1,
the principal amount of which outstanding at any one time in the aggregate
does not exceed $500,000;
(i) Liens securing the Mercom Credit Facility, at any time that Mercom
is a Subsidiary under this Agreement; and
(j) after the assumption of such Debt by the Borrower, Liens securing
Debt under the $15 Million Facility.
SECTION 10.3 Limitations on Loans, Advances, Investments and
Acquisitions. Purchase, own, invest in or otherwise acquire, directly or
indirectly, any capital stock, interests in any partnership or joint venture
(including without limitation the creation or capitalization of any
Subsidiaries), evidence of Debt or other obligation or security, substantially
all or a portion of the business or assets of any other Person or any other
investment or interest whatsoever in any other Person, or make or permit to
exist, directly or indirectly, any loans, advances or extensions of credit to,
or any investment in cash or by delivery of property in, any Person, or enter
into, directly or indirectly, any commitment or option in respect of the
foregoing except:
(a) (i) investments existing on the Closing Date in Subsidiaries of
the Borrower existing on the Closing Date, (ii) the other existing loans,
advances and investments described on Schedule 10.3, (iii) investments after
the Closing Date in any Subsidiary (and after giving effect to the applicable
investment and any concurrent investment made by the Borrower and its
Subsidiaries pursuant to Section 10.3(e)) in an aggregate amount not to exceed
(A) $15,000,000 less (B) the aggregate amount of the investments made by the
Borrower and its Subsidiaries pursuant to Section 10.3(e); and (iv) the Mercom
Transaction and any acquisition of capital stock of Mercom by the Borrower;
provided, that the Borrower may pay a portion of the consideration in the
Mercom Acquisition in cash but such portion shall be treated as an acquisition
made pursuant to Section 10.3(d);
(b) investments in (i) marketable direct obligations issued or
unconditionally guaranteed by the United States of America or any agency
thereof maturing within 120 days from the date of acquisition thereof, (ii)
commercial paper maturing no more than 120 days from the date of creation
thereof and at the time of purchase having the highest rating obtainable from
either Standard & Poor's Ratings Services, a division of The McGraw-Hill
Companies, Inc. or Moody's Investors Service, Inc., (iii) certificates of
deposit maturing no more than 120 days from the date of creation thereof
issued by commercial banks incorporated under the laws of the United States of
America or any state thereof, or branches of any foreign bank registered and
licensed under the applicable laws of the United States of America or any
state thereof, each having combined capital, surplus and undivided profits of
not less than $500,000,000 and having a rating of "A" or better by a
nationally recognized rating agency, (iv) time deposits maturing no more than
30 days from the date of creation thereof with commercial banks or savings
banks or savings and loan associations each having membership either in the
FDIC or the deposits of which are insured by the FDIC and in amounts not
exceeding the maximum amounts of insurance thereunder, or (v) money market
mutual funds;
(c) investments by the Borrower or any of its Subsidiaries in the form
of acquisitions of all or substantially all of the business or line of
business (whether by the acquisition of capital stock, assets or any
combination of both) of any other Person using the capital stock of the
Borrower as consideration for such acquisition; provided that the Borrower or
any of its Subsidiaries may not use Disqualified Stock as consideration;
(d) investments not otherwise permitted by Section 10.3(c) by the
Borrower or any of its Subsidiaries in the form of acquisitions for cash or
property of all or substantially all of the business or a line of business
(whether by the acquisition of capital stock, assets or any combination
thereof) of any other Person, in an amount not to exceed $15,000,000
individually for any such acquisition and $25,000,000 in the aggregate during
the term of this Agreement; and
(e) the purchase of or other investment in the capital stock or other
equity interests of any other Person which investment shall not result in such
Person being a Subsidiary hereunder, in an aggregate amount (after giving
effect to such investment and any concurrent investment made by the Borrower
and its Subsidiaries pursuant to Section 10.3(a)(iii)) not to exceed (A)
$15,000,000 less (B) the aggregate amount of the investments made by the
Borrower and its Subsidiaries pursuant to Section 10.3(a)(iii).
SECTION 10.4 Limitations on Mergers and Liquidation. Merge,
consolidate or enter into any similar combination with any other Person or
liquidate, wind-up or dissolve itself (or suffer any liquidation or
dissolution) except:
(a) any Wholly-Owned Subsidiary of the Borrower may merge with any
other Wholly-Owned Subsidiary of the Borrower;
(b) any Wholly-Owned Subsidiary of the Borrower may merge into the
Person such Wholly-Owned Subsidiary of the Borrower was formed to acquire in
connection with an acquisition permitted by Section 10.3(c);
(c) any Wholly-Owned Subsidiary of the Borrower may wind-up into the
Borrower or any other Wholly-Owned Subsidiary of the Borrower;
(d) the Borrower may merge or consolidate with any Person (other than
Mercom); provided, that the Borrower is the surviving Person and the Borrower
is in compliance after such merger or consolidation with all terms and
covenants contained in this Agreement and the other Loan Documents; and
(e) the Borrower may merge or consolidate with Mercom; provided, that
if Mercom is the surviving Person, it will become the Borrower under this
Agreement by executing an Assumption Agreement substantially in the form of
Exhibit J.
SECTION 10.5 Limitations on Sale of Assets. Convey, sell, lease,
assign, transfer or otherwise dispose of any of its property, business or
assets (including, without limitation, the sale of any receivables and
leasehold interests and any sale-leaseback or similar transaction), whether
now owned or hereafter acquired except:
(a) the sale of inventory in the ordinary course of business;
(b) the sale of assets no longer used or usable in the business of the
Borrower or any of its Subsidiaries;
(c) the transfer of assets to the Borrower or any other Wholly-Owned
Subsidiary pursuant to Section 10.4(c);
(d) the sale or discount of accounts receivable arising in the
ordinary course of business in connection with the compromise or collection
thereof;
(e) the sale of assets that for the four fiscal quarters ending
immediately prior to such sale generated less than ten percent (10%) of the
Operating Cash Flow of the Borrower and its Subsidiaries for such four fiscal
quarter period; provided, that during the term of the Credit Facility,
aggregate sales of assets under this subsection may not exceed twenty percent
(20%) of Operating Cash Flow accumulated from the Closing Date to the date of
the most recent sale of assets without the written consent of the Required
Lenders; and provided further that the Borrower and its Subsidiaries will
comply with Section 2.3(c) with respect to the proceeds of any sale under this
Section 10.5(e); and
(f) the Intergroup Asset Transfers.
SECTION 10.6 Limitations on Dividends and Distributions. Declare
or pay any dividends upon any of its capital stock; purchase, redeem, retire
or otherwise acquire, directly or indirectly, any shares of its capital stock,
or make any distribution of cash, property or assets among the holders of
shares of its capital stock, or make any change in its capital structure;
provided that:
(a) the Borrower may pay dividends in shares of its own capital stock;
(b) any Subsidiary may pay cash dividends to the Borrower;
(c) prior to the Internal Michigan Cable Distribution, the Borrower
may pay a cash dividend to Cable Systems for purposes of funding payment by
Cable Systems of a dividend to C-TEC to provide funds for C-TEC to repay in
full and terminate the $15 Million Facility (or to reimburse C-TEC for making
such payment and terminating such facility), and after the Internal Michigan
Cable Distribution but prior to the assumption of the $15 Million Facility by
the Borrower, the Borrower may pay a cash dividend to C-TEC to provide funds
for C-TEC to repay in full and terminate the $15 Million Facility (or to
reimburse C-TEC for making such payment and terminating such facility); and
(d) the Borrower may pay cash dividends with respect to its capital
stock in any fiscal quarter so long as the Borrower and its Subsidiaries,
after giving effect to such cash dividend and any other cash dividends made
during such fiscal quarter, would be in compliance with Section 9.3 as of the
immediately preceding fiscal quarter end if all such cash dividends had been
made on the last day of such fiscal quarter.
SECTION 10.7 Limitations on Exchange and Issuance of Capital Stock.
Issue, sell or otherwise dispose of any class or series of capital stock of it
that, by its terms or by the terms of any security into which it is
convertible or exchangeable, is, or upon the happening of an event or passage
of time would be, (a) convertible or exchangeable into Debt or (b) required to
be redeemed or repurchased, including at the option of the holder, in whole or
in part, or has, or upon the happening of an event or passage of time would
have, a redemption or similar payment due (other than in any case by the
giving of an optional notice of redemption by the issuer thereof).
SECTION 10.8 Transactions with Affiliates. Directly or indirectly:
(a) make any loan or advance to, or purchase or assume any note or other
obligation to or from, any of its officers, directors, shareholders or other
Affiliates, or to or from any member of the immediate family of any of its
officers, directors, shareholders or other Affiliates, or subcontract any
operations to any of its Affiliates, or (b) enter into, or be a party to, any
transaction with any of its Affiliates (an "Affiliate Transaction"), except
pursuant to the reasonable requirements of its business and upon fair and
reasonable terms that are no less favorable to it than it would obtain in a
comparable arm's length transaction with a Person not its Affiliate; provided,
that the foregoing provisions of this Section shall not prohibit: (i)
agreements with or for the benefit of employees of the Borrower or any of its
Subsidiaries regarding bridge home loans and other loans necessitated by the
relocation of such employee, or regarding short-term hardship advances or
routine advances for business expenses in the ordinary course of business;
(ii) any transaction solely among the Borrower and its Wholly Owned
Subsidiaries; (iii) the Borrower making any dividend or distribution permitted
by Section 10.6; (iv) any borrowing or payment of principal or interest on any
Debt permitted by Section 10.1; (v) any Affiliate Transaction pursuant to
agreements or other arrangements in effect on the date hereof or otherwise
consistent with past practice (and any renewal, replacement or modification of
any such agreement or arrangement on terms that are not materially more
adverse to the Borrower in question); (vi) the consummation of the
Reorganization; (vii) any Affiliate Transaction entered into in connection
with the Reorganization and described in the information statement, included
in the related registration statement on SEC Form 10, made available to the
shareholders of C-TEC in connection with the distribution to them of shares of
stock of the Borrower (and any renewal, replacement or modification of the
terms of any such Affiliate Transaction on terms that are not materially more
adverse to the Borrower); or (vii) any Affiliate Transaction in which the
amount involved does not exceed $100,000; provided further, that in any fiscal
year the aggregate amount paid by the Borrower and its Subsidiaries to C-TEC,
to other Subsidiaries of C-TEC, to Cable Systems Holdings and to other
Subsidiaries of Cable Systems Holdings for the provision of administrative and
management services of substantially the same nature, scope and timing as
those provided prior to the date of the Distributions shall not exceed six
percent (6%) of the Consolidated gross revenues of the Borrower and its
Subsidiaries for such Fiscal Year.
SECTION 10.9 Certain Accounting Changes. Change its Fiscal Year
end, or make any change in its accounting practices except as required or
permitted by GAAP and in accordance with Section 13.9.
SECTION 10.10 Restrictive Agreements. Other than the Mercom Credit
Facility and the $15 Million Facility, enter into any Debt which contains any
negative pledge on assets or which restricts, limits or otherwise encumbers
(a) its ability to incur Liens on or with respect to any of its assets or
properties other than the assets or properties securing such Debt or (b) the
ability of any Subsidiary to make any payment to the Borrower (in the form of
dividends, intercompany advances or otherwise); provided, that any Debt
permitted to be refinanced pursuant to Section 10.1(c) may, after any such
refinancing, include terms that are not materially more restrictive than the
terms in existence on the Closing Date with respect to such Debt.
ARTICLE XI
DEFAULT AND REMEDIES
SECTION 11.1 Events of Default. Each of the following shall
constitute an Event of Default, whatever the reason for such event and whether
it shall be voluntary or involuntary or be effected by operation of law or
pursuant to any judgment or order of any court or any order, rule or
regulation of any Governmental Authority or otherwise:
(a) Default in Payment of Principal of Loans. The Borrower shall
default in any payment of principal of any Loan or Note when and as due
(whether at maturity, by reason of acceleration or otherwise).
