<PAGE>
FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED)
For the fiscal year ended December 31, 1997
() TRANSACTION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
Commission File No. 0-22821
Cable Michigan, Inc.
(Exact name of registrant as specified in its charter)
Pennsylvania 23-2566891
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
105 Carnegie Center, Princeton, New Jersey 08540
(Address of principal executive offices) (Zip Code)
Registrant's telephone number including area code: 609-734-3737
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $1.00 per share
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
X Yes No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. (X)
Number of shares of the Registrant's Stock ($1.00 par value) outstanding at
February 28, 1998
6,872,040 Common Stock
Aggregate market value of Registrant's voting stock held by non-affiliates at
February 28, 1998 computed by reference to closing price as reported by NASDAQ
for Common Stock ($24.50 per share), is as follows:
$86,777,065 Common Stock
Documents Incorporated by Reference
1. Proxy Statement for 1998 Annual Meeting of Shareholders is incorporated by
reference into Part I and Part III of this Form 10-K.
<PAGE>
PART I
ITEM 1. BUSINESS
Prior to September 30, 1997, Cable Michigan, Inc. ("Cable Michigan" or the
"Company") was operated as part of C-TEC Corporation ("C-TEC"). On September
30, 1997 (the "Distribution Date"), C-TEC distributed 100 percent of the
outstanding shares of common stock of its wholly owned subsidiaries, RCN
Corporation ("RCN") and Cable Michigan, to holders of record of C-TEC's Common
Stock and C-TEC's Class B Common Stock as of the close of business on September
19, 1997 (the "Distribution") in accordance with the terms of a Distribution
Agreement dated September 5, 1997 among C-TEC, RCN and Cable Michigan
("Distribution Agreement"). See "Relationship Among Cable Michigan, RCN and
CTE" below. RCN consists primarily of C-TEC's high growth, bundled residential
voice, video and Internet access operations in the Boston to Washington, D.C.
corridor, its existing New York, New Jersey and Pennsylvania cable television
operations, a portion of its long distance operations and its international
investment in Megacable, S.A. de C.V. Cable Michigan consists of C-TEC's
Michigan cable operations, including its 62% ownership in Mercom, Inc.
("Mercom"). As part of C-TEC's restructuring, C-TEC changed its name to
Commonwealth Telephone Enterprises, Inc. ("CTE").
Cable Michigan is a cable television operator in the State of Michigan which,
as of December 31, 1997, served approximately 204,000 subscribers. These
figures include the approximately 39,400 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 1993 to 1997 compounded annual growth in basic subscribers was
4.6%; during the same period, basic penetration rose from 57.3% to 60.5%.
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, 1993:
<TABLE>
<CAPTION>
As of December 31,
1993 1994 1995 1996 1997 (3)
<S> <C> <C> <C> <C> <C>
Homes Passed:
Wholly Owned Systems 235,188 244,622 250,747 261,441 271,604
Mercom Systems 61,730 63,721 65,449 65,998 65,291
Total 296,918 308,343 316,196 327,439 336,895
Basic Subscribers:
Wholly Owned Systems (1) 135,420 141,785 152,921 158,310 164,552
Mercom Systems (1) 34,714 37,324 38,853 40,012 39,360
Total 170,134 179,109 191,774 198,322 203,912
Basic Penetration:
Wholly Owned Systems 57.6% 58.0% 61.0% 60.6% 60.6%
Mercom Systems 56.2% 58.6% 59.4% 60.6% 60.3%
All Systems 57.3% 58.1% 60.7% 60.6% 60.5%
Average Monthly Revenue
per Subscriber for Last
Month of the Period: (2)
Wholly Owned Systems $ 29.64 $ 27.06 $ 31.59 $ 32.20 $ 32.83
Mercom Systems $ 29.70 $ 29.36 $ 30.41 $ 32.72 $ 33.89
All Systems $ 29.65 $ 27.53 $ 31.36 $ 32.30 $ 33.03
</TABLE>
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(1) Systems include seasonal communities which experience increased subscriber
levels during the second and third quarters.
(2) The revenue per subscriber calculation includes premium revenue for each
period.
(3) The Mercom of Florida cable system was sold in July 1997. This system
served approximately 1,900 subscribers at the time of the sale.
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 592
miles of fiber optic cable as of December 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 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.
COMPANY STRATEGY
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 include 5
headends and are built to 400 - 450 MHz.
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 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.
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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 dated
as of July 1, 1997 between the Company, a group of lenders and First Union
National Bank, as agent ("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. In addition, the Company
may consider using equity as consideration for acquisitions in appropriate
cases.
THE CLUSTERS
The Company's Michigan systems are clustered in four main areas: Grand
Rapids, Traverse City, Lapeer and Monroe (Mercom). A brief description of these
clusters as of December 31, 1997 is set forth below.
<TABLE>
<CAPTION>
Grand Rapids Traverse City Lapeer Monroe
<S> <C> <C> <C> <C>
Subscribers (approximate) 71,000 77,200 16,400 39,400
Penetration Rate 59.8% 61.2% 61.2% 60.3%
Bandwidth Range 300-450MHz 300-550MHz 300-750MHz 400-450 MHz
Aerial Miles 1,706 1,982 478 1,133
Underground Miles 965 986 188 206
Total Miles 2,671 2,968 666 1,339
Total Fiber Miles 83 468 9 32
Headends 20 28 5 5
</TABLE>
MERCOM
The Company's systems include the Mercom systems, which as of December 31,
1997 served approximately 39,400 subscribers. In July 1997 Mercom sold its Port
St. Lucie, Florida system to Adelphia Communications Corporation for $3,650,000
in cash. C-TEC acquired an interest in Mercom in 1990 and C-TEC Cable Systems,
Inc. 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%. C-TEC transferred the 62% interest in
Mercom to Cable Michigan prior to the Distribution.
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. For 1997, the total fee paid to the Company under
the Management Agreement was $1,204,000. The revenue to the Company from the
Management Agreement is eliminated in the consolidated statement of operations.
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. As the 62% owner of Mercom, the Company accounts
for all Mercom subscribers as Cable Michigan subscribers.
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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 Federal Communications Commission ("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.
Monthly service rates include fees for Limited Basic Service, Expanded Basic
Service, the Family Value Package, and premium services. At December 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 $5.95
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 another city. For the year ended December 31, 1997 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 77% of total
revenues, premium service fees accounted for approximately 9% of total revenues,
pay-per-view fees were approximately 1% 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 obtain
third party programming for the Company's systems. RCN generally purchases this
programming at lower prices 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,
the Company reimburses RCN for the third party costs incurred by RCN to obtain
such programming. The arrangement is terminable by the Company upon 60 days
notice and by RCN upon one year advance notice.
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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 material 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 advertising 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 1997 was $0.51 per subscriber per month after
compensation to Cable Time.
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 Cable Data, 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 (defined below) 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.
<PAGE>
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 1997, the Company completed
negotiations with 38 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 75 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.
RELATIONSHIP AMONG CABLE MICHIGAN, RCN AND CTE
The Distribution Agreement defines certain aspects of the relationship among
CTE, RCN and Cable Michigan and provides for the allocation of certain assets
and liabilities among CTE, RCN and Cable Michigan. CTE, RCN and Cable Michigan
have also entered into a Tax Sharing Agreement dated as of September 5, 1997
(the "Tax Sharing Agreement") to define certain aspects of their relationship
with respect to taxes and to provide for the allocation of tax assets and
liabilities.
Indemnification
RCN, Cable Michigan and CTE have agreed to indemnify one another against
certain liabilities. RCN has agreed to indemnify CTE and its subsidiaries at
the time of the Distribution (collectively, the "CTE Group") and the respective
directors, officers, employees and affiliates of each person in the CTE Group
(collectively, the "CTE 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 CTE 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 CTE
Indemnitees, arising out of the provision by the CTE 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 CTE 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 Cable Michigan, RCN or CTE (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).
Cable Michigan 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 CTE Indemnitees from and against
any and all Losses incurred or suffered by any of the RCN Indemnitees or the CTE
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 CTE Indemnitees, arising out of the provision by the CTE 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 CTE 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
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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 Cable Michigan, RCN or CTE (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).
CTE 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 CTE Group to pay, perform or
otherwise discharge any of the CTE Liabilities (as defined below), (ii) arising
out of the breach by any member of the CTE 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 CTE Group except to the extent that such Losses
result from the gross negligence or willful misconduct of an RCN Indemnitee.
"CTE Liabilities" refers to (i) all liabilities of the CTE Group under the
Distribution Agreement or any of the other distribution documents, (ii) all
other liabilities of Cable Michigan, RCN or CTE (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 CTE Group
prior to the effective time of the Distribution (the liabilities in clauses (i)
and (ii) collectively, the "True CTE 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 Cable Michigan, RCN or CTE or their respective
subsidiaries which (i)(a) arises from the conduct of the corporate overhead
function with respect to CTE and its subsidiaries prior to the effective time of
the Distribution with certain exceptions or (b) is one of certain fees and
expenses incurred in connection with the Restructuring and (ii) is not a True
CTE Liability, a True RCN Liability or a True Cable Michigan Liability.
RCN, Cable Michigan and CTE 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 certain information provided to
shareholders in connection with the Distribution.
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.
<PAGE>
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.
Employee Matters
Under the Distribution Agreement, RCN, Cable Michigan and CTE agreed generally
to assume employee benefits-related liabilities with respect to its current and,
in some cases, former employees.
Services Provided By RCN
Pursuant to the Distribution Agreement, RCN has agreed to provide, or cause to
be provided, to Cable Michigan 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, (xv) investor and
public relations, (xvi) provision of third party programming and (xvii) other
miscellaneous administrative services.
Subject to certain limitations, the total fee for services listed in items
(ii)-(xii), (xv) and (xvii) will be 4.0% of revenues per year plus a direct
allocation of certain consolidated cable administration functions. The fee for
customer service listed in item (i) along with the billing service listed in
item (xiii) will be a pro rata share (based on subscribers) of the expenses
incurred by RCN to provide such services for RCN and Cable Michigan. The third
party expense incurred by RCN to obtain third party programming and monthly
cable guides for Cable Michigan will be reimbursed to RCN by Cable Michigan and
no additional fee will be charged with respect thereto.
CTE has agreed to provide or cause to be provided to the RCN Group and the
Cable Michigan Group financial data processing applications, lockbox services,
storage facilities, LAN and WAN support services, building maintenance and other
miscellaneous administrative services. The fees for such services and
arrangements will be an allocated portion (based on relative usage) of the cost
incurred by CTE to provide such services and arrangements to all three groups.
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, programming administration and
provision of third party programming 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.
These services may be terminated upon 60 days notice by either RCN or the
Company, except that the services listed as items (i), (xii), (xiii) and (xvi)
above may not be terminated by RCN on less than one year advance notice to the
Company.
<PAGE>
The aforementioned arrangements are not the result of arm's length negotiation
between unrelated parties as Cable Michigan, CTE and RCN have certain common
officers and directors. Although 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, there can be no assurance that Cable
Michigan would not be able to obtain similar services at a lower cost from
unrelated third parties. Additional or modified agreements, arrangements and
transactions may be entered into between the Company and either or both of CTE
and RCN after the Distribution, which will be negotiated at arm's length.
Miscellaneous
The Distribution Agreement also contains provisions concerning access to
information and records and rights to technology, software, intellectual
property, know-how or other proprietary rights owned, licensed or held for use
by the respective Groups. The Distribution Agreement provides that 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.
There exist relationships among CTE, RCN and Cable Michigan that may lead to
conflicts of interest. Each of the CTE, RCN and Cable Michigan are effectively
controlled by Kiewit Telecom. In addition, the majority of the directors and/or
executive officers of CTE, RCN and Cable Michigan also hold one or more offices
at other group companies. See "Item 10: Directors and Executive Officers of the
Registrant." The success of the Company may be affected by the degree of
involvement of its officers and directors in the Company's business and the
abilities of the Company's officers, directors and employees in managing both
the Company and the operations of RCN and/or CTE. Potential conflicts of
interest will be dealt with on a case-by-case basis taking into consideration
relevant factors including the requirements of NASDAQ and prevailing corporate
practices.
Tax Sharing Agreement
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 Cable Michigan, 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
Cable Michigan Group, the RCN Group or the CTE Group will be allocated solely to
such group. Adjustments to all other tax liabilities will generally be allocated
50% to CTE, 20% to Cable Michigan and 30% to RCN.
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 systems' 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 (defined below) 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 (defined below)
and FCC
<PAGE>
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.
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 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. 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. 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. 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 municipal power companies have been exploring
building new video networks to compete with the Company within the areas where
such companies deliver power. See "Regulation." Competition from other cable
television operators exists in some areas served by the Company. Approximately
2% of homes passed by the Company's wholly owned system have been overbuilt (4%
including Mercom). 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 satellite master
antenna television ("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
<PAGE>
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 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. 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.
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
<PAGE>
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 compliant 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 reduction for Regulated Services 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 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.
<PAGE>
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
RCN's investment in Mexican cable systems). The Company has challenged those
decisions on the basis that it should qualify as a "small cable operator" 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.
<PAGE>
The FCC is conducting 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
<PAGE>
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 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.
Regulations promulgated by the FCC under the 1996 Act require LECs to open
their telephone networks to competition by providing competitors
interconnection, access to unbundled network elements and retail services at
wholesale rates. As a result of these changes, companies such as RCN are now
able to interconnect with the incumbent LECs in order to provide local exchange
services. Numerous parties appealed certain aspects of these regulations, and
the appeals were consolidated in the United States Court of Appeals for the
Eighth Circuit. On July 18, 1997, the Eighth Circuit found constitutional
challenges to certain practices implementing cost provisions of the
Telecommunications Act that were ordered by certain state public utility
companies ("PUCs") to be premature; vacated significant portions of the FCC's
nationwide pricing rules; and overturned FCC rules that required that LECs
combine unbundled elements, on request, for the benefit of a competitive
carrier. On October 14, 1997, the Eighth Circuit issued a decision vacating
additional FCC rules that will likely have the effect of increasing the cost of
obtaining the use of combinations of an incumbent LEC's unbundled network
elements. On January 26, 1998, the Supreme Court granted a writ of certiorari
under which it will review the July 18 Eighth Circuit decision; it is expected
(but not yet certain) that the Court will hear arguments on this case in the
fall of 1998. Although state PUCs may still choose to implement at their
discretion some of the FCC rules that were overturned by the Eighth Circuit, the
Eighth Circuit decisions create uncertainty about the rules governing pricing
and terms and conditions of
<PAGE>
interconnection agreements, and could make negotiating and enforcing such
agreements more difficult and protracted and may require renegotiation of
existing agreements.
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. As required by the 1996 Act, the FCC has established
new regulations to govern the charges for pole attachments used by companies
providing telecommunications services, including cable operators. Although the
FCC has issued its regulations, they are subject to changes on reconsideration
(or appeal), and some issues that may affect the ultimate rates for
telecommunications attachments to utility poles remain outstanding. 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 in February 2001.
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-
<PAGE>
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
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.
<PAGE>
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 limited, however, and must be exercised consistently with federal law.
The 1992 Act immunizes franchising authorities from monetary damage awards
rising 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.
EMPLOYEES
As of December 31, 1997 the Company had a total of approximately 210
employees. The Company believes that its relationships with employees are good.
ITEM 2. PROPERTY
<PAGE>
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.
ITEM 3. 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. This lawsuit
has been dormant since the Company announced that the discussions on the
exchange transactions have been suspended.
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 results of operations or financial condition of
the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of security holders of the Registrant during
the fourth quarter of the Registrant's 1997 fiscal year.
<PAGE>
EXECUTIVE OFFICERS OF THE REGISTRANT
Pursuant to General Instruction G(3) of Form 10-K, the following list is
included as an un-numbered Item in Part I of this Report in lieu of being
included in the definitive proxy statement relating to the Registrant's Annual
Meeting of Shareholders to be filed by Registrant with the Commission pursuant
to Section 14 (A) of the Securities Exchange Act of 1934 (the "1934 Act").
