<PAGE>
As filed with the Securities and Exchange Commission on May 28, 1999.
Registration No. 333-75415
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------
Amendment No. 1 to
FORM S-4
REGISTRATION STATEMENT
Under
the Securities Act of 1933
----------------
AVALON CABLE LLC
(Exact name of registrant as specified in its charter)
Delaware 4813 13-4029965
(State or other (Primary Standard (I.R.S. Employer
jurisdiction of Industrial Classification Identification No.)
incorporation or Code Number)
organization) ----------------
AVALON CABLE HOLDINGS FINANCE, INC.
Delaware 4813 13-4029969
(State or other (Primary Standard (I.R.S. Employer
jurisdiction of Industrial Classification Identification No.)
incorporation or Code Number)
organization)
----------------
AVALON CABLE OF MICHIGAN HOLDINGS, INC.
Delaware 4813 04-3423309
(State or other (Primary Standard (I.R.S. Employer
jurisdiction of Industrial Classification Identification No.)
incorporation or Code Number)
organization) ----------------
AVALON CABLE OF MICHIGAN, INC.
Pennsylvania 4813 23-2566891
(State or other (Primary Standard (I.R.S. Employer
jurisdiction of Industrial Classification Identification No.)
incorporation or Code Number)
organization)
----------------
800 Third Avenue, Suite 3100
New York, New York 10022
Telephone: (212) 421-0600
(Address, including zip code, and telephone number, including area code, of
registrants' principal executive offices)
----------------
Copy to:
Joel C. Cohen Jill Sugar Factor
800 Third Avenue, Suite 3100 Kirkland & Ellis
New York, New York 10022 200 East Randolph Drive
Telephone: (212) 421-0600 Chicago, Illinois 60601
Telephone: (312) 861-2000
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
----------------
Approximate date of commencement of proposed sale of the securities to the
public: As soon as practicable after this Registration Statement becomes
effective.
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance
with General Instruction G, check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
----------------
The Registrants hereby amend this Registration Statement on such date or
dates as may be necessary to delay its effective date until the registrants
shall file a further amendment that specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section
8(a), may determine.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this prospectus is not complete and may be changed. We may +
+not sell these notes until the registration statement filed with the +
+Securities and Exchange Commission is effective. This prospectus is not an +
+offer to sell these notes and it is not soliciting an offer to buy these +
+notes in any state where the offer or sale is not permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
Subject to Completion, dated May 28, 1999
Preliminary Prospectus
- --------------------------------------------------------------------------------
Exchange Offer for
AVALON $196,000,000
[LOGO] 11 7/8% Senior Discount Notes due 2008
CABLE TELEVISION of Avalon Cable LLC and
Avalon Cable Holdings Finance, Inc.
- --------------------------------------------------------------------------------
Terms of the Exchange Offer
. This exchange offer expires at 5:00 p.m., New York City time, on , 1999,
unless extended.
. The terms of the notes to be issued in this exchange offer are substantially
identical to the outstanding notes, except for transfer restrictions and
registration rights that apply to the outstanding notes.
- --------------------------------------------------------------------------------
We are not making an offer to exchange notes in any jurisdiction where the
offer is not permitted.
Before you tender your notes, you should consider carefully the "Risk
Factors" beginning on page of this prospectus.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these notes or passed upon the
adequacy or accuracy of this prospectus. Any representation to the contrary is
a criminal offense.
We have not authorized any dealer, salesperson or other person to give any
information or represent anything to you other than the information contained
in this prospectus. You must not rely on unauthorized information or
representations.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Summary................................................................... 1
Risk Factors.............................................................. 14
The Company............................................................... 22
Use of Proceeds........................................................... 25
Capitalization............................................................ 26
Unaudited Pro Forma Combined Financial Data............................... 27
Selected Historical Financial and Other Data.............................. 34
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 43
Business.................................................................. 60
Regulation................................................................ 75
Management................................................................ 84
Certain Relationships and Related Transactions............................ 88
Security Ownership of Certain Beneficial Owners and Management............ 91
Description of Certain Debt............................................... 94
The Exchange Offer........................................................ 98
Description of the Notes.................................................. 108
Certain United States Federal Income Tax Consequences..................... 141
Plan of Distribution...................................................... 145
Legal Matters............................................................. 146
Available Information..................................................... 146
Experts................................................................... 147
Index to Financial Statements............................................. F-1
</TABLE>
ii
<PAGE>
SUMMARY
This summary highlights information contained elsewhere in this prospectus.
This summary may not contain all of the information you should consider before
tendering your notes for the notes offered hereby. We urge you to read this
entire prospectus carefully, including the "Risk Factors" described herein.
Our Company
Our company was formed in 1997 to acquire, operate and develop cable
television systems in mid-sized markets we believe to be attractive. As of
March 31, 1999, on a pro forma basis giving effect to all our completed and
pending acquisitions:
. we were one of the leading cable system operators in the State of
Michigan;
. we were one of the 30 largest multiple system cable operators in the
United States;
. our systems would have passed approximately 400,100 homes; and
. our systems would have served approximately 242,900 basic subscribers, of
which approximately 217,100 are located in Michigan and approximately
25,900 are located in western New England and upstate New York.
Our Operating Clusters
We currently operate in two regional areas: the Michigan cluster and the New
England cluster.
Our Michigan Cluster. On November 6, 1998, we established our Michigan
cluster by completing our acquisition of Cable Michigan, Inc. In March 1999, we
acquired the approximately 38% of the shares of Mercom, Inc. that Cable
Michigan did not own at the time we acquired Cable Michigan. In addition, we
have acquired the following:
. cable television systems from Nova Cablevision, Inc., Nova Cablevision
VI, L.P. and Nova Cablevision VII, L.P.;
. cable television systems from Cross Country Cable TV, Inc.,
. assets of Novagate Communications Corp., an Internet service provider,
. cable system assets of R/COM, L.C., and
. assets of Traverse Internet, Inc., an Internet service provider.
We have also entered into an agreement to acquire certain cable system
assets of Galaxy American Communications.
As of March 31, 1999, on a pro forma basis, we had a total of approximately
217,100 basic subscribers and 9,500 Internet subscribers in our Michigan
cluster, after giving effect to all completed and pending transactions.
Our New England Cluster. In mid-1998, we established our New England cluster
by acquiring cable system assets from AMRAC Clear View, A Limited Partnership,
and from Pegasus Cable Television, Inc. and Pegasus Cable Television of
Connecticut, Inc. This cluster provides services in western New England and
upstate New York.
Since we established our New England cluster, we have entered into
agreements to acquire cable system assets and related liabilities of Taconic
Technology Corporation and Hometown TV, Inc.
As of March 31, 1999, we had a total of approximately 25,900 basic
subscribers in our New England cluster, after giving effect to all completed
and pending transactions.
1
<PAGE>
On a pro forma combined basis, the issuers would have had revenues of $26.0
million for the quarter ended March 31, 1999 and revenues of $104.9 million for
the year ended December 31, 1998.
The principal executive offices of each of the issuers are located at 800
Third Avenue, Suite 3100, New York, NY 10022 and the telephone number of each
of the issuers is (212) 421-0600.
Business Strategy
Our objective is to increase operating cash flow and maximize the value of
our cable television systems through our expertise in acquiring and managing
cable systems. We seek to be the leading supplier of multi-channel television
services in our chosen markets. Our business strategy focuses on:
. targeting mid-sized suburban and exurban markets, which we believe offer
an attractive customer base and reduced competition from other cable
television providers;
. building regional clusters to achieve operating efficiencies while having
geographic diversity for our company as a whole;
. growing through strategic and opportunistic acquisitions at attractive
prices;
. upgrading our systems and prudently deploying capital to maintain, expand
and upgrade our cable plant to improve our cable television services and
facilitate our ability to explore new services such as Internet access;
. focusing on our customers by improving the level of customer service,
improving technical reliability and expanding program offerings; and
. pursuing aggressive marketing to increase our customer base and the
services purchased by our customers.
Recent Developments
On May 13, 1999, we signed an agreement with Charter Communications, Inc.
under which Charter Communications agreed to purchase our company and assume or
repay our outstanding debt. The acquisition by Charter Communications requires
many regulatory approvals. We expect to consummate this transaction in the
fourth quarter of 1999, subject to obtaining the required regulatory approvals.
There can be no assurance, however, whether or when this acquisition will
occur. The acquisition, if completed, will give rise to an obligation to make
an offer to purchase the notes to be issued in this exchange offer at 101% of
their accreted value. For more information on this offer, see "Description of
the Notes--Repurchase at the Option of Holders--Change of Control."
The agreement with Charter Communications contains customary covenants
limiting our ability, among other things, to do the following, subject in each
case to specified exceptions:
. merge with or acquire the assets of any other person;
. borrow money;
. dispose of material assets or property;
. enter into, terminate or amend in a material and adverse respect any
material agreement; and
. decrease rates or repackage any programming tiers.
Charter Communications is among the leading broadband communications
companies in the United States. Charter Communications currently provides cable
television, high speed Internet access, advanced digital video programming and
paging services to customers.
2
<PAGE>
The Initial Offering
The currently outstanding senior discount notes were originally issued on
December 3, 1998 in a private placement. The issuers are parties to a
registration rights agreement with the initial purchasers pursuant to which the
issuers agreed, among other things, to file a registration statement with
respect to the notes offered hereby on or before March 31, 1999, to use their
reasonable best efforts to have the registration statement declared effective
within 90 days after the filing and complete this exchange offer within 30 days
after this registration statement becomes effective. The issuers must pay
liquidated damages to the holders of the old notes if they do not meet these
deadlines.
At the same time that we issued the currently outstanding senior discount
notes, $150,000,000 principal amount of senior subordinated notes were issued
in a private placement by our operating subsidiaries. We are holding companies
with no separate operations. These operating subsidiaries carry on our
business. As a result, the provisions of the indenture governing the senior
subordinated notes are important to us as well. The senior subordinated notes
are the subject of a separate exchange offer being conducted substantially
concurrently with this exchange offer.
3
<PAGE>
The Exchange Offer
The Exchange Offer........
The issuers are offering to exchange $196,000,000
aggregate principal amount at maturity of 11 7/8%
senior discount notes which have been registered
under the Securities Act of 1933 for $196,000,000
aggregate principal amount at maturity of their
outstanding 11 7/8% senior discount notes due 2008
which were issued in December 1998.
The new notes are substantially identical to the
old notes, except that some of the transfer
restrictions and registration rights relating to
the old notes do not apply to the new notes.
Expiration Date........... The exchange offer will expire at 5:00 p.m., New
York City time, on , 1999, unless we
extend it.
Withdrawal Rights......... You may withdraw your tender of your notes at any
time before 5:00 p.m., New York City time, on the
expiration date of the exchange offer.
Conditions of the
Exchange Offer............ The exchange offer is subject to customary
conditions, which the issuers may waive. Please
read "The Exchange Offer--Conditions" section of
this prospectus for more information regarding
conditions of the exchange offer.
Procedures for Tendering
Old Notes.................
If you are a holder of old notes and wish to accept
the exchange offer, you must either:
(a) complete, sign and date the accompanying letter
of transmittal, or a facsimile thereof and mail
or otherwise deliver the documentation,
together with your old notes, to the exchange
agent at the address shown under "The Exchange
Offer--Exchange Agent;" or
(b) arrange for The Depository Trust Company to
transmit the required information to the
exchange agent for this exchange offer in
connection with a book-entry transfer.
Certain United States
Federal Income Tax
Consequences.............. Your exchange of old notes for new notes in the
exchange offer will not result in any gain or loss
to you for federal income tax purposes. See the
"Certain United States Federal Income Tax
Consequences" section of this prospectus.
Consequences of Failure
to Exchange...............
Old notes that are not exchanged will continue to
be subject to the existing transfer restrictions
after the exchange offer. The issuers will have no
further obligation to register the old notes. If
you do not participate in the exchange offer, the
liquidity of your notes could be adversely
affected.
Procedures for Beneficial If you are the beneficial owner of old notes
Owners.................... registered in the name of a broker, dealer or other
nominee and you wish to tender your notes, you
should contact the person in whose name your notes
are registered and promptly instruct the person to
tender on your behalf.
4
<PAGE>
Guaranty Delivery If you wish to tender your old notes and time will
Procedures................ not permit your required documents to reach the
exchange agent by the expiration date, or the
procedure for book-entry transfer cannot be
completed on time, you may tender your notes
according to the guaranteed delivery procedures.
See "The Exchange Offer--Guaranteed Delivery
Procedures."
Acceptance of Old Notes;
Delivery of New Notes.....
Subject to certain conditions, the issuers will
accept old notes which are properly tendered in the
exchange offer and not withdrawn, before 5:00 p.m.,
New York City time, on the expiration date of the
exchange offer. The new notes will be delivered as
promptly as practicable following the expiration
date.
Use of Proceeds...........
The issuers will receive no proceeds from the
exchange offer.
Exchange Agent............
The Bank of New York is the exchange agent for the
exchange offer.
Summary of the New Notes
Issuers................... Avalon Cable LLC and Avalon Cable Holdings Finance,
Inc.
Yield and Interest........ Before December 1, 2003, there will be no current
payments of cash interest on the new notes. The new
notes will accrete in value at a rate of 11 7/8%
per annum, compounded semi-annually, to an
aggregate principal amount of $196,000,000 on
December 1, 2003, assuming all old notes are
exchanged for new notes. After December 1, 2003,
cash interest on the new notes:
. will accrue at the rate of 11 7/8% per annum on
the principal amount at maturity of the new
notes, and
. will be payable semi-annually in arrears on June
1 and December 1 of each year, commencing June 1,
2004.
Original Issue Discount... The new notes:
. will be treated for U.S. federal income tax
purposes as having been issued at a substantial
discount to their principal amount at maturity,
and
. will bear original issue discount for U.S.
federal income tax purposes.
Original issue discount will accrue from the issue
date of the new notes and will be included as
interest income periodically, including for periods
ending prior to December 1, 2003, in a holder's
gross income for U.S. federal income tax purposes
in advance of receipt of the cash payments to which
the income is attributable. See "Certain United
States Federal Income Tax Considerations."
Mandatory Payment of
Accrued Interest..........
On December 1, 2003, the issuers will be required
to redeem an amount equal to $369.79 per $1,000
principal amount at maturity of each new note and
each old note not exchanged for a new note then
outstanding, which we refer to as the Accreted
Interest Redemption
5
<PAGE>
Amount, on a pro rata basis at a redemption price
of 100% of the principal amount at maturity of the
notes so redeemed. Assuming all of the new notes
and all of the old notes not exchanged for new
notes remain outstanding on such date, this amount
would be $72,479,000 in aggregate principal amount
at maturity of the notes. This amount represents:
. the excess of the aggregate accreted principal
amount of all notes outstanding on December 1,
2003 over the aggregate issue price thereof,
. less an amount equal to one year's simple
uncompounded interest on the aggregate issue
price of such notes at a rate per annum equal to
the stated interest rate on the notes.
Maturity Date............. December 1, 2008.
Optional Redemption.......
On or after December 1, 2003, the issuers may
redeem the new notes, in whole or in part. Before
December 1, 2001, the issuers may redeem up to 35%
of the aggregate principal amount at maturity of
the notes originally issued:
. only with the proceeds of one or more equity
offerings and/or strategic equity investments;
and
. only if at least 65% of the aggregate principal
amount at maturity of the notes originally issued
remains outstanding after each redemption.
The prices for the above optional redemptions are
set forth in the "Description of the Notes--
Optional Redemption" section of this prospectus.
Change of Control.........
If we sell certain assets or if we experience
specific kinds of changes of control, holders of
the new notes will have the opportunity to sell
their new notes to the issuers at 101% of (a) the
accreted value of the new notes in the case of
repurchases of new notes prior to December 1, 2003
or (b) the aggregate principal amount thereof in
the case of repurchases of new notes on or after
December 1, 2003, plus accrued and unpaid interest
and liquidated damages, if any, to the date of
purchase.
Ranking................... The new notes:
. will be general unsecured obligations of the
issuers,
. will be subordinate in right of payment to all
existing and future senior indebtedness of the
issuers,
. will be effectively subordinated to all
indebtedness and other liabilities and
commitments of the issuers' subsidiaries,
including their credit facility and their senior
subordinated notes,
. will rank on the same level, or "pari passu,"
with any existing and future senior indebtedness
of the issuers, and
. will rank senior to all subordinated obligations
of the issuers.
6
<PAGE>
The indenture governing the new notes permits the
issuers and their subsidiaries, Avalon Cable of
Michigan LLC and Avalon Cable of New England LLC,
which are subsidiaries of Avalon Cable LLC, and
Avalon Cable Finance, Inc., which is a subsidiary
of Avalon Cable Holdings Finance, Inc., to incur
additional indebtedness subject to certain
limitations. We refer to these subsidiaries of the
issuers as the operating subsidiaries. As of March
31, 1999, on a pro forma basis:
. the issuers would have had no outstanding
indebtedness other than the existing notes and
the debt of their subsidiaries, and
. the outstanding senior indebtedness of the
issuers' operating subsidiaries on a combined
basis would have been $328.5 million.
Certain Covenants........
The indenture governing the new notes limits the
activities of the issuers and their restricted
subsidiaries. The provisions of the new note
indenture limit their ability to:
. incur additional indebtedness,
. pay dividends or make certain other restricted
payments,
. enter into transactions with affiliates,
. sell assets or subsidiary stock,
. create liens,
. restrict dividends or other payments from
restricted subsidiaries,
. merge, consolidate or sell all or substantially
all of their combined assets, and
. with respect to restricted subsidiaries, issue
capital stock.
Guarantors...............
Avalon Cable of Michigan, Inc., an equity holder in
Avalon Cable LLC, and its sole stockholder, Avalon
Cable of Michigan Holdings, Inc. will guarantee the
obligations of Avalon Cable LLC under the new
notes. However, neither Avalon Cable of Michigan
Holdings, Inc. nor Avalon Cable of Michigan, Inc.
has any significant assets other than its equity
interest in Avalon Cable LLC and Avalon Cable of
Michigan Inc., respectively. Thus, holders should
not expect the guarantors to have any assets
available to make principal and interest payments
on the new notes. For a description of the
relationship of the guarantors to the issuers, see
"The Company--Structure After the Reorganization."
For more information about the new notes, see the "Description of the Notes"
section of this prospectus.
Summary Unaudited Pro Forma Combined Financial and Operating Data
The following table shows for the periods indicated certain financial and
operating data for the issuers, their predecessors and Taconic Technology
Corporation, which is subject to a pending acquisition by the issuers. The
following summary unaudited pro forma combined financial and operating data are
based on the historical financial statements of Avalon Cable of Michigan
Holdings, Inc., Cable Michigan, Inc., the predecessor company to Avalon Cable
of Michigan Holdings, Inc., Avalon Cable LLC, Avalon Cable of New England LLC,
AMRAC Clear View, the predecessor to Avalon Cable LLC and Avalon Cable of New
England LLC, Pegasus Cable Television, Inc. and Pegasus Cable Television of
Connecticut, Inc., Taconic Technology
7
<PAGE>
Corporation and Avalon Cable Finance, Inc. and the assumptions and adjustments
described in the notes thereto included elsewhere in this prospectus. The data
for Avalon Cable of Michigan, Inc. and Cable Michigan include 100% of Mercom
for all periods presented. The summary unaudited pro forma combined financial
and operating data gives effect to our completed acquisitions and our pending
acquisitions, the issuance of the old notes, the issuance of the senior
subordinated notes by the issuers' operating subsidiaries, the incurrence of
debt under our secured credit facility and the reorganization transactions
described herein, as if they had occurred on January 1, 1999 for pro forma
information for the period ended March 31, 1999 and January 1, 1998 for the pro
forma information for the period ended December 31, 1998. In the following
table and the related notes, we refer to:
. Avalon Cable of Michigan Holdings, Inc. as Michigan Holdings,
. Avalon Cable of New England LLC as Avalon New England,
. AMRAC Clear View as Amrac,
. Pegasus Cable Television, Inc. and Pegasus Cable Television of
Connecticut, Inc., collectively as Pegasus,
. the assets and related liabilities that we will acquire from Taconic
Technology Corporation as Taconic,
. Avalon Cable Holdings Finance, Inc. as Holdings Finance,
. Avalon Cable of Michigan, Inc. as Avalon Michigan Inc. and
. Avalon Cable of Michigan LLC as Avalon Michigan LLC.
The summary unaudited pro forma combined financial and operating data do not
purport to represent what the issuers' results of operations actually would
have been if the completed and pending acquisitions had occurred as of the date
indicated or what such results will be for future periods. Among other things,
this data do not give effect to certain non-recurring charges or cost savings
expected to result from the completed and pending acquisitions. This summary
and accompanying notes are provided for informational purposes only and do not
necessarily indicate what our operating results would have been had the
completed and pending acquisitions been consummated on January 1, 1999 or 1998,
nor do they necessarily indicate the issuers' future results of operations or
financial position. The operating results for the three months ended March 31,
1999 are not necessarily indicative of results to be expected for the year
ending December 31, 1999.
Management believes that the summary unaudited pro forma combined financial
and operating data is a meaningful presentation because the issuers had no
operations as of December 31, 1997 and only had significant operations for a
short period of time as of December 31, 1998, and their ability to satisfy debt
and other obligations is dependent upon cash flow from the completed and
pending acquisitions. The following information is qualified by reference to
and should be read in conjunction with the "Capitalization," "Selected
Historical Financial and Other Data," and "Management's Discussion and Analysis
of Financial Condition and Results of Operations" sections of this prospectus
and the financial statements and notes thereto included elsewhere in this
prospectus.
The summary unaudited pro forma combined financial and operating data should
be read in conjunction with the financial statements of Michigan Holdings,
Cable Michigan, Avalon Cable LLC, Amrac, Pegasus, Taconic and Holdings Finance
and the accompanying notes thereto included elsewhere in this prospectus.
Prior to July 21, 1998, Pegasus was operated as part of Pegasus
Communications Corporation. This table below sets forth selected historical
combined data for Pegasus for periods during which they did not operate as a
separate independent company and, accordingly, certain allocations were made in
preparing such financial data. Therefore, such data may not reflect the results
of operations or the financial condition which would have resulted if Pegasus
had operated as a separate independent company during such periods, and are not
necessarily indicative of the future results of operations or financial
position of Pegasus.
8
<PAGE>
As of March 31, 1999, Taconic was being operated as part of Taconic
Technology Corporation. The table below sets forth selected historical data for
Taconic. The historical financial data presented below reflect periods during
which Taconic did not operate as an independent company and, accordingly,
certain allocations were made in preparing such financial data. Therefore, such
data may not reflect the results of operations or the financial condition which
would have resulted if Taconic had operated as a separate independent company
during such periods, and are not necessarily indicative of Taconic's future
results of operations or financial position.
Summary Unaudited Pro Forma Combined Financial and Operating Data
For the Three Months Ended March 31, 1999
<TABLE>
<CAPTION>
Less:
Duplicate
period
consolidated
into Probable Unaudited
Michigan Avalon Michigan Transaction Pro Forma Pro Forma
Holdings(1) Cable LLC(2) Holdings(3) Taconic(4) Adjustments(5) Combined
----------- ------------ ------------ ----------- -------------- ---------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Statement of operations
data
Revenue................. $ 22,367 $ 3,551 $(1,342) $ 523 $ 949 $ 26,048
Operating expenses...... 12,129 1,657 (377) 340 728 14,477
Corporate overhead...... 376 411 (376) 6 17 434
Depreciation and
amortization........... 10,126 1,310 (597) 105 235 11,179
Non-recurring expenses.. -- -- -- -- -- --
-------- ------- ------- ------ -------- --------
Operating income (loss). (264) 173 8 72 (31) (42)
Interest expense, net... (11,518) (472) 558 -- (11) (11,443)
Other income (expense),
net.................... 4,350 -- -- (28) (4,322) --
-------- ------- ------- ------ -------- --------
Net-income (loss)....... $ (7,432) $ (299) $ 566 $ 44 $ (4,364) $(11,485)
======== ======= ======= ====== ======== ========
Other financial data
Cash flow from
operations............. $ 7,012 $ 1,910 $ (591) $ 19 $ -- $ 8,350
Cash flows from
investing activities... (43,214) (3,547) 450 (19) (13,800) (60,130)
Cash flows from
financing activities... 40,358 14,647 -- -- 573 55,578
EBITDA(14).............. $ 9,862 $ 1,483 $ (589) $ 177 $ 204 $ 11,137
Adjusted EBITDA(15)..... 11,270
Adjusted EBITDA
margin(16)............. 43.3%
Ratio of debt to
adjusted EBITDA(17) 9.8x
Capital expenditures.... $ 9,210 $ 197 $(6,387) $ 19 $ -- $ 3,039
Ratio of earnings to
fixed charges.......... 4.0x 1.0x
Deficiency of earnings
to fixed charges....... 11,782 299
Other operating data
(end of period)
Homes passed(18)........ 389,049 389,049 7,200 3,900 400,149
Basic subscribers(19)... 236,988 236,988 5,000 950 242,938
Basic penetration(20)... 60.9% 60.9% 69.4% 24.4% 60.7%
Premium units(21)....... 60,840 60,840 1,200 237 62,277
Premium penetration(22). 25.7% 25.7% 24.0% 24.9% 25.6%
Average monthly revenue
per basic
subscriber(23)......... $ 34.56 $ 36.08 $34.67 $ 28.52 $ 34.72
</TABLE>
(See Notes to Summary Unaudited Pro Forma Combined Financial and Operating
Data)
9
<PAGE>
Summary Unaudited Pro Forma Combined Financial and Operating Data
For the Year Ended December 31, 1998
<TABLE>
<CAPTION>
Avalon Probable Unaudited
Michigan Cable Cable Avalon New Transaction Pro Forma Pro Forma
Holdings(6) Michigan(7) LLC(8) England(9) Amrac(10) Pegasus(11) Taconic(12) Adjustments(13) Combined
----------- ----------- ------- ---------- --------- ----------- ----------- --------------- ---------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Statement of
operations data
Revenue......... $ 13,657 $ 74,521 $ 1,299 $ 3,231 $779 $3,277 $2,086 $ 6,061 $104,911
Operating
expenses....... 7,469 38,621 761 1,838 443 1,693 1,378 4,036 56,239
Corporate
overhead....... 249 6,087 56 350 42 97 22 97 7,000
Depreciation and
amortization... 6,614 28,098 440 1,129 47 835 426 7,239 44,828
Non-recurring
expenses....... -- 5,764 -- -- -- -- -- -- 5,764
-------- -------- ------- ------- ---- ------ ------ -------- --------
Operating income
(loss)......... (675) (4,049) 42 (86) 247 652 260 (5,311) (8,920)
Interest
expense, net... (6,784) (7,382) (785) (503) -- (938) (17) (29,120) (45,529)
Other income
(expense), net. (796) 897 (1,311) -- -- (22) (97) (2,280) (3,582)
-------- -------- ------- ------- ---- ------ ------ -------- --------
Net income
(loss)......... $(8,228) $(10,534) $(2,054) $ (589) $247 $ (308) $ 146 $(36,711) $(58,031)
======== ======== ======= ======= ==== ====== ====== ======== ========
Other financial
data
Cash flow from
operations..... 18,646 15,028 (1,252) 639 276 1,705 104 (7,454) 27,692
Cash flows from
investing
activities..... (436,302) (18,697) (15,519) (53,193) (61) (117) (81) (32,116) (556,086)
Cash flows from
financing
activities..... 419,427 (7,457) 16,988 52,797 (561) (971) (23) 30,342 510,542
EBITDA(14)...... $ 5,939 $ 29,813 $ 482 $ 1,043 $294 $1,487 $ 686 $ 1,928 $ 41,672
Adjusted
EBITDA(15)..... 48,719
Adjusted EBITDA
margin(16)..... 46.4%
Ratio of debt to
adjusted
EBITDA(17) 9.1x
Capital
expenditures... $ 4,673 $18,697 $ 157 $ 21 $ 61 $ 114 $ 81 $ 165 $ 23,969
Deficiency of
earnings to
fixed charges.. 7,524 303
Other operating
data (end of
period)
Homes
passed(18)..... 349,162 28,350 7,200 18,864 403,576
Basic
subscribers(19). 211,537 20,604 5,100 10,084 247,325
Basic
penetration(20). 60.6% 72.7% 70.8% 53.5% 61.3%
Premium
units(21)...... 55,550 4,912 1,225 2,513 64,200
Premium
penetration(22). 26.3% 23.8% 24.0% 24.9% 26.0%
Average monthly
revenue per
basic
subscriber(23). $ 34.96 $ 34.22 $34.67 $ 28.52 $ 34.57
</TABLE>
(See Notes to Summary Unaudited Pro Forma Combined Financial and Operating
Data)
10
<PAGE>
Notes to Summary Unaudited Pro Forma Combined Financial and Operating Data
For the Three Months Ended March 31, 1999 and the Year Ended December 31, 1998
(1) For the three months ended March 31, 1999, Michigan Holdings results of
operations include the results of operations of its wholly-owned
subsidiary, Avalon Michigan Inc. During this quarter, Avalon Michigan Inc.
operated the Michigan cluster from January 1 through March 26, 1999 and
then in the reorganization, contributed its operating assets and
liabilities to Avalon Cable LLC in exchange for a majority interest in
Avalon Cable LLC and consolidated the results of Avalon Cable LLC from
March 27, 1999 to March 31, 1999.
(2) Avalon Cable LLC's results of operations include its results of operations
for the three months ended March 31, 1999, the results of its wholly-owned
subsidiaries, Holdings Finance and Avalon New England for the period ended
March 31, 1999 and the results of operations of its wholly-owned
subsidiary, Avalon Michigan LLC, from the date of contribution (March 26,
1999) through March 31, 1999.
(3) This column represents the results of operations for the period from March
26 through March 31, 1999 which is included in both the results of
operations of Michigan Holdings and Avalon Cable LLC due to the
reorganization.
(4) Taconic's results of operations includes the actual historical results of
operations for the period from January 1, 1999 through March 31, 1999.
(5) Pro forma adjustments represent those adjustments necessary to present
operating results as if all pending and completed acquisitions and the
financings occurred on January 1, 1999. These adjustments include in each
case, the following:
(a) Adjustments to reflect the full year impact of the acquisitions of Nova
Cablevision, Cross Country Cable TV, Traverse Internet, Galaxy American
Communications, R/COM, Hometown TV and Novagate Communications.
(b) Increased depreciation and amortization expense due to excess of fair
value over historical cost generated from the completed and pending
acquisitions.
(c) Increased interest expense due to borrowings under our senior credit
facility to finance the acquisitions and costs associated with the new
notes.
(d) The removal of tax benefits, net, since after the reorganization
transactions described herein, two of the three issuers will be treated
as partnerships for federal income tax purposes.
See Notes to the Unaudited Pro Forma Combined Statements of Operations for a
further explanation of these pro forma adjustments.
(6) On November 6, 1998, a subsidiary of Michigan Holdings acquired Cable
Michigan, the predecessor entity. Prior to this acquisition, Michigan
Holdings did not have any operations. Michigan Holdings' results of
operations include the results of operations for the period from
acquisition through December 31, 1998.
(7) Cable Michigan's results of operations includes the actual historical
results of operations of Cable Michigan for the period from January 1, 1998
through November 5, 1998.
(8) Avalon Cable LLC results of operations include its results of operations
from its inception (October 21, 1998) through December 31, 1998, the
results of operations of Holdings Finance from its inception (October 21,
1998) through December 31, 1998 and the results of operations of Avalon New
England from the date of contribution (November 6, 1998) through December
31, 1998.
(9) On May 29, 1998, Avalon New England acquired Amrac, the predecessor entity.
On June 30, 1998, Avalon New England acquired Pegasus. Prior to these
acquisitions, Avalon New England did not have any operations. Avalon New
England's results of operations include the results of operations for the
period from the acquisitions (May 29, 1998 for Amrac and July 1, 1998 for
Pegasus) through November 5, 1998, the date of exchange with Avalon Cable
LLC.
(10) Amrac's results of operations includes the actual historical results of
operations for the period from January 1, 1998 through May 28, 1998.
11
<PAGE>
Notes to Summary Unaudited Pro Forma Combined Financial and Operating Data--
(Continued)
For the Three Months Ended March 31, 1999 and the Year Ended December 31, 1998
(11) Pegasus' combined results of operations includes the actual historical
results of operations for the period from January 1, 1998 through June 30,
1998.
(12) Taconic's results of operations includes the actual historical results of
operations of Taconic for the year ended December 31, 1998.
(13) Pro forma adjustments represent those adjustments necessary to present
operating results as if all pending and completed acquisitions and the
related financing transactions and the reorganization occurred on January
1, 1998. These adjustments include in each case, the following:
(a) Adjustments to reflect the full year impact of the acquisitions of
Nova Cablevision, Cross Country Cable TV, Traverse Internet, Galaxy
American Communications, R/COM, Hometown TV and Novagate
Communications.
(b) Increased depreciation and amortization expense due to excess of fair
value over historical cost generated from the completed and pending
acquisitions.
(c) Increased interest expense due to borrowings under our senior credit
facility and the issuance of the old notes.
(d) The removal of tax benefits, net, since after the reorganization
transactions described herein, two of the three issuers will be
treated as partnerships for federal income tax purposes.
(e) Elimination of minority interest in loss of Mercom due to the
acquisition of the remaining 38% of the outstanding stock of Mercom.
Results for Mercom are included in the results of Avalon Michigan Inc.
and Cable Michigan.
See Notes to Unaudited Pro Forma Combined Statements of Operations for a
further explanation of these pro forma adjustments.
(14) Represents net income before depreciation and amortization, interest
income (expense), net, income taxes, other expenses, net, gain or loss
from the sale of assets, nonrecurring items and non-cash expenses. For the
period from January 1, 1998 through November 5, 1998, EBITDA excludes
$5,764 of non-recurring seller transaction costs incurred by Cable
Michigan in connection with the merger with and into Avalon Michigan Inc.
Management believes that EBITDA is a meaningful measure of performance and
it is commonly used in the cable television industry to analyze and
compare cable television companies on the basis of operating performance,
leverage and liquidity. However, EBITDA is not intended to be a
performance measure that should be regarded as an alternative to, or more
meaningful than, either operating income or net income as an indicator of
operating performance or cash flows as a measure of liquidity, as
determined in accordance with generally accepted accounting principles
("GAAP"). EBITDA, as computed by management, is not necessarily comparable
to similarly titled amounts of other companies. See financial statements,
including statements of cash flows, included elsewhere herein.
(15) Represents EBITDA, adjusted for the elimination of certain expenses and
the inclusion of corporate overhead expenses as contemplated by the
definition of "Leverage Ratio" in the indenture governing the old notes
and the new notes, which is used in determining compliance with the debt
incurrence covenant in the indenture. See "Description of the Notes--
Certain Definitions." However, Adjusted EBITDA is not intended to be a
performance measure that should be regarded as an alternative to, or more
meaningful than, either operating income or net income as an indicator of
operating performance or cash flows as a measure of liquidity, as
determined in accordance with GAAP. Adjusted EBITDA, as computed by
management, is not necessarily comparable to similarly titled amounts of
other companies. See the financial statements, including statements of
cash flows, included elsewhere herein.
12
<PAGE>
Notes to Summary Unaudited Pro Forma Combined Financial and Operating Data--
(Continued)
For the Three Months Ended March 31, 1999 and the Year Ended December 31, 1998
The following table reflects the calculation of Adjusted EBITDA (dollars
in thousands):
<TABLE>
<CAPTION>
Three Months
Year Ended Ended
December 31, March 31,
1998 1999
------------ ------------
<S> <C> <C>
EBITDA $41,672 $11,137
------- -------
Adjustments:
Cable Michigan management fee...................... 3,156 --
Cable Michigan corporate overhead expenses......... 1,171 --
Amrac and Pegasus management fees and corporate
overhead expenses................................. 140 --
Completed acquisitions corporate overhead expenses. 508 --
Taconic corporate overhead expenses................ 641 73
Pending acquisitions corporate overhead expenses... 170 140
Public company expenses of Cable Michigan and
Mercom............................................ 394 --
Non-recurring expenses(a).......................... 1,908 (80)
Avalon corporate overhead expenses................. (1,041) --
------- -------
Total adjustments................................ 7,047 133
------- -------
Adjusted EBITDA ................................... $48,719 $11,270
======= =======
</TABLE>
- --------
(a) For the year ended December 31, 1998, these amounts reflect the
elimination of non-recurring expenses such as (a) litigation expenses,
(b) expenses associated with a May 1998 storm in Grand Rapids (c)
expenses related to the relocation of the customer service call center
to Michigan and (d) one-time costs associated with special promotions.
For the quarter ended March 31, 1999, these amounts reflect a non-
recurring insurance adjustment associated with the May 1998 storm in
Grand Rapids.
(16) Represents Adjusted EBITDA as a percentage of revenues.
(17) Represents total pro forma debt outstanding as of March 31, 1999 and
December 31, 1998 divided by an amount equal to Adjusted EBITDA for the
three months ended March 31, 1999 and December 31, 1998, respectively,
(see note 15) multiplied by four, as specified in the indenture for the
old notes and new notes in determining compliance with the debt incurrence
covenant. See "Description of the Notes--Certain Definitions--Leverage
Ratio."
(18) The number of dwelling units in a particular community that management
estimates can be connected to Avalon Cable LLC's cable system.
(19) A home with one or more televisions connected to a cable system is counted
as one basic subscriber. Bulk accounts are included on an equivalent basic
unit basis by dividing the total monthly bill for the account by the basic
monthly charge for a single outlet in the area.
(20) Calculated as basic subscribers as a percentage of homes passed.
(21) Includes only single channel services offered for a monthly fee per
channel and does not include tiers of channels as a package for a single
monthly fee. A subscriber may purchase more than one premium service, each
of which is counted as a separate premium service unit.
(22) Calculated as premium units as a percentage of basic subscribers.
(23) Represents revenues during the respective period divided by the number of
months in the period divided by the average number of basic subscribers
(beginning of period plus end of period divided by two) for such period.
13
<PAGE>
RISK FACTORS
You should carefully consider each of the following factors and all of the
other information in this prospectus before tendering your old notes for new
notes.
If you do not participate in the exchange offer, you will continue to be
subject to transfer restrictions.
If you do not exchange your old notes in the exchange offer, you will
continue to be subject to restrictions on transfer on your old notes. We did
not register the old notes under the federal or any state securities laws, and
we do not intend to register them following the exchange offer. As a result,
the old notes may only be transferred in limited circumstances under the
securities laws. In addition, to the extent initial notes are tendered and
accepted in the exchange offer, the trading market, if any, for the old notes
would be adversely affected. As a result, after the exchange offer, you may
have difficulty selling your old notes.
You must follow the exchange offer procedures carefully in order to receive the
new notes.
If you do not follow the procedures described herein, you will not receive
new notes. The new notes will be issued to you in exchange for your old notes
only after timely receipt by the exchange agent of:
. your old notes and
either:
. a properly completed and executed letter of transmittal and all other
required documentation or
. a book-entry delivery by transmittal of an agent's message through
The Depository Trust Company.
If you want to tender your old notes in exchange for new notes, you should
allow sufficient time to ensure timely delivery. No one is under any duty to
give you notification of defects or irregularities with respect to tenders of
old notes for exchange. For additional information, please refer to "The
Exchange Offer" and "Plan of Distribution" sections of this prospectus.
Our substantial indebtedness could make us unable to service our indebtedness
and meet our other requirements and could adversely affect our financial
health.
The issuers have a substantial amount of debt outstanding. This high level
of debt and the related need to devote a significant portion of our cash flow
to meeting debt service and other fixed charges could adversely affect our
operations and financial condition. As of March 31, 1999, on a pro forma basis,
the issuers would have had on a combined basis outstanding long-term
indebtedness of approximately $443.2 million and shareholders' equity of
approximately $138.6 million. In addition, on a pro forma basis, combined
interest expense for the issuers would have been $11.4 million for the quarter
ended March 31, 1999 and $45.5 million for the year ended December 31, 1998. On
a pro forma basis, the combined earnings of the issuers would have been
insufficient to cover their fixed charges by approximately $0.0 million for the
quarter ended March 31, 1999 and $8.9 million for the year ended December 31,
1998. In these periods, however, earnings are reduced by substantial non-cash
charges, principally consisting of depreciation and amortization of $11.2
million and $44.8 million and accreted interest of $3.3 million and $15.0
million for the quarter ended March 31, 1999 and for the year ended December
31, 1998, respectively. Subject to the restrictions in the indenture governing
the old notes and the new notes and other applicable agreements, the issuers
and their subsidiaries may incur additional indebtedness, from time to time,
which could result in greater interest expense and fixed charges.
The amount of debt and debt service obligations of the issuers could have
important consequences to you, including the following:
. the issuers may have limited ability to obtain additional financing for
working capital, capital expenditures or acquisitions in the future;
14
<PAGE>
. the issuers and their operating subsidiaries will be dedicating a
substantial portion of their cash flow from operations to the payment of
the principal of and interest on their debt, thereby reducing funds
available for future operations and our plans to expand and upgrade our
cable plant;
. all borrowings by the issuers' operating subsidiaries under their senior
credit facility and certain other borrowings are subject to variable
rates of interest, which expose the issuers to the risk of increased
interest rates; and
. the issuers may be more vulnerable to economic downturns and be limited
in their ability to withstand competitive pressures.
For additional information, please refer to the "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resources" section of this prospectus.
Covenants in our debt agreements restrict our business in many ways.
The indenture governing the old notes and the new notes, and the senior
secured credit facility and the indenture governing the senior subordinated
notes issued by the issuers' operating subsidiaries contain numerous
restrictive covenants. These covenants place significant restrictions on, among
other things, the ability of the issuers and the operating subsidiaries to:
. incur additional indebtedness,
. create liens and other encumbrances,
. pay dividends and make certain other payments, investments, loans and
guarantees,
. enter into transactions with affiliates and
. sell or otherwise dispose of assets and merge or consolidate with another
entity.
The credit facility also contains a number of financial covenants that
require the issuers' operating subsidiaries to meet specified financial ratios
and tests. Events beyond the control of the issuers' operating subsidiaries may
affect their ability to meet these ratios and tests. We cannot assure you that
the issuers' operating subsidiaries will meet these ratios or these tests. In
addition, the issuers and their subsidiaries may incur other debt in the future
that may contain more restrictive covenants than those currently applicable.
If our debt obligations are accelerated as a result of a failure to comply with
our debt agreements, we may not be able to repay the new notes.
A failure to comply with the obligations in our debt agreements, including
those of our operating subsidiaries, could result in an event of default under
such agreements. An event of default could permit acceleration of the related
debt and could also permit the acceleration of debt under other instruments
that may contain cross-acceleration or cross-default provisions. In this event,
lenders under these instruments could declare all amounts outstanding to be
immediately due and payable. In addition, in the case of the credit facility
and any other secured debt, the lenders thereunder could foreclose upon the
secured assets. We cannot assure you that the assets of the issuers and their
operating subsidiaries would be sufficient to repay the debt of the issuers and
their operating subsidiaries, including the new notes and the senior
subordinated notes, if the lenders under the credit facility accelerated their
debt.
The new notes are effectively subordinated to all debt and other liabilities of
our operating subsidiaries.
The issuers are holding companies with no significant assets other than
their direct and indirect investments in their operating subsidiaries.
Therefore, the new notes will be effectively subordinated to all debt and other
liabilities of the issuers' subsidiaries. Claims of creditors of the issuers'
subsidiaries, including general trade creditors, will generally have priority
as to the assets of the issuers' subsidiaries over the claims of the issuers
and the holders of the new notes. As of March 31, 1999, on a pro forma basis,
the issuer's subsidiaries would have had $328.5 million of debt outstanding,
including debt under the senior subordinated notes and the credit facility, and
$21.0 million of trade payables and other liabilities outstanding.
15
<PAGE>
Our subsidiaries may be prohibited from paying dividends or making other
payments to us, which payments are our sole source of operating funds to pay
amounts due under the new notes.
The issuers will rely on dividends and other advances and transfers of funds
from their subsidiaries to meet their debt service obligations under the new
notes. The ability of the issuers' subsidiaries to make payments to the issuers
will be subject to applicable state laws restricting the payment of dividends
and to restrictions in the agreements governing indebtedness of the issuers'
subsidiaries. Subject to certain conditions, our current credit facility and
the indenture governing the senior subordinated notes permit the issuers'
subsidiaries to make distributions to the issuers in amounts sufficient for the
issuers to pay interest, including the Accreted Interest Redemption Amount,
when due on the new notes. We cannot assure you that such conditions will be
satisfied at the time the Accreted Interest Redemption Amount or other interest
payments under the new notes are payable. See "Description of Certain Debt."
We can only provide you with limited information about the performance of our
company under current management on which to make your investment decision.
Our company was formed in 1997 and has grown principally through
acquisitions. We acquired a substantial portion of our operations in early
November 1998 in the Cable Michigan transaction. Accordingly, you have limited
information about our combined operations and the results that we can achieve
through our management. We cannot assure you that the past operating history of
any or all of the entities that we have acquired will be indicative of results
under our management.
Our operating strategy depends on completing and integrating acquisitions,
which we may not be able to do for a variety of reasons.
In pursuing our cluster strategy, we will continue to seek strategic
acquisitions at prices we believe to be attractive. A substantial part of our
future growth depends on these acquisitions. Our results of operations could be
materially affected if we do not complete or successfully integrate new
businesses into our existing businesses. We cannot assure you that we will find
attractive acquisition candidates at suitable prices, be able to finance those
acquisitions on satisfactory terms, successfully acquire those candidates, or
effectively manage the integration of acquired businesses into our existing
business. In addition, acquisitions of cable systems are frequently subject to
approval from local franchising authorities and other governmental agencies.
Significant competition in providing entertainment, news and information could
reduce the demand and profitability of our services.
Our industry is very competitive. The nature and level of the competition
affects, among other things, how much we must spend to maintain and upgrade our
cable systems, how much we must spend on marketing and promotions and the
prices we can charge. We cannot assure you that we will have the resources to
compete effectively. Many of our present and potential competitors have
substantially greater resources than we do. Also, some of our competitors may
use technology that customers may find superior to ours. We face competition
from:
. companies with alternative methods of receiving and distributing single
and/or multiple channels of video programming, such as direct-to-the-home
satellite programming companies and off-air television broadcast
programming companies;
. other sources of news, information and entertainment, such as newspapers,
movie theaters, live sporting events, interactive online computer
services and home video products, including videotape cassette recorders;
. potentially, other operators of cable television systems in our
communities, including systems operated by local governmental
authorities; and
. other distribution systems capable of delivering programing to homes and
businesses including direct broadcast satellite systems, private
satellite master antenna television systems and wireless terrestrial
program distribution services such as multipoint, multichannel
distribution service.
16
<PAGE>
In recent years, the number of subscribers to direct broadcast satellite
services has grown significantly on a national basis. Additionally, Congress
and the FCC have recently proposed regulations that could make it easier for
direct broadcast satellite providers to legally deliver certain distant and
local broadcast signals. Recent changes in federal law and recent
administrative and judicial decisions have also removed certain restrictions
that have limited entry into the cable television business by potential
competitors such as telephone companies, registered utility holding companies
and their subsidiaries. Such developments will enable local telephone companies
to provide a wide variety of video services in the telephone company's service
area which will be directly competitive with services provided by cable
television systems. We cannot predict the extent to which competition will
materialize in our franchise areas from other cable television operators, other
video programming distribution systems and other broadband telecommunications
services to the home. We also cannot predict whether we will face new
competitors or their impact on us. For additional information, please refer to
"Business--Competition" and "Regulation" sections of this prospectus.
We will be unable to continue to provide services in areas where our franchises
are not renewed or are terminated, which will adversely affect our business.
We operate under limited term franchises granted by state and local
authorities. We cannot assure you that we will be able to retain or renew
franchises or that any renewals will be on terms as favorable to us as the
existing terms. A franchise is generally granted for a fixed term ranging from
five to 15 years but is often terminable if the franchisee fails to comply with
any material provisions of the franchise agreement. Our franchises typically
impose conditions relating to the use and operation of the cable television
system, including requirements relating to payment of fees, system bandwidth
capacity and customer service requirements. The non-renewal or termination of
franchises relating to a significant portion of our subscribers could have a
material adverse effect on our results of operations as we would no longer be
able to offer services to affected customers. In addition, a change in the
conditions of a franchise could make it more expensive for us to operate the
related cable system, which could adversely affect our business. For additional
information, please refer to "Business--Franchises" section of this prospectus.
Extensive government regulation of the cable industry can increase our expenses
and slow our growth.
The extensive regulation of our industry by federal, state and local
governments results in increased costs, limits on our ability to offer new
services and change our prices and restricts our ability to make acquisitions.
As a result, our financial condition could be negatively affected and our
growth could be limited. The Cable Television Consumer Protection and
Competition Act of 1992 and the implementing rules of the Federal
Communications Commission generally have increased the administrative and
operational expenses of cable television systems and have resulted in
additional regulatory oversight by the Federal Communications Commission and
local and/or state franchise authorities. A number of states, including New
York, Connecticut, and Massachusetts, subject cable systems to the jurisdiction
of centralized state governmental agencies in addition to more local
regulation. Regulations cover, among other things:
. rates for certain services,
. mandatory carriage and retransmission consent requirements that require a
cable system under certain circumstances to carry a local broadcast
station or to obtain consent to carry a local or distant broadcast
station,
. rules for certain franchise renewals and all transfers, and
. other requirements covering a variety of operational areas, such as equal
employment opportunity, technical standards and customer service
requirements.
Changes in regulations can adversely affect our business and help our
competitors.
Our results of operations may be adversely impacted by changes in federal,
state and local regulations. For example, pending federal legislation would
make it easier for direct broadcast satellite services to provide local
17
<PAGE>
programming in local markets. If passed, the legislation would make direct
broadcast satellite services more competitive with cable television, which is
not currently similarly limited with respect to local programming. We cannot
predict whether this legislation, or any other pending or future legislation,
will ultimately become law, if it does what its final provisions will be and,
consequently, what impact it would have on us.
We will not be able to remain competitive if we cannot keep up with
technological change.
The cable television industry is subject to rapid and significant changes in
technology. We plan to upgrade the technical quality of our cable plant to
expand our services, increase the number of channels that we offer to customers
and, if economically viable, provide new services. We cannot assure you,
however, that existing, proposed or yet undeveloped technologies will not
become dominant in the future or otherwise render cable television services
less profitable or less viable.
Our business will be adversely affected if we cannot continue to obtain
programming on reasonable terms.
Our cable programming services are dependent upon our ability to obtain
attractive programming at reasonable rates. Although we believe that our
relations with our programming suppliers are generally good, our business could
suffer a material adverse effect if we lost key programming contracts because
the quality and amount of programming we offer affect the prices we can charge
and the attractiveness of our services to subscribers. We also anticipate that
the cost of obtaining programming will rise in the future. If we were unable to
pass on these increases to our customers, these increases could have a material
adverse effect on our results of operations. For additional information, please
refer to the "Business--Programming" section of this prospectus.
Your investment may be adversely affected due to conflicts of interest between
noteholders and our controlling equityholder.
ABRY Broadcast Partners III, L.P. controls our total voting power and can
therefore direct our policies. In addition, it controls the selection of a
majority of the managers of Avalon Cable Holdings LLC and, indirectly, the
managers and the directors of the issuers. Certain changes in ABRY Broadcast
Partners III's beneficial ownership interest in the issuers would constitute a
change of control under the indenture governing the new notes and under other
agreements, including our secured credit facility, and could result in an event
of default or otherwise give rise to an obligation to make an immediate payment
under these agreements.
ABRY Broadcast Partners III and its affiliates are in the business of making
controlling investments in broadcast and other media businesses and in
businesses which support or enhance broadcast or media properties. They and
members of our management may from time to time own or control interests in
television, cable and related businesses other than through our company,
including interests in our competitors. They may make acquisitions of
television, cable and other broadcasting and related businesses that would be
complementary to our business but are not made available to us.
ABRY Broadcast Partners III, its affiliates and members of our management
may from time to time maintain interests which are in conflict with the
interests of the owners of the new notes. Some of these interests may result in
restrictions on our ability to engage in certain activities due to limitations
on common ownership, operation or control of certain businesses.
If a change of control occurs, there may not be sufficient assets to purchase
the new notes of all noteholders wishing to have their new notes purchased.
In the event there is a change of control of the issuers, the issuers must
make an offer to buy back the new notes at a price equal to 101% of (a) the
accreted value of the new notes in the case of repurchases of new notes prior
to December 1, 2003 or (b) the aggregate principal amount thereof in the case
of repurchases of new notes on or after December 1, 2003 together with accrued
and unpaid interest and liquidated damages, if
18
<PAGE>
any, as of the date of repurchase. We cannot assure you that the issuers would
have sufficient funds to pay the purchase price for all of the new notes in
that event, in part because certain events involving a change of control may
also result in:
. an event of default under our credit facility or other applicable debt
agreements,
. an obligation of the issuers or their operating subsidiaries to make an
immediate payment under the credit facility or other debt agreements, or
. obligations to purchase, or offer to purchase, the related indebtedness,
including our subsidiaries' senior subordinated notes.
We also cannot assure you that the credit facility or other agreements to
which the issuers and their affiliates are then party would permit any of these
purchases. If a change of control occurs at a time when the issuers are
prohibited from purchasing the new notes, the issuers and their affiliates
could seek the consent of their lenders to purchase the new notes or could
attempt to refinance the borrowings that contain this prohibition. If the
issuers do not obtain consent or repay the borrowings, the issuers would remain
prohibited from purchasing the new notes. In this case, the issuers' failure to
purchase tendered new notes would constitute an event of default under the
indenture governing the new notes. For additional information, please refer to
the "Description of the Notes" section of this prospectus.
Our performance could be adversely affected if we lose our key personnel.
David Unger, our Chairman, and Joel Cohen, our President and Chief Executive
Officer, while having extensive experience in the industry, do not have
extensive experience with our company or any of our operations, including Cable
Michigan. Therefore, we cannot assure you of our performance under their
management. Our business is substantially dependent upon the performance of
certain key individuals, including Mr. Unger and Mr. Cohen. Although we intend
to maintain a strong management team, the loss of the services of Mr. Unger or
Mr. Cohen could have a material adverse effect on us. Under the terms of his
employment agreement, Mr. Unger is permitted to engage in other business
activities in addition to his duties to our company. For additional
information, please refer to the "Management" section of this prospectus.
Our business may be adversely affected if we are responsible for certain
liabilities related to the separation of Cable Michigan from Commonwealth
Telephone Enterprises, Inc.
Cable Michigan, Inc., which we acquired in November 1998, became a separate,
public company on September 30, 1997. Prior to that time, its operations were
part of Commonwealth Telephone Enterprises, Inc. Under the agreements governing
the separation of Cable Michigan from Commonwealth Telephone Enterprises, we
could be responsible for liabilities resulting from the joint operations of
Cable Michigan, Commonwealth Telephone Enterprises and RCN Corporation, which
was separated from Commonwealth Telephone Enterprises at the same time as Cable
Michigan, including liabilities related to taxes and employee benefits. If we
were so liable, it could have a material adverse effect on us.
Failure of our year 2000 efforts could adversely affect us.
We are in the process of reviewing our financial, administrative and
operational systems and analyzing the extent to which we face a year 2000
problem. We also are in the process of reviewing systems provided to us by
third parties, including billing systems. Although we have not yet made a final
determination, we believe that any year 2000 problem, if it arises in the
future, should not be material to our liquidity, financial position or results
of operations. However, we cannot assure you as to the extent of any of these
liabilities.
Your notes could be voided or subordinated to our other debt if the issuance of
the notes constituted a fraudulent conveyance.
Under federal or state fraudulent transfer laws, if a court found that at
the time the issuers issued the old notes or the new notes, any of the issuers:
19
<PAGE>
(1) incurred the debt with the intent of hindering, delaying or
defrauding current or future creditors; or
(2) received less than fair consideration or reasonably equivalent value
for incurring the debt and
. was insolvent or was rendered insolvent by reason of the incurrence
of the debt,
. was engaged, or about to engage, in a business or transaction for
which its remaining assets were unreasonably small or
. intended to incur, believed or should have believed, it would incur
debts beyond its ability to pay as the debts mature,
then, in each case, a court could void all or a portion of the issuer's
obligations to you as a holder of the new notes, or subordinate the issuer's
obligations to the holders to other debt of the issuer, as the case may be.
This result would entitle other creditors to be paid in full before any payment
could be made on your notes, and possibly allow other creditors to invalidate
your notes. In that event, we could not assure you that you would ever recover
any repayment on your notes.
The definition of insolvency for purposes of the foregoing will vary
depending upon the law applied. Generally, however, an issuer would be
considered insolvent if:
. the sum of its debts, including contingent liabilities, were greater than
the fair saleable value of all of its assets; or
. the present fair saleable value of its assets was less than the amount
that would be required to pay its probable liability on its existing
debts, including contingent liabilities, as they become absolute and
mature; or
. it could not pay its debts as they mature.
We believe that, for the above purposes, the old notes were issued and are
being exchanged without the intent to hinder, delay or defraud creditors, and
for proper purposes and in good faith. We also believe that after the issuance
and exchange of the notes and the application of their proceeds, the issuers
will be solvent, will have sufficient capital for carrying on their business
and will be able to pay their debts as they mature. We can give no assurance,
however, what standard a court would apply in reviewing the transactions or
that a court would agree with our conclusion.
We do not maintain insurance on our underground cable plant and thus damage to
our cable plant could have a material adverse effect on our business.
As is typical in the cable television industry, we do not maintain insurance
covering our underground cable plant. Therefore, the loss of or damage to a
significant portion of our cable plant or other uninsured properties could have
a material adverse effect on us.
Because the new notes will bear original issue discount, holders generally will
have taxable income arising from the new notes in advance of receiving related
cash payments.
The new notes will bear original issue discount for federal income tax
purposes. Consequently, holders of the new notes generally will be required to
include amounts in gross income for federal income tax purposes in advance of
receipt of the cash payments to which the income is attributable. Please see
the "Certain United States Federal Income Tax Considerations" section of this
prospectus for a more detailed discussion of the federal income tax
consequences of the purchase, ownership and disposition of the new notes.
If the issuers cannot deduct some of the interest on the new notes, there could
be a material adverse effect on our financial condition due to the additional
taxes payable.
Although unlikely, it is possible that the new notes will constitute
"applicable high yield discount obligations" for federal income tax purposes.
Should the new notes be applicable high yield discount
20
<PAGE>
obligations, the issuers would not be entitled to claim a deduction for
original issue discount that accrued with respect to the new notes until
amounts attributable to such original issue discount were actually paid. In
addition, to the extent that the yield to maturity of the new notes exceeded
the sum of the relevant applicable federal rate plus six percentage points, any
deduction that was attributable to this portion of the new notes would be
permanently disallowed. As a result, the issuers could be responsible for more
taxes, which could have a material adverse effect on the financial condition of
the issuers.
The new notes would be applicable high yield discount obligations if:
. the yield to maturity on the new notes is equal to or greater than the
sum of the relevant applicable federal rate plus five percentage points
and
. the new notes bear significant original issue discount.
A debt instrument bears significant original issue discount for this purpose
if, as of the close of any accrual period ending more than five years after
issuance, the total amount of income includible by a holder with respect to the
debt instrument exceeds the sum of:
. interest paid to the holder in cash or, generally, in property other than
debt instruments or stock of the issuer or a related person and
. an amount equal to the issue price of the debt instrument multiplied by
its yield to maturity.
For purposes of this discussion, the date of issuance refers to the date of
issuance of the old notes.
Although the law is unclear in certain respects and the issue is therefore
not free from doubt, the new notes should not constitute applicable high yield
discount obligations because they should not bear significant original issue
discount because, by the close of the first accrual period ending more than
five years after issuance, the issuers are required by the terms of the new
notes to pay, in cash, an amount at least equal to the excess of all original
issue discount accrued to that date since the date of issuance of the old notes
over an amount equal to one year's simple uncompounded interest on the
aggregate issue price of the old notes at a rate per annum equal to the stated
interest rate on the old notes; thereafter, cash interest is required to be
paid semiannually.
In a bankruptcy proceeding involving the issuers, holders of new notes may not
have claims for the full principal amount of their notes.
If a bankruptcy case is commenced by or against any of the issuers under
federal bankruptcy law after the issuance of the new notes, the claim of a
holder of the new notes with respect to the principal amount of those notes may
be limited to the sum of:
. the initial public offering price of the new notes, and
. that portion of the original issue discount which is not deemed to
constitute "unmatured interest" for purposes of federal bankruptcy law.
Any original issue discount that was not amortized as of any such bankruptcy
filing would constitute "unmatured interest."
Actual results of our operations may differ from those contained in forward-
looking statements.
We make forward-looking statements throughout this prospectus. Whenever you
read a statement that is not simply a statement of historical fact, such as
when we describe what we believe, expect or anticipate will occur, and other
similar statements, you must remember that our expectations may not be correct,
even though we believe they are reasonable. You should read this prospectus
completely and with the understanding that actual future results may be
materially different from what we expect as a result of certain factors,
including the risks faced by us described in the "Risk Factors" section and
elsewhere in this prospectus. We will not update these forward-looking
statements, even though our situation will change in the future.
21
<PAGE>
THE COMPANY
Overview
Set forth below are charts showing our corporate structure at the time we
issued the old notes and after giving effect to a reorganization that we
completed in March 1999. These charts should be read in light of the following
facts:
. Avalon Cable Holdings, LLC controls each of the issuers and each of their
operating subsidiaries.
. Each of the subsidiaries of Avalon Cable Holdings, LLC was organized in
connection with a particular acquisition or the financing thereof.
. In the initial structure, Avalon Cable of Michigan, Inc., Mercom, Inc.
and Avalon Cable of New England LLC are the only companies with
substantial operations. The rest are primarily holding companies, holding
only equity interests in the indicated companies and incurring and/or
guaranteeing debt.
. In the structure after the reorganization, Avalon Cable of Michigan LLC
and Avalon Cable of New England LLC are the only companies with
substantial operations. The rest are primarily holding companies, holding
only equity interests in the indicated companies and incurring and/or
guaranteeing debt.
. The controlling equityholder in Avalon Cable Holdings, LLC is ABRY
Broadcast Partners III, L.P., an investment fund. It is managed by ABRY
Partners, Inc., which manages $825 million of private equity funds and is
one of the largest private equity investment firms in North America
dedicated solely to investments in media businesses. For more
information, see "Security Ownership of Certain Beneficial Owners and
Management."
. Members of management are also equityholders in Avalon Cable Holdings,
LLC.
. Avalon Investors L.L.C. was organized by a private investor in order to
invest in our company. It does not have any voting rights with respect to
the management or operations of Avalon Cable LLC or any of its
subsidiaries.
. The senior subordinated notes of the issuers' operating subsidiaries were
privately placed at the same time as the old notes and are currently the
subject of a separate exchange offer which is registered with the
Securities and Exchange Commission on a separate registration statement.
22
<PAGE>
Initial Structure
The following chart sets forth our corporate structure as of the time of the
old note offering. Originally, the issuers under the old notes were Avalon
Cable LLC, Avalon Cable of Michigan Holdings, Inc. and Avalon Cable Holdings
Finance, Inc. At that time, Avalon Cable of Michigan, Inc. operated the cable
systems located in our Michigan cluster. Avalon Cable of New England LLC
operates the cable systems located in our New England cluster. Avalon Cable of
Michigan, Inc. is a wholly owned subsidiary of Avalon Cable of Michigan
Holdings, Inc., Avalon Cable of New England LLC is a wholly owned subsidiary of
Avalon Cable LLC and Avalon Cable Finance, Inc. is a wholly owned subsidiary of
Avalon Cable Holdings Finance, Inc. Each of Avalon Cable Holdings Finance, Inc.
and Avalon Cable Finance, Inc. was organized for purposes of facilitating the
initial financing and other financings and conducts no activities other than in
connection with those financings.
[CHART SHOWS CORPORATE STRUCTURE IMMEDIATELY AFTER GIVING EFFECT
TO THE REORGANIZATION]
- --------
(a) Issuer of old notes.
(b) Issuer under senior subordinated notes and borrower under the credit
facility.
(c) In the Cable Michigan acquisition, Avalon Cable of Michigan, Inc. acquired
the approximately 62% of Mercom, Inc.'s outstanding common stock owned by
Cable Michigan. Subsequently, Avalon Cable of Michigan, Inc. acquired the
remaining shares.
Structure After the Reorganization
In order to facilitate certain aspects of our financing, in March 1999,
after the acquisition of the approximately 38% of Mercom, Inc. that we did not
own through a merger of Mercom, Inc. into Avalon Cable of Michigan, Inc., we
completed a series of transactions we refer to as the "reorganization:"
. Avalon Cable of Michigan, Inc. transferred substantially all of its
assets and liabilities to Avalon Cable LLC, which then transferred these
assets and liabilities to Avalon Cable of Michigan LLC and, as a result,
Avalon Cable of Michigan LLC now operates our Michigan cluster;
. Avalon Cable of Michigan Holdings, Inc. ceased to be an obligor on the
old notes and together with Avalon Cable of Michigan, Inc. became a
guarantor of the obligations of Avalon Cable LLC under the old notes;
23
<PAGE>
. Avalon Cable of Michigan LLC became an additional obligor on the senior
subordinated notes of the issuers' operating subsidiaries; and
. Avalon Cable of Michigan, Inc. ceased to be an obligor on the senior
subordinated notes and the credit facility and became a guarantor of all
of the obligations of Avalon Cable of Michigan LLC under the senior
subordinated notes and the credit facility.
Neither Avalon Cable of Michigan Holdings, Inc. nor Avalon Cable of
Michigan, Inc. has any significant assets other than its equity interests in
Avalon Cable of Michigan, Inc. and Avalon Cable LLC, respectively. As a
result, you should not expect Avalon Cable of Michigan Holdings, Inc. and
Avalon Cable of Michigan, Inc., as guarantors, to have any assets available to
make interest and principal payments on the new notes.
The following chart sets forth our corporate structure immediately after
giving effect to the reorganization.
[CHART SHOWS CORPORATE STRUCTURE IMMEDIATELY AFTER GIVING EFFECT
TO THE REORGANIZATION]
- --------
(a) Issuer of old notes.
(b) Issuer of senior subordinated notes and borrower under the credit
facility.
(c) Guarantor of Avalon Cable LLC's obligations under the old notes and new
notes.
(d) Guarantor of Avalon Cable of Michigan LLC's obligations under the senior
subordinated notes and the credit facility.
24
<PAGE>
USE OF PROCEEDS
We will not receive any cash proceeds from the issuance of the new notes. We
used the proceeds of approximately $110.4 million from the offering of the old
notes and approximately $150.0 million from the offering of the senior
subordinated notes, which occurred at the same time, principally to:
. repay approximately $125.0 million under our senior credit facility,
together with accrued interest,
. repay approximately $105.0 million of borrowings under the bridge credit
facility described below, together with accrued interest,
. repay approximately $18.0 million of borrowings under the subordinated
bridge facility described below, together with accrued interest,
. pay approximately $9.4 million of financing costs and certain fees and
expenses, and
. pay approximately $3.0 million of accrued interest and for other working
capital needs.
As a result, the bridge credit facility was terminated and no amounts were
outstanding under the subordinated bridge facility. The credit facility, the
bridge credit facility and the subordinated bridge facility were all entered
into in connection with the closing of the acquisition of Cable Michigan in
November 1998. At that time, borrowings under the bridge credit facility and
the subordinated bridge facility, together with the funds received under the
credit facility and as a result of equity investments, were used to finance the
net consideration paid to acquire Cable Michigan, to repay existing Cable
Michigan indebtedness, to repay indebtedness incurred in connection with prior
acquisitions by Avalon Cable of New England and to pay financing costs and fees
and expenses.
Borrowings under the bridge credit agreement, dated as of November 5, 1998,
among the issuers, the lenders named therein, Lehman Brothers Inc. and Lehman
Commercial Paper Inc., bore interest, at the time of repayment, at
approximately 11.3% per annum. The bridge credit facility would have become due
and payable on November 6, 1999 unless converted into term loans as provided
therein, in which case these principal amounts would have become due and
payable on November 6, 2007.
The subordinated bridge facility bore interest, at the time of repayment, at
approximately 12.3% per annum. Interest under this facility was not currently
payable in cash; rather, interest due and payable could be added to the
principal amount outstanding thereunder. For a description of this facility,
see the definition of "ABRY Subordinated Debt" under "Description of the
Notes."
25
<PAGE>
CAPITALIZATION
The following table sets forth:
. the unaudited capitalization as of March 31, 1999 of each of Avalon Cable
LLC and Avalon Cable Holdings Finance, Inc., which were the issuers under
the old notes as of such date, and
. the pro forma combined capitalization of the issuers as of March 31,
1999, giving effect to the pending acquisitions and other matters
described herein.
The information in the following table should be read in conjunction with
the "Management's Discussion and Analysis of Financial Condition and Results of
Operations" section of this prospectus and the financial statements and the
notes thereto which you can find elsewhere in this prospectus.
<TABLE>
<CAPTION>
Unaudited March 31, 1999
-------------------------
Avalon Unaudited
Holdings Pro Forma Combined
Avalon Cable LLC Finance March 31, 1999
---------------- -------- ------------------
(dollars in thousands)
<S> <C> <C> <C>
Credit facility.................. $177,366 $ -- $177,939(1)
Senior subordinated notes........ 150,000 -- 150,000
New notes........................ -- -- 114,781(2)
Old notes........................ 114,781 -- --
Notes Payable--affiliates........ -- 15,338 --
Other............................ 580 -- 580
-------- ------- --------
Total debt..................... 442,727 15,338 443,300
Issuers' equity.................. 138,628 -- 138,628
-------- ------- --------
Total capitalization........... $581,355 $15,338 $581,928
======== ======= ========
</TABLE>
(1) To reflect additional borrowings under the credit facility for the
completed and pending acquisitions of Traverse Internet, Hometown TV
and Galaxy American Communications of $573.
(2) To reflect the exchange of old notes for new notes.
26
<PAGE>
UNAUDITED PRO FORMA COMBINED FINANCIAL DATA
The following Unaudited Pro Forma Combined Financial Data is based on the
historical financial statements of the Avalon Cable of Michigan Holdings, Inc.,
Cable Michigan, the predecessor to Avalon Cable of Michigan Holdings, Inc.,
Avalon Cable LLC, Avalon Cable of New England LLC, AMRAC Clear View, the
predecessor to Avalon Cable LLC and Avalon Cable of New England, Pegasus Cable
Television, Inc. and Pegasus Cable Television of Connecticut, Inc., Taconic
Technology Corporation and Avalon Cable Holdings Finance, Inc. and the
assumptions and adjustments described in the accompanying notes. The results of
Mercom are included in the results of Avalon Cable of Michigan, Inc. and Cable
Michigan for the reported periods. The following Unaudited Pro Forma Combined
Statements of Operations gives effect to our completed and pending
acquisitions, the issuance of the old notes, the issuance of the senior
subordinated notes by the issuers' operating subsidiaries, the incurrence of
debt under our senior credit facility and the reorganization transactions
described herein, as if each had occurred on January 1, 1999 for pro forma
information for the period ending March 31, 1999 and January 1, 1998 for the
pro forma information for the period ended December 31, 1998. The Unaudited Pro
Forma Combined Statements of Operations do not purport to represent what the
issuers' results of operations actually would have been if all completed and
pending acquisitions had occurred as of the date indicated or what the results
will be for future periods. Among other things, this data does not give effect
to certain non-recurring charges or cost savings expected to result from our
acquisitions. In the following table and the related notes, we refer to:
. Avalon Cable Holdings Finance, Inc. as Holdings Finance,
. the assets and related liabilities that we will acquire from Taconic
Technology Corporation as Taconic,
. Avalon Cable of Michigan Holdings, Inc. as Michigan Holdings,
. Avalon Cable of New England LLC as Avalon New England,
. AMRAC Clear View as Amrac,
. Pegasus Cable Television, Inc. and Pegasus Cable Television of
Connecticut, Inc., collectively as Pegasus,
. Avalon Cable of Michigan, Inc. as Avalon Michigan Inc., and
. Avalon Cable of Michigan LLC as Avalon Michigan LLC.
The following Unaudited Pro Forma Combined Balance Sheet as of March 31,
1999 was prepared as if all of the completed and pending acquisitions and the
reorganization had occurred on this date. The Unaudited Pro Forma Combined
Balance Sheet reflects the preliminary allocations of purchase price to the
Issuers' tangible and intangible assets and liabilities. The final allocation
of purchase price, and the resulting depreciation and amortization expense in
the accompanying Unaudited Pro Forma Combined Statements of Operations, may
differ from the preliminary estimates due to the final allocation being based
on (a) actual closing date amounts of assets and liabilities and (b) actual
appraised values of property, plant and equipment and any identifiable
intangible assets for the pending acquisitions. For every $100,000 change in
the allocation to goodwill, amortization expense would increase or decrease
accordingly by approximately $6,700 on a yearly basis.
The Unaudited Pro Forma Combined Financial Data and accompanying notes are
provided for informational purposes only and are not necessarily indicative of
the operating results that would have occurred had all completed and pending
acquisitions been consummated on the date indicated, nor are they necessarily
indicative of the Issuers' future results of operations or financial position.
The operating results for the three months ended March 31, 1999 are not
necessarily indicative of results to be expected for the year ended December
31, 1999.
The Unaudited Pro Forma Combined Financial Data should be read in
conjunction with the financial statements of Michigan Holdings, Cable Michigan,
Avalon Cable LLC, Avalon New England, Amrac, Pegasus, Taconic and Holdings
Finance and the accompanying notes thereto included elsewhere in this
prospectus.
Prior to July 21, 1998, Pegasus was operated as part of Pegasus
Communications Corporation. The table below sets forth selected historical
combined data for Pegasus. The historical combined financial data presented
27
<PAGE>
below reflect periods during which Pegasus did not operate as an independent
company and, accordingly, certain
allocations were made in preparing the financial data. Therefore, this data may
not reflect the results of operations or the financial condition which would
have resulted if Pegasus had operated as a separate independent company during
these periods, and are not necessarily indicative of Pegasus' future results of
operations or financial position.
As of March 31, 1999, the assets and liabilities that we will acquire from
Taconic were owned by Taconic Technology. The table below sets forth selected
historical data for these assets and liabilities of Taconic. The historical
financial data presented below reflect periods during which these assets and
liabilities were part of Taconic and, accordingly, certain allocations were
made in preparing the financial data. Therefore, the data may not reflect the
results of operations or the financial condition which would have resulted if
these assets and liabilities were owned by a separate independent company
during these periods, and are not necessarily indicative of the future results
of operations or financial position of these assets and liabilities.
28
<PAGE>
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
March 31, 1999
(dollars in thousands)
<TABLE>
<CAPTION>
Avalon Unaudited
Avalon Holdings Probable Pro Forma Pro Forma
Cable LLC Finance Transaction Adjustments Combined
--------- -------- Taconic ----------- ---------
<S> <C> <C> <C> <C> <C>
Current assets:
Cash................... $ 13,227 $ -- $ -- $ (8,525)(a) $ --
(4,275)(b)
(1,000)(c)
573 (d)
Accounts receivable,
net................... 6,210 -- 32 -- 6,242
Prepaids and other
current assets........ 741 -- 626 -- 1,367
-------- ------- ------ --------- --------
Total current assets. 20,178 -- 658 (13,227) 7,609
Property, plant and
equipment, net......... 115,200 -- 1,713 1,612 (a) 118,525
150 (b) 150
Intangible assets, net.. 473,323 -- -- 1,000 (c) 474,323
4,803 (a) 4,803
4,125 (b) 4,125
Notes receivable--
affiliate.............. -- 15,338 -- (15,338)(c) --
Other assets............ 94 -- 28 -- 122
-------- ------- ------ --------- --------
Total assets......... $608,795 $15,338 $2,399 $ (16,875) $609,657
======== ======= ====== ========= ========
Current liabilities:
Current portion of
long-term debt........ $ 20 $ -- $ 289 $ -- $ 309
Accounts payable and
accrued expenses...... 20,669 -- -- -- 20,669
Accounts payable--
affiliates............ 3,388 -- -- -- 3,388
Advance billings and
customer deposits..... 3,363 -- -- -- 3,363
-------- ------- ------ --------- --------
Total current
liabilities......... 27,440 -- 289 -- 27,729
Credit facility......... 177,366 -- -- 573 (d) 177,939
Senior Subordinated
Notes.................. 150,000 -- -- -- 150,000
Senior Discount Notes... 114,781 -- -- (114,781)(f) --
New Notes............... -- -- -- 114,781 (f) 114,781
Long-term debt.......... 580 -- -- -- 580
Notes payable--
affiliates............. -- 15,338 -- (15,338)(c) --
Deferred credits and
other.................. -- -- 359 (359)(a) --
-------- ------- ------ --------- --------
Total liabilities.... 470,167 15,338 648 (15,124) 471,029
Minority interest....... -- -- -- -- --
Equity, net............. 138,628 -- 1,751 (1,751)(a) 138,628
-------- ------- ------ --------- --------
Total liabilities and
equity, net......... $608,795 $15,338 $2,399 $ (16,875) $609,657
======== ======= ====== ========= ========
</TABLE>
(See Notes to Unaudited Pro Forma Combined Balance Sheet)
29
<PAGE>
NOTES TO UNAUDITED PRO FORMA COMBINED BALANCE SHEET
March 31, 1999
(a) To reflect the pending acquisition of Taconic (dollars in thousands):
<TABLE>
<S> <C>
Cash paid......................................................... $8,525
======
To record purchase price adjustments:
Historical net book value, excluding debt....................... $1,751
Eliminate net (assets)/liabilities not acquired................. 359
------
Historical cost basis of net assets acquired.................. 2,110
Identified value of property and equipment in excess of
historical cost.............................................. 1,612
Goodwill and other intangibles................................ 4,803
------
Fair value of Taconic....................................... $8,525
======
</TABLE>
(b) To reflect the acquisitions of Traverse Internet, Hometown TV and Galaxy
American Communications (the "Additional Acquisitions") as if these
acquisitions occurred on March 31, 1999 (dollars in thousands except the
price per share):
<TABLE>
<S> <C>
Additional Acquisitions purchase price (1)........................ 4,275
------
To record purchase price adjustments:
Identified value of property, plant and equipment in excess of
historical cost.................................................. 150
Goodwill and other intangibles.................................... 4,125
------
Fair value of the Additional Acquisitions......................... $4,275
======
</TABLE>
--------
(1) We have acquired certain assets and liabilities of Traverse
Internet as of April 30, 1999 and have signed definitive
agreements to acquire assets of Hometown TV and Galaxy American
Communications. These completed and pending acquisitions do not
represent significant acquisitions by the issuers and therefore do
not require separate financial statement information.
(c) To reflect deferred finance costs of $1,000,000 incurred in conjunction
with the exchange offering.
(d) To reflect additional borrowings under the credit facility of $573 incurred
in connection with the Additional Acquisitions and the exchange offering.
(e) To eliminate transactions between the issuers consisting of (i) a note
receivable, including interest receivable, of $15,338 from Avalon Michigan
LLC payable to Avalon Cable Finance and (ii) a note receivable, including
interest receivable, of $15,338 from Avalon Cable Finance payable to Avalon
New England.
(f) To reflect the exchange of old notes for new notes.
30
<PAGE>
UNAUDITED PRO FORMA COMBINED STATEMENTS OF OPERATIONS
For Three Months Ended March 31, 1999
<TABLE>
<CAPTION>
Less:
Duplicate period
Avalon consolidated Probable Unaudited
Michigan Cable into Michigan Transaction Pro Forma Pro Forma
Holdings(1) LLC(2) Holdings(3) Taconic(4) Adjustments(5) Combined
----------- ------ ---------------- ----------- -------------- ---------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues................ $ 22,367 $3,551 $(1,342) $523 $ 949(a) $ 26,048
Operating expenses...... 12,129 1,657 (377) 340 728(a) 14,477
Corporate overhead...... 376 411 (376) 6 17(a) 434
Depreciation and
amortization........... 10,126 1,310 (597) 105 235(b) 11,179
Non-recurring expenses.. -- -- -- -- -- --
-------- ------ ------- ---- ------- --------
Operating (loss) income. (264) 173 8 72 (31) (42)
Interest expense, net... (11,518) (472) 558 -- (11)(c) (11,443)
Other income (expense),
net.................... 4,350 -- -- (28) (4,322)(d) --
-------- ------ ------- ---- ------- --------
Net (loss) income....... $ (7,432) $ (299) $ 566 $ 44 $(4,364) $(11,485)
======== ====== ======= ==== ======= ========
</TABLE>
UNAUDITED PRO FORMA COMBINED STATEMENTS OF OPERATIONS
For Year Ended December 31, 1998
<TABLE>
<CAPTION>
Avalon Probable Unaudited
Michigan Cable Cable Avalon New Transaction Pro Forma Pro Forma
Holdings(6) Michigan(7) LLC(8) England(9) Amrac(10) Pegasus(11) Taconic(12) Adjustments(13) Combined
----------- ----------- ------- ---------- --------- ----------- ----------- --------------- ---------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues........ $13,657 $ 74,521 $ 1,299 $3,231 $779 $3,277 $2,086 $ 6,061 (a) $104,911
Operating
expenses....... 7,469 38,621 761 1,838 443 1,693 1,378 4,036 (a) 56,239
Corporate
overhead....... 249 6,087 56 350 42 97 22 97 (a) 7,000
Depreciation and
amortization... 6,614 28,098 440 1,129 47 835 426 7,239 (b) 44,828
Non-recurring
expenses....... -- 5,764 -- -- -- -- -- -- 5,764
------- -------- ------- ------ ---- ------ ------ -------- --------
Operating (loss)
income......... (675) (4,049) 42 (86) 247 652 260 (5,311) (8,920)
Interest
expense, net... (6,784) (7,382) (785) (503) -- (938) (17) (29,120)(c) (45,529)
Other income
(expense), net. (769) 897 (1,311) -- -- (22) (97) (2,280)(d)(e) (3,582)
------- -------- ------- ------ ---- ------ ------ -------- --------
Net (loss)
income......... $(8,228) $(10,534) $(2,054) $ (589) $247 $ (308) $ 146 $(36,711) $(58,031)
======= ======== ======= ====== ==== ====== ====== ======== ========
</TABLE>
(See Notes to Unaudited Pro Forma Combined Statements of Operations)
31
<PAGE>
NOTES TO UNAUDITED PRO FORMA COMBINED STATEMENTS OF OPERATIONS
For the Three Months Ended March 31, 1999 and the Year Ended December 31, 1998
(1) For the three months ended March 31, 1999, Michigan Holdings' results of
operations include the results of operations of its wholly-owned
subsidiary, Avalon Michigan, Inc. During this quarter, Avalon Michigan Inc.
operated the Michigan cluster from January 1 through March 26, 1999 and
then, in the reorganization, contributed its operating assets and
liabilities to Avalon Cable LLC in exchange for a majority interest in
Avalon Cable LLC and consolidated the results of Avalon Cable LLC from
March 27, 1999 to March 31, 1999.
(2) Avalon Cable LLC's results of operations include its results of operations
for the three months ended March 31, 1999, the results of its wholly-owned
subsidiaries, Holdings Finance and Avalon New England for the period ended
March 31, 1999 and the results of operations of its wholly-owned
subsidiary, Avalon Michigan LLC, from the date of contribution (March 26,
1999) through March 31, 1999.
(3) This column represents the results of operations for the period from March
26 through March 31, 1999 which is included in the results of operations of
both Michigan Holdings and Avalon Cable LLC due to the reorganization.
(4) Taconic's results of operations includes the actual historical results of
operations for the period from January 1, 1999 through March 31, 1999.
(5) Pro forma adjustments represent those adjustments necessary to present
operating results as if all pending and completed acquisitions and the
financings occurred on January 1, 1999. These adjustments included the
following:
(a) To adjust revenues, operating expenses and corporate overhead of $949,
$728 and $17, respectively for the three months ended March 31, 1999,
to account for the acquisitions of Nova Cablevision, Cross Country
Cable TV, Traverse Internet, Galaxy American Communications, R/COM,
Novagate Communications and Hometown TV as if these acquisitions
occurred on January 1, 1999.
(b) Amount represents increased depreciation and amortization due to excess
of fair value over historical cost generated from the acquisitions of
Taconic and other completed and pending acquisitions calculated as
follows (dollars in thousands):
<TABLE>
<CAPTION>
Three Months
Ended
March 31,
1999
------------
<S> <C>
Pro forma depreciation and amortization...................... $11,179
Historical depreciation and amortization..................... 10,944
-------
Pro forma adjustment......................................... $ 235
=======
</TABLE>
(c) Amount represents increased interest expense due to the financings for
acquisitions (dollars in thousands):
<TABLE>
<CAPTION>
Three Months
Ended
March 31,
1999
------------
<S> <C>
Additional borrowings........................................ $573
Credit facility interest rate on an annual basis............. 8.0%
----
Pro forma adjustment......................................... $ 11
====
</TABLE>
(d) To remove tax benefits, net, since after reorganization, two of the
three issuers will be treated as partnerships for federal income tax
purposes (dollars in thousands):
<TABLE>
<S> <C>
Taconic.......................................................... $ 28
Michigan Holdings................................................ (4,350)
-------
Total tax (benefit), net..................................... $ 4,322
=======
</TABLE>
(6) On November 6, 1998, a subsidiary of Avalon Michigan Inc. acquired Cable
Michigan. Prior to this acquisition, Avalon Michigan Inc. did not have any
operations. Avalon Michigan Inc.'s results of operations include the
results of operations for the period from acquisition through December 31,
1998.
(7) Cable Michigan's results of operations includes the actual historical
results of operations of Cable Michigan for the period from January 1, 1998
through November 5, 1998.
(8) Avalon Cable LLC results of operations include its results of operations
from its inception (October 21, 1998) through December 31, 1998, and the
results of operations of Avalon New England from the date of contribution
(November 6, 1998) through December 31, 1998.
(9) On May 29, 1998, Avalon New England acquired Amrac. On July 21, 1998,
Avalon New England acquired Pegasus. Prior to these acquisitions, Avalon
New England did not have any operations. Avalon New England's
32
<PAGE>
NOTES TO UNAUDITED PRO FORMA COMBINED
STATEMENTS OF OPERATIONS--(Continued)
For the Three Months Ended March 31, 1999 and the Year Ended December 31, 1998
results of operations include the results of operations for the period from
the acquisitions (May 29, 1998 for Amrac and July 21, 1998 for Pegasus)
through December 31, 1998.
(10) Amrac's results of operations includes the historical results of
operations for the period from January 1, 1998 through May 28, 1998.
(11) Pegasus' combined results of operations includes the actual historical
results of operations for the period from January 1, 1998 through June
30, 1998.
(12) Taconic's results of operations includes the actual historical results of
operations of Taconic for the year ended December 31, 1998.
(13) Pro forma adjustments represent those adjustments necessary to present
operating results as if all pending and completed acquisitions and the
financings and the reorganization occurred on January 1, 1998. These
adjustments included the following:
(a) To adjust revenues, operating expenses and corporate overhead of
$6,061,000, $4,036,000 and $97,000, respectively for the year ended
December 31, 1998, to account for the acquisitions of Nova Cablevision,
Cross Country Cable TV, Traverse Internet, Galaxy American
Communications, R/COM, Novagate Communications and Hometown TV as if
these acquisitions occurred on January 1, 1998.
(b) Amount represents increased depreciation and amortization due to excess
of fair value over historical cost generated from the acquisitions of
Cable Michigan (including Mercom), Amrac, Pegasus, Taconic and our
other completed and pending acquisitions calculated as follows (dollars
in thousands):
<TABLE>
<CAPTION>
Year Ended
December 31,
1998
------------
<S> <C>
Pro forma depreciation and amortization...................... $44,828
Historical depreciation and amortization..................... 37,589
-------
Pro forma adjustment......................................... $ 7,239
=======
</TABLE>
(c) Amount represents increased interest expense due to the financings and
the offerings (dollars in thousands):
<TABLE>
<CAPTION>
Year Ended
December 31,
1998
--------------
<S> <C> <C>
Historical interest expense, net.......................... $16,409
-------
Senior subordinated notes................................. 14,063
Senior discount notes..................................... 13,500
Credit facility (1)....................................... 16,386
Other debt................................................ 122
Amortization of deferred financing fees................... 1,458
------
Pro forma interest expense................................ 45,529
-------
Pro forma adjustment...................................... $29,120
=======
</TABLE>
--------
(1) If the assumed interest rate on the credit facility increased by
0.125%, total pro forma interest expense would increase by
$225,000 for the year ended December 31, 1998.
(d) To remove tax benefits, net, since after the reorganization two of the
three issuers will be treated as partnerships for federal income tax
purposes (dollars in thousands):
<TABLE>
<CAPTION>
Year Ended
December 31,
1998
------------
<S> <C>
Pegasus...................................................... $ 5
Taconic...................................................... 97
Cable Michigan............................................... (2,382)
-------
Total tax (benefit), net................................. $(2,280)
=======
</TABLE>
(e) To eliminate minority interest in loss of Mercom due to the completion
of the Mercom acquisition of $473,000 for the year ended December 31,
1998.
33
<PAGE>
SELECTED HISTORICAL FINANCIAL AND OTHER DATA
Cable Michigan and Avalon Cable of Michigan Holdings, Inc.
Avalon Cable of Michigan, Inc. is a wholly owned subsidiary of Avalon Cable
of Michigan Holdings, Inc. On November 6, 1998, Avalon Cable of Michigan, Inc.
acquired Cable Michigan. Accordingly, Cable Michigan is the predecessor entity
to both Avalon Cable of Michigan Holdings, Inc. and Avalon Cable of Michigan,
Inc.
Prior to September 30, 1997, Cable Michigan was operated as part of
Commonwealth Telephone Enterprises, Inc. The table below sets forth selected
historical consolidated data for Cable Michigan. The historical consolidated
financial data presented below reflect periods during which Cable Michigan did
not operate as an independent company and, accordingly, certain allocations
were made in preparing the financial data. Therefore, this data may not reflect
the results of operations or the financial condition which would have resulted
if Cable Michigan had operated as a separate independent company during these
periods, and are not necessarily indicative of Cable Michigan's future results
of operations or financial position.
The selected historical consolidated statement of operations and balance
sheet data of Cable Michigan shown below for the five years ended December 31,
1997 have been derived from the consolidated financial statements of Cable
Michigan which have been audited by PricewaterhouseCoopers LLP, independent
accountants. The selected historical consolidated statement of operations and
balance sheet data for the period from January 1 to November 5, 1998 have been
derived from the consolidated financial statements of Cable Michigan, which
have been audited by PricewaterhouseCoopers LLP, independent accountants. The
selected historical consolidated statements of operations and balance sheet
data of Avalon Cable of Michigan Holdings, Inc. as of December 31, 1998 and for
the period from June 2, 1998 (inception) through December 31, 1998 have been
derived from the consolidated financial statements of Avalon Cable of Michigan
Holdings, Inc., which have been audited by PricewaterhouseCoopers LLP,
independent accountants. The selected historical consolidated financial and
other data for the three months ended March 31, 1999 have been derived from the
unaudited consolidated financial statements of Avalon Cable of Michigan
Holdings, Inc., which in the opinion of the management of the issuers, reflect
all adjustments necessary to present fairly the financial position and results
of operations for the periods presented. The audited consolidated financial
statements of Cable Michigan as of December 31, 1996, 1997 and November 5, 1998
and for each of the two years in the period ended December 31, 1997 and for the
period from January 1, 1998 through November 5, 1998 are included elsewhere
herein. The operating results for the three months ended March 31, 1999 are not
necesssarily indicative of results to be expected for the year ending December
31, 1999.
The consolidated statement of operations data, other financial data and
balance sheet data include the results of operations for Mercom since August
1995. The other operating data includes Mercom operating data for all periods
presented. In July 1997, the Mercom Florida cable system was sold. This system
served approximately 1,900 subscribers at the time of the sale.
34
<PAGE>
You should read the information in this table in conjunction with the
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" section of this prospectus and the financial statements and related
notes thereto which you can find elsewhere in this prospectus.
<TABLE>
<CAPTION>
Period from Period from Three
January 1, June 2, 1998 Months
Year Ended December 31, 1998 to through Ended
------------------------------------------------ November 5, December 31, March 31,
1993 1994 1995 1996 1997 1998 1998 (10) 1999
-------- -------- -------- -------- -------- ----------- ------------ ----------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Statement of operations
data
Revenues................ $ 48,665 $ 49,141 $ 60,675 $ 76,187 $ 81,299 $ 74,521 $13,657 $ 22,367
Operating expenses...... 25,283 26,981 28,465 37,016 40,978 38,621 7,469 12,129
Corporate overhead...... 3,372 1,562 6,284 7,075 7,204 6,087 249 376
Depreciation and
amortization........... 32,697 28,685 25,154 31,427 32,082 28,098 6,554 10,126
Non-recurring expenses.. -- -- -- -- -- 5,764 -- --
-------- -------- -------- -------- -------- -------- -------- --------
Operating (loss) income. (12,687) (8,087) 772 669 1,035 (4,049) (675) (264)
Interest (expense), net. (15,960) (15,767) (15,918) (15,052) (11,393) (7,382) (6,784) (11,518)
Gain on sale of Florida
cable system........... -- -- -- -- 2,571 -- -- --
Other (expense) income,
net.................... (496) (2,372) 4,645 6,127 3,429 897 (769) 4,350
-------- -------- -------- -------- -------- -------- -------- --------
Net loss................ $(29,143) $(26,226) $(10,501) $ (8,256) $ (4,358) $(10,534) $(8,228) $ (7,432)
======== ======== ======== ======== ======== ======== ======== ========
Balance sheet data (end
of period)
Total assets............ $147,286 $116,972 $172,759 $149,200 $142,597 $131,220 $553,649 $611,055
Long-term debt
(excluding current
portion)............... -- -- 181,807 163,247 143,000 120,000 417,540 442,727
Net (deficit) equity.... (60,419) (76,931) (73,757) (79,741) (53,874) (63,865) 26,772 19,340
Cash flow data
Cash flow from operating
activities............. N/A 29,589 311 27,817 18,344 15,028 18,646 7,012
Cash flow from investing
activities............. N/A (8,995) (13,345) 19,215 (10,009) (18,697) (436,302) (43,214)
Cash flow from financing
activities............. N/A (19,786) 14,993 (18,334) 5,587 (7,457) 419,427 40,358
Other financial data
EBITDA (1).............. $ 20,010 $ 20,598 $ 25,926 $ 32,096 $ 33,117 $ 29,813 $ 5,939 9,862
EBITDA margin (2)....... 41.1% 41.9% 42.7% 42.1% 40.7% 40.0% 43.5% 44.1%
Capital expenditures.... N/A $ 8,678 $ 11,207 $ 9,605 $ 14,041 $ 18,697 4,673 9,210
Ratio of earnings to
fixed charges (3)...... N/A N/A -- -- -- -- -- --
Amount of the Deficiency
of earnings to fixed
charges (3)............ N/A N/A N/A 15,119 8,525 12,368 7,524 11,782
Other operating data
(end of period)
Homes passed (4)........ 296,918 308,343 316,196 327,439 336,895 345,010 349,162 389,049
Basic subscribers (5)... 170,134 179,109 191,774 198,322 203,912 214,819 211,537 236,988
Basic penetration (6)... 57.3% 58.1% 60.7% 60.6% 60.5% 62.3% 60.6% 60.9%
Premium units (7)....... N/A N/A 80,925 64,118 65,361 64,866 55,550 60,840
Premium penetration (8). N/A N/A 42.2% 32.3% 32.1% 30.2% 26.3% 25.7%
Average monthly revenue
per basic subscriber
(9).................... $ 29.65 $ 27.53 $ 31.36 $ 32.30 $ 33.03 $ 33.18 $ 34.96 $ 34.94
</TABLE>
(See Notes to Selected Historical Financial and Other Data)
35
<PAGE>
AMRAC Clear View
Avalon Cable LLC's wholly owned subsidiary, Avalon Cable of New England LLC,
acquired AMRAC Clear View on May 29, 1998. Accordingly, AMRAC Clear View is the
predecessor entity to both Avalon Cable LLC and Avalon Cable of New England
LLC.
The selected historical statement of operations and balance sheet data of
AMRAC Clear View shown below for the four years ended December 31, 1997 have
been derived from the financial statements of AMRAC Clear View which have been
audited by Greenfield, Altman, Brown, Berger & Katz, P.C., independent
accountants. The selected historical financial and other data of AMRAC Clear
View shown below for the year ended December 31, 1993 has been derived from the
unaudited financial statements of AMRAC Clear View. The selected historical
financial and other data for the period ended May 28, 1997 have been derived
from the unaudited financial statements of AMRAC Clear View, which in the
opinion of management of the issuers, reflect all adjustments necessary to
present fairly the financial position and results of operations for the period
presented. The audited financial statements of AMRAC Clear View as of December
31, 1996 and 1997 and May 28, 1998 and for the three years ended December 31,
1997 and for the period ended May 28, 1998 are included elsewhere herein. The
operating results for the period ended May 28, 1998 are not necessarily
indicative of results to be expected for the year ending December 31, 1998. You
should read the information contained in this table in conjunction with the
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" section of this prospectus and the financial statements and related
notes thereto which you can find elsewhere in this prospectus.