(b) Other Payment Default. The Borrower shall default in the payment
when and as due (whether at maturity, by reason of acceleration or otherwise)
of interest on any Loan or Note or any fees hereunder, and such default shall
continue unremedied for five (5) Business Days.
(c) Misrepresentation. Any representation or warranty made or deemed
to be made by the Borrower or any of its Subsidiaries under this Agreement,
any Loan Document or any amendment hereto or thereto, shall at any time prove
to have been incorrect or misleading in any material respect when made or
deemed made.
(d) Default in Performance of Certain Covenants. The Borrower shall
default in the performance or observance of any covenant or agreement
contained in Section 7.5(e) or Articles IX or X (other than Sections 10.8 and
10.9) of this Agreement.
(e) Default in Performance of Other Covenants and Conditions. The
Borrower or any of its Subsidiaries shall default in the performance or
observance of any term, covenant, condition or agreement contained in this
Agreement (other than as specifically provided for in this Section 11.1) or
any other Loan Document and such default shall continue for a period of thirty
(30) days after written notice thereof has been given to the Borrower by the
Administrative Agent.
(f) Hedging Agreement. Any termination payment shall be due by the
Borrower under any Hedging Agreement and such amount is not paid within five
(5) Business Days of the due date thereof.
(g) Debt Cross-Default. The Borrower or any of its Subsidiaries shall
(i) default in the payment of any Debt (other than the Notes) the aggregate
outstanding amount of which Debt is in excess of $1,000,000 beyond the period
of grace if any, provided in the instrument or agreement under which such Debt
was created, or (ii) default in the observance or performance of any other
agreement or condition relating to any Debt (other than the Notes) the
aggregate outstanding amount of which Debt is in excess of $1,000,000 or
contained in any instrument or agreement evidencing, securing or relating
thereto or any other event shall occur or condition exist, the effect of which
default or other event or condition is to cause, or to permit the holder or
holders of such Debt (or a trustee or agent on behalf of such holder or
holders) to cause, with the giving of notice if required, any such Debt to
become due prior to its stated maturity (any applicable grace period having
expired).
(h) Change in Control. (i) Prior to the Spinoff Date, (A) PKS shall
cease to hold, either directly or indirectly through one or more PKS Entities,
(1) C-TEC Shares constituting at least thirty percent (30%) of the number of
the Pro Forma Outstanding C-TEC Shares or (2) C-TEC Voting Shares constituting
at least thirty percent (30%) of the voting power represented by the Pro Forma
Outstanding C-TEC Voting Shares, (B) any person (other than PKS or a PKS
Entity) or group of persons (within the meaning of Section 13(d) (other than
any group comprised principally of PKS and PKS Entities)) shall have acquired
in one or more series of transactions beneficial ownership (within the meaning
of Section 13(d)) of (1) more than fifty-one percent (51%) of the outstanding
C-TEC Shares or (2) C-TEC Voting Shares constituting more than fifty-one
percent (51%) of the voting power represented by the outstanding C-TEC Voting
Shares or (C) C-TEC shall cease to hold, directly or indirectly, all of the
outstanding shares of capital stock of the Borrower; or
(ii) After the Spinoff Date, (A) PKS shall cease to hold, either
directly or indirectly through one or more PKS Entities, (1) CCSM Shares
constituting at least thirty percent (30%) of the number of the Pro Forma
Outstanding CCSM Shares or (2) CCSM Voting Shares constituting at least thirty
percent (30%) of the voting power represented by the Pro Forma Outstanding
CCSM Voting Shares or (B) any person (other than PKS or a PKS Entity) or group
of persons (within the meaning of Section 13(d) (other than any group
comprised principally of PKS and PKS Entities)) shall have acquired in one or
more series of transactions beneficial ownership (within the meaning of
Section 13(d)) of (1) more than fifty-one percent (51%) of the outstanding
CCSM Shares or (2) CCSM Voting Shares constituting more than fifty-one percent
(51%) of the voting power represented by the outstanding CCSM Voting Shares.
(iii) As used in Sections 11.1(h)(i) and 11.1(h)(ii):
(A) "comprised principally" means, with respect to determining
whether any group of persons (within the meaning of Section 13(d)) is
comprised principally of PKS and PKS Entities, that PKS and PKS Entities
that are members of such group beneficially own (within the meaning of
Section 13(d)) in the aggregate at least 51% of the relevant shares
beneficially owned (within the meaning of Section 13(d)) by all members
of such group (calculated in each case, however, without giving effect
to any provisions of Section 13(d) that attribute to each member of such
group ownership of such shares beneficially owned by other members of
such group on account of having shared voting power);
(B) "CCSM Shares" means shares of common stock (of any class, if
there are two or more classes of common stock) of the Borrower (or, if
the transaction described in Section 8.10(b) occurs, of the Parent);
(C) "CCSM Voting Shares" means any CCSM Shares and any other shares
of capital stock of the Borrower (or the Parent, as the case may be)
having ordinary power to vote for the election of directors of the
Borrower (or the Parent, as the case may be);
(D) "C-TEC Shares" means shares of C-TEC Common Stock, par value
$1.00 per share, and shares of C-TEC Class B Common Stock, par value
$1.00 per share;
(E) "C-TEC Voting Shares" means any C-TEC Shares and any other
shares of capital stock of C-TEC having ordinary power to vote for the
election of directors of C-TEC.
(F) "PKS" means Peter Kiewit Sons' Inc. and its successors;
(G) "PKS Entity" means (i) any corporation of which securities
having ordinary voting power to elect a majority of the board of
directors of such corporation are held of record or through a nominee by
PKS or another PKS Entity (or some combination thereof), (ii) any
partnership if at least a majority of the value of its general
partnership interests are held of record or through a nominee by PKS or
another PKS Entity (or some combination thereof) and (iii) any limited
liability or similar company if securities or other equity interests
having ordinary voting power to elect or appoint a majority of the
managing members of such company are held of record or through a nominee
by PKS or another PKS Entity (or some combination thereof);
(H) "Pro Forma Outstanding" means as of any date of determination:
(1) with reference to C-TEC Shares and C-TEC Voting Shares,
(a) the number of such Shares outstanding on such date less (b) the
number of Shares issued after the date hereof (i) for cash, (ii) in
consideration for the acquisition of any investment (including by way of
merger) or property or the provision of services, (iii) upon the
exercise of any warrant, option, convertible security or similar
instrument issued after the date hereof for any consideration described
in the foregoing clauses (i) and (ii) or (iv) in connection with the
establishment or operation of any employee stock option plan or similar
employee benefit arrangement hereafter adopted by C-TEC or any of its
Wholly-Owned Subsidiaries; and
(2) with reference to CCSM Shares and CCSM Voting Shares, (a)
the number of such Shares outstanding on such date less (b) the number
of Shares issued after the Spinoff Date (i) for cash, (ii) in
consideration for the acquisition of any investment (including by way of
merger) or property or the provision of services, (iii) upon the
exercise of any warrant, option, convertible security or similar
instrument issued after the Spinoff Date for any consideration described
in the foregoing clauses (i) and (ii) or (iv) in connection with the
establishment or operation of any employee stock option plan or similar
employee benefit arrangement adopted after the Spinoff Date by the
Borrower or any of its Wholly-Owned Subsidiaries;
(I) "Section 13(d)" means Section 13(d) of the Securities Exchange
Act of 1934, as amended, and the rules and regulations relating to such
section promulgated by the Securities and Exchange Commission; and
(J) "Spinoff Date" means the date during the consummation of the
Reorganization when the Borrower ceases to be, directly or indirectly, a
Wholly-Owned Subsidiary of C-TEC.
(i) Voluntary Bankruptcy Proceeding. The Borrower or any of its
Subsidiaries shall (i) commence a voluntary case under the federal bankruptcy
laws (as now or hereafter in effect), (ii) file a petition seeking to take
advantage of any other laws, domestic or foreign, relating to bankruptcy,
insolvency, reorganization, winding up or composition for adjustment of debts,
(iii) consent to or fail to contest in a timely and appropriate manner any
petition filed against it in an involuntary case under such bankruptcy laws or
other laws, (iv) apply for or consent to, or fail to contest in a timely and
appropriate manner, the appointment of, or the taking of possession by, a
receiver, custodian, trustee, or liquidator of itself or of a substantial part
of its property, domestic or foreign, (v) admit in writing its inability to
pay its debts as they become due, (vi) make a general assignment for the
benefit of creditors, or (vii) take any corporate action for the purpose of
authorizing any of the foregoing.
(j) Involuntary Bankruptcy Proceeding. A case or other proceeding
shall be commenced against the Borrower or any of its Subsidiaries in any
court of competent jurisdiction seeking (i) relief under the federal
bankruptcy laws (as now or hereafter in effect) or under any other laws,
domestic or foreign, relating to bankruptcy, insolvency, reorganization,
winding up or adjustment of debts, or (ii) the appointment of a trustee,
receiver, custodian, liquidator or the like for the Borrower or any of its
Subsidiaries or for all or any substantial part of their respective assets,
domestic or foreign, and such case or proceeding shall continue undismissed
or unstayed for a period of sixty (60) consecutive days, or an order granting
the relief requested in such case or proceeding (including, but not limited
to, an order for relief under such federal bankruptcy laws) shall be entered.
(k) Failure of Agreements. Any provision of this Agreement or of any
other Loan Document with respect to any material (in the reasonable judgement
thereof) rights and remedies of the Administrative Agent and Lenders hereunder
or thereunder shall for any reason cease to be valid and binding on the
Borrower or any of its Subsidiaries party thereto or any such Person shall so
state in writing, or this Agreement or any other Security Document shall for
any reason cease to create a valid and perfected first priority Lien on, or
security interest in, any of the collateral purported to be covered thereby,
in each case other than in accordance with the express terms hereof or thereof.
(l) Termination Event. The occurrence of any of the following events:
(i) any Borrower or any ERISA Affiliate fails to make full payment when due of
all amounts which, under the provisions of any Pension Plan or Section 412 of
the Code, the Borrower or any ERISA Affiliate is required to pay as
contributions thereto, (ii) an accumulated funding deficiency in excess of
$1,000,000 occurs or exists, whether or not waived, with respect to any
Pension Plan, (iii) a Termination Event or (iv) any Borrower or any ERISA
Affiliate as employers under one or more Multiemployer Plan makes a complete
or partial withdrawal from any such Multiemployer Plan and the plan sponsor of
such Multiemployer Plans notifies such withdrawing employer that such employer
has incurred a withdrawal liability requiring payments in an amount exceeding
$1,000,000.
(m) Judgment. A judgment or order for the payment of money which
causes the aggregate amount of all such judgments to exceed $500,000 in any
Fiscal Year shall be entered against the Borrower or any of its Subsidiaries
by any court and such judgment or order shall continue undischarged or
unstayed for a period of thirty (30) days.
(n) Related Financings. Either the C-TEC Credit Facility or the Cable
Systems Credit Facility does not close within sixty (60) days of the Closing
Date.
SECTION 11.2 Remedies. Upon the occurrence of an Event of Default,
with the consent of the Required Lenders, the Administrative Agent may, or
upon the request of the Required Lenders, the Administrative Agent shall, by
notice to the Borrower:
(a) Acceleration; Termination of Facilities. Declare the principal of
and interest on the Loans and the Notes at the time outstanding, and all other
amounts owed to the Lenders and to the Administrative Agent under this
Agreement or any of the other Loan Documents and all other Obligations, to be
forthwith due and payable, whereupon the same shall immediately become due and
payable without presentment, demand, protest or other notice of any kind, all
of which are expressly waived, anything in this Agreement or the other Loan
Documents to the contrary notwithstanding, and terminate the Credit Facility
and any right of the Borrower to request borrowings thereunder; provided, that
upon the occurrence of an Event of Default specified in Section 11.1(i) or
(j), the Credit Facility shall be automatically terminated and all Obligations
shall automatically become due and payable.
(b) Rights of Collection. Exercise on behalf of the Lenders all of
its other rights and remedies under this Agreement, the other Loan Documents
and Applicable Law, in order to satisfy all of the Borrower's Obligations.