Executive Officers of the Registrant
David C. McCourt, 41, has been the Chairman, Chief Executive Officer and a
Director of the Company since September 1997. Mr. McCourt has been Chairman and
Chief Executive Officer of RCN since September 1997. In addition, he has been
Chairman and Chief Executive Officer of CTE since October 1993. Mr. McCourt is
President and Chief Executive Officer, as well as a Director of Kiewit Telecom
Holdings, Inc. He has been Chairman and Chief Executive officer of Mercom since
October 1993, Director of MFS Communications Company, Inc. from July 1990 to
December 1996, 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, a Director of
WorldCom, Inc. since December 1996 and a Director of Kiewit Diversified Group,
Inc. now Level 3 Communications, Inc. since August 1997.
Mark Haverkate, 43, has been the President and Chief Operating Officer and a
Director of the Company since September 1997. Mr. Haverkate has been Executive
Vice President of Business Development of RCN since such date. He has been
President and Chief Operating Officer of Mercom since October 1997. He was the
President of RCN Development (a division of RCN) from June 1997 to September
1997 and the Executive Vice President of Business Development of CTE from May
1997 to September 1997. Previously, he was President for Business Operations of
RCN Telecom Services, Inc. (a wholly owned subsidiary of RCN) from August 1996
to November 1996, Executive Vice President of CTE's Cable Television Group from
July 1995 to August 1996, Executive Vice President of Development for CTE from
February 1995 to July 1995, Executive Vice President for Development of Mercom
from November 1995 to February 1996, Vice President of Development for CTE from
December 1993 to February 1995, Vice President of CTE's Cable Television Group
from October 1989 to December 1993.
Bruce C. Godfrey, 42, has been a Director and Corporate Secretary of the
Company since September 1997. Mr. Godfrey has served as a Director of CTE since
November 1996, Executive Vice President and Chief Financial Officer since April
1994 and Corporate Secretary since September 1997. He has been Executive Vice
President and Chief Financial Officer and a Director of RCN since September
1997. He has also been Executive Vice President and Chief Financial Officer of
Mercom since April 1994 and a Director of Mercom since May 1994 and Corporate
Secretary since October 1997. Mr. Godfrey served as Senior Vice President and
Principal of Daniels and Associates from January 1984 to April 1994.
Timothy J. Stoklosa, 37, has been the Executive Vice President, Chief
Financial Officer and a Director of the Company since September 1997. Mr.
Stoklosa has been Senior Vice President and Treasurer of RCN since such date.
Mr. Stoklosa has been Senior Vice President of Finance of CTE since February
1997, Treasurer of CTE since August 1994 and Executive Vice President and Chief
Financial Officer of Mercom since October 1997. Previously, Mr. Stoklosa served
as 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.
John J. Gdovin, 40, has been Executive Vice President of the Company since
September 1997. Mr. Gdovin was Executive Vice President of CTE's Cable
Television Group from August 1996 to September 1997, Senior Vice President of
RCN Telecom Services, Inc. since February 1997 and Executive
<PAGE>
Vice President of Mercom since August 1996. Previously, Mr. Gdovin was Vice
President of CTE's Cable Television Group from February 1995 to August 1996.
Ralph S. Hromisin, CPA, 37, has been Vice President and Chief Accounting
Officer of the Company since September 1997. He also has been Vice President and
Chief Accounting Officer of RCN and CTE since such date. He served as Vice
President and Corporate Conroller of CTE from August 1994 to September 1997.
Mr. Hromisin has been Vice President and Corporate Controller for Mercom since
October 1996, Director of Corporate Accounting for CTE from March 1992 to August
1994. He also held various positions, most recently Audit Manager for Parente,
Randolph, Orlando, Carey & Associates, CPA's from November 1982 to March 1992.
John D. Filipowicz, 39, has been Senior Vice President and Assistant
General Counsel and Assistant Secretary of the Company since September 1997. He
also has been Senior Vice President, Assistant General Counsel and Assistant
Secretary of RCN since such date and Senior Vice President since September 1997
and Vice President, Assistant General Counsel and Assistant Secretary of CTE
from February 1995 to September 1997; Assistant Corporate Secretary for CTE
since December 1994; Corporate Counsel for CTE from December 1990. Mr.
Filipowicz has also been Senior Vice President, Assistant General Counsel and
Corporate Secretary for Mercom from December 1996 to October 1997, Assistant
Secretary since October 1997 and Vice President, Assistant General Counsel and
Assistant Secretary from May 1995 to December 1996.
<PAGE>
PART II
Item 5. Market for the Registrant's Common Stock and Related Stockholder
Matters.
There were approximately 1,819 holders of Registrant's Common Stock on February
28, 1998. The Company maintains a no cash dividend policy. The Company does
not intend to alter this policy in the foreseeable future. Other information
required under Item 5 of Part II is set forth in Note 15 to the consolidated
financial statements included in Part IV Item 14(a)(1) of this Form 10-K.
Item 6. Selected Financial Data
Information required under Item 6 of Part II is set forth in Part IV Item
14(a)(1) of this Form 10-K.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operation.
Information required under Item 7 of Part II is set forth in Part IV Item
14(a)(1) of this Form 10-K.
Item 8. Financial Statements and Supplementary Data.
The consolidated financial statements and supplementary data required under Item
8 of Part II are set forth in Part IV Item 14(a)(1) of this Form 10-K.
Item 9. Disagreements on Accounting and Financial Disclosure.
During the two years preceding December 31, 1997 there has been neither a change
of accountants of the Registrant nor any disagreement on any matter of
accounting principles, practices, or financial statement disclosure.
PART III
Item 10. Directors and Executive Officers of the Registrant
The information required under Item 10 of Part III with respect to the Directors
of Registrant is set forth in the definitive proxy statement relating to
Registrant's Annual Meeting of Shareholders to be filed by the Registrant with
the Commission pursuant to Section 14 (a) of the 1934 Act and is hereby
specifically incorporated herein by reference thereto.
The information required under Item 10 of Part III with respect to the executive
officers of the Registrant is set forth at the end of Part I thereof.
Item 11. Executive Compensation
The information required under Item 11 of Part III is set forth in the
definitive proxy statement relating to Registrant's Annual Meeting of
Shareholders to be filed by the Registrant with the Commission pursuant to
Section 14 (a) of the 1934 Act, and is hereby specifically incorporated herein
by reference thereto.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information required under Item 12 of Part III is included in the definitive
proxy statement relating to Registrant's Annual Meeting of Shareholders to be
filed by Registrant with the Commission pursuant to Section 14 (a) of the 1934
Act, and is hereby specifically incorporated herein by reference thereto.
<PAGE>
Item 13. Certain Relationships and Related Transactions
The information required under Item 13 of Part III is included in the definitive
proxy statement to Registrant's Annual Meeting of Shareholders to be filed by
Registrant with the Commission pursuant to Section 14 (a) of the 1934 Act, and
is hereby specifically incorporated herein by reference thereto.
PART IV
Item 14. Exhibits, Financial Statement Schedules and Report on Form 8-K.
Item 14. (a)(1) Financial Statements:
Consolidated Statements of Operations for Years Ended December 31, 1997, 1996
and 1995
Consolidated Statements of Cash Flows for Years Ended December 31, 1997, 1996
and 1995
Consolidated Balance Sheets - December 31, 1997 and 1996
Consolidated Statements of Changes In Common Shareholders' Deficit for Years
Ended December 31, 1997, 1996 and 1995
Notes to Consolidated Financial Statements
Report of Independent Accountants
Item 14. (a)(2) Financial Statement Schedules:
Description
Valuation and Qualifying Accounts and Reserves for the Years Ended December 31,
1997, 1996 and 1995 (Schedule II)
All other financial statement schedules not listed have been omitted since the
required information is included in the consolidated financial statements or the
notes thereto, or are not applicable or required.
<PAGE>
Item 14. (a) (3) Exhibits
Exhibits marked with an asterisk are filed herewith and are listed in the index
to exhibits of this Form 10-K. The remainder of the exhibits have been filed
with the Commission previously and are incorporated herein by reference.
(3) Articles of incorporation and by-laws.
(a) Amended and Restated Articles of Incorporation of the Registrant are
incorporated herein by reference to Exhibit 3.1 to the Company's Amendment No. 2
to Form 10/A filed September 5, 1997 (Commission File No. 0-22821.)
(b) Amended and Restated Bylaws of the Registrant are incorporated herein
by reference to Exhibit 3.2 to the Company's Amendment No. 2 to Form 10/A filed
September 5, 1997 (Commission File No. 0-22821.)
(4) Instruments defining the rights of security holders, including indentures.
(a) Credit Agreement dated July 1, 1997 between Cable Michigan, Inc. and
First Union National Bank, as agent is incorporated herein by reference to
Exhibit 4.1 to the Company's Amendment No. 2 to Form 10/A filed September 5,
1997 (Commission file No. 0-22821.)
(b) Amended and Restated Credit Agreement dated August 16, 1995, to Credit
Agreement dated as of November 26, 1989, by and between Mercom, Inc. and Morgan
Guaranty Trust Company of New York is incorporated herein by reference to
Exhibit 10.10 of the Form 8-K of Mercom, Inc. dated August 22, 1995, File No.
0-17750.
(c) Amendment No. 1 dated August 14, 1996 to Amended and Restated Credit
Agreement dated August 16, 1995, to Credit Agreement dated as of November 26,
1989, by and between Mercom, Inc. and Morgan Guaranty Trust Company of New York
is incorporated herein by reference to Exhibit 4.3 to the Company's Amendment
No. 2 to Form 10/A filed September 5, 1997 (Commission File No. 0-22821.)
(d) Amended and Restated Credit Agreement dated September 29, 1997, to
Credit Agreement dated as of November 26, 1989 and further amended and restated
as of August 16, 1995 by and between Mercom, Inc. and Registrant is incorporated
herein by reference to Exhibit 98 to the Company's report on Form 10-Q for the
quarter ended September 30, 1997 (Commission File No. 0-22821).
(e) Assignment and Assumption Agreement dated September 29, 1997 by and
between Registrant and Morgan Guaranty Trust Company of New York is incorporated
herein by reference to Exhibit 97 to the Company's report on Form 10-Q for the
quarter ended September 30, 1997 (Commission File No. 0-22821).
(f) Assumption Agreement dated September 30, 1997 by and among C-TEC
Corporation, the Registrant and First Union Bank is incorporated herein by
reference to Exhibit 99 to the Company's report on Form 10-Q for the quarter
ended September 30, 1997 (Commission File No. 0-22821).
* (g) First Amendment and Restatement dated September 29, 1997 to the Credit
Agreement dated as of June 30, 1997 by and among Cable Michigan, Inc., the
Lenders and First Union National Bank, as Administrative Agent for the Lenders.
* (h) Credit Agreement dated June 30, 1997 by and among C-TEC Corporation,
the Lenders and First Union National Bank, as Administrative Agent for the
Lenders.
(10) Material Contracts
(a) Tax Sharing Agreement by and among C-TEC Corporation, RCN Corporation
and the Registrant is incorporated herein by reference to Exhibit 10.1 to the
Company's Amendment No. 2 to Form 10/A filed September 5, 1997 (Commission file
No. 0-22821.)
(b) Management Agreement dated January 1, 1997 by and between Mercom, Inc.
and C-TEC Cable Systems of Michigan, Inc. is incorporated herein by reference to
Exhibit 10.2 to the Company's Amendment No. 2 to Form 10/A filed September 5,
1997 (Commission File No. 0-22821.)
(c) Distribution Agreement among C-TEC Corporation, RCN Corporation and
the Registrant is incorporated herein by reference to Exhibit 2.1 to the
Company's Amendment No. 2 to Form 10/A filed September 5, 1997 (Commission File
No. 0-22821.)
<PAGE>
*(21) Subsidiaries of the Registrant
*(23) Consent of Independent Accountants
*(24) Powers of Attorney
*(27) Financial Data Schedule
Item 14.(b) Reports on Form 8-K:
No Reports on Form 8-K have been filed by the Registrant during the last
quarter of the period covered by this Report on Form 10-K.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Cable Michigan, Inc.
Date: March 31, 1998 By /s/ David C. McCourt
--------------------
David C. McCourt
Chairman and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
PRINCIPAL EXECUTIVE AND ACCOUNTING OFFICERS:
<S> <C> <C>
/s/ David C. McCourt Chairman and Chief March 31, 1998
- --------------------------- Executive Officer
David C. McCourt
/s/ Mark Haverkate President and Chief March 31, 1998
- --------------------------- Operating Officer
Mark Haverkate
/s/ Timothy J. Stoklosa Executive Vice March 31, 1998
- --------------------------- President and
Timothy J. Stoklosa Chief Financial
Officer
/s/ Ralph S. Hromisin Vice President and March 31, 1998
- --------------------------- Chief Accounting
Ralph S. Hromisin Officer
<CAPTION>
DIRECTORS:
<S> <C> <C>
/s/ David C. McCourt March 31, 1998
- ---------------------------
David C. McCourt
/s/ Raymond B. Ostroski March 31, 1998
- ---------------------------
Raymond B. Ostroski
/s/ David C. Mitchell March 31, 1998
- ---------------------------
David C. Mitchell
/s/ Frank M. Henry March 31, 1998
- ---------------------------
Frank M. Henry
/s/ Daniel E. Knowles March 31, 1998
- ---------------------------
Daniel E. Knowles
/s/ Bruce C. Godfrey March 31, 1998
- ---------------------------
Bruce C. Godfrey
/s/ Mark Haverkate March 31, 1998
- ---------------------------
Mark Haverkate
/s/ Timothy J. Stoklosa March 31, 1998
- ---------------------------
Timothy J. Stoklosa
</TABLE>
<PAGE>
CABLE MICHIGAN, INC.
AND SUBSIDIARIES
SELECTED FINANCIAL DATA
(Dollars in Thousands Except Per Share Amounts)
<TABLE>
<CAPTION>
For the Years Ended
December 31,
-----------------------------------------------------------
1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
Sales $ 81,299 $ 76,187 $ 60,675 $ 49,141 $ 48,665
Income (loss) from continuing operations ($4,358) ($8,256) ($10,501) ($26,226) ($29,143)
Income (loss) per average common share
from continuing operation ($0.63) ($1.20) ($1.53) ($6.14) ($7.06)
Dividends per share* - - - - -
Total assets $142,597 $149,200 $ 172,759 $ 116,972 $ 147,286
Long-term debt, net of current maturities $143,000 $ 15,680 $ 17,430 - -
</TABLE>
- ------------------------
* Based on average shares of Common Stock
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
Certain statements contained in this annual report are "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995 and are thus prospective. Such forward-looking statements include, in
particular, statements regarding the Company's operations, economic performance
and financial condition, plans to develop networks and upgrade facilities, the
development of the Company's businesses, the markets for the Company's services
and products, the Company's anticipated capital expenditures, the Company's
anticipated sources of capital and effects of regulatory reform and competitive
and technological developments. No assurance can be given that the future
results covered by the forward-looking statements will be achieved. Such
statements are subject to risks, uncertainties and other factors which could
cause actual results to differ materially from future results expressed or
implied by such forward-looking statements.
The following discussion should be read in conjunction with the Company's
historical Consolidated Financial Statements and Notes thereto:
The Company is a cable television operator in the State of Michigan, which, as
of December 31, 1997, served approximately 204,000 subscribers. These figures
include the approximately 39,400 subscribers served by Mercom, a 62% owned
subsidiary of the Company.
Prior to September 30, 1997, the Company was operated as part of C-TEC
Corporation. On September 30, 1997, C-TEC distributed 100% of the outstanding
shares of common stock of its wholly owned subsidiaries, RCN Corporation ("RCN")
and Cable Michigan, Inc. ("Cable Michigan" or the "Company") to holders of
record of C-TEC's Common Stock and C-TEC's Class B Common Stock as of the close
of business on September 19, 1997 (the "Distribution") in accordance with the
terms of a Distribution Agreement dated September 5, 1997 among C-TEC, RCN and
Cable Michigan. Cable Michigan consists of C-TEC's Michigan cable operations,
including its 62% ownership in Mercom, Inc. ("Mercom"). Following the
Distribution, C-TEC changed its name to Commonwealth Telephone Enterprises, Inc.