<TABLE>
<CAPTION>
Period Ended
Year Ended December 31, May 28,
------------------------------------------- ---------------
1993 1994 1995 1996 1997 1997 1998
------- ------- ------- ------- ------- ------ -------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of operations
data
Revenues................ $ 1,483 $ 1,576 $ 1,701 $ 1,807 $ 1,902 $ 786 $ 779
Operating expenses...... 891 900 975 1,045 1,038 435 443
Corporate overhead...... 100 72 94 97 102 42 42
Depreciation and
amortization........... 347 323 331 340 136 57 47
------- ------- ------- ------- ------- ------ -------
Operating income........ 145 281 301 325 626 252 247
Interest expense, net... (147) (142) (130) (91) (47) (23) --
Other income, net....... -- -- -- -- 51 -- --
------- ------- ------- ------- ------- ------ -------
Net (loss) income....... $ (2) $ 139 $ 171 $ 234 $ 630 $ 229 $ 247
======= ======= ======= ======= ======= ====== =======
Balance sheet data (end
of period)
Total assets............ $ 1,490 $ 1,200 $ 1,001 $ 1,043 $ 1,374 $1,159 $ 1,073
Long-term debt
(excluding current
portion)............... 1,512 1,044 778 488 163 416 --
Partners' (deficit)
equity................. (394) (286) (180) 54 684 283 931
Cash flow data
Cash flows from
operating activities... 369 459 436 622 689 313 276
Cash flows from
investing activities... (66) (64) (117) (75) (118) (56) (61)
Cash flows from
financing activities... (179) (420) (303) (261) (284) (139) (561)
Other financial data
EBITDA (1).............. $ 492 $ 604 $ 632 $ 665 $ 762 $ 309 $ 294
EBITDA margin (2)....... 33.2% 38.3% 37.2% 36.8% 40.1% 39.3% 37.7%
Capital expenditures.... $ 66 $ 64 $ 117 $ 65 $ 118 $ 56 $ 61
Ratio of earnings to
fixed charges (3)...... 1.0x 1.9x 2.2x 3.1x 9.3x 8.0x 44.4x
Other operating data
(end of period)
Homes passed (4)........ 6,025 6,250 6,447 6,640 6,775 6,693 6,955
Basic subscribers (5)... 4,277 4,558 4,808 4,901 5,025 4,964 5,101
Basic penetration (6)... 71.0% 72.9% 74.6% 73.8% 74.2% 74.2% 73.3%
Premium units (7)....... 2,049 1,931 1,770 1,667 1,465 1,455 1,561
Premium penetration (8). 47.9% 42.4% 36.8% 34.0% 29.2% 29.3% 30.6%
Average monthly revenue
per basic subscriber
(9).................... N/A N/A $ 30.27 $ 31.02 $ 31.94 $31.92 $ 30.77
</TABLE>
(See Notes to Selected Historical Financial and Other Data)
36
<PAGE>
Pegasus Cable Television
Prior to July 21, 1998, Pegasus Cable Television, Inc. and Pegasus Cable
Television of Connecticut, Inc., which we refer to collectively as Pegasus
Cable Television, operated as part of Pegasus Communications Corporation. The
table below sets forth selected historical combined data for Pegasus Cable
Television. The historical combined financial data presented below reflect
periods during which Pegasus Cable Television did not operate as an independent
company and, accordingly, certain allocations were made in preparing the
financial data. Therefore, this data may not reflect the results of operations
or the financial condition which would have resulted if Pegasus Cable
Television had operated as a separate independent company during these periods,
and are not necessarily indicative of Pegasus Cable Television's future results
of operations or financial position.
The selected historical combined statement of operations and balance sheet
data of Pegasus Cable Television shown below for the three years ended December
31, 1997 have been derived from the combined financial statements of Pegasus
which have been audited by PricewaterhouseCoopers LLP, independent accountants.
The selected historical combined financial and other data for the six months
ended June 30, 1997 and 1998 have been derived from the unaudited combined
financial statements of Pegasus Cable Television, which in the opinion of
management of the issuers, reflect all adjustments necessary to present fairly
the combined financial position and results of operations for the periods
presented. The audited combined financial statements of Pegasus Cable
Television as of December 31, 1996 and 1997 and for the three years ended
December 31, 1997 are included elsewhere herein. The operating results for the
six months ended June 30, 1998 are not necessarily indicative of results to be
expected for the year ending December 31, 1998. You should read the information
in this table in conjunction with the "Management's Discussion and Analysis of
Financial Condition and Results of Operations" section of this prospectus and
the combined financial statements and related notes thereto which you can find
elsewhere in this prospectus.
<TABLE>
<CAPTION>
Six Months
Year Ended December 31, Ended June 30,
------------------------- ----------------
1995 1996 1997 1997 1998
------- ------- ------- ------- -------
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
Statement of operation data
Revenues.......................... $ 5,135 $ 5,775 $ 6,191 $ 2,990 $ 3,277
Operating expenses................ 2,604 3,024 3,190 1,617 1,693
Corporate overhead................ 368 349 242 132 97
Depreciation and amortization..... 1,658 1,669 1,565 769 835
------- ------- ------- ------- -------
Operating income.................. 505 733 1,194 472 652
Interest expense, net............. (1,744) (1,887) (1,791) (863) (938)
Other (expense), net.............. (20) (27) (44) (31) (22)
------- ------- ------- ------- -------
Net loss.......................... $(1,259) $(1,181) $ (641) $ (422) $ (308)
======= ======= ======= ======= =======
Balance sheet data (end of period)
Total assets...................... $10,251 $11,584 $12,661 $12,156 $12,988
Long-term debt (excluding current
portion)......................... 15,023 15,044 15,018 15,026 14,994
Shareholders' (deficit)........... (7,026) (8,207) (8,785) (8,629) (9,093)
Cash flow data
Cash flows from operating
activities....................... 1,172 3,379 2,681 1,739 1,705
Cash flows from investing
activities....................... (291) (1,247) (889) (520) (117)
Cash flows from financing
activities....................... (401) (2,615) (1,090) (777) (971)
Other financial data
EBITDA (1)........................ $ 2,163 $ 2,402 $ 2,759 $ 1,241 $ 1,487
EBITDA margin (2)................. 42.1% 41.6% 44.6% 41.5% 45.4%
Capital expenditures.............. $ 164 $1,175 $ 691 $ 445 $ 114
Ratio of earnings to fixed charges
(3).............................. -- -- -- -- --
Amount of the Deficiency of
earnings to fixed charges (3).... 1,239 1,156 625 414 303
Other operating data (end of
period)
Homes passed (4).................. 19,245 19,437 19,631 19,562 19,739
Basic subscribers (5)............. 14,859 14,678 14,894 15,226 15,413
Basic penetration (6)............. 77.2% 75.5% 75.9% 77.8% 78.1%
Premium units (7)................. 5,315 4,807 4,300 4,607 4,236
Premium penetration (8)........... 35.8% 32.7% 28.9% 30.3% 27.5%
Average monthly revenue per basic
subscriber (9)................... $ 29.00 $ 32.59 $ 34.89 $ 33.41 $ 36.04
</TABLE>
(See Notes to Selected Historical Financial and Other Data)
37
<PAGE>
Taconic Technology
Currently, the assets and related liabilities that we will acquire from
Taconic Technology are being operated as part of Taconic Technology. The table
below sets forth selected historical data for these assets and liabilities of
Taconic Technology. The historical financial data presented below reflect
periods during which these assets and liabilities of Taconic Technology did not
operate as an independent company and, accordingly, certain allocations were
made in preparing the financial data. Therefore, this data may not reflect the
results of operations or the financial condition which would have resulted if
these assets and liabilities of Taconic Technology had operated as a separate
independent company during these periods, and are not necessarily indicative of
the future results of operations or financial position these assets and
liabilities of Taconic Technology.
The selected historical statements of operations and balance sheet data of
Taconic Technology shown below for the three years ended December 31, 1998 have
been derived from the financial statements of Taconic Technology, which have
been audited by KPMG LLP, independent accountants. The selected financial and
other data of Taconic Technology shown below for the year ended December 31,
1995 has been derived from the unaudited financial statements of Taconic
Technology. The selected historical consolidated financial and other data for
the three months ended March 31, 1998 and 1999 have been derived from the
unaudited consolidated financial statements of Taconic Technology, which in the
opinion of management of the issuers, reflect all adjustments necessary to
present fairly the financial position and results of operations for the periods
presented. The audited financial statements of Taconic Technology as of
December 31, 1997 and 1998 and for the two years then ended December 31, 1998
are included elsewhere herein. The operating results for the three months ended
March 31, 1999 are not necessarily indicative of results to be expected for the
year ending December 31, 1999. You should read the information in this table in
conjunction with the "Management's Discussion and Analysis of Financial
Condition and Results of Operations" section of this prospectus and the
combined financial statements and related notes thereto which you can find
elsewhere in this prospectus.
<TABLE>
<CAPTION>
Three Months
Ended
Year Ended December 31, March 31,
------------------------------ --------------
1995 1996 1997 1998 1998 1999
------ ------ ------ ------ ------ ------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Statement of operations data
Revenues....................... $1,771 $1,916 $2,005 $2,086 $ 489 $ 523
Operating expenses............. 1,108 1,213 1,278 1,378 343 340
Corporate overhead............. 56 62 34 22 9 6
Depreciation and amortization.. 359 432 426 426 107 105
------ ------ ------ ------ ------ ------
Operating income............... 248 209 267 260 30 72
Interest expense, net.......... (129) (102) (79) (17) (17) --
Other (expense), net........... (15) (43) (75) (97) (5) (28)
------ ------ ------ ------ ------ ------
Net income..................... $ 104 $ 64 $ 113 $ 146 $ 8 $ 44
====== ====== ====== ====== ====== ======
Balance sheet data (end of
period)
Total assets................... $2,797 $2,638 $2,337 $2,372 $2,266 $2,399
Long-term debt (excluding
current portion).............. 1,110 946 793 -- -- --
Shareholders' equity........... 614 678 792 1,707 1,569 1,751
Cash flow data
Cash flows from operating
activities.................... 521 367 104 37 19
Cash flows from investing
activities.................... (238) (214) (81) (14) (19)
Cash flows from financing
activities.................... (283) (153) (23) (23) --
Other financial data
EBITDA (1)..................... $ 607 $ 641 $ 693 $ 686 $ 137 $ 177
EBITDA margin (2).............. 34.3% 33.5% 34.6% 32.9% 28% 33.8%
Capital expenditures........... $ 445 $ 238 $ 214 $ 81 $ 14 $ 19
Ratio of earnings to fixed
charges (3)................... 1.7x 1.8x 2.5x 3.4x 3.7x 4.0x
Other operating data (end of
period)
Homes passed (4)............... 7,037 7,128 7,210 7,200 7,200 7,200
Basic subscribers (5).......... 4,738 4,733 4,819 5,100 4,875 5,000
Basic penetration (6).......... 67.3% 66.4% 66.8% 70.8% 67.7% 69.4%
Premium units (7).............. 1,492 1,337 1,271 1,225 1,262 1,200
Premium penetration (8)........ 31.5% 28.2% 26.4% 24.0% 25.9% 24.0%
Average monthly revenue per
basic subscriber (9).......... $31.87 $33.72 $34.98 $34.67 $34.92 $34.87
</TABLE>
(See Notes to Selected Historical Financial and Other Data)
38
<PAGE>
Avalon Cable LLC
The selected historical consolidated statement of operations and balance
sheet data of Avalon Cable LLC shown below as of December 31, 1998 and for the
period from October 21, 1998 (inception) through December 31, 1998 have been
derived from the consolidated financial statements of Avalon Cable LLC which
have been audited by PricewaterhouseCoopers LLP, independent accountants. The
selected historical consolidated statement of operations and balance sheet data
for the period from October 21, 1998 (inception) through December 31, 1998 and
as of December 31, 1998 have been derived from the consolidated financial
statements of Avalon Cable LLC, which have been audited by
PricewaterhouseCoopers LLP, independent accountants. The selected historical
consolidated financial and other data for the three months ended March 31, 1999
have been derived from the unaudited consolidated financial statements of
Avalon Cable LLC, which in the opinion of the management of the issuers,
reflect all adjustments necessary to present fairly the financial position and
results of operations for the periods presented. The audited consolidated
financial statements of Avalon Cable LLC as of December 31, 1998 and for the
period from October 21, 1998 (inception) through December 31, 1998 are included
elsewhere herein. The operating results for the three months ended March 31,
1999 are not necessarily indicative of results to be expected for the year
ending December 31, 1999. You should read the information in this table in
conjunction with the "Management's Discussion and Analysis of Financial
Condition and Results of Operations" section of this prospectus and the
financial statements and related notes thereto which you can find elsewhere in
this prospectus.
<TABLE>
<CAPTION>
Three
Period from Months
October 21, 1998 Ended
to December 31, March 31,
1998 1999
---------------- ---------
<S> <C> <C>
Statement of operations data
Revenues............................................ $ 1,299 $ 3,551
Operating expenses.................................. 761 1,657
Corporate overhead.................................. 56 411
Depreciation and amortization....................... 440 1,310
------- --------
Operating income.................................... 42 173
Interest (expense), net............................. (743) (472)
Other (expense) income, net......................... (1,311) --
------- --------
Net loss............................................ $(2,054) $ (299)
======= ========
Balance sheet data (end of period)
Total assets........................................ $53,648 $608,795
Long-term debt (excluding current portion).......... 3,921 442,727
Members' interest................................... 47,291 138,628
Cash flow data
Cash flows from operating activities................ $(1,252) $(13,829)
Cash flows from investing activities................ (15,519) (3,547)
Cash flows from financing activities................ 16,988 30,386
Other financial data
EBITDA (1).......................................... $ 481 1,483
EBITDA margin (2)................................... 37.0% 41.8%
Capital expenditures................................ 157 (197)
Ratio of earnings to fixed charges (3).............. -- --
Amount of the deficiency of earnings to fixed
charges (3)........................................ 2,054 299
Other operating data (end of period)
Homes passed (4).................................... 28,350 389,049
Basic subscribers (5)............................... 20,604 236,988
Basic penetration (6)............................... 72.7% 60.9%
Premium units (7)................................... 4,912 60,840
Premium penetration (8)............................. 23.8% 25.7%
Average monthly revenue per basic subscriber (9).... $ 34.22 $ 34.94
</TABLE>
(See Notes to Selected Historical Financial and Other Data)
39
<PAGE>
Avalon Cable Holdings Finance
The selected historical consolidated statement of operations and balance
sheet data of Avalon Cable Holdings Finance shown below for as of December 31,
1998 and for the period from October 21, 1998 (inception) through December 31,
1998 have been derived from the consolidated financial statements of Avalon
Cable Holdings Finance which have been audited by PricewaterhouseCoopers LLP,
independent accountants. The selected historical consolidated statement of
operations and balance sheet data for the period from October 21, 1998
(inception) through December 31, 1998 and as of December 31, 1998 have been
derived from the consolidated financial statements of Avalon Cable Holdings
Finance, which have been audited by PricewaterhouseCoopers LLP, independent
accountants. The selected historical consolidated financial and other data for
the three months ended March 31, 1999 have been derived from the unaudited
consolidated financial statements of Avalon Cable Holdings Finance, which in
the opinion of the management of the issuers, reflect all adjustments necessary
to present fairly the financial position and results of operations for the
periods presented. The audited consolidated financial statements of Avalon
Cable Holdings Finance as of December 31, 1998 and for the period from October
21, 1998 (inception) through December 31, 1998 are included elsewhere herein.
The operating results for the three months ended March 31, 1999 are not
necessarily indicative of results to be expected for the year ending December
31, 1999.
You should read the information in this table in conjunction with the
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" section of this prospectus and the financial statements and related
notes thereto which you can find elsewhere in this prospectus.
<TABLE>
<CAPTION>
Three
Period from Months
October 21, to Ended
December 31, March 31,
1998 1999
-------------- ---------
<S> <C> <C>
Statement of operations data
Revenues............................................... $ -- $ --
Operating expenses..................................... -- --
Corporate overhead..................................... -- --
Depreciation and amortization.......................... -- --
------- -------
Operating (loss) income................................ -- --
Interest (expense), net................................ -- --
Other (expense) income, net............................ -- --
------- -------
Net loss............................................... $ -- $ --
======= =======
Balance sheet data (end of period)
Total assets........................................... $15,171 $15,338
Long-term debt (excluding current portion)............. 15,171 15,338
Members' interest...................................... -- --
Cash flow data
Cash flows from operating activities................... -- --
Cash flows from investing activities................... -- --
Cash flows from financing activities................... -- --
Other financial data
EBITDA (1)............................................. $ -- $ --
EBITDA margin (2)...................................... -- --
Capital expenditures................................... -- --
Ratio of earnings to fixed charges (3)................. -- --
Other operating data (end of period)
Homes passed (4)....................................... -- --
Basic subscribers (5).................................. -- --
Basic penetration (6).................................. -- --
Premium units (7)...................................... -- --
Premium penetration (8)................................ -- --
Average monthly revenue per basic subscriber (9)....... $ -- $ --
</TABLE>
(See Notes to Selected Historical Financial and Other Data)
40
<PAGE>
Avalon Cable of Michigan, Inc.
The selected historical consolidated statement of operations and balance
sheet data of Avalon Cable of Michigan, Inc. shown below for as of December 31,
1998 and for the period from October 21, 1998 (inception) through December 31,
1998 have been derived from the consolidated financial statements of Avalon
Cable of Michigan, Inc. which have been audited by PricewaterhouseCoopers LLP,
independent accountants. The selected historical consolidated statement of
operations and balance sheet data for the period from October 21, 1998
(inception) through December 31, 1998 and as of December 31, 1998 have been
derived from the consolidated financial statements of Avalon Cable of Michigan,
Inc., which have been audited by PricewaterhouseCoopers LLP, independent
accountants. The selected historical consolidated financial and other data for
the three months ended March 31, 1999 have been derived from the unaudited
consolidated financial statements of Avalon Cable of Michigan, Inc., which in
the opinion of the management of the issuers, reflect all adjustments necessary
to present fairly the financial position and results of operations for the
periods presented. The audited consolidated financial statements of Avalon
Cable of Michigan, Inc. as of December 31, 1998 and for the period from October
21, 1998 (inception) through December 31, 1998 are included elsewhere herein.
The operating results for the three months ended March 31, 1999 are not
necessarily indicative of results to be expected for the three years ending
December 31, 1999.
This related financial and other data is for Avalon Cable of Michigan, Inc.
which is a guarantor of the new notes. The predecessor to Avalon Cable of
Michigan, Inc. is Cable Michigan, whose data is presented on a prior page.
You should read the information in this table in conjunction with the
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" section of this prospectus and the financial statements and related
notes thereto which you can find elsewhere in this prospectus.
<TABLE>
<CAPTION>
Period from Three Months
October 21, to Ended
December 31, March 31,
1998 1999
-------------- ------------
<S> <C> <C>
Statement of operations data
Revenues........................................... $ 13,657 $ 22,367
Operating expenses................................. 7,469 12,131
Corporate overhead................................. 249 374
Depreciation and amortization...................... 6,554 10,126
--------- --------
Operating (loss) income............................ (615) (264)
Interest (expense), net............................ (4,537) (8,422)
Other (expense) income, net........................ 31 3,206
--------- --------
Net loss........................................... $ (5,121) $ (5,480)
========= ========
Balance sheet data (end of period)
Total assets....................................... $549,461 $611,055
Long-term debt (excluding current portion)......... 306,046 442,727
Stockholders' equity............................... 132,254 16,372
Cash flow data
Cash flows from operating activities............... $ (1,345) $ 10,108
Cash flows from investing activities............... (436,302) (43,214)
Cash flows from financing activities............... 439,418 37,262
Other financial data
EBITDA (1)......................................... $ 5,939 $ 9,952
EBITDA margin (2).................................. 43.5% 44.5%
Capital expenditures............................... 4,673 9,210
Ratio of earnings to fixed charges (3)............. -- --
Amount of the deficiency of earnings to fixed
charges (3)....................................... 5,128 264
Other operating data (end of period)
Homes passed (4)................................... 349,213 389,049
Basic subscribers (5).............................. 211,537 236,988
Basic penetration (6).............................. 60.6% 60.9%
Premium units (7).................................. 55,550 60,840
Premium penetration (8)............................ 26.3% 25.7%
Average monthly revenue per basic
subscriber (9).................................... $ 34.96 $ 34.94
</TABLE>
(See Notes to Selected Historical Financial and Other Data)
41
<PAGE>
NOTES TO THE SELECTED HISTORICAL FINANCIAL AND OTHER DATA
(1) Represents net income before depreciation and amortization, interest
income (expense), net, income taxes, other expenses, net, gain or loss
from the sale of assets, non-recurring items and non-cash expenses. For
the period from January 1, 1998 through November 5, 1998, EBITDA excludes
$5,764,000 of non-recurring costs incurred by Cable Michigan. For the year
ended December 31, 1997, EBITDA excludes a $2,571,000 gain recognized by
Cable Michigan on the sale of a Florida cable system. Management believes
that EBITDA is a meaningful measure of performance and it is commonly used
in the cable television industry to analyze and compare cable television
companies on the basis of operating performance, leverage and liquidity.
However, EBITDA is not intended to be a performance measure that should be
regarded as an alternative to, or more meaningful than, either operating
income or net income as an indicator of operating performance or cash
flows as a measure of liquidity, as determined in accordance with GAAP.
EBITDA, as computed by management, is not necessarily comparable to
similarly titled amounts of other companies. See the financial statements,
including statements of cash flows, included elsewhere herein.
(2) Represents EBITDA as a percentage of revenues.
(3) The ratio of earnings to fixed charges represents the number of times
fixed charges were covered by net income adjusted for provision (benefit)
for income taxes, equity in (loss) of unconsolidated entities, minority
interest in (loss) income of consolidated entity and fixed charges. Fixed
charges consist of interest expense, net and a portion of operating lease
rental expense deemed to be representative of the interest factor.
(4) The number of dwelling units in a particular community that management
estimates can be connected to our cable system.
(5) A home with one or more televisions connected to a cable system is counted
as one basic subscriber. Bulk accounts are included on an equivalent basic
by dividing the total monthly bill for the account by the basic monthly
charge for a single outlet in the area.
(6) Calculated as basic subscribers as a percentage of homes passed.
(7) Includes only single channel services offered for a monthly fee per
channel and does not include tiers of channels as a package for a single
monthly fee. A subscriber may purchase more than one premium service, each
of which is counted as a separate premium service unit.
(8) Calculated as premium units as a percentage of basic subscribers.
(9) Represents revenues during the respective period divided by the number of
months in the period divided by the average number of basic subscribers
(beginning of period plus end of period divided by two) for this period.
(10) The operations of Avalon Cable of Michigan, Inc. commenced on November 6,
1998 with the acquisition of Cable Michigan.
42
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Overview
General. Members of our management and investors formed Avalon Cable LLC in
1997 to acquire, operate and develop cable television systems in mid-sized
suburban and exurban markets. Our operations in the New England cluster are the
result of our acquisitions of AMRAC Clear View in May 1998 and of Pegasus Cable
Television in July 1998. In addition, we have entered into agreements to
acquire cable system assets and related liabilities of Taconic Technology which
had approximately 5000 basic subscribers as of March 31, 1999 and Hometown TV
which had approximately 400 basic subscribers as of March 31, 1999. The
combined purchase price for these pending transactions is approximately $9.0
million. As of March 31, 1999, we had a total of 25,900 basic subscribers in
our New England cluster, after giving effect to all completed and pending
transactions. We expect that these pending acquisitions will close within the
first half of 1999.
On November 6, 1998, we completed our acquisition of Cable Michigan. The
cable systems located in the Michigan cluster account for a substantial
majority of our subscribers. Since November 6, 1998, Cable Michigan has
acquired all of the outstanding shares of Mercom, Inc. that we did not own for
total consideration of approximately $21.9 million. In addition, we have
acquired, for a combined purchase price of approximately $13.3 million, cable
television systems from Nova Cablevision which had approximately 6,400 basic
subscribers as of March 31, 1999, cable television systems from Cross Country
Cable TV which had approximately 1,850 basic subscribers as of March 31, 1999,
cable system assets of R/COM, L.C. which had approximately 800 basic
subscribers as of March 31, 1999, and assets of Novagate Communications Corp.,
an Internet service provider which had approximately 5,000 Internet subscribers
as of March 31, 1999.
Since November 6, 1998, we have also entered into agreements for our
Michigan cluster to acquire the assets of Traverse Internet, Inc., an Internet
service provider which had approximately 4,500 Internet subscribers as of March
1999 and certain cable system assets of Galaxy American Communications which
had approximately 550 basic subscribers as of March 1999. We expect that these
pending acquisitions will close within the first half of 1999. The combined
purchase price for these pending transactions is approximately $2.9 million. As
of March 31, 1999, we had a total of 217,100 basic subscribers and 9,500
Internet subscribers in our Michigan cluster, after giving effect to all
completed and pending transactions.
In order to facilitate certain aspects of our financing, on March 26, 1999,
we completed a series of transactions we refer to as the "reorganization:"
. Avalon Cable of Michigan, Inc. transferred substantially all of its
assets and liabilities to Avalon Cable LLC, which then transferred these
assets and liabilities to Avalon Cable of Michigan LLC and, as a result,
Avalon Cable of Michigan LLC now operates our Michigan cluster;
. Avalon Cable of Michigan Holdings, Inc. ceased to be an obligor on the
old notes and together with Avalon Cable of Michigan, Inc. became a
guarantor of the obligations of Avalon Cable LLC under the old notes;
. Avalon Cable of Michigan LLC became an additional obligor on the senior
subordinated notes and the credit facility; and
. Avalon Cable of Michigan, Inc. ceased to be an obligor on the senior
subordinated notes and the credit facility and became a guarantor of all
of the obligations of Avalon Cable of Michigan LLC under the senior
subordinated notes and the credit facility.
We do not expect that this reorganization will impact our operations. The
reorganization has impacted the financial statements of Avalon Cable of
Michigan Holdings, Avalon Cable of Michigan, Inc., and Avalon Cable of Michigan
LLC as follows:
. The $196 million principal amount at maturity of old notes and their
associated discount and deferred financing costs of Avalon Cable of
Michigan Holdings were transferred to Avalon Cable of Michigan,
43
<PAGE>
Inc. This increased the equity in Avalon Cable of Michigan Holdings and
reduced the equity in Avalon Cable of Michigan, Inc.
. The assets and liabilities, excluding the deferred tax liabilities, net
of Avalon Cable of Michigan, Inc. were then transferred to Avalon Cable
LLC in exchange for an approximate 88% interest in Avalon Cable LLC. The
assets and liabilities transferred by Avalon Cable of Michigan, Inc. to
Avalon Cable LLC included the old notes and associated discount and
deferred financing costs received from Avalon Cable of Michigan Holdings.
. Avalon Cable LLC contributed the assets and liabilities received from
Avalon Cable of Michigan, Inc., other than the old notes and associated
discount and deferred financing costs, to its wholly-owned subsidiary,
Avalon Cable of Michigan LLC. Since Avalon Cable LLC and Avalon Cable of
Michigan, Inc. are under common control, these assets and liabilities
were recorded at their historical cost.
. Avalon Cable of Michigan LLC's statement of operations will include
activity from the date after the reorganization through March 31, 1999.
. At March 31, 1999, the financial statements of Avalon Cable LLC were
consolidated in Avalon Cable of Michigan, Inc. with a minority interest
of approximately 12%.
. Intercompany debt with Avalon Cable of New England was cancelled.
Although Avalon Cable of Michigan Holdings and Avalon Cable of Michigan,
Inc. are guarantors of the obligations of Avalon Cable LLC under the new
notes, their assets consist of their equity interests in Avalon Cable of
Michigan, Inc. and Avalon Cable LLC, respectively. As a result, you should not
expect Avalon Cable of Michigan Holdings and Avalon Cable of Michigan, Inc.,
as guarantors, to have any assets available to make interest and principal
payments on the new notes since they do not have other operations and will not
have access to additional sources of cash flow other than their investment in
the respective companies.
We have implemented a number of operational and organizational changes to
the businesses we have acquired and expect others, including in connection
with pending acquisitions. As a result, we believe that the historical results
of operations presented below of each of Cable Michigan, AMRAC Clear View,
Pegasus Cable Television, and Taconic Technology may not be indicative of our
results of operations in the future. For additional information, please refer
to "--Pro Forma Operating Results" section of this prospectus.
Revenues. Our revenues are primarily attributable to monthly subscription
fees charged to subscribers for our basic and premium cable television
programming services. Our basic revenues consist of monthly subscription fees
for all services other than premium programming, as well as monthly charges
for customer equipment rental. Premium revenues consist of monthly
subscription fees for programming provided on a per channel basis. In
addition, we derive other revenues from installation and reconnection fees
that we charge to subscribers to commence or reinstate service, pay-per-view
charges, late payment fees, advertising revenues and commissions related to
the sale of merchandise by home shopping services.
Operating Expenses. Our expenses primarily consist of programming fees,
plant and operating costs, general and administrative expenses, and marketing
costs directly attributable to our cable systems. We expect that our
programming costs will increase in the ordinary course of our business as a
result of increases in the number of subscribers, increases in the number of
channels that we provide to customers and contractual rate increases from our
programming suppliers. We benefit and expect to continue to benefit from our
membership in industry cooperatives which provide members with volume
discounts from programming networks and cable equipment vendors. Plant and
operating costs include expenses related to wages and employee benefits,
electricity, systems supplies, vehicles and other operating costs. General and
administrative expenses directly
44
<PAGE>
attributable to the systems include wages and employee benefits for customer
service, accounting and administrative personnel, franchise fees and expenses
related to billing, payment processing and office administration.
Pro Forma Operating Results. We have begun to implement operating changes in
the business formerly conducted by Cable Michigan. Most notably, we directly
manage Cable Michigan's operations through a twelve person corporate staff and
we no longer pay RCN Corporation a management fee or reimburse RCN Corporation
for allocated costs. As a result, we have eliminated the RCN Corporation
management fee of $3.2 million for the year ended December 31, 1998. Management
expects to eliminate certain corporate overhead expenses at Nova Cablevision,
Cross Country Cable TV, Novagate Communications, R/COM, Traverse Internet,
Galaxy American Communications, Taconic Technology and Hometown TV of $1.5
million for the year ended December 31, 1998.
Amortization and depreciation. On a pro forma basis, our depreciation and
amortization has and will increase by approximately $7.3 million on a yearly
basis due to our acquisitions and the associated fair value allocation to fixed
assets and intangibles associated with these purchases.
Interest expense, net. On a pro forma basis, interest expense would be $31.5
million. Interest expense is expected to continue at approximately this amount
subject to increases for additional borrowings for acquisitions and
fluctuations due to the floating interest rates we pay under our credit
facility.
On a pro forma basis, our cash flows from operating, investing and financing
activities for the year ended December 31, 1998 were $27.7 million, $(556.1)
million, and $510.5 million, respectively, reflecting our acquisition and
financing activities described elsewhere herein.
In addition, we expect to eliminate non-recurring or one-time operating
costs incurred by Cable Michigan of $1.9 million for the year ended December
31, 1998. These non-recurring costs include expenses such as litigation
expenses, expenses associated with a May 1998 storm in Grand Rapids, expenses
related to the relocation of the customer call center to Michigan and one-time
costs associated with special promotions. We also expect lower administrative
costs through the elimination of some public company expenses of $394,000. For
the year ended December 31, 1998 we expect a total savings of $7.0 million on a
pro forma basis.
For the quarter ended March 31, 1999 management expects to eliminate certain
corporate overhead expenses at Traverse Internet, Galaxy American
Communications, Hometown TV and Taconic Technology of $213,000. We also do not
expect a recurrence of a credit resulting from the May 1998 storm insurance
adjustment of $80,000.
Other operating changes include changes in the areas of customer service and
programming, all of which RCN Corporation managed for Cable Michigan. To better
serve subscribers located in Michigan, we relocated the customer call center
from Pennsylvania, which Cable Michigan shared with RCN Corporation and
Commonwealth Telephone Enterprises, to a site within Michigan and reconfigured
the call center to operate as a stand-alone entity. Management is currently
analyzing its options for acquiring programming for the Michigan cluster. We
are currently using our existing membership in the National Cable Television
Cooperative to program both the Michigan cluster and the New England cluster.
We are exploring joining the programming consortium that RCN Corporation used
in managing Cable Michigan as well as engaging in direct negotiations with
programming suppliers. Management currently believes that, in the aggregate,
our expenses in these areas for the Michigan cluster will not be materially
different than those of Cable Michigan, considering for these purposes both the
direct costs incurred by Cable Michigan and the allocated costs reimbursed to
RCN Corporation.
45
<PAGE>
Giving effect to the foregoing operating and organizational changes and
other adjustments described above, the issuers on a combined basis would have
had pro forma EBITDA of $11.1 million and $41.7 million and pro forma Adjusted
EBITDA of $10.8 million and $48.7 million for the three months and year ended
December 31, 1998, respectively. We define EBITDA as net income before
depreciation and amortization, interest income (expense), net, income taxes,
other expenses, net, gain or loss from the sale of assets, nonrecurring items
and non-cash expenses. Adjusted EBITDA adjusts EBITDA for the elimination of
certain expenses and the inclusion of overhead expenses as contemplated in the
definition of "Leverage Ratio" in the indenture governing the new notes. The
"Leverage Ratio" is used in determining when the issuers and their subsidiaries
may incur additional indebtedness. Management believes that EBITDA is a
meaningful measure of performance and it is commonly used in the cable
television industry to analyze and compare cable television companies on the
basis of operating performance, leverage and liquidity. However, EBITDA is not
intended to be a performance measure that should be regarded as an alternative
to, or more meaningful than, either operating income or net income as an
indicator of operating performance or cash flows as a measure of liquidity, as
determined in accordance with GAAP. EBITDA, as computed by management, is not
necessarily comparable to similarly titled amounts of other companies. See the
financial statements, including statements of cash flows, included elsewhere
herein.
We cannot assure you that we will fully realize our anticipated cost savings
associated with our planned operating changes or our elimination of certain
management fees, redundant corporate, general and administrative costs. We also
cannot assure you that unanticipated costs in combining or operating the
businesses we plan to acquire will not reduce or eliminate our anticipated cost
savings.
Seasonality. We expect that our revenues and EBITDA will be slightly
seasonal. On a combined basis after giving effect to the Acquisitions, the
issuers generated approximately 51.2% of the their revenues for the fiscal year
ended December 31, 1998 during the second and third quarters. Management
believes this seasonality is primarily the result of increased use of vacation
homes in its Michigan cluster from April to September.
Results of Operations
Overview
The following historical results of operations of Avalon Cable of Michigan
Holdings, Inc., Avalon Cable LLC, and Avalon Cable of Michigan, Inc. refer to
their results of operations for the quarter ended March 31, 1999 compared to
the period from acquisition or contribution (November 6, 1998) to December 31,
1998.
Avalon Cable of Michigan Holdings, Inc.
On November 6, 1998, Cable Michigan merged with and into Avalon Cable of
Michigan, Inc., a wholly-owned subsidiary of Avalon Cable of Michigan Holdings
and Avalon Cable of Michigan, Inc. commenced its operations. Therefore, the
financial and other data for Cable Michigan for the period from November 6,
1998 to December 31, 1998 is reflected in the financial and other data for
Avalon Cable of Michigan Holdings.
On March 26, 1999, Avalon Cable of Michigan, Inc. acquired the remaining
minority interest in Mercom for approximately $21.9 million. During the first
quarter, Avalon Cable of Michigan, Inc. also acquired the cable television
systems of Nova Cablevision and Cross Country Cable for $10.7 million in the
aggregate.
In March 1999, after the acquisition of Mercom, Inc., Avalon Cable of
Michigan, Inc. and its affiliates completed a series of transactions to
facilitate certain aspects of its financing. As a result of these transactions:
. Avalon Cable of Michigan, Inc. contributed its assets and liabilities
excluding deferred tax liabilities, net to Avalon Cable LLC in exchange
for an approximate 88% voting interest in Avalon Cable LLC.
46
<PAGE>
Avalon Cable LLC contributed these assets and liabilities to its wholly-
owned subsidiary, Avalon Cable of Michigan LLC.
. Avalon Cable of Michigan Holdings, Inc. contributed the old notes and
associated deferred financing costs to Avalon Cable of Michigan, Inc.,
who in turn contributed the notes and deferred financing costs to Avalon
Cable LLC.
. Each of Avalon Cable of Michigan Holdings, Inc. and Avalon Cable of
Michigan, Inc. became a guarantor of the obligations of Avalon Cable LLC
under the old notes. Avalon Cable of Michigan Holdings, Inc. and Avalon
Cable of Michigan, Inc. do not have significant assets, other than their
investments in Avalon Cable of Michigan, Inc. and Avalon Cable LLC,
respectively.
Three months ended March 31, 1999 compared to the period from November 6 to
December 31, 1998
Revenues for the three months ended March 31, 1999 were $22.4 million, an
increase of $8.7 million, or 63%, as compared to revenues of $13.7 million for
the period from November 6 to December 31, 1998. This increase is primarily
related to the effects of having a full quarter compared to 55 days as well as
the impact of subscribers from the acquisitions offset by a decrease in
revenue of $0.6 million relating to a decrease in the number of subscribers
due to seasonality and competition.
Operating expenses excluding depreciation and amortization, corporate
overhead and non-recurring expenses were $12.1 million for the three months
ended March 31, 1999, an increase of $4.6 million, or 61%, as compared to $7.5
million for the period from November 6 to December 31, 1998. This increase is
primarily related to the effects of having a full quarter compared to 55 days,
a regulation change which allowed programmers to increase programming rates
($0.9 million) offset by the discontinuance of the RCN management fee, lower
franchise fees due to a decrease in number of subscribers and the addition of
employees.
Operating loss before depreciation and amortization, corporate overhead and
non-recurring expenses was $(0.3) million for the three months ended March 31,
1999, a decrease of $0.3 million, or 50%, as compared to $(0.6) million for
the period from November 6 to December 31, 1998.
Depreciation and amortization for the three months ended March 31, 1999 was
$10.1 million, an increase of $3.5 million, or 54%, compared to $6.5 million
for the period from November 6 to December 31, 1998. This increase is
primarily related to the effects of having a full quarter compared to 55 days
and the impact of additional depreciation and amortization from the additional
acquisitions.
Interest expense, net was $11.5 million for the three months ended March
31, 1999, an increase of $4.7 million, or 69%, compared to $6.8 million for
the period from November 6 to December 31, 1998. This increase is primarily
related to the effects of having a full quarter compared to 55 days and
additional interest on new borrowings.
Other (expense) income, net was $4.4 million for the three months ended
March 31, 1999, an increase of $5.1 million, compared to $(0.1) million for
the period from November 6 to December 31, 1998. This increase is the effect
of the tax benefit associated with the net loss for the period and that the
period from November 6 to December 31, 1998 included an extraordinary loss on
extinguishment of debt of $(3.0) million.
There was a net loss of $7.4 million for the three months ended March 31,
1999, a decrease of $0.8 million, or 10%, compared to a net loss of $8.2
million for the period from November 6 to December 31, 1998.
Avalon Cable LLC
In the first quarter of 1999, Avalon Cable of New England LLC, a wholly-
owned subsidiary of Avalon Cable LLC, formed Avalon.com, a wholly-owned
subsidiary. Avalon.com plans to provide internet services to customers in the
New England and Michigan cable areas served by Avalon Cable of New England or
Avalon Cable of Michigan LLC, a wholly-owned subsidiary of Avalon Cable LLC.
47
<PAGE>
On March 26, 1999, after the acquisition of Mercom, Inc., Avalon Cable LLC
and its affiliates completed a series of transactions to facilitate certain
aspects of its financing. As a result of these transactions:
. Avalon Cable of Michigan, Inc. contributed its assets and liabilities
excluding deferred tax liabilities, net to Avalon Cable LLC in exchange
for an approximate 88% voting interest in Avalon Cable LLC. Avalon Cable
LLC contributed these assets and liabilities to its wholly-owned
subsidiary, Avalon Cable of Michigan LLC.
. Avalon Cable of Michigan Holdings, Inc. contributed the old notes and
associated deferred financing costs to Avalon Cable of Michigan, Inc. who
in turn contributed the notes and deferred financing costs to Avalon
Cable LLC.
Three months ended March 31, 1999 compared to the period from November 6 to
December 31, 1998
Revenues for the three months ended March 31, 1999 were $3.6 million, an
increase of $2.3 million, or 177%, as compared to revenues of $1.3 million for
the period from November 6 to December 31, 1998. This increase is primarily
related to the effects of having a full quarter compared to 55 days as well as
the impact of subscribers contributed by Avalon Cable of Michigan, Inc. on
March 26, 1999.
Operating expenses excluding depreciation and amortization, corporate
overhead and non-recurring expenses were $1.7 million for the three months
ended, an increase of $0.9, or 113%, as compared to $0.8 million for the period
from November 6 to December 31, 1998. This increase is primarily related to the
effects of having a full quarter compared to 55 days, a regulation change which
allowed programmers to increase programming rates ($0.9 million), and the
addition of employees, offset by lower franchise fees due to a decrease in
number of subscribers.
Operating income before depreciation and amortization, corporate overhead
and non-recurring expenses was $1.5 million for the three months ended March
31, 1999, an increase of $1.0 million, or 200%, as compared to $0.5 for the
period from November 6 to December 31, 1998.
Depreciation and amortization for the three months ended March 31, 1999 was
$1.3 million, an increase of $0.9 million, or 225%, compared to $0.4 million
for the period from November 6 to December 31, 1998. This increase is primarily
related to the effects of having a full quarter compared to 55 days and the
impact of additional depreciation and amortization relating to the closing of
the acquisitions as well as the contribution of fixed assets and intangible
assets contributed by Avalon Cable of Michigan, Inc. on March 26, 1999.
Interest expense, net was $0.5 million for the three months ended March 31,
1999, a decrease of $0.2 million, or 76%, compared to $0.7 million for the
period from November 6 to December 31, 1998. This decrease is primarily related
to the effects of having a full quarter compared to 55 days and the note
receivable from affiliate being outstanding during the entire quarter offset by
the interest expense on the debt from March 27 through March 31, 1999
contributed by Avalon Cable of Michigan, Inc.
Other (expense) income, net was $0.0 million for the three months ended
March 31, 1999, an increase of $1.3 million, compared to $(1.3) million for the
period from November 6 to December 31, 1998. This increase is the effect of the
period from November 6 to December 31, 1998 included an extraordinary loss on
extinguishment of debt of $(1.3) million.
Net loss was $0.3 million for the three months ended March 31, 1998, a
decrease of $1.8 million or 86%, compared to $2.1 million for the period from
November 6 to December 31, 1998.
Avalon Cable of Michigan, Inc.
On November 6, 1998, Cable Michigan merged with and into Avalon Cable of
Michigan, Inc. and Avalon Cable of Michigan, Inc. commenced its operations.
Therefore, the financial and other data for Cable Michigan for the period from
November 6, 1998 to December 31, 1998 is reflected in the financial and other
data for Avalon Cable of Michigan, Inc.
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<PAGE>
On March 26, 1999, Avalon Cable of Michigan, Inc. acquired the remaining
minority interest of Mercom for approximately $21.9 million. During the
quarter, Avalon Cable of Michigan, Inc. also acquired the cable television
systems of Nova Cablevision and Cross Country Cable for $10.7 million.
In March 1999, Avalon Cable of Michigan, Inc. and its affiliates completed a
series of transactions to facilitate certain aspects of its financing. As a
result of these transactions:
. Avalon Cable of Michigan, Inc. contributed its assets and liabilities
excluding deferred tax liabilities, net to Avalon Cable LLC in exchange
for an approximate 88% voting interest in Avalon Cable LLC. Avalon Cable
LLC contributed these assets and liabilities to its wholly-owned
subsidiary, Avalon Cable of Michigan LLC.
. Avalon Cable of Michigan, Inc. is a guarantor of the obligations of
Avalon Cable LLC under the old notes and the new notes and a guarantor of
Avalon Cable of Michigan LLC's obligations under the senior subordinated
notes and the credit facility. Avalon Cable of Michigan, Inc. does not
have significant assets, other than its investment in Avalon Cable LLC.
Three months ended March 31, 1999 compared to the period from November 6 to
December 31, 1998
Revenues for the three months ended March 31, 1999 were $22.4 million, an
increase of $8.7 million, or 63%, as compared to revenues of $13.7 million for
the period from November 6 to December 31, 1998. This increase is primarily
related to the effects of having a full quarter compared to 55 days as well as
the impact of subscribers from the acquisitions offset by a decrease in revenue
of $0.6 million relating to a decrease in the number of subscribers due to
seasonality and competition.
Operating expenses excluding depreciation and amortization, corporate
overhead and non-recurring expenses were $12.1 million for the three months
ended March 31, 1999, an increase of $4.6 million, or 61%, as compared to
$7.5 million for the period from November 6 to December 31, 1998. This increase
is primarily related to the effects of having a full quarter compared to 55
days, a regulation change which allowed programmers to increase programming
rates ($0.9 million) offset by the discontinuance of the RCN management fee,
lower franchise fees due to a decrease in number of subscribers and the
addition of employees.
Operating loss before depreciation and amortization, corporate overhead and
non-recurring expenses was $(0.3) million for the three months ended March 31,
1999, a decrease of $0.3 million, or 50%, as compared to $(0.6) for the period
from November 6 to December 31, 1998.
Depreciation and amortization for the three months ended March 31, 1999 was
$10.1 million, an increase of $3.5 million, or 54%, compared to $6.5 million
for the period from November 6 to December 31, 1998. This increase is primarily
related to the effects of having a full quarter compared to 55 days and the
impact of additional depreciation and amortization relating to the closing of
the acquisitions.
Interest expense, net was $8.4 million for the three months ended March 31,
1999, an increase of $3.9 million, or 86%, compared to $4.5 million for the
period from November 6 to December 31, 1998. This increase is primarily related
to the effects of having a full quarter compared to 55 days, additional
interest on new borrowings as well as the contribution of the Senior Discount
Notes from Avalon Cable of Michigan Holdings.
Other (expense) income, net was $3.2 million for the three months ended
March 31, 1999, an increase of $3.2 million, or 100%, compared to $0.0 million
for the period from November 6 to December 31, 1998. This increase is the
effect of the tax benefit associated with the net loss for the period and that
the period from November 6 to December 31, 1998 included an extraordinary loss
on extinguishment of debt of $(1.4) million.
Net loss was $5.5 million for the three months ended March 31, 1999, an
increase of $0.4 million, or 8%, compared to $5.1 million for the period from
November 6 to December 31, 1998.
49
<PAGE>
The following historical results of operations of Cable Michigan, AMRAC
Clear View, Pegasus Cable Television and Taconic Technology refer to their
results of operations occurring before their respective acquisition by us,
other than a portion of the results of AMRAC Clear View and Pegasus Cable
Television for the year ended December 31, 1998 during which AMRAC Clear View
and Pegasus Cable Television were owned by us. Our management intends to
implement a number of operational and organizational changes to the businesses
described below. As a result, our management believes that the historical
results of operations described below are not necessarily indicative of our
future results of operations. For additional information, please refer to the
"--Overview--Pro Forma Operating Results" section of this prospectus.
Cable Michigan
General
Prior to September 30, 1997, Cable Michigan was operated as a part of
Commonwealth Telephone Enterprises. On September 30, 1997, Commonwealth
Telephone Enterprises distributed all of the outstanding common stock of Cable
Michigan to its stockholders and Cable Michigan became a separate, publicly
traded company. The historical financial and other data for Cable Michigan
presented below reflect periods during which Cable Michigan did not operate as
a separate company and, accordingly, certain assumptions were made in preparing
the financial data. Therefore, the data may not reflect the results of
operations or financial condition which would have resulted had Cable Michigan
operated as a separate, independent company during these periods, and are not
necessarily indicative of Cable Michigan's future results of operations or
financial condition.
Cable Michigan acquired a majority voting interest in Mercom in August 1995
in a common stock rights offering. Immediately before the rights offering,
Cable Michigan held a 43.6% interest in Mercom and accounted for its investment
under the equity method. Following the rights offering, Cable Michigan held a
61.9% interest in Mercom and has consolidated Mercom in its financial
statements since August 1995.
On November 6, 1998, Cable Michigan merged with and into Avalon Cable of
Michigan, Inc., a wholly-owned subsidiary of Avalon Cable of Michigan Holdings
and Avalon Cable of Michigan, Inc. commenced its operations. Therefore, the
financial and other data for Cable Michigan for the period from November 6,
1998 to December 31, 1998 is reflected in the financial and other data for
Avalon Cable of Michigan, Inc.
Nine Months Ended September 30, 1998 Compared with Nine Months Ended September
30, 1997
Revenues for the nine months ended September 30, 1998 were $65.8 million, an
increase of $4.9 million, or 8.0%, as compared to revenues of $60.9 million for
the nine months ended September 30, 1997. This increase was primarily due to
the effects of rate increases implemented in May 1998 and February 1997 and an
increase in the average number of basic subscribers of approximately 3.6%. The
average number of basic subscribers is calculated as the sum of the number of
basic subscribers at the beginning of the period and at the end of the period
divided by two.
Operating expenses excluding depreciation and amortization, corporate
overhead and non-recurring expenses were $33.9 million for the nine months
ended September 30, 1998, an increase of $3.4 million, or 11.1%, as compared to
$30.5 million for the nine months ended September 30, 1997. This increase was
primarily due to higher programming costs resulting from contractual rate
increases from programming suppliers, increases in the number of channels
provided to customers and increases in the number of basic subscribers.
Operating income before depreciation and amortization, corporate overhead
and non-recurring expenses was $31.9 million for the nine months ended
September 30, 1998, an increase of $1.5 million, or 4.9%, as compared to $30.4
million for the nine months ended September 30, 1997.
50
<PAGE>
Net loss was $8.9 million for the nine months ended September 30, 1998, an
increase of $5.6 million or 170%, as compared to $3.3 million for the nine
months ended September 30, 1997.
Year Ended December 31, 1997 Compared with the Year Ended December 31, 1996
Revenues for the year ended December 31, 1997 were $81.3 million, an
increase of $5.1 million, or 6.7%, as compared to revenues of $76.2 million for
the year ended December 31, 1996. This increase was primarily due to the
effects of rate increases implemented in the first quarter of 1996 and 1997 and
an increase in the average number of basic subscribers of approximately 3.1%.
Operating expenses excluding depreciation and amortization and corporate
overhead were $41.0 million for the year ended December 31, 1997, an increase
of $4.0 million, or 10.8%, as compared to $37.0 million for the year ended
December 31, 1996. This increase was primarily due to higher programming costs
resulting from contractual rate increases from programming suppliers, increases
in the number of channels provided to customers and increases in the number of
basic subscribers, as well as increased payroll and benefits costs.
Operating income before depreciation and amortization and corporate overhead
was $40.3 million for the year ended December 31, 1997, an increase of $1.1
million, or 2.8%, as compared to $39.2 million for the year ended December 31,
1996.
Depreciation and amortization was $32.1 million in 1997, an increase of $.7
million or 2.1% as compared to 1996. Interest expense was $11.8 million in
1997, a decrease of approximately $3.4 million, 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,
Cable Michigan realized a gain of $2.6 million 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.
Net loss was $4.4 million for the year ended December 31, 1997, a decrease
of $3.9 million, or 47%, as compared to $8.3 million for the year ended
December 31, 1996.
For the year ended December 31, 1997, Cable Michigan's net cash provided by
operating activities was $18.3 million, comprised primarily of a net loss of
$4.4 million adjusted by non-cash depreciation and amortization of $32.1
million, other non-cash items resulting in a decrease of $4.1 million and
working capital changes of a decrease of $4.6 million. Net cash used in
investing activities of $10.0 million consisting primarily of additions to
property, plant and equipment of $14.0 million, partially offset by proceeds
from the sale of Port St. Lucie of $3.5 million. Net cash provided by financing
activities of $5.6 million consisted of the issuance of long-term debt of
$128.0 million and transfers from Commonwealth Telephone Enterprises of $12.5
million, substantially offset by a change in affiliate notes of $116.8 million
and redemption of long-term debt of $17.4 million.
Year Ended December 31, 1996 Compared with Year Ended December 31, 1995
Revenues for the year ended December 31, 1996 were $76.2 million, an
increase of $15.5 million, or 25.5%, as compared to revenues of $60.7 million
for the year ended December 31, 1995. This increase primarily resulted from the
consolidation of the financial results of Mercom for a full year in 1996 as
compared to only five months in 1995. Mercom accounted for $9.6 million of the
increase in revenues over the same period in 1995. The remaining $5.9 million
increase was due to an increase in the average number of Cable Michigan's basic
subscribers of approximately 5.2% and the effects of rate increases implemented
in April 1995 and February 1996. On an annualized basis, Mercom's revenues
increased approximately $1.6 million, or 11.7%, of which approximately $1.0
million related to a rate increase implemented in February 1996 and
approximately $600,000 related to an increase in the average number of Mercom's
basic subscribers by 3.5%.
51
<PAGE>
Operating expenses excluding depreciation and amortization and corporate
overhead were $37.0 million for the year ended December 31, 1996, an increase
of $8.5 million, or 29.8%, as compared to $28.5 million for the year ended
December 31, 1995. This increase was primarily due to the consolidation of the
financial results of Mercom for a full year in 1996 as compared to only five
months in 1995. Mercom contributed $6.5 million to the increase in operating
expenses in 1996. The remaining $2.0 million increase was the result of higher
programming costs of Cable Michigan due to contractual rate increases from
programming suppliers, increases in the number of channels provided to
customers and increases in the number of basic subscribers. On an annualized
basis, Mercom's operating expenses excluding depreciation and amortization
increased approximately $1.2 million, or 13.5%, primarily as a result of higher
programming costs due to contractual increases from program suppliers.
Operating income before depreciation and amortization and corporate overhead
was $39.2 million for the year ended December 31, 1996, an increase of $7.0
million, or 21.7%, as compared to $32.2 million for the year ended December 31,
1995. Of this increase, $3.1 million resulted from the consolidation of the
financial results of Mercom for a full year in 1996 as compared to only five
months in 1995.
Depreciation and amortization was $31.4 million in 1996, an increase of $6.3
million, 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 $5.8 million for the
twelve months in 1996 as compared to the five months in 1995. Interest expense
was $15.2 million in 1996, a decrease of approximately $.8 million, or 5% as
compared to 1995, due to a combination of lower average outstanding borrowings
and lower average interest rates. Cable Michigan acquired a majority voting
interest in Mercom in August 1995 pursuant to a common stock rights offering.
Immediately prior to the rights offering, Cable Michigan had a 43.63% interest
in Mercom and accounted for its investment under the equity method. Following
the rights offering, Cable Michigan 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 a loss of $.2 million
while for 1996, minority interest in the loss of Mercom was $1.2 million.
Net loss was $8.3 million for the year ended December 31, 1996, a decrease
of $2.2 million, or 21%, as compared to $10.5 million for the year ended
December 31, 1995.
For the year ended December 31, 1996, Cable Michigan generated cash from
operating activities of $27.8 million, comprised principally of a net loss of
$8.3 million adjusted for non-cash depreciation and amortization of $31.4
million, other non-cash items of $2.1 million and working capital changes of
$2.4 million. Net cash used in investing activities was $9.2 million, comprised
principally of capital expenditures of $9.6 million. Net cash used in financing
activities was $18.3 million, comprised of a decrease in affiliate notes of
$16.8 million and principal payments on long-term debt of $1.5 million.
Pegasus Cable Television
General
Prior to July 21, 1998, Pegasus Cable Television was operated as part of
Pegasus Communications Corporation. The historical combined financial data
presented below reflect periods during which Pegasus Cable Television did not
operate as an independent company and, accordingly, certain allocations were
made in preparing the financial data. Therefore, this data may not reflect the
results of operations or the financial condition which would have resulted if
Pegasus Cable Television had operated as a separate independent company during
these periods, and are not necessarily indicative of Pegasus Cable Television's
future results of operations or financial position.
52
<PAGE>
Six Months Ended June 30, 1998 Compared with Six Months Ended June 30, 1997
Revenues for the six months ended June 30, 1998 were approximately $3.3
million, an increase of $287,000, or 9.6%, as compared to revenues of
approximately $3.0 million for the six months ended June 30, 1997. This
increase was primarily due to the effects of rate increases implemented in the
first quarters of 1997 and 1998 and an increase in the average number of basic
subscribers of approximately 1.3% during the six months ended June 30, 1998.
Operating expenses excluding depreciation and amortization and corporate
overhead were approximately $1.7 million for the six months ended June 30,
1998, an increase of $75,000, or 4.7%, as compared to $1.6 million for the six
months ended June 30, 1997. This increase was primarily due to higher
programming costs resulting from contractual rate increases from programming
suppliers, increases in the number of channels provided to customers and
increases in the number of basic subscribers.
Operating income before depreciation and amortization and corporate overhead
was approximately $1.6 million for the six months ended June 30, 1998, an
increase of $212,000, or 15.1%, as compared to $1.4 million for the six months
ended June 30, 1997.
Net loss was $0.3 million for the six months ended June 30, 1998, a decrease
of $0.1 million, or 25%, as compared to $0.4 million for the six months ended
June 30, 1997.
Year Ended December 31, 1997 Compared with Year Ended December 31, 1996
Revenues for the year ended December 31, 1997 were $6.2 million, an increase
of $416,000, or 7.2%, as compared to revenues of $5.8 million for the year
ended December 31, 1996. This increase was primarily due to the effects of rate
increases implemented during the second quarter of 1996 and the second quarter
of 1997 and the addition of a new tier of expanded basic programming in the
first quarter of 1997, which together increased average revenue per subscriber.
Operating expenses excluding depreciation and amortization and corporate
overhead were $3.2 million for the year ended December 31, 1997, an increase of
$166,000, or 5.5%, as compared $3.0 million for the year ended December 31,
1996. This increase was primarily due to higher programming costs resulting
from contractual rate increases from programming suppliers and the introduction
of a new tier of programming.
Operating income before depreciation and amortization and corporate overhead
was $3.0 million for the year ended December 31, 1997, an increase of $250,000,
or 8.9%, as compared to $2.8 million for the year ended December 31, 1996.
Net loss was $0.6 million for the year ended December 31, 1997, a decrease
of $0.6 million, or 50%, compared to $1.2 million for the year ended December
31, 1996.
Year Ended December 31, 1996 Compared with Year Ended December 31, 1995
Revenues for the year ended December 31, 1996 were $5.8 million, an increase
of $640,000, or 12.5%, as compared to revenues of $5.1 million for the year
ended December 31, 1995. This increase was primarily due to the restructuring
of its basic service offerings and rate increases implemented in the first half
of 1996.
Operating expenses excluding depreciation and amortization and corporate
overhead were $3.0 million for the year ended December 31, 1996, an increase of
$420,000, or 16.2%, as compared to $2.6 million for the year ended December 31,
1995. This increase was primarily due to an increase in the number of channels
per subscriber associated with the restructuring of its basic service described
above and higher programming costs resulting from contractual rate increases
from programming suppliers.
Operating income before depreciation and amortization and corporate overhead
was $2.8 million for the year ended December 31, 1996, an increase of $220,000,
or 8.8%, as compared to $2.5 million for the year ended December 31, 1996.
53
<PAGE>
Net loss was $1.2 million for the year ended December 31, 1996, a decrease
of $0.1 million, or 8%, compared to $1.3 million for the year ended December
31, 1995.
AMRAC Clear View
Period Ended May 28, 1998 Compared with Period Ended May 28, 1997
Revenues for the period ended May 28, 1998 were $779,000, remaining
virtually unchanged, as compared to revenues of $786,000 for the period ended
May 28, 1997.
Operating expenses excluding depreciation and amortization and corporate
overhead were $443,000 for the period ended May 28, 1998, an increase of
$8,000, or 1.8%, as compared to $435,000 for the period ended May 28, 1997.
This increase was primarily due to higher programming costs resulting from
contractual rate increases from programming suppliers.
Operating income before depreciation and amortization and corporate overhead
was $336,000 for the period ended May 28, 1998, a decrease of $15,000, or 4.3%,
as compared to $351,000 for the period ended May 28, 1997.
Net income was $0.2 million for each of the periods ended May 28, 1998 and
1997.
Year Ended December 31, 1997 Compared with Year Ended December 31, 1996
Revenues for the year ended December 31, 1997 were approximately $1.9
million, an increase of $95,000, or 5.3%, as compared to revenues of
approximately $1.8 million for the year ended December 31, 1996. This increase
was primarily due to an increase in the average number of basic subscribers of
approximately 2.2% for the year ended December 31, 1997 and a full year's
impact from the launch of pay-per-view channels in the fourth quarter of 1996.
Operating expenses excluding depreciation and amortization and corporate
overhead were $1.0 million for the year ended December 31, 1997, a decrease of
$7,000, or 0.7%, for the year ended December 31, 1996. This decrease was
primarily due to the elimination of a management position in the first quarter
of 1997, which was partially offset by higher programming costs resulting from
contractual rate increases from programming suppliers and increases in the
number of basic subscribers.
Operating income before depreciation and amortization and corporate overhead
was $864,000 for the year ended December 31, 1997, an increase of $102,000, or
13.4%, as compared to $762,000 for the year ended December 31, 1996.
Net income was $0.6 million for the year ended December 31, 1997, an
increase of $0.4 million, or 200%, compared to $0.2 million for the year ended
December 31, 1996.
Year Ended December 31, 1996 Compared with Year Ended December 31, 1995
Revenues for the year ended December 31, 1996 were $1.8 million, an increase
of $106,000, or 6.2%, as compared to revenues of $1.7 million for the year
ended December 31, 1995. This increase was primarily due to an increase in the
average number of basic subscribers of approximately 3.7%.
Operating expenses excluding depreciation and amortization and corporate
overhead were $1.0 million for the year ended December 31, 1996, an increase of
approximately $70,000, or 7.2%, as compared to $975,000 for the year ended
December 31, 1995. This increase was primarily due to higher programming costs
resulting from contractual rate increases from programming suppliers and
increases in the number of basic subscribers.
Operating income before depreciation and amortization and corporate overhead
was $762,000 for the year ended December 31, 1996, an increase of $36,000, or
5.0%, as compared to $726,000 for the year ended December 31, 1995.
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<PAGE>
Net income was $0.2 million for each of the years ended December 31, 1996
and 1995.
Taconic Technology
General
Currently, the assets and liabilities that we will acquire from Taconic
Technology is operated as part of Taconic Technology Corporation. The
historical financial data presented below reflect periods during which these
assets and liabilities of Taconic Technology did not operate as an independent
company and, accordingly, certain allocations were made in preparing the
financial data. Therefore, this data may not reflect the results of operations
or the financial condition which would have resulted if these assets and
liabilities of Taconic Technology had operated as a separate independent
company during these periods, and are not necessarily indicative of Taconic
Technology's future results of operations or financial position.
Quarter Ended March 31, 1999 Compared with Quarter Ended March 31, 1998
Revenues for the quarter ended March 31, 1999 were approximately $523,000,
an increase of $34,000 or 7.0%, as compared to revenues of approximately
$489,000 for the quarter ended March 31, 1998. This increase was primarily due
to the effects of rate increases implemented in the first quarter of 1998 and
an increase in the average number of subscribers.
Operating expenses excluding depreciation and amortization and corporate
overhead were approximately $340,000 for the quarter ended March 31, 1999, a
decrease of $5,000, or 1.4%, as compared to $345,000 for the quarter ended
March 31, 1998. This decrease was primarily due to higher programming costs
associated with the growth in subscribers offset by lower expenses due to
timing in marketing expenses.
Operating income before depreciation and amortization and corporate overhead
was approximately $183,000 for the quarter ended March 31, 1999, an increase of
$39,000, or 27.1%, as compared to $144,000 for the quarter ended March 31,
1998.
Net income was $43,000 and $8,000 for the quarters ended March 31,1999 and
March 31, 1998, respectively.
Year Ended December 31, 1998 Compared with Year Ended December 31, 1997
Revenues for the year ended December 31, 1998 were approximately $2.1
million, an increase of $81,000 or 3.9%, as compared to revenues of
approximately $2.0 million for the year ended December 31, 1997. This increase
was primarily due to the effects of rate increases implemented in the first
quarter of 1997 and 1998 and an increase in the average number of basic
subscribers of approximately 6%.
Operating expenses excluding depreciation and amortization and corporate
overhead were approximately $1.4 million for the year ended December 31, 1998,
an increase of $100,000, or 7.8%, as compared to $1.3 million for the year
ended December 31, 1997. This increase was primarily due to higher programming
costs resulting from contractual rate increases from programming suppliers and
increases in the number of basic subscribers.
Operating income before depreciation and amortization and corporate overhead
was $686,000 for the year ended December 31, 1998, a decrease of $7,000, or
1.0%, as compared to $693,000 for the year ended December 31, 1997.
Net income was $0.1 million for each of the years ended December 31, 1998
and 1997.
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Year Ended December 31, 1997 Compared with Year Ended December 31, 1996
Revenues for the year ended December 31, 1997 were $2.0 million, an increase
of $89,000, or 4.7%, as compared to revenues of $1.9 million for the year ended
December 31, 1996. This increase was primarily due to the effects of rate
increases implemented in the first quarter of 1996 and 1997.
Operating expenses excluding depreciation and amortization and corporate
overhead were $1.3 million for the year ended December 31, 1997, an increase of
$65,000, or 5.4%, as compared to $1.2 million for the year ended December 31,
1996. This increase was primarily due to higher programming costs resulting
from contractual rate increases from programming suppliers.
Operating income before depreciation and amortization and corporate overhead
was $727,000 for the year ended December 31, 1997, an increase of $24,000, or
3.4%, as compared to $703,000 for the year ended December 31, 1996.
Net income was $0.8 million for the year ended December 31, 1997, an
increase of $0.1 million, or 14%, compared to $0.7 million for the year ended
December 31, 1996.
Year Ended December 31, 1996 Compared with Year Ended December 31, 1995
Revenues for the year ended December 31, 1996 were $1.9 million, an increase
of $145,000, or 8.1%, as compared to revenues of $1.8 million for the year
ended December 31, 1995. This increase was primarily due to the effects of rate
increases that were implemented in the first quarter of 1996 and an increase in
the average number of basic subscribers of approximately 2.3%.
Operating expenses excluding depreciation and amortization and corporate
overhead were $1.2 million for 1996, an increase of $105,000, or 9.5%, as
compared to $1.1 million for the year ended December 31, 1995. The increase was
primarily due to higher programming costs resulting from contractual rate
increases from programming suppliers and increases in the number of basic
subscribers.
Operating income before depreciation and amortization and corporate overhead
was $703,000 for 1996, an increase of $40,000, or 6.0%, as compared to $663,000
for the year ended December 31, 1995.
Net income was $0.1 million for each of the years ended December 31, 1998
and 1997.
Liquidity and Capital Resources
The cable television business generally requires substantial capital for the
construction, expansion, upgrade and maintenance of the delivery system. In
addition, we have pursued, and will continue to pursue, a business strategy
that includes selective acquisitions. We have funded our acquisitions, capital
expenditures and working capital requirements to date through a combination of
secured and unsecured borrowings and equity contributions. We intend to use
amounts available under the credit facility, future debt and equity financings
and internally generated funds to finance our working capital requirements,
capital expenditures and future acquisitions.
Over the next five years, we intend to spend approximately $76 million to
upgrade our existing systems and the systems subject to pending acquisitions.
These capital expenditures are expected to consist of:
. approximately $45 million to upgrade the bandwidth capacity of these
systems and to employ additional fiber in the related cable plant,
. approximately $16 million for ongoing maintenance and replacement and
. approximately $15 million for installations and extensions to the related
cable plant required as a result of growth in our subscriber base.
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Upon the completion of our planned upgrades, virtually all of the cable plant
included in these systems will have a bandwidth capacity of 450 MHz or greater
and approximately 85% will have a bandwidth capacity of 550 MHz or greater. For
additional information, please refer to "Business--Technology" section of this
prospectus.
Our financing at the time we completed the acquisition of Cable Michigan
consisted of the credit facility, the bridge credit facility, the subordinated
bridge facility and a new equity investment of approximately $80.0 million. We
used the funds obtained in the initial financing to consummate the merger with
Cable Michigan, to refinance existing Cable Michigan indebtedness and existing
Avalon Cable of New England LLC indebtedness and to pay fees and expenses. We
will not receive any cash proceeds from the issuance of the new notes. The net
proceeds of the old note offering and the senior subordinated note offering
were used principally to repay approximately:
. $125.0 million of borrowings under the credit facility,
. $105.0 million of borrowings by the issuers under the bridge credit
facility and
. $18.0 million of borrowings by the issuers under the subordinated bridge
facility, together in each case with accrued interest.
After giving effect to the foregoing, the bridge credit facility was paid in
full and terminated and there were no amounts outstanding under the
subordinated bridge facility.
As of March 31, 1999, on a pro forma basis, after giving effect to all
completed and pending acquisitions and the reorganization, the issuers would
have had no outstanding indebtedness other than the old notes and the issuers'
subsidiaries would have had $442.7 million of indebtedness outstanding and
$24.4 million of trade payables and other liabilities outstanding. Such
indebtedness includes $177.4 million under the credit facility and $150.0
million under the old notes, but excludes $18.5 million of availability under
the revolving credit facility.
Under the credit facility, the issuers' operating subsidiaries currently
have:
. a $30.0 million revolving credit facility with $18.5 million available at
March 31, 1999, and
. senior term loan facilities consisting of a $120.9 million term loan
facility which matures on October 31, 2005 and a $170.0 million term loan
facility which matures on October 31, 2006.
No additional borrowings may be made under the senior term loan facilities.
Borrowings under the revolving credit facility are available for working
capital purposes, capital expenditures and pending and future acquisitions. The
revolving credit facility terminates, and all amounts outstanding thereunder
are payable, on October 31, 2005. In addition, the credit facility provides for
up to $75.0 million in an uncommitted acquisition facility. Borrowings under
the credit facility are guaranteed by each of the issuers, Avalon Cable and
Avalon Cable of New England Holdings, Inc. The credit facility is secured by
substantially all of the assets of the issuers' operating subsidiaries in which
a security interest may be granted. For additional information concerning the
credit facility, including the timing of scheduled payments, see "Description
of Certain Debt--The Credit Facility."
The senior subordinated notes were issued in an aggregate principal amount
of $150.0 million and will mature on December 1, 2008. The senior subordinated
notes are general unsecured obligations of the issuers' operating subsidiaries
and are subordinated in right of payment to all of their current and future
senior indebtedness, including indebtedness under the credit facility. Interest
on the senior subordinated notes accrues at the rate of 9 3/8% per annum and is
payable semi-annually in arrears on June 1 and December 1 of each year, to
holders of record on the immediately preceding May 15 and November 15. For
additional information concerning the senior subordinated notes, see
"Description of Certain Debt--The Senior Subordinated Notes."
The issuers are holding companies with no significant assets other than
their investment in their operating subsidiaries. The primary source of funds
to the issuers will be dividends and other advances and transfers
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from their operating subsidiaries. The ability of the issuers' operating
subsidiaries to make dividends and other advances and transfers of funds,
including funds required to pay interest on the new notes when due, is subject
to certain restrictions under the credit facility, the indenture governing the
senior subordinated notes and other agreements to which they become a party. A
payment default under the indenture governing the senior subordinated notes
would constitute an event of default under the credit facility, and could
result in the acceleration of the indebtedness thereunder.
The credit facility, the indenture governing the old notes and the new
notes, and the senior subordinated note indenture contain financial and other
covenants that restrict, among other things, the ability of the issuers and
their operating subsidiaries and certain of their affiliates:
. to incur additional indebtedness,
. incur liens,
. pay dividends or make certain other restricted payments,
. consummate certain asset sales,
. enter into certain transactions with affiliates,
. merge or consolidate with any other person or
. sell, assign, transfer, lease, convey or otherwise dispose of all or
substantially all of our assets.
Such limitations, together with our highly leveraged nature, could limit the
corporate and operating activities of the issuers in the future, including the
implementation of our growth strategy. See "Risk Factors--Our substantial
indebtedness could make us unable to service our indebtedness and meet our
other requirements and could adversely affect our financial health."
We believe that cash generated from operations and borrowings expected to be
available under the credit facility will be sufficient to meet our debt
service, capital expenditure and working capital requirements for the
foreseeable future. We will require additional financing if our plans
materially change in an adverse manner or prove to be materially inaccurate, or
if we engage in any significant acquisitions. We cannot assure you that this
financing, if permitted under the terms of the indenture governing the old
notes and the new notes or other then applicable agreements, will be available
on terms acceptable to us or at all. For additional information, please refer
to the "Risk Factors" section of this prospectus.
Year 2000 Information and Readiness Discussion
We have and will acquire certain financial, administrative and operational
systems. We are in the process of reviewing our existing systems and intend to
review each system that we acquire, as well as the systems employed by third
party service providers (including for billing services) in order to analyze
the extent, if any, to which we face a "Year 2000" problem (a problem that is
expected to arise with respect to computer programs that use only two digits to
identify a year in the date field and which were designed and developed without
considering the impact of the upcoming change in the century).
In particular, we are in the process of completing a review and survey of
all information technology and non-information technology equipment and
software in order to discover items that may not be Year 2000 compliant. We are
contacting each material third party vendor of products and services used by
our company in writing in order to determine the Year 2000 status of the
products and services provided by such vendors. To date, our third party
vendors have indicated that all material products and services are Year 2000
compliant. We anticipate that we will complete our survey of equipment and
software prior to July 1, 1999 and that we will complete all required
remediation and testing prior to December 31, 1999.
Our most reasonably likely worst case Year 2000 scenario involves the
complete failure of our third party billing and customer support system. Such a
scenario is, however, highly unlikely given that our billing and
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customer support systems are relatively new and that our vendors provide
readily available Year 2000 upgrades and/or system replacement packages. In the
unlikely event that our third party billing, customer support and addressable
control systems failed, we could rely on our extensive microfiche back-up
records. We intend to update our microfiche records on a regular basis prior to
December 1999.
To date, we have incurred approximately $0.1 million in expenses relating to
our Year 2000 compliance review. We anticipate that we will incur less than
$0.1 million of additional Year 2000 compliance expenses prior to January 2000.
Although we have not yet made a final determination, we believe that any
"Year 2000" problem, if it arises in the future, should not be material to our
liquidity, financial position or results of operations; however, there can be
no assurance as to the extent of any such liabilities.
Impact of Inflation
With the exception of programming costs, we do not believe that inflation
has had or will likely have a significant impact on our results of operations
or capital expenditure programs. Our programming cost increases in the past
have tended to exceed inflation and we expect them to do so in the future.
Historically, we have been successful in passing these increases on to our
customers, and we expect to be able to do so in the future. However, we cannot
assure you that we will be successful in our efforts to do so.
Proceedings
In connection with the acquisition of Mercom, former shareholders of Mercom
constituting approximately 16.5% of all outstanding Mercom common shares gave
notice of their election to exercise appraisal rights as provided by Delaware
law. We cannot predict at this time the effect of these elections on us since
we do not know whether or the extent to which these former shareholders will
continue to pursue appraisal rights and seek an appraisal proceeding under
Delaware law or choose to abandon these efforts and accept the consideration
payable in the Mercom merger. If these former shareholders continue to pursue
their appraisal rights, we cannot assure you that a Delaware court would not
find that the fair value of their shares for such purpose is in excess of the
$12.00 per Mercom share that we paid in the acquisition or that the ultimate
outcome would not have a material adverse effect on us. We have already
provided for the consideration due under the terms of our merger with Mercom
with respect to these shares.
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BUSINESS
General
Members of our management and investors formed our company in 1997 to
acquire, operate and develop cable television systems in mid-sized suburban and
exurban markets characterized by attractive growth prospects and fewer multi-
channel television competitors. We seek to acquire cable television systems in
markets with high projected household growth rates and with relatively low
basic penetration, where we believe we can increase the number of basic
subscribers and revenues per subscriber on a cost effective basis. We believe
that less direct competition in our targeted markets will result in greater
stability in operating cable television systems as well as relatively lower
acquisition costs as compared to larger, more competitive markets. Our strategy
is to assemble two or more regional clusters, each consisting of 200,000 to
300,000 basic subscribers so as to develop a critical mass of operations
capable of achieving economies of scale while maintaining geographic diversity
for our company as a whole. As of March 31, 1999, on a pro forma basis
including all of the completed and pending acquisitions:
. our systems would have passed approximately 400,100 homes,
. our systems would have served approximately 242,900 basic subscribers,
with approximately 217,100 located in Michigan and approximately 25,800
located in western New England and upstate New York,
. we would have been one of the leading cable system operators in the State
of Michigan, and
. we would have been one of the 30 largest multiple system cable operators
in the United States.
On November 6, 1998, we completed our acquisition of Cable Michigan which
represents a substantial part of our business. Cable Michigan serves basic
subscribers clustered in four main areas in Michigan: Grand Rapids, Traverse
City, Lapeer and Monroe. We acquired Cable Michigan because of its strong
growth prospects. From 1993 to 1997, Cable Michigan's basic subscribers grew at
a compounded annual rate of 4.6% as compared to the national average of 2.9%
According to Market Statistics, 1997, a publication containing county-wide
demographic information published by Bill Communications, the number of
households in Cable Michigan's territory is projected to grow at a rate equal
to approximately 175% of the national average and approximately 200% of the
Michigan average over the next five years. In addition, we believe there exists
a substantial opportunity to increase Cable Michigan's basic and premium
penetration rates through aggressive marketing and improved customer service.
As of March 31, 1999, Cable Michigan's systems had a basic penetration rate of
60%, compared to the national average of 69% (according to Paul Kagan Inc.),
and a premium penetration rate of 26%, compared to the national average of 72%
(according to Paul Kagan Inc.). The total consideration that we paid in
connection with the Cable Michigan acquisition, excluding the amounts to be
paid in the Mercom transaction and related fees and expenses, was approximately
$425.9 million, net of option exercise proceeds. At this time, Cable Michigan
owned approximately 62% of the outstanding shares of Mercom, Inc.
On March 26, 1999, we completed the acquisition of the remaining 38% from the
public shareholders of Mercom. The total consideration for that acquisition,
including related fees and expenses, was approximately $21.9 million. Prior to
the completion of our acquisition of Cable Michigan, Cable Michigan, with our
assistance, entered into agreements to acquire two additional cable systems,
Nova Cablevision and Cross Country, Cable TV which served, on a combined basis,
approximately 8,300 basic subscribers in Michigan as of March 31, 1999. We
completed the acquisition of Nova Cablevision in March 1999 and the acquisition
of Cross Country Cable TV in January 1999. In addition, we consummated the
acquisitions of the assets of Novagate Communications, an Internet service
provider, and the cable system assets of R/COM, L.C., in March 1999 which
served approximately 5,000 Internet and 800 basic subscribers, respectively, as
of March 1999. We have also entered into agreements to acquire the assets of
Traverse Internet, an Internet service provider which had approximately 4,500
Internet subscribers as of March 1999 and certain cable system assets of Galaxy
American Communications which had approximately 550 basic subscribers as of
March 1999. The combined purchase price for these pending acquisitions is
approximately $2.9 million.
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We also provide cable television services to approximately 25,800 basic
subscribers in western New England as of March 31, 1999 after giving effect to
all completed and pending acquisitions. These operations commenced with our
acquisitions of cable system assets from AMRAC Clear View in May 1998 for
approximately $8.1 million and from Pegasus Cable Television in July 1998 for
approximately $30.5 million. We believe that the consolidation of these
operations has allowed and will continue to allow us both to retain and attract
higher quality management and to realize lower overall operating costs for
these systems. Building on this base of operations, we intend to seek other
opportunistic acquisitions in western New England and upstate New York, where
cable system ownership is highly fragmented.
Since we established our New England Cluster, we have entered into
agreements to acquire cable system assets and related liabilities of Taconic
Technology which had approximately 5,000 subscribers as of December 31, 1998
and Hometown TV, which had approximately 400 subscribers as of March 31, 1999.
The combined purchase price for these pending transactions is approximately
$9.0 million.
On a pro forma combined basis, the issuers would have had revenues of $26.0
million for the quarter ended March 31, 1999 and $104.9 million for the year
ended December 31, 1998.
Business Strategy
Our objective is to increase operating cash flow and maximize the value of
our cable television systems by utilizing our expertise in acquiring and
managing cable systems. We seek to be the leading supplier of multi-channel
television services in our chosen markets by delivering high-quality products
and service at competitive prices. To achieve these goals, we are pursuing the
following business strategies:
Target Mid-Sized Markets. We believe that the mid-sized suburban and exurban
markets that we target have many of the beneficial attributes of larger urban
and suburban markets, such as moderate to high household growth, economic
stability, attractive subscriber demographics and the potential for additional
clustering. We believe that in these markets the lower population densities and
higher costs per subscriber of installing cable plant tend to result in less
direct competition from other multi-channel television services than in larger
markets. We believe that this reduced competition has benefits in both
operating and acquiring cable television systems. First, in operating cable
television systems, we expect to experience greater stability as a result of
lower customer turnover, as there are fewer multi-channel television and other
entertainment alternatives for subscribers in those markets. Second, we expect
to face less competition in acquiring cable television systems than in larger
markets, which has and is expected to continue to result in lower purchase
price multiples.
Build Regional Clusters; Achieve Operating Efficiencies. We believe that by
building regional clusters of 200,000 to 300,000 basic subscribers we will be
able to realize economies of scale while maintaining geographical diversity for
our company as a whole. We have achieved this critical mass in Michigan through
our acquisition of Cable Michigan. The economies of scale include spreading
fixed and semi-fixed costs over a greater number of subscribers, including
costs relating to general management, marketing, technical support and
administration. We believe that we may also be able to reduce technical
operating costs and capital expenditures associated with implementation of new
channels and services by consolidating headends and utilizing digital
compression technology. Furthermore, by aggregating small systems in the same
region, we believe that we will be able to attract higher quality management
than these systems could attract on a stand alone basis.
Grow Through Strategic and Opportunistic Acquisitions. In pursuing its
clustering strategy, we will continue to seek strategic acquisitions at
attractive prices. In the Michigan cluster, given the critical mass achieved
from the acquisition of Cable Michigan, we will continue to pursue fill-in
acquisitions, such as the Nova Cablevision, Cross Country Cable TV and R/COM
acquisitions and the pending cable system acquisitions entered into by Cable
Michigan, and exchanges of systems with other cable operators to create a
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more contiguous footprint. In the New England cluster, where we continue to
build a cluster with critical mass, we will pursue both larger strategic
acquisitions of 50,000 basic subscribers or more as well as fill-in
acquisitions. In addition, we may pursue opportunistic acquisitions outside of
our existing operating regions where these acquisitions could either be the
basis for creating a new cluster or be exchanged for systems that would fit
with our existing clusters.
Upgrade Systems and Prudently Deploy Capital. We seek to provide reliable,
high quality cable television services. As such, our primary objective for
capital expenditures is to maintain, expand and upgrade our cable plant to
improve our cable television services by increasing channels, enhancing signal
quality and improving technical reliability. We believe these improvements will
enhance our position as the leading provider of multi-channel television
services in our markets by creating additional revenue opportunities, enhancing
operating efficiencies, increasing customer satisfaction and improving
relations with local franchising authorities. Over the next five years, we
intend to spend approximately $46 million to upgrade significantly the cable
systems that we currently own or plan to acquire in the pending acquisitions so
that virtually all of the associated cable plant will be at least 450 MHz (60+
analog channels) and approximately 85% will be 550 MHz (78+ analog channels) or
greater. We believe that the upgrade of our cable systems will allow us to
generate additional revenue by providing expanded tiers of basic programming,
multiplexed premium services, additional home shopping channels and pay-per-
view services. In addition, we, like many other multiple system cable
operators, are exploring the viability of new services such as Internet access,
high speed data, on-screen navigators, new video-on-demand and other
interactive services. While upgraded systems will better facilitate our ability
to offer these services, we do not intend to expend significant capital in
these areas until we believe that the demand for these services is proven and
the delivery of these services is cost-effective.
Focus on Customer. We seek to provide superior customer service to our
subscribers. As part of our commitment to customer service, we intend to
maintain, expand and upgrade our cable plant to improve and expand our cable
television services. In addition, based on subscriber surveys and other
marketing studies, we intend to increase and rearrange programming packages and
tier offerings to meet the needs of the various communities we serve. By
centralizing our customer service operations as well as operating local
offices, we believe we will be able to enhance our ability to implement our
customer service policies on a more consistent and uniform basis, while
maintaining a local presence in the markets we serve. Thus, in the Michigan
cluster, we have relocated the centralized customer call center used by Cable
Michigan from a site in Pennsylvania to a site within Michigan and are
maintaining our seven existing local offices to better serve our customers. In
the New England cluster, we centralized the customer service functions of our
various operations to our regional office in Connecticut and are maintaining
our three existing local offices.
Pursue Aggressive Marketing. Our strategy is to promote and market
aggressively and to expand cable television services to increase revenues and
revenues per subscriber by adding, upgrading and retaining customers. In order
to implement our strategy, we plan to:
. introduce targeted marketing campaigns, including outbound tele-
marketing, direct mail, advertising and sponsorship of community based
events such as fairs and sports teams,
. use price promotions, such as installation specials, to attract new
subscribers,
. use premium channel promotions, such as free weekend premium channels and
a second premium channel at no charge for a limited period with a
subscription for another premium channel, to encourage existing basic and
premium subscribers to upgrade their services,
. use contacts between customer service personnel and customers as
opportunities to upgrade service, and
. centralize marketing and programming under a newly-created position of
Vice President of Marketing.
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System Descriptions
Overview
We operate cable television systems in two regions--the Michigan cluster and
the New England cluster. The following chart sets forth certain pro forma
information relating to our cable systems as of March 31, 1999, giving effect
to all completed and pending acquisitions.
<TABLE>
<CAPTION>
Michigan New England
Cluster Cluster Total
-------- ----------- --------
<S> <C> <C> <C>
Homes passed............................. 363,438 36,711 400,149
Basic subscribers........................ 217,081 25,857 242,938
Basic penetration........................ 59.7% 70.4% 60.7%
Premium units............................ 55,913 6,364 62,277
Premium penetration...................... 25.8% 24.5% 25.6%
Average monthly revenue per basic
subscriber.............................. $ 34.56 $ 36.08 $ 34.72
</TABLE>
The Michigan Cluster--Acquisition History
We formed our Michigan cluster through our acquisition of Cable Michigan. We
continue to add to the Michigan cluster through acquisitions:
Cable Michigan. We commenced our operations in the Michigan cluster when we
acquired Cable Michigan on November 6, 1998. The cable systems that we acquired
from Cable Michigan are located primarily in and around Grand Rapids, Traverse
City, Lapeer and Monroe, Michigan. As of March 31, 1999, these cable systems
passed approximately 342,300 homes and served approximately 207,500 basic
subscribers, including Mercom. In March 1999, we completed the acquisition of
the approximately 38% of Mercom that Cable Michigan did not own when we
acquired Cable Michigan.
Nova Cablevision. In March 1999, Cable Michigan completed its acquisition of
cable system assets from Nova Cablevision for approximately $7.8 million. As of
March 31, 1999, Nova Cablevision's cable system passed approximately 10,000
homes and served approximately 6,400 basic subscribers in 12 towns contiguous
to Cable Michigan's existing cable systems.
Cross Country Cable TV. In January 1999, Cable Michigan completed its
acquisition of the stock of Cross Country Cable TV for approximately $2.1
million. Cross Country Cable TV currently operates a cable system located in
Whitehall and Montague, Michigan. As of March 31, 1999, Cross Country Cable
TV's cable system passed approximately 5,000 homes and served approximately
1,850 basic subscribers.
R/COM. In March 1999, we completed our acquisition of certain assets of
R/COM for approximately $0.5 million. As of March 31, 1999, R/COM's cable
system passed approximately 2,900 homes and served approximately 800 basic
subscribers.
Galaxy American Communications. In February 1999, we signed an agreement to
acquire certain assets of Galaxy American Communications for approximately $0.8
million. As of March 31, 1999, Galaxy American Communications' cable system
passed approximately 3,200 homes and served approximately 550 basic
subscribers. We expect that the consummation of the Galaxy American
Communications acquisition will occur in May of 1999.
Traverse City ISP. On April 1, 1999, we completed our acquisition of the
assets of Traverse Internet which served approximately 4,500 residential
customers in the Traverse City area. Traverse Internet currently provides
Internet access through a standard dial-up phone modem connection. We plan to
upgrade these customers to cable-modem based Internet access, which will
provide the same service at significantly higher speeds.
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Novagate Communications ISP. In March 1999, we completed our acquisition of
the assets of Novagate Communications for approximately $2.9 million. As of
March 31, 1999, Novagate Communications served approximately 5,000 residential
Internet customers in the Grand Rapids area. Novagate Communications currently
provides Internet access through a standard dial-up phone modem connection. We
plan to upgrade these customers to cable modem based Interest access, which
will provide the same service at much higher speeds.
The Michigan Cluster--Operations
The cable systems located in the Michigan cluster serve communities situated
in the western, middle and southern portions of Michigan. The following chart
sets forth certain information relating to the cable systems located in the
Michigan cluster as of March 31, 1999, on a pro forma basis.
<TABLE>
<CAPTION>
Western Michigan Mid Michigan Southern Michigan
-------------------------- ------------ -----------------
Grand Rapids Traverse City Lapeer Monroe
------------ ------------- ------------ -----------------
<S> <C> <C> <C> <C>
Homes passed............ 128,454 137,914 27,285 69,785
Basic subscribers....... 77,929 81,498 16,737 40,917
Basic penetration....... 60.7% 59.1% 61.3% 58.6%
Premium units........... 18,405 16,982 5,107 15,419
Premium penetration..... 23.6% 20.8% 30.5% 37.7%
Average monthly revenue
per basic subscriber... $ 32.89 $ 33.64 $35.76 $34.00
</TABLE>
Approximately 80% of the Michigan cluster's subscriber base is located in
and around Grand Rapids and Traverse City. Our Grand Rapids cluster, located
near Lake Michigan in Kent and Ottawa Counties, is an affluent residential
community and popular recreational area. The economy of Grand Rapids is
supported by the presence of many large employers, including pharmaceutical
companies, automotive parts manufacturing companies and large office furniture
manufacturers. According to Market Statistics, 1997, the Grand Rapids area is
currently the fastest growing region in Michigan. Traverse City is located at
the southern end of Grand Traverse Bay in northwest Michigan, approximately 140
miles north of Grand Rapids. Traverse City is also an affluent residential
community and popular recreational area. Recently, Traverse City's tourism
industry has fueled strong commercial and residential real estate development.
The markets and towns located within the Michigan cluster are, for the most
part, characterized by high homes passed and subscriber growth rates. The
compound annual growth in homes passed and basic subscribers in the Michigan
cluster was 3.2% and 4.6%, respectively, from 1993 to 1997, as compared to the
national averages of 1.0% and 2.9%, respectively, according to Paul Kagan Inc.
The majority of this growth resulted from planned extensions of cable plant
into areas of new home construction. According to Market Statistics, 1997, over
the next five years, the number of households in the Michigan cluster is
forecasted to grow at a rate equal to 175% of the national average and 200% of
the Michigan average.
Giving effect to our merger with Cable Michigan and our other completed and
pending acquisitions, as of March 31, 1999, approximately 42% of the Michigan
cluster's plant capacity was 330 MHz (40 analog channels) or less. Over the
next five years, we expect to invest approximately $43 million to complete its
capital plan for the Michigan cluster. Cable Michigan initiated a plan in 1996
under which approximately $31.6 million had been invested as of March 31, 1999.
Our plan continues Cable Michigan's plan and anticipates the deployment of a
fiber optic network that will span approximately 75% of the Michigan cluster's
customer base. After completion of the plant upgrade projects, approximately
98% of the Michigan cluster's cable systems will have a bandwidth capacity of
at least 450 MHz (60+ analog channels) and approximately 90% of the Michigan
cluster's cable systems will have a bandwidth capacity of at least 550
MHz (78+ analog channels).
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We generally package our basic cable service in the Michigan cluster into
three distinct tiers: Limited Basic Service, Expanded Basic Service and the
Family Value Package. We currently price Limited Basic Service, which consists
primarily of broadcast channels, at an average cost of $11.35 per month;
Expanded Basic Service, which includes traditional cable channels, at an
additional average cost of $11.33 per month; and Family Value Package, which
includes popular sports and cable news channels, at an additional average cost
of $7.13 per month. As of March 31, 1999, Cable Michigan's penetration rates
for Expanded Basic Service and the Family Value Package were 89.3% and 82.4% of
basic subscribers, respectively. In May 1999, Cable Michigan implemented an
average annual rate increase for basic cable service of $2.09 per month, an
increase of approximately 8.4%. We plan to carefully review and refine our
existing programming packages and pricing structure in conjunction with our
marketing strategy.
We believe that there are significant opportunities to increase revenue in
the Michigan cluster. As of March 31, 1999, the Michigan cluster maintained a
60% basic penetration rate and a 26% premium penetration rate, as compared to
national averages of 69% and 72%, respectively, according to Paul Kagan Inc. In
order to increase our pay and basic penetration rates, we plan to introduce
targeted marketing campaigns such as outbound tele-marketing, direct mail,
advertising and sponsorship of community based events. We also believe that we
will be able to generate additional revenues from the upgrade of our cable
systems by providing expanded tiers of basic programming, multiplexed premium
services, additional home shopping channels and pay-per-view services. In
addition, we believe that the revenues generated by the cable systems serving
the Michigan cluster will increase due to the substantial projected growth of
the communities located in the Michigan cluster.
The New England Cluster--Acquisition History
The New England cluster has been formed through our acquisitions of AMRAC
Clear View and Pegasus Cable Television. We plan to add to the New England
cluster through the acquisitions of Taconic Technology and Hometown TV.
AMRAC Clear View and Pegasus Cable Television. On May 30, 1998, we acquired
the assets of AMRAC Clear View for approximately $8.1 million. The AMRAC Clear
View cable systems serve the towns of Hadley and Belchertown in the vicinity of
Amherst, Massachusetts. On July 21, 1998, we acquired the assets of Pegasus
Cable Television for approximately $30.5 million. The Pegasus Cable Television
cable systems serve seven towns located in Massachusetts and seven towns in the
County of Litchfield, Connecticut. As of March 31, 1999, these cable systems,
which currently constitute the New England cluster, passed approximately 28,800
homes and served approximately 20,500 basic subscribers.
Taconic Technology. On September 10, 1998, we entered into an agreement to
purchase the cable related assets of Taconic Technology for approximately $8.5
million. As of March 31, 1999, Taconic Technology's cable system passed
approximately 7,200 homes and served approximately 5,000 basic subscribers.
Taconic Technology's subscribers are located in eight towns in upstate New
York, all of which are situated in close proximity to our current cable systems
in the New England Cluster. We expect that the consummation of the Taconic
Technology acquisition will occur in the second quarter of 1999.
Hometown TV. In December 1998, we signed an agreement to acquire certain
assets of Hometown TV for approximately $0.5 million. As of March 31, 1999,
Hometown TV's cable systems passed approximately 700 homes and served
approximately 400 basic subscribers. We expect that the consummation of the
Hometown TV acquisition will occur in the third quarter of 1999.
The New England Cluster--Operations
The cable systems located in the New England cluster are situated in central
Massachusetts and western New England. The following chart sets forth certain
pro forma information relating to the cable systems located in the New England
cluster as of March 31, 1999, representing the cable systems acquired or to be
acquired by
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us in the AMRAC Clear View, Pegasus Cable Television, Taconic Technology and
Hometown TV acquisitions.
<TABLE>
<CAPTION>
Western
New England
Charlton/ Winsted, CT/
Central Belchertown/ Berkshire, MA/
Massachusetts Hadley Chatham, NY
------------- ------------ --------------
<S> <C> <C>
Homes passed............ 13,440 23,272
Basic subscribers....... 10,940 14,916
Basic penetration....... 88.4% 64.1%
Premium units........... 2,946 3,394
Premium penetration..... 26.9% 22.8%
Average monthly revenue
per basic subscriber... $36.08 $36.08
</TABLE>
The residential communities located within the New England cluster are
characterized by a growing middle class population base, close proximity to
urban centers, and limited off-air reception of local broadcast channels. The
majority of the New England cluster's central Massachusetts systems are located
within a 30 to 60 minute driving radius of Springfield and Worcester, the
second and third largest cities in Massachusetts. More than 10 colleges and
universities are located within the immediate vicinity of the
Charlton/Belchertown/Hadley area, including the University of Massachusetts,
Amherst College and Smith College. The western New England systems are
comprised of systems located in Connecticut, Massachusetts and New York. The
Winsted system, which is located in the affluent area of Litchfield County,
serves seven communities located approximately 30 miles west of Hartford,
Connecticut. The Chatham system, which is located in eastern New York, and the
Berkshire system, which is located in western Massachusetts, are located
approximately 15 miles from each other and approximately 30 miles southeast of
Albany, New York.
Giving effect to the Taconic Technology and Hometown TV acquisitions, as of
March 31, 1999, approximately 16% of our cable plant in the New England cluster
is 330 MHz (40 analog channels) or less. Over the next three years, we expect
to invest approximately $3 million to complete our capital plan for the New
England cluster. Pursuant to our capital plan, we intend to deploy a fiber
optic network in Charlton, Massachusetts, rebuild approximately 90 miles of
cable plant in Winsted, the most densely populated area in the New England
cluster, and upgrade the Belchertown cable plant. After the completion of our
planned upgrades, all of the New England cluster's cable systems will have a
bandwidth capacity of at least 450 MHz (60+ analog channels). In addition, as
part of our consolidation effort, we plan to eliminate three of the New England
cluster's seven headends within two years after the closing of the Taconic
Technology acquisition.
In the majority of the systems in the New England cluster, we offer a single
level of basic service containing all off-air broadcast channels and certain
satellite delivered programming at an average price of $32.55 per month. In the
remaining systems, we offer tiers of basic cable television programming at an
average price of $10.70 per month for off-air broadcast channels and $18.25 per
month for satellite delivered programming. A limited number of systems offer an
additional package of 10 channels which include news, sports and other
specialized programming not otherwise included in the basic tiers. We plan to
reconfigure these programming packages to accommodate customer preferences and
to add additional tiered programming and premium channels as we complete our
capital plan for the New England cluster.
We believe that significant opportunities exist in the New England cluster
to increase revenue per subscriber and eliminate certain costs. We believe that
the cable systems located in the New England cluster did not aggressively
market their services prior to our acquisition of them. Through the aggregation
of the acquisitions that comprise the New England cluster, we will be able to
consolidate operations, including office space, personnel and headends. We plan
to institute new channel launches, rate increases and marketing programs, in
conjunction with increased system capacity in the majority of the New England
systems by the end of 1999.
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Programming
We have various contracts to obtain basic, satellite and premium programming
for our cable systems from program suppliers, including, in limited
circumstances, some broadcast stations, with compensation generally based on a
fixed fee per customer or a percentage of the gross receipts for the particular
service. Some program suppliers provide volume discount pricing structures
and/or offer marketing support. In addition, we are a member of the National
Cable Television Cooperative, a programming purchasing consortium consisting of
small to mid-sized multiple system cable operations and individual cable
systems serving, in the aggregate, approximately 8.5 million cable basic
subscribers as of March 31, 1999. Programming consortiums such as the National
Cable Television Cooperative help create efficiencies in securing and
administering programming contracts for small and mid-sized cable operators. We
do not have long-term programming contracts for the supply of a substantial
amount of our programming. In cases where we do have these contracts, they are
generally for a fixed period of time ranging from one to five years and are
subject to negotiated renewal. While our management believes that our relations
with our programming suppliers are generally good, the loss of contracts with
certain of our programming suppliers would have a material adverse effect on
our results of operations.