SECTION 11.3 Rights and Remedies Cumulative; Non-Waiver; etc. The
enumeration of the rights and remedies of the Administrative Agent and the
Lenders set forth in this Agreement is not intended to be exhaustive and the
exercise by the Administrative Agent and the Lenders of any right or remedy
shall not preclude the exercise of any other rights or remedies, all of which
shall be cumulative, and shall be in addition to any other right or remedy
given hereunder or under the Loan Documents or that may now or hereafter exist
in law or in equity or by suit or otherwise. No delay or failure to take
action on the part of the Administrative Agent or any Lender in exercising any
right, power or privilege shall operate as a waiver thereof, nor shall any
single or partial exercise of any such right, power or privilege preclude
other or further exercise thereof or the exercise of any other right, power or
privilege or shall be construed to be a waiver of any Event of Default. No
course of dealing between the Borrower, the Administrative Agent and the
Lenders or their respective agents or employees shall be effective to change,
modify or discharge any provision of this Agreement or any of the other Loan
Documents or to constitute a waiver of any Event of Default.
ARTICLE XII
THE ADMINISTRATIVE AGENT
SECTION 12.1 Appointment. Each of the Lenders hereby irrevocably
designates and appoints First Union as Administrative Agent of such Lender
under this Agreement and the other Loan Documents and each such Lender
irrevocably authorizes First Union as Administrative Agent for such Lender, to
take such action on its behalf under the provisions of this Agreement and the
other Loan Documents and to exercise such powers and perform such duties as
are expressly delegated to the Administrative Agent by the terms of this
Agreement and such other Loan Documents, together with such other powers as
are reasonably incidental thereto. Notwithstanding any provision to the
contrary elsewhere in this Agreement or such other Loan Documents, the
Administrative Agent shall not have any duties or responsibilities, except
those expressly set forth herein and therein, or any fiduciary relationship
with any Lender, and no implied covenants, functions, responsibilities,
duties, obligations or liabilities shall be read into this Agreement or the
other Loan Documents or otherwise exist against the Administrative Agent.
SECTION 12.2 Delegation of Duties. The Administrative Agent may
execute any of its respective duties under this Agreement and the other Loan
Documents by or through agents or attorneys-in-fact and shall be entitled to
advice of counsel concerning all matters pertaining to such duties. The
Administrative Agent shall not be responsible for the negligence or misconduct
of any agents or attorneys-in-fact selected by the Administrative Agent with
reasonable care.
SECTION 12.3 Exculpatory Provisions. Neither the Administrative
Agent nor any of its officers, directors, employees, agents,
attorneys-in-fact, Subsidiaries or Affiliates shall be (a) liable for any
action lawfully taken or omitted to be taken by it or such Person under or in
connection with this Agreement or the other Loan Documents (except for actions
occasioned solely by its or such Person's own gross negligence or willful
misconduct), or (b) responsible in any manner to any of the Lenders for any
recitals, statements, representations or warranties made by the Borrower or
any of its Subsidiaries or any officer thereof contained in this Agreement or
the other Loan Documents or in any certificate, report, statement or other
document referred to or provided for in, or received by the Administrative
Agent under or in connection with, this Agreement or the other Loan Documents
or for the value, validity, effectiveness, genuineness, enforceability or
sufficiency of this Agreement or the other Loan Documents or for any failure
of the Borrower or any of its Subsidiaries to perform its obligations
hereunder or thereunder. The Administrative Agent shall not be under any
obligation to any Lender to ascertain or to inquire as to the observance or
performance of any of the agreements contained in, or conditions of, this
Agreement, or to inspect the properties, books or records of the Borrower or
any of its Subsidiaries.
SECTION 12.4 Reliance by the Administrative Agent. The
Administrative Agent shall be entitled to rely, and shall be fully protected
in relying, upon any note, writing, resolution, notice, consent, certificate,
affidavit, letter, cablegram, telegram, telecopy, telex or teletype message,
statement, order or other document or conversation believed by it to be
genuine and correct and to have been signed, sent or made by the proper Person
or Persons and upon advice and statements of legal counsel (including, without
limitation, counsel to the Borrower), independent accountants and other
experts selected by the Administrative Agent. The Administrative Agent may
deem and treat the payee of any Note as the owner thereof for all purposes
unless such Note shall have been transferred in accordance with Section 13.10
hereof. The Administrative Agent shall be fully justified in failing or
refusing to take any action under this Agreement and the other Loan Documents
unless it shall first receive such advice or concurrence of the Required
Lenders (or, when expressly required hereby or by the relevant other Loan
Document, all the Lenders) as it deems appropriate or it shall first be
indemnified to its satisfaction by the Lenders against any and all liability
and expense which may be incurred by it by reason of taking or continuing to
take any such action except for its own gross negligence or willful
misconduct. The Administrative Agent shall in all cases be fully protected
in acting, or in refraining from acting, under this Agreement and the Notes in
accordance with a request of the Required Lenders (or, when expressly required
hereby, all the Lenders), and such request and any action taken or failure to
act pursuant thereto shall be binding upon all the Lenders and all future
holders of the Notes.
SECTION 12.5 Notice of Default. The Administrative Agent shall not
be deemed to have knowledge or notice of the occurrence of any Default or
Event of Default hereunder unless it has received notice from a Lender or the
Borrower referring to this Agreement, describing such Default or Event of
Default and stating that such notice is a "notice of default". In the event
that the Administrative Agent receives such a notice, it shall promptly give
notice thereof to the Lenders. The Administrative Agent shall take such
action with respect to such Default or Event of Default as shall be reasonably
directed by the Required Lenders; provided that unless and until the
Administrative Agent shall have received such directions, the Administrative
Agent may (but shall not be obligated to) take such action, or refrain from
taking such action, with respect to such Default or Event of Default as it
shall deem advisable in the best interests of the Lenders.
SECTION 12.6 Non-Reliance on the Administrative Agent and Other
Lenders. Each Lender expressly acknowledges that neither the Administrative
Agent nor any of its respective officers, directors, employees, agents,
attorneys-in-fact, Subsidiaries or Affiliates has made any representations or
warranties to it and that no act by the Administrative Agent hereinafter
taken, including any review of the affairs of the Borrower or any of its
Subsidiaries, shall be deemed to constitute any representation or warranty by
the Administrative Agent to any Lender. Each Lender represents to the
Administrative Agent that it has, independently and without reliance upon the
Administrative Agent or any other Lender, and based on such documents and
information as it has deemed appropriate, made its own appraisal of and
investigation into the business, operations, property, financial and other
condition and creditworthiness of the Borrower and its Subsidiaries and made
its own decision to make its Loans hereunder and enter into this Agreement.
Each Lender also represents that it will, independently and without reliance
upon the Administrative Agent or any other Lender, and based on such documents
and information as it shall deem appropriate at the time, continue to make its
own credit analysis, appraisals and decisions in taking or not taking action
under this Agreement and the other Loan Documents, and to make such
investigation as it deems necessary to inform itself as to the business,
operations, property, financial and other condition and creditworthiness of the
Borrower and its Subsidiaries. Except for notices, reports and other
documents expressly required to be furnished to the Lenders by the
Administrative Agent hereunder or by the other Loan Documents, the
Administrative Agent shall not have any duty or responsibility to provide any
Lender with any credit or other information concerning the business,
operations, property, financial and other condition or creditworthiness of the
Borrower or any of its Subsidiaries which may come into the possession of the
Administrative Agent or any of its respective officers, directors, employees,
agents, attorneys-in-fact, Subsidiaries or Affiliates.
SECTION 12.7 Indemnification. The Lenders agree to indemnify the
Administrative Agent in its capacity as such and (to the extent not reimbursed
by the Borrower and without limiting the obligation of the Borrower to do so),
ratably according to the respective amounts of their Commitment Percentages,
from and against any and all liabilities, obligations, losses, damages,
penalties, actions, judgments, suits, costs, expenses or disbursements of any
kind whatsoever which may at any time (including, without limitation, at any
time following the payment of the Notes or any Reimbursement Obligation) be
imposed on, incurred by or asserted against the Administrative Agent in any
way relating to or arising out of this Agreement or the other Loan Documents,
or any documents contemplated by or referred to herein or therein or the
transactions contemplated hereby or thereby or any action taken or omitted by
the Administrative Agent under or in connection with any of the foregoing;
provided that no Lender shall be liable for the payment of any portion of such
liabilities, obligations, losses, damages, penalties, actions, judgments,
suits, costs, expenses or disbursements resulting solely from the
Administrative Agent's bad faith, gross negligence or willful misconduct. The
agreements in this Section 12.7 shall survive the payment of the Notes, any
Reimbursement Obligation and all other amounts payable hereunder and the
termination of this Agreement.
SECTION 12.8 The Administrative Agent in Its Individual Capacity.
The Administrative Agent and its respective Subsidiaries and Affiliates may
make loans to, accept deposits from and generally engage in any kind of
business with the Borrower as though the Administrative Agent were not an
Administrative Agent hereunder. With respect to any Loans made or renewed by
it and any Note issued to it and with respect to any issued by it or
participated in by it, the Administrative Agent shall have the same rights and
powers under this Agreement and the other Loan Documents as any Lender and may
exercise the same as though it were not an Administrative Agent, and the terms
"Lender" and "Lenders" shall include the Administrative Agent in its
individual capacity.
SECTION 12.9 Resignation of the Administrative Agent; Successor
Administrative Agent. Subject to the appointment and acceptance of a
successor as provided below, the Administrative Agent may resign at any time
by giving notice thereof to the Lenders and the Borrower. Upon any such
resignation, the Required Lenders shall have the right to appoint a successor
Administrative Agent, which successor shall have minimum capital and surplus
of at least $500,000,000. If no successor Administrative Agent shall have
been so appointed by the Required Lenders and shall have accepted such
appointment within thirty (30) days after the Administrative Agent's giving of
notice of resignation, then the Administrative Agent may, on behalf of the
Lenders, appoint a successor Administrative Agent, which successor shall have
minimum capital and surplus of at least $500,000,000. Upon the acceptance of
any appointment as Administrative Agent hereunder by a successor
Administrative Agent, such successor Administrative Agent shall thereupon
succeed to and become vested with all rights, powers, privileges and duties of
the retiring Administrative Agent, and the retiring Administrative Agent shall
be discharged from its duties and obligations hereunder. After any retiring
Administrative Agent's resignation hereunder as Administrative Agent, the
provisions of this Section 12.9 shall continue in effect for its benefit in
respect of any actions taken or omitted to be taken by it while it was acting
as Administrative Agent.
ARTICLE XIII
MISCELLANEOUS
SECTION 13.1 Notices.
(a) Method of Communication. Except as otherwise provided in this
Agreement, all notices and communications hereunder shall be in writing, or by
telephone subsequently confirmed in writing. Any notice shall be effective if
delivered by hand delivery or sent via telecopy, recognized overnight courier
service or certified mail, return receipt requested, and shall be presumed to
be received by a party hereto (i) on the date of delivery if delivered by hand
or sent by telecopy, (ii) on the next Business Day if sent by recognized
overnight courier service and (iii) on the third Business Day following the
date sent by certified mail, return receipt requested. A telephonic notice to
the Administrative Agent as understood by the Administrative Agent will be
deemed to be the controlling and proper notice in the event of a discrepancy
with or failure to receive a confirming written notice.
(b) Addresses for Notices. Notices to any party shall be sent to it
at the following addresses, or any other address as to which all the other
parties are notified in writing.
If to the Borrower: C-TEC Corporation
105 Carnegie Center
Princeton, NJ 08540
Attention: Tim Stoklosa
Telephone No.: 609-734-3860
Telecopy No.: 609-734-3875
With copies to: Davis Polk & Wardwell
450 Lexington Avenue
New York, NY 10017
Attention: John Fouhey, Esq.