("CTE"). C-TEC , RCN and Cable Michigan have entered into certain agreements
providing for the Distribution, and governing various ongoing relationships
between the three companies, including a distribution agreement and a tax-
sharing agreement. The historical financial information presented herein
<PAGE>
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
Year Ended December 31, 1997 Compared With Year Ended December 31, 1996
For the year ended December 31, 1997, operating income before depreciation and
amortization and management fees was $36,832 compared to $35,594 for the year
ended December 31, 1996. Sales increased 6.7% to $81,299 for 1997 from $76,187
in 1996. For the year ended December 31, 1997, net loss was ($4,358) as
compared to a net loss of ($8,256) for 1996. The improvement in operating
income before depreciation and amortization and management fees of $1,238 was
substantially offset by higher depreciation and amortization of $655. Lower
interest expense of $3,428 and a $2,571 gain on the sale of the Port St. Lucie
cable operations of Mercom, partially offset by a lower benefit for income taxes
of $1,598 and a lower minority share of Mercom's losses of $1,098 primarily
account for the decrease in the net loss of $3,898 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. Sales for 1997
were $81,299, an increase of $5,112 or 6.7%, primarily due to higher basic
revenue resulting from approximately 5,757 additional average subscribers over
the same period in 1996 and the effects of rate increases during the first
quarter of 1997.
Management fees increased $217, or 6.2% primarily due to costs associated with
the spin-off of the Company from CTE.
Costs and expenses, excluding depreciation and amortization and management fees,
are comprised of direct costs of providing services, primarily cable programming
and franchise costs, salaries and benefits, customer service costs, sales and
marketing costs and general and administrative expenses. Costs and expenses
excluding depreciation and amortization and management fees were $44,467 for
1997, an increase of $3,874, or 9.5% as compared to 1996. The increase is
primarily due to higher basic programming costs resulting from higher rates,
additional channels and increased subscribers and due to increased payroll and
benefits.
Depreciation and amortization was $32,082 in 1997, an increase of $655 or 2.1%
as compared to 1996.
Interest expense was $11,751 in 1997, a decrease of approximately $3,428, or
22.6% as compared to 1996 due to lower notes payable to affiliates, partially
offset by an increase in interest expense on new third-party debt.
For the year ended December 31, 1997, the Company realized a gain of $2,571 on
the sale of the Port St. Lucie cable operations of Mercom which also resulted in
an increase in the minority share of Mercom's income.
The Company's effective income tax rate was (48.6%) in 1997 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 6 to the Consolidated Financial Statements.
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 and management fees was $35,594 as compared to $29,228 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
<PAGE>
before depreciation and amortization and management fees of $6,366 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 5.7% in April 1995, which affected 1996
results for a full year, and approximately 12.1% 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 and management fees,
were $40,593 for 1996, an increase of $9,146, or 29.1% 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 depreciation 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 fees 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 6 to the Consolidated Financial Statements.
Liquidity and Capital Resources
<PAGE>
During 1997, the Company incurred $128,000 of newly issued third party debt and
repaid approximately $110,000 of the total amount of outstanding intercompany
notes payable owed to C-TEC Cable Systems, Inc., which is an RCN subsidiary.
The remaining amount of outstanding intercompany indebtedness of the Company of
approximately $30,731 was treated as a capital contribution to the Company. In
addition, the Company assumed approximately $15,000 of CTE indebtedness, which
is collateralized by the 62% interest in Mercom in connection with CTE's
contribution of its investment in Mercom to the Company. Cable Michigan, Inc.
(the parent company) assumed all of the bank's interest in Mercom's Term Credit
Agreement (approximately $14,000). Immediately after the assumption of the Term
Credit Agreement by Cable Michigan, Inc., the Term Credit Agreement was amended
and restated (see Note 7).
The Company has generated operating income before depreciation and amortization
of $33,117, $32,096 and $25,926 for the years ended December 31, 1997, 1996 and
1995, respectively. The Company currently anticipates that capital expenditures
in respect of system upgrades will be approximately $22,300 during 1998 and
approximately $19,300 during 1999. Additional capital expenditures in respect
of plant expansion and maintenance of $7,800 and $5,700 are expected to be
incurred in 1998 and 1999, respectively. The Company believes that cash flow
generated by operations, cash balances on hand and, if necessary, borrowings,
will enable the Company to fund its capital expenditure requirements and to make
scheduled payments of principal and interest on indebtedness, but there can be
no assurance in the regard. The Company has $37,000 of credit availability under
its Revolving Credit Facility (Note 7) at December 31, 1997.
For the year ended December 31, 1997, the Company's net cash provided by
operating activities was $18,344 comprised primarily of a net loss of $4,358
adjusted by non-cash depreciation and amortization of $32,082, other non-cash
items totaling ($4,096) and working capital changes of ($4,570). Net cash used
in investing activities of $10,009 consisted primarily of additions to property,
plant and equipment of $14,041, partially offset by proceeds from the sale of
Port St. Lucie of $3,496. Net cash provided by financing activities of $5,587
consisted of the issuance of long-term debt of $128,000 and transfers from CTE
of $12,500, substantially offset by a change in affiliate notes of ($116,836)
and redemption of long-term debt of $17,430.
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.
Regulatory Issues
No assurances can be given at this time that the following regulatory matters
will not have a material adverse effect on the Company's business and results of
operations in the future. Also, no assurance can be given as to what other
future actions Congress, the Federal Communications Commission ("FCC") or other
regulatory authorities may take or the effects thereof on the Company.
Telecommunications Act of 1996
The Telecommunications Act of 1996 (the "1996 Act") is intended to stimulate
growth and competition in virtually every component of the communications
industry. The 1996 Act established a framework for deregulation and calls for
state regulators and the FCC to work out the specific implementation process.
Companies are permitted to combine historically separate lines of business into
one, and provide that combined service in markets of their own choice. In
addition, there will be relief from the earnings restrictions and price controls
that have governed the local telephone business for many years and were imposed
on the cable industry in 1992 by the Cable Television Consumer Protection and
Competition Act of 1992 (the "1992 Act").
<PAGE>
The rate regulation provisions of the 1992 Act have not had a materially adverse
effect on the Company's financial condition and results of operations. With the
passage of the 1996 Act, all cable systems rates are deregulated as effective
competition enters the franchise area, or by March 31, 1999, whichever comes
first. The Company anticipates that certain provisions of the 1992 Act that do
not relate to rate regulation, such as the provisions relating to retransmission
consent and customer service standards, will reduce the future operating margins
of the Company.
Over the last several years, the Company has received complaints related to its
FCC rate filings. Although the Company believes that its rates are justified,
according to the rules and regulations established by the FCC, the Company
believes that it has adequately reserved for any exposures related to these rate
proceedings.
Impact of the Year 2000 Issue
The Company has certain financial, administrative and operational systems which
are subject to Year 2000 exposures. The Company has performed a study to
identify those specific systems which require remediation and developed a plan
to correct such situations in a timely fashion. The Company's plan is
proceeding on target. The plan includes ensuring that those systems for which
the Company is dependent on external vendors, such as certain billing systems,
will be Year 2000 compliant by the end of 1999 based on the status of external
vendors' remediation efforts. For those internal systems that require
corrective action, the Company has contracted with its information systems
services provider to rewrite the relevant programming code. Finally, the
Company is well along on a conversion of its suite of financial systems to a
state-of-the-art Oracle system. Such system is expected to ensure Year 2000
compliance in financial applications, enable the Company to process and report
its financial transactions more efficiently and provide a greater level of
detailed information to facilitate management's analysis which is critical to
its business decisions.
The Company is employing a team approach across its MIS, financial and
operational groups in addressing the above issues, as well as utilizing the
assistance of external consultants in the case of the Oracle implementation.
Such team approach facilitates a consistent progress along plans without
disruption of other areas of the business.
There is no assurance that the Company's plans will continue to progress as
intended. The Company estimates that its cost of Year 2000 remediation will
not be material.
<PAGE>
CABLE MICHIGAN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in Thousands)
<TABLE>
<CAPTION>
For the Years Ended December 31,
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Sales $81,299 $76,187 $60,675
Costs and expenses, excluding management fees and 44,467 40,593 31,447
depreciation and amortization
Management fees 3,715 3,498 3,302
Depreciation and amortization 32,082 31,427 25,154
------- ------- -------
Operating income 1,035 669 772
Interest income 358 127 55
Interest expense (11,751) (15,179) (15,973)
Gain on sale of Florida cable system 2,571 - -
Other (expense), net (738) (736) (363)
------- ------- -------
(Loss) before income taxes (8,525) (15,119) (15,509)
(Benefit) from income taxes (4,114) (5,712) (5,590)
------- ------- -------
(Loss) before minority interest and equity in
unconsolidated entities (4,411) (9,407) (9,919)
Equity in (loss) of unconsolidated entities - - (396)
Minority interest in loss (income) of consolidated entity 53 1,151 (186)
------- ------- -------
Net (loss) ($ 4,358) ($ 8,256) ($10,501)
======= ======= =======
Basic earnings per average common share:
Net (loss) to shareholders ($0.63) ($1.20) ($1.53)
Average common shares outstanding 6,870,528 6,864,799 6,861,292
Diluted earnings per average common share:
Net (loss) to shareholders ($0.63) ($1.20) ($1.53)
Average common shares and common stock equivalents outstanding 6,870,528 6,864,799 6,861,292
</TABLE>
See accompanying notes to Consolidated Financial Statements.
<PAGE>
CABLE MICHIGAN, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
<TABLE>
<CAPTION>
December 31,
1997 1996
--------------------
<S> <C> <C>
ASSETS
Cash and temporary cash investments $ 17,219 $ 3,297
Accounts receivable, net of reserve for
doubtful accounts of $541 in 1997 and $579 in 1996 3,644 3,884
Prepayments and other 663 518
Accounts receivable from related parties 166 1,716
Deferred income taxes 1,006 974
Property, plant and equipment, net of accumulated depreciation
of $94,174 in 1997 and $80,325 in 1996 73,836 77,792
Intangible assets, net 45,260 60,956
Deferred charges and other assets 803 63
--------------------
Total assets $142,597 $149,200
====================
LIABILITIES AND SHAREHOLDERS' DEFICIT
Liabilities
Current maturities of long-term debt $ - $ 1,750
Accounts payable 5,564 3,337
Advance billings and customer deposits 2,242 2,113
Accrued taxes 167 228
Accrued cable programming expense 2,720 1,811
Accrued litigation costs 1,450 2,150
Accrued expenses 2,928 3,092
Accounts payable to related parties 1,560 9,861
Long-term debt 143,000 15,680
Notes payable - affiliates - 147,567
Deferred income taxes 22,197 26,656
--------------------
Total liabilities 181,828 214,245
Minority interest 14,643 14,696
Commitments and contingencies
Preferred Stock - -
Common shareholders' deficit (53,874) (79,741)
--------------------
Total Liabilities and Shareholders' Deficit $142,597 $149,200
====================
</TABLE>
See accompanying notes to Consolidated Financial Statements.
<PAGE>
CABLE MICHIGAN, INC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
<TABLE>
<CAPTION>
For the years ended December 31,
------------------------------------------
1997 1996 1995
------------------------------------------
<S> <C> <C> <C>
Cash Flows from Operating Activities
Net (loss) $ (4,358) $ (8,256) $(10,501)
Gain on pension curtailment/settlement - (855) -
Depreciation and amortization 32,082 31,427 25,154
Deferred income taxes and investment tax credits, net (4,359) 988 (4,853)
Provision for losses on accounts receivable 826 843 747
Gain on sale of Florida cable operations (2,571) - -
Equity in loss of unconsolidated entitites - - 396
(Decrease) increase in minority interest (53) (1,151) 186
Other non-cash items 1,914 2,274 2,147
Net change in certain assets and liabilities, net of business acquisitions:
Accounts receivable and unbilled revenues (617) (1,226) (1,208)
Accounts payable 2,234 1,365 (1,682)
Accrued expenses 580 125 (495)
Accrued taxes 61 (99) (9,020)
Accounts receivable from related parties 1,549 567 499
Accounts payable to related parties (8,300) 1,314 (1,082)
Other, net 70 347 19
Other (714) 154 4
--------- -------- --------
Net cash provided by operating activitites 18,344 27,817 311
--------- -------- --------
Cash Flows from Investing Activities
Additions to property, plant and equipment (14,041) (9,605) (11,207)
Acquisitions, net of cash acquired (24) - (2,445)
Proceeds from sale of Florida cable operations 3,496 - -
Other 560 390 307
--------- -------- --------
Net cash used in investing activities (10,009) (9,215) (13,345)
--------- -------- --------
Cash Flows from Financing Activities
Issuance of long-term debt 128,000 - -
Redemption of long-term debt (17,430) (1,500) (5,763)
Proceeds from the issuance of common stock - - 8,256
Transfers from CTE 12,500 - 4,615
Change in affiliate notes, net (116,836) (16,834) 7,885
Payments made for debt financing costs (647) - -
--------- -------- --------
Net cash (used in) provided by financing activities 5,587 (18,334) 14,993
Net increase in cash and temporary cash investments 13,922 268 1,959
Cash and temporary cash investments at beginning of year 3,297 3,029 1,070
--------- -------- --------
Cash and temporary cash investments at end of year $ 17,219 $ 3,297 $ 3,029
========= ======== ========
</TABLE>
See accompanying notes to Consolidated Financial Statements.
<PAGE>
CABLE MICHIGAN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
<TABLE>
<CAPTION>
For the Years Ended December 31,
Supplemental disclosures of cash flow information 1997 1996 1995
<S> <C> <C> <C>
Cash paid during the year for:
Interest $11,400 $15,199 $15,849
Income taxes $370 $29 -
</TABLE>
Supplemental Schedule of Non-cash Investing and Financing Activities:
In September 1997, in connection with the transfer of CTE's investment in Mercom
to the Company, the Company assumed CTE's $15,000 Term Credit Facility.
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 C-TEC's previous
investment of 43.63% outstanding Common Stock, was accounted for as a purchase.
A summary of the acquisition is as follows:
<TABLE>
<S> <C>
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
=======
</TABLE>
Certain intercompany accounts receivable and payable and intercompany note
balances were transferred to shareholders' net investment in connection with
the Distribution.
<PAGE>
CABLE MICHIGAN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' DEFICIT
For the Years Ended December 31, 1997, 1996 and 1995
(Dollars in Thousands)
<TABLE>
<CAPTION>
Common Total
Shares Common Shareholder's Shareholders'
Outstanding Stock Deficit Net Investment Deficit
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1994 1,000 $ 1 $ - ($76,933) ($76,932)
Net loss (10,501) (10,501)
Transfers from (to) CTE 13,676 13,676
--------- ------- -------- ---------- ---------
Balance, December 31, 1995 1,000 1 - (73,758) (73,757)
Net loss (8,256) (8,256)
Transfers from (to) CTE 2,272 2,272
--------- ------- -------- ---------- ---------
Balance, December 31, 1996 1,000 1 - (79,742) (79,741)
Net loss from 1/1/97 through 9/30/97 (3,251) (3,251)
Net loss from 10/1/97 through 12/31/97 (1,107) (1,107)
Transfers from RCN Corporation 30,225 30,225
Common stock issued in connection 6,870,165 6,870 (59,638) 52,768 -
with the distribution
--------- ------- -------- ---------- ---------
Balance, December 31, 1997 6,871,165 $ 6,871 ($60,745) $ - ($53,874)
========= ======= ======== ========== =========
</TABLE>
<PAGE>
CABLE MICHIGAN, INC.