Our company, like most other cable television systems, offer our customers
various levels, or tiers, of cable service consisting of a combination of local
television stations including network affiliated, independent and public
television stations; a limited number of television signals from
"superstations" originating from distant cities:
. public, government and educational access channels; and
. various satellite-delivered, non-broadcast channels.
Our cable systems generally offer a basic tier of cable service consisting
of broadcast channels and certain satellite delivered programming. For an extra
monthly charge, our cable systems also offer one or more additional tiers of
cable services and per-channel premium satellite-delivered channels generally
providing feature films, live sports events, concerts and other special
entertainment features. The programming offered by our cable systems varies
depending upon each system's channel capacity, viewer interests and, in some
cases, franchise requirements.
We expect programming costs to increase in the ordinary course of our
business as a result of increases in the number of basic subscribers, increased
costs to purchase cable programming, expansion of the number of channels
provided to customers and contractual rate increases from programming
suppliers. We anticipate that programming costs may increase at rates beyond
historic levels, particularly for sports programming. For additional
information, please refer to the "Regulation--Copyright" section of this
prospectus.
Marketing, Customer Service and Community Relations
Our strategy is to promote and market aggressively and to expand cable
television services to increase revenues and revenues per subscriber by adding,
upgrading and retaining customers. In order to implement our strategy, we plan
to:
. introduce targeted marketing campaigns, including outbound tele-
marketing, direct mail, advertising and sponsorship of community based
events such as fairs and sports teams,
. use price promotions, such as installation specials, to attract new
subscribers,
. use premium channel promotions, such as free weekend premium channels and
a second premium channel at no charge for a limited period with a
subscription for another premium channel, to encourage existing basic and
premium subscribers to upgrade their services and
. use our customer service personnel's contacts with customers to upgrade
services.
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We believe that providing superior customer service is a key element to our
long-term success since the quality of customer service affects our ability to
retain customers. Accordingly, we have invested approximately $830,000 to
relocate the centralized customer call center used by Cable Michigan from a
site in Pennsylvania to a site within Michigan and to centralize the customer
service functions of our various operations in the New England cluster to our
regional office in Connecticut. We have staffed our Michigan customer service
center with well-trained customer service representatives and it offers 24-
hour, 7-day per week coverage to all of our customers in the Michigan cluster
on a toll-free basis. We designed our customer service center to handle a high
volume of incoming calls and to have an average call answer time below the 30
second FCC requirement. We have installed a software package that will allow
our customer service center to track call statistics ranging from average
answer time to the number of calls by type, as well as individual and group
performance statistics. This software has allowed us to respond to customer
service inquiries on a more efficient basis.
In the communities we serve, we believe that many customers prefer to
personally visit the local office to pay their bills or ask questions about
their service. As a result, we intend to maintain accessible local offices in
many of our service areas. We believe that local offices and local staffing
will increase the effectiveness of our customer relation efforts, community
relations endeavors and marketing campaigns. Additionally, we believe
familiarity with the communities we serve will allow us to customize our menu
of services and respective pricing to provide our customers with products that
are both diverse and affordable. Thus, we have seven local offices in the
Michigan cluster and the three local offices in the New England cluster.
Recognizing that strong governmental, franchise and public relations are
crucial to our overall success, we intend to undertake an aggressive initiative
to maintain and improve our working relationships with the governmental
entities within our franchise areas. We anticipate that our regional management
personnel will be required to meet regularly with local officials for the
purposes of keeping them advised of our activities within the communities,
receiving information and feedback on our standing with officials and customers
alike and ensuring that we maximize our growth potential in areas where new
housing development is occurring or where significant technical plan
improvements are underway. We also intend that our regional management
personnel, together with our corporate management personnel, will be
responsible for all franchise renewal negotiations as well as the maintenance
of our visibility through involvement in various community and civic
organizations and charities.
Technology
As part of our commitment to customer service, we seek to provide reliable,
high quality cable television services. As such, our primary objective with
respect to capital expenditures is to maintain, expand and upgrade our cable
plant to improve and expand our cable television services. Through the
implementation of our capital plan, we expect to expand channel capacity,
enhance signal quality, improve technical reliability and provide a platform to
develop high-speed Internet access. We believe that these technical
improvements and upgrades create additional revenue opportunities, enhance
operating efficiencies, improve franchising relations and increase customer
satisfaction. Before committing capital to upgrade a system, our management
team carefully assesses:
. subscribers' demand for more channels,
. upgrade requirements in connection with franchise renewals,
. the availability of competing technologies,
. the likely subscriber demand for other cable and broadband
telecommunications services,
. the cost effectiveness of any of these upgrades and
. the extent to which system improvements will increase the attractiveness
of the property to a future buyer.
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The tables below summarize our existing technical profile and our technical
profile including work in progress projects, in each case on a pro forma basis,
including all completed and pending acquisitions except the Galaxy American
Communications acquisition, as of March 31, 1999. We expect to complete our
technical profile work in progress projects by year end 1999.
<TABLE>
<CAPTION>
330 MHz or Less 400 to 450 MHz 550 MHz or Greater
(Approximately (Approximately (Approximately
40 Analog 60+ Analog 78+ Analog
Channels) Channels) Channels)
--------------- -------------- ------------------
<S> <C> <C> <C>
Existing Technical Profile
Michigan cluster:
Number of systems......... 57 25 17
Miles of plant............ 3,408 2,796 1,992
% miles of plant.......... 41.6% 34.1% 24.3%
New England cluster:
Number of systems......... 1 7 0
Miles of plant............ 197 1,012 0
% miles of plant.......... 16.3% 83.7% 0.0%
Total:
Number of systems......... 58 32 17
Miles of plant............ 3,605 3,808 1,992
% miles of plant.......... 38.3% 40.5% 21.2%
Technical Profile Including
Work-in-Progress Projects
Michigan cluster:
Number of systems......... 56 24 19
Miles of plant............ 3,140 2,405 2,766
% miles of plant.......... 37.8% 28.9% 33.3%
New England cluster:
Number of systems......... 1 7 0
Miles of plant............ 201 1,030 0
% miles of plant.......... 16.3% 83.7% 0.0%
Total:
Number of systems......... 57 31 19
Miles of plant............ 3,341 3,435 2,766
% miles of plant.......... 35.0% 36.0% 29.0%
</TABLE>
Over the next five years, we plan to spend approximately $76 million to
upgrade our existing systems and the systems we currently own, subject to
pending transactions. These capital expenditures, including the work in
progress reflected above, are expected to consist of:
. approximately $45 million to upgrade the bandwidth capacity of these
systems and to employ additional fiber in the related cable plant,
. approximately $16 million for ongoing maintenance and replacement, and
. approximately $15 million for installations and extensions to the related
cable plant required as a result of growth in our subscriber base.
Upon the completion of our planned upgrades, virtually all of the cable
plant included in these systems will have a bandwidth capacity of 450 MHz or
greater and approximately 85% will have a bandwidth capacity of 550 MHz or
greater.
We expect that our planned use of fiber optic technology as an alternative
to coaxial cable will play a major role in allowing us to consolidate headend
facilities and to reduce amplifier cascades, thereby improving picture quality,
system reliability and headend and maintenance expenditures. Fiber optic
strands are capable of carrying hundreds of video, data and voice channels over
extended distances without the extensive signal
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amplification typically required for coaxial cable. We anticipate that the
installation of fiber optic cable will allow us, within the next five years, to
consolidate from 80 headends in the Michigan cluster, excluding the number of
headends, to be acquired in the Galaxy American Communications acquisition, as
of March 31, 1999, on a pro forma basis, to approximately 75 headends,
excluding the number of headends to be acquired in the Galaxy American
Communications acquisition, and from eight headends in the New England cluster
as of March 31, 1999, on a pro forma basis, to approximately six headends.
We have been closely monitoring development in the area of digital
compression, a technology that enables cable operators to increase the channel
capacity of cable television systems by permitting a significantly increased
number of video signals to fit in a cable television system's existing
bandwidth. We believe that the utilization of digital compression technology in
the future could enable us to increase channel capacity in certain systems in a
cost efficient manner. Such utilization of digital compression would generally
be implemented as part of system upgrades, where some portion of the additional
analog channels would be allocated to additional tiers of cable services. The
use of digital compression also could expand the number and types of services
offered and enhance the development of current and future revenue sources.
For the cable industry, providing high-speed cable modems to residential and
business customers has recently become a viable source of additional revenue.
Cable modems provide Internet access at higher speeds and lower costs than the
technologies offered by other communication providers. For example, a 10
megabit cable modem provides Internet access at download speeds 350 times
faster than typical 28.8 kilobit dial-up phone modem connections. Cable
Michigan introduced cable-modem based Internet access in the Traverse City area
in 1998. Based on its success to date, we purchased assets of Novagate and
agreed to purchase Traverse Internet, a local ISP in the same market. We
believe that acquiring expertise from an incumbent ISP will allow us to offer
services in a more effective and timely manner. Based on our experience with
these acquisitions, we may seek to acquire additional ISPs.
Franchises
Cable television systems are constructed and operated under fixed-term non-
exclusive franchises or other types of operating authorities, (which we
collectively refer to as "franchises") that are granted by either local
governmental or centralized state 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;
. the maintenance of insurance and indemnity bonds; and
. the payment of fees to communities.
Certain provisions of these local franchises are subject to limits imposed
by federal law.
On a pro forma basis, as of March 31, 1999, we held 470 franchises in the
aggregate, consisting of approximately 449 in the Michigan cluster and
approximately 21 in the New England cluster. As of the same date, none of these
franchises would have accounted for more than 5% of our total revenues on a pro
forma basis. Many of these franchises require the payment of fees to the
issuing authorities of 3% to 5% of "gross revenues" (as defined by each
franchise agreement) from the related cable system. The Cable Communications
Policy Act of 1984 prohibits franchising authorities from imposing annual
franchise fees in excess of 5% of gross annual revenues and also permits the
cable television system operator to seek renegotiation and modification of
franchise requirements if warranted by changed circumstances that render
performance commercially impracticable.
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As indicated by the following chart, which was calculated on a pro forma
basis as of March 31, 1999 after giving effect to all completed and pending
acquisitions, our franchises expire at various points in time through the year
2019.
<TABLE>
<CAPTION>
Percentage
Percentage Number of of Total
Year of Franchise Number of of Total Basic Basic
Expiration Franchises Franchises Subscribers Subscribers
----------------- ---------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
1999-2001................ 60 13% 21,864 9%
2002 and after........... 410 87% 221,074 91%
--- --- ------- ---
Total.................... 470 100% 242,938 100%
=== === ======= ===
</TABLE>
The Cable Television Consumer Protection and Competition Act of 1992 and the
Cable Communications Policy Act of 1984 provide, among other things, for an
orderly franchise renewal process which limits a franchising authority's
ability to deny a franchise renewal if the incumbent operator follows
prescribed renewal procedures. In addition, these cable acts established
comprehensive renewal procedures which require, when properly elected by an
operator, that an incumbent franchisee's renewal application be assessed on its
own merits and not as part of a comparative process with competing
applications. For additional information, please refer to the "Regulation"
section of this prospectus.
Competition
As a cable television systems operator, we face competition from:
. alternative methods of receiving and distributing single and/or multiple
channels of video programming, including direct-to-the-home satellite
programming and off-air television broadcast programming;
. other sources of news, information and entertainment such as newspapers,
movie theaters, live sporting events, interactive online computer
services and home video products, including videotape cassette recorders;
and
. local exchange telephone companies and other well-financed businesses
from outside of the cable industry (such as the public and municipally
owned utilities that own certain of the poles on which cable is
attached), which are increasingly entering the business of providing
cable television services.
The extent to which we are competitive depends, in part, upon our 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.
Many of our present and potential competitors have substantially greater
resources than we do.
Congress has adopted legislation and the FCC has implemented regulations
which provide a more favorable operating environment for new and existing
technologies that provide, or have the potential to provide, substantial
competition to cable systems. For instance, the Cable Television Consumer
Protection and Competition Act of 1992 contains provisions, which the FCC has
implemented with regulations, that enhance the ability of cable competitors to
purchase and make available to home satellite dish owners certain satellite
delivered cable programming at competitive costs. In addition, the FCC adopted
regulations that 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 covenants, homeowners' association
rule, lease, or similar restriction on property within the exclusive use or
control of the antenna user.
As a result of the legislation and regulations, we presently face
competition from, among others, satellite services whereby signals are
transmitted by satellite to receiving facilities located on customer premises.
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Programming is currently available to the owners of satellite dishes through
conventional, medium and high-powered satellites. Satellite systems generally
provide movies, broadcast stations and other program services similar to those
provided by cable television systems, although some satellite services offer a
greater number of channels and programming packages than are available through
cable television systems. Satellite service known as direct broadcast satellite
service can be received anywhere in the continental United States through
installation of a small rooftop or side-mounted antenna. This technology has
the capability of providing more than 100 channels of programming over a single
high-powered satellite with significantly higher capacity if multiple
satellites are placed in the same orbital position. Direct broadcast satellite
is currently being heavily marketed on a nationwide basis by three direct
broadcast satellite providers, and a fourth company is also proposing to
provide direct broadcast satellite services over multiple satellites. Announced
acquisitions may consolidate all direct broadcast satellite spectrum and assets
into the two dominant direct broadcast satellite providers. Direct broadcast
satellite providers provide significant competition to us and other cable
service providers. Legislation pending before Congress may substantially remove
the legal obstacles to direct broadcast satellite delivery of local and distant
broadcast signals.
The digital satellite service offered by direct broadcast satellite systems
has certain advantages over cable systems with respect to programming and
digital quality. By upgrading our systems and using digital compression
technology, we expect to be able to offer expanded programming choices and
services, more channels and better picture quality, allowing us to compete more
effectively with direct broadcast satellite systems. Furthermore, direct
broadcast satellite does suffer certain significant operating disadvantages
compared to cable television, including the subscriber's present difficulty in
viewing different programming on more than one television set, line-of-sight
reception requirements, up-front costs associated with the dish antenna and the
lack of local programming. Direct broadcast satellite providers currently face
technical and legal obstacles to providing broadcast signals, although certain
direct broadcast satellite providers currently provide local and distant
broadcast signals in certain major markets. The FCC has recently adopted
regulations that may reduce the impact of the existing legal obstacles direct
broadcast satellite providers face with respect to these services.
Cable television systems generally operate under franchises granted on a
non-exclusive basis, so that more than one cable television system may be built
in the same area (known as an "overbuild"), with potential loss of revenue to
the operator of the original system. It is possible that a franchising
authority might grant a second franchise to another company containing terms
and conditions more favorable than those afforded to us. The Cable Television
Consumer Protection and Competition Act of 1992 prohibits franchising
authorities from unreasonably denying requests for additional franchises and
does not prevent franchising authorities from operating cable systems. Well-
financed businesses from outside the cable industry may compete with us for
franchises or provide competing services. Potential competitors include the
public and municipally owned utilities that own certain of the poles on which
cable is attached. Certain municipal power companies have been considering
building new video networks to compete with us within the areas where they
deliver power. Overbuilds historically have been relatively rare, as
constructing and developing a cable television system is capital-intensive, and
it is difficult for the new operator to gain a marketing advantage over the
incumbent operator. Nonetheless, on a pro forma basis as of March 31, 1999,
less than 5% of homes passed by our Michigan cluster have been overbuilt and
none of the homes passed by our New England cluster have been overbuilt. We
believe that our systems are less likely to be overbuilt than those of many
other operators because our targeted markets have lower population densities.
We also compete with local exchange telephone companies. The
Telecommunications Act of 1996 makes it easier for local exchange carriers and
others to provide a wide variety of video services and to provide multichannel
video programming services to subscribers. Various local exchange carriers
currently are providing multi-channel video programming within and outside
their telephone service areas through a variety of distribution methods. Such
distribution methods include both the deployment of broadband wire facilities
and the use of wireless terrestrial transmission facilities. In addition,
certain local exchange carriers may not be required, under certain
circumstances, to obtain local franchises to deliver these video services or to
comply with the variety of obligations imposed upon cable systems under these
franchises. As a result, cable systems
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could be placed at a competitive disadvantage if the delivery of video services
by local exchange carriers becomes widespread. Issues of cross-subsidization by
local exchange carriers of video and telephony services also pose strategic
disadvantages for cable operators seeking to compete with local exchange
carriers which provide video services. Ameritech Corporation has obtained cable
television franchises in southeastern Michigan and has overbuilt some cable
operators thereby creating a competitive environment. To date, Ameritech has
not applied for cable franchises in the areas served by us, including after
giving effect to the pending Michigan acquisitions. We cannot predict the
likelihood of success of video service ventures by local exchange carriers or
their impact on us.
We face additional competition from private satellite master antenna
television systems. Satellite master antenna television systems offer both
improved reception of local television stations and many of the same satellite-
delivered programming services offered by franchised cable television systems.
Satellite master antenna television operators often enter into exclusive
agreements with building owners or homeowners' associations to provide cable
programming to condominiums, apartments, office complexes and private
residential developments. Cable operators are, therefore, generally required to
obtain the approval of the building owners or homeowners' associations to
provide cable programming. However, some states have enacted laws to provide
franchised cable systems access to such private complexes and the Cable
Communications Policy Act of 1984 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. The Telecommunications Act of 1996 broadens the definition of
satellite master antenna television systems not subject to regulation as a
franchised cable television service. A July 1998 FCC decision allowed satellite
master antenna televisions to interconnect facilities using common carrier
facilities located in public rights of way without obtaining cable television
franchises. This decision could spur growth of satellite master antenna
television systems. In addition, some companies are developing and/or offering
packages of telephony, data and video services to these private residential and
commercial developments.
We also compete with wireless terrestrial program distribution services such
as multipoint, multichannel distribution service which use low-power microwave
frequencies to transmit video programming over-the-air to subscribers. There
are multipoint, multichannel distribution service operators who are authorized
to provide or are providing broadcast and satellite programming to subscribers
in areas in the Michigan cluster and the New England cluster. Additionally, the
FCC recently adopted new regulations allocating frequencies in the 28-GHz band
for a new multichannel wireless video service similar to multipoint,
multichannel distribution service. We are unable to predict whether wireless
terrestrial 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. Pursuant to
the Telecommunications Act of 1996, the FCC adopted regulations and policies
for the issuance of licenses for digital television to incumbent television
broadcast licensees. Digital television 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
and subscription video. In July 1998, the FCC commenced a rulemaking to
determine the extent to which cable operators will be required to carry these
digital signals. 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. Local
exchange carriers 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 communication systems. Personal communication systems 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,
we cannot predict the effect that ongoing or future
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developments might have on the cable television industry or on our operations.
As other companies begin to provide cable television services, we will face
additional competitors, many of which will have substantially greater resources
than we have.
Employees
As of March 31, 1999, we had a total of approximately 346 employees.
Approximately 20 of our employees located in Michigan are represented by labor
unions or trade councils. We have experienced no work stoppages and believe
that our employee relations are good and will continue to be so after the
closing of the pending acquisitions.
Properties
A cable television system consists of three principal operating components.
The first component is the signal reception processing and originating point
called a "headend." The headend receives television, cable programming service,
radio and data signals that are transmitted by means of off-air antennas,
microwave relay systems and satellite earth systems. Each headend includes a
tower, antennae or other receiving equipment at a location favorable for
receiving broadcast signals and one or more earth stations that receives
signals transmitted by satellite. The headend facility also houses the
electronic equipment which amplifies, modifies and modulates the signals,
preparing them for passage over the system's network of cables. The second
component of the system is the distribution network. The distribution network
originates at the headend and extends throughout the system's service area. A
cable system's distribution network consists of microwave relays, coaxial or
fiber optic cables placed on utility poles or buried underground and associated
electronic equipment. See the "Regulation--Pole Attachment" section of this
prospectus. The third component of the system is a "drop cable," which extends
from the distribution network into each customer's home and connects the
distribution system to the customer's television set.
We own and lease parcels of real property for signal reception sites
(antenna towers and headends), microwave complexes and business offices,
including our principal executive offices. In addition, we own our cable
systems' distribution networks, various office fixtures, test equipment and
certain service vehicles. We will also acquire additional property in the
pending acquisitions. The physical components of our cable systems require
maintenance and periodic upgrading to keep pace with technological advances. We
believe that our properties, including those to be acquired in the pending
acquisitions, both owned and leased, are in good condition and are suitable and
adequate for our business operations.
Legal Matters
In connection with the acquisition of Mercom, former shareholders of Mercom
constituting approximately 16.5% of all outstanding Mercom common shares gave
notice of their election to exercise appraisal rights as provided by Delaware
law. We and the companies we plan to acquire are currently party to various
legal proceedings. In addition, we expect that in the future we will have
various legal proceedings outstanding in the normal course of business. Our
management anticipates that these proceedings will not have a material adverse
effect on our results of operations or our financial condition.
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REGULATION
Overview
We face regulation from federal, state and local governments because we own
and operate cable television systems. Most of the federal laws governing our
cable systems arise from the Cable Communications Policy Act of 1984, the Cable
Television Consumer Protection and Competition Act of 1992 and the
Telecommunications Act of 1996. These statutes amended the federal
Communications Act of 1934 and added provisions specific to cable television.
Many of the cable television provisions of the Communications Act require the
FCC to adopt and enforce regulations. The FCC has done so and regulates many
aspects of our cable systems and our business. Local franchise authorities also
regulate our cable systems through local cable franchise agreements and
ordinances and, in some municipalities, through the local rate regulation
process. In some jurisdictions, state agencies also regulate our cable systems.
The substantial regulation of our cable systems adds additional costs and risks
to our business.
We provide in this section a summary of federal laws and regulations that
could materially affect our cable systems and the cable industry. We also
describe certain state and local laws.
Rate regulation
Rate regulation under the Cable Television Consumer Protection and
Competition Act. The Cable Television Consumer Protection and Competition Act
establishes cable rate regulation at two levels. Local franchise authorities
can obtain authority to regulate rates for equipment and basic service (the
lowest tier of service usually including broadcast signals, public access
programming and some cable satellite services). The FCC regulates rates for
cable programming services tiers, typically the next levels of cable service
after basic service. The Cable Television Consumer Protection and Competition
Act directs the FCC to promulgate regulations to govern the rate regulation
process at both the federal and local level. The Cable Television Consumer
Protection and Competition Act also deregulates rates for any cable system
subject to effective competition, meaning that the cable system faces specified
thresholds of competition in their franchise areas. Generally, the rate
regulation process imposes substantial administrative burdens and costs on
regulated systems and reduces cable rate increases. Rate regulation has forced
some cable systems to reduce rates and make refunds to subscribers.
Changes under the Telecommunications Act of 1996. The Telecommunications Act
of 1996 makes several significant changes to cable rate regulation. The
Telecommunications Act of 1996:
. deregulates rates for cable programming services tiers after March 31,
1999;
. deregulates all rates for certain small cable systems;
. allows non-predatory, bulk discount rates for service to commercial
residential developments;
. allows aggregation of costs for regulated equipment rates at the
franchise, system, regional or company level;
. eliminates individual subscriber rate complaints to the FCC;
. authorizes local franchise authorities to file complaints with the FCC
concerning cable programming services tier rates after receiving multiple
subscriber complaints within prescribed time frames; and
. permits certain cable operators to include prior year losses occurring
before September 1992 in rate calculations.
The changes to cable rate regulation resulting from the Telecommunications
Act of 1996 provide cable systems some relief from the administrative burdens
and costs of rate regulation.
FCC regulations. Following the Cable Television Consumer Protection and
Competition Act, the FCC adopted detailed regulations governing cable service
and equipment rates and the rate regulation process. Those
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regulations have undergone significant changes since 1993. The FCC will likely
continue to modify its rate regulations. Principal components of FCC rate
regulation include:
. Benchmark method. Cable systems subject to rate regulation can use the
FCC's benchmark method to set rates. In 1994, the FCC's benchmark
regulations required operators to implement rate reductions of up to 17%
for regulated services. Cable systems can adjust benchmark rates under
the FCC's comprehensive and restrictive regulations allowing quarterly or
annual increases or decreases for changes in the number of regulated
channels, inflation and increases in certain costs.
. Cost-of-service method. Cable operators subject to rate regulation can
elect to use the FCC's cost-of-service method to set rates. Cost-of-
service permits a cable operator to set rates higher than permitted under
the benchmark method, if costs allowable under the FCC regulations
support the higher rate. The cost-of-service method generally requires
more administrative and professional resources for a cable system. The
FCC cost-of-service rules also require exclusion from the rate base up to
one-third of acquisition costs attributed to tangible and intangible
assets related to providing regulated cable service. The FCC's cost-of-
service regulations also presume an industry-wide 11.25% after tax rate
of return on an operator's allowable rate base. The FCC has initiated a
rulemaking to consider using an operator's actual debt cost and capital
structure for cost-of-service calculations.
. Small cable system abbreviated cost-of-service method. In 1995, the FCC
adopted for qualified small systems a generally less restrictive and more
streamlined method to compute regulated rates.
. Equipment rate regulation. Where franchising authorities have the
authority to regulate basic service rates, they may also regulate the
rates for additional outlets, installation, and subscriber equipment used
to receive the basic cable service tier, such as converter boxes and
remote control units. FCC regulations require franchising authorities to
regulate these rates on the basis of actual cost plus a reasonable
profit, as defined by the FCC.
The FCC currently has several changes to its rate regulations under
consideration. We cannot predict the impact of any changes on our cable
systems.
Current rate regulation status of our cable systems. In many of the
communities where we provide cable service and in many of the systems we plan
to acquire, local franchising authorities actively regulate rates for basic and
related services. At the FCC, it remains possible that complaints remain
pending against cable programming services tier rates charged by some of our
cable systems and by some of the cable systems we propose to acquire. In
addition, a franchising authority has filed a petition for special relief
relating to our limited tier of programming.
The FCC has ordered reductions in certain cable programming services tier
rates charged by Cable Michigan. The FCC based those decisions, in part, on the
finding that Cable Michigan did not qualify for small cable system rate relief
under the FCC's 1995 small system rules. The FCC concluded that Cable Michigan
did not qualify as a "small system" because all affiliated companies served
more than 400,000 subscribers (due to RCN Corporation's investment in Mexican
cable systems). Cable Michigan challenged those decisions on the basis that
certain of its systems should qualify as "small cable systems" under the FCC's
rules, or, in the alternative, that its rates are justified under the FCC's
benchmark method. On July 15, 1998, the FCC permitted Cable Michigan to
withdraw its challenge of the FCC's decision. Because Cable Michigan is no
longer affiliated with RCN Corporation, we anticipate that certain of our
smaller systems will qualify as small cable systems.
"Anti-Buy Through" Provisions
The Cable Television Consumer Protection and Competition Act requires cable
systems to permit subscribers to purchase video programming 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. Cable systems without the
technological capability to offer programming in this manner benefit from a
statutory exemption. The
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exemption is available until a cable system obtains the technological
capability, but not later than December 2002. The FCC may also issue waivers.
We expect that our systems will comply with this requirement by the December
2002 deadline.
Broadcast Signal Carriage--Must-Carry and Retransmission Consent
Must-carry. The Cable Television Consumer Protection and Competition Act and
FCC regulations impose substantial restrictions on carriage of broadcast
signals by cable systems. The regulations allow local commercial television
broadcast stations to request mandatory carriage on a cable system ("must-
carry"), subject to certain exceptions. A cable system must devote up to one-
third of its activated channel capacity for the carriage of local commercial
television stations. If a cable operator declines to carry a local broadcast
station requesting must-carry, the broadcaster may file a complaint with the
FCC. If the FCC finds that the broadcast station qualifies for must-carry, the
FCC will order the cable system to commence carriage. Local non-commercial
television stations and certain low power television stations also have
mandatory carriage rights. In March 1997, the U.S. Supreme Court upheld the
constitutionality of the Cable Television Consumer Protection and Competition
Act's must-carry requirements.
On July 9, 1998, the FCC initiated a rulemaking to consider the
requirements, if any, for mandatory carriage of digital television signals. We
cannot predict the ultimate outcome of this rule making or the impact of new
carriage requirements on our cable systems or our business.
Retransmission consent. Local broadcast stations can also elect carriage by
retransmission consent. This means that the cable system cannot carry the
broadcast signal unless first obtaining the broadcaster's consent in writing.
Some broadcast stations have withheld consent unless the cable operator pays
for carriage or provides other consideration. Additionally, cable systems must
obtain retransmission consent for all other commercial television stations
carried on the cable system, except for certain superstations. Similarly,
federal law requires retransmission consent for carriage of commercial radio
stations and certain low-power television stations.
Access Channels
Public, Educational and Governmental Access. Federal law permits franchising
authorities to obtain channel capacity on our cable systems for public,
educational and governmental access programming. When required by a local
franchise authority, we must provide access channel capacity at no charge.
Local franchise authorities may also require us to purchase public, educational
and governmental access equipment and pay other public, educational and
governmental access related expenses. We have no direct editorial control over
programming cablecast on public, educational and governmental channels, except
that we must prohibit obscene programming.
Commercial leased access. Federal law also requires our cable systems to
designate a portion of channel capacity for commercial leased access.
Commercial leased access programmers can request channel capacity from us and
provide programming that may compete with other services we offer. The FCC
regulates commercial leased access rates, terms and dispute resolution. Cable
operators may prohibit or limit the provision of indecent programming on leased
access channels.
Local Franchise Procedures
Federal law. The Communications Act governs several aspects of the local
cable franchise process that directly impact our cable systems. Principal
franchise-related provisions of federal law include:
. A cable system may not operate without a local franchise.
. Local franchise authorities may grant one or more cable franchises and
may not unreasonably deny an application for a competitive franchise.
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. A municipality may operate its own cable system without a franchise.
. In granting or renewing franchises, state and local authorities may
establish requirements for cable-related facilities and equipment, but
not for specific video programming or information services.
. Local franchise authorities can require payments of franchise fees of 5%
of gross revenues derived from the operation of the cable system to
provide cable services. Our franchises and the franchises to be acquired
in the pending acquisitions typically provide for periodic payment of
fees to franchising authorities of 3% to 5% of gross revenues. Federal
law permits us to pass franchise fees on to subscribers.
. Local franchise authorities can require cable operators to construct and
maintain institutional networks as a condition of a franchise grant or
renewal.
. A cable operator can petition for modification of franchise requirements
by the franchise authority or judicial action if warranted by changed
circumstances.
The Telecommunications Act of 1996 imposed additional controls on the local
cable franchise process. The Telecommunications Act of 1996 generally prohibits
franchising authorities from:
. Imposing requirements in the cable franchising process that require,
prohibit or restrict the provision of telecommunications services.
. Imposing franchise fees on revenues derived by the operator from
providing telecommunications services over its cable system.
. Restricting a cable operator's use of any type of subscriber equipment or
transmission technology.
Cable franchise renewals and transfers. The Communications Act contains
renewal procedures and transfer procedures designed to protect cable operators
against arbitrary denials of renewal or transfer. Still, the cable franchise
renewal and transfer processes remain risky and potentially costly. 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 or consent to transfer.
Cable franchises and cable-based Internet services. We are planning to offer
cable-based Internet access and other information services on our systems. The
regulatory status of such services remains uncertain. In September 1998, the
FCC's Cable Services Bureau issued a discussion paper analyzing the regulatory
classification of Internet and other information services. The paper identified
three likely classifications:
. as cable services;
.as telecommunications services; or
.as information services that are currently unregulated.
The ultimate classification of cable-based Internet services under federal law
could have significant impact on the regulation of these services, the ability
of competitors to use the cable plant and the authority to provide these
services under existing franchises. Until the FCC or Congress provides further
guidance, we cannot gauge the impact, if any, such classifications would have
on us or our business.
Inside Wiring Rules
The Cable Television Consumer Protection and Competition Act directed the
FCC to prescribe regulations governing the disposition of inside wiring after a
customer terminates service. In a series of rulemakings and orders, with the
most recent order issued in October 1997, the FCC developed regulations that
limit a cable operator's right to control inside wiring after a subscriber
terminates service or after a multiple dwelling unit owner terminates the cable
operator's rights to access the multiple dwelling unit.
After a subscriber terminates service or a multiple dwelling unit owner
terminates access rights, the regulations generally require the cable operator
to offer its inside wiring for sale to the subscriber or to the
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multiple dwelling unit owner at replacement cost or a negotiated price. If the
cable operator does not sell the inside wiring within a specified period after
termination of service or access rights, then the cable operator must remove
the wiring. If the cable operator neither sells nor removes its wiring, the
wiring is deemed abandoned. A competing provider can then use the inside wiring
to provide service to the individual subscriber or to the multiple dwelling
unit. These regulations increase our risk that a competitor can gain access to
inside wiring after termination of service by a subscriber or termination of
access rights by a multiple dwelling unit owner.
The FCC has also issued a further notice of proposed rulemaking on other
inside wiring issues including possible restrictions on exclusive multiple
dwelling unit contracts and the applicability of the inside wiring rules to all
video providers, not just cable operators. We cannot predict the ultimate
outcome of this rulemaking or its impact on our cable systems.
Ownership Limitations
Horizontal ownership limits. Under the Cable Television Consumer Protection
and Competition Act, the FCC adopted rules prescribing national subscriber
limits. A federal court found the statutory limitation unconstitutional and the
FCC stayed enforcement of its rules. On June 26, 1998, the FCC released an
order on reconsideration of its horizontal ownership rules, although it did not
lift its stay of those rules. In that order, the FCC denied petitions
requesting that it lower its horizontal ownership limits. The FCC has recently
sought comments on whether to change the definition of ownership that
constitutes a cognizable interest in a cable system. The results of these
proceedings could affect all ownership prohibitions.
Affiliated programmer limits. The Cable Television Consumer Protection and
Competition Act requires the FCC to adopt limits on the number of channels on
which a cable operator can carry programming provided by an affiliated video
programmer.
Changes to broadcast cross-ownership restrictions. The Telecommunications
Act of 1996 eliminated 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 directed the FCC to review its broadcast/cable
ownership restrictions. Upon review, the FCC eliminated its regulatory
restriction on cross-ownership of cable systems and national broadcasting
network stations. The FCC has also released a notice of inquiry seeking comment
on all of the broadcast ownership rules not already under review in other
proceedings.
Changes to satellite master antenna television and MMDS cross-ownership
restrictions. In January 1995, the FCC relaxed its restrictions on ownership of
satellite master antenna television systems. The revised rules permit a cable
operator to acquire satellite master antenna television systems in the
operator's existing franchise area so long as the programming services provided
through the satellite master antenna television system are offered according to
the terms of the cable operator's local franchise agreement. The
Telecommunications Act of 1996 provides that the cable/satellite master antenna
television and cable/multipoint, multichannel distribution service cross-
ownership rules do not apply in any franchise area where the operator faces
effective competition.
Competition with Local Exchange Carriers
The Telecommunications Act of 1996 makes significant changes to the
regulation of local exchange carriers that provide cable services. The
Telecommunications Act of 1996:
. Eliminates the requirement that local exchange carriers obtain Section
214 approval from the FCC before providing video services in their
telephone service areas.
. Removes the statutory telephone company/cable television cross-ownership
prohibition, allowing local exchange carriers to offer video services in
their telephone service areas.
. Permits local exchange carriers to provide service as franchised cable
operators or as "open video system" operators. As an open video system
operator, a local exchange carrier may face less
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burdensome local regulation but must comply with other conditions
including setting aside up to two-thirds of their channel capacity for use
by unaffiliated program distributors.
. Prohibits a local exchange carrier from acquiring an existing cable
system in its telephone service area except in limited circumstances.
The changes to regulation of local exchange carrier ownership of cable
systems increases the risk to our cable systems that local exchange carriers
will seek to compete in our franchise areas.
While the Telecommunications Act of 1996 facilitates the entry of local
exchange carriers into cable markets, it also opens the local exchange markets
to competition. The Telecommunications Act of 1996 removes barriers to entry
into the local telephone exchange market by preempting state and local laws
that restrict competition and by requiring all local exchange carriers to
provide nondiscriminatory access and interconnection to potential competitors,
including cable operators, wireless telecommunications providers and long
distance companies.
Regulations promulgated by the FCC under the Telecommunications Act of 1996
require local exchange carriers 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
can interconnect with incumbent local exchange carriers to provide local
exchange services. Numerous parties appealed certain aspects of these
regulations. In a recent decision, the United States Supreme Court largely
upheld the FCC's interconnection regulations, including those related to
certain pricing and access issues. Despite the need to resolve other
outstanding issues, the Court's decision suggests promise for competition in
local exchange services.
Pole Attachments
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. State authorities can assume this role through a FCC
certification process. In the absence of state regulation, the FCC regulates
pole attachment rates according to a formula that allocates costs between the
pole owner and pole users. In some cases, utility companies have increased pole
attachment fees for cable systems that have installed fiber optic cables for
distribution of telecommunications services and other non-cable 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. The FCC has also concluded that regulated pole owners cannot
impose disparate attachment rates based on the type of service provided.
The Telecommunications Act of 1996 and the FCC's implementing regulations
make significant changes to pole attachment regulation. Changes include:
. Requiring regulated pole owners to provide cable systems and
telecommunications carriers with nondiscriminatory access to any pole,
conduit or right-of-way controlled by the utility.
. New regulations to govern the rates for pole attachments used by
companies providing telecommunications services, including cable
operators.
. New rate regulations go into effect in February 2001. Any increase will
be phased in through equal annual increments over a period of five years
beginning in February 2001.
Although the FCC has issued its regulations, they are subject to changes on
reconsideration or appeal. Some issues that may affect the ultimate rates for
telecommunications attachments to utility poles remain outstanding.
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Other Statutory Provisions
Other federal law potentially impacting our cable systems or our business
include:
Transactions with affiliated programmers. The Communications Act and FCC
regulations prohibit any satellite video programmer affiliated with a cable
company from favoring an affiliated company over competitors. A satellite video
programmer affiliated with a cable company must sell its programming to
unaffiliated multichannel video distributors on nondiscriminatory terms. These
provisions restrict the ability of program suppliers affiliated with cable
companies to offer exclusive programming arrangements to their affiliates.
Content regulation. The Telecommunications Act of 1996 required 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 defined by the FCC as the hours between 10 p.m. and 6 a.m. The
U.S. Supreme Court recently ruled that these restrictions are unconstitutional.
The Telecommunications Act of 1996 also contains provisions regulating the
content of video programming and computer services. Specifically, the 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.
Under the Telecommunications Act of 1996, the television industry recently
adopted a voluntary ratings system for violent and indecent video programming.
The Telecommunications Act of 1996 also requires all new television sets to
contain a so-called "V-chip" capable of blocking all programs with a given
rating.
Miscellaneous Telecommunications Act of 1996 provisions. The
Telecommunications Act of 1996 modifies several other cable-related statutory
provisions including those governing technical standards, equipment
compatibility, subscriber notice requirements and program access. The
Telecommunications Act of 1996 also repeals the three-year anti-trafficking
prohibition adopted in the Cable Television Consumer Protection and Competition
Act. FCC regulations implementing the Telecommunications Act of 1996 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, lease, 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, cable-related FCC
regulations govern other aspects of our cable systems and our business
including:
. signal leakage,
. equal employment opportunity,
. syndicated program exclusivity,
. network program non-duplication,
. registration of cable systems,
. maintenance of records and public inspection files,
. microwave frequency usage,
. lockbox availability,
. sponsorship identification,
. antenna structure notification, marking and lighting,
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. carriage of local sports broadcast programming,
. political broadcasts and advertising,
. advertising contained in non-broadcast children's programming,
. consumer protection and customer service,
. technical standards,
. consumer electronics equipment compatibility,
. closed captioning, and
. emergency alert systems.
The FCC has the authority to enforce its regulations through cease and
desist orders, substantial fines and other administrative sanctions including
the revocation of FCC licenses needed to operate certain transmission
facilities used in connection with cable operations.
Over the past several years, Congress and other governmental bodies have
considered bills and administrative proposals related to cable television.
Other legislative and administrative proposals regulating cable television will
likely continue to come before lawmakers and administrative agency.
Copyright
The Copyright Act requires cable television systems to obtain a compulsory
copyright license covering the retransmission of television and radio broadcast
signals. In exchange for filing periodic reports and paying a percentage of
revenues to a federal copyright royalty pool, cable systems obtain a compulsory
license to retransmit the copyrighted material on broadcast signals. Congress
and the Copyright Office have considered possible changes to, or elimination
of, the compulsory copyright license. The elimination or substantial
modification of the cable compulsory license could adversely affect our ability
to obtain suitable programming and could substantially increase the cost of
programming available for distribution to our subscribers. We cannot predict
the outcome of this activity.
Cable operators distribute programming and advertising that use music
controlled by three primary performing rights organizations, the American
Society of Composers, Authors and Publishers, Broadcast Music, Inc. and the
Society of European Stage Authors and Composers. 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 music controlled by the
American Society of Composers, Authors and Publishers. American Society of
Composers, Authors and Publishers and cable industry representatives have met
to discuss the development of a standard licensing agreement covering music
controlled by the American Society of Composers, Authors and Publishers in
local origination and access channels and pay-per-view programming. We cannot
predict the ultimate outcome of these industry negotiations or the amount of
any license fees required for past and future use of music controlled by the
American Society of Composers, Authors and Publishers. We do not believe such
license fees will materially impact our financial position, results of
operations or liquidity. The same U.S. District Court for the Southern District
of New York recently established a special rate court for Broadcast Music, Inc.
Broadcast Music, Inc. and cable industry representatives recently concluded
negotiations for a standard licensing agreement covering the performance of
Broadcast Music, Inc. 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. The Society of European Stage
Authors and Composers and cable industry representatives have agreed on an
interim licensing plan pending adoption of a standard licensing agreement.
State and Local Regulation
Because our cable systems use local streets and rights-of-way, state and
local governments regulate many aspects of our business, typically through the
cable franchise process. Generally, a municipality will grant a cable system a
non-exclusive franchise to occupy the streets and rights-of-way to operate a
cable system, subject to the terms of the franchise. Most franchises specify
terms of between 5 and 15 years, subject to earlier termination for material
noncompliance. The terms and conditions of franchises vary materially from
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jurisdiction to jurisdiction. Most franchises contain 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
similar to that of a public utility. We expect other states to increase
regulation of cable television. Currently, Connecticut, Massachusetts and New
York use centralized authorities for some or all aspects of cable regulation.
Michigan does not currently have a centralized authority for cable television
regulation. State and local authority under cable franchises remains subject to
federal law.
We have not described 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, legislative initiatives (including active
legislation) and administrative proposals which could change, in varying
degrees, the manner in which cable television systems operate. We cannot
predict the outcome of these proceedings or the impact upon us or the cable
television industry.
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MANAGEMENT
Executive Officers, Managers and Directors
Each of the issuers is an indirect subsidiary of, and is controlled by,
Avalon Cable Holdings. Avalon Cable Holdings is a limited liability company
whose affairs are governed by a Board of Managers. The following table sets
forth certain information, as of March 15, 1999, with respect to the executive
officers and managers of Avalon Cable Holdings. Each of Avalon Cable Holdings'
managers is also a manager of Avalon Cable LLC and a director of Avalon Cable
Holdings Finance, Inc. The executive officers of each of the issuers are
substantially similar to the executive officers of Avalon Cable Holdings. The
election of the managers is subject to the terms of the Members Agreement of
Avalon Cable LLC described below. For additional information, please refer to
the "Certain Relationships and Transactions--Members Agreement" section of this
prospectus.
<TABLE>
<CAPTION>
Name Age Position and Offices
---- --- --------------------
<S> <C> <C>
David W. Unger.......... 43 Chairman of the Board
Joel C. Cohen........... 54 President, Chief Executive Officer, Secretary and Manager
Peter Polimino.......... 41 Vice President--Finance
Peter Luscombe.......... 41 Vice President--Engineering
John F. Dee............. 39 General Manager of New England Operations
Mark Dineen............. 34 General Manager of Michigan Operations
Jay M. Grossman......... 39 Manager, Vice President and Assistant Secretary
Peggy J. Koenig......... 41 Manager, Vice President and Assistant Secretary
Royce Yudkoff........... 43 Manager
</TABLE>
The following sets forth certain biographical information with respect to
the executive officers and managers of Avalon Cable Holdings.
David W. Unger has been the Chairman of the Board of Avalon Cable Holdings
since 1997 when he co-founded Avalon Cable Holdings. Since 1995, Mr. Unger has
invested in, operated and sold communications businesses. Prior to 1995, Mr.
Unger worked for Communications Equity Associates, Teleprompter Corp., TKR
Cable Co. and as an investment banker. In addition to his duties to Avalon, Mr.
Unger serves as Vice President of Muzak LLC, a provider of commercial
background and foreground music. ABRY is the principal investor in Muzak. Mr.
Unger is a director of Muzak.
Joel C. Cohen has been the President, Chief Executive Officer, Secretary and
a Manager of Avalon Cable Holdings since 1997 when he co-founded Avalon Cable
Holdings. From 1996 to 1997, Mr. Cohen served as the Chief Financial Officer of
Patient Education Media, Inc. and as a consultant to various cable companies.
From 1992 to 1996 Mr. Cohen served as a director and as both Chief Operating
Officer and Chief Financial Officer for Harron Communications Corp., a cable
and broadcast television operator with more than 200,000 cable subscribers.
Prior to 1992, Mr. Cohen was Senior Vice President of United Artists
Entertainment Company and President of its international division. Mr. Cohen
also served in various executive positions at Group W Cable and Teleprompter
Corp.
As stated above, Mr. Cohen served as the Chief Financial Officer of Patient
Education Media from June 1996 through December 1997. Prior to June 1996,
Patient Education Media did not employ a Chief Financial Officer. Patient
Education Media was formed in 1994 to create and market patient educational
videos and other products under the trademark TIME-LIFE MEDICAL. Patient
Education Media ceased producing education video tapes in September 1996 and
ceased all operations on December 20, 1996. Thereafter, Patient Education Media
proceeded to liquidate the majority of its assets. On March 14, 1997, Patient
Education Media filed a petition under Chapter 11 of the United States
Bankruptcy Code. In January 1998, Mr. Cohen was appointed by the Bankruptcy
Court for the Southern District of New York to act as disbursing agent in
relation to the liquidation of Patient Education Media.
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<PAGE>
Peter Polimino has been the Vice President of Finance of Avalon Cable
Holdings since November 1998. Mr. Polimino is a financial professional with
over 18 years of experience in cable, broadcast and network television and
radio. Prior to joining Avalon Cable Holdings in November 1998, Mr. Polimino
was Vice President, Finance of the Sales Division of Fox/Liberty Networks
during 1998. From 1980 to 1998, Mr. Polimino held various financial positions
at Westinghouse Broadcasting, including Teleprompter Manhattan Cable,
Huntington TV Cable, Group W Television, KDKA TV/Radio, WINS Radio, WNEW Radio
and The CBS Television Network.
Peter Luscombe has been the Vice President of Engineering of Avalon Cable
Holdings since August 1998. Prior to joining Avalon Cable Holdings, Mr.
Luscombe was Executive Director of Engineering for the 3.1 million subscriber
Atlantic Division of Telecommunications, Inc. His responsibilities included
engineering strategy and technical operations for a variety of cable systems,
including both smaller traditional systems and larger, more technologically
aggressive cable systems with cable modem and compressed digital video
operations. From 1982 through 1997, Mr. Luscombe was Vice President of
Engineering for TKR Cable Company, an 800,000 subscriber MSO. Mr. Luscombe has
been a director of the National Society of Cable Telecommunications Engineers
and a member of the technical advisory committee of the Cable Television
Laboratories, Inc. Mr. Luscombe maintains an active membership in the National
Society of Cable Telecommunications Engineers.
John F. Dee has been the General Manager of Avalon Cable Holdings' New
England operations since July 1998. Prior to joining Avalon Cable Holdings, Mr.
Dee was responsible for the New England operations of Pegasus. He originally
joined Pegasus as Technical Manager in 1992. From 1981 through 1992, Mr. Dee
held various technical positions with United Cable TV and Telecommunications,
Inc.
Mark Dineen has been the General Manager of Avalon Cable Holdings' Michigan
operations since November 1998. Prior to joining Avalon Cable Holdings, Mr.
Dineen was employed by Cable Michigan in various corporate and field positions,
including as Corporate Director of Marketing, since 1992. From 1987 to 1992,
Mr. Dineen held marketing and sales management positions with Bresnan
Communications and Harron Communications in their Michigan cable systems.
Jay M. Grossman is a Vice President, Assistant Secretary and Manager of
Avalon Cable Holdings and a partner in ABRY Partners, Inc. Prior to joining
ABRY Partners in 1996, Mr. Grossman was managing director and co-head of
Prudential Securities' media and entertainment investment banking group. From
1986 to 1994, Mr. Grossman served in various positions, ultimately as a senior
vice president, in the corporate finance department of Kidder, Peabody & Co.
Incorporated. Mr. Grossman is a director (or the equivalent) of various
companies including Nexstar Broadcasting Group, LLC, Network Music Holdings
LLC, Connoisseur Communications Partners, L.P., and DirecTel International,
LLC.
Peggy J. Koenig is a Vice President, Assistant Secretary and Manager of
Avalon Cable Holdings and a partner in ABRY Partners. Ms. Koenig joined ABRY
Partners in 1993. From 1988 to 1992, Ms. Koenig was a Vice President, partner
and member of the Board of Directors of Sillerman Communications Management
Corporation, a merchant bank, which made investments principally in the radio
industry. Ms. Koenig was the Director of Finance from 1986 to 1988 for Magera
Management, an independent motion picture financing company. She is presently a
director (or the equivalent) of Connoisseur Communications Partners, L.P.,
Pinnacle Holdings Inc. and Network Music Holdings LLC.
Royce Yudkoff is a manager of Avalon Cable Holdings and President and
Managing Partner of ABRY Partners. Prior to joining ABRY Partners, Mr. Yudkoff
was affiliated with Bain & Company, an international management consulting
firm. At Bain, where he was a partner from 1985 through 1988, he shared
significant responsibility for the firm's media practice. Mr. Yudkoff is
presently a director (or the equivalent) of various companies including Quorum
Broadcast Holdings Inc., Nexstar Broadcasting Group, LLC, Metrocall, Inc. and
Pinnacle Holdings, Inc.
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Compensation of Managers
Each of the managers of Avalon Cable Holdings receives reimbursement of
reasonable out-of-pocket expenses incurred in connection with meetings of the
Board of Managers. The managers who are employees of Avalon Cable Holdings do
not receive any fee in addition to their regular salary for serving on the
Board of Managers. The managers who are not employees of Avalon Cable Holdings
do not receive any compensation for serving on the Board of Managers.
Executive Compensation
Avalon Cable Holdings was formed in 1997. The issuers were formed during
1997 and 1998 in connection with the acquisitions of Cable Michigan and AMRAC
Clear View and related financing transactions. The executive officers of Avalon
Cable Holdings are similar in all material respects to the executive officers
of the issuers. None of the officers of Avalon Cable Holdings, other than its
chief executive officer, received compensation in excess of $100,000 in his
capacity as an officer of Avalon Cable Holdings in 1998. The following table
sets forth information concerning the compensation of Avalon Cable Holdings'
Chief Executive Officer for services in all capacities rendered to Avalon Cable
Holdings and its affiliates in 1998.
Summary Compensation Table
<TABLE>
<CAPTION>
Long-Term
Annual Compensation Compensation
--------------------------- ------------
Securities
Name and Principal Other Annual Underlying All Other
Position Year Salary Bonus Compensation Options/SARs Compensation
- ------------------ ---- -------- ----- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Joel C. Cohen........... 1998 $104,167 -- -- -- --
Chief Executive Officer
</TABLE>
Management Employment Agreements
Each of our executive officers, Messrs. Unger, Cohen, Polimino, Luscombe,
Dee and Dineen, is a party to an employment agreement that provides for an
annual base salary and eligibility for a bonus if certain performance goals are
met. The employment agreements for Messrs. Unger, Cohen, Polimino and Luscombe
are described below. Messrs. Dee and Dineen have employment agreements with
similar provisions. In addition, certain of the equity interests in Avalon
owned by these executives will vest under the terms of the Management
Securities Purchase Agreements that are described in the "Certain Relationships
and Related Transactions--Management Securities Purchase Agreements" section of
this prospectus.
David W. Unger. Pursuant to an employment agreement dated November 6, 1998
between Mr. Unger and Avalon Cable LLC, Avalon Cable LLC has agreed to employ,
and Mr. Unger has agreed to serve, as Chairman of the Board of Avalon Cable LLC
and its subsidiaries for a period of five years or until his earlier
resignation, death, disability or termination of employment. Mr. Unger's
employment agreement provides that Mr. Unger is:
. required to devote approximately two-thirds of his business time to our
company,
. entitled to receive a minimum base salary of $125,000 with annual
increases of 5% per year,
. eligible to receive a bonus, as determined by the Board, up to 20% of his
base salary in effect during each fiscal year,
. prohibited from competing with our company during the term of his
employment period and for a period of six months thereafter, and
. prohibited from disclosing any confidential information gained during his
employment with us.
If we terminate Mr. Unger's employment without "Cause," Mr. Unger is
entitled to receive his base salary then in effect and benefits for a period of
six months thereafter subject to compliance with all other applicable
provisions of Mr. Unger's employment agreement.
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Joel C. Cohen. Pursuant to an employment agreement dated November 6, 1998
between Mr. Cohen and Avalon Cable LLC, Avalon Cable LLC has agreed to employ,
and Mr. Cohen has agreed to serve, as President and Chief Executive Officer of
Avalon Cable LLC and its subsidiaries for a period of five years or until his
earlier resignation, death, disability or termination of employment. Mr.
Cohen's employment agreement further provides that Mr. Cohen is:
. required to devote substantially all of his business time to our company,
. entitled to receive a minimum base salary of $250,000 with annual
increases of 5% per year,
. eligible to receive a bonus, as determined by the Board, of up to 20% of
his base salary,
. prohibited from competing with our company during his employment period
and for a period of six months thereafter, and
. prohibited from disclosing any confidential information gained by him
during his employment with us.
If we terminate Mr Cohen's employment without "Cause," Mr. Cohen is entitled
to receive his then base salary and benefits for a period of six months
thereafter subject to compliance with all other applicable provisions of Mr.
Cohen's employment agreement.
Peter Polimino. Pursuant to an employment agreement dated November 6, 1998
between Mr. Polimino and Avalon Cable LLC, Avalon Cable LLC has agreed to
employ, and Mr. Polimino has agreed to serve, as Vice President of Finance of
Avalon Cable LLC and its subsidiaries for a period of five years or until his
earlier resignation, death, disability or termination of employment. Mr.
Polimino's employment agreement further provides that Mr. Polimino is:
. required to devote 100% of his business time to our company,
. entitled to receive a minimum base salary of $110,000 per year,
. eligible to receive a bonus, as determined by the Board, of up to 20% of
his base salary,
. prohibited from competing with us during his employment period and for a
period of six months thereafter, and
. prohibited from disclosing any confidential information gained by him
during his employment with us.
Peter Luscombe. Pursuant to an employment agreement dated November 6, 1998
between Mr. Luscombe and Avalon Cable LLC, Avalon Cable LLC has agreed to
employ, and Mr. Luscombe has agreed to serve, as Vice President of Engineering
of Avalon Cable LLC and its subsidiaries for a period of five years or until
his earlier resignation, death, disability or termination of employment. Mr.
Luscombe's employment agreement further provides that Mr. Luscombe is:
. required to devote 100% of his business time to our company,
. entitled to receive a minimum base salary of $110,000 per year,
. eligible to receive a bonus, as determined by the Board, of up to 20% of
his base salary,
. prohibited from competing with us during his employment period and for a
period of six months thereafter, and
. prohibited from disclosing any confidential information gained by him
during his employment with us.
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<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Investor Securities Purchase Agreement
David W. Unger, Joel C. Cohen, ABRY Broadcast Partners III, Avalon Cable
Holdings and others are parties to an Investor Securities Purchase Agreement
dated as of May 29, 1998, as amended as of November 6, 1998, pursuant to which
Avalon Cable Holdings sold to investors, and investors purchased from Avalon
Cable Holdings, Class A units of Avalon Cable Holdings for $1,000 per unit, in
cash. Under this agreement, as amended, ABRY Broadcast Partners III purchased a
total of 30,000.000 Class A-2 units for an aggregate price of $30,000,000 and a
total of 11,094.031 Class A-3 units for an aggregate purchase price of
$11,094,031, Mr. Unger purchased a total of 802.658 Class A-1 units for an
aggregate price of $802,658 and Mr. Cohen purchased a total of 702.658 Class A-
1 units for an aggregate price of $702,658. The investors are entitled to
indemnification in certain circumstances to the extent that Avalon Cable
Holdings is determined to have breached certain representations, warranties or
agreements contained in the Investors Securities Purchase Agreement.
Management Securities Purchase Agreements
Each of our executives named above entered into a Management Securities
Purchase Agreement with Avalon Cable Holdings pursuant to which Avalon Cable
Holdings sold to each Executive and such Executive purchased from Avalon Cable
Holdings incentive units. The incentive units purchased by each of the
Executives are subject to vesting over a five-year period. In addition, each
Management Securities Purchase Agreement provides that the incentive units
purchased thereunder will, subject to specified limitations, automatically vest
in full upon a Sale of the Company, as defined in such Management Securities
Purchase Agreement, and will cease to vest upon the date on which each such
executive ceases to be employed by Avalon Cable Holdings or any of its
subsidiaries. Each Management Securities Purchase Agreement further provides
that Avalon Cable Holdings or ABRY Broadcast Partners III may repurchase the
applicable executive's unvested units at the initial purchase price at any time
within 18 months of such executive's termination of employment. The aggregate
price paid by each executive for their incentive units was less than $60,000.
Members Agreement
Avalon Cable Holdings, ABRY Broadcast Partners III and our executives are
parties to a Members Agreement dated as of May 29, 1998. Pursuant to this
Members Agreement, ABRY Broadcast Partners III and each of the executives have
agreed to vote their equity interests in Avalon Cable Holdings to elect three
representatives of ABRY Broadcast Partners III and each of Messrs. Unger and
Cohen to the board of managers of Avalon Cable Holdings. The Members Agreement
also contains:
. ""co-sale" rights exercisable by the executives and others in the event
of certain sales by ABRY Broadcast Partners III,
. ""drag along" sale rights exercisable by ABRY Broadcast Partners III, as
majority interest holder in Avalon Cable Holdings, in the event of an
Approved Company Sale (as defined in the Members Agreement) and
. restrictions on transfers by interest holders in Avalon Cable Holdings
other than ABRY Broadcast Partners III.
The voting, co-sale, drag along and transfer restrictions will terminate
upon the consummation of the first to occur of (a) an initial public offering
by Avalon Cable Holdings resulting in at least $25 million in net proceeds or
in which at least 25% of the equity interests of Avalon Cable Holdings are sold
or (b) a Sale of the Company (as defined in the Members Agreement).
Registration Agreement
Avalon Cable Holdings, ABRY Broadcast Partners III, our executives and
certain other holders are parties to a Registration Agreement dated as of May
29, 1998. Pursuant to the Registration Agreement, the holders of
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a majority of the ABRY Registrable Securities (as defined in the Registration
Agreement) may request registration under the Securities Act of all or any
portion of the ABRY Registrable Securities:
. on Form S-1 or any similar long-form registration,
. on Form S-2 or S-3 or any similar short-form registration, if available,
and
. on any applicable form pursuant to Rule 415 under the Securities Act.
In addition, all holders of Registrable Securities (as defined in the
Registration Agreement) will have unlimited "piggyback" registration rights,
which, subject to certain terms and conditions, entitle them to include their
registrable equity securities in any registration of securities by Avalon Cable
Holdings, other than registrations related to transactions and employee benefit
plans.
All expenses incident to a demand registration, including without limitation
all registration and filing fees, fees and expenses of compliance with
securities or blue sky laws, printing expenses, fees of counsel for Avalon
Cable Holdings and the holders of registrable securities and all independent
certified public accountants and underwriters, will be borne by us.
Avalon Cable LLC Securities Purchase Agreement
Avalon Cable Holdings, Avalon Cable LLC, Avalon Cable of Michigan Holdings,
Inc., Avalon Cable of New England Holdings, Inc., Avalon Cable of Michigan,
Inc. and Avalon Investors are parties to a Securities Purchase Agreement dated
as of November 6, 1998, as amended and restated on March 26, 1999. Pursuant to
this Securities Purchase Agreement, on November 6, 1998, Avalon Cable LLC sold
to Avalon Investors, and Avalon Investors purchased from Avalon Cable LLC, all
of the outstanding Class A units issued by Avalon Cable LLC for $45.0 million
in cash. The Class A units have no voting rights. In addition, pursuant to this
Securities Purchase Agreement, as amended on March 26, 1999, Avalon Cable of
Michigan, Inc. transferred to Avalon Cable LLC, and Avalon Cable LLC assumed
from Avalon Cable of Michigan, Inc., all right, title and interest of Avalon
Cable of Michigan, Inc. in substantially all of its assets and liabilities in
exchange for 510,994 Class B-2 Units issued by Avalon Cable LLC. Avalon Cable
LLC then transferred these assets and liabilities to Avalon Cable of Michigan
LLC. These transfers of assets and liabilities were part of the reorganization
and in the reorganization, the number of Class A units and nature of the rights
of Avalon Investors in their Class A units did not change.
Avalon Cable LLC Members Agreement
Avalon Cable LLC, ABRY Broadcast Partners III, Avalon Cable Holdings, Avalon
Cable of New England Holdings, Avalon Cable of Michigan, Inc., Avalon Cable of
Michigan Holdings and Avalon Investors are parties to an Amended and Restated
Members Agreement dated as of March 26, 1999. This Members Agreement contains:
. ""co-sale" rights exercisable by Avalon Investors in the event of certain
sales by ABRY Broadcast Partners III, Avalon Cable Holdings and their
affiliates,
. ""drag along" sale rights exercisable by Avalon Cable Holdings and its
affiliates in the event of an Approved Company Sale (as defined in this
Members Agreement),
. restrictions on transfers by interest holders in Avalon Cable LLC
. ""pre-emptive rights" provisions and
. obligations to enter into a Registration Rights Agreement immediately
before an initial public offering.
Avalon Cable of Michigan, Inc. and Avalon Cable of Michigan Holdings became
parties to this Members Agreement as part of the reorganization. This Members
Agreement terminates upon the first sale of securities of Avalon Cable LLC or a
successor entity to the public with proceeds of more than $50 million.
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ABRY Management and Consulting Services Agreement
Pursuant to an Amended and Restated Management and Consulting Services
Agreement between ABRY Partners, Avalon Cable Holdings, Avalon Cable of
Michigan Holdings, Avalon Cable of Michigan, Inc., Avalon Cable of New England,
Inc., Avalon Cable of New England LLC and Avalon Cable LLC dated as of November
6, 1998, ABRY Partners is entitled to a management fee for advisory and
management consulting services to us. No amounts have been paid or are
currently payable under this agreement.
Cable Michigan Equity Ownership
As of the date of our merger with Cable Michigan, Mr. Unger and Mr. Cohen
owned 5,000 shares and 2,000 shares of Cable Michigan common stock,
respectively, which were purchased at prices substantially below the $40.50
price per share paid in the merger. These shares were purchased by Messrs.
Cohen and Unger in their individual capacities and before the commencement of
the discussions leading to the merger. In the Cable Michigan merger, Mr. Unger
received $202,500 and Mr. Cohen received $81,000 on account of these shares.
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SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The issuers are each indirectly controlled by Avalon Cable Holdings. Avalon
Cable Holdings Finance is a wholly owned subsidiary of Avalon Cable LLC. Avalon
Cable Holdings owns a controlling interest in Avalon Cable LLC. Avalon Cable of
Michigan LLC and Avalon Cable of New England LLC are wholly owned subsidiaries
of Avalon Cable LLC. Avalon Cable Finance, Inc. is a wholly owned subsidiary of
Avalon Cable Holdings Finance.
The following table sets forth certain information regarding the beneficial
ownership of the class A units of Avalon Cable Holdings (which are the only
outstanding membership interests in Avalon Cable Holdings with voting rights)
as of May 15, 1998 by:
. holders having beneficial ownership of more than 5% of the voting equity
interests of Avalon Cable Holdings,
. each manager and director of Avalon Cable Holdings and the issuers,
. the executive officers of Avalon Cable Holdings and the issuers and
. all such managers, directors and executive officers as a group.
For purposes of the table:
. "Beneficial owner" generally means any person who, directly or
indirectly, has or shares voting or investment power with respect to a
security. Unless otherwise indicated, we believe that each holder has
sole voting and investment power with regard to the equity interests
listed as beneficially owned. Percentage ownership is based on a total of
43,202.901 units outstanding.
. Mr. Yudkoff is the sole owner of the equity interests of ABRY Holdings
III, Inc., the general partner of ABRY Equity Investors, L.P., the
general partner of ABRY Broadcast Partners III, L.P. As a result, Mr.
Yudkoff may be deemed to beneficially own the shares owned by ABRY
Broadcast Partners III, L.P. The address of Mr. Yudkoff is the address of
ABRY Broadcast Partners III, L.P.
<TABLE>
<CAPTION>
Beneficial Ownership
------------------------
Number of Percentage
Beneficial Owner Class A Units Ownership
---------------- ------------- ----------
<S> <C> <C> <C>
ABRY Broadcast Partners III, L.P............ 41,094.927 95.12%
18 Newbury Street
Boston, MA 02116
David W. Unger.............................. 802.658 1.86%
Joel C. Cohen............................... 702.658 1.63%
Peter Polimino.............................. -- --
John F. Dee................................. -- --
Mark Dineen................................. -- --
Peter Luscombe.............................. -- --
Jay M. Grossman............................. -- --
Peggy J. Koenig............................. -- --
Royce Yudkoff(b)............................ 41,094.927 95.12%
All managers, directors and executive
officers as a group (9 persons)............ 42,600.243 98.61%
</TABLE>
Avalon Equity Structure
The issuers are each indirectly controlled by Avalon Cable Holdings. Avalon
Cable Holdings has three classes of equity units authorized and available for
issuance:
. Class A units,
. Class B units, and
. Class C units.
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Each class of units represents a fractional part of the membership interests
of Avalon Cable Holdings and has the rights and obligations specified in Avalon
Cable Holdings' Amended and Restated Limited Liability Company Agreement.
Voting Units
Each Class A unit is entitled to voting rights equal to the percentage such
unit represents of the aggregate number of outstanding Class A units. A
preferred return accrues semi-annually on the original issue price of each of
these voting units at a rate of 15%, or 20% under certain circumstances, per
annum. Avalon Cable Holdings cannot pay distributions in respect of other
classes of securities, including distributions made in connection with a
liquidation, until the original issue price and accrued preferred return in
respect of each voting unit is paid to each holder thereof. In addition to
these priority distributions, each holder of voting units is also entitled to
participate in distributions payable to the residual common equity interests of
Avalon Cable Holdings.
Incentive Units
The Class B units and Class C units are non-voting equity interests in
Avalon Cable Holdings which were issued to each of Avalon Cable Holdings'
executives subject to the terms and conditions in the applicable Management
Securities Purchase Agreement. Each holder of the incentive units is entitled
to participate in the residual common equity interests, if any, provided that
all of these priority distributions on all Class A units shall have been paid
in full.
Avalon Cable LLC Equity Structure
Avalon Cable LLC directly or indirectly controls each of the issuers'
operating companies. Avalon Cable LLC has authorized two classes of equity
units: Class A units and Class B units. The units represent a fractional part
of the membership interests of Avalon Cable LLC and have the rights and
obligations specified in Avalon Cable LLC's Limited Liability Company
Agreement. Each Class B unit is entitled to voting rights equal to the
percentage such unit represents of the aggregate number of outstanding Class B
units. The Class A units are not entitled to voting rights.
Class A Units
The Class A units are non-voting participating preferred equity interests,
each of which was issued on November 6, 1998 to Avalon Investors.
A preferred return accrues annually on the initial purchase price of each
Class A unit at a rate of 15%, or 17% under certain circumstances, per annum.
Avalon Cable LLC cannot pay distributions in respect of other classes of
securities, including distributions made in connection with a liquidation,
until the initial purchase price and accrued preferred return in respect of
each Class A unit of Avalon Cable LLC is paid to the holders thereof. So long
as any portion of the preferred distributions remains unpaid, the holders of a
majority of the Class A units are entitled to block certain actions by Avalon
Cable LLC, including the payment of certain distributions, the issuance of
senior or certain types of pari passu equity securities or the entering into or
amending of certain related-party agreements. In addition to these
distributions, each Class A unit is also entitled to participate in
distributions made on the Class B units as described below after the priority
distributions, pro rata according to the percentage such unit represents of the
aggregate number of units of Avalon Cable LLC then outstanding.
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Class B Units
The Class B units are equity securities which are divided into two identical
subclasses, Class B-1 units and Class B-2 units. There are currently 64,696
Class B-1 units outstanding, all which were issued to Avalon Cable of New
England Holdings on November 6, 1998, in exchange for its contribution to the
capital of Avalon Cable LLC of its 100% membership interest in Avalon Cable of
New England. There are currently 510,994 Class B-2 units outstanding, all of
which were issued to Avalon Cable of Michigan, Inc. in exchange for the
contribution of substantially all of its assets to the capital of Avalon Cable
LLC as part of the reorganization. After the payment in full of the preferred
distributions on the Class A units, each Class B unit is entitled to
participate in distributions pro rata according to the percentage such unit
represents of the aggregate number of units of Avalon Cable LLC then
outstanding.
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DESCRIPTION OF CERTAIN DEBT
The following description of the material provisions of certain indebtedness
of the issuers and their affiliates is subject to, and is qualified in its
entirety by reference to, the applicable instruments, copies of which may be
obtained as described under "Available Information."
The Credit Facility
The credit facility is a $320,888,000 secured credit facility of Avalon
Cable of New England, Avalon Cable of Michigan LLC and Avalon Cable Finance,
each of which is a borrower. Avalon Cable of Michigan LLC became a borrower
instead of Avalon Cable of Michigan, Inc. as part of the reorganization. The
credit facility was provided to the borrowers by a syndicate of banks and other
financial institutions for which Lehman Commercial Paper Inc. acts as
administrative agent. The credit facility provides for:
. term loan borrowings of up to $120,888,000 under the Tranche A term loan
facility,
. term loan borrowings of $170,000,000 under the Tranche B term loan
facility, and
. revolving credit borrowings of up to $30,000,000 under the revolving
credit facility.
In addition, before November 6, 2001, subject to the approval of the
administrative agent and, in certain instances, to the approval of the required
lenders, the borrowers may request that incremental term loan facilities of up
to $75,000,000 be established in accordance with the terms of the credit
facility. As of March 31, 1999, there were borrowings of $36.3 million
outstanding under the Tranche A term loan facility, $129.6 million outstanding
under the Tranche B term loan facility and $13.7 million outstanding under the
revolving credit facility, and $16.3 million of availability under the
revolving credit facility. The remaining commitments under the Tranche A term
loan facility will terminate on March 31, 1999, and the revolving credit
facility will terminate on October 31, 2005. Additional borrowings could be
made under the Tranche A term loan facility only to complete certain
acquisitions. Borrowings under the revolving credit facility may be used for
acquisitions and other corporate purposes. The Tranche A term loans are subject
to quarterly amortization payments commencing on January 31, 2001 and maturing
on October 31, 2005. The Tranche B term loans are subject to minimal quarterly
amortization payments commencing on January 31, 2001 with substantially all of
such Tranche B term loans scheduled to be repaid in two equal installments on
July 31, 2006 and October 31, 2006.
The interest rate under the credit facility is a rate based on either:
(a) the base rate, which is generally defined as the greater of (1) the
prime or base rate as announced from time to time by a specified lender
under the credit facility and (2) a federal funds rate, or
(b) the Eurodollar rate, which is generally defined as the rate
appearing on Page 3750 of the Dow Jones Markets screen at a specified time
or, if such rate does not so appear, another comparable publicly available
service for displaying eurodollar rates,
plus, in either case, the applicable margin.
As of March 31, 1999, the interest rate on the Tranche A term loans was
7.94% per annum and with respect to the Tranche B term loans was 8.69% per
annum. The applicable margin for the Tranche A term loans and revolving credit
loans is subject to performance based grid pricing which is determined based
upon the consolidated leverage ratio of the borrowers as calculated in
accordance with the credit facility.
The credit facility provides for mandatory prepayments and commitment
reductions (in each case subject to certain exceptions and/or thresholds) out
of net cash proceeds from issuances of capital stock, the incurrence of
indebtedness, certain asset sales, insurance proceeds and excess cash flow.
Voluntary prepayments are permitted in whole or in part at the option of the
borrowers, in minimum principal amounts, without premium or penalty, except
that Tranche B term loans must be prepaid, at 102% and 101% of the principal
amount
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thereof, for the first year and second year, respectively, and the issuers must
reimburse certain of the senior lenders' costs under certain conditions.
The credit facility provides that the borrowers must meet or exceed a
consolidated interest coverage ratio, fixed charge coverage ratio and debt
service coverage ratio and must not exceed certain consolidated leverage
ratios, each as set forth in the credit facility. The credit facility also
contains customary affirmative covenants, including, required interest rate
protection arrangements and the pledge of additional collateral in certain
circumstances, and certain negative covenants, including covenants that limit
certain indebtedness, liens, fundamental changes, disposition of property,
restricted payments, including distributions to the issuers of amounts to pay
the Accreted Interest Redemption Amount and other interest payments on the old
notes and new notes, capital expenditures, investments, optional payments and
modifications of debt instruments, including the indenture governing the old
notes and new notes and the senior subordinated notes, transactions with
affiliates and sales and leasebacks. In particular, under the credit facility,
the issuers' operating companies may pay cash dividends to the issuers to allow
payments of interest, including the Accreted Interest Redemption Amount, on the
old notes and new notes so long as no default, or event of default shall have
occurred and be continuing or would occur as a result thereof and a
consolidated leverage ratio test is satisfied. The credit facility includes
customary events of default.
The obligations of the borrowers under the credit facility are secured by
substantially all the assets of the borrowers. In addition, the obligations of
the borrowers under the credit facility are guaranteed by each of the issuers,
Avalon Cable Holdings, Avalon Cable of New England Holdings, Avalon Cable LLC,
Avalon Cable Finance Holdings, and Avalon Cable of Michigan, Inc. None of the
guarantors have significant assets other than their investments in affiliates.
The Senior Subordinated Notes
On December 3, 1998, Avalon Cable of Michigan, Inc., Avalon Cable of New
England LLC and Avalon Cable Finance, Inc. issued $150.0 million aggregate
principal amount of their 9 3/8% senior subordinated notes due 2008. The senior
subordinated notes were issued under an indenture dated as of December 10, 1998
by and among Avalon Cable of New England, Avalon Cable Finance and Avalon Cable
of Michigan LLC, as issuers, and The Bank of New York, as trustee.
In the reorganization, Avalon Cable of Michigan, Inc. ceased to be obligated
as an issuer under the senior subordinated notes and became a guarantor of
Avalon Cable of Michigan LLC's obligations under the senior subordinated notes.
Thus, the obligors under the senior subordinated notes are currently Avalon
Cable of New England, Avalon Cable Finance and Avalon Cable of Michigan LLC,
which we refer to collectively as the senior subordinated note issuers. Avalon
Cable of Michigan LLC does not have significant assets or liabilities, other
than its equity interest in Avalon Holdings.
The senior subordinated notes are general unsecured obligations of the
senior subordinated note issuers and are subordinated in right of payment to
all current and future senior indebtedness of the senior subordinated note
issuers, including indebtedness under the credit facility. Interest on the
senior subordinated notes accrues at the rate of 9.375% per annum and is
payable semi-annually in arrears on June 1 and December 1 of each year, to
holders of record on the immediately preceding May 15 and November 15. The
senior subordinated notes are limited in aggregate principal amount to $200.0
million, of which $150.0 million was issued in the initial senior subordinated
note offering. The remaining $50.0 million may be issued from time to time,
subject to compliance with the debt incurrence covenants in the senior
subordinated note indenture, the indenture governing the old notes and the new
notes and the financial covenants in the credit facility.
On or after December 1, 2003, the senior subordinated notes will be subject
to redemption at any time at the option of the senior subordinated note
issuers, in whole or in part, at the redemption prices (expressed as percentage
of principal amount) set forth below plus accrued and unpaid interest, if any,
and liquidated
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damages, if any, thereon to the applicable redemption date, if redeemed during
the twelve-month period beginning on December 1 of the years indicated below:
<TABLE>
<CAPTION>
Year Percentage
---- ----------
<S> <C>
2003.......................... 104.688%
2004.......................... 103.125%
2005.......................... 101.563%
2006 and thereafter........... 100.000%
</TABLE>
Notwithstanding the foregoing, at any time prior to December 1, 2001, the
senior subordinated note issuers may on any one or more occasions redeem up to
35% of the aggregate principal amount of senior subordinated notes originally
issued under the senior subordinated note indenture at a redemption price equal
to 109.375% of the principal amount thereof, plus accrued and unpaid interest,
if any, and liquidated damages, if any, thereon, to the redemption date, with
the net cash proceeds of any equity offering and/or the net cash proceeds of a
strategic equity investment; provided that at least 65% of the aggregate
principal amount of senior subordinated notes originally issued remain
outstanding immediately after each occurrence of such redemption. As used in
this paragraph, "equity offering" and "strategic equity investment" have
substantially the same meanings as in the indenture governing the old notes and
new notes.
Upon the occurrence of a "change of control," each holder of senior
subordinated notes will have the right to require the senior subordinated note
issuers to repurchase all or any part of such holder's senior subordinated
notes pursuant to a change of control offer at any offer price in cash equal to
101% of the aggregate principal amount thereof plus accrued and unpaid interest
and liquidated damages thereon, if any, to the date of purchase. For such
purpose, "change of control" has substantially the same meaning as in the
Senior Subordinated Note Indenture.
The senior subordinated note indenture contains covenants that, among other
things, limits the ability of the senior subordinated note issuers and their
restricted subsidiaries, to:
. incur additional indebtedness,
. pay dividends or make certain other restricted payments, including
distributions to the issuers of amounts to pay the Accreted Interest
Redemption Amount and interest payments on the old notes and the new
notes,
. enter into transactions with affiliates,
. sell assets or subsidiary stock,
. create liens,
. restrict dividends or other payments from restricted subsidiaries,
. merge, consolidate or sell all or substantially all of their combined
assets,
. incur indebtedness that is senior to the senior subordinated notes but
junior to senior indebtedness and,
. with respect to the restricted subsidiaries, issue capital stock.
In particular, the senior subordinated note indenture provides that payments
of cash dividends by the senior subordinated note issuers to the issuers in
order to make payments of interest, including the Accreted Interest Redemption
Amount, in accordance with the terms of the old note and new notes will be
permitted so long as no default or event of default, as such terms are defined
in the senior subordinated note indenture, shall have occurred and be
continuing or would occur as a consequence thereof. The senior subordinated
note indenture also permits the senior subordinated note issuers to pay
dividends and make other restricted payments, including to the issuers, if
certain other conditions are satisfied. Under certain circumstances, the
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senior subordinated note issuers are required to make an offer to purchase
senior subordinated notes at a price equal to 100% of the aggregate principal
amount thereof plus accrued and unpaid interest and liquidated damages thereon,
if any, to the date of purchase with the proceeds of certain asset sales. The
senior subordinated note indenture contains certain customary events of default
which will include the failure to pay principal, interest and liquidated
damages, the failure to comply with certain covenants under the senior
subordinated notes or the senior subordinated note indenture, certain cross-
defaults on indebtedness, the failure to pay on final judgement in excess of a
threshold amount and events of bankruptcy or insolvency.
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THE EXCHANGE OFFER
Purpose and Effect of the Exchange Offer
The old notes were originally issued on December 3, 1998 to Lehman Brothers
Inc. and Barclays Capital Inc. pursuant to a purchase agreement dated December
3, 1998. These initial purchasers subsequently resold the notes to qualified
institutional buyers in reliance on Rule 144A under the Securities Act. The
issuers are parties to a Registration Rights Agreement with the initial
purchasers entered into as a condition to the closing under the purchase
agreement. Pursuant to the Registration Rights Agreement, the issuers agreed,
for the benefit of the holders of the old notes, at their cost, to:
. file an exchange offer registration statement on or before March 31,
1999 with the SEC with respect to the exchange offer for the new notes;
. use their best efforts to have the registration statement declared
effective under the Securities Act within 90 days after the filing of the
registration statement; and
. use their best efforts to issue on or prior to 30 business days after the
registration statement is declared effective the new notes in exchange
for all old notes duly tendered in the exchange offer.
Upon the registration statement being declared effective, we will offer the
new notes in exchange for surrender of the old notes. We will keep the exchange
offer open for not less than 20 business days, or longer if required by
applicable law, after the date on which notice of the exchange offer is mailed
to the holders of the old notes. For each old note surrendered to us pursuant
to the exchange offer, the holder of such old note will receive a new note
having a principal amount equal to that of the surrendered old note.
Under existing interpretations of the staff of the SEC contained in several
no-action letters to third parties, we believe that the new notes will in
general be freely tradeable after the exchange offer without further
registration under the Securities Act. However, any purchaser of old notes who
is an "affiliate" of the issuers or who intends to participate in the exchange
offer for the purpose of distributing the new notes:
. will not be able to rely on these interpretations of the staff of the
SEC;
. will not be able to tender its old notes in the exchange offer; and
. must comply with the registration and prospectus delivery requirements of
the Securities Act in connection with any sale or transfer of the old
notes, unless such sale or transfer is made pursuant to an exemption from
such requirements.
As contemplated by these no-action letters and the Registration Rights
Agreement, each holder accepting the exchange offer is required to represent to
us in the letter of transmittal that:
. the new notes are to be acquired by the holder or the person receiving
such new notes, whether or not such person is the holder, in the ordinary
course of business;
. the holder or any such other person, other than a broker-dealer referred
to in the next sentence, is not engaging and does not intend to engage,
in distribution of the new notes;
. the holder or any such other person has no arrangement or understanding
with any person to participate in the distribution of the new notes;
. neither the holder nor any such other person is an "affiliate" of the
issuers within the meaning of Rule 405 under the Securities Act; and
. the holder or any such other person acknowledges that if such holder or
any other person participates in the exchange offer for the purpose of
distributing the new notes it must comply with the registration and
prospectus delivery requirements of the Securities Act in connection with
any resale of the new notes and cannot rely on those no-action letters.
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As indicated above, each broker-dealer, which we refer to as a Participating
Broker-Dealer, that receives new notes for its own account in exchange for old
notes must acknowledge that it:
. acquired the new notes for its own account as a result of market-making
activities or other trading activities;
. has not entered into any arrangement or understanding with the issuers or
any "affiliate" (within the meaning of Rule 405 under the Securities Act)
to distribute the new notes to be received in the exchange offer; and
. will deliver a prospectus meeting the requirements of the Securities Act
in connection with any resale of such new notes.
For a description of the procedures for resales by Participating Broker-
Dealers, see "Plan of Distribution."
In the event that changes in the law or the applicable interpretations of
the staff of the SEC do not permit us to effect such an exchange offer, or if
the issuers receive certain notice from any holder of Transfer Restricted
Securities (as defined below) that is a qualified institutional buyer or an
institutional accredited invested prior to the 20th day following the
consummation of the exchange offer, the issuers will use their best efforts to:
. file a shelf registration statement covering the resale of the old notes
on or prior to the earlier to occur of:
(1) the 45th day after the date on which the issuers determine that they
are not required to file the registration statement, or
(2) the 45th day after the date on which the issuers receive the
applicable notice from a holder of Transfer Restricted Securities
(such earlier date being the "Shelf Filing Deadline");
. cause the Shelf Registration Statement to be declared effective under the
Securities Act on or before the 90th day after the Shelf Filing Deadline;
and
. keep the Shelf Registration Statement continuously effective.
"Transfer Restricted Securities" means each old note until:
. the date on which such old note has been exchanged by a person other than
a broker-dealer for a new note in the exchange offer,
. following the exchange by a broker-dealer in the exchange offer of an old
note for a new note, the date on which such new note is sold to a
purchaser who receives from such broker-dealer on or prior to the date of
such sale a copy of the prospectus contained in the registration
statement,
. the date on which such old note has been effectively registered under the
Securities Act and disposed of in accordance with the Shelf Registration
Statement or
. the date on which such old note is distributed to the public pursuant to
Rule 144 under the Act.
The issuers will, in the event of the filing of the Shelf Registration
Statement, provide to each applicable holder of the old notes copies of the
prospectus, which is a part of the Shelf Registration Statement, notify each
such holder when the Shelf Registration Statement has become effective, and
take certain other actions as are required to permit unrestricted resale of the
old notes. A holder of the old notes that sells such old notes pursuant to the
Shelf Registration Statement generally will be required to be named as a
selling security holder in the related prospectus and to deliver a prospectus
to purchasers, will be subject to certain of the civil liability provisions
under the Securities Act in connection with such sales, and will be bound by
the provisions of the Registration Rights Agreement which are applicable to
such a holder, including certain indemnification obligations.
Holders of old notes will be required to make certain representations to the
issuers to participate in the exchange offer and holders of old notes will be
required to deliver information to be used in connection with
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the Shelf Registration Statement and to provide comments on the Shelf
Registration Statement within the time periods set forth in the Registration
Rights Agreement to have their old notes included in the Shelf Registration
Statement and benefit from the provisions regarding liquidated damages set
forth below. Such required representations and information are described in the
Registration Rights Agreement.
The Registration Rights Agreement provides that:
. the issuers will file the registration statement with the SEC on or prior
to March 31, 1999;
. the issuers will use their best efforts to have the registration
statement declared effective by the SEC on or prior to 90 days after the
date of the original filing of the registration statement;
. unless the exchange offer would not be permitted by applicable law or SEC
policy, the issuers will offer and use their best efforts to issue on or
prior to 30 business days after the registration statement is declared
effective, new notes in exchange for all old notes tendered prior thereto
in the exchange offer; and
. if obligated to file the Shelf Registration Statement, the issues will
file the Shelf Registration Statement with the SEC on or prior to 45 days
after such filing obligation arises and to cause the Shelf Registration
Statement to be declared effective by the SEC on or prior to 90 days
thereafter.
If:
(a) the issuers fail to file any of the registration statements required
by the Registration Rights Agreement on or before the date specified for
such filing;
(b) any of such registration statements is not declared effective by
the SEC on or prior to the date specified for such effectiveness;
(c) the issuers fail to consummate the exchange offer within 30
business days after the registration statement has been declared effective;
or
(d) the Shelf Registration Statement or the registration statement is
filed and declared effective but thereafter ceases to be effective or
usable in connection with resales of Transfer Restricted Securities during
the period specified in the Registration Rights Agreement (each such event
referred to in clauses (a) through (d) above a "registration default"),
the issuers will pay liquidated damages to holders of the old notes as follows:
$.05 per week per $1,000 principal amount of old notes for the first 90-day
period following a registration default and an additional $.05 per week per
$1,000 principal amount at maturity of old notes for each subsequent 90-day
period until all registration defaults have been cured, up to a maximum amount
of liquidated damages for all registration defaults of $.50 per week per $1,000
principal amount at maturity of old notes.
All accrued liquidated damages will be payable to holders of the old notes
in cash on semi-annual payment dates that correspond to the accretion dates
(or, on or after December 1, 2003, the semi-annual interest payment date),
commencing with the first such date occurring after any such additional
interest commences to accrue, until such registration default is cured.
The summary herein of certain provisions of the Registration Rights
Agreement is subject to, and is qualified in its entirety by, all the
provisions of the Registration Rights Agreement, a copy of which is filed as an
exhibit to the registration statement of which this prospectus is a part.
Following the consummation of the exchange offer, holders of the old notes
who were eligible to participate in the exchange offer but who did not tender
their old notes will not have any further registration rights and such old
notes will continue to be subject to certain restrictions on transfer.
Accordingly, the liquidity of the market for such old notes could be adversely
affected.
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Terms of the Exchange Offer
Upon the terms and subject to the conditions set forth in this prospectus
and in the letter of transmittal, we will accept any and all old notes validly
tendered and not withdrawn prior to 5:00 p.m., New York City time, on ,
1999, or such later date and time as to which the exchange offer has been
extended. We will issue $1,000 principal amount of new notes in exchange for
each $1,000 principal amount at maturity of outstanding old notes accepted in
the exchange offer. Holders may tender some or all of their old notes pursuant
to the exchange offer. However, old notes may be tendered only in integral
multiples of $1,000.
The form and terms of the new notes are substantially the same as the form
and terms of the old notes except that:
. the new notes bear a new note designation and a different CUSIP number
from the old notes;
. the new notes have been registered under the federal securities laws and
hence will not bear legends restricting the transfer thereof as the old
notes do; and
. the holders of the new notes will generally not be entitled to rights
under the Registration Rights Agreement, which rights generally will be
satisfied when the exchange offer is consummated.
The new notes will evidence the same debt as the tendered old notes and will
be entitled to the benefits of the indenture under which the old notes were
issued. As of the date of this prospectus, $196,000,000 aggregate principal
amount at maturity of old notes were outstanding.
Holders of old notes do not have any appraisal or dissenters' rights under
the General Corporation Law of Delaware, the Delaware Limited Liability Company
Act or the indentures relating to such notes in connection with the exchange
offer. We intend to conduct the exchange offer in accordance with the
applicable requirements of the Securities Exchange Act of 1934, and the rules
and regulations of the SEC thereunder.
We shall be deemed to have accepted validly tendered old notes when, as and
if we have given oral or written notice thereof, such notice if given orally,
to be confirmed in writing, to the exchange agent. The exchange agent will act
as agent for the tendering holders for the purpose of receiving the new notes
from our company.
If any tendered old notes are not accepted for exchange because of an
invalid tender, the occurrence of certain other events set forth herein or
otherwise, the certificates for any such unaccepted old notes will be returned,
without expense, to the tendering holder thereof as promptly as practicable
after the expiration date.
Holders who tender old notes in the exchange offer will not be required to
pay brokerage commissions or fees or, subject to the instructions in the letter
of transmittal, transfer taxes with respect to the exchange of old notes
pursuant to the exchange offer. We will pay all charges and expenses, other
than transfer taxes in certain circumstances, in connection with the exchange
offer. For additional information, please refer to the "--Fees and Expenses"
section of this prospectus.
Expiration Date; Extensions; Amendments
The expiration date is 5:00 p.m., New York City time, on , 1999,
unless we extend the exchange offer, in which case the expiration date will be
the latest date and time to which the exchange offer is extended.
In order to extend the exchange offer, we will notify the exchange agent of
any extension by oral or written notice, such notice if given orally, to be
confirmed in writing, and will issue a press release or other public
announcement thereof, each prior to 9:00 a.m., New York City time, on the next
business day after the previously scheduled expiration date.
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We reserve the right:
. to delay accepting any old notes, to extend the exchange offer or to
terminate the exchange offer if any of the conditions set forth below
under "conditions" shall not have been satisfied, by giving oral or
written notice, such notice if given orally, to be confirmed in writing,
of such delay, extension or termination to the exchange agent, or
. to amend the terms of the exchange offer in any manner.
Any such delay in acceptance, extension, termination or amendment will be
followed as promptly as practicable by oral or written notice thereof to the
registered holders.
Yield and Interest on the New Notes
Before December 1, 2003, there will be no current payments of cash interest
on the new notes. The new notes and the old notes not exchanged for new notes
will accrete in value at a rate of 11 7/8% per annum, compounded semi-annually,
to an aggregate principal amount of $196,000,000 on December 1, 2003. Holders
of old notes that are accepted for exchange will receive new notes with a
principal amount equal to the accreted value of the old notes on the date of
issuance of the new notes. Old notes accepted for exchange will cease to
accrete in value upon issuance of the new notes.
On December 1, 2003, the issuers will be required to redeem an amount equal
to $369.70 per $1,000 principal amount at maturity of each new note and each
old note not exchanged for a new note then outstanding, on a pro rata basis at
a redemption price of 100% of the principal amount at maturity of the notes so
redeemed. Thereafter, cash interest will be payable semi-annually in arrears on
June 1 and December 1 of each year, commencing June 1, 2004.
Procedures for Tendering
Only a registered holder of old notes may tender such notes in the exchange
offer. To tender in the exchange offer, a holder must complete, sign and date
the letter of transmittal, or a facsimile thereof, have the signatures thereon
guaranteed if required by the letter of transmittal and mail or otherwise
deliver such letter of transmittal or such facsimile, together with the old
notes and any other required documents, or cause The Depository Trust Company
to transmit an agent's message as described below in connection with a book-
entry transfer, to the exchange agent prior to the expiration date. To be
tendered effectively, the old notes, the letter of transmittal or agent's
message and other required documents must be completed and received by the
exchange agent at the address set forth below under "--Exchange Agent" prior to
the expiration date. Delivery of the old notes may be made by book entry
transfer in accordance with the procedures described below. Confirmation of
such book-entry transfer must be received by the exchange agent prior to the
expiration date.
The term "agent's message" means a message, transmitted by a book-entry
transfer facility to, and received by, the exchange agent forming a part of a
confirmation of a book-entry, which states that such book-entry transfer
facility has received an express acknowledgment from the participant in such
book-entry transfer facility tendering the old notes that such participant has
received and agrees:
. to participate in the Automated Tender Option Program;
. to be bound by the terms of the letter of transmittal; and
. that we may enforce such agreement against such participant.
By executing the letter of transmittal or agent's message, each holder will
make to us the representations set forth above in the fourth paragraph under
the heading "--Purpose and Effect of the Exchange Offer."
The tender by a holder and the acceptance thereof by us will constitute
agreement between such holder and the company in accordance with the terms and
subject to the conditions set forth herein and in the letter of transmittal or
agent's message.
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The method of delivery of old notes and the letter of transmittal or agent's
message and all other required documents to the exchange agent is at the
election and sole risk of the holder. As an alternative to delivery by mail,
holders may wish to consider overnight or hand delivery service. In all cases,
sufficient time should be allowed to assure delivery to the exchange agent
before the expiration date. No letter of transmittal or old notes should be
sent to any of the issuers or any of their affiliates. Holders may request
their respective brokers, dealers, commercial banks, trust companies or
nominees to effect the above transactions for such holders.
Any beneficial owner whose old notes are registered in the name of a broker,
dealer, commercial bank, trust company or other nominee and who wishes to
tender should contact the registered holder promptly and instruct such
registered holder to tender on such beneficial owner's behalf. For additional
information, please refer to the "Instructions to Registered Holder and/or
Book-Entry Transfer Facility Participant from Beneficial Owner" included with
the letter of transmittal.
Signatures on a letter of transmittal or a notice of withdrawal, as the case
may be, must be guaranteed by an eligible institution (as defined below) unless
the old notes tendered pursuant thereto are tendered by a registered holder who
has not completed the box entitled "Special Registration Instructions" or
"Special Delivery Instructions" on the letter of transmittal, or for the
account of an eligible institution. In the event that signatures on a letter of
transmittal or a notice of withdrawal, as the case may be, are required to be
guaranteed, such guarantee must be by a member firm of the Medallion System (an
"eligible institution").
If the letter of transmittal is signed by a person other than the registered
holder of any old notes listed therein, such notes must be endorsed or
accompanied by a properly completed bond power, signed by such registered
holder as such registered holder's name appears on such notes with the
signature thereon guaranteed by an eligible institution.
If the letter of transmittal or any old notes or bond powers are signed by
trustees, executors, administrators, guardians, attorneys-in-fact, officers of
corporations or others acting in a fiduciary or representative capacity, such
persons should so indicate when signing, and evidence to our satisfaction of
their authority to so act must be submitted with the letter of transmittal.
We understand that the exchange agent will make a request promptly after the
date of this prospectus to establish accounts with respect to the old notes at
the book-entry transfer facility, The Depository Trust Company (the "book-entry
transfer facility"), for the purpose of facilitating the exchange offer, and
subject to the establishment thereof, any financial institution that is a
participant in the book-entry transfer facility's system may make book-entry
delivery of old notes by causing such book-entry transfer facility to transfer
such old notes into the exchange agent's account with respect to the old notes
in accordance with the book-entry transfer facility's procedures for such
transfer. Although delivery of the old notes may be effected through book-entry
transfer into the exchange agent's account at the book-entry transfer facility,
unless an agent's message is transmitted to and received by the exchange agent
in compliance with Automated Tender Option Program on or prior to the
expiration date, or, if the guaranteed delivery procedures described below are
complied with, within the time period provided under such procedures, the
tender of such notes will not be valid. Delivery of documents to the book-entry
transfer facility does not constitute delivery to the exchange agent.
All questions as to the validity, form, eligibility, including time of
receipt, acceptance of tendered Old Notes and withdrawal of tendered old notes
will be determined by the Issuers, in their sole discretion, which
determination will be final and binding. The issuers reserve the absolute right
to reject any and all old notes not properly tendered or any old notes our
acceptance of which would, in the opinion of the Issuers' counsel, be unlawful.
The issuers also reserve the right to waive any defects, irregularities or
conditions of tender as to particular old notes. The issuers may not waive any
condition to the exchange offer unless such condition is legally waiveable. In
the event such a waiver by the issuers gives rise to the legal requirement to
do so, the issuers will hold the exchange offer open for at least five business
days thereafter. The issuers' interpretation of the terms and conditions of the
exchange offer, including the instructions in the letter of transmittal, will
be
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final and binding on all parties. Unless waived, any defects or irregularities
in connection with tenders of old notes must be cured within such time as the
issuers shall determine. Although the issuers intend to notify holders of
defects or irregularities with respect to tenders of old notes, neither the
issuers, the exchange agent nor any other person shall incur any liability for
failure to give such notification. Tender of old notes will not be deemed to
have been made until such defects or irregularities have been cured or waived.
Any old notes received by the exchange agent that are not properly tendered and
as to which the defects or irregularities have not been cured or waived will be
returned by the exchange agent to the tendering holders, unless otherwise
provided in the letter of transmittal, as soon as practicable following the
expiration date.