Telephone No.: 212-450-4000
Telecopy No.: 212-450-4800
If to First Union as First Union National Bank
Administrative Agent: One First Union Center, TW-10
301 South College Street
Charlotte, North Carolina 28288-0608
Attention: Syndication Agency Services
Telephone No.: (704) 383-0281
Telecopy No.: (704) 383-0288
If to any Lender: To the Address set forth on Schedule 1.1(a) hereto
(c) Administrative Agent's Office. The Administrative Agent hereby
designates its office located at the address set forth above, or any
subsequent office which shall have been specified for such purpose by written
notice to the Borrower and Lenders, as the Administrative Agent's Office
referred to herein, to which payments due are to be made and at which Loans
will be disbursed.
SECTION 13.2 Expenses; Indemnity. The Borrower will (a) pay all
reasonable out-of-pocket expenses of the Administrative Agent in connection
with: (i) the preparation, execution and delivery of this Agreement and each
other Loan Document, whenever the same shall be executed and delivered,
including without limitation all out-of-pocket syndication and due diligence
expenses and reasonable fees and disbursements of counsel (not to exceed
$60,000) for the Administrative Agent, and (ii) the preparation, execution and
delivery of any waiver, amendment or consent by the Administrative Agent or
the Lenders relating to this Agreement or any other Loan Document, including
without limitation reasonable fees and disbursements of counsel for the
Administrative Agent, (b) at any time when a Default has occurred and is
continuing (or at any time thereafter with respect to any of the following
undertaken during the existence of a Default), pay all reasonable out-of
pocket expenses of the Administrative Agent (and of the Lenders, but only if
such Default is an Event of Default) in connection with the enforcement of any
rights and remedies of the Administrative Agent and Lenders under the Credit
Facility, including consulting with appraisers, accountants, engineers,
attorneys and other Persons concerning the nature, scope or value of any right
or remedy of the Administrative Agent or any Lender hereunder or under any
other Loan Document or any factual matters in connection therewith, which
expenses shall include without limitation the reasonable fees and
disbursements of such Persons, and (c) defend, indemnify and hold harmless the
Administrative Agent and the Lenders, and their respective parents,
Subsidiaries, Affiliates, employees, agents, officers and directors, from and
against any losses, penalties, fines, liabilities, settlements, damages, costs
and expenses, suffered by any such Person in connection with any claim,
investigation, litigation or other proceeding (whether or not the
Administrative Agent or any Lender is a party thereto) and the prosecution and
defense thereof, arising out of or in any way connected with the Agreement,
any other Loan Document or the Loans, including without limitation reasonable
attorney's and consultant's fees, except to the extent that any of the
foregoing directly result from the gross negligence or willful misconduct of
the party seeking indemnification therefor.
SECTION 13.3 Set-off. In addition to any rights now or hereafter
granted under Applicable Law and not by way of limitation of any such rights,
upon and after the occurrence of any Event of Default and during the
continuance thereof, the Lenders and any assignee or participant of a Lender
in accordance with Section 13.10 are hereby authorized by the Borrower at any
time or from time to time, without notice to the Borrower or to any other
Person, any such notice being hereby expressly waived, to set off and to
appropriate and to apply any and all deposits (general or special, time or
demand, including, but not limited to, indebtedness evidenced by certificates
of deposit, whether matured or unmatured) and any other indebtedness at any
time held or owing by the Lenders, or any such assignee or participant to or
for the credit or the account of the Borrower against and on account of the
Obligations irrespective of whether or not (a) the Lenders shall have made any
demand under this Agreement or any of the other Loan Documents or (b) the
Administrative Agent shall have declared any or all of the Obligations to be
due and payable as permitted by Section 11.2 and although such Obligations
shall be contingent or unmatured.
SECTION 13.4 Governing Law. This Agreement, the Notes and the
other Loan Documents, unless otherwise expressly set forth therein, shall be
governed by, construed and enforced in accordance with the laws of the State
of North Carolina, without reference to the conflicts or choice of law
principles thereof.
SECTION 13.5 Consent to Jurisdiction. The Borrower hereby
irrevocably consents to the personal jurisdiction of the state and federal
courts located in Mecklenburg County, North Carolina, in any action, claim or
other proceeding arising out of any dispute in connection with this Agreement,
the Notes and the other Loan Documents, any rights or obligations hereunder
or thereunder, or the performance of such rights and obligations. The
Borrower hereby irrevocably consents to the service of a summons and complaint
and other process in any action, claim or proceeding brought by the
Administrative Agent or any Lender in connection with this Agreement, the
Notes or the other Loan Documents, any rights or obligations hereunder or
thereunder, or the performance of such rights and obligations, on behalf of
itself or its property, in the manner specified in Section 13.1. Nothing in
this Section 13.5 shall affect the right of the Administrative Agent or any
Lender to serve legal process in any other manner permitted by Applicable Law
or affect the right of the Administrative Agent or any Lender to bring any
action or proceeding against the Borrower or its properties in the courts of
any other jurisdictions.
SECTION 13.6 Binding Arbitration; Waiver of Jury Trial.
(a) Binding Arbitration. Upon demand of any party, whether made
before or after institution of any judicial proceeding, any dispute, claim or
controversy arising out of, connected with or relating to the Notes or any
other Loan Documents ("Disputes"), between or among parties to the Notes or
any other Loan Document shall be resolved by binding arbitration as provided
herein. Institution of a judicial proceeding by a party does not waive the
right of that party to demand arbitration hereunder. Disputes may include,
without limitation, tort claims, counterclaims, claims brought as class
actions, claims arising from Loan Documents executed in the future, or claims
concerning any aspect of the past, present or future relationships arising out
of or connected with the Loan Documents. Arbitration shall be conducted under
and governed by the Commercial Financial Disputes Arbitration Rules (the
"Arbitration Rules") of the American Arbitration Association and Title 9 of
the U.S. Code. All arbitration hearings shall be conducted in Charlotte,
North Carolina. The expedited procedures set forth in Rule 51, et seq. of the
Arbitration Rules shall be applicable to claims of less than $500,000. All
applicable statutes of limitation shall apply to any Dispute. A judgment upon
the award may be entered in any court having jurisdiction. The panel from
which all arbitrators are selected shall be comprised of licensed attorneys.
The single arbitrator selected for expedited procedure shall be a retired
judge from the highest court of general jurisdiction, state or federal, of the
state where the hearing will be conducted. Notwithstanding the foregoing,
this paragraph shall not apply to any Hedging Agreement that is a Loan
Document.
(b) Jury Trial. TO THE EXTENT PERMITTED BY LAW, THE ADMINISTRATIVE
AGENT, EACH LENDER AND THE BORROWER HEREBY IRREVOCABLY WAIVE THEIR RESPECTIVE
RIGHTS TO A JURY TRIAL WITH RESPECT TO ANY ACTION, CLAIM OR OTHER PROCEEDING
ARISING OUT OF ANY DISPUTE IN CONNECTION WITH THIS AGREEMENT, THE NOTES OR THE
OTHER LOAN DOCUMENTS, ANY RIGHTS OR OBLIGATIONS HEREUNDER OR THEREUNDER, OR
THE PERFORMANCE OF SUCH RIGHTS AND OBLIGATIONS.
(c) Preservation of Certain Remedies. Notwithstanding the preceding
binding arbitration provisions, the parties hereto and the other Loan
Documents preserve, without diminution, certain remedies that such Persons may
employ or exercise freely, either alone, in conjunction with or during a
Dispute. Each such Person shall have and hereby reserves the right to proceed
in any court of proper jurisdiction or by self help to exercise or prosecute
the following remedies: (i) all rights to foreclose against any real or
personal property or other security by exercising a power of sale granted in
the Loan Documents or under applicable law or by judicial foreclosure and
sale, (ii) all rights of self help including peaceful occupation of property
and collection of rents, set off, and peaceful possession of property, (iii)
obtaining provisional or ancillary remedies including injunctive relief,
sequestration, garnishment, attachment, appointment of receiver and in filing
an involuntary bankruptcy proceeding, and (iv) when applicable, a judgment by
confession of judgment. Preservation of these remedies does not limit the
power of an arbitrator to grant similar remedies that may be requested by a
party in a Dispute.
SECTION 13.7 Reversal of Payments. To the extent the Borrower
makes a payment or payments to the Administrative Agent for the ratable
benefit of the Lenders or the Administrative Agent receives any payment or
proceeds of the collateral which payments or proceeds or any part thereof are
subsequently invalidated, declared to be fraudulent or preferential, set aside
and/or required to be repaid to a trustee, receiver or any other party under
any bankruptcy law, state or federal law, common law or equitable cause, then,
to the extent of such payment or proceeds repaid, the Obligations or part
thereof intended to be satisfied shall be revived and continued in full force
and effect as if such payment or proceeds had not been received by the
Administrative Agent.
SECTION 13.8 Injunctive Relief; Punitive Damages.
(a) The Borrower recognizes that, in the event the Borrower fails to
perform, observe or discharge any of its obligations or liabilities under this
Agreement, any remedy of law may prove to be inadequate relief to the Lenders.
Therefore, the Borrower agrees that the Lenders, at the Lenders' option, shall
be entitled to temporary and permanent injunctive relief in any such case
without the necessity of proving actual damages.
(b) The Administrative Agent, Lenders and Borrower hereby agree that
no such Person shall have a remedy of punitive or exemplary damages against
any other party to a Loan Document and each such Person hereby waives any
right or claim to punitive or exemplary damages that they may now have or may
arise in the future in connection with any Dispute, whether such Dispute is
resolved through arbitration or judicially.
SECTION 13.9 Accounting Matters. All financial and accounting
calculations, measurements and computations made for any purpose relating to
this Agreement, including, without limitation, all computations utilized by
the Borrower or any its Subsidiaries to determine compliance with any covenant
contained herein, shall, except as otherwise expressly contemplated hereby or
unless there is an express written direction by the Administrative Agent to
the contrary agreed to by the Borrower, be performed in accordance with GAAP
as in effect from time to time.
SECTION 13.10 Successors and Assigns; Participations.
(a) Benefit of Agreement. This Agreement shall be binding upon and
inure to the benefit of the Borrower, the Administrative Agent and the
Lenders, all future holders of the Notes, and their respective successors and
assigns, except that the Borrower shall not assign or transfer any of its
rights or obligations under this Agreement without the prior written consent
of each Lender.
(b) Assignment by Lenders. Each Lender may, with the consent of the
Administrative Agent and the Borrower, which consents shall not be
unreasonably withheld (and which consent of the Borrower shall not be required
during the continuance of an Event of Default), assign to one or more Eligible
Assignees all or a portion of its interests, rights and obligations under this
Agreement (including, without limitation, all or a portion of the Loans at the
time owing to it and the Notes held by it); provided that:
(i) each such assignment shall be of a constant, and not a
varying, percentage of all the assigning Lender's rights and obligations under
this Agreement;
(ii) if less than all of the assigning Lender's Commitment
is to be assigned, the Commitment so assigned shall not be less than
$5,000,000;
(iii) the parties to each such assignment shall execute and
deliver to the Administrative Agent, for its acceptance and recording in the
Register, an Assignment and Acceptance in the form of Exhibit G attached
hereto (an "Assignment and Acceptance"), together with any Note or Notes
subject to such assignment;
(iv) such assignment shall not, without the consent of the
Borrower, require the Borrower to file a registration statement with the
Securities and Exchange Commission or apply to or qualify the Loans or the
Notes under the blue sky laws of any state; and
(v) the assigning Lender shall pay to the Administrative
Agent an assignment fee of $3,000 upon the execution by such Lender of the
Assignment and Acceptance; provided that no such fee shall be payable upon any
assignment by a Lender to an Affiliate thereof.
Upon such execution, delivery, acceptance and recording, from and after the
effective date specified in each Assignment and Acceptance, which effective
date shall be at least five (5) Business Days after the execution thereof, (A)
the assignee thereunder shall be a party hereto and, to the extent provided in
such Assignment and Acceptance, have the rights and obligations of a Lender
hereby and (B) the Lender thereunder shall, to the extent provided in such
assignment, be released from its obligations under this Agreement.
(c) Rights and Duties Upon Assignment. By executing and delivering an
Assignment and Acceptance, the assigning Lender thereunder and the assignee
thereunder confirm to and agree with each other and the other parties hereto
as set forth in such Assignment and Acceptance.