NOTES CONSOLIDATED FINANCIAL STATEMENTS
(Dollars In Thousands Except Per Share Data)
1. BACKGROUND AND BASIS OF PRESENTATION
Prior to September 30, 1997, the Company was operated as part of C-TEC
Corporation ("C-TEC"). On September 30, 1997, C-TEC distributed 100 percent of
the outstanding shares of common stock of its wholly owned subsidiaries, RCN
Corporation ("RCN") and Cable Michigan, Inc. ("Cable Michigan") to holders of
record of C-TEC's Common Stock and C-TEC's Class B Common Stock as of the close
of business on September 19, 1997 (the "Distribution") in accordance with the
terms of the Distribution Agreement dated September 5, 1997 among C-TEC, RCN and
Cable Michigan. Cable Michigan consists of C-TEC's Michigan cable operations,
including its 62% ownership in Mercom, Inc. In connection with the Distribution,
C-TEC changed its name to Commonwealth Telephone Enterprises, Inc. ("CTE"). RCN
consists primarily of C-TEC's bundled residential voice, video and Internet
access operations in the Boston to Washington, D.C. corridor, its existing New
York, New Jersey and Pennsylvania cable television operations, a portion of its
long distance operations and its international investment in Megacable, S.A. de
C.V.
The consolidated financial statements have been prepared using the historical
basis of assets and liabilities and historical results of operations of all
wholly and majority owned subsidiaries. However, 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, financial condition or cash flows
of the Company in the future or what they would have been had the Company been
an independent, public company during the reporting periods. All material
intercompany transactions and balances have been eliminated.
RCN's corporate services group has historically provided substantial support
services such as finance, cash management, legal, human resources, insurance and
risk management. Prior to the Distribution, the corporate office of C-TEC
allocated the cost for these services pro rata among the business units
supported 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, such costs are not necessarily indicative of the costs
that would have been incurred by the Company on a stand-alone basis.
CTE, RCN and Cable Michigan have entered into certain agreements providing for
the Distribution, and governing various ongoing relationships, including the
provision of support services between the three companies, including a
distribution agreement and a tax-sharing agreement.
The fee per year for support services from RCN will be 4.0% of the revenues of
Cable Michigan plus a direct allocation of certain consolidated cable
administration functions of RCN. The direct charge for customer service along
with the billing service and the cable guide service 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.
<PAGE>
CTE has agreed to provide or cause to be provided to RCN and Cable Michigan
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 CTE to provide such financial data
processing services to all three groups.
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 RCN and Cable Michigan, such costs will be shared by each Company on a pro
rata basis based on each Company's number of subscribers.
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 effect 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.................................................. 12 to 25 years
Cable Television Distribution Equipment.................... 8.5 to 12 years
Vehicles................................................... 5 years
Other Equipment............................................ 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. Intangible
assets include cable television 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. The provisions of these local franchises are
subject to federal regulation. Costs incurred to obtain or renew franchises are
capitalized and amortized over the term of the applicable franchise agreement.
Accounting for Impairments - The Company follows 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").
<PAGE>
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 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.
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 $560, $514 and $574 in 1997, 1996 and 1995,
respectively.
Stock-Based Compensation - The Company applies Accounting Principles Board
- ------------------------
Opinion No. 25 - "Accounting for Stock Issued to Employees" ("APB 25") in
accounting for its stock plans. The Company has adopted the disclosure - only
provisions of Statement of Financial Accounting Standards No. 123 - "Accounting
for Stock-Based Compensation" ("SFAS 123").
Earnings (loss) per share - The Company has adopted statement of Financial
- -------------------------
Accounting Standards No. 128 - "Earnings Per Share" ("SFAS 128"). Basic earnings
(loss) per share is computed based on net income (loss) divided by the weighted
average number of shares of common stock outstanding during the period.
Diluted earnings (loss) per share is computed based on net income (loss) divided
by the weighted average number of shares of common stock outstanding during the
period after giving effect to convertible securities considered to be dilutive
common stock equivalents. The conversion of stock options during periods in
which the Company incurs a loss from continuing operations is not assumed since
the effect is anti-dilutive. The number of stock options which would have been
converted in 1997 and had a dilutive effect if the Company had income from
continuing operations is 55,602.
For periods prior to October 1, 1997, during which the Company was a wholly
owned subsidiary of C-TEC, earnings (loss) per share was calculated by dividing
net income (loss) by one-fourth the average common shares of C-TEC outstanding,
based upon a distribution ratio of one share of Company common stock for each
four shares of C-TEC common equity owned.
<TABLE>
<CAPTION>
Years Ended December 31,
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Net loss $(4,358) $(8,256) $(10,501)
Basic earnings per average common share:
Average shares outstanding 6,870,528 6,864,799 6,861,292
(Loss) per average common share $(0.63) $(1.20) $(1.53)
Diluted earnings per average common share:
Average shares outstanding 6,870,528 6,864,799 6,861,292
Dilutive shares resulting from stock options - - -
--------- --------- ---------
6,870,528 6,864,799 6,861,292
========= ========= =========
(Loss) per average common share $(0.63) $(1.20) $(1.53)
</TABLE>
<PAGE>
Income Taxes - Cable Michigan, Inc. and Mercom file separate consolidated
- ------------
federal income tax returns. Prior to the Distribution, income tax expense was
allocated to C-TEC's subsidiaries on a separate return basis except that C-TEC's
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 reporting purposes. 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.
3. BUSINESS COMBINATION AND DISPOSITIONS
Pursuant to a common stock rights offering, C-TEC, through a wholly-owned
subsidiary, acquired majority voting control of Mercom, Inc. ("Mercom") in
August 1995 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 owned 61.92% of the outstanding common stock of Mercom and,
accordingly, 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. C-TEC's investment in Mercom was transferred to the Company in
connection with the Distribution.
In July 1997, Mercom sold its cable system in Port St. Lucie, Florida for cash
of approximately $3,500. The Company realized a pretax gain of $2,571 on the
transaction.
4. PROPERTY, PLANT AND EQUIPMENT
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Leasehold improvements................ $ 156 $ 170
Cable plant........................... 158,655 149,434
Buildings and land.................... 2,837 2,733
Furniture, fixtures and vehicles...... 5,372 4,982
Construction in process............... 990 798
-------- --------
Total property, plant and equipment... 168,010 158,117
Less accumulated depreciation......... (94,174) (80,325)
-------- --------
Property, plant and equipment, net.... $ 73,836 $ 77,792
======== ========
</TABLE>
Depreciation expense was $16,431, $15,728 and $12,115 for the years ended
December 31, 1997, 1996 and 1995, respectively.
<PAGE>
5. INTANGIBLE ASSETS
Intangible assets consist of the following at December 31:
<TABLE>
<CAPTION>
Amortization
Period 1997 1996
-------------- --------- ---------
<S> <C> <C> <C>
Franchises.............. 6.8-19.3 years $ 91,437 $ 91,572
Subscriber lists........ 19.3 years 43,452 43,427
Noncompete agreements... 5 years 473 473
Goodwill................ 9-10 years 3,990 3,990
Other................... 5.0-19.3 years 1,729 1,772
-------- --------
Total................... 141,081 141,234
Less accumulated
amortization.......... (95,821) (80,278)
-------- --------
Intangible assets, net.. $ 45,260 $ 60,956
======== ========
</TABLE>
Amortization expense charged to operations in 1997, 1996 and 1995 was $15,651,
$15,699 and $13,039, 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.
<PAGE>
6. INCOME TAXES
The income tax provision (benefit) in the accompanying consolidated financial
statements of operations is comprised of the following:
<TABLE>
<CAPTION>
1997 1996 1995
--------- -------- ---------
<S> <C> <C> <C>
Current:
Federal............................ $ 245 $(6,700) $ (737)
State.............................. - - -
------- ------- -------
Total Current.................... 245 (6,700) (737)
------- ------- -------
Deferred:
Federal............................ (4,359) 988 (4,853)
State.............................. - - -
------- ------- -------
Total Deferred................... (4,359) 988 (4,853)
------- ------- -------
Total (benefit) for income taxes... $(4,114) $(5,712) $(5,590)
======= ======= =======
</TABLE>
The benefit for income taxes is different from the amounts computed by applying
the U.S. statutory federal tax rate of 34% for 1997 and 35% for 1996 and 1995.
The differences are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
(Loss) before (benefit) for income taxes............ $(8,525) $(15,119) $(15,509)
======= ======== ========
Federal tax (benefit) at statutory rates............ $(2,899) $ (5,307) $ (5,434)
State income taxes.................................. - - -
Goodwill............................................ 171 175 176
Increase (decrease) in valuation allowance.......... (1,190) (518) (255)
IRS Audit Adjustment................................ - - (132)
Adjustment to prior year amortization............... - - 28
Nondeductible expenses.............................. 147 - -
Benefit of rate differential applied to reversing
timing differences................................ (424) - -
Other, net.......................................... 81 (62) 27
------- -------- --------
(Benefit) for income taxes.......................... $(4,114) $ (5,712) $ (5,590)
======= ======== ========
</TABLE>
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:
<TABLE>
<CAPTION>
Tax Net
Operating Expiration
Year Losses Date
---- ------ ----
<S> <C> <C> <C>
1991 $ 329 2006
1992 $1,628 2007
1995 $2,713 2010
</TABLE>
In the current year, Mercom was liable for Federal Alternative Minimum Tax
(AMT). At December 31, 1997, the cumulative minimum tax credits are $141. This
amount can be carried forward indefinitely to reduce regular tax liabilities
that exceed AMT in future years.
<PAGE>
Temporary differences that give rise to significant portion of deferred tax
assets and liabilities at December 31 are as follows:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
NOL carryforwards................. $ 1,588 $ 3,532
Alternative minimum tax credits... 141 39
Reserves.......................... 753 828
Other, net........................ 230 158
-------- --------
Total deferred assets............. 2,712 4,557
-------- --------
Property, plant and equipment..... (11,940) (15,354)
Intangible assets................. (11,963) (13,623)
-------- --------
Total deferred liabilities........ (23,903) (28,977)
-------- --------
Sub total......................... (21,191) (24,420)
Valuation allowance............... - (1,262)
-------- --------
Total deferred taxes.............. $(21,191) $(25,682)
======== ========
</TABLE>
In the opinion of management, based on the future reversal of taxable temporary
differences, primarily depreciation and amortization, the Company will more
likely than not be able to realize all of its deferred tax assets. As a result,
the net change in the valuation allowance for deferred tax assets during 1997
was a decrease of $1,262, of which $72 related to Mercom of Florida.
Due to the sale of Mercom of Florida, the Company's deferred tax liabilities
decreased by $132.
7. DEBT
Long-term debt outstanding at December 31 is as follows:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Term Credit Facility........ $100,000 -
Revolving Credit Facility... 28,000 -
Term Loan................... 15,000 -
Term Credit Agreement....... - 17,430
-------- -------
Total....................... 143,000 17,430
Due within one year......... - 1,750
-------- -------
Total Long-Term Debt........ $143,000 $15,680
======== =======
</TABLE>
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 first is a five-year revolving credit facility in the
amount of $65,000 (the "Revolving Credit Facility"). The second is an eight-
year term credit facility in the amount of $100,000 (the "Term Credit
Facility").
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 (6.6% at December
31,1997) (each as defined in the Credit Agreement).
The entire amount of the Term Credit Facility has been drawn and as of December
31, 1997, $100,000 of the principal was outstanding thereunder. The entire
amount of the Revolving Credit Facility is available to the Company until June
30, 2002. As of December 31, 1997, $28,000 of principal was outstanding
thereunder. Revolving loans may be repaid and reborrowed from time to time.
The Term Credit Facility is payable over six years in quarterly installments,
from September 30, 1999 through June 30, 2005. Interest only is due through
June 1999. The credit agreement is currently unsecured.
<PAGE>
The Credit Agreement contains restrictive covenants which, among other things,
require the Company to maintain certain debt to cash flow, interest coverage and
fixed charge coverage ratios and place certain limitations on additional debt
and investments. The Company does not believe that these covenants will
materially restrict its activities.
On September 30, 1997, the Company assumed all obligations of CTE 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
collateralized by a first priority pledge of all shares of Mercom owned by the
Company. The $15 Million Facility has interest rate provisions (6.56% at
December 31,1997), covenants and events of default substantially the same as the
Credit Facilities.
Contractual maturities of long-term debt are as follows:
<TABLE>
<CAPTION>
Aggregate
Year Amounts
---- ---------
<S> <C>
1998 -
1999 20,000
2000 11,250
2001 13,750
2002 58,401
</TABLE>
In November 1989, Mercom entered into a term credit agreement with a bank. In
addition, Mercom entered into a revolving credit facility in August 1995 of
$2,000 with an initial maturity of August 1996, which was amended and extended
to August 1997. In August 1997, the revolving credit agreement expired. Mercom
had no borrowings under the revolving credit agreement in 1996 or 1997.
The term credit agreement was amended several times in order to, among other
things, increase borrowings thereunder and to restructure the amortization
schedule of the principal repayments.
On September 29, 1997, the Company purchased and assumed all of the bank's
interest in the term credit agreement and the note issued thereunder. As of
such date, $14,151 of principal was outstanding. Immediately after the
purchase, the term credit agreement was amended in order to, among other things,
provide for less restrictive financial covenants, eliminate mandatory
amortization of principal and provide for a bullet maturity of principal on
December 31, 2002, and remove the change of control event of default. Mercom's
borrowings under the term credit agreement contain pricing and security
provisions substantially the same as those in place prior to the purchase of the
loan. The borrowings are secured by a pledge of the stock of Mercom's
subsidiaries and a first lien on certain of the assets of Mercom and its
subsidiaries, including inventory, equipment and receivables.
At December 31, 1997 Mercom was in compliance with all covenants under the term
credit agreement, including the covenants requiring Mercom to maintain a certain
debt to cash and interest coverage ratio. The borrowings under the term credit
agreement are eliminated in the Company's consolidated balance sheet.
8. 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. Rights holders were able to purchase for a price of
$3.60 per share, one share of common stock for each right held.
<PAGE>
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.
9. COMMON STOCK AND STOCK PLANS
The Company has authorized 25,000,000 shares of $1 par value common stock, and
50,000,000 shares of $1 par value Class B common stock. The Company also has
authorized 10,000,000 shares of $1 par value preferred stock. At December 31,
1997, 6,871,165 common shares are issued and outstanding.
In connection with the Distribution, the Company Board adopted the Cable
Michigan, Inc. 1997 Equity Incentive Plan (the "1997 Plan"), designed to provide
equity based compensation opportunities to key employees when shareholders of
the Company have received a corresponding benefit through appreciation in the
value of Cable Michigan Common Stock.
The 1997 Plan contemplates the issuance of incentive stock options, as well as
stock options that are not designated as incentive stock options, performance-
based stock options, stock appreciation rights, performance share units,
restricted stock, phantom stock units and other stock-based awards
(collectively, "Awards"). Up to 300,000 shares of Common Stock, plus shares of
Common Stock issuable in connection with the Distribution related option
adjustments, may be issued pursuant to Awards granted under the 1997 Plan.
All employees and outside consultants to the Company and any of its subsidiaries
and all Directors of the Company who are not also employees of the Company are
eligible to receive discretionary Awards under the 1997 Plan.
Unless earlier terminated by the Company Board, the 1997 Plan will expire on the
10th anniversary of the Distribution. The Company Board or the Compensation
Committee may, at any time, or from time to time, amend or suspend and, if
suspended, reinstate, the 1997 Plan in whole or in part.
Prior to the Distribution, certain employees of Cable Michigan were granted
stock option awards under C-TEC's stock option plans. In connection with the
Distribution, 380,013 options covering Common Stock were issued. Each C-TEC
option was adjusted so that each holder would hold options to purchase shares of
Commonwealth Telephone Enterprises Common Stock, RCN Common Stock and Cable
Michigan Common Stock. The number of shares subject to, and the exercise price
of, such options were adjusted to take into account the Distribution and to
ensure that the aggregate intrinsic value of the resulting RCN, Cable Michigan
and Commonwealth Telephone Enterprises options immediately after the
Distribution was equal to the aggregate intrinsic value of the C-TEC options
immediately prior to the Distribution.