Guaranteed Delivery Procedures
Holders who wish to tender their old notes and whose old notes are not
immediately available, who cannot deliver their old notes, the letter of
transmittal or any other required documents to the exchange agent, or who
cannot complete the procedures for book-entry transfer, prior to the expiration
date, may effect a tender if:
(a) the tender is made through an eligible institution;
(b) prior to the expiration date, the exchange agent receives by
facsimile transmission, mail or hand delivery from such eligible
institution a properly completed and duly executed notice of guaranteed
delivery, setting forth the name and address of the holder, the certificate
number(s) of such old notes and the principal amount of old notes tendered,
stating that the tender is being made thereby and guaranteeing that, within
three New York Stock Exchange trading days after the expiration date, the
letter of transmittal, or facsimile thereof, or, in the case of a book-
entry transfer, an agent's message, together with the certificate(s)
representing the old notes, or a confirmation of book-entry transfer of
such notes into the exchange agent's account at the Book-Entry Transfer
Facility, and any other documents required by the letter of transmittal
will be deposited by the eligible institution with the exchange agent; and
(c) the certificate(s) representing all tendered old notes in proper
form for transfer, or a confirmation of a book-entry transfer of such old
notes into the exchange agent's account at the book entry transfer
facility, together with a letter of transmittal, of facsimile thereof,
properly completed and duly executed, with any required signature
guarantees, or, in the case of a book-entry transfer, an agent's message,
are received by the exchange agent within three New York Stock Exchange
trading days after the expiration date of the exchange offer.
Withdrawal of Tenders
Except as otherwise provided herein, tenders of old notes may be withdrawn
at any time prior to 5:00 p.m., New York City time, on the expiration date of
the exchange offer.
To withdraw a tender of old notes in the exchange offer, a telegram, telex,
letter or facsimile transmission notice of withdrawal must be received by the
exchange agent at its address set forth herein prior to 5:00 p.m., New York
City time, on the expiration date of the exchange offer. Any such notice of
withdrawal must:
. specify the name of the person having deposited notes to be withdrawn;
. identify the notes to be withdrawn, including the certificate number(s)
and principal amount of such notes, or, in the case of old notes
transferred by book-entry transfer, the name and number of the account at
the book entry transfer facility to be credited;
. be signed by the holder in the same manner as the original signature on
the letter of transmittal by which such notes were tendered, including
any required signature guarantees, or be accompanied by documents of
transfer sufficient to have the trustee with respect to the old notes
register the transfer of such notes into the name of the person
withdrawing the tender; and
. specify the name in which any such old notes are to be registered, if
different from that of the person having deposited the notes.
All questions as to the validity, form and eligibility, including time of
receipt, of such notices will be determined by us and shall be final and
binding on all parties. Any old notes so withdrawn will be deemed not to have
been validly tendered for purposes of the exchange offer and no new notes will
be issued with respect
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thereto unless the old notes so withdrawn are validly retendered. Any old notes
which have been tendered but which are not accepted for exchange will be
returned to the holder thereof without cost to such holder as soon as
practicable after withdrawal, rejection of tender or termination of the
exchange offer. Properly withdrawn old notes may be retendered by following one
of the procedures described above under "--Procedures for Tendering" at any
time prior to the expiration date.
Conditions
Notwithstanding any other term of the exchange offer, the issuers shall not
be required to accept for exchange, or exchange notes for, any old notes, and
may terminate or amend the exchange offer as provided herein before the
acceptance of such old notes, if:
. any action or proceeding is instituted or threatened in any court or by
or before any governmental agency with respect to the exchange offer
which, in the issuers' sole judgment, might materially impair the
issuers' ability to proceed with the exchange offer, or any material
adverse development has occurred in any existing action or proceeding
with respect to the issuers or any of their subsidiaries; or
. any law, statute, rule, regulation or interpretation by the staff of the
SEC is proposed, adopted or enacted, which, in the issuers' sole
judgment, might materially impair the issuers' ability to proceed with
the exchange offer or materially impair the contemplated benefits of the
exchange offer; or
. any governmental approval has not been obtained, which approval the
issuers shall, in their sole discretion, deem necessary for the
consummation of the exchange offer as contemplated hereby.
If the issuers determine, in their sole discretion, that any of the
conditions are not satisfied, the issuers may:
. refuse to accept any old notes and return all tendered old notes to the
tendering holders;
. extend the exchange offer and retain all old notes tendered prior to the
expiration of the exchange offer, subject, however, to the rights of
holders to withdraw such old notes as described in
"--Withdrawal of Tenders" above;
. waive such unsatisfied conditions with respect to the exchange offer and
accept all properly tendered old notes which have not been withdrawn.
Exchange Agent
The Bank of New York has been appointed as exchange agent for the exchange
offer. Questions and requests for assistance, requests for additional copies of
this prospectus or of the letter of transmittal and requests for notice of
guaranteed delivery should be directed to the exchange agent addressed as
follows:
By Registered or Certified Mail
or Overnight Courier:
The Bank of New York
101 Barclay Street
Floor 21 West
New York, New York 10286
Attn: Corporate Trust Trustee Administration
By Facsimile:
(For Eligible Institutions Only)
( ) -
Confirm by Telephone:
( ) -
[ ]
Delivery to an address other than set forth above will not constitute a
valid delivery.
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Fees and Expenses
The expenses of soliciting tenders will be borne by the issuers. The
principal solicitation is being made by mail however, additional solicitation
may be made by telegraph, telecopy, telephone or in person by officers and
regular employees of the issuers and their affiliates.
The issuers have not retained any dealer-manager in connection with the
exchange offer and will not make any payments to brokers, dealers, or others
soliciting acceptances of the exchange offer. The issuers, however, will pay
the exchange agent reasonable and customary fees for its services and will
reimburse it for its reasonable out-of-pocket expenses in connection therewith.
The issuers will pay the cash expenses to be incurred in connection with the
exchange offer. Such expenses include fees and expenses of the exchange agent
and trustee, accounting and legal fees and printing costs, among others.
Accounting Treatment
The new notes will be recorded at the same carrying value as the old notes,
which is face value, as reflected in the issuers' accounting records on the
date of exchange. Accordingly, the issuers will recognize no gain or loss for
accounting purposes. The expenses of the exchange offer will be expensed over
the term of the new notes.
Consequences of Failure to Exchange
The old notes that are not exchanged for new notes pursuant to the exchange
offer will remain restricted securities. Accordingly, such old notes may be
resold only:
. to the issuers, upon redemption thereof or otherwise;
. so long as the old notes are eligible for resale pursuant to Rule 144A
under the Securities Act, to a person inside the United States whom the
seller reasonably believes is a qualified institutional buyer within the
meaning of Rule 144A in a transaction meeting the requirements of Rule
144A;
. in accordance with Rule 144 under the Securities Act;
. outside the United States to a foreign person in a transaction meeting
the requirements of Rule 904 under the Securities Act;
. pursuant to another exemption from the registration requirements of the
Securities Act, and based upon an opinion of counsel reasonably
acceptable to the issuers; or
. pursuant to an effective registration statement under the Securities Act,
in each case in accordance with any applicable securities laws of any
state of the United States.
Resale of the New Notes
With respect to resales of new notes, based on interpretations by the staff
of the SEC set forth in no-action letters issued to third parties, we believe
that a holder or other person who receives new notes, whether or not such
person is the holder, other than a person that is an "affiliate" of the issuers
within the meaning of Rule 405 under the Securities Act, in exchange for old
notes in the ordinary course of business and who is not participating, does not
intend to participate, and has no arrangement or understanding with any person
to participate, in the distribution of the new notes, will be allowed to resell
the new notes to the public without further registration under the Securities
Act and without delivering to the purchasers of the new notes a prospectus that
satisfies the requirements of Section 10 of the Securities Act. However, if any
holder acquires new notes in the exchange offer for the purpose of distributing
or participating in a distribution of the new notes, such holder cannot rely on
the position of the staff of the SEC enunciated in such no-action letters or
any similar interpretive letters, and must comply with the registration and
prospectus delivery requirements of
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the Securities Act in connection with any resale transaction, unless an
exemption from registration is otherwise available. Further, each Participating
Broker-Dealer that receives new notes for its own account in exchange for old
notes, where such old notes were acquired by such Participating Broker-Dealer
as a result of market-making activities or other trading activities, must
acknowledge that it will deliver a prospectus in connection with any resale of
such new notes.
As contemplated by these no-action letters and the Registration Rights
Agreement, each holder accepting the exchange offer is required to represent to
the issuers in the letter of transmittal that:
. the new notes are to be acquired by the holder or the person receiving
such new notes, whether or not such person is the holder, in the ordinary
course of business;
. the holder or any such other person, other than a broker-dealer referred
to in the next sentence, is not engaging and does not intend to engage,
in the distribution of the new notes;
. the holder or any such other person has no arrangement or understanding
with any person to participate in the distribution of the new notes;
. neither the holder nor any such other person is an "affiliate" of the
company within the meaning of Rule 405 under the Securities Act; and
. the holder or any such other person acknowledges that if such holder or
other person participates in the exchange offer for the purpose of
distributing the new notes it must comply with the registration and
prospectus delivery requirements of the Securities Act in connection with
any resale of the new notes and cannot rely on those no-action letters.
As indicated above, each Participating Broker-Dealer that receives new notes
for its own account in exchange for old notes must acknowledge that it will
deliver a prospectus in connection with any resale of such new notes. For a
description of the procedures for such resales by Participating Broker-Dealers,
see "Plan of Distribution."
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DESCRIPTION OF THE NOTES
General
The old notes were originally issued pursuant to an indenture by and among
Avalon Cable of Michigan Holdings, Inc., which is referred to as "Michigan
Holdings", Avalon Cable LLC, which is referred to as "Avalon Holdings", and
Avalon Cable Holdings Finance, Inc., which is referred to as "Finance
Holdings", as joint and several obligors, and The Bank of New York, as trustee,
in a private transaction that is not subject to the registration requirements
of the Securities Act. See "Notice to Investors." In the reorganization,
Michigan Holdings ceased to be an obligor under the old notes, and became a
guarantor, together with Avalon Cable of Michigan, Inc., which is referred to
as "Avalon Michigan", of Avalon Holdings' obligations under the New Notes and
the Indenture. Michigan Holdings and Avalon Michigan do not have significant
assets or liabilities, other than their equity interests in Avalon Michigan and
Avalon Holdings, respectively. See "The Company--Corporate Structure." Thus,
currently, the "Issuers" under the Indenture are Avalon Holdings and Finance
Holdings. The form and terms of the new notes are the same as the form and
terms of the old notes, which they replace, except that the holders of the new
notes will not be entitled to certain rights under the Registration Rights
Agreement, including the provisions providing for liquidated damages on the old
notes in certain circumstances relating to the timing of the exchange offer,
which rights will terminate when the exchange offer is consummated.
The terms of the new notes and the old notes, collectively, referred to as
the "Notes", include those stated in the Indenture and those made part of the
Indenture by reference to the Trust Indenture Act of 1939. The new notes are
subject to all such terms, and holders of new notes are referred to the
Indenture and the Trust Indenture Act for a statement thereof. The following
summary of the material provisions of the Indenture does not purport to be
complete and is qualified in its entirety by reference to the Indenture,
including the definitions therein of certain terms used below. Copies of the
Indenture and Registration Rights Agreement are available as set forth below
under "Available Information." The definitions of certain terms used in the
following summary are set forth below under "Certain Definitions." For purposes
of this summary, references to the "Issuers" do not include their respective
Subsidiaries.
The new notes, like the old notes, will be general unsecured obligations of
the Issuers and will rank pari passu in right of payment with all current and
future senior Indebtedness of the Issuers. However, the operations of the
Issuers are conducted through their Subsidiaries and, therefore, the Issuers
are dependent upon the cash flow of their Subsidiaries to meet their
obligations, including their obligations under the new notes. The Issuers'
Subsidiaries will not be guarantors of the new notes. As a result, the new
notes will be effectively subordinated to all Indebtedness and other
liabilities and commitments (including trade payables and lease obligations) of
the Issuers' Subsidiaries. Any right of the Issuers to receive assets of any of
their Subsidiaries upon the latter's liquidation or reorganization (and the
consequent right of the Holders of the new notes to participate in those
assets) will be effectively subordinated to the claims of that Subsidiary's
creditors, except to the extent that the Issuers are themselves recognized as
creditors of such Subsidiary, in which case the claims of the Issuers would
still be subordinate to any security in the assets of such Subsidiary and any
Indebtedness of such Subsidiary senior to that held by the Issuers. As of
December 31, 1998, on a pro forma basis after giving effect to all completed
and pending acquisitions and the Reorganization: (a) the Issuers would have on
a combined basis no Indebtedness other than Indebtedness represented by the old
notes and Indebtedness of their subsidiaries (some of which is guaranteed by
the Issuers) and (b) the Issuers' Subsidiaries would have had on a combined
basis approximately $330.2 million of Indebtedness, including borrowings under
the credit facility, and $17.0 million of trade payables and other liabilities
outstanding and approximately $30.0 million of undrawn availability under the
credit facility. The Indenture permits the Issuers and their Restricted
Subsidiaries to incur additional Indebtedness, including secured Indebtedness,
subject to certain limitations.
All of the Issuers' Subsidiaries are currently Restricted Subsidiaries.
Under certain circumstances, the Issuers will be able to designate current or
future Subsidiaries as Unrestricted Subsidiaries. Unrestricted Subsidiaries
will not be subject to any of the restrictive covenants set forth in the
Indenture.
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Principal, Maturity and Interest
The Notes are limited in aggregate principal amount at issuance to $160.4
million, of which $110.4 million were issued in the initial offering, and will
mature on December 1, 2008. The Old Notes were issued at a substantial discount
from their principal amount at maturity of $196.0 million, to generate gross
proceeds of approximately $110.4 million. Until December 1, 2003, interest will
not be paid currently on the Notes, but the Accreted Value will increase
(representing amortization of original issue discount) between the date of
original issuance and December 1, 2003, on a semi-annual basis using a 360-day
year comprised of twelve 30-day months, such that the Accreted Value shall be
equal to the full principal amount at maturity of the Notes on December 1, 2003
(the "Full Accretion Date"). Beginning on the Full Accretion Date, interest on
the Notes will accrue at the rate of 11.875% per annum and will be payable
semi-annually in arrears on June 1 and December 1 of each year, to Holders of
record on the immediately preceding May 15 and November 15. Additional Notes
may be issued from time to time, subject to the provisions of the Indenture
described below under the caption "--Certain Covenants--Incurrence of
Indebtedness and Issuance of Preferred Stock." The Old Notes, the Notes offered
hereby and any additional Notes subsequently issued under the Indenture would
be treated as a single class for all purposes under the Indenture, including,
without limitation, waivers, amendments, redemptions and offers to purchase.
Interest on the Notes will accrue from the most recent date to which interest
has been paid or, if no interest has been paid, from the Full Accretion Date.
Interest will be computed on the basis of a 360-day year comprised of twelve
30-day months. Principal, premium, if any, and interest and Liquidated Damages
thereon, if any, on the Notes will be payable at the office or agency of the
Issuers maintained for such purpose within the City and State of New York or,
at the option of the Issuers, payment of interest may be made by check mailed
to the Holders of the Notes at their respective addresses set forth in the
register of Holders of Notes; provided that all payments of principal, premium,
if any, interest and Liquidated Damages, if any, with respect to Notes for
which Holders have given wire transfer instructions to the Issuers at least 10
business days prior to the applicable interest payment date will be required to
be made by wire transfer of immediately available funds to the accounts
specified by the Holders thereof. Until otherwise designated by the Issuers,
the Issuers' office or agency in New York will be the office of the Trustee
maintained for such purpose. The Notes will be issued in denominations of
$1,000 and integral multiples thereof.
Parent Guarantees
The payment obligations of Avalon Holdings under the Notes is jointly and
severally guaranteed (the "Parent Guarantees") by the Parent Guarantors. The
Parent Guarantees were issued in connection with the Reorganization to avoid
certain adverse tax consequences in respect of the Reorganization. Neither
Parent Guarantor has any significant business operations or assets, other than,
with respect to Avalon Michigan, its equity interest in Avalon Holdings, and,
with respect to Michigan Holdings, its equity interest in Avalon Michigan, and
neither Parent Guarantor has any revenues. As a result, prospective purchasers
of the Notes should not expect the Parent Guarantors to participate in
servicing the interest, principal obligations and Liquidated Damages, if any,
on the Notes. The obligations of each Parent Guarantor under its Parent
Guarantee will be limited so as not to constitute a fraudulent conveyance under
applicable law. See the "Risk Factors" section of this prospectus.
Maximum Amount of Obligations
The obligations of each Issuer and each Parent Guarantor (under the Parent
Guarantee) are limited to the maximum amount as will, after giving effect to
all other contingent and fixed liabilities of such Issuer or such Parent
Guarantor, as the case may be (including, without limitation, any obligations
under any senior
Indebtedness) and after giving effect to any collections from or payments made
by or on behalf of any other Issuer or Parent Guarantor, as the case may be, in
respect of the obligations of such other Issuer or other Parent Guarantor, as
the case may be, under its obligations under the Indenture, result in the
obligations of such Issuer or such Parent Guarantor, as the case may be, under
its obligations under the Indenture not constituting a fraudulent conveyance or
fraudulent transfer under federal or state law. See the "Risk Factors" section
of this prospectus.
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Mandatory Payment of Accrued Interest
Prior to December 1, 2003, interest on the Notes will accrete at an annual
rate of 11 7/8% per annum, compounded semi-annually, but will not be paid until
December 1, 2003. On December 1, 2003, the Issuers will be required to redeem
an amount equal to $369.79 per $1,000 principal amount at maturity of each Note
then outstanding (the "Accreted Interest Redemption Amount") ($72,479,000 in
aggregate principal amount at maturity of the Notes, assuming all of the Old
Notes are exchanged in this exchange offer and all New Notes remain outstanding
on such date) on a pro rata basis at a redemption price of 100% of the
principal amount at maturity of the Notes so redeemed. The Accreted Interest
Redemption Amount represents (i) the excess of the aggregate accreted principal
amount of all Notes outstanding on December 1, 2003 over the aggregate issue
price thereof less (ii) an amount equal to one year's simple uncompounded
interest on the aggregate issue price of such Notes at a rate per annum equal
to the stated interest rate on the Notes.
Optional Redemption
Except as described below, the Notes are not redeemable at the Issuers'
option prior to December 1, 2003. Thereafter, the Notes are subject to
redemption at any time at the option of the Issuers, in whole or in part, upon
not less than 30 nor more than 60 days notice, at the redemption prices
(expressed as percentages of principal amount) set forth below plus accrued and
unpaid interest, if any, and Liquidated Damages, if any, thereon to the
applicable redemption date, if redeemed during the twelve-month period
beginning on December 1 of the years indicated below:
<TABLE>
<CAPTION>
Year Percentage
---- ----------
<S> <C>
2003.......................... 105.938%
2004.......................... 103.958%
2005.......................... 101.979%
2006 and thereafter........... 100.000%
</TABLE>
Notwithstanding the foregoing, at any time prior to December 1, 2001, the
Issuers may on any one or more occasions redeem up to 35% of the aggregate
principal amount at maturity of Notes originally issued under the Indenture at
a redemption price equal to 111.875% of the Accreted Value at the date of
redemption, plus Liquidated Damages, if any, to the redemption date, with the
Net Cash Proceeds of any Equity Offering and/or the Net Cash Proceeds of a
Strategic Equity Investment; provided that at least 65% of the aggregate
principal amount at maturity of Notes originally issued remain outstanding
immediately after each occurrence of such redemption; and provided, further,
that each such redemption shall occur within 45 days of the date of the closing
of such Equity Offering and/or Strategic Equity Investment.
As used in the preceding paragraph, "Equity Offering" means any public or
private sale of Capital Stock of any of the Issuers or Avalon or any Subsidiary
of Avalon pursuant to which the Issuers together receive net proceeds of at
least $25.0 million, other than issuances of Capital Stock pursuant to employee
benefit plans or as compensation to employees; provided that to the extent such
Capital Stock is issued by Avalon or any Subsidiary of Avalon, the Net Cash
Proceeds thereof shall have been contributed to one or more of the Issuers in
the form of an equity contribution.
Selection and Notice
If less than all of the Notes are to be redeemed at any time, selection of
Notes for redemption will be made by the Trustee in compliance with the
requirements of the principal national securities exchange, if any, on which
the Notes are listed, or, if the Notes are not so listed, on a pro rata basis,
by lot or by any other customary method; provided that no Notes of $1,000 or
less shall be redeemed in part. Notices of redemption shall be mailed by first
class mail at least 30 but not more than 60 days before the redemption date to
each Holder of Notes to be redeemed at its registered address. Notices of
redemption may not be conditional. If any Note is to be redeemed in part only,
the notice of redemption that relates to such Note shall state the portion of
the principal amount thereof to be redeemed. A new Note in principal amount
equal to the unredeemed portion
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thereof will be issued in the name of the Holder thereof upon cancellation of
the original Note. Notes called for redemption become due on the date fixed for
redemption. On and after the redemption date, interest ceases to accrue on
Notes or portions of them called for redemption.
Mandatory Redemption
Except as set forth below under "Repurchase at the Option of Holders," the
Issuers are not required to make mandatory redemption or sinking fund payments
with respect to the Notes.
Repurchase at the Option of Holders
Change of Control
Upon the occurrence of a Change of Control, each Holder of Notes will have
the right to require the Issuers to repurchase all or any part (equal to $1,000
or an integral multiple thereof) of such Holder's Notes pursuant to a Change of
Control Offer (as defined below) at an offer price in cash equal to 101% of the
aggregate principal amount thereof plus accrued and unpaid interest and
Liquidated Damages thereon, if any, to the date of purchase (or, in the case of
repurchases of Notes prior to the Full Accretion Date, at a purchase price
equal to 101% of the Accreted Value thereof as of the date of purchase)
(collectively, the "Change of Control Payment"). Within 20 days following any
Change of Control, the Issuers will mail a notice to each Holder describing the
transaction or transactions that constitute the Change of Control and offer (a
"Change of Control Offer") to repurchase Notes on the date specified in such
notice, which date shall be no earlier than 30 days and no later than 60 days
from the date such notice is mailed (the "Change of Control Payment Date"),
pursuant to the procedures required by the Indenture and described in such
notice. The Issuers will comply with the requirements of Rule 14e-1 under the
Exchange Act and any other securities laws and regulations thereunder to the
extent such laws and regulations are applicable in connection with the
repurchase of the Notes as a result of a Change of Control.
On the Change of Control Payment Date, the Issuers will, to the extent
lawful:
. accept for payment all Notes or portions thereof properly tendered
pursuant to the Change of Control Offer,
. deposit with the Paying Agent an amount equal to the Change of Control
Payment in respect of all Notes or portions thereof so tendered and
. deliver or cause to be delivered to the Trustee the Notes so accepted
together with an Officers' Certificate stating the aggregate principal
amount at maturity of Notes or portions thereof being purchased by the
Issuers.
The Paying Agent will promptly mail to each Holder of Notes so tendered the
Change of Control Payment for such Notes, and the Trustee will promptly
authenticate and mail (or cause to be transferred by book entry) to each Holder
a new Note equal in principal amount to any unpurchased portion of the Notes
surrendered, if any; provided that each such new Note will be in a principal
amount of $1,000 or an integral multiple thereof. The Indenture provides that,
prior to complying with the provisions of this covenant, but in any event
within 90 days following a Change of Control, the Issuers will either repay all
outstanding senior Indebtedness or obtain the requisite consents, if any, under
all agreements governing outstanding senior Indebtedness to permit the
repurchase of Notes required by this covenant. The Issuers will publicly
announce the results of the Change of Control Offer on or as soon as
practicable after the Change of Control Payment Date.
The Credit Facility and the indenture governing the Senior Subordinated
Notes limit the ability of the Issuers to purchase any Notes and provides that
certain change of control events with respect to the Issuers, the Company
Issuers or Avalon would constitute a default thereunder. Any future credit
agreements or other agreements relating to Indebtedness to which the Issuers or
the Company Issuers become a party may contain similar restrictions and
provisions. In the event a Change of Control occurs at a time when the Issuers
are
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prohibited from purchasing Notes, the Issuers could seek the consent of its
lenders or lenders of the Company Issuers to the purchase of Notes or could
attempt to refinance the borrowings that contain such prohibition. If the
Issuers or the Company Issuers do not obtain such a consent or repay such
borrowings, the Issuers will remain prohibited from purchasing the Notes and
the Senior Subordinated Notes. In such case, the Issuers' failure to purchase
tendered Notes would constitute an Event of Default under the Indenture which
would, in turn, constitute a default under the Credit Facility.
The meaning of the phrase "all or substantially all" as used in the
Indenture in the definition of "Change of Control" with respect to a sale of
assets varies according to the facts and circumstances of the subject
transaction, has no clearly established meaning under relevant law and is
subject to judicial interpretation. Accordingly, in certain circumstances,
there may be a degree of uncertainty in ascertaining whether a particular
transaction would involve a disposition of "all or substantially all" of the
assets of the Issuers, and therefore it may be unclear whether a Change of
Control has occurred and whether the Notes are subject to a Change of Control
Offer.
Restrictions in the Indenture on the ability of the Issuers and their
Restricted Subsidiaries to incur additional Indebtedness, to grant Liens on
their property, to make Restricted Payments and to make Asset Sales may also
make more difficult or discourage a takeover of the Issuers, whether favored or
opposed by the management of the Issuers. Consummation of any such transaction
in certain circumstances may require redemption or repurchase of the Notes, and
there can be no assurance that the Issuers or the acquiring party will have
sufficient financial resources to effect such redemption or repurchase. Such
restrictions and the restrictions on transactions with Affiliates may, in
certain circumstances, make more difficult or discourage any leveraged buyout
of the Issuers or any of their Subsidiaries by the management of the Issuers or
other persons. While such restrictions cover a wide variety of arrangements
which have traditionally been used to effect highly leveraged transactions, the
Indenture may not afford the holders of the Notes protection in all
circumstances from the adverse aspects of a highly leveraged transaction,
reorganization, restructuring, merger or similar transaction.
The Issuers will not be required to make a Change of Control Offer upon a
Change of Control if a third party makes the Change of Control Offer in the
manner, at the times and otherwise in compliance with the requirements set
forth in the Indenture applicable to a Change of Control Offer made by the
Issuers and purchases all Notes validly tendered and not withdrawn under such
Change of Control Offer.
The Change of Control provisions described above will be applicable whether
or not any other provisions of the Indenture are applicable. Except as
described above with respect to a Change of Control, the Indenture does not
contain provisions that permit the Holders of the Notes to require that the
Issuers repurchase or redeem the Notes in the event of a takeover,
recapitalization or similar transaction.
Asset Sales
The Issuers will not, and will not permit any of their Restricted
Subsidiaries to, consummate an Asset Sale unless:
(i) such Issuer or such Restricted Subsidiary receives consideration at
the time of such Asset Sale at least equal to the fair market value
(evidenced by a resolution of its Board of Directors, whose determination
shall be conclusive, set forth in an Officers' Certificate delivered to the
Trustee) of the assets or Equity Interests issued or sold or otherwise
disposed of and
(ii) at least 75% of the consideration therefor received by such Issuer
or such Restricted Subsidiary is in the form of cash or Cash Equivalents;
provided that the amount of
(x) any liabilities (as shown on such Issuer's or such Restricted
Subsidiary's most recent balance sheet), of such Issuer or any of its
Restricted Subsidiaries (other than contingent liabilities and
liabilities that are by their terms subordinated to the Notes) that are
assumed by the transferee of any such assets and
(y) any securities, notes or
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other obligations received by such Issuer or any such Restricted Subsidiary
from such transferee that are promptly converted by such Issuer or such
Restricted Subsidiary into cash (to the extent of the cash received), shall be
deemed to be cash for purposes of the foregoing and the next paragraph.
Notwithstanding the immediately preceding paragraph, the Issuers and their
Restricted Subsidiaries will be permitted to consummate an Asset Sale without
complying with the prior paragraph if:
. such Issuer or such Restricted Subsidiary receives consideration at the
time of such Asset Sale at least equal to the fair market value of the
assets or other property sold, issued or otherwise disposed of (as
evidenced by a resolution of its Board of Directors, which shall be
conclusive, set forth in an Officers' Certificate delivered to the
Trustee) and
. at least 75% of the consideration for such Asset Sale constitutes a
controlling interest in a Permitted Business, assets used or useful in a
Permitted Business and/or cash or Cash Equivalents;
provided that any cash (other than any amount deemed cash under clause (ii) (x)
of the preceding paragraph) or Cash Equivalents received by such Issuer or such
Restricted Subsidiary in connection with any Asset Sale permitted to be
consummated under this paragraph shall constitute Net Cash Proceeds subject to
the provisions of the next paragraph.
Within 360 days after the receipt of any Net Cash Proceeds from an Asset
Sale, the Issuer or such Restricted Subsidiary, as the case may be, may apply
such Net Cash Proceeds, at its option, (a) to repay Indebtedness of the Company
Issuers (and to correspondingly permanently reduce the commitments with respect
thereto under the Credit Facility) or (b) to the acquisition of a controlling
interest in a Permitted Business, the making of a capital expenditure or the
acquisition of assets used or useful in a Permitted Business. Pending the final
application of any such Net Cash Proceeds, the Issuers or such Restricted
Subsidiary, as the case may be, may temporarily reduce revolving credit
borrowings or otherwise invest such Net Cash Proceeds in any manner that is not
prohibited by the Indenture. Any Net Cash Proceeds from Asset Sales that are
not applied or invested as provided in the first sentence of this paragraph
within the applicable period shall be deemed to constitute "Excess Proceeds."
When the aggregate amount of Excess Proceeds exceeds $10.0 million, the Issuers
shall be required, to the extent permitted by the Senior Subordinated Note
Indenture, to make an offer to all Holders of Notes and all holders of other
pari passu Indebtedness of the Issuers containing provisions similar to those
set forth in the Indenture with respect to offers to purchase or redeem with
the proceeds of sales of assets (an "Asset Sale Offer") to purchase the maximum
principal amount of Notes and such other pari passu Indebtedness of the Issuers
that may be purchased out of the Excess Proceeds, at an offer price in cash in
an amount equal to 100% of the principal amount thereof plus accrued and unpaid
interest and Liquidated Damages thereon, if any, to the date of repurchase (or,
in the case of repurchases of Notes prior to the Full Accretion Date, at a
purchase price equal to 100% of the Accreted Value thereof as of the date of
repurchase), in accordance with the procedures set forth in the Indenture and
such other Indebtedness. To the extent that any Excess Proceeds remain after
consummation of an Asset Sale Offer, the Issuers may use such Excess Proceeds
for any purpose not otherwise prohibited by the Indenture (including as
provided in the next paragraph). If the aggregate principal amount at maturity
or Accreted Value (as applicable) of Notes and such other Indebtedness tendered
into such Asset Sale Offer exceeds the amount of Excess Proceeds, the Trustee
shall select the Notes and such other Indebtedness to be purchased on a pro
rata basis, by lot or by any other customary method; provided that no Notes of
$1,000 or less shall be redeemed in part. Upon completion of such offer to
purchase, the amount of Excess Proceeds shall be reset at zero.
If any of the Issuers is, or may be, required to make an Asset Sale Offer,
the Company Issuers may be required to make a similar offer to purchase the
Senior Subordinated Notes (and pari passu Indebtedness) from the holders
thereof. In such event, the Issuers and the Company Issuers may make
simultaneous similar offers to purchase the Notes (and any pari passu
Indebtedness containing similar provisions) and the Senior Subordinated Notes
(and pari passu Indebtedness), respectively. If such simultaneous offers are
made, the Excess Proceeds shall first be utilized to redeem any Senior
Subordinated Notes (and pari passu Indebtedness) tendered pursuant to such
offer by the Company Issuers. To the extent that any Excess Proceeds are
remaining after such offer by the Company Issuers, such remaining Excess
Proceeds shall be utilized to redeem a pro rata portion of the Notes and any
pari passu Indebtedness containing similar provisions.
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The Issuers will comply with the requirements of Rule 14e-1 under the
Exchange Act and any other securities laws and regulations thereunder to the
extent such laws and regulations are applicable in connection with the
repurchase of Notes pursuant to an Asset Sale Offer.
Certain Covenants
Restricted Payments
The Issuers will not, and will not permit any of their Restricted
Subsidiaries to, directly or indirectly:
. declare or pay any dividend or make any other payment or distribution on
account of the Issuers' or any of their Restricted Subsidiaries' Equity
Interests (including, without limitation, any payment in connection with
any merger or consolidation involving any Issuer) or to the direct or
indirect holders of the Issuers' or any of their Restricted Subsidiaries'
Equity Interests in their capacity as such (other than dividends or
distributions payable in Equity Interests (other than Disqualified Stock)
of any Issuer and other than dividends or distributions payable to any
Issuer or another Restricted Subsidiary and if such Restricted Subsidiary
has equity holders other than any of the Issuers or other Restricted
Subsidiaries, to its other equity holders on a pro rata basis);
. purchase, redeem or otherwise acquire or retire for value (including
without limitation, in connection with any merger or consolidation
involving any Issuer) any Equity Interests of any Issuer or any direct or
indirect parent of any Issuer or other Affiliate of any Issuer;
. make any payment on or with respect to, or purchase, redeem, defease or
otherwise acquire or retire for value any Indebtedness of any Issuer that
is subordinated to the Notes, except a payment of interest or principal
at Stated Maturity, or a payment of interest made through the issuance of
additional Indebtedness of the same kind as the Indebtedness on which
such interest shall have accrued or payment on Indebtedness owed to
another Issuer and except any payment in respect of the ABRY Subordinated
Debt; or
. make any Restricted Investment (all such payments and other actions set
forth in the clauses above being collectively referred to as "Restricted
Payments"), unless, at the time of and after giving effect to such
Restricted Payment:
(a) no Default or Event of Default shall have occurred and be
continuing or would occur as a consequence thereof; and
(b) the Issuers would, at the time of such Restricted Payment and
after giving pro forma effect thereto as if such Restricted
Payment had been made at the beginning of the applicable
quarter, have been permitted to incur at least $1.00 of
additional Indebtedness pursuant to the test set forth in the
first paragraph of the covenant described below under the
caption "--Incurrence of Indebtedness and Issuance of Preferred
Stock"; and
(c) such Restricted Payment, together with the aggregate amount of all
other Restricted Payments made by the Issuers and their Restricted
Subsidiaries after the Issue Date (excluding Restricted Payments permitted
by clauses (2), (3), (4), (7), (8), (9), (10), (11), (12) and (13) of the
next succeeding paragraph), is less than the sum of:
. 100% of the aggregate Consolidated Cash Flow of the Issuers (or, in
the event such Consolidated Cash Flow shall be a deficit, minus 100%
of such deficit) accrued for the period beginning on the first day
of the Issuers' first fiscal quarter commencing after the Issue Date
and ending on the last day of the Issuers' most recent calendar
month for which financial information is available to the Issuers
ending prior to the date of such proposed Restricted Payment, taken
as one accounting period, less
. 1.4 times Consolidated Interest Expense for the same period, plus
. 100% of the aggregate Net Cash Proceeds received by the Issuers as a
contribution to the equity capital of the Issuers or from the issue
or sale since the Issue Date of Equity Interests of the
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Issuers (other than Disqualified Stock), or of Disqualified Stock or
debt securities (including the ABRY Subordinated Debt) of the Issuers
that have been converted into such Equity Interests (other than
Equity Interests (or Disqualified Stock or convertible debt
securities) sold to a Restricted Subsidiary of the Issuers and other
than Disqualified Stock or convertible debt securities that have been
converted into Disqualified Stock), plus
. to the extent that any Restricted Investment that was made after the
Issue Date is sold for cash or otherwise liquidated or repaid for
cash, the amount of such Net Cash Proceeds plus
. to the extent that any Unrestricted Subsidiary is redesignated as a
Restricted Subsidiary after the Issue Date, the fair market value of
the Investment of the applicable Issuer or Restricted Subsidiary of
such Issuer in such Subsidiary as of the date of such redesignation.
The foregoing provisions shall not prohibit:
(1) the payment of any dividend within 60 days after the date of
declaration thereof, if at said date of declaration such
payment would have complied with the provisions of the
Indenture;
(2) the redemption, repurchase, retirement, defeasance or other
acquisition of any Indebtedness of any of the Issuers which is
subordinated to the Notes or Equity Interests of any of the
Issuers in exchange for, or out of the Net Cash Proceeds of
the substantially concurrent sale (other than to a Restricted
Subsidiary of any of the Issuers) of, other Equity Interests
of any of the Issuers (other than any Disqualified Stock) or
capital contributions to any of the Issuers; provided that the
amount of any such Net Cash Proceeds that are utilized for any
such redemption, repurchase, retirement, defeasance or other
acquisition shall be excluded from clause (c) (2) of the
preceding paragraph;
(3) the defeasance, redemption, repurchase or other acquisition of
Indebtedness of any of the Issuers which is subordinated to
the Notes with the Net Cash Proceeds from an incurrence of
Permitted Refinancing Indebtedness;
(4) the payment of any dividend or distribution by a Restricted
Subsidiary of any of the Issuers to the holders of its common
Equity Interests so long as the applicable Issuer or such
Restricted Subsidiary receives at least its pro rata share of
such dividend or distribution in accordance with its Equity
Interests;
(5) the repurchase, redemption or other acquisition or retirement
for value of any Equity Interests of any of the Issuers or the
payment of a dividend to any Affiliates of the Issuers to
effect the repurchase, redemption, acquisition or retirement
of an Affiliate's equity interest, that are held by any member
of any of the Issuers' (or any of their respective Restricted
Subsidiaries) management pursuant to any management equity
subscription or purchase agreement or stock option agreement
or similar agreement; provided that the aggregate price paid
for all such repurchased, redeemed, acquired or retired Equity
Interests shall not exceed $2 million in any fiscal year;
(6) from and after the time that the aggregate Consolidated Cash
Flow of the Issuers (calculated on a pro forma basis as
described in the definition of "Leverage Ratio") for any full
fiscal quarter multiplied by four exceeds $60 million,
payments or distributions to any Affiliate of the Issuers to
permit such Affiliate to pay for the performance of management
functions by an Affiliate of the Issuers in an aggregate
amount not to exceed the greater of (A) $250,000 in any fiscal
year and (B) 0.25% of Total Revenues for such year;
(7) any payments or distributions or other transactions to be made
in connection with the Merger, the Mercom Acquisition or the
Reorganization (including fees and expenses incurred in
connection therewith);
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(8) payments to Affiliates of the Issuers and holders of Equity
Interests in the Issuers in amounts equal to the amounts
required to pay any Federal, state or local income taxes to
the extent that:
(A) such income taxes are attributable to the income of the
Issuers and their Restricted Subsidiaries (but limited, in
the case of taxes based upon taxable income, to the extent
that cumulative taxable net income subsequent to the Issue
Date is positive) and
(B) such taxes are related to Indebtedness between or among any
of the Issuers and any of their Restricted Subsidiaries or
Avalon or any of its Restricted Subsidiaries;
(9) Restricted Investments received in connection with an Asset
Sale that complies with the covenant described under "--Asset
Sales");
(10) payments on the ABRY Subordinated Debt (including all accrued
interest thereon) in accordance with the terms thereof;
(11) payments or distributions to dissenting stockholders pursuant
to transactions permitted under the terms of the Indenture;
(12) the distribution by Avalon Holdings to the holders of its
Capital Stock of all the Equity Interests held by Avalon
Holdings in any of its Subsidiaries; provided that,
substantially simultaneously with such distribution, such
Equity Interests, and/or option to purchase all such Equity
Interests, are sold to a third party for consideration in an
amount at least equal to the fair market value of such Equity
Interests and Avalon Holdings receives an amount equal to the
Net Cash Proceeds of such sale and any other consideration
received in connection therewith; and
(13) other Restricted Payments in an aggregate amount not to
exceed $5.0 million;
provided, however, that at the time of, and after giving effect to, any
Restricted Payment permitted under clauses (5), (6), (10) and (13) above,
no Default or Event of Default shall have occurred and be continuing or
would occur as a consequence thereof.
The amount of all Restricted Payments (other than cash) shall be the fair
market value on the date of the Restricted Payment of the asset(s) or
securities proposed to be transferred or issued by the applicable Issuer or the
Restricted Subsidiary of such Issuer, pursuant to the Restricted Payment. The
fair market value of any non-cash Restricted Payment shall be determined by the
Board of Directors of such Issuer or Restricted Subsidiary, as the case may be,
whose resolution with respect thereto shall be delivered to the Trustee, such
determination shall be conclusive and shall be based upon an opinion or
appraisal issued by an appraisal, accounting or investment banking firm of
national standing if such fair market value exceeds $10.0 million. Not later
than the date of making any Restricted Payment, such Issuer or Restricted
Subsidiary, as the case may be, shall deliver to the Trustee an Officers'
Certificate stating that such Restricted Payment is permitted and setting forth
the basis upon which the calculations required by the covenant "--Restricted
Payments" were computed, together with a copy of any opinion or appraisal
required by the Indenture.
Incurrence of Indebtedness and Issuance of Preferred Stock
The Issuers will not, and will not permit any of their Restricted
Subsidiaries to, directly or indirectly, create, incur, issue, assume,
guarantee or otherwise become directly or indirectly liable, contingently or
otherwise, with respect to (collectively, "incur") any Indebtedness (including
Acquired Debt) other than Permitted Debt and the Issuers will not issue any
Disqualified Stock and will not permit any of their Restricted Subsidiaries to
issue any shares of preferred stock (other than to an Issuer or another
Restricted Subsidiary); provided, however, that the Issuers may incur
Indebtedness (including Acquired Debt) or issue shares of Disqualified Stock
and any of the Issuers' Restricted Subsidiaries may incur Indebtedness or issue
shares of preferred stock if the Issuers' Leverage Ratio at the time of
incurrence of such Indebtedness or the issuance of such Disqualified Stock or
such preferred stock, as the case may be, after giving pro forma effect to such
incurrence or issuance and to the use of the proceeds therefrom would have been
no greater than (a) 7.0 to 1,
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if such incurrence or issuance is on or prior to December 31, 2000, and (b) 6.5
to 1, if such incurrence or issuance is after December 31, 2000.
The Indenture will also provide that the Issuers will not incur any
Indebtedness that is contractually subordinated in right of payment to any
other Indebtedness of the Issuers unless such Indebtedness is also
contractually subordinated in right of payment to the Notes on substantially
identical terms; provided, however, that no Indebtedness of the Issuers shall
be deemed to be contractually subordinated in right of payment to any other
Indebtedness of the Issuers solely by virtue of being unsecured.
The provisions of the first paragraph of this covenant shall not apply to
the incurrence of any of the following items of Indebtedness (collectively,
"Permitted Debt"):
(1) the incurrence by the Issuers or their Restricted Subsidiaries of
Indebtedness under the Credit Facility letters of credit (with letters of
credit being deemed to have a principal amount equal to the maximum
potential liability of the Issuers and their Restricted Subsidiaries
thereunder) and related Guarantees under the Credit Facility; provided that
the aggregate principal amount of all Indebtedness of the Issuers and their
Restricted Subsidiaries outstanding under the Credit Facility after giving
effect to such incurrence, including all Permitted Refinancing Indebtedness
incurred to refund, refinance or replace any other Indebtedness incurred
pursuant to this clause (1) does not exceed an amount equal to $345,888,000
less the aggregate amount applied by the Issuers and their Restricted
Subsidiaries to permanently reduce the availability of Indebtedness under
the Credit Facility pursuant to the provisions described under the caption
"--Certain Covenants--Asset Sales";
(2) the incurrence by the Issuers of the ABRY Subordinated Debt;
(3) the incurrence by the Issuers and their Restricted Subsidiaries of
Existing Indebtedness;
(4) the incurrence by the Issuers of the Existing Michigan Indebtedness
and the Mercom Intercompany Loan;
(5) the incurrence by the Issuers of Indebtedness represented by the
Notes and the incurrence by the Company Issuers of Indebtedness represented
by the Senior Subordinated Notes in an aggregate principal amount of $150
million outstanding on the date of the Indenture;
(6) the incurrence by the Issuers or any of their Restricted
Subsidiaries of Indebtedness represented by Capital Lease Obligations,
mortgage financings or purchase money obligations, in each case incurred
for the purpose of financing all or any part of the purchase price or cost
of construction or improvement of property, plant or equipment used in the
business of the Issuers or such Restricted Subsidiary, in an aggregate
principal amount, including all Indebtedness incurred to refund, refinance
or replace Indebtedness incurred pursuant to this clause (6), not to exceed
$10.0 million at any time outstanding;
(7) the incurrence by the Issuers or any of their Restricted
Subsidiaries of Permitted Refinancing Indebtedness;
(8) the incurrence by the Issuers or any of their Restricted
Subsidiaries of intercompany Indebtedness between or among any of the
Issuers and any of their Restricted Subsidiaries; provided, however, that
(1) if one of the Issuers is the obligor on such Indebtedness, such
Indebtedness is expressly subordinated to the prior payment in full in cash
of all Obligations with respect to the Notes and the Indenture, and (2)(A)
any subsequent event or issuance or transfer of Equity Interests that
results in any such Indebtedness being held by a Person other than one of
the Issuers or a Restricted Subsidiary thereof and (B) any sale or other
transfer of any such Indebtedness to a Person that is not any one of the
Issuers or a Restricted Subsidiary thereof shall be deemed, in each case,
to constitute an incurrence of such Indebtedness by such Issuer or such
Restricted Subsidiary, as the case may be, that was not permitted by this
clause (8);
(9) the incurrence by the Issuers or any of their Restricted
Subsidiaries of Hedging Obligations that are incurred in the ordinary
course of business for the purpose of fixing or hedging currency, commodity
or interest rate risk (including with respect to any floating rate
Indebtedness that is permitted by the terms
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of the Indenture to be outstanding) in connection with the conduct of their
respective businesses and not for speculative purposes;
(10) the guarantee by the Issuers of Indebtedness of any of their
Restricted Subsidiaries so long as the incurrence of such Indebtedness by
such Restricted Subsidiary is permitted to be incurred by another provision
of this covenant "--Incurrence of Indebtedness and Issuance of Preferred
Stock";
(11) the guarantee by any Restricted Subsidiary of Indebtedness of any
of the Issuers so long as such guarantee by such Restricted Subsidiary
complies with the provisions under the covenant "--Guarantees by Restricted
Subsidiaries";
(12) Indebtedness consisting of customary indemnification, adjustments
of purchase price or similar obligations, in each case, incurred or assumed
in connection with the acquisition of any business or assets; and
(13) the incurrence by the Issuers or any of their Restricted
Subsidiaries of additional Indebtedness in an aggregate principal amount
(or accreted value, as applicable) at any time outstanding, including all
Permitted Refinancing Indebtedness incurred to refund, refinance or replace
any other Indebtedness incurred pursuant to this clause (13), not to exceed
$15.0 million.
For purposes of determining compliance with this covenant, in the event that
an item of proposed Indebtedness meets the criteria of more than one of the
categories of Permitted Debt described in clauses (1) through (13) above as of
the date of incurrence thereof or is entitled to be incurred pursuant to the
first paragraph of this covenant as of the date of incurrence thereof, the
Issuers shall, in their sole discretion, classify or reclassify such item of
Indebtedness in any manner that complies with this covenant. Accrual of
interest, the accretion of accreted value and the payment of interest in the
form of additional Indebtedness will not be deemed to be an incurrence of
Indebtedness for purposes of this covenant and the payment of dividends on
Disqualified Stock in the form of additional shares of the same class of
Disqualified Stock will not be deemed an issuance of Disqualified Stock.
Liens
The Issuers will not, and will not permit any of their Restricted
Subsidiaries to, create, incur, assume or otherwise cause or suffer to exist or
become effective any Lien (other than Permitted Liens) of any kind securing
Indebtedness, Attributable Debt, or trade payables upon any of their property
or assets, now owned or hereafter acquired, unless all payments due under the
Indenture and the Notes are secured on an equal and ratable basis with the
obligations so secured until such time as such obligations are no longer
secured by a Lien; provided that, with respect to any Indebtedness which by its
terms is Subordinate to the Notes, any Lien securing such Indebtedness shall be
subordinate to the Liens securing the Notes and all payments due under the
Indenture and the Notes.
Dividend and Other Payment Restrictions Affecting Restricted Subsidiaries
The Issuers will not, and will not permit any of their Restricted
Subsidiaries to, directly or indirectly, create or otherwise cause or suffer to
exist or become effective any encumbrance or restriction on the ability of any
Restricted Subsidiary to:
(1)(x) pay dividends or make any other distributions to the Issuers or
any of their Restricted Subsidiaries (1) on its Capital Stock or (2) with
respect to any other interest or participation in, or measured by, its
profits, or (y) pay any Indebtedness owed to the Issuers or any of their
Restricted Subsidiaries,
(2) make loans or advances to the Issuers or any of their Restricted
Subsidiaries or
(3) transfer any of its properties or assets to the Issuers or any of
their Restricted Subsidiaries, except for such encumbrances or restrictions
existing under or by reason of:
. Existing Indebtedness as in effect on the Issue Date,
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. the Credit Facility as in effect on the date of the Indenture
and any amendments, modifications, restatements, renewals,
increases, supplements, refundings, replacements or
refinancings thereof; provided that such amendments,
modifications, restatements, renewals, increases, supplements,
refundings, replacements or refinancings are no more
restrictive with respect to such dividends and other payments
restrictions than those contained in the Credit Facility as in
effect on the date of the Indenture;
. the terms of any Indebtedness permitted by the Indenture to be
incurred by any Restricted Subsidiary of any of the Issuers,
. the Indenture and the Notes,
. the Indenture under which the Senior Subordinated Notes will be
issued and the Senior Subordinated Notes,
. any instrument governing Indebtedness or Capital Stock of a
Person acquired by the Issuers or any of their Restricted
Subsidiaries as in effect at the time of such acquisition
(except to the extent such Indebtedness was incurred in
connection with or in contemplation of such acquisition), which
encumbrance or restriction is not applicable to any Person, or
the properties or assets of any Person, other than the Person,
or the property or assets of the Person, so acquired, provided
that, in the case of Indebtedness, such Indebtedness was
permitted by the terms of the Indenture to be incurred,
. by reason of customary non-assignment provisions in leases
entered into in the ordinary course of business,
. purchase money obligations (including Capital Lease
Obligations) for property acquired in the ordinary course of
business that impose restrictions of the nature described in
clause (3) above on the property so acquired,
. Permitted Refinancing Indebtedness, provided that the
restrictions contained in the agreements governing such
Permitted Refinancing Indebtedness are no more restrictive,
taken as a whole, than those contained in the agreements
governing the Indebtedness being refinanced,
. contracts for the sale of assets, including, without
limitation, customary restrictions with respect to a Subsidiary
pursuant to an agreement that has been entered into for the
sale or disposition of all or substantially all of the Capital
Stock or assets of such Subsidiary or
. applicable law or any applicable rule, regulation or order.
Guarantees by Restricted Subsidiaries
The Issuers will not permit any of their Restricted Subsidiaries, directly
or indirectly, to Guarantee, assume or in any other manner become liable for
the payment of any Indebtedness of the Issuers (other than as part of the
Reorganization) unless:
. such Restricted Subsidiary simultaneously executes and delivers a
supplemental indenture providing for a Guarantee of payment of the
Notes by such Restricted Subsidiary, and
. such Restricted Subsidiary waives, and will not in any manner
whatsoever claim or take the benefit or advantage of, any rights of
reimbursement, indemnity or subrogation or any other rights against
the Issuers or any other Restricted Subsidiary as a result of any
payment by such Restricted Subsidiary under its Guarantee until the
Notes have been paid in full.
Merger, Consolidation, or Sale of Assets
The Issuer or Issuers holding all or substantially all of the assets of the
Issuers on a combined basis will not, directly or indirectly, consolidate or
merge with or into (whether or not such Issuer is the surviving
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corporation), or sell, assign, transfer, convey or otherwise dispose of all or
substantially all of the properties or assets of the Issuers on a combined
basis in one or more related transactions, to another Person unless:
. such Issuer is the surviving corporation or the Person formed by or
surviving any such consolidation or merger (if other than such Issuer)
or to which such sale, assignment, transfer, conveyance or other
disposition shall have been made is a Person organized or existing under
the laws of the United States, any state thereof or the District of
Columbia; provided that the Issuers agree that so long as the Notes are
outstanding at least one of the Issuers shall be a corporation organized
or existing under the laws of the United States, any state thereof or
the District of Columbia;
. the Person formed by or surviving any such consolidation or merger (if
other than such Issuer) or the Person to which such sale, assignment,
transfer, conveyance or other disposition shall have been made assumes
all the obligations of such Issuer under the Notes and the Indenture
pursuant to a supplemental indenture in a form reasonably satisfactory
to the Trustee;
. immediately before and after such transaction no Default or Event of
Default shall have occurred; and
. except in the case of a merger of such Issuer with or into a Restricted
Subsidiary of such Issuer, the Issuer or the Person formed by or
surviving any such consolidation or merger (if other than such Issuer),
or to which such sale, assignment, transfer, conveyance or other
disposition shall have been made, together with the surviving Issuers,
will, immediately before and after such transaction after giving pro
forma effect thereto and any related financing transactions as if the
same had occurred at the beginning of the applicable quarter, be
permitted to incur at least $1.00 of additional Indebtedness pursuant to
the test set forth in the first paragraph of covenant described above
under the caption "--Incurrence of Indebtedness and Issuance of
Preferred Stock."
The Indenture also provides that none of the Issuers may, directly or
indirectly, lease all or substantially all of its properties or assets, in one
or more related transactions, to any other Person.
Notwithstanding the foregoing, (a) any or all of the Issuers may merge or
consolidate with or transfer substantially all of its assets to an Affiliate
that has no significant assets or liabilities and was formed solely for the
purpose of changing the jurisdiction of organization of such Issuer or the
form of organization of such Issuer, provided that the amount of Indebtedness
of such Issuer and its Restricted Subsidiaries is not increased thereby and
provided, further, that the successor assumes all obligations of such Issuer
under the Indenture and the Registration Rights Agreement and (b) nothing in
this section shall be deemed to prevent the consummation of the
Reorganization.
Upon any consolidation or merger, or any sale, assignment, transfer, lease,
conveyance or other disposition of all or substantially all of the properties
or assets of the Issuers in accordance with this covenant, the successor
corporation formed by such consolidation or into or with which an Issuer or
Issuers are merged or to which such sale, assignment, transfer, lease,
conveyance or other disposition is made shall succeed to, and be substituted
for and may exercise every right and power of such Issuer or Issuers under the
Indenture with the same effect as if such successor Person had been named as
such Issuer or Issuers therein (so that from and after the date of such
consolidation, merger, sale, lease, conveyance or other disposition, the
provisions of the Indenture referring to the "Issuers" shall refer instead to
the successor corporation and not to such Issuer or Issuers), and may exercise
every right and power of such Issuer or Issuers under the Indenture with the
same effect as if such successor Person had been named as such Issuer or
Issuers therein; provided, however, that the predecessor Issuer shall not be
relieved from the obligation to pay the principal of and interest on the Notes
except in the case of a sale, assignment, transfer, conveyance or other
disposition of all or substantially all of the properties or assets of the
Issuers on a combined basis that meets the requirements of this covenant.
Transactions with Affiliates
The Issuers will not, and will not permit any of their Restricted
Subsidiaries to, make any payment to, or sell, lease, transfer or otherwise
dispose of any properties or assets to, or purchase any property or assets
from, or enter into or make or amend any transaction, contract, agreement,
understanding, loan, advance or Guarantee
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with, or for the benefit of, any Affiliate of any such Person (each of the
foregoing, an "Affiliate Transaction"), unless (i) such Affiliate Transaction
is on terms that are no less favorable to such Issuer or the relevant
Restricted Subsidiary than those that would have been obtained in a comparable
transaction by such Issuer or such Restricted Subsidiary with an unrelated
Person and (ii) such Issuer delivers to the Trustee (a) with respect to any
Affiliate Transaction or series of related Affiliate Transactions involving
aggregate consideration in excess of $2.5 million, a resolution of its Board of
Directors set forth in an Officers' Certificate certifying that such Affiliate
Transaction complies with clause (i) above and that such Affiliate Transaction
has been approved
by a majority of the members of its Board of Directors and (b) with respect to
any Affiliate Transaction or series of related Affiliate Transactions involving
aggregate consideration in excess of $10.0 million, an opinion as to the
fairness to the Holders of such Affiliate Transaction from a financial point of
view issued by an investment banking, appraisal or accounting firm of national
standing; provided that none of the following shall be deemed to be Affiliate
Transactions:
. any employment agreement entered into by any of the Issuers or any of
their Restricted Subsidiaries or Avalon in the ordinary course of
business,
.transactions between or among any of the Issuers and/or their Restricted
Subsidiaries,
.any sale or other issuance of Equity Interests (other than Disqualified
Stock) of any of the Issuers,
. Restricted Payments that are permitted by the covenant described above
under the caption "--Restricted Payments,"
. fees and compensation paid to members of the Boards of Directors of the
Issuers and their Restricted Subsidiaries or Avalon in their capacity as
such, to the extent such fees and compensation are reasonable and
customary,
. advances to employees for moving, entertainment and travel expenses,
drawing accounts and similar expenditures in the ordinary course of
business,
. fees and compensation paid to, and indemnity provided on behalf of,
officers, directors or employees of the Issuers or any of their
Restricted Subsidiaries or Avalon, as determined by the Board of
Directors of such Person, to the extent such fees and compensation are
reasonable and customary,
. all transactions associated with the Reorganization and the Mercom
Acquisition,
. the Mercom Intercompany Loan, the ABRY Management Agreement and the
Mercom Management Agreement and
.Indebtedness permitted under the Indenture.
Sale and Leaseback Transactions
The Issuers will not, and will not permit any of their Restricted
Subsidiaries to, enter into any sale and leaseback transaction; provided that
the Issuers or any of their Restricted Subsidiaries may enter into a sale and
leaseback transaction if:
. such Issuer or Restricted Subsidiary could have incurred Indebtedness in
an amount equal to the Attributable Debt relating to such sale and
leaseback transaction pursuant to the test set forth in the first
paragraph of the covenant described above under the caption "--
Incurrence of Indebtedness and Issuance of Preferred Stock,"
. the gross cash proceeds of such sale and leaseback transaction are at
least equal to the fair market value (as determined in good faith by the
Board of Directors of such Issuer or Restricted Subsidiary, whose
determination shall be conclusive, and set forth in an Officers'
Certificate delivered to the Trustee) of the property that is the
subject of such sale and leaseback transaction and
. the transfer of assets in such sale and leaseback transaction is
permitted by, and such Issuer or Restricted Subsidiary applies the
proceeds of such transaction in compliance with, the covenant described
above under the caption "Repurchase at the Option of Holders--Asset
Sales."
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Sale or Issuance of Capital Stock of Restricted Subsidiaries
Other than pursuant to the Reorganization, the Issuers:
. will not, and will not permit any of their Restricted Subsidiaries to,
transfer, convey, sell, lease or otherwise dispose of any Equity
Interests in any such Restricted Subsidiary to any Person (other than an
Issuer or a Restricted Subsidiary of an Issuer), unless (a)(1) such
transfer, conveyance, sale, lease or other disposition is of all the
Equity Interests in such Restricted Subsidiary or after giving effect
thereto, such Restricted Subsidiary will still constitute a Restricted
Subsidiary and (b) the Net Cash Proceeds from such transfer, conveyance,
sale, lease or other disposition are applied in accordance with the
covenant described above under the caption "Repurchase at the Option of
Holders--Asset Sales," and
. will not permit any of their Restricted Subsidiaries to issue any of its
Equity Interests (other than, if necessary, shares of its Capital Stock
constituting directors' qualifying shares) to any Person other than to
such Issuer or a Wholly Owned Restricted Subsidiary of such Issuer if,
after giving effect thereto, such Restricted Subsidiary will not be a
direct or indirect Subsidiary of an Issuer.
Reports
The Indenture provides that whether or not the Issuers are required by the
rules and regulations of the Commission, so long as any Notes are outstanding,
the Issuers, on a combined consolidated basis, will furnish to each of the
Holders of Notes:
. quarterly and annual financial statements substantially equivalent to
financial statements that would have been included in a filing with the
Commission on Forms 10-Q and 10-K if the Issuers were required to file
such financial information, including a "Management's Discussion and
Analysis of Financial Condition and Results of Operations" that
describes the financial condition and results of operations of the
Issuers and, with respect to the annual information only, reports
thereon by the Issuers' independent public accountants (which shall be
firm(s) of established national reputation) and
. all information that would be required to be filed with the Commission
on Form 8-K if the Issuers were required to file such reports.
All such information and reports shall be provided on or prior to the dates
on which such filings would have been required to be made had such Issuer been
subject to the rules and regulations of the Commission. In addition, the
Issuers shall make such information available to securities analysts and
prospective investors upon request. For so long as any Notes remain
outstanding, the Issuers shall furnish to the Holders and to securities
analysts and prospective investors, upon their request, the information
required to be delivered pursuant to Rule 144A(d)(4) under the Securities Act.
Events of Default and Remedies
The Indenture provides that each of the following constitutes an Event of
Default:
. default for 30 days in the payment when due of interest on, or
Liquidated Damages with respect to, the Notes;
. default in payment when due of the Accreted Value of or the principal of
or premium, if any, on the Notes;
. failure by any of the Issuers or any of their Restricted Subsidiaries to
comply with the provisions described under the captions "--Restricted
Payments," "--Incurrence of Indebtedness and Issuance of Preferred
Stock" or "--Merger Consolidation or Sale of Assets";
. failure by any of the Issuers or any of their Restricted Subsidiaries
for 30 days after notice to comply with the provisions described under
the captions "Repurchase at the Option of Holders--Asset Sales" or
"Repurchase at the Option of Holders--Change of Control";
. failure by any of the Issuers or any of their Restricted Subsidiaries
for 60 days after notice to comply with any of its other agreements in
the Indenture or the Notes;
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. default under any mortgage, indenture or instrument under which there
may be issued or by which there may be secured or evidenced any
Indebtedness for money borrowed by any of the Issuers or any of their
Restricted Subsidiaries (or the payment of which is guaranteed by any of
the Issuers or any of their Restricted Subsidiaries) whether such
Indebtedness or guarantee now exists, or is created after the Issue
Date, which default:
(a) is caused by a failure to pay principal of or premium, if any, or
interest on such Indebtedness prior to the expiration of the grace
period provided in such Indebtedness on the date of such default (a
"Payment Default") or
(b) results in the acceleration of such Indebtedness prior to its
express maturity and, in each case, the principal amount of any
such Indebtedness, together with the principal amount of any other
such Indebtedness under which there has been a Payment Default or
the maturity of which has been so accelerated, aggregates without
duplication $5.0 million or more;
. failure by any of the Issuers or any of their Restricted Subsidiaries to
pay final judgments aggregating in excess of $5.0 million (excluding
amounts covered by insurance), which judgments are not paid, discharged
or stayed for a period of 60 days; and
. certain events of bankruptcy or insolvency with respect to any of the
Issuers or any of their Restricted Subsidiaries that constitute a
Significant Subsidiary, or any group of Restricted Subsidiaries that,
taken together, would constitute a Significant Subsidiary.
If any Event of Default occurs and is continuing, the Trustee or the Holders
of at least 25% in principal amount at maturity of the then outstanding Notes
may declare all the Notes to be due and payable immediately; provided that so
long as any Indebtedness permitted to be incurred pursuant to the Credit
Facility shall be outstanding, such acceleration shall not be effective until
the earlier of (a) an acceleration of such Indebtedness under the Credit
Facility and (b) five business days after receipt by the Issuers of written
notice of such acceleration of the Notes. Notwithstanding the foregoing, in the
case of an Event of Default arising from certain events of bankruptcy or
insolvency, with respect to any of the Issuers or any of their Restricted
Subsidiaries, all outstanding Notes will become due and payable without further
action or notice. Holders of the Notes may not enforce the Indenture or the
Notes except as provided in the Indenture. Subject to certain limitations,
Holders of a majority in principal amount at maturity of the then outstanding
Notes may direct the Trustee in its exercise of any trust or power. The Trustee
may withhold from Holders of the Notes notice of any continuing Default or
Event of Default (except a Default or Event of Default relating to the payment
of principal or interest) if it determines that withholding notice is in their
interest.
The Holders of a majority in aggregate principal amount at maturity of the
Notes then outstanding by notice to the Trustee may on behalf of the Holders of
all of the Notes waive any existing Default or Event of Default and its
consequences under the Indenture except a continuing Default or Event of
Default in the payment of interest on, or the Accreted Value or principal of,
the Notes.
The Issuers are required to deliver to the Trustee annually a statement
regarding compliance with the Indenture, and the Issuers are required upon
becoming aware of any Default or Event of Default that is continuing, to
deliver to the Trustee a statement specifying such Default or Event of Default.
No Personal Liability of Directors, Officers, Employees and Stockholders
No past, present or future director, officer, employee, incorporator,
manager, member or stockholder of any Person who is or was an Issuer or Parent
Guarantor, as such, shall have any liability for any obligations of the Issuers
under the Notes or the Indenture or any related documents or for any claim
based on, in respect of, or by reason of, such obligations or their creation.
Each Holder of Notes by accepting a Note waives and releases all such
liability. The waiver and release are part of the consideration for issuance of
the Notes. Such waiver may not be effective to waive liabilities under the
federal securities laws and it is the view of the Commission that such a waiver
is against public policy.
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Legal Defeasance and Covenant Defeasance
The Issuers may, at their option and at any time, elect to have all of their
obligations discharged with respect to the outstanding Notes ("Legal
Defeasance") except for:
. the rights of Holders of outstanding Notes to receive payments in respect
of the principal of, premium, if any, and interest and Liquidated Damages
on such Notes when such payments are due from the trust referred to
below,
. the Issuers' obligations with respect to the Notes concerning issuing
temporary Notes, registration of Notes, mutilated, destroyed, lost or
stolen Notes and the maintenance of an office or agency for payment and
money for security payments held in trust,
. the rights, powers, trusts, duties and immunities of the Trustee, and the
Issuers' obligations in connection therewith and
. the Legal Defeasance provisions of the Indenture.
In addition, the Issuers may, at their option and at any time, elect to have
the obligations of the Issuers released with respect to certain covenants that
are described in the Indenture ("Covenant Defeasance") and thereafter any
omission to comply with such obligations shall not constitute a Default or
Event of Default with respect to the Notes. In the event Covenant Defeasance
occurs, certain events (not including non-payment, bankruptcy, receivership and
insolvency events) described under "Events of Default" will no longer
constitute an Event of Default with respect to the Notes.
In order to exercise either Legal Defeasance or Covenant Defeasance:
. the Issuers must irrevocably deposit with the Trustee, in trust, for the
benefit of the Holders of the Notes, cash in U.S. dollars, non-callable
Government Securities, or a combination thereof, in such amounts as will
be sufficient, in the opinion of a nationally recognized firm of
independent public accountants, to pay the principal of, premium, if any,
and interest and Liquidated Damages on the outstanding Notes on the
stated maturity or on the applicable redemption date, as the case may be,
and the Issuers must specify whether the Notes are being defeased to
maturity or to a particular redemption date;
. in the case of Legal Defeasance, the Issuers shall have delivered to the
Trustee an opinion of counsel in the United States reasonably acceptable
to the Trustee confirming that (A) the Issuers have received from, or
there has been published by, the Internal Revenue Service a ruling or (B)
since the Issue Date, there has been a change in the applicable federal
income tax law, in either case to the effect that, and based thereon such
opinion of counsel shall confirm that, the Holders of the outstanding
Notes will not recognize income, gain or loss for federal income tax
purposes as a result of such Legal Defeasance and will be subject to
federal income tax on the same amounts, in the same manner and at the
same times as would have been the case if such Legal Defeasance had not
occurred;
. in the case of Covenant Defeasance, the Issuers shall have delivered to
the Trustee an opinion of counsel in the United States reasonably
acceptable to the Trustee confirming that the Holders of the outstanding
Notes will not recognize income, gain or loss for federal income tax
purposes as a result of such Covenant Defeasance and will be subject to
federal income tax on the same amounts, in the same manner and at the
same times as would have been the case if such Covenant Defeasance had
not occurred;
. no Default or Event of Default shall have occurred and be continuing on
the date of such deposit (other than a Default or Event of Default
resulting from the borrowing of funds to be applied to such deposit) or
insofar as Events of Default from bankruptcy or insolvency events are
concerned, at any time in the period ending on the 91st day after the
date of deposit;
. such Legal Defeasance or Covenant Defeasance will not result in a breach
or violation of, or constitute a default under any material agreement or
instrument (other than the Indenture) to which any of the Issuers or any
of their Restricted Subsidiaries is a party or by which any of the
Issuers or any of their Restricted Subsidiaries is bound;
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. the Issuers must have delivered to the Trustee an opinion of counsel
(subject to customary qualifications and assumptions) to the effect that
after the 91st day following the deposit, the trust funds will not be
subject to the effect of any applicable bankruptcy, insolvency,
reorganization or similar laws affecting creditors' rights generally;
. the Issuers must deliver to the Trustee an Officers' Certificate stating
that the deposit was not made by the Issuers with the intent of
preferring the Holders of Notes over the other creditors of the Issuers
with the intent of defeating, hindering, delaying or defrauding creditors
of the Issuers or others; and
. the Issuers must deliver to the Trustee an Officers' Certificate and an
opinion of counsel, each stating that all conditions precedent provided
for relating to the Legal Defeasance or the Covenant Defeasance have been
complied with.
Transfer and Exchange
A Holder may transfer or exchange Notes in accordance with the Indenture.
The Registrar and the Trustee may require a Holder, among other things, to
furnish appropriate endorsements and transfer documents and the Issuers may
require a Holder to pay any taxes and fees required by law or permitted by the
Indenture. The Issuers are not required to transfer or exchange any Note
selected for redemption. Also, the Issuers are not required to transfer or
exchange any Note for a period of 15 business days before a selection of Notes
to be redeemed.
The registered Holder of a Note will be treated as the owner of it for all
purposes.
Amendment, Supplement and Waiver
Except as provided in the next two succeeding paragraphs, the Indenture or
the Notes may be amended or supplemented with the consent of the Holders of at
least a majority in principal amount at maturity of the Notes then outstanding
(including, without limitation, consents obtained in connection with a purchase
of, or tender offer or exchange offer for, Notes), and any existing default or
compliance with any provision of the Indenture or the Notes may be waived with
the consent of the Holders of a majority in principal amount at maturity of the
then outstanding Notes (including consents obtained in connection with a tender
offer or exchange offer for Notes).
Without the consent of each Holder affected, an amendment or waiver may not
(with respect to any Notes held by a non-consenting Holder):
. reduce the principal amount of Notes whose Holders must consent to an
amendment, supplement or waiver,
. reduce the Accreted Value or principal of or change the fixed maturity of
any Note or alter the provisions with respect to the redemption of the
Notes (other than provisions relating to the covenants described above
under the caption "--Repurchase at the Option of Holders"),
. reduce the rate of or change the time for payment of interest on any
Note,
. waive a Default or Event of Default in the payment of principal of or
premium, if any, or interest on the Notes (except a rescission of
acceleration of the Notes by the Holders of at least a majority in
aggregate principal amount at maturity of the Notes and a waiver of the
payment default that resulted from such acceleration),
. make any Note payable in money other than that stated in the Notes,
. make any change in the provisions of the Indenture relating to waivers of
past Defaults or the rights of Holders of Notes to receive payments of
principal of or premium, if any, or interest on the Notes,
. waive a redemption payment with respect to any Note (other than a payment
required by one of the covenants described above under the caption "--
Repurchase at the Option of Holders"), or
. make any change in the foregoing amendment and waiver provisions.
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Notwithstanding the foregoing, without the consent of any Holder of Notes,
the Issuers and the Trustee may amend or supplement the Indenture or the Notes
to cure any ambiguity, omission, defect or inconsistency, to provide for
uncertificated Notes in addition to or in place of certificated Notes, to
provide for the assumption of the Issuers' obligations to Holders of Notes in
the case of a merger, consolidation or asset transfer (including the
Reorganization), to add additional guarantees with respect to the Notes, to
make any change that would provide any additional rights or benefits to the
Holders of Notes or that does not adversely affect the legal rights under the
Indenture of any such Holder, or to comply with requirements of the Commission
in order to effect or maintain the qualification of the Indenture under the
Trust Indenture Act.
Concerning the Trustee
The Indenture contains certain limitations on the rights of the Trustee,
should it become a creditor of any of the Issuers, to obtain payment of claims
in certain cases, or to realize on certain property received in respect of any
such claim as security or otherwise. The Trustee will be permitted to engage in
other transactions; however, if it acquires any conflicting interest it must
eliminate such conflict within 90 days, apply to the Commission for permission
to continue or resign.
The Holders of a majority in principal amount of the then outstanding Notes
will have the right to direct the time, method and place of conducting any
proceeding for exercising any remedy available to the Trustee, subject to
certain exceptions. The Indenture provides that in case an Event of Default
shall occur (which shall not be cured), the Trustee will be required, in the
exercise of its power, to use the degree of care of a prudent man in the
conduct of his own affairs. Subject to such provisions, the Trustee will be
under no obligation to exercise any of its rights or powers under the Indenture
at the request of any Holder of Notes, unless such Holder shall have offered to
the Trustee security and indemnity satisfactory to it against any loss,
liability or expense.
Additional Information
Anyone who receives this prospectus may obtain a copy of the Indenture and
Registration Rights Agreement without charge by writing to Avalon Holdings,
Attention: Vice President--Finance.
Book-Entry, Delivery and Form
The new notes initially will be represented by one or more global notes in
registered, global form without interest coupons (collectively, the "Global
Note"). The Global Note will be deposited upon issuance with the Trustee as
custodian for the Depositary, in New York, New York, and registered in the name
of the Depositary or its nominee, in each case for credit to an account of a
direct or indirect participant as described below.
Except as set forth below, the Global Note may be transferred, in whole and
not in part, only to another nominee of the Depositary or to a successor of the
Depositary or its nominee. Beneficial interest in the Global Note may not be
exchanged for new notes in certificated form except in the limited
circumstances described below. Except in the limited circumstances described
below, owners of beneficial interests in the Global Note will not be entitled
to receive physical delivery of Certificated Notes (as defined below).
The new notes may be presented for registration of transfer and exchange at
the offices of the Exchange Agent.
The Depositary has advised the Issuers that the Depositary is a limited-
purpose trust company created to hold securities for its participating
organizations (collectively, the "Participants") and to facilitate the
clearance and settlement of transactions in those securities between
Participants through electronic book-entry changes in accounts of Participants.
The Participants include securities brokers and dealers (including the Initial
Purchaser), banks, trust companies, clearing corporations and certain other
organizations. Access to the Depositary's system is also available to other
entities such as banks, brokers, dealers and trust companies that
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clear through or maintain a custodial relationship with a Participant, either
directly or indirectly (collectively, "Indirect Participants"). Persons who are
not Participants may beneficially own securities held by or on behalf of the
Depositary only through the Participants or Indirect Participants. The
ownership interest and transfer of ownership interest of each actual purchaser
of each security held by or on behalf of the Depositary are recorded on the
records of the Participants and Indirect Participants.
The Depositary has also advised the Issuers that pursuant to procedures
established by it:
. upon deposit of the Global Note, the Depositary will credit the accounts
of Participants designated by the exchanging holders with portions of the
principal amount of Global Note; and
. ownership of such interests in the Global Note will be shown on, and the
transfer of ownership thereof will be effected only through, records
maintained by the Depositary (with respect to Participants) or by
Participants and the Indirect Participants (with respect to other owners
of beneficial interests in the Global Note).
Except as described below, owners of interests in the Global Note will not
have new notes registered in their names, will not receive physical delivery of
new notes in certificated form and will not be considered the registered owners
or "Holders" thereof under the Indenture for any purpose.
Payments in respect of the principal of, and premium, if any, and Liquidated
Damages, if any, and interest on a Global Note registered in the name of the
Depositary or its nominee will be payable by the Trustee to the Depositary or
its nominee in its capacity as the registered Holder under the Indenture. Under
the terms of the Indenture, the Issuers and the Trustee will treat the persons
in whose names the new notes, including the Global Note, are registered as the
owners thereof for the purpose of receiving such payments and for any and all
other purposes whatsoever. Consequently, neither the Issuers, the Trustee nor
any agent of the Issuers or the Trustee has or will have any responsibility or
liability for:
. any aspect of the Depositary's records or any Participant's or Indirect
Participant's records relating to or payments made on account of
beneficial ownership interests in the Global Note, or for maintaining,
supervising or reviewing any of the Depositary's records or any
Participant's or Indirect Participant's records relating to the
beneficial ownership interests in the Global Note; or
. any other matter relating to the actions and practices of the Depositary
or any of its Participants or Indirect Participants.
The Depositary has advised the Issuers that its current practice upon
receipt of any payment in respect of securities such as the new notes
(including principal and interest) is to credit the accounts of the relevant
Participants with the payment on the payment date, in amounts proportionate to
their respective holdings in principal amount of beneficial interests in the
relevant security as shown on the records of the Depositary unless the
Depositary has reason to believe it will not receive payment on such payment
date. Payments by Participants and the Indirect Participants to the beneficial
owners of new notes will be governed by standing instructions and customary
practices and will be the responsibility of the Participants or the Indirect
Participants and will not be the responsibility of the Depositary, the Trustee
or the Issuers. Neither the Issuers nor the Trustee will be liable for any
delay by the Depositary or its Participants in identifying the beneficial
owners of the new notes, and the Issuers and the Trustee may conclusively rely
on and will be protected in relying on instructions from the Depositary or its
nominee for all purposes.
Interests in the Global Note are expected to be eligible to trade in the
Depositary's Same-Day Funds Settlement System and secondary market trading
activity in such interests will, therefore, settle in immediately available
funds, subject in all cases to the rules and procedures of the Depositary and
its Participants. See "--Same Day Settlement and Payment."
The Depositary has advised the Issuers that it will take any action
permitted to be taken by a Holder of new notes only at the direction of one or
more Participants to whose account the Depositary has credited the
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interests in the Global Note and only in respect of such portion of the
aggregate principal amount of the new notes as to which such Participant or
Participants has or have given direction. However, if there is an Event of
Default under the new notes, the Depositary reserves the right to exchange
Global Note for legended new notes in certificated form, and to distribute such
new notes to its Participants.
The information in this section concerning the Depositary and its book entry
systems has been obtained from sources that the Issuers believe to be reliable,
but the Issuers take no responsibility for the accuracy thereof.
Although the Depositary has agreed to the foregoing procedures to facilitate
transfers of interests in the Global Note among Participants in the Depositary,
it is under no obligation to perform or to continue to perform such procedures,
and such procedures may be discontinued at any time. None of the Issuers, the
Initial Purchaser or the Trustee or any of their respective agents will have
any responsibility for the performance by the Depositary or its respective
participants or indirect participants of their respective obligations under the
rules and procedures governing their operations.
Exchange of Book-Entry Notes for Certificated Notes
A Global Note is exchangeable for definitive new notes in registered
certificated form ("Certificated Notes") if:
. the Depositary (A) notifies the Issuers that it is unwilling or unable to
continue as depositary for the Global Note and the Issuers thereupon fail
to appoint a successor depositary or (B) has ceased to be a clearing
agency registered under the Securities Exchange Act,
. the Issuers, at their option, notify the Trustee in writing that they
elect to cause issuance of the Certificated Notes or
. there shall have occurred and be continuing a Default or Event of Default
with respect to the new notes.
Neither the Issuers nor the Trustee will be liable for any delay by the
Global Note Holder or the Depositary in identifying the beneficial owners of
new notes and the Issuers and the Trustee may conclusively rely on, and will be
protected in relying on, instructions from the Global Note Holder or the
Depositary for all purposes.
Exchange of Certificated Notes for Book-Entry Notes
Certificated Notes may not be exchanged for beneficial interests in any
Global Note unless the transferor first delivers to the Trustee a written
certificate (in the form provided in the Indenture) to the effect that such
transfer will comply with the appropriate transfer restrictions applicable to
such Notes. See "Notice to Investors."
Same Day Settlement and Payment
The Indenture requires that payments in respect of the new notes represented
by the Global Note (including principal, premium, if any, interest and
Liquidated Damages, if any) be made by wire transfer of immediately available
funds to the accounts specified by the Global Note Holder. With respect to
Certificated Notes, the Issuers will make all payments of principal, premium,
if any, interest and Liquidated Damages, if any, by wire transfer of
immediately available funds to the accounts specified by the Holders thereof
or, if no such account is specified, by mailing a check to each such Holder's
registered address. The new notes represented by the Global Note are expected
to be eligible to trade in the PORTAL market and to trade in the Depositary's
Same-Day Funds Settlement System, and any permitted secondary market trading
activity in such new notes will, therefore, be required by the Depositary to be
settled in immediately available funds. The Issuers expect that secondary
trading in the certificated Notes will also be settled in immediately available
funds.
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Certain Definitions
Set forth below are certain defined terms used in the Indenture. Reference
is made to the Indenture for a full disclosure of all such terms, as well as
any other capitalized terms used herein for which no definition is provided.
"ABRY" means ABRY Partners, Inc.
"ABRY III" means ABRY Broadcast Partners III, L.P.
"ABRY Management Agreement" means the Management and Consulting Services
Agreement entered into as of May 29, 1998 and amended and restated as of
November 6, 1998 by and among ABRY Partners, Inc., Avalon Michigan Inc. and
Avalon New England, and any successor agreement; provided that any such
successor agreement shall not modify the ABRY Management Agreement as in effect
as of November 6, 1998 in any material respect, taken as a whole, adverse to
the Issuers and their Subsidiaries or the Trustee.
"ABRY Subordinated Debt" means Indebtedness of the Issuers in principal
amount not to exceed $30.0 million in the aggregate at any time outstanding (a)
that is owed to Avalon, directly or indirectly, or to ABRY III, ABRY or any
other investment fund controlled by ABRY, (b) as to which the payment of
principal of (and premium, if any) and interest and other payment obligations
in respect of such Indebtedness shall be subordinate to the prior payment in
full of the Senior Discount Notes and the Notes to at least the following
extent: (i) no payments of principal (or premium, if any) or interest on or
otherwise due in respect of such Indebtedness may be permitted for so long as
any default in the payment of principal (or premium, if any) or interest on the
Senior Discount Notes and/or the Notes exists and (ii) in the event that any
other default that with the passing of time or the giving of notice, or both,
would constitute an event of default exists with respect to the Senior Discount
Notes and/or the Notes, upon notice by 25% or more in principal amount at
maturity of the Senior Discount Notes and/or the Notes, as appropriate, to the
trustee under the Senior Discount Notes and/or the Notes, such trustee or
trustees shall have the right to give notice to the Issuers and the holders of
such Indebtedness (or trustees or agents therefor) of a payment blockage, and
thereafter no payments of principal of (or premium, if any) or interest on or
otherwise due in respect of such Indebtedness may be made for a period of 179
days from the date of such notice and (c) that shall automatically convert into
common equity of the Issuers within 18 months of the date of issuance thereof,
unless refinanced.
"Accreted Value" means as of any date prior to December 1, 2003, an amount
per $1,000 principal amount at maturity of the Notes that is equal to the sum
of (a) the initial offering price of each Note and (b) the portion of the
excess of the principal amount at maturity of each Note over such initial
offering price which shall have been amortized through such date, such amount
to be so amortized on a daily basis and compounded semi-annually on each June
1, and December 1, at the rate of 11 7/8% per annum from the Issue Date through
the date of determination computed on the basis of a 360-day year of twelve 30-
day months.
"Acquired Debt" means, with respect to any specified Person, (i)
Indebtedness of any other Person existing at the time such other Person is
merged with or into or became a Restricted Subsidiary of such specified Person,
including, without limitation, Indebtedness incurred in connection with, or in
contemplation of, such other Person merging with or into or becoming a
Restricted Subsidiary of such specified Person, and (ii) Indebtedness secured
by a Lien encumbering any asset acquired by such specified Person.
"Acquisition Transactions" means the acquisition (i) by the Issuers and
their subsidiaries of 1,822,810 outstanding shares of the common stock of
Mercom, (ii) by Avalon Michigan Inc. or Avalon Michigan LLC of a cable
television system from Cross Country Cable TV, Inc., (iii) by Avalon Michigan
Inc. or Avalon Michigan LLC of a cable television system from Nova Cablevision,
Inc., Nova Cablevision VI, L.P. and Nova Cablevision VII, L.P., (iv) by Avalon
Michigan Inc. or Avalon Michigan LLC of the assets of Traverse Internet, Inc.
and (v) by Avalon New England of all of the cable system assets of Taconic
Technology Corp.
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"Affiliate" means, with respect to any specified Person, any other Person
controlling or controlled by or under common control with such specified
Person. For purposes of this definition, "control" (including, with correlative
meanings, the terms "controlling," "controlled by" and "under common control
with"), as used with respect to any Person, shall mean the possession, directly
or indirectly, of the power to direct or cause the direction of the management
or policies of such Person, whether through the ownership of voting securities,
by agreement or otherwise; provided that beneficial ownership of 10% or more of
the voting securities of a Person shall be deemed to be control.
"Amrac" means Amrac Clear View, a Limited Partnership.
"Asset Sale" means (i) the sale, lease, conveyance or other disposition of
any assets or rights (including, without limitation, by way of a sale and
leaseback) other than in the ordinary course of business (provided that the
sale, lease, conveyance or other disposition of all or substantially all of the
assets of the Issuers and their Restricted Subsidiaries taken as a whole will
be governed by the covenants described above under the captions "Repurchase at
the Option of Holders--Change of Control" and "--Merger, Consolidation, or Sale
of Assets" and not by the provisions of the covenant described above under the
caption "--Asset Sales"), and (ii) the issue or sale by the Issuers or any of
their Restricted Subsidiaries of Equity Interests in any of their Restricted
Subsidiaries, in the case of either clause (i) or (ii), whether in a single
transaction or a series of related transactions (a) that have a fair market
value in excess of $2.5 million or (b) for Net Cash Proceeds in excess of $2.5
million. Notwithstanding the foregoing: (i) a transfer of assets by any of the
Issuers to a Restricted Subsidiary of any Issuer or by a Restricted Subsidiary
of any Issuer to such Issuer or to another Issuer or Restricted Subsidiary of
an Issuer, (ii) an issuance or sale of Equity Interests by a Restricted
Subsidiary of an Issuer to any Issuer or to another Issuer or Restricted
Subsidiary of any Issuer, (iii) a Restricted Payment that is permitted by the
covenant described above under the caption "--Restricted Payments" and (iv)
transactions that are part of the Reorganization will not be deemed to be Asset
Sales.
"Attributable Debt" in respect of a sale and leaseback transaction means, at
the time of determination, the present value (discounted at the rate of
interest implicit in such transaction, determined in accordance with GAAP) of
the obligation of the lessee for net rental payments during the remaining term
of the lease included in such sale and leaseback transaction (including any
period for which such lease has been extended or may, at the option of the
lessor, be extended).
"Avalon" means Avalon Cable Holdings LLC, a Delaware limited liability
company.
"Avalon Michigan" means Avalon Cable of Michigan, Inc., a Pennsylvania
corporation.
"Avalon Michigan LLC" means Avalon Cable of Michigan LLC, a Delaware limited
liability company.
"Avalon New England" means Avalon Cable of New England LLC, a Delaware
limited liability company.
"Board of Directors" means, as to any Person, the board of directors of such
Person (or, if such Person is a limited liability company, the board of
managers of such Person) or similar governing body or any duly authorized
committee thereof.
"Business Day" means a day other than a Saturday, Sunday or other day on
which commercial banks in New York City are authorized or required by law to
close.
"Cable Michigan" means Cable Michigan, Inc., a Pennsylvania corporation.
"Capital Lease Obligation" means, as to any Person, the obligations of such
Person to pay rent or other amounts under any lease of (or other arrangement
conveying the right to use) real or personal property, or a combination
thereof, which obligations are required to be classified and accounted for as
capital leases on a balance sheet of such Person under GAAP, and, for the
purposes of the Indenture, the amount of such obligations at any time shall be
the capitalized amount thereof at such time determined in accordance with GAAP.
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"Capital Stock" means (i) in the case of a corporation, corporate stock,
(ii) in the case of an association or business entity, any and all shares,
interests, participations, rights or other equivalents (however designated) of
corporate stock and (iii) in the case of a partnership or limited liability
company, partnership or membership interests (whether general or limited).
"Cash Equivalents" means (i) United States dollars, (ii) securities issued
or directly and fully guaranteed or insured by the United States government or
any agency or instrumentality thereof having maturities of not more than one
year from the date of acquisition, (iii) certificates of deposit and Eurodollar
time deposits with maturities of not more than one year from the date of
acquisition, bankers' acceptances with maturities of not more than one year
from the date of acquisition and overnight bank deposits, in each case with (A)
Brown Brothers Harriman or (B) any other domestic commercial bank having
capital and surplus in excess of $500 million and a Thompson Bank Watch Rating
of "B" or better, (iv) repurchase obligations with a term of not more than 30
days for underlying securities of the types described in clauses (ii) and (iii)
above entered into with any financial institution meeting the qualifications
specified in clause (iii) above, (v) commercial paper having the highest rating
obtainable from Moody's Investors Service, Inc. or one of the two highest
ratings from Standard & Poor's with maturities of not more than one year from
the date of acquisition and (vi) money market funds at least 95% of the assets
of which constitute Cash Equivalents of the kinds described in clauses (i)-(v)
of this definition.
"Change of Control" means the occurrence of any of the following: (i) the
sale, lease, transfer, conveyance or other disposition (other than by way of
merger or consolidation), in one or a series of related transactions, of all or
substantially all of the combined assets of the Issuers and their Restricted
Subsidiaries, taken as a whole, or of all or substantially all of the, direct
or indirect, assets of Avalon, in either case, to any "person" (as such term is
used in Section 13(d)(3) of the Securities Exchange Act) other than another
Issuer, a Restricted Subsidiary or an Additional Obligor; (ii) the adoption of
a plan relating to the liquidation or dissolution of an Issuer or Issuers which
individually or in the aggregate holds all or substantially all of the combined
assets of the Issuers; (iii) (A) the consummation of any transaction
(including, without limitation, any merger or consolidation) the result of
which is that any "person" (as defined above), other than the Principals,
becomes the "beneficial owner" (as such term is defined in Rule 13d-3 and Rule
13d-5 under the Securities Exchange Act, except that a person shall be deemed
to have "beneficial ownership" of all securities that such person has the right
to acquire, whether such right is currently exercisable or is exercisable only
upon the occurrence of a subsequent condition), directly or indirectly, of more
than 35% of the Capital Stock of Avalon (measured by voting power rather than
number of shares) and (B) the Principals "beneficially own" (as such term is
defined in Rule 13d-3 and Rule 13d-5 under the Securities Exchange Act, except
that a person shall be deemed to have "beneficial ownership" of all securities
that such person has the right to acquire, whether such right is currently
exercisable or is exercisable only upon the occurrence of a subsequent
condition), directly or indirectly, in the aggregate a lesser percentage of the
Capital Stock of Avalon (measured by voting power rather than number of shares)
than such other person; (iv) the first day on which a majority of the members
of the Board of Directors of Avalon are not Continuing Managers; or (v) (A)
Avalon or an Issuer or Issuers which individually or in the aggregate holds all
or substantially all of the combined assets of the Issuers, consolidates with,
or merges with or into, any Person or (B) any Person consolidates with, or
merges with or into, Avalon or an Issuer or Issuers which individually or in
the aggregate holds all or substantially all of the combined assets of the
Issuers, in any such event pursuant to a transaction in which any of the
outstanding Voting Stock of such Issuer or Issuers or Avalon is converted into
or exchanged for cash, securities or other property, other than any such
transaction where the Voting Stock of such Issuer or Issuers or Avalon
outstanding immediately prior to such transaction is converted into or
exchanged for Voting Stock (other than Disqualified Stock) of the surviving or
transferee Person constituting a majority of the outstanding shares of such
Voting Stock of such surviving or transferee Person (immediately after giving
effect to such issuance); provided, however, that notwithstanding the
foregoing, the Reorganization shall not be deemed to be a Change of Control.
"Commission" means the Securities and Exchange Commission.
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"Company Issuers" means initially Avalon Michigan, Avalon New England and
Avalon Cable Finance, Inc. or any successor thereto; provided that subsequent
to the Reorganization, the Company Issuers shall be Avalon New England, Avalon
Michigan LLC, as successor to Avalon Michigan, and Avalon Cable Finance, Inc.
or any successor thereto.
"Completed Acquisitions" means the acquisitions of Cable Michigan, Amrac and
Pegasus by Avalon or an Affiliate of Avalon.
"Consolidated Cash Flow" means, with respect to any Person for any period,
the Consolidated Net Income of such Person for such period plus (i) an amount
equal to any extraordinary loss plus any net loss realized in connection with
an Asset Sale (to the extent such losses were deducted in computing such
Consolidated Net Income), plus (ii) provision for taxes based on income or
profits of such Person and its Restricted Subsidiaries for such period, to the
extent that such provision for taxes was included in computing such
Consolidated Net Income, plus (iii) Consolidated Interest Expense of such
Person for such period, to the extent that any such expense was deducted in
computing such Consolidated Net Income, plus (iv) depreciation and amortization
(including amortization of goodwill and other intangibles but excluding
amortization of prepaid cash expenses that were paid in a prior period) of such
Person and its Restricted Subsidiaries for such period to the extent that such
depreciation and amortization were deducted in computing such Consolidated Net
Income, plus (v) other non-cash items decreasing such Consolidated Net Income,
minus (vi) non-cash items increasing such Consolidated Net Income for such
period (other than items that were accrued in the ordinary course of business),
in each case, on a consolidated basis and determined in accordance with GAAP.
"Consolidated Interest Expense" means, with respect to any Person for any
period, the sum, without duplication of (i) the consolidated interest expense
of such Person and its Restricted Subsidiaries for such period, whether paid or
accrued (including, without limitation, amortization of original issue
discount, non-cash interest payments, the interest component of any deferred
payment obligations, the interest component of all payments associated with
Capital Lease Obligations, imputed interest with respect to Attributable Debt,
commissions, discounts and other fees and charges incurred in respect of letter
of credit or bankers' acceptance financings, and net payments (if any) pursuant
to Hedging Obligations), (ii) the consolidated interest expense of such Person
and its Restricted Subsidiaries that was capitalized during such period, (iii)
any interest expense on Indebtedness of another Person that is guaranteed by
such Person or any of its Restricted Subsidiaries or secured by a Lien on
assets of such Person or any of its Restricted Subsidiaries (whether or not
such guarantee or Lien is called upon) and (iv) the product of (a) all cash
dividend payments (and non-cash dividend payments in the case of a Person that
is a Restricted Subsidiary) on any series of preferred stock of such Person or
any of its Restricted Subsidiaries, times (b) a fraction, the numerator of
which is one and the denominator of which is one minus the then current
combined federal, state and local statutory tax rate of such Person, expressed
as a decimal, in each case, on a consolidated basis and in accordance with
GAAP.
"Consolidated Net Income" means, with respect to any Person for any period,
the aggregate of the Net Income of such Person and its Restricted Subsidiaries
(for such period, on a consolidated basis, determined in accordance with GAAP);
provided that (i) the Net Income (but not loss) of any Person that is not a
Restricted Subsidiary or that is accounted for by the equity method of
accounting shall be included only to the extent of the amount of dividends or
distributions paid in cash to the referent Person or a Restricted Subsidiary,
(ii) the Net Income of any Person acquired in a pooling of interests
transaction for any period prior to the date of such acquisition shall be
excluded, (iii) the cumulative effect of a change in accounting principles
shall be excluded and (iv) the Net Income of any Unrestricted Subsidiary shall
be excluded whether or not distributed to an Issuer or one of its Restricted
Subsidiaries.
"Continuing Managers" means the managers of Avalon on the Issue Date and
each other manager, if, in each case, such other manager's nomination for
election to the board of managers of Avalon is recommended by at least 66 2/3%
of the then Continuing Managers or such other manager receives the vote of the
Permitted Investors in his or her election by the equityholders of Avalon.
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"Control Investment Affiliate" means as to any Person, any other Person
which (a) directly or indirectly, is in control of, is controlled by, or is
under common control with, such Person and (b) is organized by such Person
primarily for the purpose of making equity or debt investments in one or more
companies. For purposes of this definition, "control" of a Person means the
power, directly or indirectly, to direct or cause the direction of the
management and policies of such Person whether by contract or otherwise.
"Credit Facility" means that certain Senior Credit Agreement, dated as of
November 5, 1998, by and among the Company Issuers, the lenders party thereto,
Lehman Commercial Paper Inc., as administrative agent and other parties
thereto, including any related notes, guarantees, collateral documents,
instruments and agreements executed in connection therewith, and in each case
as amended, modified, renewed, refunded, replaced or refinanced from time to
time.
"Default" means any event that is or with the passage of time or the giving
of notice (or both) would be an Event of Default.
"Disqualified Stock" means any Capital Stock that, by its terms (or by the
terms of any security into which it is convertible or for which it is
exchangeable at the option of the holder thereof), or upon the happening of any
event, matures or is mandatorily redeemable, pursuant to a sinking fund
obligation or otherwise, or redeemable at the option of the holder thereof, in
whole or in part, on or prior to the date that is 91 days after the date on
which the Notes mature, except to the extent that such Capital Stock is solely
redeemable with, or solely exchangeable for, any Capital Stock of such Person
that is not Disqualified Stock; provided, however, that any Capital Stock that
would constitute Disqualified Stock solely because the holders thereof have the
right to require the Issuers or their Affiliates to repurchase such Capital
Stock upon the occurrence of a Change of Control or an Asset Sale shall not
constitute Disqualified Stock if the terms of such Capital Stock provide that
the Issuers or their Affiliates may not repurchase or redeem any such Capital
Stock pursuant to such provisions unless such repurchase or redemption complies
with the covenant described under the caption under "--Certain Covenants--
Restricted Payments."
"Equity Interests" means Capital Stock and all warrants, options or other
rights to acquire Capital Stock (but excluding any debt security that is
convertible into, or exchangeable for, Capital Stock).
"Excess Proceeds" means any Net Cash Proceeds from Asset Sales that are not
applied or invested as provided in the first sentence of the third paragraph
under the caption "--Asset Sales" within the applicable period.