(d) Register. The Administrative Agent shall maintain a copy of each
Assignment and Acceptance delivered to it and a register for the recordation
of the names and addresses of the Lenders and the amount of the Loans with
respect to each Lender from time to time (the "Register"). The entries in the
Register shall be conclusive, in the absence of manifest error, and the
Borrower, the Administrative Agent and the Lenders may treat each person whose
name is recorded in the Register as a Lender hereunder for all purposes of
this Agreement. The Register shall be available for inspection by the
Borrower or Lender at any reasonable time and from time to time upon
reasonable prior notice.
(e) Issuance of New Notes. Upon its receipt of an Assignment and
Acceptance executed by an assigning Lender and an Eligible Assignee together
with any Note or Notes subject to such assignment and the written consent to
such assignment, the Administrative Agent shall, if such Assignment and
Acceptance has been completed and is substantially in the form of Exhibit G:
(i) accept such Assignment and Acceptance;
(ii) record the information contained therein in the
Register;
(iii) give prompt notice thereof to the Lenders and the
Borrower; and
(iv) promptly deliver a copy of such Assignment and
Acceptance to the Borrower.
Within five (5) Business Days after receipt of notice, the Borrower shall
execute and deliver to the Administrative Agent, in exchange for the
surrendered Note or Notes, a new Note or Notes to the order of such Eligible
Assignee in amounts equal to the Commitment assumed by it pursuant to such
Assignment and Acceptance and a new Note or Notes to the order of the
assigning Lender in an amount equal to the Commitment retained by it
hereunder. Such new Note or Notes shall be in an aggregate principal amount
equal to the aggregate principal amount of such surrendered Note or Notes,
shall be dated the effective date of such Assignment and Acceptance and shall
otherwise be in substantially the form of the assigned Notes delivered to the
assigning Lender. Each surrendered Note or Notes shall be canceled and
returned to the Borrower.
(f) Participations. Each Lender may sell participations to one or
more banks or other entities in all or a portion of its rights and obligations
under this Agreement (including, without limitation, all or a portion of its
Loans and the Notes held by it); provided that:
(i) such Lender's obligations under this Agreement
(including, without limitation, its Commitment) shall remain unchanged;
(ii) such Lender shall remain solely responsible to the
other parties hereto for the performance of such obligations;
(iii) such Lender shall remain the holder of the Notes held
by it for all purposes of this Agreement;
(iv) the Borrower, the Administrative Agent and the other
Lenders shall continue to deal solely and directly with such Lender in
connection with such Lender's rights and obligations under this Agreement;
(v) such Lender shall not permit such participant the
right to approve any waivers, amendments or other modifications to this
Agreement or any other Loan Document other than waivers, amendments or
modifications which would reduce the principal of or the interest rate on any
Loan or Reimbursement Obligation, extend the term or increase the amount of
the Commitment, reduce the amount of any fees to which such participant is
entitled, extend any scheduled payment date for principal of any Loan or,
except as expressly contemplated hereby or thereby, release substantially all
of the Collateral; and
(vi) any such disposition shall not, without the consent of
the Borrower, require the Borrower to file a registration statement with the
Securities and Exchange Commission to apply to qualify the Loans or the Notes
under the blue sky law of any state.
(g) Disclosure of Information; Confidentiality. The Administrative
Agent and the Lenders shall hold all non-public information with respect to
the Borrower obtained pursuant to the Loan Documents on a need-to-know basis
for making and administering the credit basis in accordance with their
customary procedures for handling confidential information; provided, that the
Administrative Agent may disclose information relating to this Agreement to
Gold Sheets and other similar bank trade publications, such information to
consist of deal terms and other information customarily found in such
publications. Any Lender may, in connection with any assignment, proposed
assignment, participation or proposed participation pursuant to this Section
13.10, disclose to the assignee, participant, proposed assignee or proposed
participant, any information relating to the Borrower furnished to such Lender
by or on behalf of the Borrower; provided, that prior to any such disclosure,
each such assignee, proposed assignee, participant or proposed participant
shall agree with the Borrower or such Lender to preserve the confidentiality
of any confidential information relating to the Borrower received from such
Lender.
(h) Certain Pledges or Assignments. Nothing herein shall prohibit any
Lender from pledging or assigning any Note to any Federal Reserve Bank in
accordance with Applicable Law.
SECTION 13.11 Amendments, Waivers and Consents. Except as set forth
below, any term, covenant, agreement or condition of this Agreement or any of
the other Loan Documents may be amended or waived by the Lenders, and any
consent given by the Lenders, if, but only if, such amendment, waiver or
consent is in writing signed by the Required Lenders (or by the Administrative
Agent with the consent of the Required Lenders) and delivered to the
Administrative Agent and, in the case of an amendment, signed by the Borrower;
provided, that no amendment, waiver or consent shall (a) increase the amount
or extend the time of the obligation of the Lenders to make Loans (including
without limitation pursuant to Section 2.6), (b) extend the originally
scheduled time or times of payment of the principal of any Loan or the time or
times of payment of interest on any Loan, (c) reduce the rate of interest or
fees payable on any Loan, (d) permit any subordination of the principal or
interest on any Loan, (e) release any Security Document (other than as
specifically permitted in this Agreement or the applicable Security Document),
(f) amend the provisions of this Section 13.11 or the definition of Required
Lenders, (g) amend the provisions of Section 4.4 providing that all payments
to the Lenders shall be pro rata in accordance with their respective
Commitment Percentages or (h) amend the several nature of the obligations of
the Lenders under this Agreement, without the prior written consent of each
Lender. In addition, no amendment, waiver or consent to the provisions of
Article XII shall be made without the written consent of the Administrative
Agent.
SECTION 13.12 Performance of Duties. The Borrower's obligations
under this Agreement and each of the Loan Documents shall be performed by the
Borrower at its sole cost and expense.
SECTION 13.13 All Powers Coupled with Interest. All powers of
attorney and other authorizations granted to the Lenders, the Administrative
Agent and any Persons designated by the Administrative Agent or any Lender
pursuant to any provisions of this Agreement or any of the other Loan
Documents shall be deemed coupled with an interest and shall be irrevocable so
long as any of the Obligations remain unpaid or unsatisfied or the Credit
Facility has not been terminated.
SECTION 13.14 Survival of Indemnities. Notwithstanding any
termination of this Agreement, the indemnities to which the Administrative
Agent and the Lenders are entitled under the provisions of this Article XIII
and any other provision of this Agreement and the Loan Documents shall
continue in full force and effect and shall protect the Administrative Agent
and the Lenders against events arising after such termination as well as
before.
SECTION 13.15 Titles and Captions. Titles and captions of Articles,
Sections and subsections in this Agreement are for convenience only, and
neither limit nor amplify the provisions of this Agreement.
SECTION 13.16 Severability of Provisions. Any provision of this
Agreement or any other Loan Document which is prohibited or unenforceable in
any jurisdiction shall, as to such jurisdiction, be ineffective only to the
extent of such prohibition or unenforceability without invalidating the
remainder of such provision or the remaining provisions hereof or thereof or
affecting the validity or enforceability of such provision in any other
jurisdiction.
SECTION 13.17 Counterparts. This Agreement may be executed in any
number of counterparts and by different parties hereto in separate
counterparts, each of which when so executed shall be deemed to be an original
and shall be binding upon all parties, their successors and assigns, and all
of which taken together shall constitute one and the same agreement.
SECTION 13.18 Term of Agreement. This Agreement shall remain in
effect from the Closing Date through and including the date upon which all
Obligations shall have been indefeasibly and irrevocably paid and satisfied in
full. No termination of this Agreement shall affect the rights and
obligations of the parties hereto arising prior to such termination.
[Signature pages to follow]
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their duly authorized officers, all as of the day and year first
written above.
[CORPORATE SEAL] CABLE MICHIGAN, INC.
By:
--------------------------------
Name:
--------------------------
Title:
--------------------------
FIRST UNION NATIONAL BANK, as
Administrative Agent and Lender
By:
--------------------------------
Name:
--------------------------
Title:
--------------------------
SCHEDULE 1.1(a): LENDERS AND COMMITMENTS
COMMITMENT
AND COMMITMENT
LENDER PERCENTAGE
First Union National Bank $18,796,296.30
One First Union Center, TW-10 12.9629629620%
301 South College Street
Charlotte, North Carolina 28288-0608
Attention: Syndication Agency Services
Telephone No.: (704) 383-0281
Telecopy No.: (704) 382-0288
Fleet National Bank $15,574,074.07
One Federal Street 10.7407407400%
MA OF D0030
Boston, Massachusetts 02110
Attention: Christine Campanelli
Telephone No.: (617) 346-4349
Telecopy No.: (617) 346-4345
CoreStates Bank, N.A. $15,574,074.07
1339 Chestnut Street 10.7407407400%
Philadelphia, Pennsylvania 19101
Attention: Elizabeth Elmore
Telephone No.: (215) 786-4321
Telecopy No.: (215) 786-7721
PNC Bank, National Association $15,574,074.07
21st Floor Mail Stop F2-F070-21-1 10.7407407400%
1600 Market Street
Philadelphia, Pennsylvania 19103
Attention: Jerry Hauser
Telephone No.: (215) 585-6468
Telecopy No.: (215) 585-6680
CIBC Wood Gundy Securities Corp. $15,574,074.07
425 Lexington Avenue 10.7407407400%
New York, New York 10017
Attention: Amy V. Kothari
Telephone No.: (212) 856-3608
Telecopy No.: (212) 856-3558
Summit Bank $14,500,000.00
512 Township Line Road 10.0000000000%
Suite 280
Blue Bell, Pennsylvania 19422
Attention: Christopher J. Annas
Telephone No.: (215) 619-4802
Telecopy No.: (215) 619-4820
ABN AMRO Bank N.V., New York Branch
$14,500,000.00
500 Park Avenue 10.0000000000%
New York, New York 10022
Attention: William S. Bennett
Telephone No.: (212) 446-4282
Telecopy No.: (212) 446-4203
Banque Nationale de Paris $13,425,925.94
499 Park Avenue 9.2592592590%
New York, New York 10022
Attention: Serge Desrayaud
Telephone No.: (212) 415-9638
Telecopy No.: (212) 415-8269
The Bank of New York $10,740,740.74
1 Wall Street 7.4074074070%
16th Floor
New York, New York 10286
Attention: Jerome Kapelus
Telephone No.: (212) 635-8694
Telecopy No.: (212) 635-8595
Bank of Montreal, Chicago Branch
$10,740,740.74
430 Park Avenue, 15th Floor 7.4074074070%
New York, New York 10022
Attention: Kevin Cullen
Telephone No.: (212) 605-1631
Telecopy No.: (212) 605-1648
<PAGE>
EXHIBIT I
to
Credit Agreement dated as of June __, 1997,
by and among
Cable Michigan, Inc.
as the Borrower,
the Lenders party thereto,
and
First Union National Bank,
as Administrative Agent
PLEDGE AGREEMENT
----------------
THIS PLEDGE AGREEMENT (as amended, restated or otherwise modified, the
"Pledge Agreement"), dated as of ___________, 1997 is made by
___________________, a corporation (the "Pledgor"), in favor of
First Union National Bank, a national banking association ("First Union"), as
Administrative Agent for the ratable benefit of itself and the Lenders
delivered pursuant to the Credit Agreement dated as of June 30, 1997 (as
amended, restated or otherwise modified, the "Credit Agreement") by and among
Cable Michigan, Inc., the Lenders who are or may become party thereto (the
"Lenders") and First Union National Bank, as Administrative Agent (the
"Administrative Agent").
STATEMENT OF PURPOSE
--------------------
Pursuant to the terms of the Credit Agreement, the Lenders have agreed
to extend certain credit facilities to the Borrowers in the aggregate amount
of up to the Aggregate Commitment under the Credit Agreement.
The Pledgor is the legal and beneficial owner of the shares of Pledged
Stock (as hereinafter defined) issued by _____________ (the "Issuer").