Information relating to Cable Michigan stock options during 1997 is as follows:
<PAGE>
<TABLE>
<CAPTION>
Weighted
Average
Number of Exercise
Shares Price
--------------------
<S> <C> <C>
Outstanding December 31, 1994 178,875
Granted 157,125
Exercised --
Canceled (35,000)
-------
Outstanding December 31, 1995 301,000
Granted 33,750 8.82
Exercised (7,250) -
Canceled (35,500) 10.01
-------
Outstanding December 31, 1996 292,000 8.46
Granted 88,013 8.82
Exercised - -
Canceled (375) 10.01
-------
Outstanding December 31, 1997 379,638 8.82
=======
Shares exercisable December 31, 1997 155,125 8.45
</TABLE>
The range of exercise prices for options outstanding at December 31, 1997 is
$7.47 to $10.06.
No compensation expense related to stock option grants was recorded in 1997 as
the option exercise prices were equal to fair market value on the date granted.
Pro forma information regarding net income and earnings per share is required by
SFAS 123, and has been determined as if the Company had accounted for its stock
options under the fair value method of SFAS 123. The fair value for these
options was estimated at the date of grant using a Black Scholes option pricing
model with the following weighted average assumptions for 1997. The fair value
for these options was estimated at the date of grant using a Black Scholes
option pricing model with weighted average assumptions for dividend yield of 0%
for 1997, 1996 and 1995; expected volatility of 38.6% prior to the Distribution
and 49.8% subsequent to the Distribution for 1997 39.5% for 1996, and 35.9% for
1995; risk-free interest rate of 6.52%, 5.95% and 6.32% for 1997, 1996 and 1995,
respectively, and expected lives of 5 years for 1997, 1996 and 1995.
The weighted-average fair value of options granted during 1997 was $4.19.
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period. The Company's pro
forma net earnings and earnings per share were as follows:
<TABLE>
<CAPTION>
1997 1996 1995
--------------------------
<S> <C> <C> <C>
Net (Loss) as reported ($4,358) ($8,256) ($10,501)
Net (Loss) pro forma ($4,373) ($8,256) ($10,501)
Basic (Loss) per share - as reported ($0.63) ($1.20) ($1.53)
Basic (Loss) per share - pro forma ($0.64) ($1.20) ($1.53)
Diluted (Loss) per share - as reported ($0.63) ($1.20) ($1.53)
Diluted (Loss) per share - pro forma ($0.64) ($1.20) ($1.53)
</TABLE>
In November 1996, the C-TEC shareholders approved a stock purchase plan for
certain key executives (the "Executive Stock Purchase Plan" or "C-TEC ESPP").
Under the C-TEC ESPP, participants may purchase shares of C-TEC Common Stock in
an amount of between 1% and 20% of their annual base compensation and between 1%
and 100% of their annual bonus compensation and provided, however, that in no
event
<PAGE>
shall the participant's total contribution exceed 20% of the sum of their annual
compensation, as defined by the C-TEC ESPP. Participant's accounts are credited
with the number of share units derived by dividing the amount of the
participant's contribution by the average price of a share of C-TEC Common Stock
at approximately the time such contribution is made. The share units credited to
participant's account do not give such participant any rights as a shareholder
with respect to, or any rights as a holder or record owner of, any shares of C-
TEC Common Stock. Amounts representing share units that have been credited to a
participant's account will be distributed, either in a lump sum or in
installments, as elected by the participant, following the earlier of the
participant's termination of employment with the Company or three calendar years
following the date on which the share units were initially credited to the
participant's account. It is anticipated that, at the time of distribution, a
participant will receive one share of C-TEC Common Stock for each share unit
being distributed.
Following the crediting of each share unit to a participant's account, a
matching share of Common Stock is issued in the participant's name. Each
matching share is subject to forfeiture as provided in the C-TEC ESPP. The
issuance of matching shares will be subject to the participant's execution of an
escrow agreement. A participant will be deemed to be the holder of, and may
exercise all the rights of a record owner of, the matching shares issued to such
participant while such matching shares are held in escrow. Shares of restricted
C-TEC Common Stock awarded under the C-TEC ESPP and share units awarded under
the C-TEC ESPP that relate to C-TEC Common Stock were adjusted so that following
the Distribution, each such participant was credited with an aggregate
equivalent value of restricted shares of common stock of Commonwealth Telephone
Enterprises, the Company and RCN. In September 1997, the Company's Board of
Directors approved the Cable Michigan, Inc. Executive Stock Purchase Plan, (the
"Cable Michigan ESPP"), with terms substantially the same as the C-TEC ESPP.
The number of shares which may be distributed under the Cable Michigan ESPP as
matching shares or in payment of share units is 30,000. At December 31, 1997,
13,198 matching shares have been issued under the Cable Michigan ESPP, none of
which are vested.
10. PENSIONS AND EMPLOYEE BENEFITS
Prior to the Distribution, the Company'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 the Company were
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. Substantially, all
employees of C-TEC's Pennsylvania cable television operations (formerly Twin
County Trans Video, Inc.) were covered by an underfunded plan which was merged
into C-TEC's overfunded plan on February 28, 1996.
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 for 1996:
<TABLE>
<CAPTION>
<S> <C>
Benefits earned during the year (service cost)............. $ 2,365
Interest cost on projected benefit obligation.............. 3,412
Actual return on plan assets............................... (3,880)
Other components - net..................................... (1,456)
-------
Net periodic pension cost.................................. $ 441
=======
</TABLE>
The following assumptions were used in the determination of the consolidated
projected benefit obligation and net periodic pension cost (credit) for
December 31, 1996:
<TABLE>
<S> <C>
Discount Rate............................................... 7.5%
Expected long-term rate of return on plan assets............ 8.0%
Weighted average long-term rate of compensation increases... 6.0%
</TABLE>
<PAGE>
The Company's allocable share of the consolidated net periodic pension costs
(credit), based on the Company's proportionate share of consolidated annualized
salaries as of the valuation date, was approximately $10 and $3 for 1996 and
1995, respectively. These amounts are reflected in operating expenses. As
discussed below, no pension cost (credit) was recognized in 1997.
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 the Company no longer accrue
benefits under the defined benefit pension plans and became 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 sum distributions. The allocation of assets and
liabilities resulted in a curtailment/settlement gain of $4,292. The Company's
allocable share of this gain was $855. This gain results primarily from the
reduction of the related projected benefit obligation. The curtailed plan has
assets in excess of the projected benefit obligation.
The following table sets forth the plans' funded status and amounts recognized
in the C-TEC's balance sheet at December 31, 1996:
<TABLE>
<CAPTION>
<S> <C>
Plan assets at fair value $ 53,325
Actuarial present value of benefit obligations:
Accumulated benefit obligations:
Vested 32,372
Nonvested 1,704
--------
Total 34,076
Effect of increases in compensation 6,042
--------
Plan assets in excess of (less than) projected benefit obligation 15,207
Unrecognized transition asset (3,463)
Unrecognized prior service cost 2,438
Unrecognized net gain (11,215)
--------
Prepaid pension cost $ 2,967
========
</TABLE>
C-TEC's pension plan has assets in excess of the accumulated benefit obligation.
Plan assets include cash, 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 at December 31, 1996.
C-TEC sponsors a 401(k) savings plan covering substantially all employees of the
Company who are not covered by collective bargaining agreements. Contributions
made by the Company to the 401(k) plan are based on a specific percentage of
employee contributions. Contributions charged to expense were $128 and $107 in
1996 and 1995, respectively. Contributions charged to expense in 1997 prior to
the Distribution were $107.
In connection with the Distribution, Cable Michigan, Inc. established a
qualified saving plan under Section 401(k) of the Code. Contributions charged
to expense in 1997 were $53.
The Company provides certain postemployment benefits to former or inactive
employees of the Company who are not retirees. These benefits are primarily
short-term disability salary continuance. The Company accrues the cost of
postemployment benefits over employees' service lives. The Company uses the
services of an enrolled actuary to calculate the expense. Prior to the
Distribution, C-TEC allocated the cost of these benefits to the Company based on
the Company's proportionate share of consolidated annualized salaries. The
Company reimbursed C-TEC for its allocable share of the consolidated
postemployment benefit cost. The net periodic postemployment benefit cost was
approximately $109, $100 and $98 in 1997, 1996 and 1995, respectively.
<PAGE>
11. COMMITMENTS AND CONTINGENCIES
a. Total rental expense, primarily for office space and pole rental, was $908,
$984 and $998 for 1997, 1996 and 1995, respectively. At December 31, 1997,
rental commitments under noncancelable leases, excluding annual pole rental
commitments of approximately $692 that are expected to continue indefinitely,
are as follows:
<TABLE>
<CAPTION>
AGGREGATE
YEAR AMOUNTS
---- ---------
<S> <C>
1998 $187
1999 $125
2000 $104
2001 $47
2002 $32
Thereafter $312
</TABLE>
b. 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
statements of operations include charges aggregating approximately $833 relating
to cable rate regulation liabilities. Such charges were not significant in 1997
and 1995.
c. The Company had various purchase commitments at December 31, 1997 related to
its 1998 construction budget.
d. 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.
e. 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.
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.
<PAGE>
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.
12. AFFILIATE AND RELATED PARTY TRANSACTIONS
The Company has the following transactions with affiliates during the years
ended December 31, 1997, 1996 and 1995:
<TABLE>
<CAPTION>
1997 1996 1995
------ ------- -------
<S> <C> <C> <C>
Corporate office costs allocated to the Company... $3,715 $ 3,498 $ 3,302
Cable staff and customer service costs
allocated from RCN Cable........................ 3,489 3,577 2,982
Interest expense on affiliate notes............... 8,447 13,952 15,318
Royalty fees charged by CTE....................... 465 585 486
Charges for engineering services.................. - 296 2,169
Other affiliate expenses.......................... 171 189 153
</TABLE>
At December 31, 1997 and 1996, the Company has accounts receivable from related
parties of $166 and $1,716 respectively, for these transactions. At December
31, 1997 and 1996, the Company has accounts payable to related parties of $1,560
and $9,861 respectively, for these transactions.
The Company had a note payable to RCN Corporation of $147,567 at December 31,
1996 primarily related to the acquisition of the Michigan cable operations and
its subsequent operations. The Company repaid approximately $110,000 of this
note payable in 1997. The remaining balance was transferred to shareholder's
net investment in connection with the Distribution.
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 11). 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.
13. 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.
The Company's trade receivables reflect a customer base centered in the state of
Michigan. The Company routinely assesses the financial strength of its
customers; as a result, concentrations of credit risk are limited.
14. 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.
<PAGE>
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:
<TABLE>
<CAPTION>
1997 1996
---- ----
CARRYING CARRYING
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
------ ---------- ------ ----------
<S> <C> <C> <C> <C>
Financial assets:
Cash and temporary cash investments $ 17,219 $ 17,219 $ 3,297 $ 3,297
Financial liabilities:
Floating rate long-term debt:
Term Credit Facility 100,000 100,000 - -
Revolving Credit Facility 28,000 28,000 - -
$15 Million Facility 15,000 15,000 - -
Term Credit Agreement - - 17,430 17,430
</TABLE>
15. 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.
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
1997 QUARTER QUARTER QUARTER QUARTER
- ---- ------- ------- ------- -------
<S> <C> <C> <C> <C>
Sales.......................... $19,557 $20,673 $20,682 $ 20,387
Operating income before
depreciation, amortization,
and management
fees.......................... $ 8,940 $ 9,592 $ 9,287 $ 9,013
Operating income (loss)........ $ 275 $ 809 ($118) $ 69
Net (loss)..................... N/A N/A N/A ($1,107)
Net (loss) per average
Common Share.................. N/A N/A N/A ($0.16)
Common Stock closing price
High N/A N/A $ 18.38 $ 23.88
Low N/A N/A $ 17.75 $ 19.00
<CAPTION>
FIRST SECOND THIRD FOURTH
1996 QUARTER QUARTER QUARTER QUARTER
- ---- ------- ------- ------- -------
<S> <C> <C> <C> <C>
Sales.......................... $18,340 $19,004 $19,544 $ 19,299
Operating income before
depreciation, amortization,
and management
fees.......................... $ 8,598 $ 8,582 $ 9,003 $ 9,411
Operating income (loss)........ $ 168 ($372) $ 367 $ 506
</TABLE>
<PAGE>
REPORT OF MANAGEMENT
The integrity and objectivity of the financial information presented in these
financial statements is the responsibility of the management of Cable Michigan,
Inc.
The financial statements report on management's accountability for Company
operations and assets. To this end, management maintains a system of internal
controls and procedures designed to provide reasonable assurance that the
Company's assets are protected and that all transactions are accounted for in
conformity with generally accepted accounting principles. The system includes
documented policies and guidelines, augmented by a comprehensive program of
internal and independent audits conducted to monitor overall accuracy of
financial information and compliance with established procedures.
Coopers & Lybrand, L.L.P., independent accountants, conduct a review of internal
accounting controls to the extent required by generally accepted auditing
standards and perform such tests and procedures as they deem necessary to arrive
at an opinion on the fairness of the financial statements presented herein.
The Board of Directors meets its responsibility for the Company's financial
statements through its Audit Committee which is comprised exclusively of
directors who are not officers or employees of the Company. The Audit Committee
recommends to the Board of Directors the independent auditors for election by
the shareholders. The Committee also meets periodically with management and the
independent and internal auditors to review accounting, auditing, internal
accounting controls and financial reporting matters. As a matter of policy, the
internal auditors and the independent auditors periodically meet alone with, and
have access to, the Audit Committee.
\s\ Bruce C. Godfrey
- --------------------
Executive Vice President
Chief Financial Officer
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders of Cable Michigan, Inc.:
We have audited the consolidated financial statements and financial statement
schedule of Cable Michigan Inc. and Subsidiaries listed in Item 14(a) of this
Form 10-K. These financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and financial statement schedule 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
amounts and disclosures in the financial statements. An audit also includes
assessing the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Cable
Michigan and Subsidiaries as of December 31, 1997 and 1996 and the consolidated
results of their operations and their cash flows for each of the three years in
period ended December 31, 1997 in conformity with generally accepted accounting
principles. In addition, in our opinion, the financial statement schedule
referred to above, when considered in relation to the basic financial statements
taken as a whole, present fairly, in all material respects, the information
required to be included therein.
/S/ Coopers & Lybrand L.L.P.
- ---------------------------
COOPERS & LYBRAND L.L.P.
2400 Eleven Penn Center
Philadelphia, Pennsylvania
March 13, 1998
<PAGE>
CABLE MICHIGAN, INC. SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 and 1995
(THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
----------------------
ADDITIONS
----------------------
BALANCE AT CHARGED CHARGED BALANCE AT
BEGINNING OF TO COSTS TO OTHER END OF
DESCRIPTION PERIOD AND EXPENSE ACCOUNTS DEDUCTIONS PERIOD
- ----------- ------ ----------- -------- ---------- ------
<S> <C> <C> <C> <C> <C>
ALLOWANCE FOR DOUBTFUL ACCOUNTS-
DEDUCTED FROM ACCOUNTS RECEIVABLE
IN THE CONSOLIDATED BALANCE SHEETS.
1997 $579 $826 ($21) $843 $541
1996 $496 $843 $23 $783 $579
1995 $344 $747 $47 $642 $496
ALLOWANCE FOR DEFERRED TAX ASSETS-
DEDUCTED FROM DEFERRED TAX ASSETS
IN THE CONSOLIDATED BALANCE SHEETS.
1997 $1,262 $0 $0 $1,262 $0
1996 $1,780 $0 $0 $518 $1,262
1995 $0 $0 $2,036 $256 $1,780
</TABLE>
<PAGE>
Exhibit 4(g)
FIRST AMENDMENT AND RESTATEMENT
-------------------------------
THIS FIRST AMENDMENT AND RESTATEMENT (the "Amendment"), to the Credit
Agreement referred to below is entered into as of the 29th day of September,
1997, by and among CABLE MICHIGAN, INC. (the "Borrower"), the Lenders set forth
on the signature pages hereto and FIRST UNION NATIONAL BANK, as Administrative
Agent for the Lenders (the "Administrative Agent").