"Existing Michigan Indebtedness" means Indebtedness incurred by Avalon
Michigan Inc. or Mercom between the Issue Date and the completion of the
Reorganization that would be permitted to be incurred under the terms of the
Indenture, including any related notes, guarantees, collateral documents,
instruments and agreement executed in connection therewith, and in each case,
as amended, modified renewed, refunded, replaced or refinanced.
"Existing Indebtedness" means up to $5.0 million in aggregate principal
amount of Indebtedness of the Issuers and their Restricted Subsidiaries (other
than Indebtedness under the Credit Facility and the Notes) in existence on the
Issue Date, until such amounts are repaid.
"GAAP" means generally accepted accounting principles in the United States
of America as in effect from time to time, except for the provisions described
above under the captions "Certain Covenants--Restricted Payments" and "Certain
Covenants--Incurrence of Indebtedness and Issuance of Preferred Stock", GAAP
shall be determined on the basis of such principles in effect on the Issue
Date.
"Governmental Authority" means any nation or government, any state or other
political subdivision thereof and any entity exercising executive, legislative,
judicial, regulatory or administrative functions of or pertaining to
government.
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"Government Securities" means direct obligations of, or obligations
guaranteed by, the United States of America, and the payment for which the
United States pledges its full faith and credit.
"Guarantee" means a guarantee (other than by endorsement of negotiable
instruments for collection in the ordinary course of business), direct or
indirect, in any manner (including, without limitation, letters of credit and
reimbursement agreements in respect thereof), of all or any part of any
Indebtedness.
"Hedging Obligations" means, with respect to any Person, the net payment
Obligations of such Person under (i) interest rate swap agreements, interest
rate cap agreements and interest rate collar agreements and (ii) other
agreements or arrangements in the ordinary course of business designed to
protect such Person against fluctuations in commodity prices, interest rates or
currency exchange rates.
"Holder" means a Person in whose name a Note is registered.
"Indebtedness" means, with respect to any Person, without duplication, any
indebtedness of such Person, whether or not contingent, in respect of borrowed
money or evidenced by bonds, notes, debentures or similar instruments or
letters of credit (or reimbursement agreements in respect thereof) or banker's
acceptances or representing Capital Lease Obligations or the balance deferred
and unpaid of the purchase price of any Property acquired by such Person or
representing any Hedging Obligations, except any such balance that constitutes
an accrued expense or trade or accounts payable, if and to the extent any of
the foregoing indebtedness (other than letters of credit and Hedging
Obligations) would appear as a liability upon a balance sheet of such Person
prepared in accordance with GAAP, as well as all Indebtedness of others secured
by a Lien on any asset of such Person (whether or not such Indebtedness is
assumed by such Person) and, to the extent not otherwise included, the
Guarantee by such Person of any Indebtedness of any other Person. The amount of
any Indebtedness outstanding as of any date shall be (i) the face amount
thereof, in the case of any Indebtedness with respect to acceptances, letters
of credit and similar facilities, (ii) the accreted value thereof in the case
of any Indebtedness that does not require current payments of interest and
(iii) the principal amount thereof, together with any interest thereon that is
more than 30 days past due, in the case of any other Indebtedness; provided,
however, that, in each case, with respect to any Indebtedness of any Person
secured by a Lien on any asset of such Person and non-recourse to such Person,
the amount of such Indebtedness shall be the lesser of (A) the principal amount
thereof and (B) the fair market value of the Property subject to such Lien.
Notwithstanding the foregoing, the term "Indebtedness" shall not include
Indebtedness of the Issuers to Affiliates for which principal and interest
payments are not required to be made prior to the maturity of the Notes and
which is otherwise subordinated to the prior payment in full of the Notes.
"Investments" means, with respect to any Person, all investments by such
Person in other Persons (including Affiliates) in the forms of direct or
indirect loans (including Guarantees of Indebtedness or other Obligations),
advances of assets or capital contributions (excluding commission, travel and
entertainment, moving, and similar advances to officers and employees made in
the ordinary course of business), purchases or other acquisitions for
consideration of Indebtedness, Equity Interests or other securities, together
with all items that are or would be classified as investments on a balance
sheet prepared in accordance with GAAP. If any of the Issuers or any of their
Restricted Subsidiaries sells or otherwise disposes of any Equity Interests of
any direct or indirect Restricted Subsidiary of any Issuer such that, after
giving effect to any such sale or disposition, such Person is no longer a
direct or indirect Restricted Subsidiary of any Issuer, such Issuer or such
Restricted Subsidiary, as the case may be, shall be deemed to have made an
Investment on the date of any such sale or disposition equal to the fair market
value of the Equity Interests of such Restricted Subsidiary not sold or
disposed of in an amount determined as provided in the final paragraph of the
covenant described above under the caption "--Restricted Payments."
"Issue Date" means the date on which the Notes are originally issued.
"Issuers" means, initially, Michigan Holdings, Avalon Holdings and Finance
Holdings or any successor thereto; provided that subsequent to the
Reorganization, the Issuers shall be Avalon Holdings, as successor to Michigan
Holdings, and Finance Holdings or any successor thereto.
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"Leverage Ratio" means the ratio of (i) the aggregate outstanding amount of
Indebtedness of each of the Issuers and their Restricted Subsidiaries as of the
date of calculation on a combined consolidated basis in accordance with GAAP
(subject to the terms described in the next paragraph) plus the aggregate
liquidation preference of all outstanding Disqualified Stock of the Issuers and
preferred stock of the Issuers' Restricted Subsidiaries (except preferred stock
issued to the Issuers or a Wholly Owned Subsidiary of the Issuers) on such date
to (ii) the aggregate Consolidated Cash Flow of the Issuers for the full fiscal
quarter ending on or prior to the date of determination multiplied by four.
For purposes of this definition, (i) the amount of Indebtedness which is
issued at a discount shall be deemed to be the accreted value of such
Indebtedness at the end of the quarter, whether or not such amount is the
amount then reflected on a balance sheet prepared in accordance with GAAP, and
(ii) the aggregate outstanding principal amount of Indebtedness of the Issuers
and their Subsidiaries and the aggregate liquidation preference of all
outstanding preferred stock of the Issuers' Subsidiaries for which such
calculation is made shall be determined on a pro forma basis as if the
Indebtedness and preferred stock giving rise to the need to perform such
calculation had been incurred and issued and the proceeds therefrom had been
applied, and all other transactions in respect of which such Indebtedness is
being incurred or preferred stock is being issued had occurred, on the first
day of the quarter. In addition to the foregoing, for purposes of this
definition, Consolidated Cash Flow shall be calculated on a pro forma basis
after giving effect to (i) the incurrence of the Indebtedness of such Person
and its Subsidiaries and the issuance of the preferred stock of such
Subsidiaries (and the application of the proceeds therefrom) giving rise to the
need to make such calculation and any incurrence (and the application of the
proceeds therefrom) or repayment of other Indebtedness, at any time subsequent
to the beginning of the quarter and on or prior to the date of determination,
as if such incurrence or issuance (and the application of the proceeds
thereof), or the repayment, as the case may be, occurred on the first day of
the quarter (except that, in making such computation, the amount of
Indebtedness under any revolving credit facility shall be computed based upon
the average balance of such Indebtedness at the end of each month during such
period) and (ii) any acquisition (including, without limitation, the
acquisitions of Cable Michigan, Amrac and Pegasus and any other acquisition
giving rise to the need to make such calculation as a result of such Person or
one of its Subsidiaries (including any Person that becomes a Subsidiary as a
result of such acquisition) incurring, assuming or otherwise becoming liable
for Indebtedness or such Person's Subsidiaries issuing preferred stock) at any
time on or subsequent to the first day of the quarter and on or prior to the
date of determination, as if such acquisition (including the incurrence,
assumption or liability for any such Indebtedness and the issuance of such
preferred stock and also including any Consolidated Cash Flow associated with
such acquisition) occurred on the first day of the quarter, giving pro forma
effect to any non-recurring expenses, non-recurring costs and cost reductions
within the first year after such acquisition the Issuers anticipate if the
Issuers deliver to the Trustee an officer's certificate executed by the chief
financial or accounting officer of any of the Issuers certifying to and
describing and quantifying with reasonable specificity such non-recurring
expenses, non-recurring costs and cost reductions. Furthermore, in calculating
Consolidated Interest Expense for purposes of the calculation of Consolidated
Cash Flow, (a) interest on Indebtedness determined on a fluctuating basis as of
the date of determination (including Indebtedness actually incurred on the date
of the transaction giving rise to the need to calculate the Leverage Ratio) and
which will continue to be so determined thereafter shall be deemed to have
accrued at a fixed rate per annum equal to the rate of interest on such
Indebtedness as in effect on the date of determination and (b) notwithstanding
(a) above, interest determined on a fluctuating basis, to the extent such
interest is covered by Hedging Obligations, shall be deemed to accrue at the
rate per annum resulting after giving effect to the operation of such
agreements.
"Lien" means, with respect to any asset, any mortgage, lien, pledge, charge,
security interest or encumbrance of any kind in respect of such asset, whether
or not filed, recorded or otherwise perfected under applicable law (including
any conditional sale or other title retention agreement, any lease in the
nature thereof, any option or other agreement to sell or give a security
interest in any asset and any filing of or agreement to give any financing
statement under the Uniform Commercial Code (or equivalent statutes) of any
jurisdiction).
"Mercom" means Mercom, Inc., a Delaware corporation.
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"Mercom Intercompany Loan" means the Term Credit Agreement between Mercom
and Cable Michigan, Inc. originally dated as of November 26, 1989, amended and
restated as of August 16, 1995, further amended and restated as of September
29, 1997 and as may be further amended from time to time; provided that any
such further amendment shall not modify the Mercom Intercompany Loan as in
effect as of September 29, 1997 in any material respect, taken as a whole,
adverse to the Issuers and their Subsidiaries or the Trustee or the Holders.
"Mercom Management Agreement" means the Management Agreement between Mercom
and Cable Michigan, Inc. dated as of January 1, 1997, as may be amended from
time to time; provided that any such amendment shall not modify the Mercom
Management Agreement as in effect as of January 1, 1997 in any material
respect.
"Merger" means the merger of Avalon Cable Michigan, Inc. with and into Cable
Michigan, Inc.
"Net Cash Proceeds" means (a) with respect to any Asset Sale, the aggregate
cash proceeds or Cash Equivalents received by the Issuers or any of their
Restricted Subsidiaries in respect of any Asset Sale (including, without
limitation, any cash received upon the sale or other disposition of any non-
cash consideration received in any Asset Sale), net of (i) all costs relating
to such Asset Sale (including, without limitation, legal, accounting,
investment banking and brokers fees, and sales and underwriting commissions)
and any relocation expenses incurred as a result thereof, taxes paid or payable
as a result thereof (after taking into account any available tax credits or
deductions and any tax sharing arrangements), (ii) any reserve established in
accordance with GAAP or amounts deposited in escrow for adjustment in respect
of the sale price of such asset or assets or for indemnities with respect to
any Asset Sale (provided that such amounts shall be Net Cash Proceeds to the
extent and at the time released or not required to be reserved) and (iii)
amounts required to be applied to the repayment of Indebtedness secured by a
Lien which is expressly permitted hereunder on any asset that is the subject of
such Asset Sale and (b) with respect to transactions or events other than Asset
Sales, the aggregate cash proceeds or Cash Equivalents received by the Issuers
or any of their Restricted Subsidiaries in connection therewith less the
reasonable fees, commissions and other out-of-pocket expenses incurred by the
Issuers or any of their Restricted Subsidiaries in connection with such
transaction or event and less any taxes paid or payable as a result thereof
(after taking into account any available tax credits or deductions and any tax
sharing arrangements).
"Net Income" means, with respect to any Person, the net income (loss) of
such Person, determined in accordance with GAAP and before any reduction in
respect of preferred stock dividends, excluding, however, (i) any gain (but not
loss), together with any related provision for taxes on such gain (but not
loss), realized in connection with (a) any Asset Sale (including, without
limitation, dispositions pursuant to sale and leaseback transactions) or (b)
the disposition of any securities by such Person or any of its Restricted
Subsidiaries or the extinguishment of any Indebtedness of such Person or any of
its Restricted Subsidiaries and (ii) any extraordinary gain (but not loss),
together with any related provision for taxes on such extraordinary gain (but
not loss).
"Non-Recourse Debt" means Indebtedness (i) as to which none of the Issuers
nor any of their Restricted Subsidiaries (a) provides credit support of any
kind (including any undertaking, agreement or instrument that would constitute
Indebtedness), (b) is directly or indirectly liable (as a guarantor or
otherwise) or (c) constitutes the lender; and (ii) no default with respect to
which (including any rights that the holders thereof may have to take
enforcement action against an Unrestricted Subsidiary) would permit (upon
notice, lapse of time or both) any holder of any Indebtedness (other than the
Notes being offered hereby) of any of the Issuers or their Restricted
Subsidiaries to declare a default on such other Indebtedness or cause the
payment thereof to be accelerated or payable prior to its stated maturity; and
(iii) as to which the lenders have been notified in writing that they will not
have any recourse to the stock or assets of any of the Issuers or their
Restricted Subsidiaries.
"Obligations" means any principal, premium, if any, interest (including
interest accruing on or after the filing of any petition in bankruptcy or for
reorganization relating to any Issuer or any of their Restricted
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Subsidiaries whether or not a claim for post-filing interest is allowed in such
proceeding), penalties, fees, charges, expenses, indemnifications,
reimbursement obligations, damages (including Liquidated Damages), guarantees
and other liabilities or amounts payable under the documentation governing any
Indebtedness or in respect thereof.
"Pegasus" means, collectively, Pegasus Cable Television, Inc. and Pegasus
Cable Television of Connecticut, Inc.
"Permitted Business" means any business engaged in by the Issuers or their
Restricted Subsidiaries as of the Issue Date or any business reasonably
related, ancillary or complementary thereto.
"Permitted Investments" means (a) any Investment in any Issuer or in any
Restricted Subsidiary of the Issuers; (b) any Investment in Cash Equivalents
constituting Cash Equivalents at the time made; (c) any Investment by the
Issuers or any of their Restricted Subsidiaries in a Person engaged in a
Permitted Business, if as a result of such Investment (i) such Person becomes a
Wholly-Owned Subsidiary of any Issuer or (ii) such Person is merged,
consolidated or amalgamated with or into, or transfers or conveys substantially
all of its assets to, or is liquidated into, any of the Issuers or any of their
Restricted Subsidiaries; (d) any Restricted Investment made as a result of the
receipt of non-cash consideration from an Asset Sale that was made in
compliance with the covenant described above under the caption "Repurchase at
the Option of Holders--Asset Sales"; (e) any acquisition of assets solely in
exchange for the issuance of Equity Interests (other than Disqualified Stock)
of any of the Issuers; (f) other Investments by the Issuers or any of their
Restricted Subsidiaries in any Person having an aggregate fair market value
(measured as of the date made and without giving effect to subsequent changes
in value), when taken together with all other Investments made pursuant to this
clause (f) that are at the time outstanding, not to exceed $10.0 million; (g)
Investments arising in connection with Hedging Obligations that are incurred in
the ordinary course of business, for the purpose of fixing or hedging currency,
commodity or interest rate risk (including with respect to any floating rate
Indebtedness that is permitted by the terms of the Indenture to be outstanding)
in connection with the conduct of the business of the Issuers and their
Restricted Subsidiaries; (h) prior to the completion of the Mercom Acquisition,
the Mercom Intercompany Loan; and (i) any Investment existing on the Issue Date
and any amendment, modification, restatement, supplement, extension, renewal,
refunding, replacement, refinancing, in whole or in part, thereof.
"Permitted Investors" means the collective reference to ABRY and its Control
Investment Affiliates, including ABRY III.
"Permitted Liens" means (i) Liens securing Indebtedness under the Credit
Facility or other senior Indebtedness if such Indebtedness was permitted by the
terms of the Indenture to be incurred, (ii) Liens securing Indebtedness of any
Restricted Subsidiary of any of the Issuers if such Indebtedness was permitted
by the terms of the Indenture to be incurred; (iii) Liens securing Hedging
Obligations with respect to Indebtedness permitted by the Indenture to be
incurred; (iv) Liens on property of a Person existing at the time such Person
is merged into or consolidated with any of the Issuers or any of their
Restricted Subsidiaries; provided that such Liens were not created in
contemplation of such merger or consolidation and do not extend to any assets
other than those of the Person merged into or consolidated with such Issuer;
(v) Liens on property existing at the time of acquisition thereof by any of the
Issuers or any of their Restricted Subsidiaries, provided that such Liens were
not created in contemplation of such acquisition and only extend to the
property so acquired; (vi) Liens existing on the Issue Date; (vii) Liens to
secure any Permitted Refinancing Indebtedness incurred to refinance any
Indebtedness secured by any Lien referred to in the foregoing clauses (ii)
through (vi), as the case may be, at the time the original Lien became a
Permitted Lien; (viii) Liens in favor of any of the Issuers or any of their
Restricted Subsidiaries; (ix) Liens incurred in the ordinary course of business
of the Issuers or any of their Restricted Subsidiaries with respect to
obligations that do not exceed the greater of $15.0 million or 5% of Total
Assets in the aggregate at any one time outstanding and that (a) are not
incurred in connection with the borrowing of money or the obtaining of advances
or credit (other than trade credit in the ordinary course of business) and (b)
do not in the aggregate materially detract from the value of the property or
materially impair
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the use thereof in the operation of business by such Issuer or such Restricted
Subsidiary; (x) Liens to secure the performance of statutory obligations,
surety or appeal bonds, performance bonds, deposits to secure the performance
of bids, trade contracts, government contracts, leases or licenses or other
obligations of a like nature incurred in the ordinary course of business
(including, without limitation, landlord Liens on leased properties); (xi)
Liens for taxes, assessments or governmental charges or claims that are not yet
delinquent or that are being contested in good faith by appropriate proceedings
promptly instituted and diligently prosecuted, provided that any reserve or
other appropriate provision as shall be required to conform with GAAP shall
have been made therefor; (xii) Liens to secure Indebtedness (including Capital
Lease Obligations) permitted by clause (vi) of the second paragraph of the
covenant described above under the caption "--Incurrence of Indebtedness and
Issuance of Preferred Stock" covering only the assets acquired with such
Indebtedness; (xiii) carriers', warehousemen's, mechanics', landlords',
materialmen's, repairmen's or other like Liens arising in the ordinary course
of business in respect of obligations not overdue for a period in excess of 60
days or which are being contested in good faith by appropriate proceedings
promptly instituted and diligently prosecuted; provided that any reserve or
other appropriate provision as shall be required to conform with GAAP shall
have been made therefor; (xiv) easements, rights-of-way, zoning and similar
restrictions and other similar encumbrances or title defects incurred, or
leases or subleases granted to others, in the ordinary course of business,
which do not in any case materially detract from the value of the Property
subject thereto or do not interfere with or adversely affect in any material
respect the ordinary conduct of the business of the Issuers and their
Restricted Subsidiaries taken as a whole; (xv) Liens in favor of customs and
revenue authorities to secure payment of customs duties in connection with the
importation of goods in the ordinary course of business and other similar Liens
arising in the ordinary course of business; (xvi) leases or subleases granted
to third Persons not materially interfering with the ordinary course of
business of the Issuers or any of their Restricted Subsidiaries; (xvii) Liens
(other than any Lien imposed by ERISA or any rule or regulation promulgated
thereunder) incurred or deposits made in the ordinary course of business in
connection with workers' compensation, unemployment insurance, and other types
of social security; (xviii) deposits made in the ordinary course of business to
secure liability to insurance carriers; (xix) Liens to secure Indebtedness
permitted under the covenant described above under the caption "--Incurrence of
Indebtedness and Issuance of Preferred Stock"; provided, that any such Lien
encumbers only the assets so purchased with the proceeds thereof; (xx) any
attachment or judgment Lien not constituting an Event of Default under clause
(vii) of the first paragraph of the section described above under the caption
"Events of Default and Remedies"; (xxi) any interest or title of a lessor or
sublessor under any operating lease; (xxii) Liens under licensing agreements
for use of Intellectual Property entered into in the ordinary course of
business; (xxiii) Liens encumbering deposits made to secure obligations arising
from statutory, regulatory, contractual, or warranty requirements of any of the
Issuers or any of their Restricted Subsidiaries, including rights of offset and
set-off; (xxiv) bankers' Liens in respect of deposit accounts; (xxv) Liens
created under the Indenture; (xxvi) Liens imposed by law incurred by the
Issuers or their Restricted Subsidiaries in the ordinary course of business;
and (xxvii) any renewal of or substitution for any Lien permitted by clauses
(i) through (xxvi), provided, however, that with respect to Liens incurred
pursuant to this clause (xxvii), the principal amount secured has not increased
nor the Liens extended to any additional property (other than proceeds of the
property in question).
"Permitted Refinancing Indebtedness" means any Indebtedness of any of the
Issuers or any of their Restricted Subsidiaries issued in exchange for, or the
net proceeds of which are used to extend, refinance, renew, replace, defease or
refund other Indebtedness of such Issuer or such Restricted Subsidiary (other
than intercompany Indebtedness); provided that either: (A) the principal amount
(or accreted value, if applicable) of such Permitted Refinancing Indebtedness
does not exceed the principal amount of (or accreted value, if applicable),
plus accrued and unpaid interest on, any Indebtedness so extended, refinanced,
renewed, replaced, defeased or refunded (plus the amount of reasonable fees and
expenses incurred in connection therewith); (B) for Indebtedness other than
Indebtedness incurred pursuant to the Senior Credit Facility, such Permitted
Refinancing Indebtedness has a final maturity date the same as or later than
the final maturity date of, and has a Weighted Average Life to Maturity equal
to or greater than the Weighted Average Life to Maturity of, the Indebtedness
being extended, refinanced, renewed, replaced, defeased or refunded; (C) if the
Indebtedness being extended, refinanced, renewed, replaced, defeased or
refunded is subordinated in right of payment to the
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Notes, such Permitted Refinancing Indebtedness has a final maturity date later
than the final maturity date of, and is subordinated in right of payment to,
the Notes on terms at least as favorable to the Holders of Notes as those
contained in the documentation governing the Indebtedness being extended,
refinanced, renewed, replaced, defeased or refunded; and (D) such Indebtedness
is incurred either by the Issuer or the Restricted Subsidiary who is the
obligor on the Indebtedness being extended, refinanced, renewed, replaced,
defeased or refunded or by the parent company of such obligor.
"Person" means any individual, corporation, partnership, limited liability
company, joint venture, association, joint-stock company, trust, unincorporated
organization, Governmental Authority or any other entity.
"Principal" means (i) Permitted Investors and (ii) the members of management
of the Issuers or any of the Subsidiaries of the Issuers as of the Issue Date,
in each case, together with any spouse or immediate family member (including
adoptive children), estate, heirs, executors, personal representatives and
administrators of such Person.
"Reorganization" means the related series of substantially simultaneous
transactions pursuant to which (i) substantially all the assets of Avalon
Michigan Inc. (other than, at the option of Avalon Michigan Inc., the Capital
Stock of Mercom and any Subsidiary of Avalon Michigan Inc. organized for
purposes of consummating the Mercom Acquisition) and Mercom (other than, at the
option Avalon Michigan Inc., the Capital Stock of Wholly-Owned Subsidiaries of
Mercom) are transferred to Avalon Michigan LLC; (ii) substantially all of the
liabilities of Avalon Michigan Inc. and Mercom (other than liabilities
hereunder and, at the option of Avalon Michigan Inc., intercompany debt) are
transferred to Avalon Michigan LLC; (iii) Michigan Holdings ceases to be an
Issuer and together with Avalon Michigan becomes a guarantor under the
Indenture and (iv) certain Indebtedness of Avalon New England shall be assumed
by Avalon Michigan Inc.
"Restricted Investment" means any Investment other than a Permitted
Investment.
"Restricted Subsidiary" of a Person means any Subsidiary of the referent
Person that is not an Unrestricted Subsidiary; provided that, on the Issue
Date, all Subsidiaries of each of the Issuers shall be Restricted Subsidiaries
of each such Issuer.
"Senior Subordinated Notes" means the Senior Subordinated Notes due 2008 of
the Company Issuers, as co-obligors, issued under the Indenture dated as of
December 10, 1998.
"Significant Subsidiary" means any Subsidiary that would be a "significant
subsidiary" as defined in Article 1 Rule 1-02 of Regulation S-X, promulgated
pursuant to the Act, as such Regulation is in effect on the Issue Date.
"Stated Maturity" means, with respect to any installment of interest or
principal on any series of Indebtedness, the date on which such payment of
interest or principal was scheduled to be paid in the credit agreement or other
original documentation governing such Indebtedness, and shall not include any
contingent obligations to repay, redeem or repurchase any such interest or
principal prior to the date originally scheduled for the payment thereof.
"Strategic Equity Investment" means a cash contribution to the equity
capital of any of the Issuers or a purchase from any such Issuer of common
Equity Interests (other than Disqualified Stock), in either case by or from a
Strategic Equity Investor and for aggregate cash consideration of at least
$25.0 million.
"Strategic Equity Investor" means, as of any date, any Person (other than an
Affiliate of any of the Issuers) engaged in a Permitted Business.
"Subsidiary" means, with respect to any Person, (i) any corporation,
association or other business entity of which more than 50% of the total voting
power of shares of Capital Stock entitled (without regard to the
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occurrence of any contingency) to vote in the election of directors, managers
or trustees thereof is at the time owned or controlled, directly or indirectly,
by such Person and (ii) any partnership (a) the sole general partner or the
managing general partner of which is such Person or an entity described in
clause (i) and related to such Person or (b) the only general partners of which
are such Person or of one or more entities described in clause (i) and related
to such Person (or any combination thereof).
"Total Assets" means the total combined consolidated assets of the Issuers
and their Restricted Subsidiaries, as shown on the most recent balance sheets
(excluding the footnotes thereto) of the Issuers.
"Total Revenues" means the total combined consolidated revenues of the
Issuers and their Restricted Subsidiaries, as shown on the most recent balance
sheets (excluding the footnotes thereto) of the Issuers.
"Unrestricted Subsidiary" means (i) any Subsidiary that is designated by the
Board of Directors of the applicable Issuer as an Unrestricted Subsidiary
pursuant to a Board Resolution; but only to the extent that such Subsidiary:
(a) has no Indebtedness other than Non-Recourse Debt; (b) is not party to any
agreement, contract, arrangement or understanding with such Issuer or any
Restricted Subsidiary of such Issuer unless the terms of any such agreement,
contract, arrangement or understanding are no less favorable to such Issuer or
such Restricted Subsidiary than those that might be obtained at the time from
Persons who are not Affiliates of such Issuer; (c) is a Person with respect to
which none of the Issuers nor any of their Restricted Subsidiaries has any
direct or indirect obligation (x) to subscribe for additional Equity Interests
or (y) to maintain or preserve such Person's financial condition or to cause
such Person to achieve any specified levels of operating results; and (d) has
not guaranteed or otherwise directly or indirectly provided credit support for
any Indebtedness of the Issuers or any of their Restricted Subsidiaries. The
Board of Directors of the Issuers may at any time designate any Unrestricted
Subsidiary to be a Restricted Subsidiary; provided that such designation shall
be deemed to be an incurrence of Indebtedness by a Restricted Subsidiary of the
Issuers of any outstanding Indebtedness of such Unrestricted Subsidiary and
such designation shall only be permitted if (i) such Indebtedness is permitted
pursuant to the provisions described above under the caption "Certain
Covenants--Incurrence of Indebtedness and Issuance of Preferred Stock",
calculated on a pro forma basis as if such designation had occurred at the
beginning of the reference period, and (ii) no Default or Event of Default
would be in existence following such designation.
"Voting Stock" of any Person as of any date means the Capital Stock of such
Person that is at the time entitled to vote in the election of the Board of
Directors of such Person.
"Weighted Average Life to Maturity" means, when applied to any Indebtedness
at any date, the number of years obtained by dividing (i) the sum of the
products obtained by multiplying (a) the amount of each then remaining
installment, sinking fund, serial maturity or other required payments of
principal, including payment at final maturity, in respect thereof, by (b) the
number of years (calculated to the nearest one-twelfth) that will elapse
between such date and the making of such payment, by (ii) the then outstanding
principal amount of such Indebtedness.
"Wholly Owned Subsidiary" of any Person means a Restricted Subsidiary of
such Person all of the outstanding Capital Stock and other Equity Interests of
which shall at the time be owned by such Person or by one or more Wholly Owned
Subsidiaries of such Person.
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CERTAIN UNITED STATES FEDERAL INCOME TAX CONSEQUENCES
The following summary describes material United States federal income tax
consequences of the exchange of old notes for new notes pursuant to the
exchange offer and the ownership and disposition of the new notes. The
discussion is a summary and does not consider all aspects of U.S. federal
income taxation that may be relevant to the purchase, ownership and disposition
of the new notes by a prospective investor in light of such investor's personal
circumstances. This discussion also does not address the U.S. federal income
tax consequences of ownership of notes not held as capital assets within the
meaning of Section 1221 of the U.S. Internal Revenue Code of 1986, as amended
(the "Code"), or the U.S. federal income tax consequences to investors subject
to special treatment under the U.S. federal income tax laws, such as dealers in
securities or foreign currency, tax-exempt entities, financial institutions,
insurance companies, persons that hold the notes as part of a straddle, a
hedging or a conversion or constructive sale transaction, persons that have a
"functional currency" other than the U.S. dollar, and investors in pass-through
entities. In addition, this discussion does not describe any tax consequences
arising under U.S. gift and estate taxes or out of the tax laws of any state,
local or foreign jurisdiction.
Furthermore, the discussion below is based upon the provisions of the Code,
and the regulations, rulings and judicial decisions thereunder as of the date
hereof, and such authorities may be repealed, revoked or modified, possibly on
a retroactive basis, so as to result in United States federal income tax
consequences different from those discussed below. Persons considering the
purchase, ownership or disposition of the new notes should consult their own
tax advisors concerning the United States federal income tax consequences in
light of their particular situations as well as any consequences arising under
the laws of any other taxing jurisdiction.
The exchange of old notes for new notes pursuant to the exchange offer will
not be treated as an "exchange" for federal income tax purposes because the new
notes will not be considered to differ materially in kind or extent from the
old notes. Rather, the new notes received by a holder will be treated as a
continuation of the old notes in the hands of such holder. As a result, there
will be no federal income tax consequences to holders exchanging old notes for
new notes pursuant to the exchange offer.
Exchange of Old Notes
The exchange of old notes for new notes with terms identical to those of the
old notes and the filing of a registration statement with respect to the resale
of the old notes will not be a taxable event to holders of the old notes.
Consequently, as a result of such an exchange or such a filing, no gain or loss
will be recognized by a holder, the holding period of the new note will include
the holding period of the old note and the basis of the new note will be the
same as the basis of the old note immediately before the exchange. The issuers
are obligated to pay liquidated damages to the holders of the old notes under
certain circumstances. Any such payments should be treated for tax purposes as
interest, taxable to holders as such payments are received or accrued in
accordance with the holder's method of accounting for federal income tax
purposes.
In any event, persons considering the exchange of old notes for new notes
should consult their own tax advisors concerning the United States federal
income tax consequences in light of their particular situations as well as any
consequences arising under the laws of any other taxing jurisdiction.
Payments of Interest
Except as set forth below, interest on a new note will generally be taxable
to a United States Holder as ordinary income from domestic sources at the time
it is paid or accrued in accordance with the United States Holder's method of
accounting for tax purposes. As used herein, a "United States Holder" means a
holder of a new note that is:
. a citizen or resident of the United States,
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. a corporation or partnership created or organized in or under the laws of
the United States or any political subdivision thereof,
. an estate the income of which is subject to United States federal income
taxation regardless of its source or
. a trust which is subject to the supervision of a court within the United
States and the control of one or more United States persons as described
in section 7701(a)(30) of the Code.
A "Non-United States Holder" is a holder that is not a United States Holder.
Original Issue Discount
The new notes will bear original issue discount in an amount equal to the
difference between their stated redemption price at maturity (the sum of all
payments to be made on the new note) and their "issue price." United States
Holders should be aware that they generally must include original issue
discount in gross income as it accrues; regardless of their regular method of
accounting for federal income tax purposes, and in advance of the receipt of
cash attributable to that income. However, United States Holders of such new
notes generally will not be required to include separately in income cash
payments received on the new notes, even if denominated as interest.
This summary is based upon final Treasury regulations addressing debt
instruments issued with original issue discount.
The "issue price" of a new note will be the first price at which a
substantial amount of the particular offering of old notes to which such new
note relates was sold (other than to an underwriter, placement agent or
wholesaler).
The amount of original issue discount includible in income by the initial
United States Holder is the sum of the "daily portions" of original issue
discount with respect to the new note for each day during the taxable year or
portion of the taxable year in which such United States Holder held such new
note (including, in the case of the taxable year in which such holder exchanged
old notes for new notes, each day during such taxable year in which such holder
held such old notes) ("accrued original issue discount"). The daily portion is
determined by allocating to each day in any "accrual period" a pro rata portion
of the original issue discount allocable to that accrual period. The "accrual
period" may be of any length and may vary in length over the terms of the new
note, provided that each accrual period is no longer than one year and each
scheduled payment of principal or interest occurs on the first day or the final
day of an accrual period. The amount of original issue discount allocable to
any accrual period is an amount equal to the product of the new note's adjusted
issue price at the beginning of such accrual period and its yield to maturity
(determined on the basis of compounding at the close of each accrual period and
properly adjusted for the length of the accrual period). Original issue
discount allocable to a final accrual period is the difference between the
amount payable at maturity and the adjusted issue price at the beginning of the
final accrual period. The "adjusted issue price" of a new note at the beginning
of any accrual period is equal to its issue price increased by the accrued
original issue discount for each prior accrual period and reduced by any
payments made on such new note on or before the first day of the accrual
period. Under these rules, a United States Holder will have to include in
income increasingly greater amounts of original issue discount in successive
accrual periods. The issuers are required to provide information returns
stating the amount of original issue discount accrued on new notes held of
record by persons other than corporations and other exempt holders.
United States Holders may be able to elect to treat all interest on any new
note as original issue discount and calculate the amount includible in gross
income under the constant yield method described above. For the purposes of
this election, interest includes stated interest, acquisition discount,
original issue discount, de minimis original issue discount and unstated
interest. The election is to be made for the taxable year in which the United
States Holder acquired the old note to which a new note relates, and may not be
revoked without the consent of the Internal Revenue Service. United States
Holders should consult with their own tax advisors about this election and its
availability.
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Sale, Exchange, Redemption and Retirement of New Notes
A United States Holder's tax basis in a new note will, in general, be the
United States Holder's cost therefor, increased by the amount of original issue
discount previously included in income with respect to such new note and
reduced by any cash payments on the new note (including, in each case, original
issue discount included and cash payments made with respect to the old note for
which such new note was exchanged). Upon the sale, exchange, redemption,
retirement or other disposition of a new note, a United States Holder will
recognize gain or loss equal to the difference between the amount realized upon
the sale, exchange, redemption, retirement or other disposition and the
adjusted tax basis of the new note. Such gain or loss will be capital gain or
loss. Capital gains of individuals derived in respect of capital assets held
for more than one year are eligible for reduced rates of taxation. The
deductibility of capital losses is subject to limitations.
Non-United States Holders
For purposes of the following discussion, interest, dividends and gain on
the sale, exchange or other disposition of a new note will be considered "U.S.
trade or business income" if such income or gain is:
. effectively connected with the conduct of a U.S. trade or business and
. in the case of a qualified resident of a country having an applicable
income tax treaty with the United States containing a permanent
establishment provision, attributable to a U.S. permanent establishment
(or to a fixed base) in the United States.
Under present United States federal income and estate tax law, and subject
to the discussion below concerning backup withholding:
(a) A new note beneficially owned by an individual who at the time of
death is a Non-United States Holder will not be subject to United States
federal estate tax as a result of such individual's death, provided that
such individual does not actually or constructively own 10% or more of the
total combined voting power of all classes of stock of any of the issuers
entitled to vote within the meaning of section 871(h)(3) of the Code and
provided that the interest payments with respect to such new note would not
have been, if received prior to the time of such individual's death, U.S.
trade or business income to such individual.
(b) (i) No withholding of United States federal income tax will be
required with respect to the payment by the Issuers or any paying agent of
principal or interest on a new note owned by a Non-United States Holder,
provided that:
(A) the beneficial owner does not actually or constructively own 10%
or more of the total combined voting power of all classes of stock of
any of the issuers entitled to vote (or, in the case of any issuer
which is a limited liability company, 10% or more of the capital or
profits interest in such issuer) within the meaning of section
871(h)(3) of the Code and the regulations promulgated thereunder,
(B) the beneficial owner is not a controlled foreign corporation
that is related to any of the issuers as described in Section 864(d)(4)
of the Code,
(C) the beneficial owner is not a bank whose receipt of interest on
a new note is described in section 881(c)(3)(A) of the Code, and
(D) the beneficial owner satisfies the statement requirement
(described generally below) set forth in section 871(h) and section
881(c) of the Code and the regulations promulgated thereunder (the
"Portfolio Interest Exception").
(ii) To satisfy the requirement referred to in (b)(i)(D) above, the
beneficial owner of such new note, or a financial institution holding the
new note on behalf of such owner, must provide, in accordance with
specified procedures, a paying agent of any of the issuers with a statement
to the effect that the beneficial owner is not a United States person.
Currently, these requirements will be met if (1) the beneficial owner
provides its name and address, and certifies, under penalties of perjury,
that it is not a United States person (which certification may be made on
an Internal Revenue Service Form W-8 (or successor form)) or (2) a
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financial institution holding the new note on behalf of the beneficial
owner certifies, under penalties or perjury, that such statement has been
received by it and furnishes a paying agent with a copy thereof. Under
recently finalized Treasury regulations (the "Final Regulations"), the
statement requirement referred to in (b)(i)(D) above may also be satisfied
with other documentary evidence for interest paid after December 31, 1999,
with respect to an offshore account or through certain foreign
intermediaries.
(iii) No withholding of United States federal income tax will be
required with respect to any gain or income realized by a Non-United States
Holder upon the sale, exchange or other disposition of a new note.
(iv) If a Non-United States Holder cannot satisfy the requirements of
the Portfolio Interest Exception described in (i) above, payments of
interest made to such Non-United States Holder will be subject to a 30%
withholding tax unless the beneficial owner of the new note provides the
issuers or their paying agent, as the case may be, with a properly executed
(1) IRS Form 1001 (or successor form) claiming an exemption from
withholding under the benefit of a tax treaty or (2) IRS Form 4224 (or
successor form) stating that interest paid on the new note is not subject
to withholding tax because it is U.S. trade or business income to the
beneficial owner. Under the Final Regulations, Non-United States Holders
will generally be required to provide IRS Form W-8 instead of IRS Form 1001
and IRS Form 4224, although alternative documentation may be applicable in
certain situations.
(c) If interest, including original issue discount, on the new note is
U.S. trade or business income to the beneficial owner, the Non-United
States Holder, although exempt from the withholding tax discussed above,
will be subject to United States federal income tax on such interest,
including original issue discount, on a net income basis in the same manner
as if it were a United States Holder. In addition, if such holder is a
foreign corporation, it may be subject to a branch profits tax equal to 30%
of its effectively connected earnings and profits for the taxable year,
subject to adjustments. For this purpose, interest, including original
issue discount, on a new note will be included in such foreign
corporation's earnings and profits.
(d) Any gain or income realized upon the sale, exchange, redemption,
retirement or other disposition of a new note generally will not be subject
to United States federal income tax unless (i) such gain or income is U.S.
trade or business income, or (ii) in the case of a Non-United States Holder
who is an individual, such individual is present in the United States for
183 days or more in the taxable year of such sale, exchange, retirement or
other disposition, and certain other conditions are met.
Information Reporting and Backup Withholding
In general, information reporting requirements will apply to certain
payments of principal, interest and original issue discount paid on new notes
and to the proceeds of the sale of a new note made to United States Holders
other than certain exempt recipients (such as corporations). A 31% backup
withholding tax will apply to such payments if the United States Holder fails
to provide a correct taxpayer identification number or certification of foreign
or other exempt status or fails to report in full dividend and interest income.
In general, no information reporting or backup withholding will be required
with respect to payments made by the issuers or any paying agent to Non-United
States Holders if a statement described in (b)(i)(D) under "Non-United States
Holders" has been received (and the payor does not have actual knowledge that
the beneficial owner is a United States person).
In addition, backup withholding and information reporting may apply to the
proceeds of the sale of a new note within the United States or conducted
through certain U.S. related financial intermediaries unless the statement
described in (b)(i)(D) under "Non-United States Holders" has been received (and
the payor does not have actual knowledge that the beneficial owner is a United
States person) or the holder otherwise establishes an exemption.
Backup withholding is not an additional tax. Any amounts withheld under the
backup withholding rules may be returned or credited against the holder's U.S.
Federal income tax liability, provided that the required information is
furnished to the IRS.
144
<PAGE>
Holders of new notes should consult their tax advisors as to their
qualification for exemption from backup withholding and the procedure for
obtaining such exemption.
PLAN OF DISTRIBUTION
A Broker-Dealer who holds old notes that are Transfer Restricted Securities
and that were acquired for its own account as a result of market-making
activities or other trading activities (other than those acquired directly from
the issuers or their predecessors) may exchange such old notes in the exchange
offer; provided however, that each such Participating Broker-Dealer may be
deemed an "underwriter" under the Securities Act and therefore must deliver a
prospectus in connection with any resales of new notes received on account of
such old notes in the exchange offer. Accordingly, each Participating Broker-
Dealer that receives new notes for its own account pursuant to the exchange
offer must acknowledge that it will deliver a prospectus in connection with any
resale of such new notes. This prospectus, as it may be amended or supplemented
from time to time, may be used by a Participating Broker-Dealer in connection
with the resale of new notes received in exchange for old notes where such old
notes were acquired as a result of market-making activities or other trading
activities. The issuers have agreed that for a period of 180 days from the
consummation of the exchange offer, they will make this prospectus, as amended
or supplemented, available to any Participating Broker-Dealer for use in
connection with any such resale.
The issuers will not receive any proceeds from any sales of the new notes by
Participating Broker Dealers. New notes received by Participating Broker-
Dealers for their own account pursuant to the exchange offer may be sold from
time to time in one or more transactions in the over-the-counter market, in
negotiated transactions, through the writing of options on the new notes or a
combination of such methods of resale, at market prices prevailing at the time
of resale, at prices related to such prevailing market prices or negotiated
prices. Any such resale may be made directly to purchasers or to or through
brokers or dealers who may receive compensation in the form of commissions or
concessions from any such Participating Broker-Dealer and/or the purchasers of
any such new notes. Any Participating Broker-Dealer that resells the new notes
that were received by it for its own account pursuant to the exchange offer and
any broker or dealer that participates in a distribution of such new notes may
be deemed to be an "underwriter" within the meaning of the Securities Act and
any profit on any such resale of new notes and any commissions or concessions
received by any such persons may be deemed to be underwriting compensation
under the Securities Act. The letter of transmittal states that by
acknowledging that it will deliver and by delivering a prospectus, a
Participating Broker-Dealer will not be deemed to admit that it is an
"underwriter" within the meaning of the Securities Act.
With respect to resales of the new notes, based on interpretations by the
staff of the Commission set forth in no-action letters issued to third parties,
the issuers believe that a holder or other person who receives new notes,
whether or not such person is the holder (other than a person that is an
"affiliate" of any of the issuers within the meaning of Rule 405 under the
Securities Act) who receives new notes in exchange for old notes in the
ordinary course of business and who is not participating, does not intend to
participate, and has no arrangement or understanding with any person to
participate, in the distribution of the new notes, will be allowed to resell
the new notes to the public without further registration under the Securities
Act and without delivering to the purchasers of the new notes a prospectus that
satisfies the requirements of Section 10 of the Securities Act. However, if any
holder acquires new notes in the exchange offer for the purpose of distributing
or participating in a distribution of the new notes, such holder cannot rely on
the position of the staff of the Commission enunciated in such no-action
letters or any similar interpretive letters, and must comply with the
registration and prospectus delivery requirements of the Securities Act in
connection with any resale transaction and such a secondary resale transaction
should be covered by an effective registration statement containing the selling
security holder information required by Item 507 or 508, as applicable, of
Regulation S-K under the Securities Act, unless an exemption from registration
is otherwise available. Further, each Participating Broker-Dealer that receives
new notes for its own account in exchange for old notes, where such old notes
were acquired by such Participating Broker-Dealer as a result of market-making
activities or other trading activities,
145
<PAGE>
must acknowledge that it will deliver a prospectus in connection with any
resale of such new notes. The issuers have agreed that, for a period of up to
one year from the consummation of the exchange offer, it will make this
prospectus available to any Participating Broker-Dealer for use in connection
with any such resale.
LEGAL MATTERS
Certain legal matters relating to the issuance of the new notes will be
passed upon for the issuers by Kirkland & Ellis, Chicago, Illinois.
AVAILABLE INFORMATION
The issuers have filed with the Commission a Registration Statement on Form
S-4 (the "Registration Statement," which term shall encompass all amendments,
exhibits, annexes and schedules thereto) pursuant to the Securities Act, and
the rules and regulations promulgated thereunder, covering the exchange offer
contemplated hereby. This prospectus does not contain all the information set
forth in the Registration Statement. For further information with respect to
the issuers and the exchange offer, reference is made to the Registration
Statement. Statements made in this prospectus as to the contents of any
contract, agreement, or other document filed as an exhibit to the Registration
Statement, reference is made to the exhibit for a more complete description of
the document or matter involved, and each such statement shall be deemed
qualified in its entirety by such reference.
The issuers are not currently subject to the periodic reporting and other
informational requirements of the Securities Exchange Act. Upon the
effectiveness of the Registration Statement, the issuers will become subject to
the periodic reporting and other informational requirements of the Securities
Exchange Act, and in accordance therewith, will be required to file periodic
reports and other information with the SEC. The issuers have agreed that,
whether or not they are required to do so by the rules and regulations of the
SEC, for so long as any of the Notes remain outstanding, the issuers, on a
combined consolidated basis, will furnish to the holders of the Notes:
. quarterly and annual financial statements substantially equivalent to
financial statements that would have been included in a filing with the
SEC on Forms 10-Q and 10-K if the issuers were required to file such
financial information, including a "Management's Discussion and Analysis
of Financial Condition and Results of Operations" that describes the
financial condition and results of operations of the Issuers and, with
respect to the annual information only, reports thereon by the issuers'
independent public accountants, and
. all information that would be required to be filed with the SEC on Form
8-K if the issuers were required to file such reports.
In addition, for so long as any of the Notes remain outstanding, the issuers
have agreed to furnish to the holders and to securities analysts and
prospective investors, upon their request, the information required to be
delivered by Rule 144A(d)(4) under the Securities Act.
The Registration Statement may be inspected at the public reference
facilities maintained by the SEC at 450 Fifth Street, N.W., Washington, D.C.
20549 and at the regional offices of the SEC located at 7 World Trade Center,
Suite 1300, New York, New York 10048 and Citicorp Center, 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661-2511. Copies of such materials may
be obtained from the Public Reference Section of the SEC, 450 Fifth Street,
N.W., Washington, D.C. 20549 at prescribed rates. The SEC maintains a web site
at http://www.sec.gov that contains reports and other information regarding
registrants, like Avalon Cable Holdings, that file electronically with the SEC.
146
<PAGE>
EXPERTS
The consolidated financial statements of Avalon Cable of Michigan Holdings,
Inc. and Subsidiaries as of December 31, 1998 and for the period from June 2,
1998 (inception) through December 31, 1998, included in this prospectus, have
been so included in reliance on the report of PricewaterhouseCoopers LLP,
independent accountants, given on the authority of said firm as experts in
auditing and accounting.
The consolidated financial statements of Cable Michigan Inc. and
Subsidiaries as of December 31, 1997 and November 5, 1998, and for the year
ended December 31, 1997 and the period from January 1, 1998 through November 5,
1998, included in this prospectus, have been audited so included in reliance on
the report of PricewaterhouseCoopers LLP, independent accountants, given on the
authority of said firm as experts in auditing and accounting.
The consolidated financial statements of Avalon Cable LLC as of December 31,
1998 and for the period from October 21, 1998 (inception) through December 31,
1998, included in this prospectus, have been so included in reliance on the
report of PricewaterhouseCoopers LLP, independent accountants, given on the
authority of said firm as experts in auditing and accounting.
The financial statements of Amrac Clear View, a Limited Partnership as of
May 28, 1998 and for the period from January 1, 1998 through May 28, 1998,
included in this prospectus, have been so included in reliance on the report of
PricewaterhouseCoopers LLP, independent accountants, given on the authority of
said firm as experts in auditing and accounting.
The financial statements of Amrac Clear View, a Limited Partnership as of
December 31, 1996 and 1997 and for each of the three years in the period ended
December 31, 1997, included in this prospectus, have been so included in
reliance on the report of Greenfield, Altman, Brown, Berger & Katz, P.C.,
independent accountants, given on the authority of said firm as experts in
auditing and accounting.
The combined financial statements of Pegasus Cable Television of
Connecticut, Inc. and the Massachusetts operations of Pegasus Cable Television,
Inc. as of December 31, 1996 and 1997 and for each of the three years in the
period ended December 31, 1997, included in this prospectus, have been so
included in reliance on the report of PricewaterhouseCoopers LLP, independent
accountants, given on the authority of said firm as experts in auditing and
accounting.
The financial statements of Taconic CATV as of December 31, 1997 and 1998
and for the years then ended have been included herein and in the registration
statement in reliance upon the report of KPMG LLP, independent certified public
accountants, appearing elsewhere herein, and upon the authority of said firm as
experts in accounting and auditing.
The financial statements of Avalon Cable Holdings Finance, Inc. as of
December 31, 1998 and for the period from October 21, 1998 (inception) through
December 31, 1998, included in this prospectus, have been so included in
reliance on the report of PricewaterhouseCoopers LLP, independent accountants,
given on the authority of said firm as experts in auditing and accounting.
The consolidated financial statements of Avalon Cable of Michigan, Inc. as
of December 31, 1998 and for period from June 2, 1998 (inception) through
December 31, 1998, included in this prospectus, have been so included in
reliance on the report of PricewaterhouseCoopers LLP, independent accountants,
given on the authority of said firm as experts in auditing and accounting.
147
<PAGE>
INDEX TO THE FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Avalon Cable LLC and Subsidiaries
Report of Independent Accountants ...................................... F-3
Consolidated Balance Sheet as of December 31, 1998...................... F-4
Consolidated Statement of Operations for the period from October 21,
1998 (inception) through December 31, 1998............................. F-5
Consolidated Statements of Changes in Members' Interest from October 21,
1998 (inception) through December 31, 1998............................. F-6
Consolidated Statement of Cash Flows for the period from October 21,
1998 (inception) through December 31, 1998............................. F-7
Notes to the Consolidated Financial Statements.......................... F-8
Consolidated Balance Sheet as of March 31, 1999......................... F-15
Consolidated Statement of Operations for the quarter ended March 31,
1999................................................................... F-16
Consolidated Statement of Changes in Members' Interest for the quarter
ended March 31, 1999................................................... F-17
Consolidated Statement of Cash Flows for the quarter ended March 31,
1999................................................................... F-18
Notes to Consolidated Financial Statements.............................. F-19
Avalon Cable of Michigan Holdings, Inc. and Subsidiaries
Report of Independent Accountants ...................................... F-22
Consolidated Balance Sheets as of December 31, 1998 .................... F-23
Consolidated Statement of Operations and Changes in Accumulated Deficit
for the period from June 2, 1998 (inception) through December 31, 1998. F-24
Consolidated Statement of Cash Flows for the period from June 2, 1998
(inception) through December 31, 1998.................................. F-26
Notes to the Consolidated Financial Statements.......................... F-27
Consolidated Balance Sheet as of March 31, 1999......................... F-36
Consolidated Statement of Operations for the quarter ended March 31,
1999................................................................... F-37
Consolidated Statement of Changes in Shareholders' Equity for the
quarter ended March 31, 1999........................................... F-38
Consolidated Statement of Cash Flows for the quarter ended March 31,
1999................................................................... F-39
Notes to Conslidated Financial Statements............................... F-40
Avalon Cable Holdings Finance, Inc. and Subsidiary
Report of Independent Accountants ...................................... F-43
Consolidated Balance Sheet as of December 31, 1998 ..................... F-44
Consolidated Statement of Operations for the period from October 21,
1998 (inception) through December 31, 1998............................. F-45
Consolidated Statement of Cash Flows for the period from October 21,
1998 (inception) through December 31, 1998............................. F-46
Notes to the Consolidated Financial Statements.......................... F-47
Consolidated Balance Sheet as of March 31, 1999......................... F-50
Consolidated Statement of Operations for the quarter ended March 31,
1999................................................................... F-51
Consolidated Statement of Cash Flows for the quarter ended March 31,
1999................................................................... F-52
Notes to Consolidated Financial Statements.............................. F-53
Cable Michigan, Inc. and Subsidiaries
Report of Independent Accountants....................................... F-54
Consolidated Balance Sheets as of December 31, 1997 and November 5,
1998................................................................... F-55
Consolidated Statements of Operations for the years ended December 31,
1996, 1997 and for the period from January 1, 1998 through November 5,
1998................................................................... F-56
Consolidated Statements of Changes in Shareholders' Deficit for the
years ended December 31, 1996, 1997 and for the period from January 1,
1998 through November 5, 1998.......................................... F-57
Consolidated Statement of Cash Flows for the years ended December 31,
1996, 1997 and for the period from January 1, 1998 through November 5,
1998................................................................... F-58
Notes to Consolidated Financial Statements.............................. F-60
</TABLE>
F-1
<PAGE>
INDEX TO THE FINANCIAL STATEMENTS--(Continued)
<TABLE>
<CAPTION>
Page
-----
<S> <C>
Amrac Clear View, A Limited Partnership
Report of Independent Accountants...................................... F-73
Balance Sheet as of May 28, 1998....................................... F-74
Statement of Operations for the period from January 1, 1998 through May
28, 1998.............................................................. F-75
Statement of Changes in Partners' Equity (Deficit) for the period from
January 1, 1998 through May 28, 1998.................................. F-76
Statement of Cash Flows for the period from January 1, 1998 through May
28, 1998.............................................................. F-77
Notes to Financial Statements.......................................... F-78
Amrac Clear View, A Limited Partnership
Independent Auditors' Report........................................... F-82
Balance Sheets as of December 31, 1996 and 1997........................ F-83
Statements of Net Earnings for the years ended December 31, 1995, 1996
and 1997.............................................................. F-84
Statements of Changes in Partners' Equity (Deficit) for the years ended
December 31, 1995, 1996 and 1997...................................... F-85
Statements of Cash Flows for the years ended December 31, 1995, 1996
and 1997.............................................................. F-86
Notes to Financial Statements.......................................... F-87
Pegasus Cable Television, Inc.
Report of Independent Accountants...................................... F-90
Combined Balance Sheets at December 31, 1996 and 1997 and June 30,
1998.................................................................. F-91
Combined Statement of Operations for the years ended December 31, 1995,
1996 and 1997 and the six months ended June 30, 1998.................. F-92
Combined Statements of Changes in Stockholder's Deficit for the three
years ended December 31, 1997 and the six months ended June 30, 1998.. F-93
Combined Statements of Cash Flows for the years ended December 31,
1995, 1996 and 1997 and for the six months ended June 30, 1998........ F-94
Notes to Combined Financial Statements................................. F-95
Taconic Technology Corp.
Independent Auditors' Report........................................... F-101
Balance Sheets at December 31, 1997 and 1998 and March 31, 1999
(unaudited)........................................................... F-102
Statements of Operations and Component Equity for the two years ended
December 31, 1997 and 1998 and three months ended March 31, 1998 and
1999, (unaudited)..................................................... F-103
Statements of Cash Flows for the years ended December 31, 1997 and 1998
and three months ended March 31, 1998 and 1999, (unaudited)........... F-104
Notes to Financial Statements.......................................... F-105
Financial Statements of Guarantor
Avalon Cable of Michigan, Inc. and Subsidiaries
Report of Independent Accountants...................................... F-109
Consolidated Balance Sheet as of December 31, 1998..................... F-110
Consolidated Statements of Operations.................................. F-111
Consolidated Statement of Shareholders' Equity for the period from June
2, 1998 (inception) through December 31, 1998......................... F-112
Consolidated Statement of Cash Flows for the period from June 2, 1998
(inception) through December 31, 1998................................. F-113
Notes to Consolidated Financial Statements............................. F-114
Consolidated Balance Sheet as of March 31, 1999........................ F-123
Consolidated Statement of Operations for the quarter ended March 31,
1999.................................................................. F-124
Consolidated Statement of Changes in Shareholder's Equity for the
quarter ended March 31, 1999.......................................... F-125
Consolidated Statement of Cash Flows for the quarter ended March 31,
1999.................................................................. F-126
Notes to Consolidated Financial Statements............................. F-127
</TABLE>
F-2
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Managers
of Avalon Cable LLC
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statement of operations, changes in members' interest and cash
flows present fairly, in all material respects, the financial position of
Avalon Cable LLC and its subsidiaries (the "Company") at December 31, 1998 and
the results of their operations, changes in members' interest and their cash
flows for the period from October 21, 1998 (inception), through December 31,
1998 in conformity with generally accepted accounting principles. The financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on the financial statements based on
our audit. We conducted our audit of these statements in accordance with
generally accepted auditing standards which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for the
opinion expressed above.
PricewaterhouseCoopers LLP
New York, New York
March 30, 1999
F-3
<PAGE>
AVALON CABLE LLC AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
December 31, 1998
(in thousands)
<TABLE>
<S> <C>
Assets
Current assets:
Cash................................................................. $ 217
Subscriber receivables, less allowance for doubtful accounts of $70.. 847
Prepaid expenses and other current assets............................ 121
-------
Total current assets............................................... 1,185
Property, plant and equipment, net..................................... 6,456
Intangible assets, net................................................. 30,804
Notes receivable--affiliate............................................ 15,171
Other assets........................................................... 32
-------
Total assets....................................................... $53,648
=======
Liabilities and Members' Interest
Current liabilities:
Current portion of notes payable..................................... $ 20
Accounts payable and accrued expenses................................ 1,331
Accounts payable, net--affiliate..................................... 247
Deferred revenue..................................................... 717
Accrued interest..................................................... 121
-------
Total current liabilities.......................................... 2,436
Note payable, net of current portion................................... 580
Note payable--affiliate................................................ 3,341
-------
Total liabilities.................................................. 6,357
-------
Commitments and contingencies (Note 10)
Members' interest:
Members' capital....................................................... 49,345
Accumulated deficit.................................................. (2,054)
-------
Total member's interest............................................ 47,291
-------
Total liabilities and member's interest............................ $53,648
=======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
AVALON CABLE LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
For the Period from October 21, 1998 (inception) through December 31, 1998
(in thousands)
<TABLE>
<S> <C>
Revenue:
Basic services..................................................... $ 1,117
Premium services................................................... 121
Other.............................................................. 61
-------
Total revenues................................................... 1,299
Operating expenses:
Selling, general and administrative................................ 343
Programming........................................................ 338
Technical and operations........................................... 136
Depreciation and amortization...................................... 440
-------
Income from operations............................................... 42
Other income (expense):
Interest income.................................................... 177
Interest (expense)................................................. (962)
-------
Net loss before the extraordinary loss on early extinguishment of
debt (743)
Extraordinary loss on early extinguishment of debt................... (1,311)
-------
Net loss......................................................... $(2,054)
=======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
AVALON CABLE LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN MEMBERS' INTEREST
From the Period from October 21, 1998 (inception) through December 31, 1998
(in thousands, except share data)
<TABLE>
<CAPTION>
Class A Class B-1 Total
-------------- ------------- Net Members'
Units $ Units $ Loss Interest
------ ------- ------ ------ ------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balances at (inception)
October 21, 1998........... -- $ -- -- $ -- $ -- $ --
Issuance of Class A units... 45,000 45,000 -- -- -- 45,000
Issuance of Class B-1 units
in consideration
for Avalon New England..... -- -- 64,696 4,345 -- 4,345
Net loss.................... -- -- (2,054) (2,054)
------ ------- ------ ------ ------- -----------
Balance at December 31,
1998....................... 45,000 $45,000 64,696 $4,345 $(2,054) $ 47,291
====== ======= ====== ====== ======= ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE>
AVALON CABLE LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
From the Period from October 21, 1998 (inception) through December 31, 1998
In thousands
<TABLE>
<S> <C>
Cash flows from operating activities:
Net loss........................................................... $ (2,054)
Adjustments to reconcile net income to net cash provided by
operating activities
Depreciation and amortization.................................... 440
Changes in operating assets and liabilities........................
Increase in subscriber receivables............................... (30)
Increase in prepaid expenses and other current assets............ (32)
Increase in accounts payable and accrued expenses................ 424
--------
Net cash used in operating activities.......................... (1,252)
--------
Cash flows from investing activities:
Increase in note receivable--affiliate............................. (15,362)
Capital expenditures............................................... (157)
--------
Net cash used in investing activities.......................... (15,519)
--------
Cash flows from financing activities:
Contributions by members........................................... 46,588
Proceeds from issuance of notes payable-affiliates................. 33,070
Payment of terms loans and revolving credit facility............... (29,600)
Payment of note payable to affiliates.............................. (33,070)
--------
Net cash provided by financing activities...................... 16,988
Increase in cash..................................................... 217
Cash, beginning of period............................................ --
--------
Cash, end of period.................................................. $ 217
========
Supplemental disclosures of cash flow information:
Cash paid during the period for interest........................... $ 841
========
Non-cash contributions by members.................................. $ 2,757
========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-7
<PAGE>
AVALON CABLE LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands)
December 31, 1998
1. Basis of Presentation and Description of Business
Avalon Cable LLC ("Avalon"), and its wholly owned subsidiary Avalon Cable
Holdings Finance, Inc ("Avalon Holdings Finance"), were formed in October 1998,
pursuant to the laws of the State of Delaware, as a wholly owned subsidiary of
Avalon Cable of New England Holdings, Inc. ("Avalon New England Holdings").
On November 6, 1998, Avalon New England Holdings contributed its 100%
interest in Avalon Cable of New England LLC ("Avalon New England") to Avalon in
exchange for a membership interest in Avalon. On that same date, Avalon
received $63,000 from affiliated entities, which was comprised of (i) a $45,000
capital contribution by Avalon Investors, LLC ("Avalon Investors") and (ii) an
$18,000 promissory note from Avalon Cable Holdings LLC ("Avalon Holdings"),
which was used to make a $62,800 cash contribution to Avalon New England.
The cash contribution received by Avalon New England was used to (i)
extinguish existing indebtedness of $29,600 and (ii) fund a $33,200 loan to
Avalon Holdings Finance which matures on December 31, 2001.
On December 10, 1998, Avalon received a dividend distribution from Avalon
New England in the amount of $18,206, which was used by Avalon to pay off the
promissory note payable to Avalon Holdings, plus accrued interest.
Avalon New England provides cable service to the western New England area.
Avalon New England's cable systems offer customer packages of basic and premium
cable programming services which are offered at a per channel charge or are
packaged together to form a tier of services offered at a discount from the
combined channel rate. Avalon New England's cable systems also provide premium
cable services to their customers for an extra monthly charge. Customers
generally pay initial connection charges and fixed monthly fees for cable
programming and premium cable services, which constitute the principal sources
of revenue for Avalon New England.
Avalon Holdings Finance was formed for the sole purpose of facilitating
financings associated with the acquisitions of various cable operating
companies. Avalon Holdings Finance conducts no other activities.
2. Summary of Significant Accounting Policies
Principles of consolidation
The consolidated financial statements of Avalon and its subsidiaries,
include the accounts of Avalon and its wholly owned subsidiaries, Avalon New
England and Avalon Holdings Finance (collectively, the "Company"). All
significant transactions between Avalon and its subsidiaries have been
eliminated.
Use of estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and use
assumptions that affect the reported amounts of assets and liabilities and the
disclosure for contingent assets and liabilities at the date of the financial
statements as well as the reported amounts of revenues and expenses during the
reported period. Actual results may vary from estimates used.
Revenue recognition
Revenue is recognized as cable services are provided. Installation fee
revenue is recognized in the period in which the installation occurs.
F-8
<PAGE>
AVALON CABLE LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1998
Advertising costs
Advertising costs are charged to operations as incurred. Advertising costs
were $11 for the year ended December 31, 1998.
Concentration of credit risk
Financial instruments which potentially expose the Company to a
concentration of credit risk include cash and subscriber and other receivables.
The Company extends credit to customers on an unsecured basis in the normal
course of business. The Company maintains reserves for potential credit losses
and such losses, in the aggregate, have not historically exceeded management's
expectations.
Property, plant and equipment
Property, plant and equipment is stated at cost. Initial subscriber
installation costs, including material, labor and overhead costs, are
capitalized as a component of cable plant and equipment. The cost of
disconnection and reconnection are charged to expense when incurred.
Depreciation is computed for financial statement purposes using the straight-
line method based upon the following lives:
<TABLE>
<S> <C>
Vehicles...................................................... 5 years
Cable plant and equipment..................................... 5-12 years
Office furniture and equipment................................ 5-10 years
Buildings and improvements.................................... 10-25 years
</TABLE>
Intangible assets
Intangible assets represent the estimated fair value of cable franchises and
goodwill resulting from acquisitions. Goodwill is the excess of the purchase
price over the fair value of the net assets acquired, determined through an
independent appraisal. Amortization is computed for financial statement
purposes using the straight-line method based upon the anticipated economic
lives:
<TABLE>
<S> <C>
Cable franchises.............................................. 13-15 years
Goodwill...................................................... 15 years
Non-compete agreement......................................... 5 years
</TABLE>
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").
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.
F-9
<PAGE>
AVALON CABLE LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(continued)
December 31, 1998
Financial instruments
The Company estimates that the fair value of all financial instruments at
December 31, 1998 does not differ materially from the aggregate carrying values
of its financial instruments recorded in the accompanying balance sheet. The
fair value of the notes payable-affiliate are considered to be equal to
carrying values since the Company believes that its credit risk has not changed
from the time this debt instrument was executed and therefore, would obtain a
similar rate in the current market.
Income taxes
The Company is not subject to federal and state income taxes. Accordingly,
no recognition has been given to income taxes in the accompanying financial
statements of the Company since the income or loss of the Company is to be
included in the tax returns of the Parent.
3. Members' Capital
Avalon has authorized two classes of equity units; class A units ("Class A
Units") and class B units ("Class B Units") (collectively, the "Units"). Each
class of the Units represents a fractional part of the membership interests in
Avalon and has the rights and obligations specified in Avalon's Limited
Liability Company Agreement. Each Class B Unit is entitled to voting rights
equal to the percentage such units represents of the aggregate number of
outstanding Class B Units. The Class A Units are not entitled to voting rights.
Class A Units
The Class A Units are participating preferred equity interests. A preferred
return accrues annually (the Company's "Preferred Return") on the initial
purchase price (the Company's "Capital Value") of each Class A Unit at a rate
of 15, or 17% under certain circumstances, per annum. The Company cannot pay
distributions in respect of other classes of securities including distributions
made in connection with a liquidation until the Company's Capital Value and
accrued Preferred Return in respect of each Class A Unit is paid to the holders
thereof (such distributions being the Company's "Priority Distributions"). So
long as any portion of the Company's Priority Distributions remains unpaid, the
holders of a majority of the Class A Units are entitled to block certain
actions by the Company including the payment of certain distributions, the
issuance of senior or certain types of pari passu equity securities or the
entering into or amending of certain related-party agreements. In addition to
the Company's Priority Distributions, each Class A Unit is also entitled to
participate in common distributions, pro rata according to the percentage such
unit represents of the aggregate number of the Company's units then
outstanding.
Class B Units
The Class B Units are junior equity securities which are divided into two
identical subclasses, Class B-1 Units and Class B-2 Units. After the payment in
full of Avalon's Priority Distributions, each Class B Unit is entitled to
participate in distributions pro rata according to the percentage such unit
represents of the aggregate number of the Avalon units then outstanding.
4. Pending Acquisition
The Company has a definitive agreement to purchase all of the cable systems
of Taconic Technology Corporation ("Taconic") for approximately $8,525
(excluding transaction fees). As of December 31, 1998, the
F-10
<PAGE>
AVALON CABLE LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1998
Company incurred $41 of transaction costs related to the acquisition of
Taconic, which are included in current assets. The merger is expected to close
in the second quarter of 1999.
5. Prepaid Expenses and Other Current Assets
At December 31, 1998, prepaid expenses and other current assets consist of
the following:
<TABLE>
<S> <C>
Installation supplies............................................... $ 51
Deferred transaction costs.......................................... 41
Other............................................................... 29
----
$121
====
</TABLE>
6. Property, Plant and Equipment
At December 31, 1998, property, plant and equipment consists of the
following:
<TABLE>
<S> <C>
Cable plant and equipment......................................... $6,435
Vehicles.......................................................... 97
Office furniture and fixtures..................................... 180
Buildings and improvements........................................ 83
------
6,795
Less: accumulated depreciation.................................... (339)
------
$6,456
======
</TABLE>
7. Intangible Assets
At December 31, 1998, intangible assets consist of the following:
<TABLE>
<CAPTION>
1998
-------
<S> <C>
Cable franchises................................................. $30,711
Goodwill......................................................... 1,223
Non-compete agreement............................................ 100
-------
32,034
Less: accumulated amortization................................... (1,230)
-------
$30,804
=======
</TABLE>
8. Accounts Payable and Accrued Expenses
At December 31, 1998, accounts payable and accrued expenses consist of the
following:
<TABLE>
<S> <C>
Accrued corporate expenses........................................ $ 404
Accrued programming costs......................................... 564
Taxes payable..................................................... 276
Other............................................................. 87
------
$1,331
======
</TABLE>
F-11
<PAGE>
AVALON CABLE LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1998
9. Debt
Credit Facilities
On May 28, 1998, Avalon New England entered into a term loan and revolving
credit agreement with a major commercial lending institution (the "Credit
Agreement"). The Credit Agreement allowed for aggregate borrowings under Term
Loans A and B (collectively, the "Term Loans") and a revolving credit facility
of $30,000 and $5,000, respectively. The proceeds from the Term Loans and
revolving credit facility were used to fund the acquisitions made by Avalon New
England and to provide for Avalon New England's working capital requirements.
In December 1998, Avalon New England retired the Term Loans and revolving
credit agreement through the proceeds of a capital contribution from Avalon.
The fees and associated costs relating to the early retirement of this debt was
$1,311.
On November 6, 1998, Avalon New England became a co-borrower along with
Avalon Cable Michigan, Inc. ("Avalon Michigan") and Avalon Cable Finance, Inc.
("Avalon Finance"), affiliated companies (collectively referred to as the "Co-
Borrowers"), on a $320,888 senior credit facility, which includes term loan
facilities consisting of (i) tranche A term loans of $120,888 and (ii) tranche
B term loans of $170,000, and a revolving credit facility of $30,000
(collectively, the "Credit Facility"). Subject to compliance with the terms of
the Credit Facility, borrowings under the Credit Facility will be available for
working capital purposes, capital expenditures and pending and future
acquisitions. The ability to advance funds under the tranche A term loan
facility terminates on March 31, 1999. The tranche A term loans are subject to
minimum quarterly amortization payments commencing on January 31, 2001 and
maturing on October 31, 2005. The tranche B term loans are subject to minimum
quarterly payments commencing on January 31, 2001 with substantially all of
tranche B term loans scheduled to be repaid in two equal installments on July
31, 2006 and October 31, 2006. The revolving credit facility borrowings are
scheduled to be repaid on October 31, 2005.
On November 6, 1998, Avalon Michigan borrowed $265,888 under the Credit
Facility. In connection with the Senior Subordinated Notes and Senior Discount
Notes offerings, Avalon Michigan repaid $125,013 of the Credit Facility, and
the availability under the Credit Facility was reduced to $195,000. Avalon
Michigan had borrowings of $11,300 and $129,575 outstanding under the tranche A
and tranche B term note facilities, respectively, and had available $30,000 for
borrowings under the revolving credit facility. Avalon New England and Avalon
Finance had no borrowings outstanding under the Credit Facility at December 31,
1998.
The interest rate under the Credit Facility is a rate based on either (i)
the Base Rate (a rate per annum equal to the greater of the prime rate and the
federal funds rate plus one-half of 1%) or (ii) the Eurodollar Rate (a rate per
annum equal to the Eurodollar base rate divided by 1.00 less the Eurocurrency
reserve requirement plus, in either case, the applicable margin). As of
December 31, 1998, the applicable margin was (a) with respect to the tranche B
term loans was 2.75% per annum for Base Rate loans and 3.75% per annum for
Eurodollar loans and (b) with respect to tranche A term loans and the revolving
credit facility was 2.00% per annum for Base Rate loans and 3.00% for
Eurodollar loans. The applicable margin for the tranche A term loans and the
revolving credit facility are subject to performance based grid pricing which
is determined based upon the consolidated leverage ratio of the Co-Borrowers.
The interest rate for the tranche A and tranche B term loans outstanding at
December 31, 1998 was 8.58% and 9.33%, respectively. Interest is payable on a
quarterly basis. Accrued interest on the borrowings incurred by Avalon Cable of
Michigan Inc. under the credit facility was $1,390 at December 31, 1998.
F-12
<PAGE>
AVALON CABLE LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1998
The Credit Facility contains restrictive covenants which among other things
require the Co-Borrowers to maintain certain ratios including consolidated
leverage ratios and the interest coverage ratio, fixed charge ratio and debt
service coverage ratio.
The obligations of the Co-Borrowers under the Credit Facility are secured by
substantially all of the assets of the Co-Borrowers. In addition, the
obligations of the Co-Borrowers under the Credit Facility are guaranteed by
affiliated companies; Avalon Cable of Michigan Holdings, Inc., Avalon Cable
Finance Holdings, Inc., Avalon New England Holdings, Inc., Avalon Cable
Holdings, LLC and the Company.
Subordinated Debt
In December 1998, Avalon New England became a co-issuer of a $150,000
principal balance, Senior Subordinated Notes ("Subordinated Notes") offering
and the Company became a co-issuer of $196,000, accreted value, Senior Discount
Notes ("Senior Discounts Notes") offering. In conjunction with these
financings, Avalon New England received $18,130 from Avalon Michigan as a
partial payment against the Company's note receivable--affiliate from Avalon
Michigan. Avalon Michigan paid $75 in interest during the period from October
21, 1998 (inception) through December 31, 1998. The cash proceeds received by
Avalon New England of $18,206 was paid to Avalon as a dividend.
The Subordinated Notes mature on December 1, 2008, and interest accrues at a
rate of 9.375% per annum. Interest is payable semi-annually in arrears on June
1 and December 1 of each year, commencing on June 1, 1999. The Senior Discount
Notes also mature on December 12, 2008, and interest accrues at a rate of
11.875% per annum on the principal amount at maturity on the Senior Discount
Notes. Interest is payable semi-annually in arrears on December 31, 1999.
Note payable
The Company issued a note payable for $500 which is due on May 29, 2003, and
bears interest at a rate of 7% per annum (which approximates Avalon New
England's incremental borrowing rate) payable annually. Additionally, the
Company has a $100 non-compete agreement. The agreement calls for five annual
payments of $20, commencing on May 29, 1999.
10. Commitments and Contingencies
Leases
The Company rents poles from utility companies for use in its operations.
While rental agreements are generally short-term, the Company anticipates such
rentals will continue in the future. The Company also leases office facilities
and various items of equipment under month-to-month operating leases. Rent
expense was $23 for the period from October 21 (inception) through December 31,
1998. Future minimum payments on equipment and office facilities under non-
cancelable operating lease commitments approximates $112, $108, $105, $100 and
$100 for the five years ended December 31, 2004.
Legal matters
The Company is subject to regulation by the Federal Communications
Commission ("FCC") and other franchising authorities.
From time to time the Company is also involved with claims that arise in the
normal course of business. In the opinion of management, the ultimate liability
with respect to these claims will not have a material adverse effect on the
operations, cash flows or financial position of the Company.
F-13
<PAGE>
AVALON CABLE LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1998
11. Related Party Transactions and Balances
The Company provides support services such as finance, accounting and human
resources to Avalon New England and Avalon Cable of Michigan, Inc., who are
related entities. All shared costs are allocated on the basis of average time
spent servicing each entity. In the opinion of management, the methods used in
allocating costs from the Company are reasonable; however, the costs of these
services as allocated are not necessarily indicative of the costs that would
have been incurred by the combined operations on a stand-alone basis.
At December 31, 1998, the Company had an accounts payable, net--affiliate
balance of $247, with Avalon Cable of Michigan, Inc.
In November 1998, Avalon New England loaned $33,200 to Avalon Finance
Holdings. This note is recorded as a note receivable--affiliate on the balance
sheet at December 31, 1998. The note matures on December 31, 2001. Interest
accrues at a rate of 4.47% per year. During 1998, the Company received a
payment with the remaining $15,171 payable on December 31, 2001. Accrued
interest receivable of $102 has been recorded in connection with this note at
December 31, 1998.
During 1998, Avalon New England received $3,341 from Avalon Holdings. In
consideration for this amount, Avalon New England executed a note payable to
Avalon Holdings. This note is recorded as note payable--affiliate on the
balance sheet at December 31, 1998. Interest accrues at a rate of 5.57% per
year and Avalon New England has recorded accrued interest on this note of $100
at December 31, 1998.
F-14
<PAGE>
AVALON CABLE LLC AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(In thousands)
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
----------- ------------
(Unaudited)
<S> <C> <C>
Assets
Current assets
Cash................................................. $ 13,227 $ 217
Subscriber receivables, less allowance
for doubtful accounts of $957 and $70............... 6,210 847
Prepaid expenses and other current assets............ 741 121
-------- -------
Total current assets............................... 20,178 1,185
Property, plant and equipment, net................... 115,200 6,456
Intangible assets, net............................... 473,323 30,804
Notes receivable--affiliate.......................... -- 15,171
Other assets......................................... 94 32
-------- -------
Total assets....................................... $608,795 $53,648
======== =======
Liabilities and Members' Interest
Current liabilities
Current portion of notes payable..................... $ 20 $ 20
Accounts payable and accrued expenses................ 20,669 1,452
Accounts payable, net--affiliate..................... 3,388 247
Deferred revenue..................................... 3,363 717
-------- -------
Total current liabilities.......................... 27,440 2,436
Note payable, net of current portion................. 442,727 580
Note payable--affiliate.............................. -- 3,341
-------- -------
Total liabilities.................................. 470,167 6,357
Commitments and contingencies (Note 4)
Members' interests
Members' capital..................................... 140,981 49,345
Accumulated deficit.................................. (2,353) (2,054)
-------- -------
Total members' interest............................ 138,628 47,291
-------- -------
Total liabilities and members' interest............ $608,795 $53,648
======== =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-15
<PAGE>
AVALON CABLE LLC and SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(In thousands)
<TABLE>
<CAPTION>
For the Quarter
Ended
March 31, 1999
---------------
(Unaudited)
<S> <C>
Revenue
Basic services.......................................... $2,971
Premium services........................................ 230
Other................................................... 350
------
Total revenues........................................ 3,551
Operating expenses
Selling, general and administrative..................... 719
Programming............................................. 900
Technical and operations................................ 449
Depreciation and amortization........................... 1,310
------
Income from operations.................................. 173
Other income (expense)
Interest income......................................... 36
Interest expense........................................ (508)
------
Net Loss.............................................. $ (299)
======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-16
<PAGE>
AVALON CABLE LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN MEMBERS' INTEREST
(In thousands, except share data)
<TABLE>
<CAPTION>
For the Quarter Ended March 31, 1999
(unaudited)
------------------------------------------------
Class A Class B-1
-------------- ---------------
Total
Net Members'
Units $ Units $ Loss Interest
------ ------- ------- ------- ------- --------
(Unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31,
1998.................... 45,000 $45,000 64,696 $ 4,345 $(2,054) $ 47,291
Contribution of assets
and liabilities of
Avalon Cable of
Michigan, Inc........... -- -- 510,994 91,636 -- 91,636
Net loss for the quarter
ended March 31, 1999.... -- -- -- -- (299) (299)
------ ------- ------- ------- ------- --------
Balance at March 31,
1999.................... 45,000 $45,000 575,690 $95,981 $(2,353) $138,628
====== ======= ======= ======= ======= ======== ===
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-17
<PAGE>
AVALON CABLE LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
For the Quarter
Ended
March 31,
1999
---------------
(Unaudited)
<S> <C>
Cash flows from operating activities
Net loss..................................................... $ (299)
Adjustments to reconcile net income to net cash provided by
operating activities
Depreciation and amortization.............................. 1,310
Amortization of deferred financing cost.................... 90
Changes in operating assets and liabilities
Increase in subscriber receivables........................... (221)
Increase in prepaid expenses and other assets................ (214)
Increase in accounts payable and accrued expenses............ 843
Increase in accounts payable, net--affiliate................. 401
-------
Net cash provided by operating activities.................. 1,910
-------
Cash flows from investing activities
Capital expenditures......................................... (197)
Payments for acquisitions.................................... (3,350)
-------
Net cash used in investing activities...................... (3,547)
-------
Cash flows from financing activities
Cash contributed by member................................... 11,747
Proceeds from issuance of notes payable--affiliate........... 2,900
-------
Net cash provided by financing activities.................. 14,647
-------
Increase in cash............................................... 13,010
Cash, beginning of period...................................... 217
-------
Cash, end of period........................................ $13,227
=======
Non-cash investing and financing activities:
Contribution of net assets, net of cash contributed in
exchange for stock.......................................... $79,889
=======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-18
<PAGE>
AVALON CABLE LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands)
March 31, 1999
1. Description of Business
Avalon Cable LLC ("the Company"), and its wholly owned subsidiary Avalon
Cable Holdings Finance, Inc ("Avalon Holdings Finance"), were formed in October
1998, pursuant to the laws of the State of Delaware, as a wholly owned
subsidiary of Avalon Cable of New England Holdings, Inc. ("Avalon New England
Holdings").
On November 6, 1998, Avalon New England Holdings contributed its 100%
interest in Avalon Cable of New England LLC ("Avalon New England") to Avalon in
exchange for a membership interest in Avalon. On that same date, Avalon
received $63,000 from affiliated entities, which was comprised of (i) a $45,000
capital contribution by Avalon Investors, LLC ("Avalon Investors") and (ii) an
$18,000 promissory note from Avalon Cable Holdings LLC ("Avalon Holdings"),
which was used to make a $62,800 cash contribution to Avalon New England.
The cash contribution received by Avalon New England was used to (i)
extinguish existing indebtedness of $29,600 and (ii) fund a $33,200 loan to
Avalon Holdings Finance which matures on December 31, 2001.
On December 10, 1998, Avalon received a dividend distribution from Avalon
New England in the amount of $18,206, which was used by Avalon to pay off the
promissory note payable to Avalon Holdings, plus accrued interest.
In March 1999, after the acquisition of the remaining 38% of Mercom, Inc.
through a merger of Mercom into Avalon Cable of Michigan, Inc., and in order to
facilitate certain aspects of the financing of such acquisition, the following
series of transactions refer to as the "Reorganization" were completed:
. Avalon Cable of Michigan, Inc. transferred substantially all of its
assets and liabilities to the Company, which then transferred those
assets and liabilities to Avalon Cable of Michigan LLC and, as a result,
Avalon Cable of Michigan LLC now operates the Michigan cluster;
. Avalon Cable of Michigan Holdings, Inc. ceased to be an obligor on the
exchanged notes and together with Avalon Cable of Michigan, Inc. became
a guarantor of the obligations of the Company under the exchanged notes;
. Avalon Cable of Michigan LLC became an additional obligor on the Senior
Subordinated Notes; and
. Avalon Cable of Michigan, Inc. ceased to be an obligor on the Senior
Subordinated Notes and the credit facility and became a guarantor of the
obligations of Avalon Cable of Michigan LLC under the Senior
Subordinated Notes and the credit facility.
This reorganization is not expected to impact the operations of our Michigan
cluster.
Avalon New England and Avalon Cable Michigan provide cable service to the
western New England area and the state of Michigan, respectively. Avalon New
England and Avalon Cable Michigan's cable systems offer customer packages of
basic and premium cable programming services which are offered at a per channel
charge or are packaged together to form a tier of services offered at a
discount from the combined channel rate. Avalon New England and Avalon Cable
Michigan cable systems also provide premium cable services to their customers
for an extra monthly charge. Customers generally pay initial connection charges
and fixed monthly fees for cable programming and premium cable services, which
constitute the principal sources of revenue for Avalon New England and Avalon
Cable Michigan.
F-19
<PAGE>
AVALON CABLE LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands)--(Continued)
March 31, 1999
Avalon Holdings Finance was formed for the sole purpose of facilitating
financings associated with the acquisitions of various cable operating
companies. Avalon Holdings Finance conducts no other activities.
2. Basis of Presentation
Pursuant to the rules and regulations of the Securities and Exchange
Commission, certain financial information has been condensed and certain
footnote disclosures have been omitted. Such information and disclosures are
normally included in financial statements prepared in accordance with generally
accepted accounting principles.
The consolidated financial statements herein include the accounts of the
Company and its wholly-owned subsidiaries.
These condensed financial statements should be read in conjunction with the
Company's audited financial statements as of December 31, 1998 and notes
thereto included elsewhere herein.
The financial statements as of March 31, 1999 and for the three month period
then ended are unaudited; however, in the opinion of management, such
statements include all adjustments necessary to present fairly the financial
information included therein.
3. Pending Acquisition
The Company has a definitive agreement to purchase all of the cable systems
of Taconic Technology Corporation for approximately $8,525 (excluding
transaction fees). The merger is expected to close in the second quarter of
1999.
4. Commitments and Contingencies
Legal matters
The Company is subject to the provisions of the Cable Television Consumer
Protection and Competition Act of 1992, as amended, and the Telecommunications
Act of 1996. The Company has either settled challenges or accrued for
anticipated exposures related to rate regulation; however, there is no
assurance that there will not be further additional challenges to its rates.
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.
Mercom Acquisition
In connection with the acquisition of Mercom, former shareholders of Mercom
constituting approximately 16.5% of all outstanding Mercom common shares gave
notice of their election to exercise appraisal rights as provided by Delaware
law. The Company cannot predict at this time the effect of these elections on
the Company or the extent to which these former shareholders will continue to
pursue appraisal rights and seek an appraisal proceeding under Delaware law or
choose to abandon these efforts and accept the consideration payable in the
Mercom merger. If these former shareholders continue to pursue their appraisal
rights, the Company makes no assurance that a Delaware court would not find
that the fair value of these shares for such
F-20
<PAGE>
AVALON CABLE LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands)--(Continued)
March 31, 1999
purpose is in excess of the $12.00 per Mercom share that the Company paid in
the acquisition or that the ultimate outcome would not have a material adverse
effect on the Company. The Company has already provided for the consideration
due under the terms of our merger with Mercom with respect to these shares.
5. Subsequent Event
In May 1999, the Company signed an agreement with Charter Communications,
Inc. ("Charter Communications") under which Charter Communications agreed to
purchase Avalon Cable LLC's cable television systems and assume some of their
debt. The acquisition by Charter Communications is subject to regulatory
approvals. The Company expects to consummate this transaction in the fourth
quarter of 1999.
This agreement, if closed, would constitute a change in control under the
Indenture pursuant to which the Senior Subordinated Notes and the Senior
Discount Notes (collectively, the "Notes") were issued. The Indenture provides
that upon the occurrence of a change of control of the Company (a "Change of
Control") each holder of the Notes has the right to require the Company to
purchase all or any part (equal to $1,000 or an integral multiple thereof) of
such holder's Notes at an offer price in cash equal to 101% of the aggregate
principal amount thereon (or 101% of the accreted value for the Senior Discount
Notes as of the date of purchase if prior to the full accretion date) plus
accrued and unpaid interest and Liquidated Damages (as defined in the
Indenture) thereof, if any, to the date of purchase.
This agreement, if closed, would represent a Change of Control which, on the
closing date, constitutes an event of default under the Credit Facility giving
the lender the right to terminate the credit commitment and declare all amounts
outstanding immediately due and payable. Charter Communications has agreed to
repay all amounts due under the Credit Facility or cause all events of default
under the Credit Facility arising from the Change of Control to be waived.
F-21
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Managers of
Avalon Cable of Michigan Holdings, Inc. and Subsidiaries
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statement of operations, shareholders' equity and cash flows
present fairly, in all material respects, the financial position of Avalon
Cable of Michigan Holdings, Inc. and subsidiaries (collectively, the "Company")
at December 31, 1998, and the results of their operations, changes in
shareholders' equity and their cash flows for the period from June 2, 1998
(inception) to December 31, 1998, in conformity with generally accepted
accounting principles. The financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audit. We conducted our audit of these
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statements presentation. We believe that our audit provides a
reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
New York, New York
March 30, 1999
F-22
<PAGE>
AVALON CABLE OF MICHIGAN HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
December 31, 1998
(in thousands)
<TABLE>
<S> <C>
ASSETS
------
Cash.................................................................. $ 9,071
Accounts receivable, net of allowance for doubtful accounts of $873... 5,015
Prepayments and other current assets.................................. 1,267
Accounts receivable from related parties.............................. 371
Deferred income taxes................................................. 377
--------
Current assets.................................................... 16,101
Property, plant and equipment, net.................................... 104,965
Intangible assets, net................................................ 431,313
Deferred charges and other assets..................................... 1,270
--------
Total assets...................................................... $553,649
========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Accounts payable and accrued expenses................................. $ 10,194
Advance billings and customer deposits................................ 2,454
Accounts payable--affiliate........................................... 2,023
--------
Current liabilities............................................... 14,671
Long-term debt........................................................ 402,369
Notes payable--affiliate.............................................. 15,171
Deferred income taxes................................................. 80,811
--------
Total liabilities................................................. 513,022
--------
Commitments and contingencies (Note 10)............................... --
Minority interest..................................................... 13,855
--------
Stockholders equity:
Common stock.......................................................... --
Additional paid-in capital............................................ 35,000
Accumulated deficit................................................... (8,228)
--------
Total shareholders' equity........................................ 26,772
--------
Total liabilities and shareholders' equity........................ $553,649
========
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
F-23
<PAGE>
AVALON CABLE OF MICHIGAN HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Period from June 2, 1998 (inception) through December 31, 1998
(dollars in thousands)
<TABLE>
<S> <C>
Revenue:
Basic services....................................................... $11,119
Premium services..................................................... 1,036
Other................................................................ 1,502
-------
13,657
Operating expenses:
Selling, general and administrative.................................. 2,719
Programming.......................................................... 3,281
Technical and operations............................................. 1,718
Depreciation and amortization........................................ 6,614
-------
Loss from operations................................................... (675)
Interest income........................................................ 173
Interest (expense)..................................................... (6,957)
Other (expense), net................................................... (65)
-------
(Loss) before income taxes............................................. (7,524)
(Benefit) from income taxes............................................ (2,754)
-------
(Loss) before minority interest and extraordinary item................. (4,770)
Minority interest in loss of consolidated entity....................... (398)
-------
(Loss) before extraordinary item....................................... (5,168)
Extraordinary loss on extinguishment of debt (net of tax of $1,743).... (3,060)
-------
Net loss............................................................. $(8,228)
=======
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
F-24
<PAGE>
AVALON CABLE OF MICHIGAN HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
For the Period from June 2, 1998 (inception) through December 31, 1998
(in thousands, except share amounts)
<TABLE>
<CAPTION>
Common Additional Total
Shares Common Paid-in Accumulated Shareholders'
Outstanding Stock Capital Deficit Equity
----------- ------ ---------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Balance, June 2, 1998... 100 $-- $ -- $ -- $ --
Net loss from date of
inception through
December 31, 1998...... -- -- -- (8,228) (8,228)
Contributions by parent. -- -- 35,000 -- 35,000
--- ---- ------- ------- -------
Balance, December 31,
1998................... 100 $-- $35,000 $(8,228) $26,772
=== ==== ======= ======= =======
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
F-25
<PAGE>
AVALON CABLE OF MICHIGAN HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
For the Period from June 2, 1998 (inception) through December 31, 1998
(in thousands)
<TABLE>
<S> <C>
Cash flows from operating activities:
Net (loss)......................................................... $ (8,228)
Extraordinary loss on extinguishment of debt....................... 3,060
Depreciation and amortization...................................... 6,414
Deferred income taxes, net......................................... 10,369
Provision for loss on accounts receivable.......................... 75
Increase (decrease) in minority interest........................... 398
Net change in certain assets and liabilities, net of business
acquisitions......................................................
Increase in accounts receivable.................................. (832)
Increase in prepayment and other current assets.................. (446)
Increase in accounts payable and accrued expenses................ 6,869
Increase in deferred revenue..................................... 967
--------
Net cash used by operating activities.......................... 18,646
--------
Cash flows from investing activities:
Additions to property, plant and equipment......................... (4,673)
Payment for acquisition............................................ (431,629)
--------
Net cash used in investing activities............................ (436,302)
--------
Cash flows from Financing Activities:
Proceeds from the issuance of the Credit Facility.................. 265,888
Principal payment on debt.......................................... (125,013)
Proceeds from the issuance of senior subordinated notes............ 150,000
Payments made on bridge loan....................................... (105,000)
Proceeds from bridge loan.......................................... 105,000
Proceeds from the senior discount notes............................ 110,411
Proceeds from the issuance of note payable affiliate............... 33,200
Payments made on note payable--affiliate........................... (18,037)
Payments made for debt financing costs............................. (2,978)
Proceeds from the issuance of common stock......................... 35,000
--------
Net cash provided by financing activities........................ 419,427
--------
Net increase in cash................................................. 1,771
Cash at beginning of the period...................................... 7,300
--------
Cash at end of the period........................................ $ 9,071
--------
Supplemental disclosures of cash flow information....................
Cash paid during the year for........................................
Interest........................................................... $ 2,639
Income taxes....................................................... --
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
F-26
<PAGE>
AVALON CABLE OF MICHIGAN HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands except per share data)
December 31, 1998
1. Basis of Presentation and Description of Business
Avalon Cable of Michigan Holdings, Inc. ("The Company") was formed in June
1998, pursuant to the laws of the state of Delaware. Avalon Cable of Michigan
Inc. ("Avalon Michigan") was formed in June 1998, pursuant to the laws of the
state of Delaware as a wholly owned subsidiary of the Company. On June 3, 1998,
Avalon Michigan entered into an Agreement and Plan of Merger (the "Agreement")
among the Company, Cable Michigan, Inc. and Avalon Cable of Michigan Inc.
("Avalon Sub"), pursuant to which Avalon Sub will merge into the Company and
the Company will become a wholly owned subsidiary of the Company (the
"Merger").
In accordance with the terms of the Agreement, each share of common stock,
par value $1.00 per share ("common stock"), of Cable Michigan, Inc. ("Cable
Michigan") outstanding prior to the effective time of the Merger (other than
treasury stock, shares owned by the Company or its subsidiaries, or shares as
to which dissenters' rights have been exercised) shall be converted into the
right to receive $40.50 in cash (the "Merger Consideration"), subject to
certain possible closing adjustments.
In conjunction with the acquisition of Cable Michigan, Avalon Michigan
acquired Cable Michigan's 62% ownership interest in Mercom, Inc. ("Mercom").
On November 6, 1998, Avalon Michigan completed its merger into and with
Cable Michigan. The total consideration paid in conjunction with the merger,
including fees and expenses was $431,629, including repayment of all existing
Cable Michigan indebtedness and accrued interest of $135,205. Subsequent to the
merger, the arrangements with RCN and CTE were terminated. The Agreement also
permitted Avalon Michigan to agree to acquire the remaining shares of Mercom
that it did not own.
The Company contributed $137,375 in cash to Avalon Michigan, which was used
to consummate the Merger. On November 5, 1998, the Company received $105,000 in
cash in exchange for promissory notes to lenders (the "Bridge Agreement"). On
November 6, 1998, the Company contributed the proceeds received from the Bridge
Agreement and an additional $35,000 in cash to Avalon Michigan in exchange for
100 shares of common stock.
In March 1999, after the acquisition of Mercom, Inc. Avalon Michigan
completed a series of transactions to facilitate certain aspects of its
financing. As a result of these transactions:
. Avalon Cable of Michigan LLC has become the operator of the Michigan
cluster replacing Avalon Cable of Michigan, Inc.;
. Avalon Cable of Michigan LLC is an obligor on the Senior Subordinated
Notes replacing Avalon Cable of Michigan, Inc.; and
. Avalon Cable of Michigan, Inc. is a guarantor of the obligations of
Avalon Cable of Michigan LLC under the Senior Subordinated Notes. Avalon
Cable of Michigan, Inc. does not have significant assets, other than its
investment in Avalon Cable LLC.
Avalon Michigan provides cable services to various areas in the state of
Michigan. Avalon Michigan's cable systems offer customer packages for basic
cable programming services which are offered at a per channel charge or
packaged together to form a tier of services offered at a discount from the
combined channel rate. Avalon Michigan's cable systems also provide premium
cable services to their customers for an extra monthly charge. Customers
generally pay initial connection charges and fixed monthly fees for cable
programming and premium cable services, which constitute the principle sources
of revenue for the Company.
F-27
<PAGE>
AVALON CABLE OF MICHIGAN HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in thousands except per share data)
(December 31, 1998
2. Summary of Significant Accounting Policies
Principles of consolidation
The consolidated financial statements of the Company include the accounts of
the Company and of all its wholly and majority owned subsidiaries. All
significant transactions between the Company and its subsidiaries have been
eliminated.
Use of estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Revenue recognition
Revenues from cable services are recorded in the month the service is
provided. Installation fee revenue is recognized in the period in which the
installation occurs.
Advertising expense
Advertising costs are expensed as incurred. Advertising expense charged to
operations was $39.
Concentration of credit risk
Financial instruments which potentially expose the Company to a
concentration of credit risk include cash and subscriber and other receivables.
The Company had cash in excess of federally insured deposits at financial
institutions at December 31, 1998. The Company does not believe that such
deposits are subject to any unusual credit risk beyond the normal credit risk
associated with operating its business. The Company extends credit to customers
on an unsecured basis in the normal course of business. The Company maintains
reserves for potential credit losses and such losses, in the aggregate, have
not historically exceeded management's expectations. 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.
Property, plant and equipment
Property, plant and equipment is stated at its fair value for items acquired
from Cable Michigan, historical cost for the minority interests' share of
Mercom property, plant and equipment and cost for additions subsequent to the
merger. Initial subscribers installation costs, including materials, labor and
overhead costs, are capitalized as a component of cable plant and equipment.