In connection with the transactions contemplated by the Credit
Agreement, the Lenders have requested, and the Pledgor has agreed to execute
and deliver this Pledge Agreement and the Pledged Stock (in accordance with
the terms hereof) to the Administrative Agent for the ratable benefit of the
itself and the Lenders.
NOW, THEREFORE, in consideration of the premises and to induce the
Administrative Agent and the Lenders to enter into and make available Loans
pursuant to the Credit Agreement, the Pledgor hereby agrees with the
Administrative Agent for the ratable benefit of itself and the Lenders as
follows:
1. Defined Terms. Unless otherwise defined herein, terms which are
defined in the Credit Agreement and used herein are so used as so defined, and
the following terms shall have the following meanings:
"Code" means the Uniform Commercial Code from time to time in
effect in the State of North Carolina.
"Collateral" means the Pledged Stock and all Proceeds.
"Pledge Agreement" means this Pledge Agreement, as amended,
restated or otherwise modified.
"Pledged Stock" means the shares of capital stock of the Issuer
listed on Schedule I hereto, together with all stock certificates,
options or rights of any nature whatsoever that may be issued or granted
by the Issuer to the Pledgor while this Pledge Agreement is in effect.
"Proceeds" means all "proceeds" as such term is defined in Section
9-306(1) of the Code on the date hereof and, in any event, shall
include, without limitation, all dividends or other income from the
Pledged Stock, collections thereon, proceeds of sale thereof or
distributions with respect thereto.
2. Pledge and Grant of Security Interest. The Pledgor hereby delivers
to the Administrative Agent, for the ratable benefit of itself and the
Lenders, all the Pledged Stock and hereby grants to Administrative Agent, for
the ratable benefit of itself and the Lenders, a first priority security
interest in the Collateral, as collateral security for the prompt and complete
payment and performance when due (whether at the stated maturity, by
acceleration or otherwise) of the Obligations.
3. Stock Powers. Concurrently with the delivery to the Administrative
Agent of each certificate representing one or more shares of Pledged Stock,
the Pledgor shall deliver an undated stock power covering such certificate,
duly executed in blank by the Pledgor.
4. Representations and Warranties. To induce the Administrative Agent
and Lenders to execute the Credit Agreement and make any Loans and to accept
the security contemplated hereby, the Pledgor hereby represents and warrants
that:
(a) the Pledgor has the corporate power, authority and legal
right to execute and deliver, to perform its obligations under, and to
grant the Lien on the Collateral pursuant to, this Pledge Agreement and
has taken all necessary corporate action to authorize its execution,
delivery and performance of, and grant of the Lien on the Collateral
pursuant to, this Pledge Agreement;
(b) this Pledge Agreement constitutes a legal, valid and binding
obligation of the Pledgor enforceable in accordance with its terms,
except as enforceability may be limited by bankruptcy, insolvency,
reorganization, moratorium or similar laws affecting the enforcement of
creditors' rights generally and by the availability of equitable
remedies;
(c) except as contemplated by Section 19 hereof, the execution,
delivery and performance of this Pledge Agreement will not violate any
provision of any Applicable Law or contractual obligation of the Pledgor
and will not result in the creation or imposition of any Lien on any of
the properties or revenues of the Pledgor pursuant to any Applicable Law
or contractual obligation, except as contemplated hereby;
(d) except as contemplated by Section 19 hereof, no consent or
authorization of, filing with, or other act by or in respect of, any
arbitrator or Governmental Authority and no consent of any other Person
(including, without limitation, any stockholder or creditor of the
Pledgor or any Issuer), is required in connection with the execution,
delivery, performance, validity or enforceability of this Pledge
Agreement, except that certain routine notification filings with the
FCC, any applicable PUC and any other Governmental Authority that grants
CATV Franchises with respect to the Loan Documents may be required after
the Closing Date;
(e) no litigation, investigation or proceeding of or before any
arbitrator or Governmental Authority is pending or, to the knowledge of
the Pledgor, threatened by or against the Pledgor or against any of its
properties or revenues with respect to this Pledge Agreement or any of
the transactions contemplated hereby;
(f) the shares of Pledged Stock listed on Schedule I constitute
all the issued and outstanding shares of all classes of the capital
stock of the Issuer;
(g) all the shares of the Pledged Stock have been duly and
validly issued and are fully paid and nonassessable;
(h) the Pledgor is the record and beneficial owner of, and has
good and marketable title to, the Pledged Stock listed on Schedule I,
free of any and all Liens or options in favor of, or claims of, any
other Person, except the Lien created by this Pledge Agreement; and
(i) upon (i) filing of UCC-1 financing statements with the
jurisdictions set forth on Schedule II hereto and (ii) delivery to the
Administrative Agent of the stock certificates evidencing the Pledged
Stock, the Lien granted pursuant to this Pledge Agreement will
constitute a valid, perfected first priority Lien on the Collateral (to
the extent that such a security interest in such collateral can be
perfected under the Code by taking such action (and subject to the
requirements of Section 9-306 of the Code with respect to any proceeds
of Collateral and to the further requirement that additional steps
described in Section 5(a) hereof may be necessary to perfect a security
interest in dividends or other distributions in kind)) enforceable as
such against all creditors of the Pledgor and any Persons purporting to
purchase any Collateral from the Pledgor.
5. Certain Covenants. The Pledgor covenants and agrees with the
Administrative Agent for the ratable benefit of the Administrative Agent and
the Lenders that, from and after the date of this Pledge Agreement until the
Obligations are paid in full and the Commitments are terminated:
(a) If the Pledgor shall, as a result of its ownership of the
Pledged Stock, become entitled to receive or shall receive any stock
certificate (including, without limitation, any certificate representing
a stock dividend or a distribution in connection with any
reclassification, increase or reduction of capital or any certificate
issued in connection with any reorganization), option or rights, whether
in addition to, in substitution of, as a conversion of, or in exchange
for any shares of the Pledged Stock, or otherwise in respect thereof,
the Pledgor shall accept the same as the agent of the Administrative
Agent, hold the same in trust for the Administrative Agent and deliver
the same forthwith to the Administrative Agent in the exact form
received, duly indorsed by the Pledgor to the Administrative Agent, if
required, together with an undated stock power covering such certificate
duly executed in blank by the Pledgor, to be held by the Administrative
Agent, subject to the terms hereof, as additional collateral security
for the Obligations. In addition, any sums paid upon or in respect of
the Pledged Stock upon the liquidation or dissolution of the Issuer
shall be paid over to the Administrative Agent to be held by it
hereunder as additional collateral security for the Obligations, and in
case any distribution of capital shall be made on or in respect of the
Pledged Stock or any property shall be distributed upon or with respect
to the Pledged Stock pursuant to the recapitalization or
reclassification of the capital of the Issuer or pursuant to the
reorganization thereof, the property so distributed shall be delivered
to the Administrative Agent to be held by it hereunder as additional
collateral security for the Obligations. If any sums of money or
property so paid or distributed in respect of the Pledged Stock shall be
received by the Pledgor, the Pledgor shall, until such money or property
is paid or delivered to the Administrative Agent, hold such money or
property in trust for the Administrative Agent, segregated from other
funds of the Pledgor, as additional collateral security for the
Obligations.
(b) Without the prior written consent of the Administrative
Agent, the Pledgor will not (i) vote to enable, or take any other action
to permit, the Issuer to issue any stock or other equity securities of
any nature or to issue any other securities convertible into or granting
the right to purchase or exchange for any stock or other equity
securities of any nature of the Issuer, (ii) sell, assign, transfer,
exchange, or otherwise dispose of, or grant any option with respect to,
the Collateral, or (iii) create, incur or permit to exist any Lien or
option in favor of, or any claim of any Person with respect to, any of
the Collateral, or any interest therein, except for the Lien provided
for by this Pledge Agreement. The Pledgor will defend the right, title
and interest of the Administrative Agent in and to the Collateral
against the claims and demands of all Persons whomsoever.
(c) At any time and from time to time, upon the written request
of the Administrative Agent, and at the sole expense of the Pledgor, the
Pledgor will promptly and duly execute and deliver such further
instruments and documents and take such further actions as the
Administrative Agent may reasonably request for the purposes of
obtaining or preserving the full benefits of this Pledge Agreement and
of the rights and powers herein granted provided, that unless an Event
of Default shall have occurred and be continuing, the Pledgor shall not
be obligated to make any filing with, or to seek or obtain any consent
or authorization of, any Governmental Authority of the nature described
in Section 19 hereof. If any amount payable under or in connection with
any of the Collateral shall be or become evidenced by any promissory
note, other instrument or chattel paper, such note, instrument or
chattel paper shall be immediately delivered to the Administrative
Agent, duly endorsed in a manner satisfactory to the Administrative
Agent, to be held as Collateral pursuant to this Pledge Agreement.
(d) The Pledgor agrees to pay, and to save the Administrative
Agent and the Lenders harmless from, any and all liabilities with
respect to, or resulting from any delay in paying, any and all stamp,
excise, sales or other taxes which may be payable or determined to be
payable with respect to any of the Collateral or in connection with any
of the transactions contemplated by this Pledge Agreement.
6. Cash Dividends; Voting Rights. Unless an Event of Default shall
have occurred and be continuing and the Administrative Agent shall have given
notice to the Pledgor of the Administrative's Agent intent to exercise its
rights pursuant to Section 7 below, the Pledgor shall be permitted to receive
all dividends or other payments or distributions made upon or with respect to
the Pledged Stock in cash paid in accordance with the terms of the Credit
Agreement in respect of the Pledged Stock and to exercise all voting and
corporate rights with respect to the Pledged Stock; provided, that no vote
shall be cast or corporate right exercised or other action taken which, in the
Administrative Agent's judgment, exercised in a reasonable manner, would
impair the Collateral or which would be inconsistent with or result in any
violation of any provision of the Credit Agreement, the Notes, any other Loan
Documents or this Pledge Agreement.
7. Rights of the Administrative Agent.
(a) If an Event of Default shall occur and be continuing on or after the
Borrowing Date and the Administrative Agent shall give notice of its intent to
exercise such rights to the Pledgor, (i) the Administrative Agent shall have
the right to receive any and all cash dividends paid in respect of the Pledged
Stock and make application thereof to the Obligations in the order set forth
in the Credit Agreement and (ii) all shares of the Pledged Stock shall be
registered in the name of the Administrative Agent or its nominee, and the
Administrative Agent or its nominee may thereafter exercise, in a commercially
reasonable manner but otherwise in its discretion, (A) all voting, corporate
and other rights pertaining to such shares of the Pledged Stock at any meeting
of shareholders of the Issuer or otherwise and (B) any and all rights of
conversion, exchange, subscription and any other rights, privileges or options
pertaining to such shares of the Pledged Stock (including, without limitation,
the right to exchange any and all of the Pledged Stock upon the merger,
consolidation, reorganization, recapitalization or other fundamental change in
the corporate structure of the Issuer, or upon the exercise by the Pledgor or
the Administrative Agent of any right, privilege or option pertaining to such
shares of the Pledged Stock, and in connection therewith, the right to deposit
and deliver any and all of the Pledged Stock with any committee, depositary,
transfer agent, registrar or other designated agency upon such terms and
conditions as it may determine), all without liability except to account for
property actually received by it, but the Administrative Agent shall have no
duty to the Pledgor to exercise any such right, privilege or option and shall
not be responsible for any failure to do so or delay in so doing.
(b) The rights of the Administrative Agent and the Lenders hereunder
shall not be conditioned or contingent upon the pursuit by the Administrative
Agent or any Lender of any right or remedy against the Borrower or against any
other Person which may be or become liable in respect of all or any part of
the Obligations or against any collateral security therefor, guarantee
therefor or right of offset with respect thereto. Neither the Administrative
Agent nor any Lender shall be liable for any failure to demand, collect or
realize upon all or any part of the Collateral or for any delay in doing so,
nor shall the Administrative Agent be under any obligation to sell or
otherwise dispose of any Collateral upon the request of the Pledgor or any
other Person or to take any other action whatsoever with regard to the
Collateral or any part thereof.