STATEMENT OF PURPOSE
--------------------
The Borrower, the Lenders and the Administrative Agent are parties to a
certain Credit Agreement dated as of June 30, 1997 (as amended hereby and as may
from time to time be further amended, restated or otherwise modified, the
"Credit Agreement"), pursuant to which the Lenders have agreed to make, and have
made, certain Loans to the Borrower.
The Borrower has requested that the Credit Agreement be amended in the
manner provided for herein in order to increase the Revolving Credit Commitment
and to permit an intercompany loan from the Borrower to Mercom, Inc. ("Mercom").
The Agents and Lenders are willing to agree to the requested amendments,
but only upon the terms and conditions of this Amendment.
NOW, THEREFORE, in consideration of the premises and mutual agreements
contained herein, the parties hereto hereby agree as follows:
I. Amendments.
----------
1. Amendments to Article I of the Credit Agreement.
-----------------------------------------------
(a) The definition of "Aggregate Commitment" contained in Section 1.1 is
hereby deleted in its entirety and the following is substituted in lieu thereof:
"'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 First
Amendment Effective Date, the Aggregate Commitment shall be $165,000,000."
(b) The following definition is hereby added to Section 1.1 in alphabetical
order:
"'First Amendment Effective Date' means the date that the conditions to
------------------------------
effectiveness set forth in the First Amendment hereto dated as of September
29, 1997 are satisfied in accordance with the terms thereof."
<PAGE>
(c) The definition of "Mercom Credit Facility" contained in Section 1.1 is
hereby deleted in its entirety and the following is substituted in lieu thereof:
"'Mercom Credit Facility' means the Amended and Restated Term Credit
----------------------
Agreement and Revolving Credit Agreement each dated August 16, 1995 among
Mercom and Morgan Guaranty Trust Company of New York, as refinanced in its
entirety by a loan from the Borrower to Mercom made pursuant to Section
10.3(f), together with any extension, amendment, replacement, restatement,
modification, renewal or refinancing thereof (whether or not the principal
amount available or outstanding thereunder is increased)."
(d) The definition of "Net Income" contained in Section 1.1 is hereby
deleted in its entirety and the following is substituted in lieu thereof:
"'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."
(e) The definition of "Revolving Credit Commitment" contained in Section
1.1 is hereby deleted in its entirety and the following is substituted in lieu
thereof:
"'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 First Amendment Effective Date
shall be $65,000,000."
(f) The definition of "Subsidiary" contained in Section 1.1 is hereby
deleted in its entirety and the following is substituted in lieu thereof:
"'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). Unless otherwise qualified,
references to "Subsidiary" or "Subsidiaries" herein shall refer to those of
the Borrower."
2. Amendment to Section 8.10 of the Credit Agreement. The parenthetical
-------------------------------------------------
"(other than Mercom)" contained in clause (a) of Section 8.10 is hereby deleted
in its entirety and the following is substituted in lieu thereof:
"(other than Mercom or any of its Subsidiaries)"
<PAGE>
3. Amendment to Section 10.3 of the Credit Agreement.
-------------------------------------------------
(a) Section 10.3 is hereby amended by deleting the word "and" at the end of
subsection (d) of such Section and deleting the punctuation mark at the end of
clause (e) of such Section and inserting a semi-colon and the word "and" in lieu
thereof and adding a clause (f) immediately thereunder as follows:
"(f) an investment in Mercom in the form of loans not to exceed an
aggregate principal amount of $20,000,000 from the Borrower to Mercom
refinancing the Mercom Credit Facility."
4. Amendment to Section 10.6 of the Credit Agreement. Clause (b) of Section
-------------------------------------------------
10.6 is hereby deleted in its entirety and the following is substituted in lieu
thereof:
"(b) any Subsidiary may make dividends or distributions to holders
of its capital stock pro rata in accordance with their respective
shareholdings;"
5. Amendment to Schedule 1.1(a) of the Credit Agreement.
----------------------------------------------------
(a) Schedule 1.1(a) is hereby deleted in its entirety and the Schedule
--------
1.1(a) attached hereto is substituted in lieu thereof.
- ------
II. Confirmation; Conditions to Effectiveness.
-----------------------------------------
1. Representations and Warranties. In order to induce the Administrative
------------------------------
Agent and Lenders to execute this Amendment, the Borrower hereby confirms that
each representation and warranty made by it under the Loan Documents is true and
correct as of the date hereof and that no Default or Event of Default has
occurred and is continuing under the Credit Agreement. The Borrower hereby
represents and warrants that as of the date hereof there are no claims or
offsets against or defenses or counterclaims to its obligations under the Credit
Agreement or any other Loan Document.
2. Conditions to Effectiveness. This Amendment shall become effective
---------------------------
upon completion of the following conditions to the reasonable satisfaction of
the Administrative Agent:
(a) receipt by the Administrative Agent of an originally executed copy of
this Amendment executed by the Borrower and each Lender;
(b) receipt by the Administrative Agent of an originally executed
Revolving Credit Note dated as of the date hereof for each Lender in
the principal amount of such Lender's Revolving Credit Commitment;
(c) receipt by the Administrative Agent of an originally executed copy of
a pledge agreement executed by the Borrower in favor of the
Administrative Agent for the
<PAGE>
ratable benefit of itself and the Lenders pursuant to which the
Borrower pledges the promissory note delivered by Mercom to the
Borrower evidencing the refinancing of the Mercom Credit Facility,
such pledge agreement to be substantially in the form of a Borrower
Pledge Agreement with such changes thereto deemed necessary by the
Administrative Agent to effect the pledge described in this paragraph;
(d) receipt by the Administrative Agent of a certificate of the Secretary
of the Borrower certifying that the articles of incorporation and
bylaws of the Borrower delivered in connection with the Credit
Agreement remain true and correct as of the date hereof (or attaching
any changes thereto); that no Default or Event of Default exists or
would be created by the execution of the Amendment; that attached
thereto is a true and complete copy of the resolutions duly adopted by
the Board of Directors of the Borrower authorizing the execution,
delivery and performance of the Amendment; and as to the incumbency
and genuineness of the signature of each officer of the Borrower
executing this Amendment;
(e) receipt by the Administrative Agent of an opinion of counsel to the
Borrower dated the date hereof with respect to the Amendment and
addressed to the Administrative Agent and Lenders in form and
substance reasonably satisfactory to the Administrative Agent;
(f) receipt by the Administrative Agent of any other document or
instrument reasonably requested by it relating to the existence of the
Borrower or the corporate authority and the validity of this
Amendment; and
(g) receipt by the Administrative Agent and the Lenders of the applicable
fees due to the Administrative Agent and the Lenders in connection
with the execution of the Amendment.
3. Mercom Contribution. No later than one Business Day after the
-------------------
Effective Date the Borrower shall deliver to the Administrative Agent
confirmation reasonably satisfactory thereto that the Mercom Contribution has
taken place substantially in the manner set forth in Schedule 1.1(b) of the
Credit Agreement. Failure of the Mercom Contribution to take place within one
Business Day of the Effective Date shall constitute an Event of Default under
Section 11.1(d) of the Credit Agreement.
<PAGE>
III. General Provisions.
------------------
1. Refunding of Loans. The Administrative Agent and Lenders shall
------------------
make such transfers of funds on the Effective Date as are necessary in order to
adjust the outstanding Obligations to reflect the revised Commitment Percentages
set forth on Schedule 1.1(a) hereto (and the Borrower hereby acknowledges and
---------------
consents to such transfers).
2. Existing Notes. Each Lender hereby covenants and agrees to return
--------------
to the Borrower for cancellation the originally executed Revolving Credit Notes
delivered thereto on the Closing Date promptly after receipt of the Revolving
Credit Note to be delivered pursuant hereto.
3. Restatement; Limited Amendment. Except as expressly amended
------------------------------
herein, the Credit Agreement and each other Loan Document shall continue to be,
and shall remain, in full force and effect and each provision of the Credit
Agreement not expressly amended hereby is incorporated herein by reference as if
expressly restated herein in its entirety. This Amendment shall not be deemed
(a) to be a waiver of, or consent to, or a modification or amendment of, any
other term or condition of the Credit Agreement or (b) to prejudice any other
right or rights which the Administrative Agent or Lenders may now have or may
have in the future under or in connection with the Credit Agreement or the Loan
Documents or any of the instruments or agreements referred to therein, as the
same may be amended, restated or otherwise modified from time to time.
4. Costs and Expenses. The Borrower agrees to pay or reimburse the
------------------
Administrative Agent for all of their reasonable and customary out-of-pocket
costs and expenses incurred in connection with the preparation, negotiation and
execution of this Amendment including, without limitation, the reasonable fees
and disbursements of their counsel.
5. Counterparts. This Amendment may be executed by one or more of the
------------
parties hereto in any number of separate counterparts and all of said
counterparts taken together shall be deemed to constitute one and the same
instrument.
6. Definitions. All capitalized terms used and not defined herein
-----------
shall have the meanings given thereto in the Credit Agreement.
7. GOVERNING LAW. THIS AMENDMENT SHALL BE GOVERNED BY, AND CONSTRUED
-------------
AND INTERPRETED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NORTH CAROLINA.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
executed and delivered by their respective duly authorized officers as of the
date first above written.
CABLE MICHIGAN, INC
[CORPORATE SEAL]
FIRST UNION NATIONAL BANK,
as Lender and Administrative Agent
[SIGNATURE PAGES FOR EACH OTHER LENDER FOLLOWS]
<PAGE>
FLEET NATIONAL BANK
<PAGE>
CORESTATES BANK, N.A.
<PAGE>
PNC BANK, NATIONAL ASSOCIATION
<PAGE>
CIBC, INC.
<PAGE>
SUMMIT BANK
<PAGE>
ABN AMRO BANK, N.V.
<PAGE>
BANQUE NATIONALE DE PARIS
<PAGE>
THE BANK OF NEW YORK
<PAGE>
BANK OF MONTREAL, CHICAGO BRANCH
<PAGE>
Exhibit 4(h)
CREDIT AGREEMENT, dated as of the 30 day of June, 1997, by and among C-TEC
CORPORATION ("C-TEC"), 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
--------------------
C-TEC has requested, and the Lenders have agreed, to extend certain credit
facilities to the Borrower referred to below 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:
"Administrative Agent" means First Union in its capacity as Administrative
--------------------
Agent hereunder, and any successor thereto appointed pursuant to Section 11.9.
"Administrative Agent's Office" means the office of the Administrative
-----------------------------
Agent specified in or determined in accordance with the provisions of Section
12.1.
"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.
"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
-----------------
3.1(c).
<PAGE>
"Assignment and Acceptance" shall have the meaning assigned thereto in
-------------------------
Section 12.10.
"Assumption Agreement" means, with respect to any Person, any Assumption
--------------------
Agreement executed in favor of the Administrative Agent for the ratable benefit
of the Administrative Agent and Lenders and substantially in the form of Exhibit
-------
I, as amended, restated or otherwise modified.
- -
"Assumption Date" means the date that CCSM has assumed all of the
---------------
Obligations under this Agreement pursuant to an Assumption Agreement in
accordance with Section 2.6.
"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 3.1(a).
"Borrower" means, prior to the Assumption Date, C-TEC in its capacity as
--------
borrower hereunder, and on and after the Assumption Date, CCSM in its capacity
as borrower hereunder.
"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 Systems Credit Facility" means the credit agreement dated as of June
-----------------------------
30, 1997, by and among C-TEC Cable Systems, Inc., ComVideo Systems, Inc. and C-
TEC Cable Systems of New York, Inc, as borrowers, First Union, as administrative
agent, and the lenders party thereto, as amended, restated or otherwise
modified.
"CCI" means Commonwealth Communications, Inc.
---
"CCSM" means Cable Michigan, Inc., and its successors.
----
"CCSM Credit Facility" means the credit agreement dated as of June 30,
--------------------
1997, by and among CCSM, as borrower, First Union, as administrative agent, and
the lenders party thereto, as amended, restated or otherwise modified.
"C-TEC" means C-TEC Corporation, and its successors.
-----
"C-TEC Credit Facility" means the credit agreement dated as of June 30,
---------------------
1997, by and among C-TEC, as borrower, First Union, as administrative agent, and
the lenders party thereto, as amended, restated or otherwise modified.
<PAGE>
"Closing Date" means the date of this Agreement or such later Business Day
------------
upon which each condition described in Section 4.2 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 prior to Assumption Date, such
statements or items on a combined basis in accordance with applicable principles
of combination under GAAP, and on and after the Assumption Date, such statements
or items on a consolidated basis in accordance with applicable principles of
consolidation under GAAP.
"Commitment" means (a) as to any Lender, the obligation of such Lender to
----------
make the 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 Loans. The Commitment of all
Lenders as of the Closing Date shall be Fifteen Million Dollars ($15,000,000).
"Commitment Percentage" means, as to any Lender at any time, the ratio of
---------------------
(a) the amount of the Commitment of such Lender to (b) the Commitment of all of
the Lenders.
"Commonwealth" means Commonwealth Telephone Company and its successors.
------------
"Commonwealth Long Distance" means Commonwealth Long Distance Company and
--------------------------
its successors.
"Debt" means, with respect to any Person at any date and without
----
duplication, the sum of the following calculated in accordance with GAAP: (a)
all liabilities, obligations and indebtedness for borrowed money including but
not limited to obligations evidenced by bonds, debentures, notes or other
similar instruments of any such Person, (b) all obligations to pay the deferred
purchase price of property or services of any such Person, except trade payables
arising in the ordinary course of business not more than ninety (90) days past
due, (c) all obligations of any such Person as lessee under Capital Leases, (d)
all Debt of any other Person secured by a Lien on any asset of any such Person,
(e) all Guaranty Obligations of any such Person, (f) all obligations, contingent
or otherwise, of any such person relative to the face amount of letters of
credit, whether drawn or not drawn, and banker's acceptances issued for the
account of any such person and (g) all obligations incurred by any such Person
pursuant to Hedging Agreements.
"Default" means any of the events specified in Section 10.1 which with the
-------
passage of time, the giving of notice or both, would constitute an Event of
Default.
<PAGE>
"Designated Subsidiaries" means, prior to the Assumption Date,
-----------------------
Commonwealth, CCI and Commonwealth Long Distance, and any of their Subsidiaries,
and on and after the Assumption Date, all Subsidiaries (as such term is defined
in the CCSM Credit Facility) of the Borrower.
"Dollars" or "$" 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 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 the Borrower and the
Administrative Agent.
"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 the 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 10.1,
----------------
provided that any requirement for passage of time, giving of notice, or both,
has been satisfied.
"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.
<PAGE>
"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 Designated
-----------
Subsidiaries ending on December 31.
"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).
"Interest Period" shall have the meaning assigned thereto in Section
---------------
3.1(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 12.10.
"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 prior to the
--------------
Assumption Date, the ratio as of such date determined in accordance with Section
8.1 of the C-TEC Credit Facility as incorporated by reference herein, and on and
after the Assumption Date, the ratio as of such date determined in accordance
with Section 9.1 of the CCSM Credit Facility as incorporated herein by
reference.
"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 3.1(a).
<PAGE>
"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 the Borrower pursuant to Section 2.1 and all
----
such Loans collectively as the context requires.
"Loan Documents" means, collectively, this Agreement, the Notes, any
--------------
Hedging Agreement executed by any Lender and each other document referenced in
Article IV or otherwise required to be delivered by or on behalf of the Borrower
or its Designated Subsidiaries 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 Designated
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.
"Mercom" means Mercom, Inc. and its successors.
------
"Mercom Pledge Agreement" means the pledge agreement with respect to the
-----------------------
capital stock of Mercom held by the Borrower executed by the Borrower in favor
of the Administrative Agent for the ratable benefit of itself and the other
Lenders, substantially in the form of Exhibit H, as amended, restated or
---------
otherwise modified.
"Multiemployer Plan" means a "multiemployer plan" as defined in Section
------------------
4001(a)(3) of ERISA to which the Borrower or any ERISA Affiliate is making, or
is accruing an obligation to make, contributions within the preceding six years.