The cost of disconnection and reconnection are charged to expense when
incurred. Depreciation is computed for financial statement purposes using the
straight-line method based on the following lives:
<TABLE>
<S> <C>
Buildings......................................................... 25 years
Cable television distribution equipment........................... 5-12 years
Vehicles.......................................................... 5years
Other equipment................................................... 5-10years
</TABLE>
F-28
<PAGE>
AVALON CABLE OF MICHIGAN HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in thousands except per share data)
(December 31, 1998
Intangible assets
Intangible assets represent the estimated fair value of cable franchises and
goodwill resulting from acquisitions. Cable franchises are amortized over a
period ranging from 13 to 15 years on a straight-line basis. Goodwill is the
excess of the purchase price over the fair value of the net assets acquired,
determined through an independent appraisal, and is amortized over 15 years
using the straight-line method. Deferred financing costs represent direct costs
incurred to obtain long-term financing and are amortized to interest expense
over the term of the underlying debt utilizing the effective interest method.
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").
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.
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 Company estimates that the fair value of all financial
instruments at December 31, 1998 does not differ materially from the
aggregate carrying values of its financial instruments recorded in the
accompanying balance sheet. The fair value of the notes payable-affiliate
are considered to be equal to carrying values since the Company believes
that its credit risk has not changed from the time this debt instrument was
executed and therefore, would obtain a similar rate in the current market.
b. The fair value of the cash and temporary cash investments
approximates fair value because of the short maturity of these instruments.
Income taxes
The Company and Mercom file separate consolidated federal income tax
returns. 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.
F-29
<PAGE>
AVALON CABLE OF MICHIGAN HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in thousands except per share data)
(December 31, 1998
3. Merger
The Merger was accounted for using the purchase method of accounting.
Accordingly, the consideration was allocated to the net assets acquired based
on their fair market values at the date of the Merger as determined through the
use of an independent appraisal. The excess of consideration paid over the fair
market value of the net assets acquired was $81,705, and is being amortized
using the straight line method over 15 years, its estimated economic life.
The Merger agreement between the Company and Avalon Michigan permitted
Avalon Michigan to agree to acquire the 1,822,810 shares (approximately 38% of
the outstanding stock) of Mercom that it did not own (the "Mercom
Acquisition"). On September 10, 1998 Avalon Michigan and Mercom entered into a
definitive agreement (the "Mercom Merger Agreement") providing for the
acquisition by Avalon Michigan of all of such shares at a price of $12.00 per
share. Avalon Michigan completed this acquisition in March 1999. The total
estimated consideration payable in conjunction with the Mercom Acquisition,
excluding fees and expenses was $21,900.
Following is the unaudited pro forma results of operations for the year
ended December 31, 1998, as if the Merger occurred on January 1, 1998:
<TABLE>
<CAPTION>
December 31,
1998
------------
(Unaudited)
<S> <C>
Revenue................................... $ 88,178
========
Loss from operations...................... $ (4,664)
========
Net loss.................................. $(30,989)
========
</TABLE>
In March 1999, Avalon Michigan acquired the cable television systems of Nova
Cablevision, Inc., Nova Cablevision VI, L.P. and Nova Cablevision VII, L.P. for
approximately $7,800, excluding transaction fees.
4. Property, Plant and Equipment
Property, plant and equipment consists of the following:
<TABLE>
<S> <C>
Cable plant..................................................... $100,167
Vehicles........................................................ 2,475
Buildings and improvements...................................... 2,151
Office furniture and fixtures................................... 846
Construction in process......................................... 768
--------
Total property, plant and equipment............................. 106,407
Less--accumulated depreciation.................................. (1,442)
--------
Property, plant and equipment, net.............................. $104,965
========
</TABLE>
Depreciation expense was $1,442 for period from inception (June 2, 1998) to
December 31, 1998.
F-30
<PAGE>
AVALON CABLE OF MICHIGAN HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1998
5. Intangible Assets
Intangible assets consist of the following:
<TABLE>
<S> <C>
Cable Franchise................................................. $344,063
Goodwill........................................................ 81,705
Deferred Financing Costs........................................ 10,657
--------
Total........................................................... 436,425
Less--accumulated amortization.................................. (5,112)
--------
Intangible assets, net.......................................... $431,313
========
</TABLE>
Amortization expense charged to operations in during the period from
inception (June 2, 1998) through December 31, 1998 was $5,112.
6. Account payable and accrued expenses consist of the following:
<TABLE>
<S> <C>
Accounts payable................................................ $ 5,321
Accrued cable programming costs................................. 1,824
Accrued taxes................................................... 1,107
Other........................................................... 1,942
-------
$10,194
=======
7. Income Taxes
The income tax provision (benefit) in the accompanying consolidated
financial statements of operations is comprised of the following:
<CAPTION>
1998
-------
<S> <C>
Current
Federal........................................................ $ 243
State.......................................................... --
-------
Total Current................................................ 243
-------
Deferred
Federal........................................................ (2,757)
State.......................................................... (240)
-------
Total Deferred............................................... (2,997)
-------
Total (benefit) for income taxes............................. $(2,754)
=======
</TABLE>
The benefit for income taxes is different from the amounts computed by
applying the U.S. statutory federal tax rate of 35% for 1998. The differences
are as follows:
<TABLE>
<CAPTION>
1998
-------
<S> <C>
(Loss) before (benefit) for income taxes........................ $(7,524)
=======
Federal tax (benefit) at statutory rates........................ (2,633)
State income taxes.............................................. (198)
Goodwill........................................................ 77
-------
(Benefit) for income taxes...................................... (2,754)
=======
</TABLE>
F-31
<PAGE>
AVALON CABLE OF MICHIGAN HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1998
<TABLE>
<CAPTION>
Tax Net
Operating Expiration
Year Losses Date
---- --------- ----------
<S> <C> <C>
1998................................................. $10,360 2018
</TABLE>
Temporary differences that give rise to significant portion of deferred tax
assets and liabilities at December 31 are as follows:
<TABLE>
<CAPTION>
1998
-------
<S> <C>
NOL carryforwards................................................ $ 5,363
Alternative minimum tax credits.................................. 141
Reserves......................................................... 210
Other, net....................................................... 309
-------
Total deferred assets.......................................... 6,023
-------
Property, plant and equipment.................................... (10,635)
Intangible assets................................................ (75,538)
-------
Total deferred liabilities..................................... (86,173)
-------
Subtotal......................................................... (80,150)
-------
Valuation allowance.............................................. --
-------
Total deferred taxes........................................... (80,150)
=======
</TABLE>
The tax benefit related to the loss on extinguishment of debt results in
deferred tax, and it approximating the statutory U.S. tax rate. The tax benefit
of $2,036 related to the exercise of certain stock options of Cable Michigan
Inc. was charged directly to goodwill in conjunction with the closing of the
merger.
8. Debt
At December 31, 1998, Long-term Debt consists of the following:
<TABLE>
<S> <C>
Senior credit facility.......................................... $150,000
Senior subordinated notes....................................... 140,875
Senior discount notes........................................... 111,494
--------
402,369
Current portion............................................... --
--------
$402,369
========
</TABLE>
Credit Facility
On November 6, 1998, Avalon Michigan became a co-borrower along with Avalon
New England and Avalon Cable Finance Inc (Avalon Finance), affiliated
companies, collectively referred to as the ("Co-Borrowers") on a $320,888
senior credit facility, which includes term loan facilities consisting of (i)
tranche A term loans of $120,888 and (ii) tranche B term loans of $170,000 and
a revolving credit facility of $30,000 (collectively, the "Credit Facility").
Subject to compliance with the terms of the Credit Facility, borrowings under
the Credit Facility will be available for working capital purposes, capital
expenditures and pending and future acquisitions. The ability to advance funds
under the tranche A term loan facility terminates on March 31, 1999. The
tranche A term loans are subject to minimum quarterly amortization payments
commencing on January 31, 2001 and maturing on October 31, 2005. The tranche B
term loans are scheduled to be repaid in two equal installments on July 31,
2006 and October 31, 2006. The revolving credit facility borrowings are
scheduled to be repaid on October 31, 2005.
F-32
<PAGE>
AVALON CABLE OF MICHIGAN HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1998
On November 6, 1998, Avalon Michigan borrowed $265,888 under the Credit
Facility in order to consummate the Merger. In connection with the Senior
Subordinated Notes (as defined below) and Senior Discount Notes (as defined
below) offerings, Avalon Michigan repaid $125,013 of the Credit Facility, and
the availability under the Credit Facility was reduced to $195,000. Avalon
Michigan had borrowings of $140,875 outstanding under the tranche B term note
facilities, and had available $30,000 for borrowings under the revolving credit
facility. Avalon New England and Avalon Finance had no borrowings outstanding
under the Credit Facility at December 31, 1998.
The interest rate under the Credit Facility is a rate based on either (i)
the base rate (a rate per annum equal to the greater of the Prime Rate and the
Federal Funds Effective Rate plus 1/2 of 1%) or (ii) the Eurodollar rate (a
rate per annum equal to the Eurodollar Base Rate divided by 1.00 less the
Eurocurrency Reserve Requirements) plus, in either case, the applicable margin.
As of December 31, 1998, the applicable margin was (a) with respect to the
tranche B term loans was 2.75% per annum for Base Rate loans and 3.75% per
annum for Eurodollar loans and (b) with respect to tranch A term loans and the
revolving credit facility was 2.00% per annum for Base Rate loans and 3.00% for
Eurodollar loans. The applicable margin for the tranche A term loans and the
revolving credit facility are subject to performance based grid pricing which
is determined based on upon the consolidated leverage ratio of the Co-
Borrowers. The interest rate for the tranche B term loans outstanding at
December 31, 1998 was 9.19%. Interest is payable on a quarterly basis. Accrued
interest on the borrowings under the credit facility was $1,389 at December 31,
1998.
The Credit Facility contains restrictive covenants which among other things
require the Co-Borrowers to maintain certain ratios including consolidated
leverage ratios and the interest coverage ratio, fixed charge ratio and debt
service coverage ratio.
The obligations of the Co-Borrowers under the Credit Facility are secured by
substantially all of the assets of the Co-Borrowers. In addition, the
obligations of the Co-Borrowers under the Credit Facility are guaranteed by
Avalon Cable of Michigan Holdings, Inc., Avalon Cable LLC, Avalon Cable Finance
Holdings, Inc., Avalon Cable of New England Holdings, Inc. and Avalon Cable
Holdings, LLC.
Subordinated debt
In December 1998, Avalon Michigan became a co-issuer of a $150,000,
principal balance, Senior Subordinated Notes ("Subordinated Notes") offering
and Michigan Holdings became a co-issuer of a $196,000, gross proceeds, Senior
Discount Notes ("Senior Discount Notes") offering. In conjunction with these
financings, Avalon Michigan paid $18,130 to Avalon Finance as a partial payment
against Avalon Michigan's note payable--affiliate. Avalon Michigan paid $75 in
interest on this note payable--affiliate during the period from inception (June
2, 1998) through December 31, 1998.
The Subordinated Notes mature on December 1, 2008, and interest accrued at a
rate of 9.375% per annum. Interest is payable semi-annually in arrears on June
1 and December 1 of each year, commencing on
June 1, 1999. Accrued interest on the Subordinated Notes was $1,078 at December
31, 1998. The Senior Discount Notes mature on December 1, 2008. Until December
1, 2003, interest will not be paid currently on the Senior Discount Notes, but
the accreted value will increase (representing original issue discount) between
the date of original issuance and December 1, 2003. Beginning on December 1,
2003, interest will accrue at a rate of 11.875% per annum and will be payable
semi-annually in arrears on June 1 and December 1 of each year, to holders of
record on the immediately preceding May 15 and November 15. Original issue
discount accretion on the Senior Discount Notes was $1,083 at December 31,
1998.
F-33
<PAGE>
AVALON CABLE OF MICHIGAN HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1998
The Senior Subordinated Notes will not be redeemable at the Co-Borrowers'
option prior to December 1, 2003. Thereafter, the Senior Subordinated Notes
will be subject to redemption at any time at the option of the Co-Borrowers, in
whole or in part at the redemption prices (expressed as percentages of
principal amount) plus accrued and unpaid interest, if any, thereon to the
applicable redemption date, if redeemed during the twelve-month period
beginning on December 1 of the years indicated below:
The scheduled maturities of the long-term debt are $2,000 in 2001, $4,000 in
2002, $72,479 in 2003, and the remainder thereafter.
At any time prior to December 1, 2001, the Co-Borrowers may on any one or
more occasions redeem up to 35% of the aggregate principal amount of Senior
Subordinate Notes originally issued under the Indenture at a redemption price
equal to 109.375% of the principal amount thereof, plus accrued and unpaid
interest, if any, to the redemption date, with the net cash proceeds of any
equity offering and/or the net cash proceeds of a strategic equity investment;
provided that at least 65% of the aggregate principal amount at maturity of
Senior Subordinated Notes originally issued remain outstanding immediately
after each such redemption.
As used in the preceding paragraph, "Equity Offering and Strategic Equity
Investment" means any public or private sale of Capital Stock of any of the Co-
Borrowers pursuant to which the Co-Borrowers together receive net proceeds of
at least $25 million, other than issuances of Capital Stock pursuant to
employee benefit plans or as compensation to employees; provided that to the
extent such Capital Stock is issued by the Co-Borrowers, the net cash proceeds
thereof shall have been contributed to one or more of the Co-Borrowers in the
form of an equity contribution.
Mercom debt
In August 1997, the Mercom revolving credit agreement for $2,000 expired.
Mercom had no borrowings under the revolving credit agreement in 1996 or 1997.
On September 29, 1997, Avalon Michigan purchased and assumed all of the bank's
interest in the term credit agreement and the note issued thereunder.
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, 1998, $14,151 of principal was outstanding. The borrowings under the term
credit agreement are eliminated in the Company's consolidated balance sheet.
9. Employee Benefit Plans
Avalon Michigan has a qualified savings plan under Section 401(K) of the
Internal Revenue Code. Contributions charged to expense for the period from
November 5, 1998 to December 31, 1998 was $30.
10. Commitments and Contingencies
Leases
Total rental expense, primarily for office space and pole rental, was $43.
Rental commitments are expected to continue at approximately $1 million a year
for the foreseeable future, including pole rental commitments which are
cancelable.
F-34
<PAGE>
AVALON CABLE OF MICHIGAN HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1998
Legal Matters
The Company is subject to the provisions of the Cable Television Consumer
Protection and Competition Act of 1992, as amended, and the Telecommunications
Act of 1996. The Company has either settled challenges or accrued for
anticipated exposures related to rate regulation; however, there is no
assurance that there will not be further additional challenges to its rates.
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.
11. Related Party Transactions and Balances
In November 1998, Avalon Michigan received $33,200 from Avalon Finance. In
consideration for this amount, Avalon Michigan executed a note payable to
Avalon Finance. The note matures on December 31, 2001. This note is recorded as
note payable-affiliate on the balance sheet at December 31, 1998. Interest
accrues at a rate of 4.47% per year, and is payable on December 31, 2001.
Accrued interest receivable of $102 has been recorded in connection with this
note at December 31, 1998. On December 10,1998, Avalon Michigan made a partial
payment of $18,130 against this note payable-affiliate to Avalon Finance.
Avalon Michigan receives support services such as finance, accounting and
human resources from Avalon Cable LLC, a related party. All shared costs are
allocated on the basis of average time spent servicing each entity. In the
opinion of management, the methods used in allocating costs from Avalon Cable
LLC are reasonable; however, the costs of these services as allocated are not
necessarily indicative of the costs that would have been incurred by the
combined operations on a stand-alone basis. For the period ended December 31,
1998, the Company was allocated charges related to such services of $250. The
Company had a payable of $250 related to these services at December 31, 1998.
At December 31, 1998, the Company had an accounts receivable-affiliate
balance of $247 with Avalon Cable LLC.
F-35
<PAGE>
AVALON CABLE OF MICHIGAN HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(In thousands)
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
----------- ------------
(Unaudited)
<S> <C> <C>
Assets
Cash.................................................. $ 13,227 $ 9,071
Accounts receivable, net of allowance for doubtful
accounts of $957 and $873............................ 6,210 5,015
Prepayments and other current assets.................. 1,549 1,267
Accounts receivable from related parties.............. -- 371
Deferred income taxes................................. 377 377
-------- --------
Current assets.................................... 21,363 16,101
Property, plant and equipment, net.................... 115,200 104,965
Intangible assets, net................................ 473,323 431,313
Deferred charges and other assets..................... 1,169 1,270
-------- --------
Total assets...................................... 611,055 553,649
======== ========
Liabilities and Shareholders' Equity
Current liabilities
Accounts payable and accrued expenses............... $ 20,689 $ 10,194
Advance billings and customer deposits.............. 3,363 2,454
Accounts payable--affiliate......................... 3,388 2,023
-------- --------
Current liabilities............................... 27,440 14,671
Long-term debt........................................ 442,727 402,369
Notes payable--affiliates............................. -- 15,171
Deferred income taxes................................. 74,053 80,811
-------- --------
Total liabilities................................. 544,220 513,022
-------- --------
Commitments and contingencies (Note 4)
Minority interest..................................... 47,495 13,855
Stockholders' equity
Common stock........................................ -- --
Additional paid-in capital.......................... 35,000 35,000
Accumulated deficit................................. (15,660) (8,228)
-------- --------
Total stockholders' equity........................ 19,340 26,772
-------- --------
Total liabilities and shareholders' equity........ $611,055 $553,649
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-36
<PAGE>
AVALON CABLE OF MICHIGAN HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(In thousands)
<TABLE>
<CAPTION>
For the Quarter
Ended
March 31, 1999
---------------
(Unaudited)
<S> <C>
Revenue
Basic services................................................ $ 18,153
Premium services.............................................. 1,843
Other......................................................... 2,371
--------
Total Revenue............................................... 22,367
Operating expenses
Selling, general and administrative........................... 3,716
Programming................................................... 6,293
Technical and operations...................................... 2,496
Depreciation and amortization................................. 10,126
--------
Loss from operations............................................ (264)
Interest income................................................. 318
Interest expense................................................ (11,836)
--------
Loss before income taxes........................................ (11,782)
Benefit from income taxes....................................... 4,286
--------
Loss before minority interest and extraordinary item............ (7,496)
Minority interest in loss of consolidated entity................ 64
--------
Net loss...................................................... $ (7,432)
========
</TABLE>
The accompanying notes are an integral part of these financial statements
F-37
<PAGE>
AVALON CABLE OF MICHIGAN HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
(In thousands)
<TABLE>
<CAPTION>
For the Quarter Ended March 31, 1999
-------------------------------------------------------
Common Additional Total
Shares Common Paid-in Accumulated Shareholders'
Outstanding Stock Capital Deficit Equity
----------- ------ ---------- ----------- -------------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Balance, December 31,
1998................. 100 $ -- $35,000 $ (8,228) $26,772
Net loss for the quar-
ter ended
March 31, 1999....... (7,432) (7,432)
--- ----- ------- --------- -------
Balance, March 31,
1999................. 100 $ -- $35,000 $ (15,660) $19,340
=== ===== ======= ========= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-38
<PAGE>
AVALON CABLE OF MICHIGAN HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
For the Quarter
Ended
March 31,
1999
---------------
(Unaudited)
<S> <C>
Cash flows from operating activities
Net loss..................................................... $(7,432)
Depreciation and amortization................................ 10,126
Increase (decrease) in minority interest..................... (398)
Net change in certain assets and liabilities, net of business
acquisitions
Increase in accounts receivable............................ (942)
Decrease in accounts receivable--related parties........... 371
Increase in prepayment and other current assets............ (275)
Increase in accounts payable and accrued expenses.......... 10,436
Increase in deferred revenue............................... 2,213
Decrease in other assets................................... 101
Deferred income taxes, net................................. (7,188)
-------
Net cash provided by operating activities................ 7,012
-------
Cash flows from investing activities
Additions to property, plant and equipment................... (9,210)
Payment for acquisitions..................................... (34,004)
-------
Net cash used in investing activities.................... (43,214)
-------
Cash flows from financing activities
Proceeds from the issuance of the Credit Facility............ 40,358
-------
Net cash provided by financing activities................ 40,358
-------
Net increase in cash........................................... 4,156
Cash at beginning of the period................................ 9,071
-------
Cash at end of the period................................ $13,227
=======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-39
<PAGE>
AVALON CABLE OF MICHIGAN HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(In thousands)
March 31, 1999
1. Description of Business
Avalon Cable of Michigan Holdings, Inc. ("The Company") was formed in June
1998, pursuant to the laws of the state of Delaware. Avalon Cable of Michigan
Inc. ("Avalon Michigan") was formed in June 1998, pursuant to the laws of the
state of Delaware as a wholly owned subsidiary of the Company. On June 3, 1998,
Avalon Michigan entered into an Agreement and Plan of Merger (the "Agreement")
among the Company, Cable Michigan, Inc. and Avalon Michigan, pursuant to which
Cable Michigan, Inc. will merge into Avalon Michigan and Avalon Michigan will
become a wholly owned subsidiary of the Company (the "Merger").
In accordance with the terms of the Agreement, each share of common stock,
par value $1.00 per share ("common stock"), of Cable Michigan, Inc. (Cable
Michigan") outstanding prior to the effective time of the Merger (other than
treasury stock, shares owned by the Company or its subsidiaries, or shares as
to which dissenters' rights have been exercised) shall be converted into the
right to receive $40.50 in cash (the "Merger Consideration"), subject to
certain possible closing adjustments.
In conjunction with the acquisition of Cable Michigan, Avalon Michigan
acquired Cable Michigan's 62% ownership interest in Mercom, Inc. ("Mercom").
On November 6, 1998, Avalon Michigan completed its merger into and with
Cable Michigan. The total consideration paid in conjunction with the merger,
including fees and expenses was $431,629, including repayment of all existing
Cable Michigan indebtedness and accrued interest of $135,205. The Agreement
also permitted Avalon Michigan to agree to acquire the remaining shares of
Mercom that it did not own.
The Company contributed $137,375 in cash to Avalon Michigan, which was used
to consummate the Merger. On November 5, 1998, the Company received $105,000 in
cash in exchange for promissory notes to lenders (the "Bridge Agreement"). On
November 6, 1998, the Company contributed the proceeds received from the Bridge
Agreement and an additional $35,000 in cash to Avalon Michigan in exchange for
100 shares of common stock.
On March 26, 1999, after the acquisition of Mercom, Avalon Michigan
completed a series of transactions to facilitate certain aspects of its
financing. As a result of these transactions:
. The Company contributed the Senior Discount Notes and associated debt
finance costs to Avalon Michigan.
. Avalon Michigan contributed its assets and liabilities excluding
deferred tax liabilities, net to Avalon Cable LLC in exchange for an
approximate 88% voting interest in Avalon Cable LLC. Avalon Cable LLC
contributed these assets and liabilities, excluding the Senior Discount
Notes and associated debt finance costs, to its wholly-owned subsidiary,
Avalon Cable of Michigan LLC.
. Avalon Cable of Michigan LLC has become the operator of the Michigan
cluster replacing Avalon Michigan;
. Avalon Cable of Michigan LLC is an obligor on the Senior Subordinated
Notes replacing Avalon Michigan; and
. Avalon Michigan is a guarantor of the obligations of Avalon Cable of
Michigan LLC under the Senior Subordinated Notes. Avalon Michigan does
not have significant assets, other than its 88% investment in Avalon
Cable LLC at March 31, 1999.
F-40
<PAGE>
AVALON CABLE OF MICHIGAN HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(In thousands)
Avalon Cable LLC provides cable services to various areas in the state of
Michigan and New England. Avalon Cable LLC's cable systems offer customer
packages for basic cable programming services which are offered at a per
channel charge or packaged together to form a tier of services offered at a
discount from the combined channel rate. Avalon Cable LLC's cable systems also
provide premium cable services to their customers for an extra monthly charge.
Customers generally pay initial connection charges and fixed monthly fees for
cable programming and premium cable services, which constitute the principle
sources of revenue for Avalon Cable LLC.
2. Basis of Presentation
Pursuant to the rules and regulations of the Securities and Exchange
Commission, certain financial information has been condensed and certain
footnote disclosures have been omitted. Such information and disclosures are
normally included in financial statements prepared in accordance with generally
accepted accounting principles.
These condensed financial statements should be read in conjunction with the
Company's audited financial statements at December 31, 1998 and notes thereto
included elsewhere herein.
The financial statements as of March 31,1999 and for the three month period
then ended are unaudited; however, in the opinion of management, such
statements include all adjustments necessary to present fairly the financial
information included therein.
3. Merger
The Merger agreement between the Company and Avalon Michigan permitted
Avalon Michigan to agree to acquire the 1,822,810 shares (approximately 38% of
the outstanding stock) of Mercom that it did not own (the "Mercom
Acquisition"). On September 10, 1998 Avalon Michigan and Mercom entered into a
definitive agreement (the "Mercom Merger Agreement") providing for the
acquisition by Avalon Michigan of all of such shares at a price of $12.00 per
share. Avalon Michigan completed this acquisition in March 1999. The total
estimated consideration payable in conjunction with the Mercom Acquisition,
excluding fees and expenses was $21,900.
In connection with the acquisition of Mercom, former shareholders of Mercom
constituting approximately 16.5% of all outstanding Mercom common shares gave
notice of their election to exercise appraisal rights as provided by Delaware
law. The Company cannot predict at this time the effect of these elections on
the Company or the extent to which these former shareholders will continue to
pursue appraisal rights and seek an appraisal proceeding under Delaware law or
choose to abandon these efforts and accept the consideration payable in the
Mercom merger. If these former shareholders continue to pursue their appraisal
rights, the Company makes no assurance that a Delaware court would not find
that the fair value of these shares for such purpose is in excess of the $12.00
per Mercom share that the Company paid in the acquisition or that the ultimate
outcome would not have a material adverse effect on the Company. The Company
has already provided for the consideration due under the terms of our merger
with Mercom with respect to these shares.
4. Commitments and Contingencies
Legal matters
The Company is subject to the provisions of the Cable Television Consumer
Protection and Competition Act of 1992, as amended, and the Telecommunications
Act of 1996. The Company has either settled challenges or accrued for
anticipated exposures related to rate regulation; however, there is no
assurance that there will not be further additional challenges to its rates.
F-41
<PAGE>
AVALON CABLE OF MICHIGAN HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(In thousands)
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.
5. Subsequent Event
In May 1999, the Company signed an agreement with Charter Communications,
Inc. ("Charter Communications") under which Charter Communications agreed to
purchase Avalon Cable LLC's cable television systems and assume some of their
debt. The acquisition by Charter Communications is subject to regulatory
approvals. The Company expects to consummate this transaction in the fourth
quarter of 1999.
This agreement, if closed, would constitute a change in control under the
Indenture pursuant to which the Senior Subordinated Notes and the Senior
Discount Notes (collectively, the "Notes") were issued. The Indenture provides
that upon the occurrence of a change of control of the Company (a "Change of
Control") each holder of the Notes has the right to require the Company to
purchase all or any part (equal to $1,000 or an integral multiple thereof) of
such holder's Notes at an offer price in cash equal to 101% of the aggregate
principal amount thereon (or 101% of the accreted value for the Senior Discount
Notes as of the date of purchase if prior to full accretion date) plus accrued
and unpaid interest and Liquidated Damages (as defined in the Indenture)
thereof, if any, to the date of purchase.
This agreement, if closed, would represent a Change of Control which, on the
closing date, constitutes an event of default under the Credit Facility giving
the lender the right to terminate the credit commitment and declare all amounts
outstanding immediately due and payable. Charter Communications has agreed to
repay all amounts due under the credit facility or cause all events of default
under the credit facility arising from a change of control to be waived.
F-42
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
of Avalon Cable Holdings Finance, Inc.
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statement of operations and of cash flows present fairly, in all
material respects, the financial position of Avalon Cable Holdings Finance,
Inc. and its subsidiary (the "Company") as of December 31, 1998 and the results
of their operations and their cash flows for the period from October 21, 1998
(inception) through December 31, 1998, in conformity with generally accepted
accounting principles. These consolidated financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these consolidated financial statements based on our audit. We
conducted our audit of these consolidated statements in accordance with
generally accepted auditing standards which requires that we plan and perform
the audit to obtain reasonable assurance about whether the consolidated
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the consolidated financial statements, assessing the accounting principles used
and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
New York, New York
March 30, 1999
F-43
<PAGE>
AVALON CABLE HOLDINGS FINANCE, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
December 31, 1998
(in thousands, except share amounts)
<TABLE>
<S> <C>
Assets
------
Cash................................................................... $ --
Note receivable--affiliate............................................. 15,171
-------
Total assets....................................................... $15,171
=======
Liabilities and stockholder's equity
------------------------------------
Note payable--affiliate................................................ $15,171
-------
Total liabilities.................................................. 15,171
-------
Commitments and contingencies (Note 5)
Common stock, par value of $.01; authorized 1,000 shares; issued 100
shares................................................................ --
-------
Total stockholder's equity......................................... --
-------
Total liabilities and stockholder's equity......................... $15,171
=======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-44
<PAGE>
AVALON CABLE HOLDINGS FINANCE, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF OPERATIONS
For the Period from October 21, 1998 (inception) through December 31, 1998
(in thousands)
<TABLE>
<S> <C>
Revenue.................................................................. $ --
Operating expenses....................................................... --
-----
Income from operations............................................... --
-----
Other income (expense):
Interest income........................................................ 177
Interest (expense)..................................................... (177)
-----
Net income........................................................... $ --
=====
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-45
<PAGE>
AVALON CABLE HOLDINGS FINANCE, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
For the Period from October 21, 1998 (inception) through December 31, 1998
(in thousands)
<TABLE>
<S> <C>
Cash flows from financing activities:
Net proceeds from issuance of note payable--affiliate............... $ 15,171
Receipts for payments on note receivable--affiliate................. (15,171)
--------
Net cash provided by financing activities......................... --
--------
Cash, end of period............................................... $ --
========
Supplemental disclosures of cash flow information
Cash paid during the year for:
Interest.......................................................... $ 75
--------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-46
<PAGE>
AVALON CABLE HOLDINGS FINANCE, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands)
December 31, 1998
1. Basis of Presentation and Description of Business
Avalon Cable Holdings Finance, Inc. (the "Company") was formed in October
1998, pursuant to the laws of Delaware, as a wholly owned subsidiary of Avalon
Cable Holdings LLC, for the sole purpose of facilitating financings associated
with the acquisitions of various cable television companies. The Company
conducts no other activities.
2. Summary of Significant Accounting Policies
Principles of consolidation
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiary, Avalon Cable Finance, Inc. ("Avalon Finance").
All significant transactions between the Company and its subsidiary have been
eliminated.
Use of estimates
The preparation of the consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and use assumptions that affect the reported amounts of assets and liabilities
and the disclosure for contingent assets and liabilities at the date of the
consolidated financial statements as well as the reported amounts of revenues
and expenses during the reported period. Actual results may vary from estimates
used.
Financial instruments
The Company estimates that the fair value of all financial instruments at
December 31, 1998 does not differ materially from the aggregate carrying values
of its financial instruments recorded in the accompanying balance sheet. The
fair value of the notes payable-affiliate are considered to be equal to
carrying values since the Company believes that its credit risk has not changed
from the time this debt instrument was executed and therefore, would obtain a
similar rate in the current market.
Accounting for income taxes
The Company has prepared its income tax provision using the liability method
in accordance with Financial Accounting Standards Board statement 109,
"Accounting for Income Taxes". Under this method, deferred tax assets and
liabilities are determined based on the difference between the financial
reporting and tax basis of assets and liabilities and are measured using tax
rates that will be in effect when the differences are expected to reverse. As
of December 31, 1998 the Company has no deferred tax assets or liabilities and
no tax provision to record.
3. Related Party Transactions
In November 1998, Avalon Finance received $33,200 from Avalon Cable of New
England LLC ("Avalon New England"). In consideration for this amount, Avalon
Finance executed a note payable to Avalon New England. The note matures on
December 31, 2001. Interest accrues at a rate of 4.47% per year, and is payable
in arrears on December 31, 2001. This note is recorded as note payable--
affiliate on the consolidated balance sheet at December 31, 1998. Avalon
Finance has recorded accrued interest payable on this note of $102 at December
31, 1998.
F-47
<PAGE>
AVALON CABLE HOLDINGS FINANCE, INC. AND SUBSIDIARY (continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands)
December 31, 1998
In November 1998, the Company loaned $33,200 to Avalon Cable of Michigan,
Inc. ("Avalon Michigan") in order to assist Avalon Michigan in consummating its
acquisition of Cable Michigan, Inc. The note matures on December 31, 2001.
Interest accrues at a rate of 4.47% per year, and is payable in arrears on
December 31, 2001. This note is recorded as note receivable--affiliate on the
consolidated balance sheet at December 31, 1998. Accrued interest receivable of
$102 has been recorded in connection with this note at December 31, 1998.
4. Debt
Credit Facilities
On May 28, 1998, Avalon New England entered into a term loan and revolving
credit agreement with a major commercial lending institution (the "Credit
Agreement"). The Credit Agreement allowed for aggregate borrowings under Term
Loans A and B (collectively, the "Term Loans") and a revolving credit facility
of $30,000 and $5,000, respectively. The proceeds from the Term Loans and
revolving credit facility were used to fund acquisitions and to provide for
Avalon New England's working capital requirements.
In December 1998, Avalon New England retired the Term Loans and revolving
credit agreement through the proceeds of a capital contribution from Avalon.
The fees and associated costs relating to the early retirement of this debt was
$1,310, which has been recorded as an extraordinary item by Avalon New England.
On November 6, 1998, Avalon Finance became a co-borrower along with Avalon
Cable Michigan, Inc. ("Avalon Michigan") and Avalon Cable of New England LLC
("Avalon New England"), affiliated companies, collectively referred to as the
"Co-Borrowers") on a $320,888 senior credit facility, which includes term loan
facilities consisting of (i) tranche A term loans of $120,888 and (ii) tranche
B term loans of $170,000, and a revolving credit facility of $30,000
(collectively, the "Credit Facility"). Subject to compliance with the terms of
the Credit Facility, borrowings under the Credit Facility will be available for
working capital purposes, capital expenditures and pending and future
acquisitions. The ability to advance funds under the tranche A term loan
facilities terminate on March 31, 1999. The tranche A term loans are subject to
minimum quarterly amortization payments commencing on January 31, 2001 and
maturing on October 31, 2005. The tranche B term loans are scheduled to be
repaid in two equal installments on July 31, 2006 and October 31, 2006. The
revolving credit facility borrowings are scheduled to be repaid on October 31,
2005.
On November 6, 1998, Avalon Michigan borrowed $265,888 under the Credit
Facility. In connection with the Senior Subordinated Notes and Senior Discount
Notes offerings, Avalon Michigan repaid $125,013 of the Credit Facility, and
the availability under the Credit Facility was reduced to $195,000. Avalon
Michigan had borrowings of $11,300 and $129,575 outstanding under the tranche A
and tranche B term note facilities, respectively, and had available $30,000 for
borrowings under the revolving credit facility. The Company and Avalon New
England had no borrowings outstanding under the Credit Facility at December 31,
1998.
The interest rate under the Credit Facility is a rate based on either (i)
the Base Rate (a rate per annum equal to the greater of the prime rate and the
federal funds rate plus one-half of 1%) or (ii) the Eurodollar Rate (a rate per
annum equal to the Eurodollar base rate divided by 1.00 less the Eurocurrency
reserve requirement) plus, in either case, the applicable margin. As of
December 31, 1998, the applicable margin was (a) with respect to the tranche B
term loans was 2.75% per annum for Base Rate loans and 3.75% per annum for
Eurodollar loans and (b) with respect to tranche A term loans and the revolving
credit facility was 2.00% per annum for Base Rate loans and 3.00% per annum for
Eurodollar loans. The applicable margin for the tranche A term loans and the
revolving credit facility are subject to performance based grid pricing which
is determined
F-48
<PAGE>
AVALON CABLE HOLDINGS FINANCE, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in thousands)
December 31, 1998
based on upon the consolidated leverage ratio of the Co-Borrowers. The interest
rate for the tranche A and tranche B term loans outstanding at December 31,
1998 was 8.58% and 9.33%, respectively. Interest is payable on a quarterly
basis. Accrued interest on the borrowings incurred by Avalon Cable of Michigan,
Inc. under the credit facility was $1,390 at December 31, 1998.
The Credit Facility contains restrictive covenants which among other things
require the Co-Borrowers to maintain certain ratios including consolidated
leverage ratios and the interest coverage ratio, fixed charge ratio and debt
service coverage ratio.
The obligations of the Co-Borrowers under the Credit Facility are secured by
substantially all of the assets of the Co-Borrowers. In addition, the
obligations of the Co-Borrowers under the Credit Facility are guaranteed by
affiliated companies; Avalon Cable of Michigan Holdings, Inc., Avalon Finance,
Avalon Cable of New England Holdings, Inc., Avalon Cable Holdings, LLC and
Avalon Cable LLC.
Subordinated debt
In December 1998, Avalon Finance became a co-issuer of an $150,000 principal
balance, Senior Subordinated Notes ("Subordinated Notes") offering and the
Company became a co-issuer of an $196,000, accreted value, Senior Discount
Notes ("Senior Discounts Notes") offering. In conjunction with these
financings, Avalon Finance received $18,130 from Avalon Michigan as a partial
payment against the Company's note receivable--affiliate from Avalon Michigan.
Avalon Michigan paid $75 in interest during the period from October 21, 1998
(inception) through December 31, 1998. The cash proceeds received of $18,206
were used by Avalon Finance to make a partial principal payment of $18,130 on
its note payable--affiliate and an interest payment of $75 to Avalon New
England.
The Subordinated Notes mature on December 1, 2008, and interest accrues at a
rate of 9.375% per annum. Interest is payable semi annually in arrears on June
1 and December 1 of each year, commencing on June 1, 1999. The Senor Discount
Notes also mature on December 1, 2008, and interest accrues at a rate of
11.875% per annum on the principal amount at maturity on the Senior Discount
Notes. Interest is payable semi-annually in arrears on December 31, 1999.
5. Commitment and Contingencies
From time to time, the Company is involved with claims that arise in the
normal course of business. In the opinion of management, the ultimate liability
with respect to these claims will not have a material adverse effect on the
financial position of the Company.
F-49
<PAGE>
AVALON CABLE HOLDINGS FINANCE, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
(in thousands, except share amounts)
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
----------- ------------
(Unaudited)
<S> <C> <C>
Assets
Note receivable--affiliate............................ $15,338 $15,171
------- -------
Total assets........................................ $15,338 $15,171
======= =======
Liabilities and Stockholder's Equity
Note payable--affiliate............................... $15,338 $15,171
------- -------
Total liabilities................................... 15,338 15,171
------- -------
Common stock, par value of $.01; authorized 1,000
shares;
issued 100 shares.................................... -- --
------- -------
Total stockholder's equity.......................... -- --
------- -------
Total liabilities and stockholder's equity.......... $15,338 $15,171
======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-50
<PAGE>
AVALON CABLE HOLDINGS FINANCE, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF OPERATIONS
(in thousands)
<TABLE>
<CAPTION>
For the
Quarter Ended
March 31, 1999
--------------
(Unaudited)
<S> <C>
Revenue.......................................................... $--
Operating expenses............................................... --
----
Income from operations....................................... --
----
Other income/(expense)
Interest income................................................ 167
Interest expense............................................... (167)
----
Net income................................................... $--
====
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-51
<PAGE>
AVALON CABLE HOLDINGS FINANCE, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
For the
Quarter Ended
March 31, 1999
--------------
<S> <C>
Cash flows from operating activities
Change in note payable--affiliate.............................. $ 167
Change in note receivable--affiliate........................... (167)
-----
Net cash provided by financing activities.................... --
-----
Cash, end of period.......................................... $ --
=====
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-52
<PAGE>
AVALON CABLE HOLDINGS FINANCE, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1999
1. Description of Business
Avalon Cable Holdings Finance, Inc. (the "Company") was formed in October
1998, pursuant to the laws of Delaware, as a wholly owned subsidiary of Avalon
Cable LLC, for the sole purpose of facilitating financings associated with the
acquisitions of various cable television companies. The Company conducts no
other activities.
2. Basis of Presentation
Pursuant to the rules and regulations of the Securities and Exchange
Commission, certain financial information has been condensed and certain
footnote disclosures have been omitted. Such information and disclosures are
normally included in financial statements prepared in accordance with generally
accepted accounting principles.
These condensed financial statements should be read in conjunction with the
Company's audited consolidated financial statements at December 31, 1998 and
notes thereto included elsewhere herein.
The financial statements as of March 31, 1999 and for the three month period
then ended are unaudited; however, in the opinion of management, such
statements include all adjustments necessary to present fairly the financial
information included therein.
F-53
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders of
Avalon Cable of Michigan, Inc.
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations and changes in shareholders' deficit and
of cash flows present fairly, in all material respects, the financial position
of Cable Michigan, Inc. and subsidiaries (collectively, the "Company") at
December 31, 1996 and 1997 and November 5, 1998, and the results of their
operations and their cash flows for each of the two years ended December 31,
1996 and 1997 and the period from January 1, 1998 to November 5, 1998, in
conformity with generally accepted accounting principles. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform
the audits to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for the
opinion expressed above.
PricewaterhouseCoopers LLP
New York, New York
March 30, 1999
F-54
<PAGE>
CABLE MICHIGAN, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, November 5,
ASSETS 1997 1998
------ ------------ -----------
(dollars in thousands)
<S> <C> <C> <C>
Cash and temporary cash investments.............. $ 17,219 $ 6,093
Accounts receivable, net of reserve for doubtful
accounts of $541 at December 31, 1997 and $873
at November 5, 1998............................. 3,644 4,232
Prepayments and other............................ 663 821
Accounts receivable from related parties......... 166 396
Deferred income taxes............................ 1,006 541
-------- --------
Total current assets........................... 22,698 12,083
Property, plant and equipment, net............... 73,836 77,565
Intangible assets, net........................... 45,260 32,130
Deferred charges and other assets................ 803 9,442
-------- --------
Total assets................................... $142,597 $131,220
======== ========
<CAPTION>
LIABILITIES AND SHAREHOLDERS' DEFICIT
-------------------------------------
<S> <C> <C> <C>
Current portion of long-term debt................ $ -- $ 15,000
Accounts payable................................. 5,564 8,370
Advance billings and customer deposits........... 2,242 1,486
Accrued taxes.................................... 167 1,035
Accrued cable programming expense................ 2,720 5,098
Accrued expenses................................. 4,378 2,052
Accounts payable to related parties.............. 1,560 343
-------- --------
Total current liabilities...................... 16,631 33,384
Long-term debt................................... 143,000 120,000
Deferred income taxes............................ 22,197 27,011
-------- --------
Total liabilities.............................. 181,828 180,395
-------- --------
Minority interest................................ 14,643 14,690
-------- --------
Commitments and contingencies (Note 11).......... -- --
Preferred Stock.................................. -- --
Common stock..................................... -- --
Common shareholders' deficit..................... (53,874) (63,865)
-------- --------
Total Liabilities and Shareholders' Deficit.... $142,597 $131,220
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-55
<PAGE>
CABLE MICHIGAN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the
Period from
For the Years Ended January 1,
December 31, 1998 to
-------------------- November 5,
1996 1997 1998
--------- --------- -----------
(dollars in thousands except
per share and share amounts)
<S> <C> <C> <C>
Revenues..................................... $ 76,187 $ 81,299 $ 74,521
Costs and expenses, excluding management fees
and depreciation and amortization........... 40,593 44,467 41,552
Management fees.............................. 3,498 3,715 3,156
Depreciation and amortization................ 31,427 32,082 28,098
Merger related expenses...................... -- -- 5,764
--------- --------- ---------
Operating income............................. 669 1,035 (4,049)
Interest income.............................. 127 358 652
Interest expense............................. (15,179) (11,751) (8,034)
Gain on sale of Florida cable system......... -- 2,571 --
Other (expense), net......................... (736) (738) (937)
--------- --------- ---------
(Loss) before income taxes................... (15,119) (8,525) (12,368)
(Benefit) from income taxes.................. (5,712) (4,114) (1,909)
--------- --------- ---------
(Loss) before minority interest and equity in
unconsolidated entities..................... (9,407) (4,411) (10,459)
Minority interest in loss (income) of
consolidated entity......................... 1,151 53 (75)
--------- --------- ---------
Net (Loss)............................... $ (8,256) $ (4,358) $ (10,534)
========= ========= =========
Basic and diluted earnings per average common
share
Net (loss) to shareholders................. $ (1.20) $ (.63) $ (1.45)
Average common shares and common stock
equivalents outstanding................... 6,864,799 6,870,528 6,891,932
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-56
<PAGE>
CABLE MICHIGAN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' DEFICIT
<TABLE>
<CAPTION>
For the Years Ended December 31, 1996 and 1997 and
the Period from January 1, 1998 to November 5, 1998
-------------------------------------------------------------------
Common Additional Shareholder's Total
Shares Common Paid-in Net Shareholders'
Outstanding Stock Capital Deficit Investment Deficit
----------- ------ ---------- -------- ------------- -------------
(dollars in thousands except share amounts)
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31,
1995................... 1,000 $ 1 $-- $ -- $(73,758) $(73,757)
Net loss.............. (8,256) (8,256)
Transfers from 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 with the
Distribution......... 6,870,165 6,870 (59,638) 52,768 --
--------- ------ ---- -------- -------- --------
Balance, December 31,
1997................... 6,871,165 $6,871 -- $(60,745) $ -- $(53,874)
========= ====== ==== ======== ======== ========
Net loss from January
1, 1998 to November
5, 1998.............. (10,534) (10,534)
Exercise of stock
options.............. 30,267 30 351 381
Tax benefits of stock
option exercises..... 162 162
--------- ------ ---- -------- -------- --------
Balance, November 5,
1998................... 6,901,432 $6,901 $513 $(71,279) -- $(63,865)
========= ====== ==== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-57
<PAGE>
CABLE MICHIGAN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the Years
Ended December 31, For the Period from
------------------- January 1, 1998 to
1996 1997 November 5, 1998
-------- --------- -------------------
(dollars in thousands)
<S> <C> <C> <C>
Cash flows from operating activities
Net (loss).......................... $ (8,256) $ (4,358) $(10,534)
Gain on pension
curtailment/settlement............. (855) -- --
Depreciation and amortization....... 31,427 32,082 28,098
Deferred income taxes, net.......... 988 (4,359) (3,360)
Provision for losses on accounts
receivable......................... 843 826 710
Gain on sale of Florida cable
systems............................ -- (2,571) --
Increase (decrease) in minority
interest........................... (1,151) (53) 47
Other non-cash items................ 2,274 1,914 --
Net change in certain assets and
liabilities, net of business
acquisitions
Accounts receivable and customer
deposits......................... (1,226) (617) (2,054)
Accounts payable.................. 1,365 2,234 2,806
Accrued expenses.................. 125 580 52
Accrued taxes..................... (99) 61 868
Accounts receivable from related
parties.......................... 567 1,549 (230)
Accounts payable to related
parties.......................... 1,314 (8,300) (1,217)
Other, net........................ 501 (644) (158)
-------- --------- --------
Net cash provided by operating
activities..................... 27,817 18,344 15,028
-------- --------- --------
Cash flows from investing activities
Additions to property, plant and
equipment.......................... (9,605) (14,041) (18,697)
Acquisitions, net of cash acquired.. -- (24) --
Proceeds from sale of Florida cable
systems............................ -- 3,496 --
Other............................... 390 560 --
-------- --------- --------
Net cash used in investing
activities..................... (9,215) (10,009) (18,697)
-------- --------- --------
Cash flows from financing activities
Issuance of long-term debt.......... -- 128,000 --
Redemption of long-term debt........ (1,500) (17,430) (8,000)
Proceeds from the issuance of common
stock.............................. -- - 543
Transfers from CTE.................. -- 12,500 --
Change in affiliate notes, net...... (16,834) (116,836) --
Payments made for debt financing
costs.............................. -- (647) --
-------- --------- --------
Net cash provided by (used in)
financing activities........... (18,334) 5,587 (7,457)
Net increase/(decrease) in cash and
temporary cash investments........... 268 13,922 (11,126)
Cash and temporary cash investments at
beginning of year.................... 3,029 3,297 17,219
-------- --------- --------
Cash and temporary cash investments at
end of year.......................... $ 3,297 $ 17,219 $ 6,093
======== ========= ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-58
<PAGE>
CABLE MICHIGAN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the
For the Years Period from
Ended December January 1,
31, 1998 to
--------------- November 5,
1996 1997 1998
------- ------- -----------
(dollars in thousands)
<S> <C> <C> <C>
Supplemental disclosures of cash flow information
Cash paid during the year for
Interest......................................... $15,199 $11,400 $7,777
Income taxes..................................... 29 370 315
</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.
Certain intercompany accounts receivable and payable and intercompany note
balances were transferred to shareholders' net investment in connection
with the Distribution described in note 1.
The accompanying notes are an integral part of
these consolidated financial statements.
F-59
<PAGE>
CABLE MICHIGAN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands Except per Share Data)
December 31, 1998
1. Background and Basis of Presentation
Prior to September 30, 1997, Cable Michigan, Inc. and subsidiaries (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 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 the Distribution Agreement dated September 5, 1997
among C-TEC, RCN and the Company. The Company consists of C-TEC's Michigan
cable operations, including its 62% ownership in Mercom, Inc. ("Mercom"). 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. C-TEC, RCN, and the Company
continue as entities under common control until the Company completes the
Merger (as described below).
On June 3, 1998, the Company entered into an Agreement and Plan of Merger
(the "Agreement") among the Company, Avalon Cable of Michigan Holdings Inc.
("Avalon Holdings") and Avalon Cable of Michigan Inc. ("Avalon Sub"), pursuant
to which Avalon Sub will merge into the Company and the Company will become a
wholly owned subsidiary of Avalon Holdings (the "Merger").
In accordance with the terms of the Agreement, each share of common stock,
par value $1.00 per share ("common stock"), of the Company outstanding prior to
the effective time of the Merger (other than treasury stock, shares owned by
Avalon Holdings or its subsidiaries, or shares as to which dissenters' rights
have been exercised) shall be converted into the right to receive $40.50 in
cash (the "Merger Consideration"), subject to certain possible closing
adjustments.
On November 6, 1998, the Company completed its merger into and with Avalon
Cable Michigan, Inc. The total consideration payable in conjunction with the
merger, including fees and expenses is approximately 431,600. Subsequent to the
merger, the arrangements with RCN and CTE (as described below) were terminated.
The Merger agreement also permitted the Company to agree to acquire the
remaining shares of Mercom that it did not own.
Cable Michigan provides cable services to various areas in the state of
Michigan. Cable Michigan's cable television systems offer customer packages for
basic cable programming services which are offered at a per channel charge or
packaged together to form a tier of services offered at a discount from the
combined channel rate. Cable Michigan's cable television systems also provide
premium cable services to their customers for an extra monthly charge.
Customers generally pay initial connection charges and fixed monthly fees for
cable programming and premium cable services, which constitute the principle
sources of revenue for the Company.
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.
F-60
<PAGE>
CABLE MICHIGAN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 the Company have entered into certain agreements subsequent to
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 the Company 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 RCN and the
Company.
CTE has agreed to provide or cause to be provided to RCN and the Company
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.
2. Summary of Significant Accounting Policies
Use of estimates
The preparation of financial statements, in conformity with generally
accepted accounting principles, requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Cash and temporary cash investments
For purposes of reporting cash flows, the Company considers all highly
liquid investments purchased with an original maturity of three months or less
to be temporary cash investments. Temporary cash investments are stated at
cost, which approximates market.
Property, plant and equipment and depreciation
Property, plant and equipment reflects the original cost of acquisition or
construction, including payroll and related costs such as taxes, pensions and
other fringe benefits, and certain general administrative costs.
Depreciation 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 property, plant and equipment are:
<TABLE>
<S> <C>
Buildings.................................................... 12-25 years
Cable television distribution equipment...................... 8.5-12 years
Vehicles..................................................... 5 years
Other equipment.............................................. 12 years
</TABLE>
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.
F-61
<PAGE>
CABLE MICHIGAN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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
franchises. The cable 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 nonexclusive 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").
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. Installation fee revenue is recognized in the period in
which the installation occurs.
Advertising expense
Advertising costs are expensed as incurred. Advertising expense charged to
operations was $514, $560, and $505 in 1996, 1997, and for the period from
January 1, 1998 to November 5, 1998 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 conversions 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 in 1998 and had a dilutive effect if the
Company had income from continuing operations are 55,602 and 45,531,
respectively.
F-62
<PAGE>
CABLE MICHIGAN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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.
Income taxes
The Company 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.
Reclassification
Certain amounts have been reclassified to conform with the current year's
presentation.
3. Business Combination and Dispositions
The Agreement between Avalon Cable of Michigan Holdings, Inc. and the
Company permitted the Company to agree to acquire the 1,822,810 shares
(approximately 38% of the outstanding stock) of Mercom that it did not own (the
"Mercom Acquisition"). On September 10, 1998 the Company and Mercom entered
into a definitive agreement (the "Mercom Merger Agreement") providing for the
acquisition by the Company of all of such shares at a price of $12.00 per
share. The Company completed this acquisition in March 1999. The total
estimated consideration payable in conjunction with the Mercom Acquisition,
excluding fees and expenses was $21,900.
In March 1999, Avalon Michigan Inc. acquired the cable television systems of
Nova Cablevision, Inc., Nova Cablevision VI, L.P. and Nova Cablevision VII,
L.P. for approximately $7,800, excluding transaction fees.
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>
December 31, November 5,
1997 1998
------------ -----------
<S> <C> <C>
Cable plant............................................ $158,655 $174,532
Buildings and land..................................... 2,837 2,917
Furniture, fixtures and vehicles....................... 5,528 6,433
Construction in process................................ 990 401
-------- --------
Total property, plant and equipment.................... 168,010 184,283
Less accumulated depreciation.......................... (94,174) (106,718)
-------- --------
Property, plant and equipment, net..................... $ 73,836 $ 77,565
======== ========
</TABLE>
Depreciation expense was $15,728, $16,431 and $14,968 for the years ended
December 31, 1996 and 1997, and the period from January 1, 1998 to November 5,
1998, respectively.
F-63
<PAGE>
CABLE MICHIGAN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
5. Intangible Assets
Intangible assets consist of the following at:
<TABLE>
<CAPTION>
December 31, November 5,
1997 1998
------------ -----------
<S> <C> <C>
Cable Franchises................................. $134,889 $134,889
Noncompete agreements............................ 473 473
Goodwill......................................... 3,990 3,990
Other............................................ 1,729 1,729
-------- --------
Total............................................ 141,081 141,081
Less accumulated amortization.................... (95,821) (108,951)
-------- --------
Intangible assets, net........................... $ 45,260 $ 32,130
======== ========
</TABLE>
Amortization expense charged to operations for the years ended December 31,
1996 and 1997 was $15,699 and $15,651, respectively, and $13,130 for the period
from January 1, 1998 to November 5, 1998.
6. Income Taxes
The income tax provision (benefit) in the accompanying consolidated
financial statements of operations is comprised of the following:
<TABLE>
<CAPTION>
1996 1997 1998
------- ------- -------
<S> <C> <C> <C>
Current
Federal .................................... $(6,700) $ 245 $ 320
State....................................... -- -- 28
------- ------- -------
Total Current............................. (6,700) 245 348
------- ------- -------
Deferred:
Federal .................................... 988 (4,359) (2,074)
State....................................... -- -- (183)
------- ------- -------
Total Deferred............................ 988 (4,359) (2,257)
------- ------- -------
Total (benefit) for income taxes.......... $(5,712) $(4,114) $(1,909)
======= ======= =======
</TABLE>
The benefit for income taxes is different from the amounts computed by
applying the U.S. statutory federal tax rate of 35% for 1996, 34% for 1997 and
35% for the period from January 1, 1998 to November 5, 1998. The differences
are as follows:
<TABLE>
<CAPTION>
Period from
Year ended January 1,
December 31, 1998 to
----------------- November 11,
1996 1997 1998
-------- ------- ------------
<S> <C> <C> <C>
(Loss) before (benefit) for income taxes. $(15,119) $(8,525) $(12,368)
Federal tax (benefit) at statutory rates. (5,307) (2,899) (4,329)
State income taxes....................... -- -- (101)
Goodwill................................. 175 171 492
Increase (decrease) in valuation
allowance............................... (518) (1,190) --
Nondeductible expenses................... -- 147 2,029
Benefit of rate differential applied to
reversing timing differences............ -- (424) --
Other, net............................... (62) 81 --
-------- ------- --------
(Benefit) for income taxes............... $ (5,712) $(4,114) $ (1,909)
======== ======= ========
</TABLE>
F-64
<PAGE>
CABLE MICHIGAN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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>
1992................................................. $ 435 2007
1995................................................. $2,713 2010
</TABLE>
In 1997, Mercom was liable for Federal Alternative Minimum Tax (AMT). At
December 31, 1997 and at November 5, 1998, the cumulative minimum tax credits
are $141 and $141, respectively. This amount can be carried forward
indefinitely to reduce regular tax liabilities that exceed AMT in future years.
Temporary differences that give rise to a significant portion of deferred
tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
December 31, November 5,
1997 1998
------------ -----------
<S> <C> <C>
NOL carryforwards................................ $ 1,588 $ 1,132
Alternative minimum tax credits.................. 141 141
Reserves......................................... 753 210
Other, net....................................... 230 309
-------- --------
Total deferred assets............................ 2,712 1,792
-------- --------
Property, plant and equipment.................... (11,940) (10,515)
Intangible assets................................ (11,963) (10,042)
-------- --------
Total deferred liabilities....................... (23,903) (20,557)
-------- --------
Subtotal......................................... (21,191) (18,765)
Valuation allowance.............................. -- --
-------- --------
Total deferred taxes........................... $(21,191) $(18,765)
======== ========
</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, 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 November 5, 1998 is as follows:
<TABLE>
<CAPTION>
December 31, November 5,
1997 1998
------------ -----------
<S> <C> <C>
Term Credit Facility............................. $100,000 $100,000
Revolving Credit Facility........................ 28,000 20,000
Term Loan........................................ 15,000 15,000
-------- --------
Total............................................ 143,000 135,000
Current portion of long-term debt................ -- 15,000
-------- --------
Total Long-Term Debt........................... $143,000 $120,000
======== ========
</TABLE>
F-65
<PAGE>
CABLE MICHIGAN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Credit Facility
The Company had an outstanding line of credit with a banking institution for
$3 million. No amounts were outstanding under this facility.
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 (6.25% at November 5,
1998) (each as defined in the Credit Agreement).
The entire amount of the Term Credit Facility has been drawn and as of
November 5, 1998, $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 November 5, 1998, $20,000 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.
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.
Term Loan
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 (6.25% at
November 5, 1998), covenants and events of default substantially the same as
the Credit Facilities.
On November 6, 1998, the long-term debt of the Company was paid off in
conjunction with the closing of the merger.
Mercom debt
In August 1997, the Mercom revolving credit agreement for $2,000 expired.
Mercom had no borrowings under the revolving credit agreement in 1996 or 1997.
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.
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 November
5, 1998, $14,151 of
F-66
<PAGE>
CABLE MICHIGAN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
principal was outstanding. The borrowings under the term credit agreement are
eliminated in the Company's consolidated balance sheet.
8. 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 November
5, 1998, 6,901,432 common shares are issued and outstanding.
In connection with the Distribution, the Company Board of Directors (the
"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 Board, the 1997 Plan will expire on the
10th anniversary of the Distribution. The 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 the Company 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 Enterprise 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, the Company 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.
F-67
<PAGE>
CABLE MICHIGAN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Information relating to the Company stock options is as follows:
<TABLE>
<CAPTION>
Weighted
Average
Number of Exercise
Shares Price
--------- --------
<S> <C> <C> <C>
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
Granted.......................................... 47,500 31.25
Exercised........................................ (26,075) 26.21
Canceled......................................... (10,250) --
------- ------
Outstanding November 5, 1998....................... 390,813 $11.52
======= ======
Shares exercisable November 5, 1998.............. 155,125 $ 8.45
</TABLE>
The range of exercise prices for options outstanding at November 5, 1998 was
$8.46 to $31.25.
No compensation expense related to stock option grants was recorded in 1997.
For the period ended November 5, 1998 compensation expense in the amount of
$161 was recorded relating to services rendered by the Board.
Under the term of the Merger Agreement the options under the 1997 Plan vest
upon the closing of the merger and each option holder will receive $40.50 per
option.
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
of these options was estimated at the date of grant using a Black Scholes
option pricing model with the following weighted average assumptions for the
period ended November 5, 1998. The fair value of 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 1996, 1997 and 1998; expected
volatility of 39.5% for 1996, 38.6% prior to the Distribution and 49.8%
subsequent to the Distribution for 1997 and 40% for 1998; risk-free interest
rate of 5.95%, 6.52% and 5.68% for 1996, 1997 and 1998 respectively, and
expected lives of 5 years for 1996 and 1997 and 6 years for 1998.
The weighted-average fair value of options granted during 1997 and 1998 was
$4.19 and $14.97, respectively.
F-68
<PAGE>
CABLE MICHIGAN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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>
For the Years For the Period
Ended from January 1,
December 31, 1998
---------------- to November 5,
1996 1997 1998
------- ------- ---------------
<S> <C> <C> <C>
Net (Loss) as reported........................ $(8,256) $(4,358) $(10,534)
Net (Loss) pro forma.......................... (8,256) (4,373) (10,174)
Basic (Loss) per share--as reported........... (1.20) (0.63) (1.45)
Basic (Loss) per share--pro forma............. (1.20) (0.64) (1.48)
Diluted (Loss) per share--as reported......... (1.20) (0.63) (1.45)
Diluted (Loss) per share--pro forma........... (1.20) (0.64) (1.48)
</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 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 CTE, the
Company and RCN. In September 1997, the Board 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.
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
Country Trans Video, Inc.) were covered by an underfunded plan which was merged
into C-TEC's overfunded plan on February 28, 1996.
F-69
<PAGE>
CABLE MICHIGAN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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>
<S> <C>
Benefits earned during the year (service costs)................... $ 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>
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 for 1996. 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.
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 in 1996. Contributions charged to expense in 1997 prior to the
Distribution were $107.
In connection with the Distribution, the Company established a qualified
saving plan under Section 401(k) of the Code. Contributions charged to expense
in 1997 were $53. Contributions charged to expense for the period from January
1, 1998 to November 5, 1998 were $164.
11. Commitments and Contingencies
Total rental expense, primarily for office space and pole rental, was $984,
$908 and $1,077 for the year ended December 31, 1996, 1997 and for the period
from January 1, 1998 to November 5, 1998, respectively. Rental commitments are
expected to continue to approximate $1 million a year for the foreseeable
future, including pole rental commitments which are cancelable.
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. No additional charges were
incurred in the year ended December 31, 1997 and for the period from January 1,
1998 to November 5, 1998.
F-70
<PAGE>
CABLE MICHIGAN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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.
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 to
taxes that are clearly attributable to the Company group, the RCN group, or the
C-TEC group will be borne solely by such group. Adjustments to all other tax
liabilities will be borne 50% by C-TEC, 20% by the Company and 30% by RCN.
Notwithstanding the above, if as a result of the acquisition of all or a
portion of the capital stock or assets of the Company, the Distribution fails
to qualify as a tax-free distribution under Section 355 of the Internal Revenue
Code, then the Company will be liable for any and all increases in tax
attributable thereto.
13. Affiliate and Related Party Transactions
The Company has the following transactions with affiliates:
<TABLE>
<CAPTION>
For the Year
Ended For the Period
------------- Ended
1996 1997 November 5, 1998
------ ------ ----------------
<S> <C> <C> <C>
Corporate office costs allocated to the
Company.................................. $3,498 $3,715 $1,866
Cable staff and customer service costs
allocated from RCN Cable................. 3,577 3,489 3,640
Interest expense on affiliate notes....... 13,952 8,447 795
Royalty fees charged by CTE............... 585 465 --
Charges for engineering services.......... 296 -- --
Other affiliate expenses.................. 189 171 157
</TABLE>
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 the Company, such costs will be shared by each company,
on a pro rata basis, based on each company's number of subscribers.
At December 31, 1997 and November 5, 1998, the Company has accounts
receivable from related parties of $166 and $396 respectively, for these
transactions. At December 31, 1997 and November 5, 1998, the Company has
accounts payable to related parties of $1,560 and $343 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.
F-71
<PAGE>
CABLE MICHIGAN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
14. 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.
15. Disclosures about Fair value of Financial Instruments
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments for which it is practicable to estimate
that value:
a. The fair value of the revolving credit agreement is considered to be
equal to carrying value since the debt re-prices at least every six months
and the Company believes that its credit risk has not changed from the time
the floating rate debt was borrowed and therefore, would obtain similar
rates in the current market.
b. The fair value of the cash and temporary cash investments
approximates fair value because of the short maturity of these instruments.
16. 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
1998 Quarter Quarter Quarter Quarter
---- ------- ------- ------- -------
<S> <C> <C> <C> <C>
Revenue................................. $20,734 $22,311 $22,735 $ 8,741
Operating income before depreciation,
amortization, and management fees...... 9,043 10,047 10,185 12,277
Operating income (loss)................. 7,000 (3,324) (674) (7,051)
Net (loss).............................. (1,401) (5,143) (2,375) (1,615)
Net (loss) per average Common Share..... (0.20) (0.75) (0.34) (.23)
<CAPTION>
1997
----
<S> <C> <C> <C> <C>
Revenue................................. $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 $ (.16)
</TABLE>
The fourth quarter information for the quarter ended December 31, 1998
includes the results of operations of the Company for the period from October
1, 1998 through November 5, 1998.
F-72
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Managers
of Avalon Cable of New England LLC
In our opinion, the accompanying balance sheet and the related statements of
operations, partners' equity (deficit) and of cash flows present fairly, in all
material respects, the financial position of Amrac Clear View, a Limited
Partnership, (the "Partnership"), as of May 28, 1998 and the results of its
operations and its cash flows for the period ended May 28, 1998, in conformity
with generally accepted accounting principles. These financial statements are
the responsibility of the Partnership's management; our responsibility is to
express an opinion on these financial statements based on our audit. We
conducted our audit of these statements in accordance with generally accepted
auditing standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audit provides a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Boston, Massachusetts
September 11, 1998
F-73
<PAGE>
AMRAC CLEAR VIEW, A LIMITED PARTNERSHIP
BALANCE SHEET
May 28, 1998
ASSETS
<TABLE>
<S> <C>
Current Assets
Cash and cash equivalents......................................... $ 415,844
Subscribers and other receivables, net of allowance for doubtful
accounts of $16,445.............................................. 45,359
Prepaid expenses and other current assets......................... 129,004
----------
Total current assets............................................ 590,207
Property, plant and equipment, net.................................. 483,134
----------
$1,073,341
==========
</TABLE>
LIABILITIES AND PARTNERS' EQUITY
<TABLE>
<S> <C>
Accounts payable.................................................... $ 57,815
Accrued expenses.................................................... 84,395
----------
Total current liabilities....................................... 142,210
----------
Commitments and contingencies (Note 7)
Partners' equity.................................................... 931,131
----------
$1,073,341
==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-74
<PAGE>
AMRAC CLEAR VIEW, A LIMITED PARTNERSHIP
STATEMENT OF OPERATIONS
For the period from January 1, 1998 through May 28, 1998
<TABLE>
<S> <C>
Revenue:
Basic services...................................................... $651,878
Premium services.................................................... 78,365
Other............................................................... 49,067
--------
779,310
--------
Operating expenses:
Programming......................................................... 193,093
Selling, general and administrative................................. 151,914
Technical and operations............................................ 98,628
Depreciation and amortization....................................... 47,268
Management fees..................................................... 41,674
--------
Income from operations................................................ 246,733
Interest income....................................................... 2,319
Interest (expense).................................................... (1,871)
--------
Net income............................................................ $247,181
========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-75
<PAGE>
AMRAC CLEAR VIEW, A LIMITED PARTNERSHIP
STATEMENT OF CHANGES IN PARTNERS' EQUITY (DEFICIT)
For the period from January 1, 1998 through May 28, 1998
<TABLE>
<CAPTION>
Class A Class B Investor
General Limited Limited Limited
Partner Partner Partner Partners Total
------- ------- ------- -------- --------
<S> <C> <C> <C> <C> <C>
Partners' (deficit) equity at
December 31, 1997................ $(6,756) $(6,756) $(2,703) $700,165 $683,950
Net income........................ 6,180 6,180 2,472 232,349 247,181
------- ------- ------- -------- --------
Partners' equity at May 28, 1998.. $ (576) $ (576) $ (231) $932,514 $931,131
------- ------- ------- -------- --------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-76
<PAGE>
AMRAC CLEAR VIEW, A LIMITED PARTNERSHIP
STATEMENT OF CASH FLOWS
For the period from January 1, 1998 through May 28, 1998
<TABLE>
<S> <C>
Cash flows from operating activities
Net income........................................................ $ 247,181
Adjustments to reconcile net earnings to net cash provided by
operating activities:
Depreciation and amortization................................... 47,268
Changes in operating assets and liabilities:
Decrease in subscribers and other receivables................... 21,038
Increase in prepaid expenses and other current assets........... (52,746)
Increase in accounts payable.................................... 9,866
Increase in accrued expenses.................................... 3,127
---------
Net cash provided by operating activities................... 275,734
---------
Cash flows for investing activities
Capital expenditures.............................................. (61,308)
---------
Cash flows for financing activities
Repayment of long-term debt....................................... (560,500)
---------
Net increase in cash and cash equivalents........................... (346,074)
---------
Cash and cash equivalents, beginning of the period.................. 761,918
---------
Cash and cash equivalents, end of the period........................ $ 415,844
=========
Supplemental disclosures
Cash paid during the period for:
Interest........................................................ $ 6,939
=========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-77
<PAGE>
AMRAC CLEAR VIEW, A LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
1. Organization and Nature of Business
The Partnership is a Massachusetts limited partnership created pursuant to a
Limited Partnership Agreement, dated as of October 1, 1986, as amended (the
"Partnership Agreement"), by and among (1) Amrac Telecommunications as the
general partner (the "General Partner"), (2) Clear View Cablevision, Inc. as
the class A limited partner (the "Class A Limited Partner"), (3) Schuparra
Properties, Inc., as the class B limited partner (the "Class B Limited
Partner"), and (4) those persons admitted to the Partnership from time to time
as investor limited partners (the "Investor Limited Partner").
The Partnership provides cable television service to the towns of Hadley and
Belchertown located in western Massachusetts. At May 28, 1998, the Partnership
provided services to approximately 5,100 customers residing in those towns.
The Partnership's cable television systems offer customer packages of basic
and cable programming services which are offered at a per channel charge or are
packaged together to form a tier of services offered at a discount from the
combined channel rate. The Partnership's cable television systems also provide
premium television services to their customers for an extra monthly charge.
Customers generally pay initial connection charges and fixed monthly fees for
cable programming and premium television services, which constitute the
principal sources of revenue for the Partnership.
On October 7, 1997, the Partnership entered into a definitive agreement with
Avalon Cable of New England LLC ("Avalon New England") whereby Avalon New
England would purchase the assets and operations of the Partnership for
$7,500,000. This transaction was consummated and became effective on May 29,
1998. The assets and liabilities at May 28, 1998, have not been adjusted or
reclassified to reflect this transaction.
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 use
assumptions that affect the reported amounts of assets and liabilities and the
disclosure for contingent assets and liabilities at the date of the financial
statements as well as the reported amounts of revenues and expenses during the
reported period. Actual results may vary from estimates used.
Cash and Cash Equivalents
Cash and cash equivalents include highly liquid investments purchased with
an initial maturity of three months or less.
Revenue Recognition
Revenue is recognized as cable television services are provided.
Concentration of Credit Risk
Financial instruments which potentially expose the Partnership to a
concentration of credit risk include cash, cash equivalents and subscriber and
other receivables. The Partnership does not believe that such deposits are
subject to any unusual credit risk beyond the normal credit risk associated
with operating its business. The Partnership extends credit to customers on an
unsecured basis in the normal course of business. The Partnership maintains
reserves for potential credit losses and such losses, in the aggregate, have
not historically exceeded management's expectations.
F-78
<PAGE>
AMRAC CLEAR VIEW, A LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS--(Continued)
Property and Equipment
Property and equipment is stated at cost. Initial subscriber installation
costs, including material, labor and overhead costs, are capitalized as a
component of cable plant and equipment. Depreciation is computed for financial
statement purposes using the straight-line method based upon the following
lives:
<TABLE>
<S> <C>
Cable plant and equipment................................... 10 years
Office furniture and equipment.............................. 5 to 10 years
Vehicles.................................................... 6 years
</TABLE>
Financial Instruments
The Partnership estimates that the fair value of all financial instruments
at May 28, 1998 does not differ materially from the aggregate carrying values
of its financial instruments recorded in the accompanying balance sheet.
Income Taxes
The Partnership is not subject to federal and state income taxes.
Accordingly, no recognition has been given to income taxes in the accompanying
financial statements of the Partnership since the income or loss of the
Partnership is to be included in the tax returns of the individual partners.
Allocation of Profits and Losses and Distributions of Cash Flow
Partnership profits and losses (other than those arising from capital
transactions, described below) and distributions of cash flow are allocated 94%
to the Investor Limited Partners, 2.5% to the Class A Limited Partner, 1% to
the Class B Limited Partner and 2.5% to the General Partner until Payout (as
defined in the Partnership Agreement) and after Payout, 65% to the Investor
Limited Partners, 15% to the Class A Limited Partner, 5% to the Class B Limited
Partner and 15% to the General Partner.
Partnership profits and capital transactions are allocated first, in
proportion to the partners' respective capital accounts until their respective
account balances are zero and second, in proportion to any distributed cash
proceeds resulting from the capital transaction and third, any remaining
profit, if any, is allocated 65% to the Investor Limited Partners, 15% to the
Class A Limited Partner, 5% to the Class B Limited Partner, and 15% to the
General Partner.
Partnership losses from capital transactions are allocated first, in
proportion to the partners' respective capital accounts until their respective
account balances are zero and, second, any remaining loss, if any, is allocated
65% to the Investor Limited Partners, 15% to the Class A Limited Partner, 5% to
the Class B Limited Partner, and 15% to the General Partner.
New Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 130, "Reporting Comprehensive Income," which establishes standards for
reporting and display of comprehensive income and its components in financial
statements. SFAS No. 130 states that comprehensive income includes reported net
income of a company, adjusted for items that are currently accounted for as
direct entries to equity, such as the net unrealized gain or loss on securities
available for sale. SFAS No. 130 is effective for both interim and annual
periods beginning after December 15, 1997. Management does not anticipate that
adoption of SFAS No. 130 will have a material effect on the financial
statements.
F-79
<PAGE>
AMRAC CLEAR VIEW, A LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS--(Continued)
In June 1997, the FASB issued SFAS No. 131, "Disclosure about Segments of an
Enterprise and Related Information," which establishes standards for reporting
by public companies about operating segments of their business. SFAS No. 131
also establishes standards for related disclosures about products and services,
geographic areas, and major customers. SFAS No. 131 is effective for periods
beginning after December 15, 1997. Management does not anticipate that the
adoption of SFAS No. 131 will have a material effect on the financial
statements.
3. Prepaid Expenses and Other Current Assets
At May 28, 1998, prepaid expenses and other current assets consist of the
following:
<TABLE>
<S> <C>
Deferred transaction costs...................................... $ 91,024
Other........................................................... 37,980
--------
$129,004
========
</TABLE>
Deferred transaction costs consist primarily of attorney fees related to the
sale of assets of the Partnership (Note 1).
4. Property, Plant and Equipment
At May 28, 1998, property, plant and equipment consists of the following:
<TABLE>
<S> <C>
Cable plant and equipment.................................... $ 3,460,234
Office furniture and equipment............................... 52,531
Vehicles..................................................... 32,468
-----------
3,545,233
Accumulated depreciation..................................... (3,062,099)
-----------
$ 483,134
===========
</TABLE>
Depreciation expense was $47,018 for the period from January 1, 1998 through
May 28, 1998.
5. Accrued Expenses
At May 28, 1998, accrued expenses consist of the following:
<TABLE>
<S> <C>
Accrued compensation and benefits................................ $17,004
Accrued programming costs........................................ 24,883
Accrued legal costs.............................................. 25,372
Other............................................................ 17,136
-------
$84,395
=======
</TABLE>
6. Long-Term Debt
The Partnership repaid its term loan, due to a bank, on January 15, 1998.
Interest on the loan was paid monthly and accrued at the bank's prime rate plus
2% (10.5% at December 31, 1997). The loan was collateralized by substantially
all of the assets of the Partnership and a pledge of all partnership interests.
The total principal outstanding at December 31, 1997 was $560,500.
F-80
<PAGE>
AMRAC CLEAR VIEW, A LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS--(Continued)
7. Commitments and Contingencies
The Partnership rents poles from utility companies for use in its
operations. These rentals amounted to approximately $15,918 of rent expense
during the period. While rental agreements are generally short-term, the
Partnership anticipates such rentals will continue in the future. The
Partnership leases office facilities and various items of equipment under
month-to-month operating leases. Rental expense under operating leases amounted
to $8,171 during the period.
The operations of the Partnership are subject to regulation by the Federal
Communications Commission and various franchising authorities.
From time to time the Partnership is also involved with claims that arise in
the normal course of business. In the opinion of management, the ultimate
liability with respect to these claims will not have a material adverse effect
on the operations, cash flows or financial position of the Partnership.
8. Related Party Transactions
The General Partner provides management services to the Partnership for
which it receives a management fee of 5% of revenue. The General Partner also
allocates, in accordance with a management agreement, certain general,
administrative and payroll costs to the Partnership. For the period from
January 1, 1998 through May 28, 1998, management fees totaled $41,674 and
allocated general, administrative and payroll costs totaled $3,625, which are
included in selling general and administrative expenses.
The Partnership believes that these fees and allocations were made on a
reasonable basis. However, the amounts paid are not necessarily indicative of
the level of expenses that might have been incurred had the Partnership
contracted directly with third parties. The Partnership has not attempted to
obtain quotes from third parties to determine what the cost of obtaining such
services from third parties would have been.
F-81
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Partners of
AMRAC CLEAR VIEW, A LIMITED PARTNERSHIP
We have audited the accompanying balance sheets of Amrac Clear View, a
Limited Partnership as of December 31, 1996 and 1997, and the related
statements of net earnings, changes in partners' equity (deficit) and cash
flows for each of the three years in the period ended December 31, 1997. These
financial statements are the responsibility of the Partnership's management.
Our responsibility is to express an opinion on the financial statements based
on our audit.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Amrac Clear View, a Limited
Partnership as of December 31, 1996 and 1997, and the results of its operations
and its cash flows for each of the three years in the period ended December 31,
1997 in conformity with generally accepted accounting principles.
Greenfield, Altman, Brown, Berger & Katz, P.C.
Canton, Massachusetts
February 13, 1998
F-82
<PAGE>
AMRAC CLEAR VIEW, A LIMITED PARTNERSHIP
BALANCE SHEETS
At December 31, 1996 and 1997
<TABLE>
<CAPTION>
ASSETS 1996 1997
------ ---------- ----------
<S> <C> <C>
Current assets:
Cash and cash equivalents............................... $ 475,297 $ 761,918
Subscribers and other receivables, net of allowance for
doubtful accounts of $2,500 in 1996 and $3,000 in 1997. 49,868 66,397
Prepaid expenses:
Legal................................................. -- 53,402
Miscellaneous......................................... 28,016 20,633
---------- ----------
Total current assets................................ 553,181 902,350
---------- ----------
Property and equipment, net of accumulated depreciation
$2,892,444 in 1996 and $3,015,081 in 1997................ 473,438 468,844
---------- ----------
Other assets:
Franchise cost, net of accumulated amortization of
$6,757 in 1996 and $7,417 in 1997...................... 3,133 2,473
Deferred financing costs, net of accumulated
amortization of $60,247 in 1996 and $73,447 in 1997.... 13,200 --
---------- ----------
16,333 2,473
---------- ----------
$1,042,952 $1,373,667
========== ==========
<CAPTION>
LIABILITIES AND PARTNERS' EQUITY
--------------------------------
<S> <C> <C>
Current liabilities:
Current maturities of long-term debt.................... $ 356,500 $ 397,500
Accounts payable--trade................................. 34,592 47,949
Accrued expenses:
Utilities............................................... 59,668 --
Miscellaneous........................................... 50,074 81,268
---------- ----------
Total current liabilities........................... 500,834 526,717
---------- ----------
Long-term debt, net of current maturities................. 488,000 163,000
---------- ----------
Commitments and contingencies (Note 4)
Partners' equity.......................................... 54,118 683,950
---------- ----------
$1,042,952 $1,373,667
========== ==========
</TABLE>
See notes to financial statements
F-83
<PAGE>
AMRAC CLEAR VIEW, A LIMITED PARTNERSHIP
STATEMENTS OF NET EARNINGS
For the years ended December 31, 1995, 1996 and 1997
<TABLE>
<CAPTION>
1995 1996 1997
---------- ---------- ----------
<S> <C> <C> <C>
Revenues.................................... $1,701,322 $1,807,181 $1,902,080
Less cost of service........................ 644,736 656,881 687,433
---------- ---------- ----------
Net revenues................................ 1,056,586 1,150,300 1,214,647
---------- ---------- ----------
Operating expenses excluding management fees
and depreciation and amortization.......... 330,574 388,284 351,031
Management fees............................. 94,317 96,742 101,540
Depreciation and amortization............... 330,913 340,166 136,497
---------- ---------- ----------
755,804 825,192 589,068
---------- ---------- ----------
Earnings from operations.................... 300,782 325,108 625,579
---------- ---------- ----------
Other expenses (income):
Interest income........................... (7,250) (23,996)
Interest expense.......................... 130,255 98,603 70,738
Utility refunds........................... (50,995)
---------- ---------- ----------
130,255 91,353 (4,253)
---------- ---------- ----------
Net earnings................................ $ 170,527 $ 233,755 $ 629,832
========== ========== ==========
</TABLE>
See notes to financial statements
F-84
<PAGE>
AMRAC CLEAR VIEW, A LIMITED PARTNERSHIP
STATEMENT OF CHANGES IN PARTNERS' EQUITY (DEFICIT)
For the years ended December 31, 1995, 1996 and 1997
<TABLE>
<CAPTION>
Class A Class B Investor
General Limited Limited Limited
Partner Partner Partner Partners Total
-------- -------- -------- --------- ---------
<S> <C> <C> <C> <C> <C>
Partners' deficit at
December 31, 1994......... $(31,012) $(31,012) $(12,405) $(211,905) $(286,334)
Net earnings for the year.. 4,263 4,263 1,705 160,296 170,527
Partners' distributions
during the year........... (1,596) (1,596) (638) (60,000) (63,830)
-------- -------- -------- --------- ---------
Partners' deficit at
December 31, 1995......... (28,345) (28,345) (11,338) (111,609) (179,637)
Net earnings for the year.. 5,844 5,844 2,337 219,730 233,755
-------- -------- -------- --------- ---------
Partners' equity (deficit)
at December 31, 1996...... (22,501) (22,501) (9,001) 108,121 54,118
Net earnings for the year.. 15,745 15,745 6,298 592,044 629,832
-------- -------- -------- --------- ---------
Partners' equity (deficit)
at December 31, 1997...... $ (6,756) $ (6,756) $ (2,703) $ 700,165 $ 683,950
======== ======== ======== ========= =========
</TABLE>
See notes to financial statements
F-85
<PAGE>
AMRAC CLEAR VIEW, A LIMITED PARTNERSHIP
STATEMENTS OF CASH FLOWS
For the years ended December 31, 1995, 1996 and 1997
<TABLE>
<CAPTION>
1995 1996 1997
--------- --------- ---------
<S> <C> <C> <C>
Cash flows from operating activities
Net earnings................................ $ 170,527 $ 233,755 $ 629,832
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Depreciation and amortization............. 330,913 340,166 136,497
Changes in assets and liabilities:
(Increase) decrease in:
Subscribers and other receivables....... 4,573 (12,093) (16,529)
Prepaid expenses........................ (3,378) (9,468) (46,019)
Increase (decrease) in accounts payable
and accrued expenses..................... (66,424) 69,262 (15,117)
--------- --------- ---------
Net cash provided by operating
activities........................... 436,211 621,622 688,664
--------- --------- ---------
Cash flows for investing activities
Purchases of equipment...................... (116,794) (74,879) (118,043)
--------- --------- ---------
Cash flows for financing activities
Repayment of long-term debt................. (239,250) (260,750) (284,000)
Distributions to partners................... (63,830)
--------- --------- ---------
Net cash used by financing activities. (303,080) (260,750) (284,000)
--------- --------- ---------
Net increase in cash and cash equivalents..... 16,337 285,993 286,621
Cash and cash equivalents, beginning of year.. 172,967 189,304 475,297
--------- --------- ---------
Cash and cash equivalents, end of year........ $ 189,304 $ 475,297 $ 761,918
========= ========= =========
Supplemental disclosures
Cash paid during the year for:
Interest.................................. $ 133,540 $ 94,038 $ 73,124
========= ========= =========
</TABLE>
See notes to financial statements
F-86
<PAGE>
AMRAC CLEAR VIEW, A LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
For the years ended December 31, 1995, 1996 and 1997
1. Summary of Business Activities and Significant Accounting Policies:
This summary of significant accounting policies of Amrac Clear View, a
Limited Partnership (the "Partnership"), is presented to assist in
understanding the Partnership's financial statements. The financial statements
and notes are representations of the Partnership's management, which is
responsible for their integrity and objectivity. The accounting policies
conform to generally accepted accounting principles and have been consistently
applied in the preparation of the financial statements.
Management uses estimates and assumptions in preparing these financial
statements in accordance with generally accepted accounting principles. Those
estimates and assumptions affect the reported amounts of assets and
liabilities, the disclosure of contingent assets and liabilities, and the
reported revenues and expenses. Actual results could vary from the estimates
that were used.
Operations:
The Partnership provides cable television service to the residents of the
towns of Hadley and Belchertown in western Massachusetts.
Credit concentrations:
The Partnership maintains cash balances at several financial institutions.
Accounts at each institution are insured by the Federal Deposit Insurance
Corporation up to $100,000. At various times during the year the Partnership's
cash balances exceeded the federally insured limits.
Concentration of credit risk with respect to subscriber receivables are
limited due to the large number of subscribers comprising the Partnership's
customer base.
Property and equipment/depreciation:
Property and equipment are carried at cost. Minor additions and renewals are
expensed in the year incurred. Major additions and renewals are capitalized.
Depreciation is computed using the straight-line method over the estimated
useful lives of the respective assets. Total depreciation for the years ended
December 31, 1995, 1996 and 1997 was $321,872, $331,707 and $122,637,
respectively.
Other assets/amortization:
Amortizable assets are recorded at cost. The Partnership amortizes
intangible assets using the straight-line method over the useful lives of the
various items. Total amortization for the years ended December 31, 1995, 1996
and 1997 was $9,041, $8,459 and $13,860, respectively.
Cash equivalents:
For purposes of the statements of cash flows, the Partnership considers all
short-term instruments purchased with a maturity of three months or less to be
cash equivalents. There were no cash equivalents at December 31, 1995 and 1997.
Cash equivalents at December 31, 1996, amounted to $300,000.
Advertising:
The Partnership follows the policy of charging the costs of advertising to
expense as incurred. Advertising expense was $1,681, $1,781 and $2,865 for the
years ended December 31, 1995, 1996 and 1997, respectively.
F-87
<PAGE>
AMRAC CLEAR VIEW, A LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS--(Continued)
Income taxes:
The Partnership does not incur a liability for federal or state income
taxes. The current income or loss of the Partnership is included in the taxable
income of the partners, and therefore, no provision for income taxes is
reflected in the financial statements.
Revenues:
The principal sources of revenues are the monthly charges for basic and
premium cable television services and installation charges in connection
therewith.
Allocation of profits and losses and distributions of cash flow:
Partnership profits and losses, (other than those arising from capital
transactions, described below), and distributions of cash flow are allocated
94% to the Investor Limited Partners, 2.5% to the Class A Limited Partner, 1%
to the Class B Limited Partner and 2.5% to the General Partner until Payout (as
defined in the Partnership Agreement) and after Payout, 65% to the Investor
Limited Partners, 15% to the Class A Limited Partner, 5% to the Class B Limited
Partner and 15% to the General Partner.
Partnership profits from capital transactions are allocated first, in
proportion to the partners' respective capital accounts until their respective
account balances are zero and second, in proportion to any distributed cash
proceeds resulting from the capital transaction and third, any remaining
profit, if any, is allocated 65% to the Investor Limited Partners, 15% to the
Class A Limited Partner, 5% to the Class B Limited Partner, and 15% to the
General Partner.
Partnership losses from capital transactions are allocated first, in
proportion to the partners' respective capital accounts until their respective
account balances are zero and, second, any remaining loss, if any, is allocated
65% to the Investor Limited Partners, 15% to the Class A Limited Partner, 5% to
the Class B Limited Partner, and 15% to the General Partner.
2. Property and Equipment:
Property and equipment consists of the following at December 31:
<TABLE>
<CAPTION>
1996 1997
--------- ---------
<S> <C> <C>
Cable plant and equipment............................. 3,274,684 3,391,750
Office furniture and equipment........................ 63,373 64,350
Vehicles.............................................. 27,825 27,825
--------- ---------
3,365,882 3,483,925
========= =========
</TABLE>
Depreciation is provided over the estimated useful lives of the above items
as follows:
<TABLE>
<S> <C>
Cable plant and equipment..... 10 years
Office furniture and
equipment.................... 5-10 years
Vehicles...................... 6 years
</TABLE>
3. Long-Term Debt:
The Partnership's term loan, due to a bank, is payable in increasing
quarterly installments through June 30, 1999. Interest on the loan is paid
monthly and accrues at the bank's prime rate plus 2% (10.5% at December 31,
1997). The loan is collateralized by substantially all of the assets of the
Partnership and a pledge of all partnership interests. The total principal
outstanding at December 31, 1997 was $560,500.
F-88
<PAGE>
AMRAC CLEAR VIEW, A LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS--(Continued)
Annual maturities are as follows:
<TABLE>
<S> <C>
1998............................. 397,500
1999............................. 163,000
-------
560,500
=======
</TABLE>
The loan agreement contains covenants including, but not limited to,
maintenance of certain debt ratios as well as restrictions on capital
expenditures and investments, additional indebtedness, partner distributions
and payment of management fees. The Partnership was in compliance with all
covenants at December 31, 1996 and 1997. In 1995, the Partnership obtained,
from the bank, unconditional waivers of the following covenant violations: (1)
to make a one-time cash distribution of $63,830, (2) to increase the capital
expenditure limit to $125,000, and (3) to waive certain other debt ratio and
investment restrictions, which were violated during the year.
4. Commitments and Contingencies:
The Partnership rents poles from utility companies in its operations. These
rentals amounted to approximately $31,000, $39,500 and $49,000 for the years
ended December 31, 1995, 1996 and 1997, respectively. While rental agreements
are generally short-term, the Partnership anticipates such rentals will
continue in the future.
The Partnership leases a motor vehicle under an operating lease that expires
in December 1998. The minimum lease cost for 1998 is approximately $6,000.
5. Related-Party Transactions:
The General Partner provides management services to the Partnership for
which it receives a management fee of 5% of revenue. The General Partner also
allocates, in accordance with a management agreement, certain general,
administrative and payroll costs to the Partnership. For the years ended
December 31, 1995, 1996 and 1997, management fees totaled $87,800, $90,242 and
$95,040, respectively and allocated general, administrative and payroll costs
totaled $7,200, $7,450 and $8,700, respectively. During each year the
Partnership also incurred tap audit fees payable to the General Partner
totaling $4,000. At December 31, 1996, the balance due from the General Partner
was $12,263. The balance due to Amrac Telecommunications at December 31, 1997
was $4,795.
6. Subsequent Events:
On October 7, 1997, the Partnership entered into an agreement with another
cable television service provider to sell all of its assets for $7,500,000. The
Partnership received, in escrow, $250,000, which shall be released as
liquidating damages if the closing fails to occur solely as a result of a
breach of the agreement. As of December 31, 1997, the Partnership incurred
$53,402 in legal costs associated with the sale which are included in prepaid
expenses. Subject to certain regulatory approvals, it is anticipated that the
transaction will be consummated in the Spring of 1998.
On January 15, 1998, the Partnership paid, prior to the maturity date, its
outstanding term loan due to a bank as described in Note 3.
F-89
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Managers of
Avalon Cable of New England LLC
In our opinion, the accompanying combined balance sheets and the related
combined statements of operations, changes in stockholder's deficit and cash
flows present fairly, in all material respects, the financial position of the
Combined Operations of Pegasus Cable Television of Connecticut, Inc. and the
Massachusetts Operations of Pegasus Cable Television, Inc. at December 31, 1996
and 1997 and June 30, 1998, and the results of their operations, changes in
stockholder's deficit and their cash flows for each of the three years in the
period ended December 31, 1997 and for the six months ended June 30, 1998, in
conformity with generally accepted accounting principles. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform
the audits to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for the
opinion expressed above.
PricewaterhouseCoopers LLP
Philadelphia, Pennsylvania
March 30, 1999
F-90
<PAGE>
THE COMBINED OPERATIONS OF PEGASUS CABLE TELEVISION OF CONNECTICUT, INC. AND
THE MASSACHUSETTS OPERATIONS OF PEGASUS CABLE TELEVISION, INC.
COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
------------------------ June 30,
ASSETS 1996 1997 1998
------ ----------- ----------- -----------
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents............. $ 389,097 $ 1,092,084 $ 1,708,549
Accounts receivable, less allowance
for doubtful accounts at December 31,
1996 and 1997 and June 30, 1998 of
$11,174, $3,072 and $0, respectively. 140,603 116,112 144,653
Prepaid expenses and other............ 62,556 90,500 92,648
----------- ----------- -----------
Total current assets................ 592,256 1,298,696 1,945,850
Property and equipment, net............. 4,164,545 3,565,597 3,005,045
Intangible assets, net.................. 2,174,084 2,096,773 1,939,904
Accounts receivable, affiliates......... 4,216,682 5,243,384 5,692,013
Deposits and other...................... 436,382 456,135 406,135
----------- ----------- -----------
Total assets........................ $11,583,949 $12,660,585 $12,988,947
=========== =========== ===========
<CAPTION>
LIABILITIES AND STOCKHOLDER'S DEFICIT
-------------------------------------
<S> <C> <C> <C>
Current liabilities:
Current portion of long-term debt..... $ 71,744 $ 34,272 $14,993,581
Accounts payable...................... 786,284 803,573 764,588
Accrued incentive compensation........ 117,692 149,823 220,724
Accrued franchise fees................ 193,369 173,735 86,332
Accrued pole rental................... 83,910 78,345 52,954
Accrued expenses...................... 383,572 203,561 42,038
----------- ----------- -----------
Total current liabilities........... 1,636,571 1,443,309 16,160,217
Long-term debt, net..................... 15,043,763 15,018,099 --
Accrued interest........................ 2,811,297 4,685,494 5,622,593
Other................................... 299,030 299,030 299,030
----------- ----------- -----------
Total liabilities................... 19,790,661 21,445,932 22,081,840
Commitments and contingent liabilities -- -- --
Stockholder's deficit:
Common stock--par value $1 per share;
10,000 shares authorized; 7,673
shares issued and outstanding........ 7,673 7,673 7,673
Accumulated deficit................... (8,214,385) (8,793,020) (9,100,566)
----------- ----------- -----------
Total stockholder's deficit......... (8,206,712) (8,785,347) (9,092,893)
----------- ----------- -----------
Total liabilities and stockholder's
deficit............................ $11,583,949 $12,660,585 $12,988,947
=========== =========== ===========
</TABLE>
See accompanying notes to combined financial statements
F-91
<PAGE>
THE COMBINED OPERATIONS OF PEGASUS CABLE TELEVISION OF CONNECTICUT, INC. AND
THE MASSACHUSETTS OPERATIONS OF PEGASUS CABLE TELEVISION, INC.
COMBINED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Six Months
Years Ended December 31, Ended
------------------------------------- June 30,
1995 1996 1997 1998
----------- ----------- ----------- ----------
<S> <C> <C> <C> <C>
Revenues:
Basic and satellite
service.................. $ 4,371,736 $ 4,965,377 $ 5,353,735 $2,841,711
Premium services.......... 619,035 640,641 686,513 348,628
Other..................... 144,300 169,125 150,714 86,659
----------- ----------- ----------- ----------
Total revenues.......... 5,135,071 5,775,143 6,190,962 3,276,998
Operating expenses:
Programming............... 1,119,540 1,392,247 1,612,458 876,588
General and
administrative........... 701,420 811,795 829,977 391,278
Technical and operations.. 713,239 702,375 633,384 341,249
Marketing and selling..... 20,825 15,345 19,532 12,041
Incentive compensation.... 48,794 101,945 94,600 70,900
Management fees........... 368,085 348,912 242,267 97,714
Depreciation and
amortization............. 1,658,455 1,669,107 1,565,068 834,913
----------- ----------- ----------- ----------
Income from operations.. 504,713 733,417 1,193,676 652,315
Interest expense............ (1,745,635) (1,888,976) (1,884,039) (937,662)
Interest income............. 956 2,067 93,060 29
Other income (expense), net. 794 (2,645) (27,800) (17,228)
----------- ----------- ----------- ----------
Loss before state income
taxes.................... (1,239,172) (1,156,137) (625,103) (302,546)
Provision for state income
taxes...................... 20,000 25,000 16,000 5,000
----------- ----------- ----------- ----------
Net loss................ $(1,259,172) $(1,181,137) $ (641,103) $ (307,546)
=========== =========== =========== ==========
</TABLE>
See accompanying notes to combined financial statements
F-92
<PAGE>
THE COMBINED OPERATIONS OF PEGASUS CABLE TELEVISION OF CONNECTICUT, INC. AND
THE MASSACHUSETTS OPERATIONS OF PEGASUS CABLE TELEVISION, INC.