8. Remedies. If an Event of Default shall occur and be continuing,
with the consent of the Required Lenders, the Administrative Agent may, and
upon the request of the Required Lenders, the Administrative Agent shall,
exercise on behalf of itself and the Lenders, all rights and remedies granted
in this Pledge Agreement and in any other instrument or agreement securing,
evidencing or relating to the Obligations, and in addition thereto, all rights
and remedies of a secured party under the Code. Without limiting the
generality of the foregoing with regard to the scope of the Administrative
Agent's remedies, the Administrative Agent, without demand of performance or
other demand, presentment, protest, advertisement or notice of any kind
(except any notice required by law referred to below) to or upon the Pledgor,
the Issuer or any other Person (all and each of which demands, defenses,
advertisements and notices are hereby waived), may in such circumstances
forthwith collect, receive, appropriate and realize upon the Collateral, or
any part thereof, and/or may forthwith sell, assign, give option or options to
purchase or otherwise dispose of and deliver the Collateral or any part
thereof (or contract to do any of the foregoing), in one or more parcels at
public or private sale or sales, in the over-the-counter market, at any
exchange, broker's board or office of the Administrative Agent or any Lender
or elsewhere upon such terms and conditions as it may deem advisable and at
such prices as it may deem best, for cash or on credit or for future delivery
without assumption of any credit risk. The Administrative Agent or any Lender
shall have the right upon any such public sale or sales, and, to the extent
permitted by law, upon any such private sale or sales, to purchase the whole
or any part of the Collateral so sold, free of any right or equity of
redemption in the Pledgor, which right or equity is hereby waived or released.
The Administrative Agent shall apply any Proceeds from time to time held by it
and the net proceeds of any such collection, recovery, receipt, appropriation,
realization or sale, after deducting all reasonable costs and expenses of
every kind incurred in respect thereof or incidental to the care or
safekeeping of any of the Collateral or in any way relating to the Collateral
or the rights of the Administrative Agent and the Lenders hereunder,
including, without limitation, reasonable attorneys' fees and disbursements of
counsel thereto, to the payment in whole or in part of the Obligations, in the
order set forth in the Credit Agreement, and only after such application and
after the payment by the Administrative Agent of any other amount required by
any provision of law, including, without limitation, Section 9-504(1)(c) of
the Code, need the Administrative Agent account for the surplus, if any, to
the Pledgor. To the extent permitted by applicable law, the Pledgor waives
all claims, damages and demands it may acquire against the Administrative
Agent or any Lender arising out of the exercise by them of any rights
hereunder. If any notice of a proposed sale or other disposition of
Collateral shall be required by law, such notice shall be deemed reasonable
and proper if given at least 10 days before such sale or other disposition.
The Pledgor further waives and agrees not to assert any rights or privileges
which it may acquire under Section 9-112 of the Code.
9. Private Sales.
(a) The Pledgor recognizes that the Administrative Agent may be unable
to effect a public sale of any or all the Pledged Stock, by reason of certain
prohibitions contained in the Securities Act and applicable state securities
laws or otherwise, and may be compelled to resort to one or more private sales
thereof to a restricted group of purchasers which will be obliged to agree,
among other things, to acquire such securities for their own account for
investment and not with a view to the distribution or resale thereof. The
Pledgor acknowledges and agrees that any such private sale may result in
prices and other terms less favorable than if such sale were a public sale
and, notwithstanding such circumstances, agrees that any such private sale
shall be deemed to have been made in a commercially reasonable manner. The
Administrative Agent shall be under no obligation to delay a sale of any of
the Pledged Stock for the period of time necessary to permit the Issuer to
register such securities for public sale under the Securities Act, or under
applicable state securities laws, even if the Issuer would agree to do so.
(b) The Pledgor further agrees to use its best efforts to do or cause to
be done all such other acts as may be necessary to make such sale or sales of
all or any portion of the Pledged Stock pursuant to this Section 9 valid and
binding and in compliance with any and all other Applicable Laws. The Pledgor
further agrees that a breach of any of the covenants contained in this Section
9 will cause irreparable injury to the Administrative Agent and the Lenders not
compensable in damages, that the Administrative Agent and the Lenders have no
adequate remedy at law in respect of such breach and, as a consequence, that
to the greatest extent permitted by law each and every covenant contained in
this Section 9 shall be specifically enforceable against the Pledgor, and to
the greatest extent permitted by law the Pledgor hereby waives and agrees not
to assert any defenses against an action for specific performance of such
covenants except for a defense that no Event of Default has occurred under the
Credit Agreement.
10. No Subrogation. Notwithstanding any payment or payments made by
the Pledgor hereunder, or any setoff or application of funds of the Pledgor by
the Administrative Agent or Lender, or the receipt of any amounts by the
Administrative Agent or any Lender with respect to any of the Collateral, the
Pledgor shall not be entitled to be subrogated to any of the rights of the
Administrative Agent or any Lender against the Borrower or against any other
collateral security held by the Administrative Agent or any Lender for the
payment of the Obligations, nor shall the Pledgor seek any reimbursement from
the Borrower in respect of payments made by the Pledgor in connection with the
Collateral, or amounts realized by the Administrative Agent or any Lender in
connection with the Collateral, until all amounts owing to the Agents and
Lenders on account of the Obligations are paid in full and the Commitments are
terminated. If any amount shall be paid to the Pledgor on account of such
subrogation rights at any time when all of the Obligations shall not have been
paid in full, such amount shall be held by the Pledgor in trust for the
Administrative Agent, segregated from other funds of the Pledgor, and shall,
forthwith upon receipt by the Pledgor, be turned over to the Administrative
Agent in the exact form received by the Pledgor (duly indorsed by the Pledgor
to the Administrative Agent, if required) to be applied against the
Obligations, whether matured or unmatured, in such order as set forth in the
Credit Agreement.
11. Amendments, etc. With Respect to the Obligations. The Pledgor
shall remain obligated hereunder, and the Collateral shall remain subject to
the Lien granted hereby, notwithstanding that, without any reservation of
rights against the Pledgor, and without notice to or further assent by the
Pledgor, any demand for payment of any of the Obligations made by the
Administrative Agent or any Lender may be rescinded by the Administrative
Agent or such Lender, and any of the Obligations continued, and the
Obligations, or the liability of the Borrower or any other Person upon or for
any part thereof, or any collateral security or guarantee therefor or right of
offset with respect thereto, may, from time to time, in whole or in part, be
renewed, extended, amended, modified accelerated, compromised, waived,
surrendered, or released by the Administrative Agent or any Lender, and the
Credit Agreement, the Notes, any other Loan Documents and any other documents
executed and delivered in connection therewith may be amended, modified,
supplemented or terminated, in whole or part, as the Lenders (or the Required
Lenders, as the case may be) may deem advisable from time to time, and any
guarantee, right of offset or other collateral security at any time held by the
Administrative Agent or any Lender for the payment of the Obligations may be
sold, exchanged, waived, surrendered or released. Neither the Administrative
Agent nor any Lender shall have any obligation to protect, secure, perfect or
insure any other Lien at any time held by it as security for the Obligations
or any property subject thereto. The Pledgor waives any and all notice of the
creation, renewal, extension or accrual of any of the Obligations and notice
of or proof of reliance by the Administrative Agent or any Lender upon this
Pledge Agreement; the Obligations, and any of them, shall conclusively be
deemed to have been created, contracted or incurred in reliance upon this
Pledge Agreement; and all dealings between the Borrower and the Pledgor, on
the one hand, and the Administrative Agent and the Lenders, on the other, shall
likewise be conclusively presumed to have been had or consummated in reliance
upon this Pledge Agreement. The Pledgor waives diligence, presentment,
protest, demand for payment and notice of default or nonpayment to or upon the
Borrower or the Pledgor with respect to the Obligations.
12. Regulatory Approval. The Pledgor will, at its expense, promptly
execute and deliver, or cause the execution and delivery of, all applications,
certificates, instruments, registration statements and all other documents and
papers the Administrative Agent may, to the extent commercially reasonable,
request or as may be required by law in connection with the obtaining of any
consent, approval, registration, qualification or authorization of any
Governmental Authority or of any other Person necessary or appropriate for the
effective exercise of any rights under this Pledge Agreement, provided, that
unless an Event of Default shall have occurred and be continuing, the Pledgor
shall not be obligated to make any filing with, or to seek or obtain any
consent or authorization of, any Governmental Authority of the nature
described in Section 19 hereof. Without limiting the generality of the
foregoing, if an Event of Default shall have occurred and be continuing, the
Pledgor shall take any action which the Administrative Agent may, to the
extent commercially reasonable, request in order to transfer and assign to the
Administrative Agent, or to such one or more third parties as the
Administrative Agent may designate, or to a combination of the foregoing, each
FCC License, PUC Authorization and CATV Franchise. To enforce the provisions
of this Section, the Administrative Agent is, at any time when an Event of
Default has occurred and is continuing, empowered to request the appointment
of a receiver from any court of competent jurisdiction. Such receiver shall
be instructed to seek from the applicable Governmental Authority an
involuntary transfer of control of each such FCC License, PUC Authorization
and CATV Franchise for the purpose of seeking a bona fide purchaser to whom
control will ultimately be transferred. The Pledgor hereby agrees, so long as
such Event of Default is continuing, to authorize such an involuntary transfer
of control upon the request of the receiver so appointed and, if the Pledgor
shall refuse to authorize the transfer, its approval may be required by the
court. Upon the occurrence and continuance of an Event of Default, the
Pledgor shall further use its best efforts to assist in obtaining approval of
the applicable Governmental Authority, if required, for any action or
transactions contemplated by this Pledge Agreement including, without
limitation, the preparation, execution and filing with the applicable
Governmental Authority of the assignor's or transferor's portion of any
application or applications for consent to the assignment of any FCC License,
PUC Authorization or CATV Franchise or transfer of control necessary or
appropriate under the rules and regulations of the applicable Governmental
Authority for the approval of the transfer or assignment of any portion of the
Collateral, together with any FCC License, PUC Authorization and CATV
Franchise. The Pledgor acknowledges that the assignment or transfer of each
FCC License, PUC Authorization and CATV Franchise is integral to the
Administrative Agent's and Lenders' realization of the value of the Collateral,
that there is no adequate remedy at law for failure by the Pledgor to comply
with the provisions of this Section and that such failure would cause
irreparable injury not adequately compensable in damages, and therefore agrees
that to the greatest extent permitted by law each and every covenant contained
in this Section may be specifically enforced, and to the greatest extent
permitted by law the Pledgor hereby waives and agrees not to assert any
defenses against an action for specific performance of such covenants.
13. Limitation on Duties Regarding Collateral. The Administrative
Agent's sole duty with respect to the custody, safekeeping and physical
preservation of the Collateral in its possession, under Section 9-207 of the
Code or otherwise, shall be to deal with it in the same manner as the
Administrative Agent deals with similar securities and property for its own
account. Neither the Administrative Agent, any Lender nor any of their
respective directors, officers, employees or agents shall be liable for
failure to demand, collect or realize upon any of the Collateral or for any
delay in doing so or shall be under any obligation to sell or otherwise
dispose of any Collateral upon the request of the Pledgor or otherwise.
14. Powers Coupled with an Interest. All authorizations and agencies
herein contained with respect to the Collateral constitute irrevocable powers
coupled with an interest.
15. Severability. Any provision of this Pledge Agreement which is
prohibited or unenforceable in any jurisdiction shall, as to such
jurisdiction, be ineffective to the extent of such prohibition or
unenforceability without invalidating the remaining provisions hereof, and any
such prohibition or unenforceability in any jurisdiction shall not invalidate
or render unenforceable such provision in any other jurisdiction.
16. Paragraph Headings. The paragraph headings used in this Pledge
Agreement are for convenience of reference only and are not to affect the
construction hereof or be taken into consideration in the interpretation
hereof.