"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 term loan 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 Term Loan Facility, and any amendments
and modifications thereto, any substitutes therefor, and any replacements,
restatements, renewals or extension thereof, in whole or in part.
"Notice of Account Designation" shall have the meaning assigned thereto in
-----------------------------
Section 2.2(b).
"Notice of Borrowing" shall have the meaning assigned thereto in Section
-------------------
2.2(a).
<PAGE>
"Notice of Conversion/Continuation" shall have the meaning assigned thereto
---------------------------------
in Section 3.2.
"Notice of Payment" shall have the meaning assigned thereto in Section 2.4.
-----------------
"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 Loans and (b) 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 4.2.
"Other Taxes" shall have the meaning assigned thereto in Section 3.11(c).
-----------
"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 the Borrower or any ERISA
Affiliates or (b) has at any time within the preceding six years been maintained
for the employees of the 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.
"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.
"Register" shall have the meaning assigned thereto in Section 12.10(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.
<PAGE>
"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%).
"Solvent" means, as to the Borrower and its Designated Subsidiaries on a
-------
particular date, that such Persons, taken as a whole and on a Combined basis (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.
"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).
"Taxes" shall have the meaning assigned thereto in Section 3.11(a).
-----
"Termination Date" means June 30, 1999.
----------------
"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 the 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
the 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 Facility" means the term loan facility established pursuant to
------------------
Article II hereof.
"United States" means the United States of America.
-------------
<PAGE>
"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) Incorporation by Reference. The definitions of all capitalized terms
--------------------------
used in the provisions of the C-TEC Credit Facility and the CCSM Credit Facility
which provisions are incorporated by reference herein, and which definitions are
not otherwise set forth herein, are also incorporated by reference herein.
(c) 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
TERM LOAN FACILITY
------------------
SECTION 2.1 Term Loan. Subject to the terms and conditions of this
---------
Agreement, each Lender severally agrees to make a Loan to the Borrower on or
within ninety (90) days after the Closing Date. The Loan shall be funded by the
Lenders in a single advance during such ninety (90) day period and 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 Loan requested by the Borrower
during such ninety (90) day period shall not exceed the total Commitment.
<PAGE>
SECTION 2.2 Procedure for Advance of Loan.
-----------------------------
(a) Requests for Borrowing. In connection with the advance of the Loan
----------------------
pursuant to Section 2.1, the Borrower shall give the Administrative Agent
irrevocable prior written notice in the form attached hereto as Exhibit B (a
---------
"Notice of 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 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 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 amount requested pursuant to Section
2.2(a). The Borrower hereby irrevocably authorizes the Administrative Agent to
disburse the proceeds of the borrowing requested pursuant to Section 2.2(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. The Administrative Agent shall not be obligated to disburse the portion
of the proceeds of the Loans requested pursuant to Section 2.2(a) to the extent
that any Lender has not made available to the Administrative Agent its
Commitment Percentage of such Loan.
SECTION 2.3 Repayment of Loan.
-----------------
(a) Repayment on Termination Date. The Borrower shall repay the
-----------------------------
outstanding principal amount of all Loans in full, together with all accrued but
unpaid interest thereon, on the Termination Date.
(b) Mandatory Repayment of Excess Loans. If at any time the outstanding
-----------------------------------
principal amount of all Loans exceeds the 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 Loans in an amount
equal to such excess.
(c) Other Mandatory Prepayments. If (i) prior to the Assumption Date, the
---------------------------
Obligations under the C-TEC Credit Facility have been paid in full and the
Commitments thereunder terminated or (ii) on and after the Assumption Date, the
Obligations under the CCSM Credit Facility have been paid in full and the
Commitments thereunder terminated, the Borrower shall within three Business Days
repay the outstanding principal amount of the Loans in full, together with all
accrued but unpaid interest thereon and any other outstanding Obligations.
<PAGE>
SECTION 2.4 Optional Prepayments of 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 in the form attached hereto as Exhibit C (a "Notice of
---------
Payment") to the Administrative Agent, to prepay the Loan in whole or in part
without premium or penalty except as provided below. Each optional prepayment
of the 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
accompanied by any payment required under Section 3.9.
SECTION 2.5 Notes. Each Lender's Loan and the obligation of the Borrower
-----
to repay such Loan shall be evidenced by a Note payable to the order of such
Lender. Each Note shall bear interest on the unpaid principal amount thereof at
the applicable interest rate per annum specified in Section 3.1.
SECTION 2.6 Assumption Agreement. C-TEC may not make the Mercom
--------------------
Contribution unless C-TEC causes CCSM to execute an Assumption Agreement, a
supplement to the Mercom Pledge Agreement and any other documents reasonably
requested by the Administrative Agent such that CCSM becomes the Borrower under
this Agreement and assumes all outstanding Obligations hereunder and the
Collateral referred to in the Mercom Pledge Agreement continues as security
therefor. Each Lender and the Administrative Agent agrees that upon CSSM
becoming the Borrower under this Agreement and assuming all outstanding
Obligations, as contemplated by this Section 2.6, C-TEC shall be unconditionally
and absolutely released and discharged from all liability and responsibility
with respect to any Obligations, whether arising and existing before or after
the Assumption Date.
ARTICLE III
GENERAL LOAN PROVISIONS
-----------------------
SECTION 3.1 Interest.
--------
(a) Interest Rate Options. Subject to the provisions of this Section 3.1,
---------------------
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 Borrowing is given pursuant
to Section 2.2 or at the time a Notice of Conversion/Continuation is given
pursuant to Section 3.2. 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 has 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 3.1(a), shall elect
an interest period (each, an
<PAGE>
"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 Termination Date and
no interest period shall be selected by the Borrower which would result in the
repayment of any LIBOR Rate Loan pursuant to Section 2.3 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
-----------------
3.1(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 4.2(d)(iv) and (ii) for each fiscal quarter thereafter prior
to the Assumption Date 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:
<TABLE>
<CAPTION>
Applicable Margin Per Annum
Leverage Ratio Base Rate + LIBOR Rate +
-------------- -------------------------------
<S> <C> <C>
*3.00x 0.00% .750%
*2.50 **3.00x 0.00% .625%
*2.00 **2.50x 0.00% .500%
**2.00x 0.00% .425%
- ---------------------
</TABLE>
and on and after the Assumption Date 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:
- --------------
* Represents "greater than."
** Represents "less than or equal to."
Applicable Margin Per Annum
<PAGE>
<TABLE>
<CAPTION>
Leverage Ratio Base Rate + LIBOR Rate +
-------------- -------------------------------
<S> <C> <C>
*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%
- --------------------------
* Represents greater than
** Represents greater than or equal to
</TABLE>
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
Designated Subsidiaries and the accompanying Officer's Compliance Certificate
setting forth the Leverage Ratio of the Borrower and its Designated Subsidiaries
as of the most recent fiscal quarter end. Subject to Section 3.1(d), in the
event the Borrower fails to deliver such financial statements and certificate
within the time required prior to the Assumption Date by Section 6.2 of the C-
TEC Credit Facility and on and after the Assumption Date by Section 7.2 of the
CCSM Credit Facility, the Applicable Margin shall be the relevant 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
<PAGE>
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 3.2 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 D (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 3.3 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 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
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.
- --- ----
SECTION 3.4 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 10.1, 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
<PAGE>
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 3.8, 3.9, 3.10, 3.11 or 12.2 shall
be paid to the Administrative Agent for the account of the applicable Lender.
SECTION 3.5 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 10.2, 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 3.6 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 3.7 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 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
<PAGE>
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 3.8 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
<PAGE>
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;
<PAGE>
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 3.8(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 3.8 incurred by such Lender more than
90 days prior to its request to the Administrative Agent for such compensation.
SECTION 3.9 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 3.10 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
<PAGE>
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 3.10 incurred by such Lender
more than 90 days prior to its request to the Borrower for such compensation.
SECTION 3.11 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 3.11) 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 3.11(e).
(b) Refunds. If the Borrower pays any additional amount under Section 3.11
-------
(a "Tax Payment") and any Lender or Affiliate thereof effectively obtains a
refund of tax or credit against
<PAGE>
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
---------------------
3.11(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 3.11) 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 12.1, 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
<PAGE>
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 3.11 shall survive the payment in full of the Obligations and
the termination of the Commitments.
SECTION 3.12 Change in Lending Office; Replacement Lenders. (a) Each
---------------------------------------------
Lender agrees that on the occurrence of any event giving rise to the operation
of Sections 3.8(b), 3.8(c), 3.10, 3.11(a) or 3.11(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
3.12(a) shall affect or postpone any of the obligations of the Borrower or the
rights of any Lender provided in Sections 3.8, 3.10 or 3.11.
(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
3.8(b), 3.8(c), 3.10, 3.11(a) or 3.11(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 12.10(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 12.10(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 12.10(b) shall be for the account of the Borrower.
<PAGE>
SECTION 3.13 Use of Proceeds. The Borrower shall use the proceeds of
---------------
the Loans to make an RCN Capital Contribution or for general corporate proposes.
ARTICLE IV
CLOSING; CONDITIONS OF CLOSING AND BORROWING
--------------------------------------------
SECTION 4.1 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 4.2 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, the Mercom Pledge
-----------------------
Agreement 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.
<PAGE>
(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.
----------
(i) Filings and Recordings. All Form UCC-1 financing statements that
----------------------
are necessary to perfect the security interests of the Lenders granted under the
Mercom Pledge Agreement in the capital stock of Mercom shall have been delivered
to the Administrative Agent for filing or recordation in all appropriate
locations and the Administrative Agent shall have received evidence satisfactory
thereto that upon such filing or recordation by the Administrative Agent such
security interests will constitute valid and perfected first priority Liens
subject to Liens described prior to the Assumption Date in Section 9.2 of the C-
TEC Credit Facility and on and after the Assumption Date in Section 10.2 of the
CCSM Credit Facility.
(ii) Pledged Stock. The Administrative Agent shall have received
-------------
original stock certificates evidencing the capital stock pledged pursuant to the
Mercom Pledge Agreement, together with an appropriate undated stock power for
each stock certificate duly executed in blank by the registered owner thereof.
(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.
<PAGE>
(e) Financial Matters.
-----------------
(i) 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 Designated 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 Designated Subsidiaries setting
- -----
forth on a pro forma basis the financial condition of the Borrower and its
--- -----
Designated Subsidiaries on a Combined 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 VIII 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 3.1(c).
(ii) Payment at Closing; Fee Letters. There shall have been
-------------------------------
paid by the Borrower to the Administrative Agent and the Lenders any 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 Borrowing from the Borrower in accordance with Section
2.2(a) 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.
<PAGE>
SECTION 4.3 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 V 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).
(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.
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF THE BORROWER
----------------------------------------------
SECTION 5.1 Representations and Warranties. To induce the
------------------------------
Administrative Agent to enter into this Agreement and the Lenders to make the
Loans, (a) on the date hereof and on any borrowing date prior to the Assumption
Date, each representation and warranty contained in Article V of the C-TEC
Credit Facility is hereby made and confirmed by the Borrower in favor of the
Administrative Agent and Lenders and, in furtherance thereof, each such
representation and warranty is hereby incorporated by reference as if fully set
forth herein (provided that clause (i) of Section 5.1(d) of the C-TEC Credit
Facility as herein confirmed and incorporated by reference is hereby qualified
and made subject to any Governmental Approval contemplated by Section 19 of the
Mercom Pledge Agreement); and (b) and on any borrowing date on and after the
Assumption Date, each representation and warranty contained in Article VI of the
CCSM Credit Facility is hereby made and confirmed by the Borrower in favor of
the Administrative Agent and Lenders and, in furtherance thereof, each such
representation and warranty is hereby incorporated by reference as if fully set
forth herein.
SECTION 5.2 Survival of Representations and Warranties, Etc. All
-----------------------------------------------
representations and warranties incorporated by reference in this Article V 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 VI
FINANCIAL INFORMATION AND NOTICES
---------------------------------
<PAGE>
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 12.11 hereof, the Borrower will (a)
prior to the Assumption Date, comply with Article VI of the C-TEC Credit
Facility and in furtherance thereof, each section thereof is hereby incorporated
by reference as if fully set forth herein and (b) on and after the Assumption
Date, comply with Article VII of the CCSM Credit Facility and in furtherance
thereof, each section thereof is hereby incorporated by reference as if fully
set forth herein.
ARTICLE VII
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 12.11, the Borrower will (a)
prior to the Assumption Date, comply with Article VII of the C-TEC Credit
Facility and in furtherance thereof, each section thereof is hereby incorporated
by reference as if fully set forth herein and (b) on and after the Assumption
Date, comply with Article VIII of the CCSM Credit Facility (other than Section
8.10 thereof) and in furtherance thereof, each section thereof (other than
Section 8.10 thereof) is hereby incorporated by reference as if fully set forth
herein. Any covenant of the Borrower to deliver documents, certificates or
other information to the Administrative Agent shall be deemed complied with if
the Borrower shall have complied with such covenant pursuant to the C-TEC Credit
Facility or the CCSM Credit Facility, as the case may be.
ARTICLE VIII
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 12.11 hereof, the Borrower and its
Designated Subsidiaries on a Combined basis will (a) prior to the Assumption
Date, comply with Article VIII of the C-TEC Credit Facility and in furtherance
thereof, each section thereof is hereby incorporated by reference as if fully
set forth herein, and (b) on and after the Assumption Date, comply with Article
IX of the CCSM Credit Facility and in furtherance thereof, each section thereof
is hereby incorporated by reference as if fully set forth herein.
ARTICLE IX
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 12.11 hereof, the Borrower will (a)
prior to the Assumption Date, comply with Article IX
<PAGE>
of the C-TEC Credit Facility and in furtherance thereof, each section thereof is
hereby incorporated by reference as if fully set forth herein, and (b) on and
after the Assumption Date, comply with Article X of the CCSM Credit Facility and
in furtherance thereof, each section thereof is hereby incorporated by reference
as if fully set forth herein.
ARTICLE X
DEFAULT AND REMEDIES
--------------------
SECTION 10.1 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 Designated 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,
prior to the Assumption Date in Section 6.5(e) or Articles VIII or IX (other
than Sections 9.8 and 9.9) of the C-TEC Credit Facility and, on and after the
Assumption Date, in Section 7.5(e) or Articles IX or X (other than Sections 9.8
and 9.9) of the CCSM Credit Facility, in each case as incorporated by reference.
(e) Default in Performance of Other Covenants and Conditions. The Borrower
--------------------------------------------------------
or any of its Designated 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 10.1) 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 Designated Subsidiaries
------------------
shall (i) default in the payment of any Debt (other than the Notes) the
aggregate outstanding amount of
<PAGE>
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, (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) or (iii) prior to the Assumption
Date, any Default or Event of Default (as defined therein) under the C-TEC
Credit Facility shall have occurred and be continuing and on and after the
Assumption Date, any Default or Event of Default (as defined therein) under the
CCSM Credit Facility shall have occurred and be continuing.
(h) Change in Control. (i) Prior to the Assumption Date, any event of
-----------------
default described in Section 10.1(h) of the C-TEC Credit Facility, which is
incorporated herein by reference as if set forth herein in its entirety and (ii)
as of and after the Assumption Date, any event of default described in Section
11.1(h) of the CCSM Credit Facility which is incorporated herein by reference as
if set forth herein in its entirety.
(i) Voluntary Bankruptcy Proceeding. The Borrower or any of its Designated
-------------------------------
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 Designated 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 Designated 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
<PAGE>
valid and binding on the Borrower or any of its Designated 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 Designated Subsidiaries by
any court and such judgment or order shall continue undischarged or unstayed for
a period of thirty (30) days.
SECTION 10.2 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 10.1(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 10.3 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
<PAGE>
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 XI
THE ADMINISTRATIVE AGENT
------------------------
SECTION 11.1 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 11.2 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 11.3 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 Designated
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,
<PAGE>
enforceability or sufficiency of this Agreement or the other Loan Documents or
for any failure of the Borrower or any of its Designated 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 Designated Subsidiaries.