COMBINED STATEMENTS OF CHANGES IN STOCKHOLDER'S DEFICIT
<TABLE>
<CAPTION>
Common Stock
---------------- Total
Number Par Accumulated Stockholder's
of Shares Value Deficit Deficit
--------- ------ ----------- -------------
<S> <C> <C> <C> <C>
Balances at January 1, 1995......... 7,673 $7,673 $(5,774,076) $(5,766,403)
Net loss............................ (1,259,172) (1,259,172)
----- ------ ----------- -----------
Balances at December 31, 1995....... 7,673 7,673 (7,033,248) (7,025,575)
Net loss............................ (1,181,137) (1,181,137)
----- ------ ----------- -----------
Balances at December 31, 1996....... 7,673 7,673 (8,214,385) (8,206,712)
Net loss............................ (641,103) (641,103)
Stock incentive compensation........ 62,468 62,468
----- ------ ----------- -----------
Balances at December 31, 1997....... 7,673 7,673 (8,793,020) (8,785,347)
Net loss............................ (307,546) (307,546)
----- ------ ----------- -----------
Balances at June 30, 1998........... 7,673 $7,673 $(9,100,566) $(9,092,893)
===== ====== =========== ===========
</TABLE>
See accompanying notes to combined financial statements
F-93
<PAGE>
THE COMBINED OPERATIONS OF PEGASUS CABLE TELEVISION OF CONNECTICUT, INC. AND
THE MASSACHUSETTS OPERATIONS OF PEGASUS CABLE TELEVISION, INC.
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Six Months
Years Ended December 31, Ended
------------------------------------- June 30,
1995 1996 1997 1998
----------- ----------- ----------- ----------
<S> <C> <C> <C> <C>
Cash flows from operating
activities:
Net loss.................. $(1,259,172) $(1,181,137) $ (641,103) $ (307,546)
Adjustments to reconcile
net loss to net cash
provided by operating
activities:
Depreciation and
amortization........... 1,658,455 1,669,107 1,565,068 834,913
Bad debt expense........ 26,558 48,566 45,839 36,074
Change in assets and
liabilities:
Accounts receivable... (75,263) (88,379) (21,348) (64,615)
Prepaid expenses and
other................ (403,212) 75,208 (27,944) (2,148)
Accounts payable and
accrued expenses..... 239,207 981,496 (93,322) 221,219
Accrued interest...... 902,006 1,874,198 1,874,197 937,099
Deposits and other.... 83,431 -- (19,753) 50,000
----------- ----------- ----------- ----------
Net cash provided by
operating
activities......... 1,172,010 3,379,059 2,681,634 1,704,996
----------- ----------- ----------- ----------
Cash flows from investing
activities:
Capital expenditures...... (163,588) (1,174,562) (691,269) (114,221)
Purchase of intangible
assets................... (127,340) (72,753) (197,540) (3,271)
----------- ----------- ----------- ----------
Net cash used for
investing
activities......... (290,928) (1,247,315) (888,809) (117,492)
----------- ----------- ----------- ----------
Cash flows from financing
activities:
Proceeds from long-term
debt..................... 37,331 -- -- --
Repayments of long-term
debt..................... (13,764) -- -- (10,837)
Capital lease repayments.. (19,764) (52,721) (63,136) (47,952)
Advances to affiliates,
net...................... (404,576) (2,562,295) (1,026,702) (912,250)
----------- ----------- ----------- ----------
Net cash used by
financing
activities......... (400,773) (2,615,016) (1,089,838) (971,039)
----------- ----------- ----------- ----------
Net increase in cash and
cash equivalents........... 480,309 (483,272) 702,987 616,465
Cash and cash equivalents,
beginning of year.......... 392,060 872,369 389,097 1,092,084
----------- ----------- ----------- ----------
Cash and cash equivalents,
end of year................ $ 872,369 $ 389,097 $ 1,092,084 $1,708,549
=========== =========== =========== ==========
Supplemental Cash Flow
Information:
Cash paid during the year
for interest............. $ 843,629 $ 14,778 $ 9,842 $ 563
Cash paid during the year
for income taxes......... -- -- $ 9,796 $ 25,600
Supplemental Non-Cash
Investing and Financing
Activities:
Capital contribution and
related accrued incentive
compensation............. -- -- $ 62,468 --
Acquisition of plant under
capital leases........... $ 298,250 $ 48,438 -- --
</TABLE>
See accompanying notes to combined financial statements
F-94
<PAGE>
THE COMBINED OPERATIONS OF PEGASUS CABLE TELEVISION OF CONNECTICUT, INC. AND
THE MASSACHUSETTS OPERATIONS OF PEGASUS CABLE TELEVISION, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
1. Basis of Presentation:
These financial statements reflect the results of operations and financial
position of Pegasus Cable Television of Connecticut, Inc. ("PCT-CT"), a wholly
owned subsidiary of Pegasus Cable Television, Inc. ("PCT"), and the
Massachusetts Operations of Pegasus Cable Television, Inc. ("PCT-MA" or the
"Massachusetts Operations") (referred herein as the "Combined Operations"). PCT
is a wholly owned subsidiary of Pegasus Media & Communications, Inc. ("PM&C").
PM&C is a wholly owned subsidiary of Pegasus Communications Corporation
("PCC").
On July 21, 1998, PCT sold the assets of its Combined Operations to Avalon
Cable of New England, LLC. for $30.1 million. In January 1997, PCT sold the
assets of its only other operating division, a cable television system that
provided service to individual and commercial subscribers in New Hampshire (the
"New Hampshire Operations") for $7.1 million.
In presenting the historical financial position, results of operations and
cash flows of the Combined Operations, it has been necessary to eliminate the
results and financial position of the New Hampshire Operations. Many items are
identifiable as relating to the New Hampshire or Massachusetts divisions as PCT
has historically separated results of operations as well as billing and
collection activity. However, in certain areas, assumptions and estimates have
been required in order to eliminate the New Hampshire Operations for periods
prior to its sale. For purposes of eliminating the following balances: Prepaid
expenses and other; Deposits and other; Accounts payable; and Accrued expenses,
balances have been apportioned between the New Hampshire Operations and the
Massachusetts Operations on the basis of subscriber counts. Amounts due to and
due from affiliates have been allocated to PCT-MA and are included in these
financial statements.
Prior to October 1996, BDI Associates, L.P. provided substantial support
services such as finance, accounting and human resources to PCT. Since October
1996, these services have been provided by PCC. All non-accounting costs of PCC
are allocated on the basis of average time spent servicing the divisions, while
the costs of the accounting function are allocated on the basis of revenue. In
the opinion of management, the methods used in allocating costs from PCC are
reasonable; however, the costs of these services as allocated are not
necessarily indicative of the costs that would have been incurred by the
Combined Operations on a stand-alone basis.
The financial information included herein may not necessarily reflect the
results of operations, financial position and cash flows of the Combined
Operations in the future or what they would have been had it been a separate,
stand-alone entity during the periods presented.
2. Summary of Significant Accounting Policies:
Use of Estimates in the Preparation of Financial Statements:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of revenues, expenses, assets and
liabilities and disclosure of contingencies. Actual results could differ from
those estimates.
Property and Equipment:
Property and equipment are stated at cost. The cost and related accumulated
depreciation of assets sold, retired, or otherwise disposed of are removed from
the respective accounts, and any resulting gains or losses are included in the
statement of operations. Initial subscriber installation costs, including
material, labor and overhead costs of the hookup, are capitalized as part of
the distribution facilities. The costs of disconnection and reconnection are
charged to expense.
F-95
<PAGE>
THE COMBINED OPERATIONS OF PEGASUS CABLE TELEVISION OF CONNECTICUT, INC. AND
THE MASSACHUSETTS OPERATIONS OF PEGASUS CABLE TELEVISION, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
2. Summary of Significant Accounting Policies--(continued):
Depreciation is computed for financial reporting purposes using the
straight-line method based upon the following lives:
<TABLE>
<S> <C>
Reception and distribution facilities...................... 7 to 11 years
Building and improvements.................................. 12 to 39 years
Equipment, furniture and fixtures.......................... 5 to 10 years
Vehicles................................................... 3 to 5 years
</TABLE>
Intangible Assets:
Intangible assets are stated at cost and amortized by the straight-line
method. Costs of successful franchise applications are capitalized and
amortized over the lives of the related franchise agreements, while
unsuccessful franchise applications and abandoned franchises are charged to
expense. Financing costs incurred in obtaining long-term financing are
amortized over the term of the applicable loan. Intangible assets are reviewed
periodically for impairment or whenever events or circumstances provide
evidence that suggest that the carrying amounts may not be recoverable. The
Company assesses the recoverability of its intangible assets by determining
whether the amortization of the respective intangible asset balance can be
recovered through projected undiscounted future cash flows.
Amortization of intangible assets is computed for financial reporting
purposes using the straight-line method based upon the following lives:
<TABLE>
<S> <C>
Organization costs............................................... 5 years
Other intangibles................................................ 5 years
Deferred franchise costs......................................... 15 years
</TABLE>
Revenue:
The Combined Operations recognize revenue when video and audio services are
provided.
Advertising Costs:
Advertising costs are charged to operations as incurred and totaled $20,998,
$12,768, $14,706 and $8,460 for the years ended December 31, 1995, 1996 and
1997 and for the six months ended June 30, 1998, respectively.
Cash and Cash Equivalents:
Cash and cash equivalents include highly liquid investments purchased with
an initial maturity of three months or less. The Combined Operations have cash
balances in excess of the federally insured limits at various banks.
Income Taxes:
The Combined Operations is not a separate tax paying entity. Accordingly,
its results of operations have been included in the tax returns filed by PCC.
The accompanying financial statements include tax computations assuming the
Combined Operations filed separate returns and reflect the application of
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes" ("SFAS 109").
Concentration of Credit Risk:
Financial instruments which potentially subject the Combined Operations to
concentrations of credit risk consist principally of trade receivables.
Concentrations of credit risk with respect to trade receivables are limited due
to the large number of customers comprising the Combined Operation's customer
base.
F-96
<PAGE>
THE COMBINED OPERATIONS OF PEGASUS CABLE TELEVISION OF CONNECTICUT, INC. AND
THE MASSACHUSETTS OPERATIONS OF PEGASUS CABLE TELEVISION, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
3. Property and Equipment:
Property and equipment consist of the following:
<TABLE>
<CAPTION>
December 31, December 31, June 30,
1996 1997 1998
------------ ------------ -----------
<S> <C> <C> <C>
Land.............................. $ 8,000 $ 8,000 $ 8,000
Reception and distribution
facilities....................... 8,233,341 9,009,179 9,123,402
Building and improvements......... 242,369 250,891 250,891
Equipment, furniture and fixtures. 307,844 312,143 312,143
Vehicles.......................... 259,503 287,504 287,504
Other equipment................... 139,408 79,004 79,004
----------- ----------- -----------
9,190,465 9,946,721 10,060,944
Accumulated depreciation.......... (5,025,920) (6,381,124) (7,055,899)
----------- ----------- -----------
Net property and equipment........ $ 4,164,545 $ 3,565,597 $ 3,005,045
=========== =========== ===========
</TABLE>
Depreciation expense amounted to $1,059,260, $1,267,831, $1,290,217 and
$674,775 for the years ended December 31, 1995, 1996 and 1997 and for the six
months ended June 30, 1998, respectively.
4. Intangibles:
Intangible assets consist of the following:
<TABLE>
<CAPTION>
December 31, December 31, June 30,
1996 1997 1998
------------ ------------ -----------
<S> <C> <C> <C>
Deferred franchise costs........... $ 4,367,594 $ 4,486,016 $ 4,486,333
Deferred financing costs........... 1,042,079 1,156,075 1,159,027
Organization and other costs....... 439,188 389,187 389,187
----------- ----------- -----------
5,848,861 6,031,278 6,034,547
----------- ----------- -----------
Accumulated amortization........... (3,674,777) (3,934,505) (4,094,643)
----------- ----------- -----------
Net intangible assets.......... $ 2,174,084 $ 2,096,773 $ 1,939,904
=========== =========== ===========
</TABLE>
Amortization expense amounted to $599,195, $401,276, $274,851 and $160,138
for the years ended December 31, 1995, 1996 and 1997 and for the six months
ended June 30, 1998, respectively.
5. Long-Term Debt:
Long-term debt consists of the following at:
<TABLE>
<CAPTION>
December December 31, June 30,
31, 1996 1997 1998
----------- ------------ -----------
<S> <C> <C> <C>
Note payable to PM&C, payable by PCT,
interest is payable quarterly at an
annual rate of 12.5%. Principal is due on
July 1, 2005. The note is collateralized
by substantially all of the assets of the
Combined Operations and imposes certain
restrictive covenants.................... $14,993,581 $14,993,581 $14,993,581
Capital lease obligations................. 121,926 58,790 --
----------- ----------- -----------
15,115,507 15,052,371 14,993,581
Less current maturities................... 71,744 34,272 14,993,581
----------- ----------- -----------
Long-term debt............................ $15,043,763 $15,018,099 $ --
=========== =========== ===========
</TABLE>
F-97
<PAGE>
THE COMBINED OPERATIONS OF PEGASUS CABLE TELEVISION OF CONNECTICUT, INC. AND
THE MASSACHUSETTS OPERATIONS OF PEGASUS CABLE TELEVISION, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
6. Leases:
The Combined Operations lease utility pole attachments and occupancy of
underground conduits. Rent expense for the years ended December 31, 1995, 1996
and 1997 and for the six months ended June 30, 1998 was $184,386, $185,638,
$173,930 and $90,471, respectively. The Combined Operations lease equipment
under long-term leases and have the option to purchase the equipment for a
nominal cost at the termination of the leases. The related obligations are
included in long-term debt. There are no future minimum lease payments on
capital leases at June 30, 1998. Property and equipment that was leased include
the following amounts that have been capitalized:
<TABLE>
<CAPTION>
December 31, December 31,
1996 1997
------------ ------------
<S> <C> <C>
Billing and phone systems....................... $ 56,675 $ 56,675
Vehicles........................................ 166,801 129,227
-------- ---------
223,476 185,902
Accumulated depreciation........................ (69,638) (101,397)
-------- ---------
Total....................................... $153,838 $ 84,505
======== =========
</TABLE>
7. Related Party Transactions:
The Combined Operations pay management fees to various related parties. The
management fees are for certain administrative and accounting services, billing
and programming services, and the reimbursement of expenses incurred therewith.
For the years ended December 31, 1995, 1996 and 1997 and for the six months
ended June 30, 1998, the fees and expenses were $368,085, $348,912, $242,267
and $97,714, respectively.
As described in Note 5, PCT has an outstanding loan from its parent company.
This loan has been allocated to PCT-MA and is included in these financial
statements. Interest expense on that loan was $916,274, $1,874,198, $1,874,195
and $937,098 for the years ended December 31, 1995, 1996 and 1997 and for the
six months ended June 30, 1998 respectively. Other related party transaction
balances at December 31, 1996 and 1997 and June 30, 1998 included $4,216,682,
$5,243,384 and $5,692,013 in accounts receivable, affiliates; $581,632, $6,433
and $331,374 in accounts payable; and $299,030, $299,030 and $299,030 in other
liabilities, respectively. These related party balances arose primarily as a
result of financing capital expenditures, interest payments, programming and
other operating expenses.
F-98
<PAGE>
THE COMBINED OPERATIONS OF PEGASUS CABLE TELEVISION OF CONNECTICUT, INC. AND
THE MASSACHUSETTS OPERATIONS OF PEGASUS CABLE TELEVISION, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
8. Income Taxes:
The deferred income tax assets and liabilities recorded in the balance sheet
are as follows:
<TABLE>
<CAPTION>
December December
31, 31, June 30,
1996 1997 1998
----------- ----------- -----------
<S> <C> <C> <C>
Assets:
Excess of tax basis over book basis
from tax gain recognized upon
incorporation of PCT And PCT-CT...... $ 707,546 $ 707,546 $ 707,546
Loss carryforwards.................... 1,324,236 1,039,849 957,318
Other................................. 6,997 11,856 11,856
----------- ----------- -----------
Total deferred tax assets........... 2,038,779 1,759,251 1,676,720
----------- ----------- -----------
Liabilities:
Excess of book basis over tax basis of
property, plant and equipment and
intangible asset..................... (258,311) (294,934) (335,014)
Other................................. (118,086) (134,859) (135,267)
----------- ----------- -----------
Total deferred tax liabilities........ (376,397) (429,793) (470,281)
----------- ----------- -----------
Net deferred tax assets............... 1,662,382 1,329,458 1,206,439
Valuation allowance................. (1,662,382) (1,329,458) (1,206,439)
----------- ----------- -----------
Net deferred tax liabilities.......... $ -- $ -- $ --
=========== =========== ===========
</TABLE>
The Combined Operations have recorded a valuation allowance to reflect the
estimated amount of deferred tax assets which may not be realized due to the
expiration of deferred tax assets related to the incorporation of PCT and PCT-
CT and the expiration of net operating loss carryforwards.
9. Employee Benefit Plans:
The Company employees participate in PCC's stock option plan that awards
restricted stock (the "Restricted Stock Plan") to eligible employees of the
Company.
Restricted Stock Plan
The Restricted Stock Plan provides for the granting of restricted stock
awards representing a maximum of 270,000 shares (subject to adjustment to
reflect stock dividends, stock splits, recapitalizations and similar changes in
the capitalization of PCC) of Class A Common Stock of the Company to eligible
employees who have completed at least one year of service. Restricted stock
received under the Restricted Stock Plan vests over four years. The Plan
terminates in September 2006. The expense for this plan amounted to $82,425,
$80,154 and $63,533 in 1996 and 1997 and for the six months ended June 30,
1998, respectively.
401(k) Plans
Effective January 1, 1996, PM&C adopted the Pegasus Communications Savings
Plan (the "US 401(k) Plan") for eligible employees of PM&C and its domestic
subsidiaries. Substantially all Company employees who, as of the enrollment
date under the 401(k) Plans, have completed at least one year of service with
the Company are eligible to participate in one of the 401(k) Plans.
Participants may make salary deferral contributions of 2% to 6% of their salary
to the 401(k) Plans. The expense for this plan amounted to $19,520, $14,446 and
$7,367 in 1996 and 1997 and for the six months ended June 30, 1998,
respectively.
F-99
<PAGE>
THE COMBINED OPERATIONS OF PEGASUS CABLE TELEVISION OF CONNECTICUT, INC. AND
THE MASSACHUSETTS OPERATIONS OF PEGASUS CABLE TELEVISION, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
9. Employee Benefit Plans (continued):
All employee contributions to the 401(k) Plans are fully vested at all times
and all Company contributions, if any, vest 34% after two years of service with
the Company (including years before the 401(k) Plans were established), 67%
after three years of service and 100% after four years of service. A
participant also becomes fully vested in Company contributions to the 401(k)
Plans upon attaining age 65 or upon his or her death or disability.
10. Commitments and Contingent Liabilities:
Legal Matters:
The operations of PCT-CT and PCT-MA are subject to regulation by the Federal
Communications Commission ("FCC") and other franchising authorities.
From time to time the Combined Operations are also involved with claims that
arise in the normal course of business. In the opinion of management, the
ultimate liability with respect to these claims will not have a material
adverse effect on the operations, cash flows or financial position of the
Combined Operations.
F-100
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors
Taconic Technology Corp.
We have audited the balance sheets of Taconic CATV (a component of Taconic
Technology Corp. as described in note 1) as of December 31, 1997 and 1998, and
the related statements of operations and component equity, and cash flows for
the years then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Taconic CATV (a component
of Taconic Technology Corp.) at December 31, 1997 and 1998, and the results of
its operations and its cash flows for the years then ended in conformity with
generally accepted accounting principles.
KPMG LLP
Albany, New York
March 23, 1999
F-101
<PAGE>
TACONIC CATV
(a component of Taconic Technology Corp.)
BALANCE SHEETS
December 31, 1997 and 1998 and March 31, 1999 (unaudited)
<TABLE>
<CAPTION>
December 31,
--------------------- March 31,
1997 1998 1999
---------- ---------- -----------
(unaudited)
ASSETS
------
<S> <C> <C> <C>
Cash......................................... $ -- $ -- $ --
Accounts receivable, net of allowance of
$23,177 in 1997 and $16,968 in 1998......... 109,834 55,435 31,453
Receivable from related entities............. -- 457,987 590,897
Inventories.................................. 135,192 116,627 106,377
Prepaid expenses............................. 28,230 21,252 34,597
Property and equipment, net.................. 2,030,428 1,692,175 1,606,968
Other assets, net............................ 33,441 28,607 28,412
---------- ---------- ----------
$2,337,125 $2,372,083 $2.398,704
========== ========== ==========
<CAPTION>
LIABILITIES AND EQUITY
----------------------
<S> <C> <C> <C>
Accounts payable and accrued expenses........ $ 338,324 $ 294,073 $ 288,787
Payable to related entities.................. 27,917 -- --
Deferred income taxes........................ 386,879 370,663 359,139
Bank debt.................................... 792,501 -- --
---------- ---------- ----------
1,545,621 664,736 647,926
Component equity............................. 791,504 1,707,347 1,750,778
---------- ---------- ----------
$2,337,125 $2,372,083 $2,398,704
========== ========== ==========
</TABLE>
See accompanying notes to financial statements.
F-102
<PAGE>
TACONIC CATV
(a component of Taconic Technology Corp.)
STATEMENTS OF OPERATIONS AND COMPONENT EQUITY
Years ended December 31, 1997 and 1998 and
Three months ended March 31, 1998 and 1999 (unaudited)
<TABLE>
<CAPTION>
December 31, March 31,
--------------------- --------------------
1997 1998 1998 1999
---------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenues........................... $2,004,672 2,085,964 489,036 522,950
Operating expenses:
Technical and operating.......... 841,528 948,484 223,256 239,789
Salaries, general and
administrative.................. 470,830 451,413 128,222 106,309
Depreciation and amortization.... 425,569 425,556 107,173 105,133
---------- --------- --------- ---------
1,737,927 1,825,453 458,651 451,231
---------- --------- --------- ---------
Operating income................... 266,745 260,511 30,385 71,719
Other income (expense):
Interest income.................. 1,019 -- -- --
Interest expense................. (79,322) (17,192) (17,192) --
---------- --------- --------- ---------
Income before income taxes......... 188,442 243,319 13,193 71,719
Income taxes....................... 75,377 97,328 5,277 28,288
---------- --------- --------- ---------
Net income......................... 113,065 145,991 7,916 43,431
Component equity at beginning of
year.............................. 678,439 791,504 791,504 1,707,347
Repayment of debt by ultimate
parent company (note 4)........... -- 769,852 769,852 --
---------- --------- --------- ---------
Component equity at end of year.... $ 791,504 1,707,347 1,569,272 1,750,778
========== ========= ========= =========
</TABLE>
See accompanying notes to financial statements.
F-103
<PAGE>
TACONIC CATV
(a component of Taconic Technology Corp.)
STATEMENT OF CASH FLOWS
Years ended December 31, 1997 and 1998
Three months ended March 31, 1998 and 1999 (unaudited)
<TABLE>
<CAPTION>
December 31, March 31,
------------------- -----------------
1997 1998 1998 1999
--------- -------- ------- --------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income........................... $ 113,065 145,991 7,916 43,431
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation and amortization...... 425,569 425,556 107,173 105,133
Provision for deferred taxes....... 58,199 (17,542) (3,591) (12,722)
(Increase) decrease in accounts
receivable........................ (6,590) 54,399 28,918 23,982
Increase in receivable from related
entities.......................... -- (457,987) -- (132,910)
Decrease in inventories............ 87,681 18,565 33 10,250
(Increase) decrease in prepaid
expenses.......................... 6,964 6,978 (23,107) (13,345)
Increase (decrease) in accounts
payable and accrued expenses...... 111,531 (44,251) (27,275) (5,286)
Decrease in payable to related
entities.......................... (429,460) (27,917) (52,926) --
--------- -------- ------- --------
Net cash provided by operating
activities...................... 366,959 103,792 37,141 18,533
Cash flows from investing activities:
Capital expenditures................. (213,626) (81,143) (14,492) (18,533)
--------- -------- ------- --------
Net cash used by investing
activities...................... (213,626) (81,143) (14,492) (18,533)
Cash flows from financing activities:
Principal payment on bank debt....... (153,333) (22,649) (22,649) --
--------- -------- ------- --------
Net cash used by financing
activities...................... (153,333) (22,649) (22,649) --
--------- -------- ------- --------
Net increase in cash................... -- -- -- --
Cash at:
Beginning of year.................... -- -- -- --
--------- -------- ------- --------
End of year.......................... $ -- -- -- --
========= ======== ======= ========
Supplemental schedule of non-cash
financing activities:
Decrease in bank debt resulting from
repayment by ultimate parent company
and contribution to capital........... $ -- 769,852 769,852 --
========= ======== ======= ========
</TABLE>
See accompanying notes to financial statements.
F-104
<PAGE>
TACONIC CATV
(a component of Taconic Technology Corp.)
NOTES TO FINANCIAL STATEMENTS
December 31, 1997 and 1998
(Information with respect to the three months ended March 31, 1998 and 1999 is
unaudited)
(1) Basis of Presentation
The accompanying financial statements present the assets and liabilities,
operating results and cash flows of the cable television component of Taconic
Technology Corp. On July 10, 1998 the ultimate parent company of Taconic
Technology Corp. signed a letter of intent with Avalon Cable of New England,
LLC for the purchase of the assets of the cable component of Taconic Technology
Corp. ("Taconic CATV"). The asset purchase agreement, requires that separate
financial statements be presented for Taconic CATV without giving effect to
purchase accounting adjustments. The accompanying financial statements of
Taconic CATV have been prepared on a going concern basis and reflect all
activity as if Taconic CATV were a separate operating unit. The accompanying
balance sheets have been prepared assuming that all available cash has been
used to reduce the payable to related entities or transferred to related
entities. The accompanying statements of operations include an allocation of
general administrative costs incurred by the parent of Taconic Technology Corp.
This allocation is based upon cost studies.
Taconic CATV operates a cable television service and derives substantially
all of its revenue from providing cable services to residential subscribers.
(2) Summary of Significant Accounting Policies
(a) Revenue Recognition
Taconic CATV recognizes cable television revenue as services are provided to
subscribers. Revenue derived from other sources are recognized when services
are provided or events occur.
(b) Inventories
Inventories are stated at the lower of average cost or market and consist
primarily of materials and supplies.
(c)Property and Equipment
Property and equipment are stated at cost. Major expenditures for property
and those substantially increasing the useful lives of assets are capitalized.
Maintenance and repairs are expensed as incurred.
For book purposes, depreciation is provided on a straight line basis over
the estimated useful lives which range from five to twenty years.
(d) Income Taxes
For the accompanying financial statements, income tax expense have been
calculated as if Taconic CATV were a separate tax paying entity. Income taxes
are provided based upon the provisions of Statement of Financial Accounting
Standards ("SFAS") No. 109, "Accounting for Income Taxes," which requires the
liability method of accounting for deferred income taxes and permits the
recognition of deferred tax assets, subject to an ongoing assessment of
realizability.
F-105
<PAGE>
TACONIC CATV
(A Component OF Taconic Technology Corp.)
NOTES TO FINANCIAL STATEMENTS--(Continued)
(e) Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amount 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.
(f) Other Assets
Other assets primarily consist of fees paid to acquire franchises and are
being amortized over the life of the franchise or extensions (up to 15 years).
(g) Recent Accounting Pronouncements
In March 1998, the Accounting Standards Executive Committee (AcSEC) of the
AICPA issued Statement of Position 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use" (SOP 98-1). SOP 98-1 provides
guidance on accounting for the costs of computer software developed or obtained
for internal use. SOP 98-1 is effective for financial statements for fiscal
years beginning after December 15, 1998. Management does not anticipate that
the adoption of this statement will have a material effect on the financial
statements.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which establishes accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts, and for hedging activities. This Statement is
effective for all fiscal quarters of fiscal years beginning after June 15,
1999. Management does not anticipate that the adoption of this Statement will
have a material effect on the financial statements.
In June 1998, the Accounting Standards Executive Committee (AcSEC) of the
AICPA issued Statement of Position 98-5, "Reporting on the Costs of Start-up
Activities" (SOP 98-5). SOP 98-5 requires that the costs of start-up activities
including organizational costs, be expensed as incurred. SOP 98-5 is effective
for financial statements for fiscal years beginning after December 15, 1998.
Management does not anticipate that the adoption of this Statement will have a
material effect on the financial statements.
(3) Property and Equipment
Property and equipment is summarized as follows:
<TABLE>
<CAPTION>
December 31, March 31,
----------------------- ----------
1997 1998 1999
----------- ---------- ----------
<S> <C> <C> <C>
Trunk and distribution system.............. $ 3,360,169 3,358,529 3,369,221
Central equipment.......................... 484,217 511,104 512,211
Subscriber devices......................... 590,576 636,550 643,396
Converters................................. 448,181 443,781 443,361
Miscellaneous.............................. 34,263 34,263 34,263
----------- ---------- ----------
4,917,406 4,984,227 5,002,452
Less accumulated depreciation.............. (2,886,978) (3,292,052) (3,395,484)
----------- ---------- ----------
Property and equipment, net.............. $ 2,030,428 1,692,175 1,606,968
=========== ========== ==========
</TABLE>
F-106
<PAGE>
TACONIC CATV
(A Component OF Taconic Technology Corp.)
NOTES TO FINANCIAL STATEMENTS--(Continued)
(4) Bank Debt
Bank debt consists of the following:
<TABLE>
<CAPTION>
December 31,
----------------- March
1997 1998 31, 1999
-------- -------- --------
<S> <C> <C> <C>
Bank note payable at prime plus 1/2% (9.00% at
December 31, 1997), due in monthly installments of
$1,944 plus interest, through March 1, 2002,
secured by property and equipment................. $ 99,167 -- --
Bank note payable at prime plus 1/2% (9.00% and
8.75% at December 31, 1997 and 1996,
respectively), due in monthly installments of
$10,833 plus interest, through February 1, 1999,
at which time remaining principal of $563,334 is
due in full, secured by accounts receivable,
inventories and a second lien on property and
equipment......................................... 693,334 -- --
-------- -------- --------
Total bank debt................................ $792,501 -- --
======== ======== ========
</TABLE>
During 1998, the ultimate parent company of Taconic Technology Corporation
paid outstanding bank debt of $769,852 and contributed the amount to capital.
Such payment has been reflected as addition to component equity in the 1998
financial statements.
Cash paid for interest on bank debt was $104,521 and $17,192 for the years
ended December 31, 1997 and 1998, respectively, and $17,192 and $0 for the
three months ended March 31, 1998 and 1999, respectively.
(5) Income Taxes
The components of the provision for income tax expense (benefit) are as
follows:
<TABLE>
<CAPTION>
Thre months
Year ended ended
December 31, March 31,
--------------- ---------------
1997 1998 1998 1999
------- ------- ------ -------
<S> <C> <C> <C> <C>
Current....................................... $17,178 114,870 8,868 41,010
Deferred (benefit)............................ 58,199 (17,542) (3,591) (12,722)
------- ------- ------ -------
$75,377 97,328 5,277 28,288
======= ======= ====== =======
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities are as
follows:
<TABLE>
<CAPTION>
March
December 31, 31,
------------------- --------
1997 1998 1999
--------- -------- --------
<S> <C> <C> <C>
Deferred tax assets:
Accounts receivable due to allowance for
doubtful accounts............................ $ 8,756 10,082 11,280
Less valuation allowance...................... -- -- --
--------- -------- --------
Net deferred tax assets..................... 8,756 10,082 11,280
--------- -------- --------
Deferred tax liabilities:
Plant and equipment, due to differences in
depreciation................................. (386,879) (370,663) (359,139)
--------- -------- --------
Net deferred tax liability.................. $(378,123) (360,581) (347,859)
========= ======== ========
</TABLE>
F-107
<PAGE>
TACONIC CATV
(A Component OF Taconic Technology Corp.)
NOTES TO FINANCIAL STATEMENTS--(Continued)
In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred tax
assets will not be realized. The ultimate realization of deferred tax assets is
dependent upon the generation of future taxable income during the periods in
which those temporary differences become deductible. Management considers the
scheduled reversal of deferred tax liabilities, projected future taxable
income, and tax planning strategies in making this assessment. Based upon the
level of historical taxable income and projections for future taxable income
over the periods which the deferred tax assets are deductible, management
believes it is more likely than not the benefits of these deductible
differences will be realized.
(6) Retirement Plans
Prior to 1996, all employees of Taconic Technology Corp. were included in
Taconic Telephone Corp.'s defined benefit and defined contribution retirement
plans. Effective January 1, 1996, the defined benefit plan was frozen and
during 1997 was amended to cease benefit accruals for all participants. The
amendment increased benefits to the level of fair value of plan assets at
December 31, 1997, $5,452,047.
Effective January 1, 1996, all full time employees of Taconic Technology
Corp. with at least one year of service became eligible to receive an employer
contribution of 5% of gross wages under Taconic Telephone Corp.'s defined
contribution plan. In addition, the plan calls for an employer match of
employee contributions not to exceed 3% of gross wages. Taconic CATV's expense
relative to this plan for the years ended December 31, 1997 and 1998 was $5,686
and $5,227, respectively, and $1,307 and $2,519 for the three months ended
March 31, 1998 and 1999, respectively.
(7) Receivable From/Payable to Related Entities
Receivable from/payable to related entities represents amounts due from/to
other components of Taconic Technology Corp. and amounts due from/to Taconic
Telephone Corp. (parent of Taconic Technology Corp.) for working capital funds
and services provided.
(8) Disclosure About the Fair Value of Financial Instruments
Cash, Accounts Receivable, Accounts Payable and Accrued Expenses--the
carrying amount approximates fair value.
Bank Debt--the carrying value of the bank debt approximates fair value.
F-108
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Managers of
Avalon Cable of Michigan, Inc. and Subsidiaries
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statement of operations, shareholders' equity and cash flows
present fairly, in all material respects, the financial position of Avalon
Cable of Michigan, Inc. and subsidiaries (collectively, the "Company") at
December 31, 1998, and the results of their operations, changes in
shareholders' equity and their cash flows for the period from June 2, 1998
(inception) to December 31, 1998, in conformity with generally accepted
accounting principles. The financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audit. We conducted our audit of these
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
New York, New York
March 30, 1999
F-109
<PAGE>
AVALON CABLE OF MICHIGAN, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
December 31, 1998
(in thousands)
<TABLE>
<S> <C>
ASSETS
------
Cash.................................................................. $ 9,071
Accounts receivable, net of allowance for doubtful accounts of $873... 5,015
Prepayments and other current assets.................................. 1,267
Accounts receivable from related parties.............................. 371
Deferred income taxes................................................. 377
--------
Current assets.................................................... 16,101
Property, plant and equipment, net.................................... 104,965
Intangible assets, net................................................ 427,125
Deferred charges and other assets..................................... 1,270
--------
Total assets...................................................... $549,461
========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Accounts payable and accrued expenses................................. $ 10,194
Advance billings and customer deposits................................ 2,454
Accounts payable--affiliate........................................... 2,023
--------
Current liabilities............................................... 14,671
Long-term debt........................................................ 290,875
Notes payable--affiliate.............................................. 15,171
Deferred income taxes................................................. 82,635
--------
Total liabilities................................................. 403,352
--------
Commitments and contingencies (Note 10)............................... --
Minority interest..................................................... 13,855
--------
Stockholders equity:
Common stock.......................................................... --
Additional paid-in capital............................................ 137,375
Accumulated deficit................................................... (5,121)
--------
Total shareholders' equity........................................ 132,254
--------
Total liabilities and shareholders' equity........................ $549,461
========
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
F-110
<PAGE>
AVALON CABLE OF MICHIGAN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Period from June 2, 1998 (inception) through December 31, 1998
(dollars in thousands)
<TABLE>
<S> <C>
Revenue:
Basic services...................................................... $ 11,119
Premium services.................................................... 1,036
Other............................................................... 1,502
--------
13,657
Operating expenses:
Selling, general and administrative................................. 2,719
Programming......................................................... 3,281
Technical and operations............................................ 1,718
Depreciation and amortization....................................... 6,554
--------
Loss from operations.................................................. (615)
Interest income....................................................... 173
Interest (expense).................................................... (4,710)
Other (expense), net.................................................. (66)
--------
(Loss) before income taxes............................................ (5,218)
(Benefit) from income taxes........................................... (1,901)
--------
(Loss) before minority interest and extraordinary item................ (3,317)
Minority interest in loss of consolidated entity...................... (398)
--------
(Loss) before extraordinary item...................................... (3,715)
Extraordinary loss on extinguishment of debt (net of tax of $824)..... (1,406)
--------
Net loss............................................................ $( 5,121)
========
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
F-111
<PAGE>
AVALON CABLE OF MICHIGAN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
For the Period from June 2, 1998 (inception) through December 31, 1998
(in thousands, except share amounts)
<TABLE>
<CAPTION>
Common Additional Total
Shares Common Paid-in Accumulated Shareholders'
Outstanding Stock Capital Deficit Equity
----------- ------ ---------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Balance, June 2, 1998... 100 $-- $ -- $ -- $ --
Net loss from date of
inception through
December 31, 1998...... -- -- -- (5,121) (5,121)
Contributions by parent. -- -- 137,375 -- 137,375
--- ---- -------- ------- --------
Balance, December 31,
1998................... 100 $-- $137,375 $(5,121) $132,254
=== ==== ======== ======= ========
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
F-112
<PAGE>
AVALON CABLE OF MICHIGAN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
For the Period from June 2, 1998 (inception) through December 31, 1998
(in thousands)
<TABLE>
<S> <C>
Cash flows from operating activities:
Net (loss)......................................................... $ (5,121)
Extraordinary loss on extinguishment of debt....................... 1,460
Depreciation and amortization...................................... 6,554
Deferred income taxes, net......................................... (8,234)
Provision for loss on accounts receivable.......................... 75
Increase (decrease) in minority interest........................... 398
Net change in certain assets and liabilities, net of business
acquisitions......................................................
Increase in accounts receivable.................................. (832)
Increase in prepayment and other current assets.................. (446)
Increase in accounts payable and accrued expenses................ 3,834
Increase in deferred revenue..................................... 967
--------
Net cash used by operating activities.......................... (1,345)
--------
Cash flows from investing activities:
Additions to property, plant and equipment......................... (4,673)
Payment for acquisition............................................ (431,629)
--------
Net cash used in investing activities............................ (436,302)
--------
Cash flows from Financing Activities:
Proceeds from the issuance of the Credit Facility.................. 265,888
Principal payment on debt.......................................... (125,013)
Proceeds from the issuance of senior subordinated notes............ 150,000
Proceeds from the issuance of note payable affiliate............... 33,200
Payments made on note payable--affiliate........................... (18,037)
Payments made for debt financing costs............................. (3,995)
Proceeds from the issuance of common stock......................... 137,375
--------
Net cash provided by financing activities........................ 439,418
--------
Net increase in cash................................................. 1,771
Cash at beginning of the period...................................... 7,300
--------
Cash at end of the period........................................ $ 9,071
--------
Supplemental disclosures of cash flow information
Cash paid during the year for
Interest........................................................... $ 2,639
Income taxes....................................................... --
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-113
<PAGE>
AVALON CABLE OF MICHIGAN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands except per share data)
1. Basis of Presentation and Description of Business
Avalon Cable of Michigan, Inc. ("the Company") was formed in June 1998,
pursuant to the laws of the state of Delaware, as a wholly owned subsidiary of
Avalon Cable of Michigan Holdings, Inc. ("Michigan Holdings".) On June 3, 1998,
the Company entered into an Agreement and Plan of Merger (the "Agreement")
among the Company, Avalon Cable of Michigan Holdings Inc. ("Avalon Holdings")
and Cable Michigan, Inc. (Cable Michigan), pursuant to which the Company will
merge into Cable Michigan and Cable Michigan will become a wholly owned
subsidiary of Avalon Holdings (the "Merger"). As part of the Merger, the name
of the company was changed to Avalon Cable of Michigan, Inc.
In accordance with the terms of the Agreement, each share of common stock,
par value $1.00 per share ("common stock"), of the Company outstanding prior to
the effective time of the Merger (other than treasury stock, shares owned by
Avalon Holdings or its subsidiaries, or shares as to which dissenters' rights
have been exercised) shall be converted into the right to receive $40.50 in
cash (the "Merger Consideration"), subject to certain possible closing
adjustments.
In conjunction with the acquisition of Cable Michigan, the Company acquired
Cable Michigan's 62% ownership interest in Mercom, Inc. ("Mercom").
On November 6, 1998, the Company completed its merger. The total
consideration payable in conjunction with the merger, including fees and
expenses is $431,629, including repayment of all existing Cable Michigan
indebtedness and accrued interest of $135,205. Subsequent to the merger, the
arrangements with RCN and CTE were terminated. The Agreement also permitted the
Company to agree to acquire the remaining shares of Mercom that it did not own.
Michigan Holdings contributed $140,000 in cash to the Company, which was
used to consummate the Merger. On November 5, 1998, Michigan Holdings received
$105,000 in cash in exchange for promissory notes to lenders (the "Bridge
Agreement"). On November 6, 1998, Michigan Holdings contributed the proceeds
received from the Bridge Agreement and an additional $35,000 in cash to the
Company in exchange for 100 shares of common stock.
In March 1999, after the acquisition of Mercom, Inc. (as described in Note
3) the Company completed a series of transactions to facilitate certain aspects
of its financing. As a result of these transactions:
. Avalon Cable of Michigan LLC has become the operator of the Michigan
cluster replacing Avalon Cable of Michigan, Inc.
. Avalon Cable of Michigan LLC is an obligor on the Senior Subordinated
Notes replacing Avalon Cable of Michigan, Inc., and
. Avalon Cable of Michigan, Inc. is a guarantor of the obligations of
Avalon Cable of Michigan LLC under the Senior Subordinated Notes. Avalon
Cable of Michigan, Inc. does not have significant assets, other than its
investment in Avalon Cable LLC.
The Company provides cable services to various areas in the state of
Michigan. The Company's cable systems offer customer packages for basic cable
programming services which are offered at a per channel charge or packaged
together to form a tier of services offered at a discount from the combined
channel rate. The Company's cable systems also provide premium cable services
to their customers for an extra monthly charge. Customers generally pay initial
connection charges and fixed monthly fees for cable programming and premium
cable services, which constitute the principle sources of revenue for the
Company.
F-114
<PAGE>
AVALON CABLE OF MICHIGAN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in thousands except per share data)
2. Summary of Significant Accounting Policies
Principles of consolidation
The consolidated financial statements of the Company include the accounts of
the Company and of all its wholly and majority owned subsidiaries. All
significant transactions between the Company and its subsidiaries have been
eliminated.
Use of estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Revenue recognition
Revenues from cable services are recorded in the month the service is
provided. Installation fee revenue is recognized in the period in which the
installation occurs.
Advertising expense
Advertising costs are expensed as incurred. Advertising expense charged to
operations was $39.
Concentration of credit risk
Financial instruments which potentially expose the Company to a
concentration of credit risk include cash and subscriber and other receivables.
The Company had cash in excess of federally insured deposits at financial
institutions at December 31, 1998. The Company does not believe that such
deposits are subject to any unusual credit risk beyond the normal credit risk
associated with operating its business. The Company extends credit to customers
on an unsecured basis in the normal course of business. The Company maintains
reserves for potential credit losses and such losses, in the aggregate, have
not historically exceeded management's expectations. 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.
Property, plant and equipment
Property, plant and equipment is stated at its fair value for items acquired
from Cable Michigan, historical cost for the minority interests share of Mercom
property, plant and equipment and cost for additions subsequent to the merger.
Initial subscribers installation costs, including materials, labor and overhead
costs, are capitalized as a component of cable plant and equipment. The cost of
disconnection and reconnection are charged to expense when incurred.
Depreciation is computed for financial statement purposes using the straight-
line method based on the following lives:
<TABLE>
<S> <C>
Buildings......................................................... 25 years
Cable television distribution equipment........................... 5-12 years
Vehicles.......................................................... 5years
Other equipment................................................... 5-10years
</TABLE>
F-115
<PAGE>
AVALON CABLE OF MICHIGAN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in thousands except per share data)
Intangible assets
Intangible assets represent the estimated fair value of cable franchises and
goodwill resulting from acquisitions. Cable franchises are amortized over a
period ranging from 13 to 15 years on a straight-line basis. Goodwill is the
excess of the purchase price over the fair value of the net assets acquired,
determined through an independent appraisal, and is amortized over 15 years
using the straight-line method. Deferred financing costs represent direct costs
incurred to obtain long-term financing and are amortized to interest expense
over the term of the underlying debt utilizing the effective interest method.
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").
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.
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 Company estimates that the fair value of all financial
instruments at December 31, 1998 does not differ materially from the
aggregate carrying values of its financial instruments recorded in the
accompanying balance sheet. The fair value of the notes payable-affiliate
are considered to be equal to carrying values since the Company believes
that its credit risk has not changed from the time this debt instrument was
executed and therefore, would obtain a similar rate in the current market.
b. The fair value of the cash and temporary cash investments
approximates fair value because of the short maturity of these instruments.
Income taxes
The Company and Mercom file separate consolidated federal income tax
returns. 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.
F-116
<PAGE>
AVALON CABLE OF MICHIGAN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in thousands except per share data)
3. Merger
The Merger was accounted for using the purchase method of accounting.
Accordingly, the consideration was allocated to the net assets acquired based
on their fair market values at the date of the Merger as determined through the
use of an independent appraisal. The excess of consideration paid over the fair
market value of the net assets acquired was $81,705, and is being amortized
using the straight line method over 15 years, its estimated economic life.
The Merger agreement between Avalon Cable of Michigan Holdings, Inc. and the
Company permitted the Company to agree to acquire the 1,822,810 shares
(approximately 38% of the outstanding stock) of Mercom that it did not own (the
"Mercom Acquisition"). On September 10, 1998 the Company and Mercom entered
into a definitive agreement (the "Mercom Merger Agreement") providing for the
acquisition by the Company of all of such shares at a price of $12.00 per
share. The Company completed this acquisition in March 1999. The total
estimated consideration payable in conjunction with the Mercom Acquisition,
excluding fees and expenses was $21,900.
Following is the unaudited pro forma results of operations for the year
ended December 31, 1998, as if the Merger occurred on January 1, 1998:
<TABLE>
<CAPTION>
December 31,
1998
------------
(Unaudited)
<S> <C>
Revenue................................... $ 88,178
========
Loss from operations...................... $ (4,664)
========
Net loss.................................. $(17,055)
========
</TABLE>
In March 1999, Avalon Michigan Inc. acquired the cable television systems of
Nova Cablevision, Inc., Nova Cablevision VI, L.P. and Nova Cablevision VII,
L.P. for approximately $7,800, excluding transaction fees.
4. Property, Plant and Equipment
Property, plant and equipment consists of the following:
<TABLE>
<S> <C>
Cable plant..................................................... $100,167
Vehicles........................................................ 2,475
Buildings and improvements...................................... 2,151
Office furniture and fixtures................................... 846
Construction in process......................................... 768
--------
Total property, plant and equipment............................. 106,407
Less--accumulated depreciation.................................. (1,442)
--------
Property, plant and equipment, net.............................. $104,965
========
</TABLE>
Depreciation expense was $1,442 for period from inception (June 2, 1998) to
December 31, 1998.
F-117
<PAGE>
AVALON CABLE OF MICHIGAN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
5. Intangible Assets
Intangible assets consist of the following:
<TABLE>
<S> <C>
Cable franchises................................................ $344,062
Goodwill........................................................ 81,705
Deferred financing costs........................................ 6,470
--------
Total........................................................... 432,237
Less--accumulated amortization.................................. (5,112)
--------
Intangible assets, net.......................................... $427,125
========
</TABLE>
Amortization expense charged to operations in during the period from
inception (June 2, 1998) through December 31, 1998 was $5,112.
6. Account payable and accrued expenses consist of the following:
<TABLE>
<S> <C>
Accounts payable................................................ $ 5,321
Accrued cable programming costs................................. 1,824
Accrued taxes................................................... 1,107
Other........................................................... 1,942
-------
$10,194
=======
7. Income Taxes
The income tax provision (benefit) in the accompanying consolidated
financial statements of operations is comprised of the following:
<CAPTION>
1998
-------
<S> <C>
Current
Federal........................................................ $ 243
State.......................................................... --
-------
Total Current................................................ 243
-------
Deferred
Federal........................................................ (1,970)
State.......................................................... (174)
-------
Total Deferred............................................... (2,144)
-------
Total (benefit) for income taxes............................. $(1,901)
=======
</TABLE>
The benefit for income taxes is different from the amounts computed by
applying the U.S. statutory federal tax rate of 35% for 1998. The differences
are as follows:
<TABLE>
<CAPTION>
1998
-------
<S> <C>
(Loss) before (benefit) for income taxes........................ $(5,218)
=======
Federal tax (benefit) at statutory rates........................ (1,826)
State income taxes.............................................. (152)
Goodwill........................................................ 77
-------
(Benefit) for income taxes...................................... (1,901)
=======
</TABLE>
<TABLE>
<CAPTION>
Tax Net
Operating Expiration
Year Losses Date
---- --------- ----------
<S> <C> <C>
1998................................................. $8,536 2018
</TABLE>
F-118
<PAGE>
AVALON CABLE OF MICHIGAN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Temporary differences that give rise to significant portion of deferred tax
assets and liabilities at December 31 are as follows:
<TABLE>
<CAPTION>
1998
--------
<S> <C>
NOL carryforwards............................................... $ 3,539
Alternative minimum tax credits................................. 141
Reserves........................................................ 210
Other, net...................................................... 309
--------
Total deferred assets......................................... 4,199
--------
Property, plant and equipment................................... (10,635)
Intangible assets............................................... (75,538)
--------
Total deferred liabilities.................................... (86,173)
--------
Subtotal........................................................ (81,974)
--------
Valuation allowance............................................. --
--------
Total deferred taxes.......................................... (81,974)
========
</TABLE>
The tax benefit related to the loss on extinguishment of debt results in
deferred tax, approximating the statutory U.S. tax rate. The tax benefit of
$2,036 related to the exercise of certain stock options of Cable Michigan, Inc.
was charged directly to goodwill.
8. Debt
At December 31, 1998, Long-term Debt consists of the following:
<TABLE>
<S> <C>
Senior credit facility.......................................... $150,000
Senior subordinated notes....................................... 140,875
--------
290,875
Current portion............................................... --
--------
$290,875
========
</TABLE>
Credit Facility
On November 6, 1998, the Company became a co-borrower along with Avalon New
England and Avalon Finance, affiliated companies, collectively referred to as
the ("Co-Borrowers") on a $320,888 senior credit facility, which includes term
loan facilities consisting of (i) tranche A term loans of $120,888 and (ii)
tranche B term loans of $170,000, and a revolving credit facility of $30,000
(collectively, the "Credit Facility"). Subject to compliance with the terms of
the Credit Facility, borrowings under the Credit Facility will be available for
working capital purposes, capital expenditures and pending and future
acquisitions. The ability to advance funds under the tranche A term loan
facilities terminate on March 31, 1999. The tranche A term loans are subject to
minimum quarterly amortization payments commencing on January 31, 2001 and
maturing on October 31, 2005. The tranche B term loans are scheduled to be
repaid in two equal installments on July 31, 2006 and October 31, 2006. The
revolving credit facility borrowings are scheduled to be repaid on October 31,
2005.
On November 6, 1998, the Company borrowed $265,888 under the Credit Facility
in order to consummate the Merger. In connection with the Senior Subordinated
Notes (as defined below) and Senior Discount Notes
F-119
<PAGE>
AVALON CABLE OF MICHIGAN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(as defined below) offerings, the Company repaid $125,013 of the Credit
Facility, and the availability under the Credit Facility was reduced to
$195,000. The Company had borrowings of $140,875 outstanding under the tranche
B term note facilities, and had available $30,000 for borrowings under the
revolving credit facility. Avalon New England and Avalon Finance had no
borrowings outstanding under the Credit Facility at December 31, 1998.
The interest rate under the Credit Facility is a rate based on either (i)
the base rate (a rate per annum equal to the greater of the Prime Rate and the
Federal Funds Effective Rate plus 1/2 of 1%) or (ii) the Eurodollar rate (a
rate per annum equal to the Eurodollar Base Rate divided by 1.00 less the
Eurocurrency Reserve Requirements) plus, in either case, the applicable margin.
As of December 31, 1998, the applicable margin was (a) with respect to the
tranche B term loans was 2.75% per annum for Base Rate loans and 3.75% per
annum for Eurodollar loans and (b) with respect to tranch A term loans and the
revolving credit facility was 2.00% per annum for Base Rate loans and 3.00% for
Eurodollar loans. The applicable margin for the tranche A term loans and the
revolving credit facility are subject to performance based grid pricing which
is determined based on upon the consolidated leverage ratio of the Co-
Borrowers. The interest rate for the tranche B term loans outstanding at
December 31, 1998 was 9.19%. Interest is payable on a quarterly basis. Accrued
interest on the borrowings under the credit facility was $1,389 at December 31,
1998.
The Credit Facility contains restrictive covenants which among other things
require the Co-Borrowers to maintain certain ratios including consolidated
leverage ratios and the interest coverage ratio, fixed charge ratio and debt
service coverage ratio.
The obligations of the Co-Borrowers under the Credit Facility are secured by
substantially all of the assets of the Co-Borrowers. In addition, the
obligations of the Co-Borrowers under the Credit Facility are guaranteed by
Avalon Cable of Michigan Holdings, Inc. Avalon Cable LLC, Avalon Cable Finance
Holdings, Inc., Avalon Cable of New England Holdings, Inc. and Avalon Cable
Holdings, LLC.
Subordinated debt
In December 1998, the Company became a co-issuer of a $150,000, principal
balance, Senior Subordinated Notes ("Subordinated Notes") offering and Michigan
Holdings became a co-issuer of a $196,000, gross proceeds, Senior Discount
Notes ("Senior Discount Notes") offering. In conjunction with these financings,
the Company paid $18,130 to Avalon Finance as a partial payment against the
Company's note payable-affiliate. The Company paid $75 in interest on this note
payable-affiliate during the period from inception (June 2, 1998) through
December 31, 1998.
The Subordinated Notes mature on December 1, 2008, and interest accrued at a
rate of 9.375% per annum. Interest is payable semi-annually in arrears on June
1 and December 1 of each year, commencing on
June 1, 1999. Accrued interest on the Subordinated Notes was $1,078 at December
31, 1998. The Senior Discount Notes mature on December 1, 2008. Until December
1, 2003, interest will not be paid currently on the Senior Discount Notes, but
the accreted value will increase (representing original issue discount) between
the date of original issuance and December 1, 2003. Beginning on December 1,
2003, interest will accrue at a rate of 11.875% per annum and will be payable
semi-annually in arrears on June 1 and December 1 of each year, to holders of
record on the immediately preceding May 15 and November 15. Original issue
discount accretion on the Senior Discount Notes was $1,083 at December 31,
1998.
The Senior Subordinated Notes will not be redeemable at the Co-Borrowers'
option prior to December 1, 2003. Thereafter, the Senior Subordinated Notes
will be subject to redemption at any time at the option of the Co-Borrowers, in
whole or in part at the redemption prices (expressed as percentages of
principal amount) set
F-120
<PAGE>
AVALON CABLE OF MICHIGAN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
forth below plus accrued and unpaid interest, if any, thereon to the applicable
redemption date, if redeemed during the twelve-month period beginning on
December 1 of the years indicated below:
<TABLE>
<CAPTION>
Year Percentage
---- ----------
<S> <C>
2003........................................ 104.688%
2004........................................ 103.125%
2005........................................ 101.563%
2006 and thereafter......................... 100.000%
</TABLE>
The scheduled maturities of the long-term debt are $2,000 in 2001, $4,000 in
2002, $7,000 in 2003, and the remainder thereafter.
At any time prior to December 1, 2001, the Co-Borrowers may on any one or
more occasions redeem up to 35% of the aggregate principal amount of Senior
Subordinate Notes originally issued under the Indenture at a redemption price
equal to 109.375% of the principal amount thereof, plus accrued and unpaid
interest, if any, to the redemption date, with the net cash proceeds of any
equity offering and/or the net cash proceeds of a strategic equity investment;
provided that at least 65% of the aggregate principal amount at maturity of
Senior Subordinated Notes originally issued remain outstanding immediately
after each such redemption.
As used in the preceding paragraph, "Equity Offering and Strategic Equity
Investment" means any public or private sale of Capital Stock of any of the Co-
Borrowers pursuant to which the Co-Borrowers together receive net proceeds of
at least $25 million, other than issuances of Capital Stock pursuant to
employee benefit plans or as compensation to employees; provided that to the
extent such Capital Stock is issued by the Co-Borrowers, the net cash proceeds
thereof shall have been contributed to one or more of the Co-Borrowers in the
form of an equity contribution.
Mercom debt
In August 1997, the Mercom revolving credit agreement for $2,000 expired.
Mercom had no borrowings under the revolving credit agreement in 1996 or 1997.
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.
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, 1998, $14,151 of principal was outstanding. The borrowings under the term
credit agreement are eliminated in the Company's consolidated balance sheet.
9. Employee Benefit Plans
The Company has a qualified savings plan under Section 401(K) of the
Internal Revenue Code. Contributions charged to expense for the period from
November 5, 1998 to December 31, 1998 was $30.
10. Commitments and Contingencies
Leases
Total rental expense, primarily for office space and pole rental, was $43.
Rental commitments are expected to continue to approximate $1 million a year
for the foreseeable future, including pole rental commitments which are
cancelable.
F-121
<PAGE>
AVALON CABLE OF MICHIGAN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Legal Matters
The Company is subject to the provisions of the Cable Television Consumer
Protection and Competition Act of 1992, as amended, and the Telecommunications
Act of 1996. The Company has either settled challenges or accrued for
anticipated exposures related to rate regulation; however, there is no
assurance that there will not be further additional challenges to its rates.
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.
11. Related Party Transactions and Balances
In November 1998, the Company received $33,200 from Avalon Cable Finance,
Inc. ("Avalon Finance"). In consideration for this amount, the Company executed
a note payable to Avalon Finance. The note matures on December 31, 2001. This
note is recorded as note payable-affiliate on the balance sheet at December 31,
1998. Interest accrues at a rate of 4.47% per year, and is payable on December
31, 2001. Accrued interest receivable of $102 has been recorded in connection
with this note at December 31, 1998. On December 10,1998, the Company made a
partial payment of $18,130 against this note payable-affiliate to Avalon
Finance.
The Company receives support services such as finance, accounting and human
resources from Avalon Cable LLC, a related party. All shared costs are
allocated on the basis of average time spent servicing each entity. In the
opinion of management, the methods used in allocating costs from Avalon Cable
LLC are reasonable; however, the costs of these services as allocated are not
necessarily indicative of the costs that would have been incurred by the
combined operations on a stand-alone basis. For the period ended December 31,
1998, the Company was allocated charges related to such services of $250. The
Company had a payable of $250 related to these services at December 31, 1998.
At December 31, 1998, the Company had an accounts receivable-affiliate
balance of $247 with Avalon New England.
F-122
<PAGE>
AVALON CABLE OF MICHIGAN, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(In thousands)
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
----------- ------------
(Unaudited)
<S> <C> <C>
Assets
Cash.................................................. $ 13,227 $ 9,071
Accounts receivable, net of allowance for doubtful
accounts of $957 and $873............................ 6,210 5,015
Prepayments and other current assets.................. 1,549 1,267
Accounts receivable from related parties.............. -- 371
Deferred income taxes................................. 377 377
-------- --------
Current assets.................................... 21,363 16,101
Property, plant and equipment, net.................... 115,200 104,965
Intangible assets, net................................ 473,323 427,125
Deferred charges and other assets..................... 1,169 1,270
-------- --------
Total assets...................................... $611,055 $549,461
======== ========
Liabilities and Shareholders' Equity
Accounts payable and accrued expenses................. $ 20,689 $ 10,194
Advance billings and customer deposits................ 3,363 2,454
Accounts payable--affiliate........................... 3,388 2,023
-------- --------
Current liabilities............................... 27,440 14,671
Long-term debt........................................ 442,727 290,875
Notes payable--affiliate.............................. -- 15,171
Deferred income taxes................................. 77,021 82,635
-------- --------
Total liabilities................................. 547,188 403,352
-------- --------
Commitments and contingencies (Note 4)................ -- --
Minority interest..................................... 47,495 13,855
-------- --------
Stockholders' equity
Common stock........................................ -- --
Addition paid-in capital............................ 26,973 137,375
Accumulated deficit................................. (10,601) (5,121)
-------- --------
Total shareholders' equity........................ 16,372 132,254
-------- --------
Total liabilities and shareholders' equity........ $611,055 $549,461
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-123
<PAGE>
AVALON CABLE OF MICHIGAN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(In thousands)
<TABLE>
<CAPTION>
For the Quarter
Ended
March 31,
1999
---------------
(Unaudited)
<S> <C>
Revenue
Basic services................................................ $18,153
Premium services.............................................. 1,843
Other......................................................... 2,371
-------
22,367
Operating expenses
Selling, general and administrative........................... 3,716
Programming................................................... 6,293
Technical and operations...................................... 2,496
Depreciation and amortization................................. 10,126
-------
Loss from operations............................................ (264)
Interest income................................................. 318
Interest expense................................................ (8,740)
-------
Loss before income taxes........................................ (8,686)
Benefit from income taxes....................................... 3,142
-------
Loss before minority interest................................... (5,544)
Minority interest in loss of consolidated entity................ 64
-------
Net loss.................................................... $(5,480)
=======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-124
<PAGE>
AVALON CABLE OF MICHIGAN, INC. and SUBSIDIARIES
CONSOLIDATED STATEMENT of CHANGES IN SHAREHOLDERS' EQUITY
(In thousands, except share amounts)
<TABLE>
<CAPTION>
For the Quarter Ended March 31, 1999 (unaudited)
--------------------------------------------------------
Common Additional Total
Shares Common Paid-in Accumulated Shareholders'
Outstanding Stock Capital Deficit Equity
----------- ------ ---------- ----------- -------------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Balance, December 31,
1998................... 100 $ -- $ 137,375 $ (5,121) $ 132,254
Contribution of debt
from Parent, net of
deferred financing
costs.................. -- -- (110,402) -- (110,402)
Net loss for the quarter
ended March 31, 1999... -- -- (5,480) (5,480)
--- ------ --------- -------- ---------
Balance, March 31, 1999. 100 $ -- $ 26,973 $(10,601) $ 16,372
=== ====== ========= ======== =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-125
<PAGE>
AVALON CABLE OF MICHIGAN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
For the Quarter
Ended
March 31,
1999
---------------
(Unaudited)
<S> <C>
Cash flows from operating activities
Net loss..................................................... $ (5,480)
Depreciation and amortization................................ 10,126
Decrease in minority interest................................ (398)
Net change in certain assets and liabilities, net of business
acquisitions
Increase in accounts receivable............................ (942)
Decrease in other assets, net.............................. 101
Increase in prepayment and other current assets............ (275)
Increase in accounts payable and accrued expenses.......... 10,436
Increase in deferred revenue............................... 2,213
Decrease in receivable--affiliates......................... 371
Decrease in deferred income taxes, net..................... (6,044)
--------
Net cash provided by operating activities................ 10,108
--------
Cash flow from investing activities
Additions to property, plant and equipment................... (9,210)
Payment for acquisitions, net................................ (34,004)
--------
Net cash used in investing activities.................... (43,214)
--------
Cash flow from financing activities
Proceeds from the issuance of the Credit Facility............ 37,262
--------
Net cash provided by financing activities................ 37,262
--------
Net increase in cash........................................... 4,156
Cash at beginning of the period................................ 9,071
--------
Cash at end of the period................................ $ 13,227
========
Non-cash investing and financing activities
Contribution of debt from Parent, net of deferred financing
cost........................................................ $110,402
========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-126
<PAGE>
AVALON CABLE OF MICHIGAN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands except per share data)
1. Description of Business
Avalon Cable of Michigan, Inc. (the "Company") was formed in June 1998,
pursuant to the laws of the state of Delaware, as a wholly owned subsidiary of
Avalon Cable of Michigan Holdings, Inc. ("Michigan Holdings"). On June 3, 1998,
the Company entered into an Agreement and Plan of Merger (the "Agreement")
among the Company, Michigan Holdings and Cable Michigan, Inc. ("Cable
Michigan"), pursuant to which the Company will merge into Cable Michigan and
Cable Michigan will become a wholly owned subsidiary of Michigan Holdings (the
"Merger"). As part of the Merger, the name of Cable Michigan was changed to
Avalon Cable of Michigan, Inc.
In accordance with the terms of the Agreement, each share of common stock,
par value of $1.00 per share ("common stock"), of the Company outstanding prior
to the effective time of the Merger (other than treasury stock, shares owned by
Avalon Holdings or its subsidiaries, or shares as to which dissenters' rights
have been exercised) shall be converted into the right to receive $40.50 in
cash (the "Merger Consideration"), subject to certain possible closing
adjustments.
In conjunction with the acquisition of Cable Michigan, the Company acquired
Cable Michigan's 62% ownership interest in Mercom, Inc. ("Mercom").
On November 6, 1998, the Company completed its merger. The total
consideration paid in conjunction with the merger, including fees and expenses
is $431,629, including repayment of all existing Cable Michigan indebtedness
and accrued interest of $135,205. The Agreement also permitted the Company to
agree to acquire the remaining shares of Mercom that it did not own.
Michigan Holdings contributed $137,375 in cash to the Company, which was
used to consummate the Merger. On November 5, 1998, Michigan Holdings received
$105,000 in cash in exchange for promissory notes to lenders (the "Bridge
Agreement"). On November 6, 1998, Michigan Holdings contributed the proceeds
received from the Bridge Agreement and an additional $35,000 in cash to the
Company in exchange for 100 shares of common stock.
On March 26, 1999, after the acquisition of Mercom, Inc. (as described in
Note 3) the Company completed a series of transactions to facilitate certain
aspects of its financing between affiliated companies under common control. As
a result of these transactions:
. The Company contributed its assets and liabilities excluding deferred
tax liabilities, net to Avalon Cable LLC in exchange for an approximate
88% voting interest in Avalon Cable LLC. Avalon Cable LLC contributed
these assets and liabilities to its wholly-owned subsidiary, Avalon
Cable of Michigan LLC.
. Avalon Cable of Michigan LLC has become the operator of the Michigan
cluster, replacing the Company.
. Avalon Cable of Michigan LLC is an obligor on the Senior Subordinated
Notes replacing the Company, and
. The Company is a guarantor of the obligations of Avalon Cable of
Michigan LLC under the Senior Subordinated Notes. The Company does not
have significant assets, other than its investment in Avalon Cable LLC
at March 31, 1999.
F-127
<PAGE>
AVALON CABLE OF MICHIGAN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands except per share data)
Avalon Cable LLC provides cable services to various areas in the state of
Michigan and the New England area. Avalon Cable LLC's cable systems offer
customer packages for basic cable programming services which are offered at a
per channel charge or packaged together to form a tier of services offered at a
discount from the combined channel rate. Avalon Cable LLC's cable systems also
provide premium cable services to their customers for an extra monthly charge.
Customers generally pay initial connection charges and fixed monthly fees for
cable programming and premium cable services, which constitute the principle
sources of revenue for the Company.
2. Basis of Presentation
Pursuant to the rules and regulations of the Securities and Exchange
Commission, certain financial information has been condensed and certain
footnote disclosures have been omitted. Such information and disclosures are
normally included in financial statements prepared in accordance with generally
accepted accounting principles.
These condensed financial statements should be read in conjunction with the
Company's audited financial statements as of December 31, 1998 and notes
thereto included elsewhere herein.
The financial statements as of March 31, 1999 and for the three month period
then ended are unaudited; however, in the opinion of management, such
statements include all adjustments (consisting solely of normal and recurring
adjustments except for the acquisition of Cross Country Cable, LLC ("Cross
Country"), Nova Cablevision, Inc., Nova Cablevision VI, L.P. and Nova
Cablevision VII, L.P. ("Nova Cable"), Novagate Communication Corporation
("Novagate") and R/Com. L.C. and the contribution of assets to Avalon Cable
LLC) necessary to present fairly the financial information included therein.
3. Merger
The Merger agreement between Michigan Holdings and the Company permitted the
Company to agree to acquire the 1,822,810 shares (approximately 38% of the
outstanding stock) of Mercom that it did not own (the "Mercom Acquisition"). On
September 10, 1998 the Company and Mercom entered into a definitive agreement
(the "Mercom Merger Agreement") providing for the acquisition by the Company of
all of such shares at a price of $12.00 per share. The Company completed this
acquisition in March 1999. The total estimated consideration paid in
conjunction with the Mercom Acquisition, excluding fees and expenses was
$21,900.
In connection with the acquisition of Mercom, former shareholders of Mercom
constituting approximately 16.5% of all outstanding Mercom common shares gave
notice of their election to exercise appraisal rights as provided by Delaware
law. The Company cannot predict at this time the effect of these elections on
the Company since the Company does not know whether or the extent to which
these former shareholders will continue to pursue appraisal rights and seek an
appraisal proceeding under Delaware law or choose to abandon these efforts and
accept the consideration payable in the Mercom merger. If these former
shareholders continue to pursue their appraisal rights, the Company makes no
assurance that a Delaware court would not find that the fair value of these
shares for such purpose is in excess of the $12.00 per Mercom share that the
Company paid in the acquisition or that the ultimate outcome would not have a
material adverse effect on the Company. The Company has already provided for
the consideration due under the terms of our merger with Mercom with respect to
these shares.
In March 1999, Avalon Cable of Michigan Inc. acquired the cable television
systems of Nova Cable for approximately $7,800, excluding transaction fees.
F-128
<PAGE>
AVALON CABLE OF MICHIGAN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands except per share data)
On January 21, 1999, the Company through its subsidiary, Avalon Cable of New
England, LLC and subsidiaries, acquired Novagate for a purchase price of
$2,900.
On March 26, 1999, the Company through its subsidiary, Avalon Cable of
Michigan, LLC, acquired the assets of R/Com, L.C., for a total purchase price
of approximately $450.
In January 1999, the Company acquired all of the issued and outstanding
Common Stock of Cross Country for a purchase price of approximately $2,500,
excluding transaction fees.
The acquisitions have been accounted for as purchases and the results of the
companies acquired have been included in the accompanying financial statements
since their acquisition dates. Accordingly, the consideration was allocated to
the net assets based on their respective fair market values. The excess of the
consideration paid over the estimated fair market values of the net assets
acquired was $11,041 and is being amortized using the straight line method over
15 years.
4. Commitments and Contingencies
Legal matters
The Company is subject to the provisions of the Cable Television Consumer
Protection and Competition Act of 1992, as amended, and the Telecommunications
Act of 1996. The Company has either settled challenges or accrued for
anticipated exposures related to rate regulation; however, there is no
assurance that there will not be further additional challenges to its rates.
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.
5. Subsequent Event
In May 1999, the Company signed an agreement with Charter Communications,
Inc. under which Charter Communications agreed to purchase Avalon Cable LLC's
cable television systems and assume some of their debt. The acquisition by
Charter Communication is subject to regulatory approvals. The Company expects
to consummate this transaction in the fourth quarter of 1999.
This agreement, if closed, would constitute a change in control under the
indentures pursuant to which the Senior Subordinated Notes and the Senior
Discount Notes (collectively, the "Notes") were issued. The Indentures provide
that upon the occurrence of a change of control (a "Change of Control") each
holder of the Notes has the right to require the Company to purchase all or any
part (equal to $1,000 or an integral multiple thereof) of such holder's Notes
at an offer price in cash equal to 101% of the aggregate principal amount
thereon (or 101% of the accreted value for the Senior Discount Notes as of the
date of purchase if prior to the full accretion date) plus accrued and unpaid
interest and Liquidated Damages (as defined in the Indentures) thereof, if any,
to the date of purchase.
This agreement, if closed, would represent a Change of Control which, on the
closing date, constitutes an event of default under the Credit Facility giving
the lender the right to terminate the credit commitment and declare all amounts
outstanding immediately due and payable. Charter Communications has agreed to
repay all amounts due under the Credit Facility or cause all events of default
under the Credit Facility arising from the Change of Control to be waived.
F-129
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
$196,000,000
Avalon Cable LLC
Avalon Cable
Holdings Finance, Inc.
Offer to Exchange Series B
11 7/8% Senior Subordinated
Notes due 2008
For All Outstanding
11 7/8% Senior Subordinated
Notes due 2008
----------------
PROSPECTUS
----------------
,1999
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II: INFORMATION NOT REQUIRED IN THE PROSPECTUS
Item 20. Indemnification of Directors and Officers.
Avalon Cable LLC. Avalon Cable LLC is a limited liability company organized
under the laws of the State of Delaware. Section 18-108 of the Delaware Limited
Liability Company Act (the "Act") provides that, subject to such standards and
restrictions, if any, as are set forth in its limited liability company
agreement, a limited liability company may, and shall have the power to,
indemnify and hold harmless any member or manager or other person from and
against any and all claims and demands whatsoever.
Section 3.14 of Avalon Cable LLC's Limited Liability Company Agreement
provides, among other things, that neither the managers, officers or members of
Avalon Cable LLC shall be liable to Avalon Cable LLC or any member for monetary
damages for a breach of duty to Avalon Cable LLC or any member. Section 3.14
also provides that the managers, officers and members of Avalon Cable LLC shall
be indemnified and held harmless by Avalon Cable LLC, including advancement of
reasonable attorney's fees and other expenses, but only to the extent that
Avalon Cable LLC's assets are sufficient therefor, from and against all claims,
liabilities, and expenses arising out of any management of Avalon Cable LLC
affairs (but excluding those caused by the gross negligence or willful
misconduct of such manager, officer member), to the fullest extent permitted
by, but subject to all limitations and requirements imposed by, the Act.
Section 3.14 of Avalon Cable LLC's Limited Liability Company Agreement also
provides that, the rights of indemnification will be in addition to any rights
to which such manager, officer or member may otherwise have against third
parties, and will inure to the benefit of the respective heirs and personal
representatives of the managers, officers and members.
Avalon Cable Holdings Finance, Inc. Avalon Cable Holdings Finance, Inc. is
incorporated under the laws of the State of Delaware. Section 145 of the
General Corporation Law of the State of Delaware, inter alia ("Section 145")
provides that a Delaware corporation may indemnify any persons who were, are or
are threatened to be made, parties to any threatened, pending or completed
action, suit or proceeding, whether civil, criminal, administrative or
investigative (other than an action by or in the right of such corporation), by
reason of the fact that such person is or was an officer, director, employee or
agent of such corporation, or is or was serving at the request of such
corporation as a director, officer, employee or agent of another corporation or
enterprise. The indemnity may include expenses, such as attorneys' fees,
judgments, fines and amounts paid in settlement actually and reasonably
incurred by such person in connection with such action, suit or proceeding,
provided such person acted in good faith and in a manner he or she reasonably
believed to be or not opposed to the corporation's best interests and, with
respect to any criminal action or proceeding, had no reasonable cause to
believe that his or her conduct was illegal. A Delaware corporation may
indemnify any persons who are, were or are threatened to be made, party to any
threatened, pending or completed action or suit by or in the right of the
corporation by reasons of the fact that such person was a director, officer,
employee or agent of such corporation, or is or was serving at the request of
such corporation as a director, officer, employee or agent of another
corporation or enterprise. The indemnity may include expenses, including
attorneys' fees, actually and reasonably incurred by such person in connection
with the defense or settlement of such action or suit, provided such person
acted in good faith and in a manner he or she reasonably believed to be in or
not opposed to the corporation's best interests, provided that no
indemnification is permitted without judicial approval if the officer,
director, employee or agent is adjudged to be liable to the corporation. Where
an officer, director, employee or agent is successful on the merits or
otherwise in the defense of any action referred to above, the corporation must
indemnify him or her against the expenses which such officer or director has
actually and reasonably incurred.
Avalon Cable Holdings Finance, Inc.'s Certificate of Incorporation provides
that to the fullest extent permitted by the General Corporation Law of the
State of Delaware as the same exists or may hereafter be amended, a director of
Avalon Cable Holdings Finance, Inc. shall not be liable to Avalon Cable
Holdings Finance, Inc. or its stockholders for monetary damages for a breach of
fiduciary duty as a director.
II-1
<PAGE>
Article V of the By-laws of Avalon Cable Holdings Finance, Inc. ("Article
V") provides, among other things, that each person who was or is made a party
or is threatened to be made a party to or is involved in any action, suit or
proceeding, whether civil, criminal, administrative or investigative, by reason
of the fact that he or she, or a person of whom he or she is the legal
representative, is or was a director or officer, of the corporation or is or
was serving at the request of Avalon Cable Holdings Finance, Inc. as a
director, officer, employee, fiduciary, or agent of another corporation or of a
partnership, joint venture, trust or other enterprise, shall be indemnified and
held harmless by Avalon Cable Holdings Finance, Inc. to the fullest extent
which it is empowered to do so unless prohibited from doing so by the General
Corporation Law of the State of Delaware, as the same exists or may hereafter
be amended but, in the case of any such amendment, only to the extent that such
amendment permits Avalon Cable Holdings Finance, Inc. to provide broader
indemnification rights than said law permitted the corporation to provide prior
to such amendment, against all expense, liability and loss, including
attorneys' fees actually and reasonably incurred by such person in connection
with such proceeding, and such indemnification shall inure to the benefit of
his or her heirs, executors and administrators; provided, however, that, Avalon
Cable Holdings Finance, Inc. shall indemnify any such person seeking
indemnification in connection with a proceeding initiated by such person only
if such proceeding was authorized by the board of directors of Avalon Cable
Holdings Finance, Inc.
Article V also provides that persons who are not covered by the foregoing
provisions of Article V and who are or were employees or agents of Avalon Cable
Holdings Finance, Inc., or who are or were serving at the request of Avalon
Cable Holdings Finance, Inc. as employees or agents of another corporation,
partnership, joint venture, trust or other enterprise, may be indemnified to
the extent authorized at any time or from time to time by the board of
directors.
Section 145 further authorizes a corporation to purchase and maintain
insurance on behalf of any person who is or was a director, officer, employee
or agent of the corporation, or is or was serving at the request of the
corporation as a director, officer, employee or agent of another corporation or
enterprise, against any liability asserted against him and incurred by him or
her in any such capacity, arising out of his or her status as such, whether or
not the corporation would otherwise have the power to indemnify him or her
under Section 145.
Article V further provides that Avalon Cable Holdings Finance, Inc. may
purchase and maintain insurance on its behalf and on behalf of any person who
is or was a director, officer, employee, fiduciary or agent of Avalon Cable
Holdings Finance, Inc. or was serving at the request of Avalon Cable Holdings
Finance, Inc. as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise against any liability
asserted against him or her and incurred by him or her in any such capacity,
whether or not Avalon Cable Holdings Finance, Inc. would have the power to
indemnify such person against such liability under Article V.
Avalon Cable of Michigan Holdings, Inc. Avalon Cable of Michigan Holdings,
Inc. is incorporated under the laws of the State of Delaware. Section 145 of
the General Corporation Law of the State of Delaware, inter alia ("Section
145") provides that a Delaware corporation may indemnify any persons who were,
are or are threatened to be made, parties to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative
or investigative (other than an action by or in the right of such corporation),
by reason of the fact that such person is or was an officer, director, employee
or agent of such corporation, or is or was serving at the request of such
corporation as a director, officer, employee or agent of another corporation or
enterprise. The indemnity may include expenses, such as attorneys' fees,
judgments, fines and amounts paid in settlement actually and reasonably
incurred by such person in connection with such action, suit or proceeding,
provided such person acted in good faith and in a manner he or she reasonably
believed to be or not opposed to the corporation's best interests and, with
respect to any criminal action or proceeding, had no reasonable cause to
believe that his or her conduct was illegal. A Delaware corporation may
indemnify any persons who are, were or are threatened to be made, party to any
threatened, pending or completed action or suit by or in the right of the
corporation by reasons of the fact that such person was a director, officer,
employee or agent of such corporation, or is or was serving at the request of
such corporation as a director, officer, employee or
II-2
<PAGE>
agent of another corporation or enterprise. The indemnity may include expenses,
including attorneys' fees, actually and reasonably incurred by such person in
connection with the defense or settlement of such action or suit, provided such
person acted in good faith and in a manner he or she reasonably believed to be
in or not opposed to the corporation's best interests, provided that no
indemnification is permitted without judicial approval if the officer,
director, employee or agent is adjudged to be liable to the corporation. Where
an officer, director, employee or agent is successful on the merits or
otherwise in the defense of any action referred to above, the corporation must
indemnify him or her against the expenses which such officer or director has
actually and reasonably incurred.
Avalon Cable of Michigan Holdings, Inc.'s Certificate of Incorporation
provides that to the fullest extent permitted by the General Corporation Law of
the State of Delaware as the same exists or may hereafter be amended, a
director of Avalon Cable of Michigan Holdings, Inc. shall not be liable to
Avalon Cable of Michigan Holdings, Inc. or its stockholders for monetary
damages for a breach of fiduciary duty as a director.
Article V of the By-laws of Avalon Cable of Michigan Holdings, Inc.
("Article V") provides, among other things, that each person who was or is made
a party or is threatened to be made a party to or is involved in any action,
suit or proceeding, whether civil, criminal, administrative or investigative,
by reason of the fact that he or she, or a person of whom he or she is the
legal representative, is or was a director or officer, of the corporation or is
or was serving at the request of Avalon Cable of Michigan Holdings, Inc. as a
director, officer, employee, fiduciary, or agent of another corporation or of a
partnership, joint venture, trust or other enterprise, including service with
respect to employee benefit plans, whether the basis of such proceeding is
alleged action in an official capacity as a director, officer, employee,
fiduciary or agent or in any other capacity while serving as a director,
officer, employee, fiduciary or agent, shall be indemnified and held harmless
by Avalon Cable of Michigan Holdings, Inc. to the fullest extent which it is
empowered to do so by the General Corporation Law of the State of Delaware, as
the same exists or may hereafter be amended but, in the case of any such
amendment, only to the extent that such amendment permits Avalon Cable of
Michigan Holdings, Inc. to provide broader indemnification rights than said law
permitted the corporation to provide prior to such amendment, against all
expense, liability and loss, including attorneys' fees actually and reasonably
incurred by such person in connection with such proceeding, and such
indemnification shall inure to the benefit of his or her heirs, executors and
administrators; provided, however, that, Avalon Cable of Michigan Holdings,
Inc. shall indemnify any such person seeking indemnification in connection with
a proceeding initiated by such person only if such proceeding was authorized by
the board of directors of Avalon Cable of Michigan Holdings, Inc.
Article V also provides that persons who are not covered by the foregoing
provisions of Article V and who are or were employees or agents of Avalon Cable
of Michigan Holdings, Inc., or who are or were serving at the request of Avalon
Cable of Michigan Holdings, Inc. as employees or agents of another corporation,
partnership, joint venture, trust or other enterprise, may be indemnified to
the extent authorized at any time or from time to time by the board of
directors.
Section 145 further authorizes a corporation to purchase and maintain
insurance on behalf of any person who is or was a director, officer, employee
or agent of the corporation, or is or was serving at the request of the
corporation as a director, officer, employee or agent of another corporation or
enterprise, against any liability asserted against him and incurred by him or
her in any such capacity, arising out of his or her status as such, whether or
not the corporation would otherwise have the power to indemnify him or her
under Section 145.
Article V further provides that Avalon Cable of Michigan Holdings, Inc. may
purchase and maintain insurance on its behalf and on behalf of any person who
is or was a director, officer, employee, fiduciary or agent of Avalon Cable of
Michigan Holdings, Inc. or was serving at the request of Avalon Cable of
Michigan Holdings, Inc. as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise against any
liability asserted against him or her and incurred by him or her in any such
capacity, whether or not Avalon Cable of Michigan Holdings, Inc. would have the
power to indemnify such person against such liability under Article V.
II-3
<PAGE>
Avalon Cable of Michigan, Inc. Avalon Cable of Michigan, Inc. is
incorporated under the laws of the State of Pennsylvania. Section 1741 of the
Pennsylvania Business Corporation Law, inter alia ("Section 1741") provides
that a business corporation has the power to indemnify any person who was or is
a party or is threatened to be made a party to any threatened, pending or
completed action or proceeding, whether civil, criminal, administrative or
investigative (other than an action by or in the right of the corporation), by
reason of the fact that he is or was a representative of the corporation, or is
or was serving at the request of the corporation as a representative of another
domestic or foreign corporation for profit or not-for-profit, partnership,
joint venture, trust or other enterprise, against expenses (including
attorneys' fees), judgments, fines and amounts paid in settlement actually and
reasonably incurred by him in connection with the action or proceeding if he
acted in good faith and in a manner he reasonably believed to be in, or not
opposed to, the best interests of the corporation and, with respect to any
criminal proceeding, had no reasonable cause to believe his conduct was
unlawful. Section 1742 of the Pennsylvania Business Corporation Law ("Section
1742") provides that a business corporation shall have power to indemnify any
person who was or is a party, or is threatened to be made a party, to any
threatened, pending or completed action by or in the right of the corporation
to procure a judgment in its favor by reason of the fact that he is or was a
representative of the corporation or is or was serving at the request of the
corporation as a representative of another domestic or foreign corporation for
profit or not-for-profit, partnership, joint venture, trust or other
enterprise, against expenses (including attorneys' fees) actually and
reasonably incurred by him in connection with the defense or settlement of the
action if he acted in good faith and in a manner he reasonably believed to be
in, or not opposed to, the best interests of the corporation. Indemnification
shall not be made under Section 1742 in respect of any claim, issue or matter
as to which the person has been adjudged to be liable to the corporation unless
and only to the extent that the court of common pleas of the judicial district
embracing the county in which the registered office of the corporation is
located or the court in which the action was brought determines upon
application that, despite the adjudication of liability but in view of all the
circumstances of the case, the person is fairly and reasonably entitled to
indemnity for the expenses that the court of common pleas or other court deems
proper. To the extent that a representative of a business corporation has been
successful on the merits or otherwise in defense of any action or proceeding
referred to in Section 1741 (relating to third-party actions) or Section 1742
(relating to derivative and corporate actions) or in defense of any claim,
issue or matter therein, he shall be indemnified against expenses (including
attorney fees) actually and reasonably incurred by him in connection therewith.
Article V of the By-laws of Avalon Cable of Michigan, Inc. ("Article V")
provides, among other things, that each person who was or is made a party or is
threatened to be made a party to or is involved in any action, suit or
proceeding, whether civil, criminal, administrative or investigative, by reason
of the fact that he or she, or a person of whom he or she is the legal
representative, is or was a director or officer, of the corporation or is or
was serving at the request of Avalon Cable of Michigan, Inc. as a director,
officer, employee, fiduciary, or agent of another corporation or of a
partnership, joint venture, trust or other enterprise, shall be indemnified and
held harmless by Avalon Cable of Michigan, Inc. to the fullest extent which it
is empowered to do so unless prohibited from doing so by the Business
Corporation Law of the State of Pennsylvania, as the same exists or may
hereafter be amended but, in the case of any such amendment, only to the extent
that such amendment permits Avalon Cable of Michigan, Inc. to provide broader
indemnification rights than said law permitted the corporation to provide prior
to such amendment, against all expense, liability and loss, including
attorneys' fees actually and reasonably incurred by such person in connection
with such proceeding, and such indemnification shall inure to the benefit of
his or her heirs, executors and administrators; provided, however, that, except
as otherwise provided, Avalon Cable of Michigan, Inc. shall indemnify any such
person seeking indemnification in connection with a proceeding initiated by
such person only if such proceeding was authorized by the board of directors of
Avalon Cable of Michigan, Inc.
Section 1747 of the Pennsylvania Business Corporation Law authorizes a
business corporation to purchase and maintain insurance on behalf of any person
who is or was a representative of the corporation or is or was serving at the
request of the corporation as a representative of another domestic or foreign
corporation for profit or not-for-profit, partnership, joint venture, trust or
other enterprise against any liability asserted against him
II-4
<PAGE>
and incurred by him in any such capacity, or arising out of his status as such,
whether or not the corporation would have the power to indemnify him against
that liability under the provisions of Subchapter D of Pennsylvania's Business
Corporation Law.
Article V further provides that Avalon Cable of Michigan, Inc. may purchase
and maintain insurance on its own behalf and on behalf of any person who is or
was a director, officer, employee, fiduciary or agent of Avalon Cable of
Michigan, Inc. or was serving at the request of Avalon Cable of Michigan, Inc.
as a director, officer, employee or agent of another corporation, partnership,
joint venture, trust or other enterprise against any liability asserted against
him or her and incurred by him or her in any such capacity, whether or not
Avalon Cable of Michigan, Inc. would have the power to indemnify such person
against such liability under Article V.
Item 21. Exhibits and Financial Statement Schedules.
(a) Exhibits.
<TABLE>
<CAPTION>
Exhibit
Number Exhibit
------- --------------------------------------------------------------------------
<S> <C>
2.1 Taconic Technology Corp. acquisition agreement. (1)
2.2 Securities Purchase Agreement, dated as of May 13, 1999, by and between
Avalon Cable Holdings, LLC, Avalon Investors, L.L.C., Avalon Cable of
Michigan Holdings, Inc., Avalon Cable LLC, Charter Communications Holdings
LLC and Charter Communications, Inc. (1)
3.1 Certificate of Formation of Avalon Cable LLC.
3.2 Certificate of Incorporation of Avalon Cable Holdings Finance, Inc.
3.3 Certificate of Incorporation of Avalon Cable of Michigan Holdings, Inc.
3.4 Articles of Incorporation of Avalon Cable of Michigan, Inc. (1)
3.5 Amended and Restated Limited Liability Company Agreement of Avalon Cable
LLC.
3.6 By-Laws of Avalon Cable Holdings Finance, Inc.
3.7 By-Laws of Avalon Cable of Michigan Holdings, Inc.
3.8 By-Laws of Avalon Cable of Michigan, Inc. (1)
4.1 Indenture, dated as of December 10, 1998 by and among Avalon Cable LLC,
Avalon Cable of Michigan Holdings, Inc. and Avalon Cable Holdings Finance,
Inc., as Issuers and The Bank of New York, as Trustee for the Notes.
4.2 Supplemental Indenture, dated as of March 26, 1999 by and among Avalon
Cable LLC, Avalon Cable of Michigan Holdings, Inc. and Avalon Cable
Holdings Finance, Inc., as Issuers, Avalon Cable of Michigan, Inc., as
guarantor, and The Bank of New York, as Trustee for the Notes.
4.3 Purchase Agreement, dated as of December 3, 1998, by and among Avalon
Cable of Michigan, Inc., Avalon Cable of New England LLC and Avalon Cable
Finance, Inc. and the Initial Purchasers of the Notes.
4.4 Registration Rights Agreement, dated as of December 10, 1998, by and among
Avalon Cable of Michigan, Inc., Avalon Cable of New England LLC and Avalon
Cable Finance, Inc. and the Initial Purchasers of the Notes.
4.5 Form of 9 5/8% Senior Subordinated Notes due 2008 (included in Exhibit 4.1
above as Exhibit A).
5.1 Opinion of Kirkland & Ellis.
10.1 Senior Credit Agreement, dated as of November 6, 1998, among Avalon Cable
of New England LLC, Avalon Cable of Michigan, Inc., Avalon Cable Finance,
Inc., Avalon Cable of Michigan LLC, Lehman Brothers Inc., Fleet Bank of
Massachusetts, N.A., Union Bank of California, N.A. and Lehman Commercial
Paper Inc. (previously filed with the
</TABLE>
II-5
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Exhibit
------- --------------------------------------------------------------------------
<S> <C>
Commission by Avalon Cable of Michigan, Inc., Avalon Cable of Michigan
Holdings, Inc., Avalon Cable Holdings, LLC, ABRY Broadcast Partners III,
L.P., ABRY Equity Investors, L.P., ABRY Holdings III, Inc. and Royce
Yudkoff as Exhibit 99.8 to Amendment No. 4 filed on November 12, 1998, to
its Schedule 13D relating to Mercom, Inc., and incorporated herein by
reference).
10.2 Guarantee and Collateral Agreement, dated as of November 6, 1998 made by
Avalon LLC, Avalon Cable LLC, Avalon Cable of New England Holdings, Inc.,
Avalon Cable Holdings Finance, Inc., Avalon Cable of Michigan Holdings,
Inc. and Avalon Cable of Michigan, Inc. in favor of Lehman Commercial
Paper Inc. (previously filed with the Commission by Avalon Cable of
Michigan, Inc., Avalon Cable of Michigan Holdings, Inc., Avalon Cable
Holdings, LLC, ABRY Broadcast Partners III, L.P., ABRY Equity Investors,
L.P., ABRY Holdings III, Inc. and Royce Yudkoff as Exhibit 99.9 to
Amendment No. 4 filed on November 12, 1998, to its Schedule 13D relating
to Mercom, Inc., and incorporated herein by reference).
10.3 Indenture relating to the Senior Subordinated Notes, dated as of December
10, 1998, by and between Avalon Cable of Michigan, Inc., Avalon Cable of
New England LLC and Avalon Cable Finance, Inc., as issuers, and The Bank
of New York, as Trustee. (1)
10.4 Employment Agreement, dated November 6, 1998, by and among David W. Unger,
Avalon Cable LLC and Avalon Cable of New England LLC. (1)
10.5 Employment Agreement, dated as of November 6, 1998, by and among Joel C.
Cohen, Avalon Cable LLC and Avalon Cable of New England LLC. (1)
10.6 Employment Agreement, dated as of November 6, 1998, by and between Peter
Polimino and Avalon Cable LLC. (1)
10.7 Employment Agreement, dated as of November 6, 1998, by and between Peter
Luscombe and Avalon Cable LLC. (1)
10.8 Amended and Restated Management and Consulting Services Agreement dated as
of November 6, 1998 among ABRY Partners, Inc., Avalon Cable Holdings, LLC,
Avalon Cable of Michigan, Inc., Avalon Cable of New England, Inc., Avalon
Cable of New England, LLC and Avalon Cable LLC. (1)
10.9 Amended and Restated Members Agreement, dated as of March 26, 1999, by and
among Avalon Cable LLC, ABRY Broadcast Partners III, Avalon Cable
Holdings, LLC, Avalon Cable of Michigan Holdings, Inc., Avalon Cable of
New England Holdings, Inc. and Avalon Investors, L.L.C. (1)
12.1 Statement regarding computation of ratio of earnings to fixed charges.
12.2 Statement regarding computation of ratio of earnings to fixed charges for
Avalon Cable of Michigan Holdings, Inc.
12.3 Statement regarding computation of ratio of earnings to fixed charges for
Avalon Cable of Michigan, Inc.(1)
12.4 Statement regarding computation of ratio of earnings to fixed charges for
AMRAC Clear View.(1)
12.5 Statement regarding computation of ratio of earnings to fixed charges for
Pegasus Cable Television, Inc. and Pegasus Cable Television of
Connecticut, Inc.(1)
12.6 Statement regarding computation of ratio of earnings to fixed charges for
Taconic Technology.(1)
</TABLE>
II-6
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Exhibit
------- --------------------------------------------------------------------------
<S> <C>
*21.1 Subsidiaries of Avalon Cable LLC, Avalon Cable Holdings Finance, Inc.,
Avalon Cable of Michigan, Inc. and Avalon Cable of Michigan Holdings, Inc.
23.1 Consents of PricewaterhouseCoopers LLP, Independent Accountants.
23.2 Consent of Greenfield, Altman, Brown, Berger & Katz, P.C., Independent
Accountants.
23.3 Consent of KPMG LLP, Independent Accountants.
23.4 Consent of Kirkland & Ellis (included in Exhibit 5.1 above).
23.5 Consent of Kirkpatrick & Lockhart LLP (included in Exhibit 99.4 below).
*24.1 Power of Attorney.
25.1 Statement of Eligibility of Trustee on Form T-1 with respect to the New
Notes.
99.1 Form of Letter of Transmittal.
99.2 Form of Notice of Guaranteed Delivery.
99.3 Form of Tender Instructions.
99.4 Opinion of Kirkpatrick & Lockhart LLP.
</TABLE>
- --------
<TABLE>
<S> <C>
*Previously Filed.
</TABLE>
**To be filed by Amendment.
(1) Filed as an Exhibit to the Registration Statement on Form S-4 (File No.
333-75453) filed by Avalon Cable of Michigan LLC on May 27, 1999.
(b) Financial Statement Schedules.
All schedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission are not required under
the related instructions, are inapplicable or not material, or the information
called for thereby is otherwise included in the financial statements and
therefore has been omitted.
Item 22. Undertakings.
(a) The undersigned registrants hereby undertake:
(1) To file, during any period in which offers or sales are being made,
a post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement;
(iii) To include any material information with respect to the plan
of distribution not previously disclosed in the registration statement
or any material change to such information in the registration
statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at the time shall be deemed to
be the initial bona fide offering thereof.
II-7
<PAGE>
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
(4) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 (the "Securities Act") may be permitted to
directors, officers and controlling persons of the registrants pursuant to
the provisions described under Item 20 or otherwise, the registrants have
been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable. In the event that a claim
for indemnification against such liabilities (other than the payment by the
registrants of expenses incurred or paid by a director, officer or
controlling person of the registrants in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
registrants will, unless in the opinion of their counsel the matter has
been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by them is against
public policy as expressed in the Securities Act and will be governed by
the final adjudication of such issue.
(5) The undersigned registrants hereby undertake to respond to requests
for information that is incorporated by reference into the prospectus
pursuant to Item 4, 10(b), 11, or 13 of this form, within one business day
of receipt of such request, and to send the incorporated documents by first
class mail or other equally prompt means. This includes information
contained in documents filed subsequent to the effective date of the
registration statement through the date of responding to the request.
(6) The undersigned registrants hereby undertake to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
II-8
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended,
Avalon Cable of Michigan LLC has duly caused this Registration Statement to be
signed on its behalf by the undersigned, thereunto duly authorized, in City of
New York, State of New York, on the 27th day of May, 1999.
Avalon Cable of Michigan LLC
/s/ Joel C. Cohen
By: _________________________________
Name:Joel C. Cohen
Title: Chief Executive Officer,
President and Secretary
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Registration Statement has been signed below by the following persons in the
capacities indicated on the 27th day of May, 1999.