17. No Waiver; Cumulative Remedies. Neither the Administrative Agent
nor any Lender shall by any act (except by a written instrument pursuant to
Section 18 hereof) be deemed to have waived any right or remedy hereunder or
to have acquiesced in any Default or Event of Default or in any breach of any
of the terms and conditions hereof. No failure to exercise, nor any delay in
exercising, on the part of the Administrative Agent or any Lender, any right,
power or privilege hereunder shall operate as a waiver thereof. No single or
partial exercise of any right, power or privilege hereunder shall preclude any
other or further exercise thereof or the exercise of any other right, power or
privilege. A waiver by the Administrative Agent or any Lender of any right or
remedy hereunder on any one occasion shall not be construed as a bar to any
right or remedy which the Administrative Agent or such Lender would otherwise
have on any future occasion. The rights and remedies herein provided are
cumulative, may be exercised singly or concurrently and are not exclusive of
any other rights or remedies provided by law.
18. Waivers and Amendments; Successors and Assigns; Governing Law.
None of the terms or provisions of this Pledge Agreement may be amended,
supplemented or otherwise modified except by a written instrument executed by
the Pledgor and Administrative Agent; provided that (i) any provision of this
Pledge Agreement may be waived by the Administrative Agent in a letter or
agreement executed by the Administrative Agent or by telex or facsimile
transmission from the Administrative Agent and (ii) any consent by the
Administrative Agent to any amendment, supplement or modification hereto shall
be subject to approval thereof by the Lenders or Required Lenders, as
applicable, in accordance with Section 13.11 of the Credit Agreement. This
Pledge Agreement shall be binding upon the successors and assigns of the
Pledgor and shall inure to the benefit of the Administrative Agent and the
Lenders and their respective successors and assigns. This Pledge Agreement
shall be governed by, and construed and interpreted in accordance with, the
laws of the State of North Carolina.
19. Regulatory Concerns. Notwithstanding any other provision to the
contrary contained in this Agreement, the ability of the Administrative Agent
to (i) transfer record ownership of the
Pledged Stock into the name of the Administrative Agent or its nominee
pursuant to Section 7 hereof, (ii) vote and give consents, ratifications and
waivers with respect to the Pledged Stock pursuant to Section 7 hereof and
(iii) sell the Pledged Stock pursuant to Section 8 or 9 hereof is subject to
the Administrative Agent or its nominee (a) obtaining, to the extent necessary
under applicable laws and regulations, the prior approval of the FCC, any PUC
or any other Governmental Authority having jurisdiction with respect to any
Issuer and its Subsidiaries and (b) making any additional filings, reports or
notifications required with respect to the exercise by the Administrative
Agent of the powers specified in clauses (i), (ii) and (iii) of this section.
20. Notices. All notices and communications hereunder shall be given
to the addresses and otherwise in accordance with Section 13.1 of the Credit
Agreement.
21. Irrevocable Authorization and Instruction to Issuer. The Pledgor
hereby authorizes and instructs the Issuer to comply with any instruction
received by it from the Administrative Agent in writing that (a) states that
an Event of Default has occurred and (b) is otherwise in accordance with the
terms of this Pledge Agreement, without any other or further instructions from
the Pledgor, and the Pledgor agrees that the Issuer shall be fully protected
in so complying.
22. Authority of Administrative Agent. The Pledgor acknowledges that
the rights and responsibilities of the Administrative Agent under this Pledge
Agreement with respect to any action taken by the Administrative Agent or the
exercise or non-exercise by the Administrative Agent of any option, voting
right, request, judgment or other right or remedy provided for herein or
resulting or arising out of this Pledge Agreement shall, as between the
Administrative Agent and the Lenders, be governed by the Credit Agreement and
by such other agreements with respect thereto as may exist from time to time
among them, but, as between the Administrative Agent and the Pledgor, the
Administrative Agent shall be conclusively presumed to be acting as agent for
itself and the Lenders with full and valid authority so to act or refrain from
acting, and neither the Pledgor nor any Issuer shall be under any obligation,
or entitlement, to make any inquiry respecting such authority.
23. Consent to Jurisdiction. The Pledgor hereby irrevocably consents
to the personal jurisdiction of the state and federal courts located in
Mecklenburg County, North Carolina, in any action, claim or other proceeding
arising out of any dispute in connection with this Pledge Agreement, the other
Loan Documents, any rights or obligations hereunder or thereunder, or the
performance of such rights and obligations. The Pledgor hereby irrevocably
consents to the service of a summons and complaint and other process in any
action, claim or proceeding brought by the Administrative Agent or any Lender
in connection with this Pledge Agreement, the other Loan Documents, any rights
or obligations hereunder or thereunder, or the performance of such rights and
obligations, on behalf of itself or its property, in the manner specified in
Section 20. Nothing in this Section 23 shall affect the right of the
Administrative Agent or any Lender to serve legal process in any other manner
permitted by Applicable Law or affect the right of the Administrative Agent or
any Lender to bring any action or proceeding against the Pledgors or their
properties, individually or collectively, in the courts of any other
jurisdictions.
24. Binding Arbitration; Waiver of Jury Trial.
(a) Jury Trial. TO THE EXTENT PERMITTED BY LAW, THE ADMINISTRATIVE
AGENT, EACH LENDER AND THE PLEDGOR HEREBY IRREVOCABLY WAIVE THEIR RESPECTIVE
RIGHTS TO A JURY TRIAL WITH RESPECT TO ANY ACTION, CLAIM OR OTHER PROCEEDING
ARISING OUT OF ANY DISPUTE IN CONNECTION WITH THIS PLEDGE AGREEMENT OR
THEREUNDER, THE OTHER LOAN DOCUMENTS, ANY RIGHTS OR OBLIGATIONS HEREUNDER, OR
THE PERFORMANCE OF SUCH RIGHTS AND OBLIGATIONS.
(b) Binding Arbitration. Upon demand of any party, whether made before
or after institution of any judicial proceeding, any dispute, claim or
controversy arising out of, connected with or relating to this Pledge
Agreement or any other Loan Documents ("Disputes"), between or among parties
to this Agreement or any other Loan Document shall be resolved by binding
arbitration as provided herein. Institution of a judicial proceeding by a
party does not waive the right of that party to demand arbitration hereunder.
Disputes may include, without limitation, tort claims, counterclaims, claims
brought as class actions, claims arising from Loan Documents executed in the
future, or claims concerning any aspect of the past, present or future
relationships arising out or connected with the Loan Documents. Arbitration
shall be conducted under and governed by the Commercial Financial Disputes
Arbitration Rules (the "Arbitration Rules") of the American Arbitration
Association (the "AAA") and Title 9 of the U.S. Code. All arbitration
hearings shall be conducted in Charlotte, North Carolina. The expedited
procedures set forth in Rule 51, et seq. of the Arbitration Rules shall be
applicable to claims of less than $500,000. All applicable statutes of
limitation shall apply to any Dispute. A judgment upon the award may be
entered in any court having jurisdiction. The panel from which all
arbitrators are selected shall be comprised of licensed attorneys. The single
arbitrator selected for expedited procedure shall be a retired judge from the
highest court of general jurisdiction, state or federal, of the state where
the hearing will be conducted. Notwithstanding the foregoing, this paragraph
shall not apply to any Hedging Agreement that is a Loan Document.
(c) Preservation of Certain Remedies. Notwithstanding the preceding
binding arbitration provisions, the parties hereto and the other Loan
Documents preserve, without diminution, certain remedies that such Persons may
employ or exercise freely, either alone, in conjunction with or during a
Dispute. Each such Person shall have and hereby reserves the right to proceed
in any court of proper jurisdiction or by self help to exercise or prosecute
the following remedies: (i) all rights to foreclose against any real or
personal property or other security by exercising a power of sale granted in
the Loan Documents or under applicable law or by judicial foreclosure and
sale, (ii) all rights of self help including peaceful occupation of property
and collection of rents, set off, and peaceful possession of property, (iii)
obtaining provisional or ancillary remedies including injunctive relief,
sequestration, garnishment, attachment, appointment of receiver and in filing
an involuntary bankruptcy proceeding, and (iv) when applicable, a judgment by
confession of judgment. Preservation of these remedies does not limit the
power of an arbitrator to grant similar remedies that may be requested by a
party in a Dispute.
25. Reorganization. Notwithstanding anything to the contrary contained
in this Agreement, no action required to be taken by the Pledgor or the Issuer
pursuant to the Reorganization shall be deemed to constitute an Event of
Default arising out of a breach of the terms of this Agreement; provided, that
if any such action conflicts with or otherwise results in any breach of any
provision of this Agreement, the Pledgor and the Issuer, or their successors
or assignees shall execute such amendments thereto and take all the actions
reasonably requested by the Administrative Agent in order that this Agreement
shall remain enforceable in accordance with its terms against such Persons
after the Reorganization.
26. Termination of Pledge Agreement. This Pledge Agreement shall
terminate upon the date when the obligations have been paid in full and the
Commitments terminated. Upon the termination of this Pledge Agreement, the
Administrative Agent will, at the expense of the Pledgor, deliver any
certificate evidencing the Pledged Stock and any other Collateral held by it
to the Pledgor and execute and deliver to the Pledgor such documents as the
Pledgor shall reasonably request to evidence the termination of the Lien
created hereby on the Collateral.
IN WITNESS WHEREOF, the undersigned has caused this Pledge Agreement to
be executed under seal by its duly authorized officers as of the date first
above written.
[CORPORATE SEAL] [INSERT PLEDGOR]
By:______________________________
Name:_________________________
Title:________________________
ACKNOWLEDGEMENT AND CONSENT
The Issuer referred to in the foregoing Pledge Agreement hereby
acknowledges receipt of a copy thereof and agrees to be bound thereby and to
comply with the terms thereof insofar as such terms are applicable to it. The
Issuer agrees to notify the Administrative Agent promptly in writing of the
occurrence of any of the events described in Section 5(a) of the Pledge
Agreement with respect to its shares.
[CORPORATE SEAL] [INSERT ISSUER]
ATTEST: By:_____________________________
Name:________________________
_____________________ Title:_______________________
______________Secretary
SCHEDULE 1
To Pledge
Agreement
---------
DESCRIPTION OF PLEDGED STOCK
Class of Stock No. of
Issuer Stock Certificate No. Shares
- ------ -------- --------------- -------
SCHEDULE II
To Pledge
Agreement
-----------
UCC INFORMATION
Debtor Filing Jurisdiction
------ -------------------
Exhibit 21.1
Subsidiaries of Cable Michigan, Inc.
Jurisdiction of
Incorporation or
Subsidiary Organization
- ---------- ----------------
Mercom, Inc. (61.92%) DE
<PAGE>
/TEXT>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
FINANCIAL STATEMENTS AS OF AND FOR THE THREE MONTHS ENDED MARCH 31, 1997
AND AS OF AND FOR THE YEAR ENDED DECEMBER 31, 1996 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS YEAR
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1996
<PERIOD-START> JAN-01-1997 JAN-01-1996
<PERIOD-END> MAR-31-1997 DEC-31-1996
<CASH> 2,366 3,297
<SECURITIES> 0 0
<RECEIVABLES> 3,837 4,463
<ALLOWANCES> 657 579
<INVENTORY> 0 0
<CURRENT-ASSETS> 0 0
<PP&E> 159,649 158,117
<DEPRECIATION> 84,314 80,325
<TOTAL-ASSETS> 141,253 149,200
<CURRENT-LIABILITIES> 0 0
<BONDS> 14,663 15,680
0 0
0 0
<COMMON> 1 1
<OTHER-SE> (81,046) (79,742)
<TOTAL-LIABILITY-AND-EQUITY> 141,253 149,200
<SALES> 0 0
<TOTAL-REVENUES> 19,557 76,187
<CGS> 0 0
<TOTAL-COSTS> 19,282 107,614
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 222 843
<INTEREST-EXPENSE> 3,347 15,179
<INCOME-PRETAX> (3,162) (15,119)
<INCOME-TAX> (1,090) (5,712)
<INCOME-CONTINUING> (1,795) (8,256)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (1,795) (8,256)
<EPS-PRIMARY> (.07) (.30)
<EPS-DILUTED> (.07) (.30)
</TABLE>