SECTION 11.4 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 12.10 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 11.5 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 11.6 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 Designated
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
<PAGE>
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 Designated 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 Designated 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, Designated Subsidiaries or Affiliates.
SECTION 11.7 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 11.8 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.
<PAGE>
SECTION 11.9 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 11.9 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 XII
MISCELLANEOUS
-------------
SECTION 12.1 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
<PAGE>
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 12.2 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 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 and (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) 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 (b) 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
<PAGE>
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 12.3 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 12.10 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 10.2 and
although such Obligations shall be contingent or unmatured.
SECTION 12.4 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 12.5 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 12.1. Nothing in this Section 12.5 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 12.6 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
<PAGE>
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 12.7 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
<PAGE>
continued in full force and effect as if such payment or proceeds had not been
received by the Administrative Agent.
SECTION 12.8 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 12.9 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 Designated 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 12.10 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 (other
than to an Assignee
<PAGE>
who is then a Lender under this Agreement, the C-TEC Credit Facility, the CCSM
Credit Facility or the Cable Systems Credit Facility);
(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 F 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 F:
---------
(i) accept such Assignment and Acceptance;
(ii) record the information contained therein in the Register;
<PAGE>
(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.
<PAGE>
(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 12.10, 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 12.11 Amendments, Waivers and Consents. (a) 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 (i) increase the amount or extend the time
of the obligation of the Lenders to make Loans, (ii) 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, (iii) reduce the rate of interest or
fees payable on any Loan, (iv) permit any subordination of the principal or
interest on any Loan, (v) release any Security Document (other than as
specifically permitted in this Agreement or the applicable Security Document),
(vi) amend the provisions of this Section 12.11 or the definition of Required
Lenders (vii) 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 (viii) 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.
(b) Each provision hereof which is incorporated by reference from the C-
TEC Credit Facility or CCSM Credit Facility shall be incorporated herein as
amended from time to time pursuant to the terms in each case thereof, without
the requirement of any separate consent hereunder.
SECTION 12.12 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.
<PAGE>
SECTION 12.13 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 12.14 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 XII 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 12.15 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 12.16 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 12.17 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 12.18 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.
<PAGE>
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] C-TEC CORPORATION
FIRST UNION NATIONAL BANK, as
Administrative Agent and Lender
<PAGE>
SCHEDULE 1.1(a): LENDERS AND COMMITMENTS
COMMITMENT
AND COMMITMENT
LENDER PERCENTAGE
- ------ ----------
First Union National Bank $15,000,000.00
One First Union Center, TW-10 100%
301 South College Street
Charlotte, North Carolina 28288-0608
Attention: Syndication Agency Services
Telephone No.: (704) 383-0281
Telecopy No.: (704) 382-0288
<PAGE>
================================================================================
$15,000,000
CREDIT AGREEMENT
dated as of June 30, 1997,
by and among
C-TEC CORPORATION
as Borrower,
the Lenders referred to herein,
and
FIRST UNION NATIONAL BANK,
as Administrative Agent
================================================================================
<PAGE>
TABLE OF CONTENTS
PAGE
EXHIBITS
- --------
Exhibit A - Form of Note
Exhibit B - Form of Notice of Borrowing
Exhibit C - Form of Notice of Payment
Exhibit D - Form of Notice of Conversion/Continuation
Exhibit E - Form of Officer's Certificate
Exhibit F - Form of Assignment and Acceptance
Exhibit G - Form of Notice of Account Designation
Exhibit H - Form of Pledge Agreement
Exhibit I - Form of Assumption Agreement
SCHEDULES
- ---------
Schedule 1.1(a) - Lenders and Commitments
Schedule 1.1(b) - Plan of Reorganization
<PAGE>
<TABLE>
<CAPTION>
CABLE MICHIGAN, INC. Exhibit 21
LIST OF SUBSIDIARIES
State of PERCENTAGE
Name Incorporation OWNED
- ----------------------------------------------------------------- ------------- -----------
<S> <C> <C>
Mercom, Inc. DE 61.92%
</TABLE>
3
<PAGE>
EXHIBIT 23
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration statements of
Cable Michigan Inc. on Form S-8 (File Nos. 333-37947 and 333-38139) of our
report dated March 13, 1998, on our audits of the consolidated financial
statements and financial statement schedule of Cable Michigan Inc. and
Subsidiaries as of December 31, 1997 and 1996, and for the years ended December
31, 1997, 1996 and 1995, which report is included in this Annual Report on Form
10-K.
/s/ Coopers & Lybrand L.L.P.
- ----------------------------
COOPERS & LYBRAND L.L.P.
2400 Eleven Penn Center
Philadelphia, Pennsylvania
March 31, 1998
<PAGE>
EXHIBIT 24
SPECIFIC POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that I, Raymond B. Ostroski, do make,
constitute and appoint Timothy J. Stoklosa, Cable Michigan, Inc.'s Chief
Financial Officer, as my true and lawful attorney for me and in my name:
1. I authorize said attorney in fact to specifically execute in my
name and in my behalf the Cable Michigan, Inc. Form 10-K for the fiscal year
ended December 31, 1997, and to file said form to the Securities and Exchange
Commission, 450 5th Street, N.W., Washington, D.C. 20549, and relative
instruments in writing which I deem requisite or proper to effectuate
specifically the execution and delivery of the above-mentioned form with the
same validity as I could, if personally present, and I hereby ratify and affirm
that my said attorney as I may deem to act for me, shall do, by virtue of these
presents, herein set forth by me.
2. All rights, powers and authority of said attorney in fact to
exercise any and all of the specific rights and powers herein granted shall
commence and be in full force and effect as of March 30, 1998 and such specific
rights, powers and authority shall remain in full force and effect thereafter
until termination in writing by me.
3. I give to said attorney in fact full power and authority to
appoint a substitute to perform all such of the acts that said attorney in fact
is by this instrument authorized to perform, with the right to revoke such
appointment of substitute at pleasure.
IN WITNESS WHEREOF, I hereunto set my hand and seal this 23/rd/ day of
March, 1998.
/s/ Raymond B. Ostroski
__________________________(SEAL)
Raymond B. Ostroski
Witness:
/s/ Carlo J. Mullay
____________________________
Carlo J. Mullay
<PAGE>
SPECIFIC POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that I, Bruce C. Godfrey do make,
constitute and appoint Timothy J. Stoklosa, Cable Michigan, Inc.'s Chief
Financial Officer, as my true and lawful attorney for me and in my name:
1. I authorize said attorney in fact to specifically execute in my
name and in my behalf the Cable Michigan, Inc. Form 10-K for the fiscal year
ended December 31, 1997, and to file said form to the Securities and Exchange
Commission, 450 5th Street, N.W., Washington, D.C. 20549, and relative
instruments in writing which I deem requisite or proper to effectuate
specifically the execution and delivery of the above-mentioned form with the
same validity as I could, if personally present, and I hereby ratify and affirm
that my said attorney as I may deem to act for me, shall do, by virtue of these
presents, herein set forth by me.
2. All rights, powers and authority of said attorney in fact to
exercise any and all of the specific rights and powers herein granted shall
commence and be in full force and effect as of March 30, 1998, and such specific
rights, powers and authority shall remain in full force and effect thereafter
until termination in writing by me.
3. I give to said attorney in fact full power and authority to
appoint a substitute to perform all such of the acts that said attorney in fact
is by this instrument authorized to perform, with the right to revoke such
appointment of substitute at pleasure.
IN WITNESS WHEREOF, I hereunto set my hand and seal this 27/th/ day of
March, 1998.
/s/ Bruce C. Godfrey
_______________________(SEAL)
Bruce C. Godfrey
Witness:
/s/ Josephine Crutchley
_____________________________
Josephine Crutchley
<PAGE>
SPECIFIC POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that I, Daniel E. Knowles do make,
constitute and appoint Timothy J. Stoklosa, Cable Michigan, Inc.'s Chief
Financial Officer, as my true and lawful attorney for me and in my name:
1. I authorize said attorney in fact to specifically execute in my
name and in my behalf the Cable Michigan, Inc. Form 10-K for the fiscal year
ended December 31, 1997, and to file said form to the Securities and Exchange
Commission, 450 5th Street, N.W., Washington, D.C. 20549, and relative
instruments in writing which I deem requisite or proper to effectuate
specifically the execution and delivery of the above-mentioned form with the
same validity as I could, if personally present, and I hereby ratify and affirm
that my said attorney as I may deem to act for me, shall do, by virtue of these
presents, herein set forth by me.
2. All rights, powers and authority of said attorney in fact to
exercise any and all of the specific rights and powers herein granted shall
commence and be in full force and effect as of March 30, 1998, and such specific
rights, powers and authority shall remain in full force and effect thereafter
until termination in writing by me.
3. I give to said attorney in fact full power and authority to
appoint a substitute to perform all such of the acts that said attorney in fact
is by this instrument authorized to perform, with the right to revoke such
appointment of substitute at pleasure.
IN WITNESS WHEREOF, I hereunto set my hand and seal this 25th day of
March, 1998.
/s/ Daniel E. Knowles (SEAL)
------------------------
Daniel E. Knowles
Witness:
/s/ Jean Hagen Burger
- ------------------------
Jean Hagen Burger
<PAGE>
SPECIFIC POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that I, Mark Haverkate do make,
constitute and appoint Timothy J. Stoklosa, Cable Michigan, Inc.'s Chief
Financial Officer, as my true and lawful attorney for me and in my name:
1. I authorize said attorney in fact to specifically execute in my
name and in my behalf the Cable Michigan, Inc. Form 10-K for the fiscal year
ended December 31, 1997, and to file said form to the Securities and Exchange
Commission, 450 5th Street, N.W., Washington, D.C. 20549, and relative
instruments in writing which I deem requisite or proper to effectuate
specifically the execution and delivery of the above-mentioned form with the
same validity as I could, if personally present, and I hereby ratify and affirm
that my said attorney as I may deem to act for me, shall do, by virtue of these
presents, herein set forth by me.
2. All rights, powers and authority of said attorney in fact to
exercise any and all of the specific rights and powers herein granted shall
commence and be in full force and effect as of March 30, 1998, and such specific
rights, powers and authority shall remain in full force and effect thereafter
until termination in writing by me.
3. I give to said attorney in fact full power and authority to
appoint a substitute to perform all such of the acts that said attorney in fact
is by this instrument authorized to perform, with the right to revoke such
appointment of substitute at pleasure.
IN WITNESS WHEREOF, I hereunto set my hand and seal this 26th day of
March, 1998.
/s/ Mark Haverkate (SEAL)
----------------------------
Mark Haverkate
Witness:
/s/ Taara C. Young
- ----------------------------
Taara C. Young
<PAGE>
SPECIFIC POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that I, David C. Mitchell do make,
constitute and appoint Timothy J. Stoklosa, Cable Michigan, Inc.'s Chief
Financial Officer, as my true and lawful attorney for me and in my name:
1. I authorize said attorney in fact to specifically execute in my
name and in my behalf the Cable Michigan, Inc. Form 10-K for the fiscal year
ended December 31, 1997, and to file said form to the Securities and Exchange
Commission, 450 5th Street, N.W., Washington, D.C. 20549, and relative
instruments in writing which I deem requisite or proper to effectuate
specifically the execution and delivery of the above-mentioned form with the
same validity as I could, if personally present, and I hereby ratify and affirm
that my said attorney as I may deem to act for me, shall do, by virtue of these
presents, herein set forth by me.
2. All rights, powers and authority of said attorney in fact to
exercise any and all of the specific rights and powers herein granted shall
commence and be in full force and effect as of March 30, 1998 and such specific
rights, powers and authority shall remain in full force and effect thereafter
until termination in writing by me.
3. I give to said attorney in fact full power and authority to
appoint a substitute to perform all such of the acts that said attorney in fact
is by this instrument authorized to perform, with the right to revoke such
appointment of substitute at pleasure.
IN WITNESS WHEREOF, I hereunto set my hand and seal this 23rd day of
March, 1998.
/s/ David C. Mitchell (SEAL)
------------------------
David C. Mitchell
Witness:
/s/ Jean Mitchell
- ------------------------
Jean Mitchell
<PAGE>
SPECIFIC POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that I, David C. McCourt do make,
constitute and appoint Timothy J. Stoklosa, Cable Michigan, Inc.'s Chief
Financial Officer, as my true and lawful attorney for me and in my name:
1. I authorize said attorney in fact to specifically execute in my
name and in my behalf the Cable Michigan, Inc. Form 10-K for the fiscal year
ended December 31, 1997, and to file said form to the Securities and Exchange
Commission, 450 5th Street, N.W., Washington, D.C. 20549, and relative
instruments in writing which I deem requisite or proper to effectuate
specifically the execution and delivery of the above-mentioned form with the
same validity as I could, if personally present, and I hereby ratify and affirm
that my said attorney as I may deem to act for me, shall do, by virtue of these
presents, herein set forth by me.
2. All rights, powers and authority of said attorney in fact to
exercise any and all of the specific rights and powers herein granted shall
commence and be in full force and effect as of March 30, 1998, and such specific
rights, powers and authority shall remain in full force and effect thereafter
until termination in writing by me.
3. I give to said attorney in fact full power and authority to
appoint a substitute to perform all such of the acts that said attorney in fact
is by this instrument authorized to perform, with the right to revoke such
appointment of substitute at pleasure.
IN WITNESS WHEREOF, I hereunto set my hand and seal this 26th of
March, 1998.
/s/ David C. McCourt (SEAL)
-------------------------
David C. McCourt
Witness:
/s/ Blair Turner
- -----------------------
Blair Turner
<PAGE>
SPECIFIC POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that I, Frank M. Henry do make,
constitute and appoint Timothy J. Stoklosa, Cable Michigan, Inc.'s Chief
Financial Officer, as my true and lawful attorney for me and in my name:
1. I authorize said attorney in fact to specifically execute in my
name and in my behalf the Cable Michigan, Inc. Form 10-K for the fiscal year
ended December 31, 1997, and to file said form to the Securities and Exchange
Commission, 450 5th Street, N.W., Washington, D.C. 20549, and relative
instruments in writing which I deem requisite or proper to effectuate
specifically the execution and delivery of the above-mentioned form with the
same validity as I could, if personally present, and I hereby ratify and affirm
that my said attorney as I may deem to act for me, shall do, by virtue of these
presents, herein set forth by me.
2. All rights, powers and authority of said attorney in fact to
exercise any and all of the specific rights and powers herein granted shall
commence and be in full force and effect as of March 30, 1998 and such specific
rights, powers and authority shall remain in full force and effect thereafter
until termination in writing by me.
3. I give to said attorney in fact full power and authority to
appoint a substitute to perform all such of the acts that said attorney in fact
is by this instrument authorized to perform, with the right to revoke such
appointment of substitute at pleasure.
IN WITNESS WHEREOF, I hereunto set my hand and seal this 23rd day of
March, 1998.
/s/ Frank M. Henry (SEAL)
---------------------------
Frank M. Henry
Witness:
/s/ Helen P. O'Neill
- -------------------------
Helen P. O'Neill
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FINANCIAL
STATEMENTS AS OF AND FOR THE YEAR ENDED DECEMBER 31, 1997 AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 17,219
<SECURITIES> 0
<RECEIVABLES> 4,185
<ALLOWANCES> 541
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 168,010
<DEPRECIATION> 94,174
<TOTAL-ASSETS> 142,597
<CURRENT-LIABILITIES> 0
<BONDS> 143,000
0
0
<COMMON> 6,871
<OTHER-SE> (60,745)
<TOTAL-LIABILITY-AND-EQUITY> 142,597
<SALES> 0
<TOTAL-REVENUES> 81,299
<CGS> 0
<TOTAL-COSTS> 80,264
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 826
<INTEREST-EXPENSE> 11,751
<INCOME-PRETAX> (8,525)
<INCOME-TAX> (4,114)
<INCOME-CONTINUING> (4,358)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,358)
<EPS-PRIMARY> (0.63)
<EPS-DILUTED> (0.63)
</TABLE>