<TABLE>
<CAPTION>
Signature Capacity
--------- --------
<S> <C>
/s/ Joel C. Cohen Manager, Chief Executive Officer, President
___________________________________________ and Secretary (Principal Executive
Joel C. Cohen Officer)
* Vice President--Finance (Principal
___________________________________________ Financial and Accounting Officer)
Peter Polimino
* Manager and Assistant Secretary
___________________________________________
David W. Unger
* Manager, Vice President and Assistant
___________________________________________ Secretary
Jay M. Grossman
* Manager, Vice President and Assistant
___________________________________________ Secretary
Peggy J. Koenig
* Manager
___________________________________________
Royce Yudkoff
</TABLE>
- --------
*The undersigned, by signing his name hereto, does hereby execute this
amendment to the registration statement on behalf of the officers and
directors of the registrant listed above pursuant to the Powers of Attorney
previously filed with the Commission.
<TABLE>
<S> <C>
/s/ Joel C. Cohen
___________________________________________
Joel C. Cohen, Attorney in Fact
</TABLE>
II-9
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended,
Avalon Cable of New England LLC has duly caused this Registration Statement to
be signed on its behalf by the undersigned, thereunto duly authorized, in City
of New York, State of New York, on the 27th day of May, 1999.
Avalon Cable of New England LLC
/s/ Joel C. Cohen
By: _________________________________
Name:Joel C. Cohen
Title: Chief Executive Officer,
President and Secretary
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Registration Statement has been signed below by the following persons in the
capacities indicated on the 27th day of May, 1999.
<TABLE>
<CAPTION>
Signature Capacity
--------- --------
<S> <C>
/s/ Joel C. Cohen Chief Executive Officer, President,
___________________________________________ Secretary and Manager (Principal
Joel C. Cohen Executive Officer)
* Vice President--Finance (Principal
___________________________________________ Financial and Accounting Officer)
Peter Polimino
* Manager and Assistant Secretary
___________________________________________
David W. Unger
* Manager, Vice President and Assistant
___________________________________________ Secretary
Jay M. Grossman
* Manager, Vice President and Assistant
___________________________________________ Secretary
Peggy J. Koenig
* Manager
___________________________________________
Royce Yudkoff
</TABLE>
- --------
*The undersigned, by signing his name hereto, does hereby execute this
amendment to the registration statement on behalf of the officers and
directors of the registrant listed above pursuant to the Powers of Attorney
previously filed with the Commission.
<TABLE>
<S> <C>
/s/ Joel C. Cohen
___________________________________________
Joel C. Cohen, Attorney in Fact
</TABLE>
II-10
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended,
Avalon Cable Finance, Inc. has duly caused this Registration Statement to be
signed on its behalf by the undersigned, thereunto duly authorized, in City of
New York, State of New York, on the 27th day of May, 1999.
Avalon Cable Finance, Inc.
/s/ Joel C. Cohen
By: _________________________________
Name:Joel C. Cohen
Title: Chief Executive Officer,
President and Secretary
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Registration Statement has been signed below by the following persons in the
capacities indicated on the 27th day of May, 1999.
<TABLE>
<CAPTION>
Signature Capacity
--------- --------
<S> <C>
/s/ Joel C. Cohen Chief Executive Officer, President,
___________________________________________ Secretary and Director (Principal
Joel C. Cohen Executive Officer)
* Vice President--Finance (Principal
___________________________________________ Financial and Accounting Officer)
Peter Polimino
* Chairman and Assistant Secretary
___________________________________________
David W. Unger
* Director, Vice President and Assistant
___________________________________________ Secretary
Jay M. Grossman
* Director, Vice President and Assistant
___________________________________________ Secretary
Peggy J. Koenig
* Director
___________________________________________
Royce Yudkoff
</TABLE>
- --------
*The undersigned, by signing his name hereto, does hereby execute this
amendment to the registration statement on behalf of the officers and
directors of the registrant listed above pursuant to the Powers of Attorney
previously filed with the Commission.
<TABLE>
<S> <C>
/s/ Joel C. Cohen
___________________________________________
Joel C. Cohen, Attorney in Fact
</TABLE>
II-11
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended,
Avalon Cable of Michigan, Inc. has duly caused this Registration Statement to
be signed on its behalf by the undersigned, thereunto duly authorized, in City
of New York, State of New York, on the 27th day of May, 1999.
Avalon Cable of Michigan, Inc.
/s/ Joel C. Cohen
By: _________________________________
Name:Joel C. Cohen
Title: Chief Executive Officer,
President and Secretary
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Registration Statement has been signed below by the following persons in the
capacities indicated on the 27th day of May, 1999.
<TABLE>
<CAPTION>
Signature Capacity
--------- --------
<S> <C>
/s/ Joel C. Cohen Chief Executive Officer, President,
___________________________________________ Secretary and Director (Principal
Joel C. Cohen Executive Officer)
* Vice President--Finance (Principal
___________________________________________ Financial and Accounting Officer)
Peter Polimino
* Chairman and Assistant Secretary
___________________________________________
David W. Unger
* Director, Vice President and Assistant
___________________________________________ Secretary
Jay M. Grossman
* Director, Vice President and Assistant
___________________________________________ Secretary
Peggy J. Koenig
* Director
___________________________________________
Royce Yudkoff
</TABLE>
- --------
*The undersigned, by signing his name hereto, does hereby execute this
amendment to the registration statement on behalf of the officers and
directors of the registrant listed above pursuant to the Powers of Attorney
previously filed with the Commission.
<TABLE>
<S> <C>
/s/ Joel C. Cohen
___________________________________________
Joel C. Cohen, Attorney in Fact
</TABLE>
II-12
<PAGE>
EXHIBIT 3.1
CERTIFICATE OF FORMATION
OF
AVALON CABLE LLC
This Certificate of Formation is being executed as of October 21,
1998, for the purpose of forming a limited liability company pursuant to the
Delaware Limited Liability Company Act, 6 Del. C. Sections 18-101, et seq.
--- - -- ---
The undersigned, being duly authorized to execute and file this
Certificate, does hereby certify as follows:
1. Name. The name of the limited liability company is Avalon Cable
----
LLC (the "Company").
2. Registered Office and Registered Agent. The Company's registered
--------------------------------------
office in the State of Delaware is located at 1209 Orange Street, City of
Wilmington, New Castle County, Delaware 19801. The registered agent of the
Company for service of process at such address is The Corporation Trust
Company.
IN WITNESS WHEREOF, the undersigned has duly executed this Certificate
of Formation as of the day and year first above written.
By: /s/ Barbara A. Beach
------------------------------------------
Barbara A. Beach, an Authorized Person
<PAGE>
EXHIBIT 3.2
CERTIFICATE OF INCORPORATION
OF
AVALON CABLE HOLDINGS FINANCE, INC.
================================================================================
ARTICLE ONE
-----------
The name of the corporation is Avalon Cable Holdings Finance, Inc.
(hereinafter called the "Corporation").
ARTICLE TWO
-----------
The address of the corporation's registered office in the State of
Delaware is 1209 Orange Street Wilmington, Delaware 19801, county of New Castle.
The name of its registered agent at such address is The Corporation Trust
Company.
ARTICLE THREE
-------------
The nature of the business or purposes to be conducted or promoted is
to engage in any lawful act or activity for which corporations may be organized
under the General Corporation Law of the State of Delaware.
ARTICLE FOUR
------------
The total number of shares of stock which the corporation has
authority to issue is One Thousand (1,000) shares, all of which shall be shares
of Common Stock, with a par value of $.01 (One Cent) per share.
<PAGE>
ARTICLE FIVE
------------
The name and mailing address of the sole incorporator are as follows:
NAME MAILING ADDRESS
---- ---------------
Barbara A. Beach 200 East Randolph Drive
Suite 5700
Chicago, Illinois 60601
ARTICLE SIX
-----------
The corporation is to have perpetual existence.
ARTICLE SEVEN
-------------
In furtherance and not in limitation of the powers conferred by
statute, the board of directors of the corporation is expressly authorized to
make, alter or repeal the by-laws of the corporation.
ARTICLE EIGHT
-------------
Meetings of stockholders may be held within or without the State of
Delaware, as the by-laws of the corporation may provide. The books of the
corporation may be kept outside the State of Delaware at such place or places as
may be designated from time to time by the board of directors or in the by-laws
of the corporation. Election of directors need not be by written ballot unless
the by-laws of the corporation so provide.
ARTICLE NINE
------------
To the fullest extent permitted by the General Corporation Law of the
State of Delaware as the same exists or may hereafter be amended, a director of
this corporation shall not be liable to the corporation or its stockholders for
monetary damages for a breach of fiduciary duty as a director. Any repeal or
modification of this ARTICLE NINE shall not adversely affect any right or
------------
protection of a director of the corporation existing at the time of such repeal
or modification.
-2-
<PAGE>
ARTICLE TEN
-----------
The corporation expressly elects not to be governed by Section 203 of
the General Corporation Law of the State of Delaware.
ARTICLE ELEVEN
--------------
The corporation reserves the right to amend, alter, change or repeal
any provision contained in this certificate of incorporation in the manner now
or hereafter prescribed herein and by the laws of the State of Delaware, and all
rights conferred upon stockholders herein are granted subject to this
reservation.
I, THE UNDERSIGNED, being the sole incorporator hereinbefore named,
for the purpose of forming a corporation pursuant to the General Corporation Law
of the State of Delaware, do make this certificate, hereby declaring and
certifying that this is my act and deed and the facts stated herein are true,
and accordingly have hereunto set my hand on the 21/st/ day of October, 1998.
/s/ Barbara A. Beach
-----------------------------------
Barbara A. Beach, Sole Incorporator
-3-
<PAGE>
Exhibit 3.3
CERTIFICATE OF INCORPORATION
OF
AVALON CABLE OF MICHIGAN HOLDINGS INC.
ARTICLE ONE
-----------
The name of the corporation is Avalon Cable of Michigan Holdings Inc.
(hereinafter called the "Corporation").
ARTICLE TWO
-----------
The address of the Corporation's registered office in the state of
Delaware is 1013 Centre Road, Wilmington, Delaware 19805, in the City of
Wilmington, County of New Castle. The name of its registered agent at such
address is Corporation Service Company.
ARTICLE THREE
-------------
The purpose of the Corporation is to engage in any lawful act or
activity for which corporations may be organized under the General Corporation
Law of Delaware.
ARTICLE FOUR
------------
The total number of shares which the Corporation shall have the
authority to issue is One Thousand (1,000) shares, all of which shall be shares
of Common Stock, with a par value of $0.01 (One Cent) per share.
ARTICLE FIVE
------------
The name and mailing address of the incorporator is as follows:
Name Address
---- -------
David N. Britsch c/o Kirkland & Ellis
153 East 53rd Street
39th Floor
New York, NY 10022
<PAGE>
ARTICLE SIX
-----------
The directors shall have the power to adopt, amend or repeal By-Laws,
except as may be otherwise be provided in the By-Laws.
ARTICLE SEVEN
-------------
The Corporation expressly elects not to be governed by Section 203 of
the General Corporation Law of the State of Delaware.
ARTICLE EIGHT
-------------
Section 1. Nature of Indemnity. Each person who was or is made a
party or is threatened to be made a party to or is involved in any action, suit
or proceeding, whether civil, criminal, administrative or investigative
(hereinafter a "proceeding"), by reason of the fact that he (or a person of whom
he is the legal representative), is or was a director or officer of the
Corporation or is or was serving at the request of the Corporation as a
director, officer, employee, fiduciary, or agent of another corporation or of a
partnership, joint venture, trust or other enterprise, including service with
respect to employee benefit plans, whether the basis of such proceeding is
alleged action in an official capacity as a director, officer, employee,
fiduciary or agent or in any other capacity while serving as a director,
officer, employee, fiduciary or agent, shall be indemnified and held harmless by
the Corporation to the fullest extent which it is empowered to do so by the
General Corporation Law of the State of Delaware, as the same exists or may
hereafter be amended (but, in the case of any such amendment, only to the extent
that such amendment permits the Corporation to provide broader indemnification
rights than said law permitted the Corporation to provide prior to such
amendment) against all expense, liability and loss (including attorneys' fees
actually and reasonably incurred by such person in connection with such
proceeding and such indemnification shall inure to the benefit of his or her
heirs, executors and administrators; provided, however, that, except as provided
in Section 2 of this Article Eight, the Corporation shall indemnify any such
person seeking indemnification in connection with a proceeding initiated by such
person only if such proceeding was authorized by the Board of Directors of the
Corporation. The right to indemnification conferred in this Article Eight shall
be a contract right and, subject to Sections 2 and 5 of this Article Eight,
shall include the right to payment by the Corporation of the expenses incurred
in defending any such proceeding in advance of its final disposition. The
Corporation may, by action of the Board of Directors, provide indemnification to
employees and agents of the Corporation with the same scope and effect as the
foregoing indemnification of directors and officers.
Section 2. Procedure for Indemnification of Directors and Officers.
Any indemnification of a director or officer of the Corporation under Section 1
of this Article Eight or advance of expenses under Section 5 of this Article
Eight shall be made promptly, and in any event
2
<PAGE>
within 30 days, upon the written request of the director or officer. If a
determination by the Corporation that the director or officer is entitled to
indemnification pursuant to this Article Eight is required, and the Corporation
fails to respond within sixty days to a written request for indemnity, the
Corporation shall be deemed to have approved the request. If the Corporation
denies a written request for indemnification or advancing of expenses, in whole
or in part, or if payment in full pursuant to such request is not made within 30
days, the right to indemnification or advances as granted by this Article Eight
shall be enforceable by the director or officer in any court of competent
jurisdiction. Such person's costs and expenses incurred in connection with
successfully establishing his right to indemnification, in whole or in part, in
any such action shall also be indemnified by the Corporation. It shall be a
defense to any such action (other than an action brought to enforce a claim for
expenses incurred in defending any proceeding in advance of its final
disposition where the required undertaking, if any, has been tendered to the
Corporation) that the claimant has not met the standards of conduct which make
it permissible under the General Corporation Law of the State of Delaware for
the Corporation to indemnify the claimant for the amount claimed, but the burden
of such defense shall be on the Corporation. Neither the failure of the
Corporation (including the Board of Directors, independent legal counsel, or its
stockholders) to have made a determination prior to the commencement of such
action that indemnification of the claimant is proper in the circumstances
because he or she has met the applicable standard of conduct set forth in the
General Corporation Law of the State of Delaware, nor an actual determination by
the Corporation (including its Board of Directors, independent legal counsel, or
its stockholders) that the claimant has not met such applicable standard of
conduct, shall be a defense to the action or create a presumption that the
claimant has not met the applicable standard of conduct.
Section 3. Nonexclusivity of Article Eight. The rights to
indemnification and the payment of expenses incurred in defending a proceeding
in advance of its final disposition conferred in this Article Eight shall not be
exclusive of any other right which any person may have or hereafter acquire
under any statute, provision of the certificate of incorporation, by-law,
agreement, vote of stockholders or disinterested directors or otherwise.
Section 4. Insurance. The Corporation may purchase and maintain
insurance on its own behalf and on behalf of any person who is or was a
director, officer, employee, fiduciary, or agent of the Corporation or was
serving at the request of the Corporation as a director, officer, employee or
agent of another corporation, partnership, joint venture, trust or other
enterprise against any liability asserted against him or her and incurred by him
or her in any such capacity, whether or not the Corporation would have the power
to indemnify such person against such liability under this Article Eight.
Section 5. Expenses. Expenses incurred by any person described in
Section 1 of this Article Eight in defending a proceeding shall be paid by the
Corporation in advance of such proceeding's final disposition unless otherwise
determined by the Board of Directors in the specific case upon receipt of an
undertaking by or on behalf of the director or officer to repay such amount if
it
3
<PAGE>
shall ultimately be determined that he is not entitled to be indemnified by
the Corporation. Such expenses incurred by other employees and agents may be so
paid upon such terms and conditions, if any, as the Board of Directors deems
appropriate.
Section 6. Employees and Agents. Persons who are not covered by the
foregoing provisions of this Article Eight and who are or were employees or
agents of the Corporation, or who are or were serving at the request of the
Corporation as employees or agents of another corporation, partnership, joint
venture, trust or other enterprise, may be indemnified to the extent authorized
at any time or from time to time by the Board of Directors.
Section 7. Contract Rights. The provisions of this Article Eight
shall be deemed to be a contract right between the Corporation and each director
or officer who serves in any such capacity at any time while this Article Eight
and the relevant provisions of the General Corporation Law of the State of
Delaware or other applicable law are in effect, and any repeal or modification
of this Article Eight or any such law shall not affect any rights or obligations
then existing with respect to any state of facts or proceeding then existing.
Section 8. Merger or Consolidation. For purposes of this Article
Eight, references to "the Corporation" shall include, in addition to the
resulting corporation, any constituent corporation (including any constituent
of a constituent) absorbed in a consolidation or merger which, if its separate
existence had continued, would have had power and authority to indemnify its
directors, officers, and employees or agents, so that any person who is or was a
director, officer, employee or agent of such constituent corporation, or is or
was serving at the request of such constituent corporation as a director,
officer, employee or agent of another corporation, partnership, joint venture,
trust or other enterprise, shall stand in the same position under this Article
Eight with respect to the resulting or surviving corporation as he or she would
have with respect to such constituent corporation if its separate existence had
continued.
ARTICLE NINE
------------
The Corporation reserves the right to amend or repeal any provisions
contained in this Certificate of Incorporation from time to time and at any time
in the manner now or hereafter prescribed by the laws of the State of Delaware,
and all rights conferred upon stockholders and directors are granted subject to
such reservation.
* * * *
4
<PAGE>
I, the undersigned, being the sole incorporator hereinbefore named,
for the purpose of forming a corporation in pursuance of the General Corporation
Law of the State of Delaware, do make and file this Certificate, hereby
declaring and certifying that the facts herein stated are true, and accordingly
have hereunto set my hand this 2nd day of June, 1998.
/s/ David N. Britsch
-------------------------
David N. Britsch
Sole Incorporator
5
<PAGE>
EXHIBIT 3.5
EXECUTION COPY
--------------
AMENDED AND RESTATED
LIMITED LIABILITY COMPANY AGREEMENT
OF
AVALON CABLE LLC,
A DELAWARE LIMITED LIABILITY COMPANY
THE MEMBERSHIP INTERESTS REFERENCED HEREIN HAVE BEEN ACQUIRED FOR INVESTMENT AND
HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY
STATE SECURITIES LAWS. WITHOUT REGISTRATION, THESE SECURITIES MAY NOT BE SOLD,
PLEDGED, HYPOTHECATED, OR OTHERWISE TRANSFERRED AT ANY TIME WHATSOEVER, EXCEPT
ON DELIVERY TO THE COMPANY OF AN OPINION OF COUNSEL SATISFACTORY TO THE MANAGERS
OF THE COMPANY THAT REGISTRATION IS NOT REQUIRED FOR THE TRANSFER, OR THE
SUBMISSION TO THE MANAGERS OF THE COMPANY OF OTHER EVIDENCE SATISFACTORY TO THE
MANAGERS TO THE EFFECT THAT ANY TRANSFER WILL NOT BE IN VIOLATION OF THE
SECURITIES ACT OF 1933, AS AMENDED, AND APPLICABLE STATE SECURITIES LAWS OR ANY
RULE OR REGULATIONS PROMULGATED THEREUNDER. ADDITIONALLY, ANY SALE OR OTHER
TRANSFER OF ANY SUCH MEMBERSHIP INTEREST IS SUBJECT TO CERTAIN RESTRICTIONS THAT
ARE SET FORTH IN THIS LIMITED LIABILITY COMPANY AGREEMENT AND THE MEMBERS
AGREEMENT REFERRED TO HEREIN.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
ARTICLE I
DEFINITIONS..................................................................... 1
-----------
1.1 Definitions................................................................ 1
-----------
1.2 Other Definitional Provisions.............................................. 14
------------------------------
ARTICLE II
FORMATION OF THE COMPANY........................................................ 14
------------------------
2.1 Name and Formation......................................................... 14
------------------
2.2 Principal Place of Business................................................ 14
---------------------------
2.3 Registered Office and Registered Agent..................................... 14
--------------------------------------
2.4 Term....................................................................... 14
----
2.5 Purposes and Powers........................................................ 14
-------------------
ARTICLE III
RIGHTS AND DUTIES OF MANAGERS................................................... 15
-----------------------------
3.1 Management................................................................. 15
----------
3.2 Number and Qualifications; Class A Observer................................ 17
-------------------------------------------
3.3 Election................................................................... 17
--------
3.4 Vacancy.................................................................... 18
-------
3.5 Removal.................................................................... 18
-------
3.6 Meetings of Managers....................................................... 18
--------------------
3.7 Quorum..................................................................... 18
------
3.8 Attendance and Waiver of Notice............................................ 18
-------------------------------
3.9 Compensation of Managers................................................... 18
------------------------
3.10 Officers................................................................... 19
--------
3.11 Committees of Managers..................................................... 19
----------------------
3.12 Issuances of Units; Creation of New Classes of Equity Securities........... 20
----------------------------------------------------------------
3.13 Actions Without a Meeting and Telephone Meetings........................... 21
------------------------------------------------
3.14 Indemnification............................................................ 22
---------------
ARTICLE IV
MEETINGS OF MEMBERS............................................................. 22
-------------------
4.1 Meetings of Members........................................................ 22
-------------------
4.2 Notice of Meetings of Members.............................................. 22
-----------------------------
</TABLE>
ii
<PAGE>
<TABLE>
<S> <C>
4.3 Quorum..................................................................... 22
------
4.4 Voting..................................................................... 23
------
4.5 Registered Members......................................................... 23
------------------
4.6 Actions Without a Meeting and Telephone Meetings........................... 23
------------------------------------------------
4.7 Limitation of Liability.................................................... 23
-----------------------
4.8 No Right to Withdraw....................................................... 23
--------------------
4.9 Outside Activities......................................................... 23
------------------
4.10 Business Opportunity....................................................... 23
--------------------
ARTICLE V
UNIT OWNERSHIP.................................................................. 24
--------------
5.1 Unit Ownership............................................................. 24
--------------
ARTICLE VI
CAPITAL ACCOUNTS................................................................ 24
----------------
6.1 Generally.................................................................. 24
---------
6.2 Method of Determining Profit and Loss...................................... 25
-------------------------------------
6.3 No Interest................................................................ 25
-----------
6.4 No Withdrawal.............................................................. 25
-------------
ARTICLE VII
DISTRIBUTIONS................................................................... 26
-------------
7.1 Order of Priority Generally................................................ 26
---------------------------
7.2 Indemnification and Reimbursement for Payments on Behalf of a Unitholder... 27
------------------------------------------------------------------------
7.3 Indemnification for Liabilities............................................ 27
-------------------------------
7.4 Special Distributions...................................................... 28
---------------------
ARTICLE VIII
ALLOCATIONS..................................................................... 29
-----------
8.1 Regular Allocations........................................................ 29
-------------------
8.2 Special Allocations........................................................ 31
-------------------
8.3 Tax Allocations............................................................ 32
---------------
8.4 Curative Allocations....................................................... 33
--------------------
</TABLE>
iii
<PAGE>
<TABLE>
<S> <C>
ARTICLE IX
ELECTIONS AND REPORTS........................................................... 34
---------------------
9.1 Generally.................................................................. 34
---------
9.2 Reports.................................................................... 34
-------
9.3 Financial Statements and Other Information................................. 34
------------------------------------------
9.4 Tax Elections.............................................................. 36
-------------
9.5 Tax Controversies.......................................................... 37
-----------------
ARTICLE X
DISSOLUTION AND TERMINATION..................................................... 38
---------------------------
10.1 Dissolution................................................................ 38
-----------
10.2 Liquidation................................................................ 38
-----------
ARTICLE XI
ISSUANCE OR TRANSFER OF MEMBERSHIP INTERESTS.................................... 40
--------------------------------------------
11.1 Generally.................................................................. 40
---------
11.2 Additional Members......................................................... 41
------------------
11.3 Assignee's Rights.......................................................... 41
-----------------
11.4 Withdrawal of Member....................................................... 41
--------------------
11.5 Tax Matters................................................................ 41
-----------
ARTICLE XII
MATTERS CONCERNING BRIDGE FACILITIES............................................ 42
------------------------------------
12.1 Intentionally Omitted...................................................... 42
---------------------
12.2 Intentionally Omitted...................................................... 42
---------------------
ARTICLE XIII
MISCELLANEOUS PROVISIONS........................................................ 42
------------------------
13.1 Notices.................................................................... 42
-------
13.2 Governing Law.............................................................. 42
-------------
13.3 No Action for Partition.................................................... 43
-----------------------
13.4 Headings and Sections...................................................... 43
---------------------
13.5 Amendments................................................................. 43
----------
13.6 Number and Gender.......................................................... 43
-----------------
13.7 Binding Effect............................................................. 43
--------------
13.8 Counterparts............................................................... 43
------------
13.9 Severability............................................................... 43
------------
13.10 Remedies................................................................... 43
--------
</TABLE>
iv
<PAGE>
<TABLE>
<S> <C>
13.11 Business Days.............................................................. 44
-------------
13.12 Waiver of Jury Trial....................................................... 44
--------------------
13.13 No Strict Construction..................................................... 44
----------------------
13.14 Entire Agreement........................................................... 44
----------------
SCHEDULE I
- ----------
NAMES AND UNIT OWNERSHIP.......................................................... 46
SCHEDULE II
- -----------
OFFICERS OF THE COMPANY........................................................... 48
-----------------------
EXHIBIT A
- ---------
FORM OF NEW BRIDGE LOAN........................................................... 49
-----------------------
</TABLE>
v
<PAGE>
AMENDED AND RESTATED
LIMITED LIABILITY COMPANY AGREEMENT
OF
AVALON CABLE LLC
THIS AMENDED AND RESTATED LIMITED LIABILITY COMPANY AGREEMENT (this
"Agreement"), dated as of March 26, 1999, of Avalon Cable LLC, a Delaware
---------
limited liability company, among the Persons listed on the attached Schedule 1.
----------
WHEREAS, the Company was formed on October 21, 1998 pursuant to and in
accordance with the Act; and
WHEREAS, in accordance with the Act and the Limited Liability Company
Agreement of the Company, dated as of November 6, 1998 (the "Prior Agreement"),
---------------
and to effectuate the provisions of the Securities Purchase Agreement, the
Members desire to, and hereby, amend and restate the Prior Agreement in its
entirety in accordance with this Agreement.
NOW, THEREFORE, the parties hereto, intending to be legally bound, hereby
agree as follows:
ARTICLE I
DEFINITIONS
-----------
1.1 DEFINITIONS. The following terms used in this Agreement shall have
-----------
the following meanings (unless otherwise expressly provided in this Agreement):
"ABRY" means ABRY Broadcast Partners III, L.P., a Delaware limited
----
partnership.
"Act" means the Delaware Limited Liability Company Act, as the same
---
may be amended from time to time.
"Adjusted Capital Account Deficit" means, with respect to any Capital
--------------------------------
Account as of the end of any Fiscal Year or other period, the amount (if any) by
which the balance in such Capital Account is less than zero. For this purpose,
such Person's Capital Account balance will be (a) reduced for any items
described in Treasury Regulation Section 1.704-1(b)(2)(ii)(d)(4), (5), and (6),
- - - -
and (b) increased for any amount such Person is obligated to contribute to the
Company or is treated as being so obligated pursuant to Treasury Regulation
Section 1.704-1(b)(2)(ii)(c) (relating to partner liabilities to a partnership)
-
or 1.704-2(g)(1) and 1.704-2(i) (relating to minimum gain).
"Affiliate" of a Member or Manager means any Person, directly or
---------
indirectly, through one or more intermediaries, controlling, controlled by, or
under common control with the Member or Manager, as applicable. The term
"control" as used in the immediately preceding sentence, means with respect to a
corporation, limited liability company, limited life company or limited duration
<PAGE>
company, the right to exercise, directly or indirectly, more than fifty percent
(50%) of the voting rights attributable to the controlled corporation or limited
liability company and, with respect to any individual, partnership, trust,
estate, association or other entity, the possession, directly or indirectly, of
the power to direct or cause the direction of the management or policies of the
controlled entity.
"Ancillary Agreements" means the Securities Purchase Agreement, the
--------------------
Members Agreement, the Contribution Agreement, the Assumption Agreement, the
Instrument of Assignment, the Put Agreement, the Investment Agreement and all
other documents required to be executed (in each case, as in effect from time to
time) in order to effectuate the transactions contemplated by the Securities
Purchase Agreement.
"Applicable Rate" for any Class A Unit means 15% per annum compounded
---------------
annually as provided in the definition of the term "Yield"; provided, that in
--------
the event a Sale of the Company has not been effected on or prior to the
eleventh anniversary of the First Closing Date, the Applicable Rate shall be 17%
per annum compounded annually as provided in the definition of the term "Yield"
and shall be deemed to have been 17% retroactively from the First Closing Date.
"Assignee" means any Unitholder (including a Person who purchases
--------
Units from the Company) which is not a Member.
"Avalon Bridge Loan" means the promissory note of the Company dated as
------------------
of the First Closing Date in favor of Avalon Cable Holdings, LLC, initially in
the principal amount of $18,000,000.
"Avalon Cable Holdings" means Avalon Cable Holdings, LLC, a Delaware
---------------------
limited liability company.
"Avalon Cable Michigan" means Avalon Cable of Michigan, Inc., a
---------------------
Pennsylvania corporation.
"Avalon Investors" means Avalon Investors, L.L.C., a Delaware limited
----------------
liability company.
"Avalon Members" collectively means Avalon Cable Michigan and Avalon
--------------
New England, Inc.
"Avalon Michigan Interest" means the membership interest of Avalon
------------------------
Cable Michigan owned by the Company.
"Avalon Michigan LLC" means Avalon Cable of Michigan, LLC, a Delaware
-------------------
limited liability company.
"Avalon New England, Inc." means Avalon Cable of New England Holdings
------------------------
Inc., a Delaware corporation.
2
<PAGE>
"Avalon New England Interest" means the membership interest of Avalon
---------------------------
New England LLC owned by the Company.
"Avalon New England LLC" means Avalon Cable of New England LLC, a
----------------------
Delaware limited liability company and wholly-owned Subsidiary of the Company.
"Bankruptcy" means, with respect to the Company: (i) the Company makes
----------
an assignment for the benefit of creditors; (ii) the Company files a voluntary
petition of bankruptcy; (iii) the Company is adjudged a bankrupt or insolvent,
or has entered against it an order for relief, in any bankruptcy or insolvency
proceeding; (iv) the Company files a petition or answer seeking for itself any
reorganization, arrangement, composition, readjustment, liquidation, dissolution
or similar relief under any statute, law or regulation; (v) the Company files an
answer or other pleading admitting or failing to contest the material
allegations of a petition filed against it in any proceeding of a nature
described in this definition; (vi) the Company seeks, consents to or acquiesces
in the appointment of a trustee, receiver or liquidator of the Company or of all
or any substantial part of its properties; (vii) 120 days after the commencement
of any proceeding against the Company seeking reorganization, arrangement,
composition, readjustment, liquidation, dissolution or similar relief under any
statute, law or regulation, such proceeding has not been dismissed; or (viii)
within 90 days after the appointment without the Company's consent or
acquiescence of a trustee, receiver or liquidator of the Company or of all or
any substantial part of its properties, the appointment is not vacated or
stayed, or within 90 days after the expiration of any such stay, the appointment
is not vacated.
For definition of "Board", see definition of "Manager."
-----
"Book Value" means, with respect to any Company property, the
----------
Company's adjusted basis for federal income tax purposes, adjusted from time to
time to reflect the adjustments required or permitted by Treasury Regulation
Section 1.704-1(b)(2)(iv)(d)-(g).
- -
"Bridge Facilities" collectively means Indebtedness incurred under the
-----------------
Lehman Bridge Loan and the Avalon Bridge Loan.
"Business Day" means a day other than a Saturday, Sunday or other day
------------
which is a nationally recognized holiday.
"Cable Michigan" means Cable Michigan Inc., a Pennsylvania
--------------
corporation.
"Capital Account" means, with respect to any Member, the account
---------------
maintained for such Member as provided in Article VI and in a manner which the
Managers determine is in accordance with Treasury Regulations Section 1.704-
1(b)(2)(iv), and this Agreement.
"Capital Contribution" means any contribution to the capital of the
--------------------
Company in cash or property by any Person, whenever made.
3
<PAGE>
"Capital Value" for each Class A Unit means the amount of the Capital
-------------
contribution paid to the Company in consideration for the issuance of such Class
A Unit. Each Class A Unit issued at the First Closing pursuant to the
Securities Purchase Agreement will have a Capital Value of $1,000.
"Class A Manager" has the meaning set forth in Section 3.2(a).
---------------
"Class A Observer" has the meaning set forth in Section 3.2(b).
----------------
"Class A Unit" means a Unit representing a fractional part of the
------------
membership interests of the Company and having the rights and obligations
specified with respect to a Class A Unit in this Agreement which shall be
limited to the 45,000 Units issued to Avalon Investors on the First Closing
Date, and any other Class A Units that may be issued to Avalon Investors
pursuant to Section 7 of the Members Agreement.
"Class B Unit" means a Unit representing a fractional part of the
------------
membership interests of the Company and having the rights and obligations
specified with respect to a Class B Unit in this Agreement.
"Class B-1 Unit" means a Class B Unit of the subclass to be issued to
--------------
Avalon Cable New England, Inc.
"Class B-2 Unit" means a Class B Unit of the subclass to be issued to
--------------
Avalon Cable Michigan.
"Code" means the United States Internal Revenue Code of 1986, as
----
amended and effective as of the date of this Agreement. Such term will be
deemed to include any future amendments to such statutes and any corresponding
provisions of succeeding statutes which are mandatory. Such term will also be
deemed to include any future amendments or succeeding statutes which call for an
election by the Company as to the application of the amendment or succeeding
statutes to the Company if the Tax Matters Partner so elects, to the extent that
the Tax Matters Partner determines that any such amendments and succeeding
statutes do not materially and adversely affect the economic interests of the
Unitholders.
"Company" means the Delaware limited liability company formed and
-------
governed pursuant to this Agreement.
"Company Indebtedness" has the meaning set forth in Section 4.7.
--------------------
"Distribution" means each distribution made by the Company to a
------------
Unitholder, whether in cash, securities of the Company or other property and
whether by liquidating distribution, redemption, repurchase or otherwise;
provided, that none of the following will be a Distribution: (i) any Special
- --------
Distribution; (ii) any recapitalization or exchange of securities of the
Company; (iii) any
4
<PAGE>
subdivision (by Unit split or otherwise) or any combination (by reverse Unit
split or otherwise) of any outstanding Units; and (iv) a Permitted Redemption.
"Equity Securities" of any Person means: (i) any capital stock,
-----------------
partnership, membership, joint venture or other ownership or equity interest,
participation or securities (whether voting or non-voting, whether preferred,
common or otherwise, and including any stock appreciation, contingent interest
or similar right); and (ii) any option, warrant, security or other right
(including debt securities) directly or indirectly convertible into or
exercisable or exchangeable for, or otherwise to acquire directly or indirectly,
any stock, interest, any contract right, any form of derivative, participation
or security described in clause (i) above.
"Fair Market Value" of any asset as of any date means the purchase
-----------------
price which a willing buyer having all relevant knowledge would pay a willing
seller for such asset in an arm's-length transaction.
"Financing Agreement" means any agreement, document or instrument
-------------------
arising from or related to Indebtedness of the Company.
"First Closing Date" means the date upon which the Class A Units were
------------------
originally issued.
"First Test Date" means the 30th day after the eighth anniversary of
---------------
the First Closing Date.
"Fiscal Year" means the Company's fiscal year, which shall be the
-----------
calendar year unless the Managers determine otherwise.
"GAAP" means United States generally accepted accounting principles,
----
as in effect from time to time.
"Indebtedness" means at a particular time, without duplication, (i)
------------
any indebtedness for borrowed money or issued in substitution for or exchange of
indebtedness for borrowed money, (ii) any indebtedness evidenced by any note,
bond, debenture or other debt security, (iii) any indebtedness for the deferred
purchase price of property or services with respect to which a Person is liable,
contingently or otherwise, as obligor or otherwise (other than trade payables
and other current liabilities incurred in the ordinary course of business), (iv)
any commitment by which a Person assures a creditor against loss (including,
without limitation, contingent reimbursement obligations with respect to letters
of credit), (v) any indebtedness guaranteed in any manner by a Person
(including, without limitation, guarantees in the form of an agreement to
repurchase or reimburse), (vi) any obligations under capitalized leases with
respect to which a Person is liable, contingently or otherwise, as obligor,
guarantor or otherwise, or with respect to which obligations a Person assures a
creditor against loss, (vii) any indebtedness secured by a Lien on a Person's
assets
5
<PAGE>
and (viii) any unsatisfied obligation for "withdrawal liability" to a
"multiemployer plan" as such terms are defined under ERISA.
"Lehman Bridge Loan" means the Bridge Credit Agreement dated as of the
------------------
First Closing Date by and among the Company, Avalon Cable Michigan, Inc. and the
other parties whose names appear on the signature pages thereto, as in effect
from time to time.
"Liquidator" has the meaning set forth in Section 10.2.
----------
"Losses" means items of loss and deduction of the Company determined
------
according to Section 6.2.
"Majority" means, with respect to the Managers, a combination of any
--------
of such Managers constituting more than fifty percent (50%) of the number of
Managers who are then elected and qualified.
"Majority in Voting Interest" means Members which own Units having
---------------------------
aggregate Voting Interests in excess of 50%.
"Manager" or "Board" means David Unger, Joel Cohen, Jay Grossman,
------- -----
Peggy Koenig, Royce Yudkoff or any other Person that succeeds any of them in his
or her capacity as a manager of the Company or is elected to act as an
additional manager of the Company as provided in this Agreement.
"Member" means each Person designated as a member on the attached
------
Schedule 1 and hereby made a part of this Agreement, any successor or successors
- ----------
to all or any part of any such Person's interest in the Company, or any other
Person admitted as a member of the Company in accordance with this Agreement,
each in the capacity as a member of the Company.
"Members Agreement" means that certain Amended and Restated Members
-----------------
Agreement dated as of the date of this Agreement by and among the Company and
the Members, as in effect from time to time.
"Member Nonrecourse Deductions" mean "partner nonrecourse deductions"
-----------------------------
as determined in accordance with Treasury Regulations Section 1.704-2(i)(2).
"Mercom" means Mercom, Inc., a Delaware corporation.
------
"Michigan Holdings" means Avalon Cable of Michigan Holdings, Inc., a
-----------------
Delaware corporation.
"Minimum Gain" means Company minimum gain determined pursuant to
------------
Treasury Regulation Section 1.704-2(d).
6
<PAGE>
"Net Aggregate Taxable Operating Income" means, with respect to any
--------------------------------------
holder of Units, the amount, if any, by which taxable income allocated to such
holder for all Fiscal Years exceeds taxable losses allocated to such holder for
all Fiscal Years, except that taxable income or loss shall not include any gains
whatsoever allocated under Section 704(c) of the Code pertaining to
"precontribution gain" as that term is used in Treasury Regulation Section
1.704-3(a). Notwithstanding the foregoing, Net Aggregate Taxable Operating
Income shall include any gains allocated under Section 704(c) of the Code
pertaining to "precontribution gain" but only to the extent such gains are
recognized by the Company with respect to an isolated sale or disposition of
tangible assets not accompanied, directly or indirectly, by a sale or
disposition of intangible assets.
"Net Losses" has the meaning set forth in Section 8.1(b).
----------
"Net Profits" has the meaning set forth in Section 8.1(a).
-----------
"New Bridge Loan" means a loan to the Company: (i) the proceeds of
---------------
which are used to fund in whole or in part acquisitions by the Company or its
Subsidiaries and/or costs associated therewith; (ii) bearing interest at a
maximum rate per annum equal to (A) at any time when any amount remains
outstanding under the Lehman Bridge Loan, the rate in effect at such time under
such loan plus 100 basis points, or (B) at any time when there are no amounts
----
outstanding under the Lehman Bridge Loan, the rate equal to the yield implied by
the trading price of securities issued to refinance the Bridge Facilities plus
----
50 basis points; (iii) that is subordinated to the same extent as, and that has
the same interest payment restrictions as, the Avalon Bridge Loan; and (iv) are
convertible only on the same terms and conditions as the Avalon Bridge Loan.
Each New Bridge Loan shall be evidenced by a promissory note substantially in
the form attached hereto as Exhibit A.
---------
"Nonrecourse Deductions" have the meaning set forth in Treasury
----------------------
Regulation Section 1.704-(2)(e).
"Paid Distributions" as of any Test Date, means the aggregate
------------------
Distributions paid in respect of the Class A Units, on or prior to such Test
Date, pursuant to Section 7.1.
"Permitted Pari-Passu Equity" has the meaning set forth in Section
---------------------------
3.12(b).
"Permitted Redemption" means the redemption of Equity Securities
--------------------
issued to any management employee of or consultant to the Company or any of its
Subsidiaries in connection with any termination of employment or consulting
arrangement.
"Person" means any individual, corporation, partnership, limited
------
liability company, trust, joint venture, governmental entity or other
unincorporated entity, association or group.
"PPPE Applicable Rate" for any PPPE Unit means the annual percentage
--------------------
rate upon which the preferred return, if any, in respect of such PPPE Units
shall accrue.
7
<PAGE>
"PPPE Capital Value" for any PPPE Unit means the aggregate amount of
------------------
Capital Contributions made in respect of such PPPE Unit.
"PPPE Issuance Date" for any PPPE Unit means the date upon which the
------------------
Company issues such PPPE Unit.
"PPPE Unit" means a Unit representing a fractional part of the
---------
membership interests of the Company and constituting Permitted Pari-Passu
Equity.
"PPPE Unpaid Yield" on any PPPE Unit means, as of any date, an amount
-----------------
equal to the excess, if any, of (a) the aggregate PPPE Yield accrued on such
PPPE Unit prior to such date, over (b) the aggregate amount of prior
Distributions made on such PPPE Unit by the Company pursuant to Section 7.1(b).
"PPPE Unreturned Capital Value" for any PPPE Unit means the amount of
-----------------------------
the PPPE Capital Value for such PPPE Unit, reduced by all Distributions made by
the Company in respect of such Unit pursuant to Section 7.1(c).
"PPPE Yield" on any PPPE Unit means the amount accruing in respect of
----------
such Unit on an annual or other specified basis, at the PPPE Applicable Rate for
such PPPE Unit in effect from time to time, on (a) the PPPE Unreturned Capital
Value for such PPPE Unit plus (b) the PPPE Unpaid Yield for such PPPE Unit for
all prior annual or other applicable periods (or portions thereof). In
calculating the amount of any Distribution to be made during an annual or other
applicable period, the portion of the PPPE Yield for such portion of such annual
or other applicable period elapsing before such Distribution is made will be
taken into account.
"Prior Agreement" has the meaning set forth in the recitals.
---------------
"Profits" means items of income and gain of the Company determined
-------
according to Section 6.2
"Reference Rate" means the rate equal to the yield implied by the
--------------
trading price of securities issued to refinance the Bridge Facilities plus 50
----
basis points.
"Related Agreements" means the Securities Purchase Agreement and the
------------------
Members Agreement.
"Related Boards" means each of the boards of directors or similar
--------------
governing bodies of Avalon Cable Holdings and its Subsidiaries (other than
Company).
"Related Party" means ABRY, ABRY Partners, Inc., a Delaware
-------------
corporation, Avalon Cable Finance, Inc., a Delaware corporation, Avalon Cable
Holdings, Avalon Cable Holdings Finance, Inc., a Delaware corporation, Michigan
Holdings, Avalon Cable Michigan, Avalon New
8
<PAGE>
England, Inc., Avalon New England LLC, Mercom and each of their respective
Subsidiaries and Affiliates.
"Related-Party Agreement" means any agreement, contract or arrangement
-----------------------
between the Company and/or any of its Subsidiaries, on the one hand, and any
other Related Party (other than the Company or any of its Subsidiaries), on the
other hand.
"Restricted Reorganization" means any reorganization of the Company
-------------------------
whether by merger, consolidation, any reclassification or other change of any
Units or any recapitalization of the Company, in each case only where: (i) the
Company is not the surviving entity to the reorganization; (ii) the
classification of the Class A Units as equity interests for federal income tax
purposes is affected; (iii) the securities received by the Class A Unitholders
would materially adversely affect the interest of the Class A Unitholders; or
(iv) the rights and priorities of the Class A Units, including, but not limited
to, Yield, Capital Value, Allocations, Distributions and voting rights as
provided for in this Agreement are adversely affected.
"Sale of the Company" means any direct or indirect sale or other
-------------------
disposition of all or substantially all of the consolidated assets of the Parent
and its Subsidiaries, including, but not limited to, Avalon Michigan LLC and
Avalon New England LLC, whether by means of a sale or other disposition of
assets, a sale or other disposition of Equity Securities (including a sale or
disposition of Equity Securities of the Company and/or its Members or the direct
or indirect owners of its Members), a merger, a consolidation or otherwise, in
one or more transactions; except that for purposes of Section 3.1(b)(vi) and
------
Section 10.1, the word "Parent" as it appears in the first sentence of this
definition shall be replaced with the word "Company".
"Securities Purchase Agreement" means that certain Securities Purchase
-----------------------------
Agreement dated as of November 6, 1998 among the Company, Avalon Cable Holdings,
Michigan Holdings, Avalon Cable Michigan, Avalon New England, Inc. and Avalon
Investors, as in effect from time to time.
9
<PAGE>
"Special Capital Account Adjustment" mean an allocation of Net Profits
----------------------------------
pursuant to Section 8.1(a)(v)(a) to Unitholders which own Class A Units such
that after this allocation, the Net Aggregate Allocation of Section 8.1(a)(v)
Profits for each Unitholder of Class A Units equals the Target Amount for each
Unitholder of Class A Units. The "Net Aggregate Allocation of Section 8.1(a)(v)
---------------------------------------------
Profits" for each Unitholder which owns Class A Units equals the aggregate
- -------
allocations of Net Profits to such owner's Class A Units that have been made
pursuant to Section 8.1(a)(v)(a) and (b) for all periods, reduced by the
aggregate allocations of Net Losses pursuant to Section 8.1(b)(i) that have been
made against the Net Profits of such owner's Class A Units allocated under
Section 8.1(a)(v)(a) and (b). The "Target Amount" for each Unitholder is
-------------
determined by multiplying the number of Units owned by such Unitholder as a
percentage of the total number of Units outstanding, by an amount equal to the
Aggregate Capital Balances, as defined herein. The "Aggregate Capital Balances"
--------------------------
equal the net positive Capital Account balances of all Unitholders which own
Class B Units with respect to those Class B Units, increased by the Net
Aggregate Allocation of Section 8.1(a)(v) Profits for all Unitholders which own
Class A Units, including the allocation being currently made of Net Profits
under Section 8.1(a)(v)(a). However, the Aggregate Capital Balances taken into
account for all Unitholders in determining the amount of the allocation of Net
Profits pursuant to Section 8.1(a)(v)(a) shall be calculated before any
allocation of Net Profits under Section 8.1(a)(v)(b) is made for the same year.
No allocation of Net Profits under the Special Capital Account Adjustment shall
be made to Unitholders which own Class B Units with respect to such Class B
Units. Moreover, no negative allocation of Net Profits shall be made under the
Special Capital Account Adjustment. In addition, the Special Capital Account
Adjustment shall not be made for any year to the extent that Capital Account
balances of all Unitholders which own Class B Units with respect to Class B
Units, is not a positive number immediately prior to the time that such
adjustment would otherwise be made.
For example, assume that as of Year X, a Unitholder of Class A Units
owns 40,000 Class A Units (which comprise all of the Class A Units), and the
total number of Units outstanding equals 551,724 Units. Thus the number of
Units owned by such Unitholder as a percentage of the total number of Units
outstanding equals 7.25 percent. Assume the net positive Capital Account
balances of all Unitholders which own Class B Units with respect to those Class
B Units equals $45,000,000. In addition, assume that the Net Aggregate
Allocation of Section 8.1(a)(v) Profits with respect to the Unitholder of Class
A Units, before determining the allocation being currently made, is equal to
zero. In such a case, a Special Capital Account Adjustment, i.e., an allocation
of Net Profits to the Unitholder of Class A Units pursuant to Section
8.1(a)(v)(a), will be necessary. The amount of Net Profits that will be
allocated pursuant to Section 8.1(a)(v)(a), (assuming Net Profits exist adequate
to make such allocation) will be equal to $3,517,520. After such allocation,
the Net Aggregate Allocation of Section 8.1(a)(v) Profits with respect to the
Unitholder of Class A Units will be equal to $3,517,520. This equals the Target
Amount for such Unitholder which is equal to 7.25 percent multiplied times the
sum of $45,000,000 and $3,517,520. Assume, in Year X, that Net Profits actually
allocated pursuant to Section 8.1(a)(v)(a) are equal to $3,517,520, and that an
additional $1 million of Net Profits is allocated for such year under Section
8.1(a)(v)(b). Note that the additional $1 million of Net Profits allocated for
such year under Section 8.1(a)(v)(b) is not taken into account in determining
the amount of Net Profits allocated under Section 8.1(a)(v) for such year,
10
<PAGE>
although it will be taken into account in making such calculations for
subsequent years. Note also that allocations of Yield to the owners of Class A
Units (and other higher priority allocations), which occur prior to any
allocations discussed in this definition, are not taken into account for
purposes of these calculations.
Assume in the subsequent year, that the net positive Capital Account
balances of all Unitholders which own Class B Units are equal to $45,927,500.
(This equals the initial Capital Account balance of $45,000,000, plus an
allocation of 92.75 percent of $1 million in Net profits under Section
8.1(a)(v)(b) for the previous year.) In addition, assume that the number of
Units owned by all Persons remains the same. The Net Aggregate Allocation of
Section 8.1(a)(v) Profits for each Unitholder which owns Class A Units is equal
to $3,590,020. (This equals the allocation of $3,517,520 under Section
8.1(a)(v)(a) in Year X, plus 7.25 percent of the $1 million allocated in Year X
under Section 8.1(a)(v)(b). No additional allocation of Net Profits pursuant to
Section 8.1(a)(v)(a) will be required, since the Net Aggregate Allocation of
Section 8.1(a)(v) Profits for each Unitholder which owns Class A Units is equal
to $3,590,020, which equals the Target Amount. The Target Amount is equal to
7.25 percent multiplied by the sum of $45,927,500 and $3,590,020. Thus, since
no additional allocation of Net Profits pursuant to Section 8.1(a)(v)(a) will be
required, any additional profits remaining shall be allocated under the residual
provision of Section 8.1(a)(v)(b) for this year.
The intention of the Special Capital Account Adjustment is to ensure
that if the Company proves profitable, owners of Class A Units receive (both in
terms of Net Profits as well as in ultimate Distributions): (i) the Yield with
respect to such Units, (ii) the Capital Value with respect to such Units, and
(iii) a residential amount of any gains remaining based on the number of Units
owned by such Unitholder as a percentage of the total number of Units
outstanding. (In the example, the residual amount is 7.25 percent). However,
the appropriate residual amount will not be achieved to the extent that the
Class B Units have a positive capital account balance before the allocation of
residual profits is made based on the 92.75 percent/7.25 percent (in the
example) residual sharing ratio of Section 8.1(a)(v)(b). In such a situation,
the Class B Units will receive more than 92.75 percent (in the example) of the
residual amount, since their initial positive Capital Account Balance will
increase the amount received and the total will exceed 92.75 percent (in the
example) of the residual amount left after payment of the Yield and Capital
Value with respect to owners of Class A Units. Thus, the purpose of the Special
Capital Account Adjustment is to allocate additional Net Profits to the owners
of Class A Units so that the "starting point" for such Class A Units (excluding
Yield and Capital Value) is proportionate, based on the percentage of total
Units owned, to the "starting point" for Class B Units which equals the positive
Capital Account balances for such Class B Units. Thus, additional profits are
allocated to the Holders of Class A Units, so that the "starting point" for such
Units equals 7.25 percent (in the example) of the sum of the positive Capital
Account balances for all Class B Holders and the additional profits that have
been just been allocated to the owners of Class A Units.
"Special Distribution" means a distribution made pursuant to Section
--------------------
7.3.
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"Special Sale" means a sale or other disposition, directly or
------------
indirectly, of the equity interest or all or substantially all of the
consolidated assets of Avalon New England LLC.
"Special Sale Price" means the sum of the aggregate cash consideration
------------------
and the aggregate Fair Market Value of any other property paid by the
acquiror(s) in connection with a Special Sale.
"Special Sale Proceeds" means the cash portion of the Special Sale
---------------------
Price received by Unitholders.
"Subsidiary" means, with respect to any Person, any corporation,
----------
limited liability company, partnership, association or other business entity of
which (i) if a corporation, a majority of the total voting power of shares of
stock entitled (without regard to the occurrence of any contingency) to vote in
the election of directors, managers or trustees thereof is at the time owned or
controlled, directly or indirectly, by such Person or one or more of the other
Subsidiaries of such Person or a combination thereof, or (ii) if a limited
liability company, partnership, association or other business entity, a majority
of the partnership or other similar ownership interest thereof is at the time
owned or controlled, directly or indirectly, by any Person or one or more
Subsidiaries of such Person or entity or a combination thereof. For purposes of
this Agreement, a Person or Persons shall be deemed to have a majority ownership
interest in a limited liability company, partnership, association or other
business entity if such Person or Persons shall be allocated a majority of
limited liability company, partnership, association or other business entity
gains or losses or shall be or control any managing director, managing member,
or general partner of such limited liability company, partnership, association
or other business entity.
"Target Distribution Amount" on the Class A Units means, on the First
--------------------------
Test Date, an amount equal to the aggregate Yield accrued on such Class A Unit
during such the first Target Year. The Target Distribution Amount will increase
on each anniversary of the First Test Date in the amount equal to the aggregate
Yield accrued on the Class A Units during the immediately preceding Target Year.
"Target Year" means any 12-month period beginning on either the
-----------
seventh anniversary of the First Closing Date or any anniversary of such date.
"Tax Distribution Amount" means the Net Aggregate Taxable Operating
-----------------------
Income of the Company allocated to such holder, multiplied by the combined
Federal and New York State maximum, effective marginal individual tax rates.
"Tax Matters Partner" has the meaning set forth in Code Section 6231.
-------------------
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"Test Date" means the First Test Date and any day thereafter.
---------
"Transfer" has the meaning which the Members Agreement assign to that
--------
term.
"Transferor Member" has the meaning set forth in Section 11.4.
-----------------
"Treasury Regulations" means the income tax regulations promulgated
--------------------
under the Code and effective as of the date of this Agreement. Such term will
be deemed to include any future amendments to such regulations and any
corresponding provisions of succeeding regulations which are mandatory. Such
term will also be deemed to include any future amendments or succeeding
regulations which call for an election by the Company as to the application of
the amendment or succeeding regulation to the Company if the Managers so elect,
to the extent that the Managers determine that any such amendments and
succeeding regulations do not materially and adversely affect the economic
interests of the Unitholders.
"Unallocated Yield" on any Class A Unit means, as of any date, an
-----------------
amount equal to the excess, if any, of (a) the aggregate Yield accrued on such
Class A Unit prior to such date, over (b) the aggregate amount of all prior
allocations pursuant to Sections 8.1(a)(ii) and (iii) in respect of such Class A
Unit reduced by the aggregate amount of all prior allocations pursuant to
Section 8.1(b)(iii) in respect of such Class A Unit.
"Unit" means a fractional part of the membership interests of the
----
Company; provided, that any class of Units issued will have designations,
--------
preferences or special rights set forth in this Agreement and the Company
interest represented by such class of Units will be determined in accordance
with such designations, preferences or special rights.
"Unitholder" means any Person, whether or not a Member, in its
----------
capacity as owner of one or more outstanding Units, as reflected on the
Company's books and records.
"Unpaid Yield" on any Class A Unit means, as of any date, an amount
------------
equal to the excess, if any, of (a) the aggregate amount of the accrued Yield on
such Class A Unit accrued for all prior annual periods (or portions thereof) as
of such date over (b) the aggregate amount of all prior Distributions made by
the Company pursuant to Section 7.1(a) in respect of the Unpaid Yield on such
Class A Unit and all prior Distributions made on such Class A Unit pursuant to
Section 7.1(b).
"Unreturned Capital Value" with respect to any Class A Unit, means the
------------------------
amount of the Capital Value for such Class A Unit, reduced by the aggregate
amount of all prior Distributions made by the Company pursuant to Section 7.1(a)
in payment of the Unreturned Capital Value of such Class A Unit and all
Distributions made by the Company in respect of such Unit pursuant to Section
7.1(c).
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"Voting Interest" with respect to Class B Units held by any Member
---------------
means the percentage which such Class B Units represent of the aggregate number
of Class B Units held by Persons who are Members. Class B Units which are owned
by Persons who are not Members and Class A Units will have no Voting Interest.
"Yield" on any Class A Unit means the amount accruing in respect of
-----
such Unit on an annual basis, at the Applicable Rate in effect from time to time
calculated by multiplying such Applicable Rate by the sum of subparagraphs (a)
and (b). Subparagraph (a) shall equal the Unreturned Capital Value for such
Class A Unit. Subparagraph (b) shall equal the aggregate yield accrued, at the
Applicable Rate, on such Class A Unit prior to such date for all prior annual
periods (or portions thereof) ending on December 31, less the aggregate amount
of all prior Distributions made by the Company pursuant to Section 7.1(a) in
respect of the Unpaid Yield on such Class A Unit and all prior Distributions
made on such Class A Unit pursuant to Section 7.1(b). In calculating the amount
of any Distribution to be made during an annual period, the portion of the Yield
on any Class A Unit for such portion of such annual period elapsing before such
Distribution is made will be taken into account. Similarly, in determining the
Yield, Unallocated Yield, or Unpaid Yield as of any particular date in question,
for purposes of this Agreement or any other agreement, the Yield on any Class A
Unit for the portion of such annual period prior to and ending upon the
particular date in question will be taken in account and will be included in the
determination of Yield, Unallocated Yield, or Unpaid Yield, as the case may be.
1.2 OTHER DEFINITIONAL PROVISIONS. Capitalized terms used in this
-----------------------------
Agreement which are not defined in this Article I have the meanings contained
elsewhere in this Agreement. Defined terms used in this Agreement in the
singular shall import the plural and vice versa.
----------
ARTICLE II
FORMATION OF THE COMPANY
------------------------
2.1 NAME AND FORMATION. The name of the Company is "Avalon Cable LLC"
------------------
The Company was formed upon the filing of the Certificate of Formation of the
Company with the Secretary of State of the State of Delaware on October 21,
1998, pursuant to the Act. This Agreement shall constitute the "limited
liability company agreement" (as that term is used in the Act) of the Company.
2.2 PRINCIPAL PLACE OF BUSINESS. The Company may locate its place or
---------------------------
places of business and registered office at any other place or places as the
Managers may from time to time deem necessary or advisable.
2.3 REGISTERED OFFICE AND REGISTERED AGENT. The Company's registered
--------------------------------------
office shall be at Corporation Trust Center, 1209 Orange Street, City of
Wilmington, County of New Castle, Delaware, and the name of its initial
registered agent at such address shall be The Corporation Trust Company.
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<PAGE>
2.4 TERM. The term of existence of the Company shall be perpetual from
----
the date its Certificate of Formation was filed with the Secretary of State of
Delaware, unless the Company is earlier dissolved in accordance with either the
provisions of this Agreement or the Act.
2.5 PURPOSES AND POWERS. The purposes and character of the business of
-------------------
the Company shall be to transact any or all lawful business for which limited
liability companies may be organized under the Act. Notwithstanding the
foregoing, so long as there is any Unpaid Yield or Unreturned Capital Value with
respect to the Class A Units, without the consent of a majority of the holders
of the Class A Units, the Company shall not engage in any business other than in
the operation and development of cable television systems, internet and
telephony services, any other business activity conducted by cable or
subscription television companies from time to time, and in each case any
activity reasonably related or incidental thereto and reasonable extensions
thereof. The Company shall have any and all powers which are necessary or
desirable to carry out the purposes and business of the Company, to the extent
the same may be legally exercised by limited liability companies under the Act.
The Company shall carry out the foregoing activities pursuant to the
arrangements set forth in this Agreement.
ARTICLE III
RIGHTS AND DUTIES OF MANAGERS
-----------------------------
3.1 MANAGEMENT.
----------
(a) AUTHORITY GENERALLY. The powers of the Company shall be exercised
-------------------
by or under the authority of, and the business and affairs of the Company
shall be managed under, the Managers. In addition to the powers and
authorities expressly conferred by this Agreement upon the Managers, the
Managers may exercise all such powers of the Company and do all such lawful
acts and things as are not directed or required to be exercised or done by
the Members by the Act or this Agreement, including, but not limited to,
contracting for or incurring debts, liabilities and other obligations on
behalf of the Company. Except as otherwise expressly provided in this
Agreement, no Member (in such capacity) shall have the authority or power
to act for or on behalf of the Company; to take part in the day-to-day
management, the operation, or control of the business and affairs of the
Company; to do any act that would be binding on the Company; or to incur
any expenditures, debts, liabilities or obligations on behalf of the
Company. No non-Member Manager will be treated by virtue of its position
as Manager of the Company as a Member of the Company or as a partner of or
joint venturer with any Member of the Company. The provisions of this
Article III concerning the Managers and the actions thereof are subject to
the provisions of the Members Agreement.
(b) LIMITATION OF AUTHORITY. So long as there is any Unpaid Yield or
-----------------------
Unreturned Capital Value with respect to the Class A Units, without first
obtaining the
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<PAGE>
written consent of Members which own a majority of the outstanding Class A
Units owned by Members, the Managers shall not have the authority to:
(i) create new classes of Equity Securities senior or pari
passu to the Class A Units in right of allocation or payment of the
Unpaid Yield or Unreturned Capital Value (including in connection with
a Special Distribution), except as otherwise provided in Section
------
3.12(b);
(ii) redeem securities of the Company ranking junior to the
Class A Units in right of allocation or payment of the Unpaid Yield or
Unreturned Capital Value (including in connection with a Special
Distribution), except for Permitted Redemptions;
------
(iii) make Distributions to any class of Equity Securities,
except for Distributions in respect of Class A Units or Distributions
------
made in respect of Permitted Pari-Passu Equity in accordance with
Section 3.12(b); provided, that the Managers shall be permitted to
--------
cause the Company to make Distributions in accordance with Section
7.1(a) without first having obtained the written consent of such
Members;
(iv) authorize the issuance of additional Class A Units (other
than for issuance to Avalon Investors pursuant to Section 7 of the
Members Agreement) or any security convertible into or exercisable or
exchangeable for Class A Units;
(v) mandate additional capital contributions by holders of
Class A Units (other than pursuant to Section 7 of the Members
Agreement or Section 7.2(a) of this Agreement);
(vi) admit or cause to admit additional members to Avalon
Michigan LLC or Avalon New England LLC (other than the Company), or
issue Equity Securities of such entities (other than to the Company),
or directly or indirectly cause a sale or other disposition of more
than 50% (but not a Sale of the Company) of the consolidated assets of
the Company and its Subsidiaries, taken as a whole;
(vii) authorize or cause, directly or indirectly, Avalon
Michigan LLC or Avalon New England LLC or any direct or indirect
Subsidiary of the Company to engage in transactions or other acts that
the Company is prohibited from engaging in pursuant to the terms and
conditions of this Agreement;
(viii) enter into and/or amend or otherwise change any Related
Party Agreement other than issuances of Equity Securities of the
Company and Permitted Pari Passu Equity in accordance with this
Agreement, provided, that the Company may: (i) borrow money from
--------
Related Parties pursuant to New Bridge Loans; (ii)
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<PAGE>
amend this Agreement pursuant to the terms hereof; (iii) amend the
Members Agreement pursuant to the terms thereof; and (iv) make
payments of types permitted under Section 7.6(c) or (f) of the Senior
Credit Agreement.
(ix) issue any Equity Securities of the Company to employees,
consultants, officers or directors of the Company other than for cash
in a transaction in which the owners of Class A Units are entitled to
participate as provided in the right of first refusal granted in
Section 6(a) of the Members Agreement;
(x) authorize or give effect to a Restricted Reorganization; or
(xi) amend any of Sections 3.1(b)(i) through (b)(xi) hereof.
3.2 NUMBER AND QUALIFICATIONS; CLASS A OBSERVER.
-------------------------------------------
(a) The number of Managers of the Company initially shall be five, and
may be increased or decreased by the Managers from time to time; provided,
--------
that: (i) in the event that a Sale of the Company has not been effected on
or prior to the eleventh anniversary of the First Closing Date, but only
until a Sale of the Company occurs; or (ii) so long as Paid Distributions
are less than or equal to the Target Distribution Amount on any Test Date,
the number of Managers of the Company shall be increased by one additional
member (as the case may be, the "Class A Manager") and the vacancy
---------------
resulting therefrom shall be filled by action of Members which own a
majority of the Class A Units owned by Members; provided further, that if
----------------
at any time the right to designate the Class A Manager ceases, the Class A
Manager shall be automatically removed as a Manager and the number of
Managers will be reduced by one (subject to later increase by the Managers
or as provided in this proviso) once a Sale of the Company occurs. Neither
the Managers nor the Class A Observer need be residents of the State of
Delaware.
(b) The Members which own a majority of the Class A Units owned by
Members shall be entitled to designate an individual who may attend
meetings (whether such meetings are conducted in person or by telephone) of
the Board or any committee of the Board (the "Class A Observer"); provided,
---------------- --------
that: (i) at such meetings the Class A Observer shall act in the sole
capacity of a non-voting observer; (ii) neither the absence of the Class A
Observer from any meeting of the Board nor the absence of notice to the
Class A Observer shall prevent the transaction of business in accordance
with this Article III at any of such meetings or affect the validity of any
written action of the Managers in lieu of a meeting in accordance with this
Article III; and (iii) the Board may exclude the Class A Observer from any
meeting to the extent that, in the Board's reasonable judgment the presence
of the Class A Observer at such meeting could result in the waiver by the
Company of any evidentiary or discovery privilege between the Company and
its professional advisors.
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<PAGE>
(C) The Company shall give the Class A Observer: (i) notice of
meetings of the Board or any committee of the Board as and when the same
are given to the Managers; (ii) notice of meetings of the Related Boards or
any committee of such Related Boards as and when the same are given to the
members of such Related Boards; and (iii) all materials provided to the
Board or any committee of the Board, except to the extent that, in the
Board's reasonable judgment, the release of such materials or information
by the Company or any of its Affiliates would result in the waiver by the
Company or such Affiliate of any evidentiary or discovery privilege between
the Company and its professional advisors. The Class A Observer shall
agree to hold in confidence and trust and not to misuse or disclose any
confidential information provided to the Class A Observer in accordance
with this Section 3.2 or otherwise.
3.3 ELECTION. The individuals identified in the definition of the term
--------
"Manager" are hereby elected to serve as the initial Managers. Each such
individual, or any other Manager, shall hold office until he or she dies,
resigns or is removed by action of the Members (except as provided in the
proviso to Section 3.2(a)).
3.4 VACANCY. Any vacancy occurring for any reason in the number of
-------
Managers (including by an increase in the number of Managers authorized pursuant
to Section 3.2) shall be filled by action of the Members.
3.5 REMOVAL. Managers may be removed at any time, with or without cause,
-------
by action of the Members; provided, that: (i) a Class A Manager elected under
--------
the proviso to Section 3.2(a) can be removed only upon action of the Members
which own a majority of the Class A Units owned by Members; and (ii) the vacancy
resulting from a removal of the Class A Manager pursuant to the preceding clause
(i) shall be filled by action of the Members which own a majority of the Class A
Units owned by Members.
3.6 MEETINGS OF MANAGERS. Meetings of the Managers may be held at such
--------------------
time and place either within or without the State of Delaware as shall from time
to time be determined by the Managers. Initially, the Managers shall have
meetings at least once each calendar quarter. Meetings of the Managers may be
called by a Majority of the Managers on not fewer than five (5) Business Days'
written notice to each Manager, unless such meeting shall be conducted by
------
telephone, in which case such written notice must be given not fewer than two
(2) Business Days prior to such meeting.
3.7 QUORUM. At all meetings of the Managers, the presence of a Majority
------
of the Managers shall be necessary and sufficient to constitute a quorum for the
transaction of business unless a greater number is required by law. The act of
a Majority of the Managers shall be the act of the Managers, except as otherwise
provided by law or this Agreement. If a quorum shall not be present at any
meeting of the Managers, the Managers present at the meeting may adjourn the
meeting from time to time, without notice other than announcement at the
meeting, until a quorum shall be present. A Manager may vote or be present at a
meeting either in Person or by proxy.
18
<PAGE>
3.8 ATTENDANCE AND WAIVER OF NOTICE. Attendance of a Manager at any
-------------------------------
meeting shall constitute a waiver of notice of such meeting, except where a
Manager attends a meeting for the express purpose of objecting to the
transaction of any business on the ground that the meeting is not lawfully
called or convened. Neither the business to be transacted at, nor the purpose
of, any regular or special meeting of the Managers need be specified in the
notice or waiver of notice of such meeting.
3.9 COMPENSATION OF MANAGERS. Managers, as such, shall not receive any
------------------------
stated salary for their services; provided, that any Manager which is not a
--------
Related Party or affiliated with a Related Party (other than by reason of being
a manager, or serving in a similar capacity, thereof) shall receive such
compensation for its or his services as may be from time to time agreed upon by
a Majority in Voting Interest. In addition, a fixed sum and expenses of
attendance, if any, may be allowed for attendance at each regular or special
meeting of the Managers, provided that nothing contained in this Agreement shall
be construed to preclude any Manager from serving the Company in any other
capacity and receiving compensation for such service.
3.10 OFFICERS. The Managers may, from time to time, designate one or more
--------
Persons to be officers of the Company. The initial officers of the Company are
listed on the attached Schedule II. No officer need be a Member or a Manager.
-----------
Any officers so designated shall have such authority and perform such duties as
the Managers may, from time to time, delegate to them. Without limiting the
foregoing, the officers (who shall at all times be subject to the authority of
the Board) will have the authority to conduct the day-to-day operations of the
Company consistent with and in the ordinary course of its business. The
Managers may assign titles to particular officers, including, without
limitation, chief executive officer, president, vice president, chief operating
officer, secretary, assistant secretary, treasurer and assistant treasurer.
Each officer shall hold office until his or her successor shall be duly
designated and shall qualify or until his or her death or until he or she shall
resign or shall have been removed. Any number of offices may be held by the
same Person. The salaries or other compensation, if any, of the officers and
agents of the Company shall be fixed from time to time by the Managers. Any
officer may be removed as such, either with or without cause, by the Managers
whenever in their judgment the best interests of the Company will be served
thereby. Any vacancy occurring in any office of the Company may be filled by
the Managers.
3.11 COMMITTEES OF MANAGERS.
----------------------
(a) CREATION. The Managers may, by resolution, designate from among
--------
the Managers one or more committees (including, but not limited to, an
Audit Committee, a Nominating Committee, and a Compensation Committee),
each of which shall be comprised of one or more Managers, and may designate
one or more of the Managers as alternate members of any committee, who may,
subject to any limitations imposed by the Managers, replace absent or
disqualified Managers at any meeting of that committee. Any such
committee, to the extent provided in such resolution, shall have and may
exercise all of the authority of the Managers, subject to the limitations
set forth in the Act or in the
19
<PAGE>
establishment of the committee. Any members thereof may be removed by a
Majority of the Managers. Unless the resolution designating a particular
committee or this Agreement expressly so provides, a committee of the
Managers shall not have the authority to authorize or make a distribution
of Company cash or property to the Members or to authorize the issuance of
interests in the Company.
(b) LIMITATION OF AUTHORITY. No committee of the Managers shall have
-----------------------
the authority of the Managers in reference to:
(i) amending this Agreement, except that a committee may, to
the extent provided in the resolution designating that committee or in
this Agreement, exercise the authority of the Managers provided in
this Agreement to establish the relative rights and preferences of the
membership interests of any class or series;
(ii) approving a plan of merger of the Company;
(iii) recommending to the Members a voluntary dissolution of the
Company or a revocation thereof;
(iv) fixing the compensation of any member or alternate members
of such committee; or
(v) altering or repealing any resolution of the Managers that
by its terms provides that it shall not be so amendable or repealable.
3.12 ISSUANCES OF UNITS; CREATION OF NEW CLASSES OF EQUITY SECURITIES.
----------------------------------------------------------------
(a) Subject to Section 3.12(b) and Section 3.1(b), the Managers shall
have sole and complete discretion in determining whether to cause the
Company to issue Units, the number of Units to be issued at any particular
time, the purchase price or Capital Contribution(s) for any Units issued,
and all other terms and conditions applicable to Units and/or governing the
issuance of Units; provided, that the Managers shall not issue Units to any
--------
Person unless the issuance of the Units satisfies the conditions set forth
in Section 11.1. The purchase price or Capital Contribution(s) for any Unit
shall be paid to the Company in cash or cash equivalents, or if approved by
the Managers, any other form of consideration; provided, that non-cash
--------
consideration shall be allowed in the following cases only:
(i) the issuance of Units to Persons who are not Related
Parties; and
20
<PAGE>
(ii) the issuance of Units in connection with the conversion of
any New Bridge Loans.
(b) Without first obtaining the written consent of Members which own
a majority of the outstanding Class A Units owned by Members, the Managers
shall not create new classes of Equity Securities senior or pari passu to
the Class A Units in right of allocation of or payment of the Unpaid Yield
or Unreturned Capital Value (including in connection with a Special
Distribution); except that the Managers will be permitted to authorize and
------
cause the Company to issue Units of one or more other classes ("Permitted
----------
Pari Passu Equity") so long as the terms of the Class A Units are more
-----------------
favorable to such Units at least as follows:
(i) prior to any Distribution being made in respect of the
Permitted Pari-Passu Equity, all of the Unreturned Capital Value and
Unpaid Yield accrued on the Class A Units as of the date of the
issuance of such Permitted Pari-Passu Equity (the "Permitted Pari
--------------
Passu Equity Issuance Date"), if any, shall be paid in full. No
--------------------------
Distributions described in Section 3.12(b)(ii) in respect of such
Permitted Pari Passu Equity shall be made until the entire amount of
the Unreturned Capital Value and Unpaid Yield as of the Permitted Pari
Passu Equity Issuance Date has been paid in full;
(ii) after the Distributions described above in clause (i) of
this Section 3.12(b) have been made, Distributions up to the amount of
the PPPE Unreturned Capital Value in respect of such Permitted Pari
Passu Equity may be made to the holders of such Permitted Pari-Passu
Equity prior to any additional Distributions being made in respect of
the Class A Units. However, after the Distributions described above
in clauses (i) and (ii) of this Section 3.12(b) have been made,
Distributions of (A) the Unpaid Yield accruing on the Class A Units
since the Permitted Pari Passu Equity Issuance Date and (B) PPPE
Unpaid Yield in respect of such Permitted Pari Passu Equity, if any,
will be paid on a pari passu basis, pro rata according to the unpaid
accrued amounts;
(iii) the Permitted Pari-Passu Equity shall not be subject to
mandatory redemption that would enable the holders thereof to receive
any amount that they would not be entitled to receive in accordance
with the distribution priority set forth above in clauses (i) and (ii)
of this Section 3.12(b); and
(iv) prior to the First Test Date, the Company shall not be
contractually obligated to pay, and shall not pay, Distributions of
the PPPE Unpaid Yield in respect of such Permitted Pari Passu Equity
in an amount that they would not be entitled to receive in accordance
with the distribution priority set forth above in clauses (i) and (ii)
of this Section 3.12(b).
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<PAGE>
(c) Any sale and issuance of Permitted Pari Passu Equity and the
terms thereof shall be based on reasonably negotiated terms entered into in
good faith by the Company and the purchaser of such Permitted Pari Passu
Equity.
(d) Without first obtaining the written consent of Members which own
a majority of the outstanding Class A Units owned by Members, the Permitted
Pari Passu Equity shall not be issued to a Related Party or its Affiliate.
3.13 ACTIONS WITHOUT A MEETING AND TELEPHONE MEETINGS. Notwithstanding any
------------------------------------------------
provision contained in this Agreement, any action of the Managers may be taken
by written consent without a meeting, or any meeting thereof may be held by
means of a conference telephone connection (subject to Section 3.6). Any such
action taken by the Managers without a meeting shall be effective only if the
written consent or consents are in writing, set forth the action so taken, and
are signed by a Majority of the Managers, or such greater number of Managers, if
any, that would be necessary to take such action at a meeting of the Managers.
3.14 INDEMNIFICATION. To the fullest extent permitted by the Act, neither
---------------
the Managers, officers or Members of the Company nor the Class A Observer shall
be liable to the Company or any Member for monetary damages for a breach of duty
to the Company or any Member. The Managers, officers, and Members of the
Company and the Class A Observer shall be indemnified and held harmless by the
Company, including advancement of reasonable attorneys' fees and other expenses,
but only to the extent that the Company's assets are sufficient therefor, from
and against all claims, liabilities, and expenses arising out of any management
of Company affairs (but excluding those caused by the gross negligence or
willful misconduct of such Manager, officer, Member or Class A Observer), to the
fullest extent permitted by, but subject to all limitations and requirements
imposed by, the Act. These indemnification rights are in addition to any rights
that the Managers, officers or Members of the Company or the Class A Observer
may have against third parties, and will inure to the benefit of the respective
heirs and personal representatives of the Managers, officers and Members of the
Company and the Class A Observer.
ARTICLE IV
MEETINGS OF MEMBERS
-------------------
4.1 MEETINGS OF MEMBERS. Meetings of the Members may be called by the
-------------------
Managers or by Members which own Units which represent a Majority in Voting
Interest. All meetings of the Members shall be held at the principal office of
the Company or at such other place within or without the State of Delaware as
may be determined by the Managers or Member(s) calling the meeting and set forth
in the respective notice or waivers of notice of such meeting.
4.2 NOTICE OF MEETINGS OF MEMBERS. Written or printed notice stating the
-----------------------------
place, day and hour of the meeting shall be delivered not fewer than (five) 5
Business Days before the date of the meeting (unless such meeting shall be
------
conducted by telephone, in which case such notice must be
22
<PAGE>
delivered not fewer than two (2) Business Days prior to such meeting), either
personally or by any written method by which it is reasonable to expect that the
Members would receive such notice not later than the business day prior to the
date of the meeting, to each Member having a Voting Interest and to the holders
of the Class A Units, by or at the direction of the Member(s) or Manager(s)
calling the meeting; provided, that neither the absence of a non-voting
--------
representative of the holders of the Class A Units from any meeting of the
Members, nor the absence of notice to the holders of the Class A Units shall
prevent the transaction of business in accordance with this Article IV at any of
such meetings or affect the validity of any written action of the Members in
lieu of a meeting in accordance with this Article IV. Such notice may, but need
not, specify the purpose or purposes of such meeting and may, but need not,
limit the business to be conducted at such meeting to such purpose(s).
4.3 QUORUM. Members which own Units which represent a Majority in Voting
------
Interest shall constitute a quorum at all meetings of the Members, except as
otherwise provided by law. Once a quorum is present at the meeting of the
Members, the subsequent withdrawal from the meeting of any Member prior to
adjournment or the refusal of any Member to vote shall not affect the presence
of a quorum at the meeting. If, however, such quorum shall not be present at
any meeting of the Members, the Members entitled to vote at such meeting shall
have the power to adjourn the meeting from time to time, without notice other
than announcement at the meeting, until Members which own Units which represent
a Majority in Voting Interest shall be present or represented.
4.4 VOTING. For purposes of voting on all matters, other than matters for
------
which another portion is required by the Act, at any meeting of the Members at
which a quorum is present, the act of Members which own Units which represent a
Majority in Voting Interest will constitute the act of the Members unless the
vote of a greater number is required by law or this Agreement. A Member may
vote or be present at a meeting either in Person or by proxy. There will be no
cumulative voting in the election or removal of Managers.
4.5 REGISTERED MEMBERS. The Company shall be entitled to treat the owner
------------------
of record of any Units as the owner in fact of such Unit for all purposes, and
accordingly shall not be bound to recognize any equitable or other claim to or
interest in such Unit on the part of any other Person, whether or not it shall
have express or other notice of such claim or interest, except as expressly
provided by this Agreement or the laws of the State of Delaware.
4.6 ACTIONS WITHOUT A MEETING AND TELEPHONE MEETINGS. Notwithstanding any
------------------------------------------------
provision contained in this Agreement, any action of the Members may be taken by
written consent without a meeting, or any meeting thereof may be held by means
of a conference telephone connection. Any such action which may be taken by the
Members without a meeting shall be effective only if the written consent or
consents are in writing, set forth the action so taken, and are signed by
Members which own Units which represent not less than the minimum amount of
Voting Interest that would be necessary to take such action at a meeting at
which all Members entitled to vote on the action were present and voted.
23
<PAGE>
4.7 LIMITATION OF LIABILITY. Except as otherwise provided in the Act or
-----------------------
in this Agreement, no Member will be obligated personally for any debt,
obligation or liability of the Company or of any other Member by reason of being
a Member. Except as otherwise provided in the Act, by law or expressly in this
Agreement, no Member will have any fiduciary or other duty to another Member
with respect to the business and affairs of the Company. No Member will have
any responsibility to restore any negative balance in his or her Capital Account
or to contribute to or in respect of the liabilities or obligations of the
Company or return distributions made by the Company except as required by the
Act or other applicable law.
4.8 NO RIGHT TO WITHDRAW. Except as set forth in Section 11.4, no Member
--------------------
will have any right to resign or withdraw from the Company or to receive any
distribution or the repayment of such Member's Capital Contribution, except
Distributions as provided in Article VII.
4.9 OUTSIDE ACTIVITIES. Subject to the terms of any agreement by any
------------------
Member to the contrary, a Member may have business interests and engage in
business activities in addition to those relating to the Company, including
business interests and activities which compete with the Company. Neither the
Company nor any other Member shall have any rights by virtue of this Agreement
in any business interests or activities of any Member.
4.10 BUSINESS OPPORTUNITY. The Avalon Members covenant and agree that
--------------------
prior to a Related Party entering into any definitive acquisition agreement
relating to cable television systems, within a geographic area served by a cable
television system owned and operated by the Company or its Subsidiaries, such
Members shall give written notice of the proposed transaction to the Board and
the Class A Observer; provided, however, that: (i) regardless of the giving of
-------- -------
notice under this Section 4.10, the management, employees or officers of any
Avalon Member shall not participate in such proposed transaction unless such
transaction is first presented to the Company for its consideration; and (ii)
notice to the Board and the Class A Observer under this Section 4.10 shall not
be required if such notice is prohibited under confidentiality obligations
imposed by a third-party or its representatives.
ARTICLE V
UNIT OWNERSHIP
--------------
5.1 UNIT OWNERSHIP. The name, address and Unit ownership of each Member
--------------
are set forth on the attached Schedule 1. The Managers may amend such Schedule
---------- --------
1 from time to time to reflect changes in such names, addresses and/or
- -
ownership, including by reason of the admission or withdrawal of any Member or
the issuance or transfer of any Unit. A loan or guarantee to the Company by a
Member will not be deemed to be a Capital Contribution.
24
<PAGE>
ARTICLE VI
CAPITAL ACCOUNTS
----------------
6.1 GENERALLY. The Company will maintain a separate Capital Account for
---------
each Unitholder according to the rules of Treasury Regulation Section 1.704-
1(b)(2)(iv). For this purpose, the Company may, upon the occurrence of the
events specified in Treasury Regulation Section 1.704-1(b)(2)(iv)(f), and then
only upon the consent of (i) the Members that hold a majority of the Class A
Units held by Members, and (ii) the Members that hold a majority of the Class B
Units held by Members, increase or decrease the Capital Accounts in accordance
with the rules of such Treasury Regulation Section 1.704-1(b)(2)(iv)(g) to
-
reflect a revaluation of Company property. To the extent that the Company does
not increase or decrease Capital Accounts upon the occurrence of the events
specified in Treasury Regulation Section 1.704-1(b)(2)(iv)(f), then upon the
occurrence of any such event, the Company shall provide for special allocations
of gain and loss to achieve a result substantially equivalent to that which
would have been obtained by an increase or decrease of Capital Accounts. Such
special allocations shall generally be made only upon the consent of (i) the
Members that hold a majority of the Class A Units held by Members, and (ii) the
Members that hold a majority of the Class B Units held by Members.
Notwithstanding the foregoing, special allocations relating to the contribution
of money or other property to the Company by a Member holding Class B Units, an
Affiliate of any such Member, or a Related Party, as consideration for an
interest in the Company, shall be provided if and only if such special
allocations are requested by the Members that hold a majority of the Class A
Units held by Members. Similarly, special allocations relating to distributions
of money or other property by the Company to a Member holding Class B Units, an
Affiliate of any such Member, or a Related Party, as consideration for an
interest in the Company, shall be provided if and only if such special
allocations are requested by the Members that hold a majority of the Class A
Units held by Members.
6.2 METHOD OF DETERMINING PROFIT AND LOSS. For purposes of computing the
-------------------------------------
amount of any item of Company income, gain, loss or deduction to be allocated
pursuant to Article VIII and to be reflected in the Capital Accounts, the
determination, recognition and classification of any such item will be the same
as its determination, recognition and classification for federal income tax
purposes (including any method of depreciation, cost recovery or amortization
used for this purpose); provided, that:
--------
(a) the computation of all items of income, gain, loss and deduction
will include tax-exempt income and those items described in Treasury
Regulation Section 1.704-1(b)(2)(iv)(i), without regard to the fact that
-
such items are not includable in gross income or are not deductible for
federal income tax purposes;
(b) if the Book Value of any Company property is adjusted pursuant to
Treasury Regulation Section 1.704-1(b)(2)(iv)(e) or (f), the amount of such
- -
adjustment will be taken into account as gain or loss from the disposition
of such property;
25
<PAGE>
(c) items of income, gain, loss or deduction attributable to the
disposition of Company property having a Book Value that differs from its
adjusted basis for tax purposes will be computed by reference to the Book
Value of such property;
(d) items of depreciation, amortization and other cost recovery
deductions with respect to Company property having a Book Value that
differs from its adjusted basis for tax purposes will be computed by
reference to the property's Book Value in accordance with Treasury
Regulation Section 1.704-1(b)(2)(iv)(g); and
-
(e) to the extent an adjustment to the adjusted tax basis of any
Company asset pursuant to Code Section 732(d), 734(b) or 743(b) is
required, pursuant to Treasury Regulation Section 1.704-1(b)(2)(iv)(m), to
-
be taken into account in determining Capital Accounts, the amount of such
adjustment to the Capital Accounts will be treated as an item of gain (if
the adjustment increases the basis of the asset) or loss (if the adjustment
decreases such basis).
6.3 NO INTEREST. No interest will be paid by the Company on Capital
-----------
Contributions or on balances in Capital Accounts.
6.4 NO WITHDRAWAL. No Person will be entitled to withdraw any part of his
-------------
or her Capital Contribution or Capital Account or to receive any Distribution
from the Company, except as expressly provided in this Agreement.
ARTICLE VII
DISTRIBUTIONS
-------------
7.1 ORDER OF PRIORITY GENERALLY. As and when determined by the Managers
---------------------------
(taking into account any reserves that the Managers deem appropriate except that
the Managers shall not have discretion with respect to distributions made
pursuant to Section 7.1(a) which shall be mandatory, except to the extent of
restrictions imposed by law or third-party contract), subject to any
restrictions imposed by law or third-party contract, the Company may make
Distributions at any time or from time to time in the following order and
priority:
(a) FIRST, to the Unitholders until such holders shall have received,
-----
their respective Tax Distribution Amounts (giving effect to all prior
distributions to holders of such Units for all periods pursuant to this
Section 7.1(a) with payment of such Tax Distribution Amounts under this
section 7.1(a) occurring in chronological order, i.e., with Tax
Distribution Amounts pertaining to or accruing in earlier periods paid
first, in their entirety, before any payment is made under this section
7.1(a) of Tax Distribution Amounts pertaining to or accruing in subsequent
periods). For purposes of determining the amounts of the Unpaid Yield and
the Unreturned Capital Value for any Class A Unit, Distributions made in
respect of such Class A Unit pursuant to this Section 7.1(a) will be deemed
first to
26
<PAGE>
be a payment of the Unpaid Yield, and second a payment of the Unreturned
Capital Value, of such Class A Unit.
(b) SECOND, to the Unitholders which own Class A Units, in proportion
------
to and to the extent of the Unpaid Yield on the Class A Units owned by each
such Unitholder as of the time of such Distribution.
(c) THIRD, to the Unitholders which own Class A Units, in proportion
-----
to and to the extent of the Unreturned Capital Value in respect of the
Class A Units owned by each such Unitholder as of the time of such
Distribution. No distribution or any portion thereof may be made pursuant
to Section 7.1(d) until the entire amount of the distributions pursuant to
Sections 7.1(b) and (c) have been made.
(d) FOURTH, to the Unitholders, pro rata according to the number of
------
Units owned by each Unitholder as a percentage of the total number of Units
outstanding.
Notwithstanding any provisions of this Section 7.1 to the contrary,
distributions shall be made pursuant to Sections 7.1(b), (c) and (d) only to the
extent of each Unitholder's positive Capital Account balance, after taking into
account any previous distributions under this Section 7.1. To the extent that
all or any portion of the entire amount of the distributions pursuant to
Sections 7.1(b) and (c) has not been made because of an inadequate Capital
Account balance, then no distribution or any portion thereof shall be made
pursuant to Section 7.1(d) until the entire amount of the distributions pursuant
to Sections 7.1(b) and (c) have been made. For purposes of this Section 7.1, a
positive Capital Account balance shall include the amount of a Unitholder's
share of minimum gain (including any minimum gain arising from prior or current
distributions of liability proceeds), which is or would be effectively treated
as a deficit restoration obligation, as described in Treasury Regulation Section
1.704-2(g)(1) or (i)(5).
7.2 INDEMNIFICATION AND REIMBURSEMENT FOR PAYMENTS ON BEHALF OF A
-------------------------------------------------------------
UNITHOLDER. Except as otherwise provided in this Agreement, if the Company is
- ----------
required by law (as determined by the Tax Matters Partner based on the advice of
legal or tax counsel to the Company) to make any payment on behalf of a
Unitholder in its capacity as such (including in respect of withholding taxes,
personal property taxes, and unincorporated business taxes, etc.), then such
Unitholder (the "Indemnifying Unitholder") will indemnify the Company in full
-----------------------
for the entire amount paid, including interest, penalties and expenses
associated with such payment. The amount to be indemnified shall be charged
against the Capital Account of the Indemnifying Unitholder, and:
(a) first, promptly upon notification of an obligation to indemnify
the Company, the Indemnifying Unitholder will make a cash payment to the
Company in an amount equal to the full amount to be indemnified (and the
amount paid will be added to the Indemnifying Unitholder's Capital Account
but will not be deemed to be a Capital Contribution); and
27
<PAGE>
(b) then, if any deficiency remains, the Company will reduce the next
subsequent distributions which would otherwise be made to the Indemnifying
Unitholder pursuant to Section 7.1 until the Company has recovered the
amount (including interest accruing at a rate of 12% per annum) to be
indemnified (and that the amount of such reduction will be deemed to have
been distributed for all purposes, but such deemed distribution will not
further reduce the Indemnifying Unitholder's Capital Account).
A Unitholder's obligation to make contributions to the Company under this
Section 7.2 will survive the termination, dissolution, liquidation and winding
up of the Company, and for purposes of this Section 7.2, the Company will be
treated as continuing in existence. The Company may pursue and enforce all
rights and remedies it may have against each Unitholder under this Section 7.2,
including instituting a lawsuit to collect such contribution with interest
calculated at a rate equal to the Company's and its Subsidiaries' effective cost
of borrowed funds.
7.3 INDEMNIFICATION FOR LIABILITIES. In the event that the Company, any
-------------------------------
Subsidiary of the Company, or any Member that holds Class A Units (or any assets
or property of any of the foregoing Persons) become subject to any liability
(including but not limited to a liability described in Code Section 6901)
relating to income taxes (either federal, state or local), including interest or
penalties associated with such taxes, in connection with: (i) the transaction
in which all of the stock of Cable Michigan, Inc. was distributed by
Commonwealth Telephone Enterprises, Inc. pro rata to its common equity holders;
(ii) the contribution to the Company of the assets of Avalon Cable of New
England, Inc.; or (iii) the contribution to the Company of the assets of Avalon
Cable of Michigan, Inc., then (a) in the case of clauses (i) and (iii), the
Member (or its Affiliates or Subsidiaries) that contributed the assets of Avalon
Cable of Michigan, Inc. to the Company, or (b) in the case of clause (ii), the
Member (or its Affiliates or Subsidiaries) that contributed the assets of Avalon
Cable of New England, Inc. to the Company, shall indemnify the Company and the
other Members in full for the entire liability paid, including interest,
penalties and expenses associated with such liability. The amount to be
indemnified shall be charged against a Capital Account of the indemnifying
Member, and such Member shall make payments to the Company pursuant to Section
7.2 hereof. A Unitholder's obligation to make contributions to the Company
under this Section 7.3 will survive the termination, dissolution, liquidation
and winding up of the Company, and for purposes of this Section 7.3, the Company
will be treated as continuing in existence. The Company may pursue and enforce
all rights and remedies it may have against each Unitholder under this Section
7.3, including instituting a lawsuit to collect such contribution with interest
calculated at a rate equal to the Company's and its Subsidiaries' effective cost
of borrowed funds. No inference is intended herein that the Company, any
Subsidiary of the Company, or any Member that holds Class A Units (or any assets
or property of any of the foregoing Persons) will become subject to any
liability described in this Section 7.3, or that the Company is assuming or
receiving assets subject to any such liability.
28
<PAGE>
7.4 SPECIAL DISTRIBUTIONS.
---------------------
(a) In the event of a Special Sale, and then only upon the election
of the Board, immediately prior to the consummation of such Special Sale
the Company shall distribute 100% of the Avalon New England Interest
pursuant to the following provisions:
(i) Prior to the distribution, the Gross Asset Value of the
Avalon New England Interest being distributed shall be adjusted, under
the provisions of Treasury Regulation Sections 1.704-1(b)(2)(iv)(f)
and (g), to equal its gross Fair Market Value and the amount of such
adjustment shall be taken into account as gain or loss from the
disposition of such Interest for purposes of Article VIII
(Allocations);
(ii) Solely for purposes of this Section 7.4, and solely for
purposes of determining the number of Class B Units redeemed pursuant
to Section 7.4(a)(iv), the Gross Asset Value of all other assets of
the Company, including the Avalon Michigan Interest, shall be deemed
to have been adjusted, on a pro forma basis, pursuant to the
principles of Treasury Regulation Sections 1.704-1(b)(2)(iv)(f) and
(g), to equal their respective gross Fair Market Values and the amount
of such adjustment shall be deemed taken into account, as a pro forma
matter, as gain or loss from the disposition of such assets pursuant
to the principles of Article VIII (Allocations);
(iii) The Unitholders which own Class A Units shall receive a
percentage of the Avalon New England Interest equal in value to the
amount of the Distribution that such Unitholders would have received
had an amount equal to the Gross Asset Value of the Avalon New England
Interest was distributed by the Company in accordance with Section
7.1. No Special Distribution or any portion thereof may be made
pursuant to Sections 7.4(a)(iv) or (v) until the entire amount of the
Distribution described in this Section 7.4(a)(iii) has been paid to
the Unitholders which own Class A Units;
(iv) Avalon New England, Inc. shall receive the following
Special Distribution of the Avalon New England Interest in redemption
of some or all of its Class B Units: the Company shall redeem the
number of Class B Units owned by Avalon New England, Inc. that have an
aggregate positive Capital Account balance equal to the Fair Market
Value of the Avalon New England Interest being received by Avalon New
England, Inc. in the redemption. For purposes of this Section
7.4(a)(iv) only, the aggregate positive Capital Account balance of
Class B Units owned by Avalon New England, Inc. shall be determined,
on a pro forma basis, by including both the adjustment described in
Section 7.4(a)(ii), as well as the pro forma adjustment described in
Section 7.4(a)(iii). In the event that the Fair Market Value of the
Avalon New England Interest remaining after the distribution described
in Section 7.4(a)(iii) exceeds the positive Capital Account balances
of all Class B Units owned by Avalon New England, Inc. as determined
under this Section 7.4(a)(iv), then the Special Distribution described
in this Section 7.4(a)(iv) shall consist of such percentage of the
Avalon New England Interest having a Fair Market Value equal to the
positive Capital Account balances of all Class B Units
<TABLE>
<CAPTION>
DATE PRINCIPAL LOANED OR REPAID UNPAID PRINCIPAL BALANCE
- ---------------------- ------------------------------------ -----------------------------------
<S> <C> <C>
___________ $___________ $____________
</TABLE>
29
<PAGE>
owned by Avalon New England, Inc. as determined under this Section 7.4
(a)(iv), then the Special Distribution described in this Section
7.4(a)(iv) shall consist of such percentage of the Avalon New England
Interest having a Fair Market Value equal to the positive Capital
Account balances of all Class B Units owned by Avalon New England,
Inc. In that event, any remaining amount of the Distribution shall be
distributed in accordance with Section 7.4(a)(v); and
(v) the Unitholders which own the remaining Class B Units shall
receive any remaining amount of such Special Distribution equal in
value to the value of the Distribution that such Unitholders would
have received had such amounts been distributed by the Company in
accordance with Section 7.1.
(b) If and to the extent required by the Financing Agreements, the
Unitholders hereby agree to return any Special Sale Proceeds to the
Company, net of any tax liability; provided, that such Special Sale
--------
Proceeds shall be used only to reduce Indebtedness under the Financing
Agreements or as otherwise required or permitted thereunder. Tax
liability, for this section only, shall mean the actual taxable income
recognized from the Special Sale by the Unitholder multiplied by the
combined Federal and New York State maximum, effective marginal individual
tax rates.
ARTICLE VII
ALLOCATIONS
-----------
8.1 REGULAR ALLOCATIONS.
-------------------
(a) ALLOCATION FOR NET PROFIT YEAR. For purposes of this Section 8.1,
------------------------------
subject to Section 8.2, if Profits exceed Losses for a Fiscal Year or other
period, the net amount for such period ("Net Profits") shall be allocated
-----------
according to the following provisions:
(i) FIRST, to Unitholders which own Class A Units in proportion
-----
to, and to the extent of, any Losses allocated to them pursuant to
Section 8.1(b)(iv) for all prior Fiscal Years or other periods. To
the extent any allocation of Losses are offset pursuant to this
Section 8.1(a)(i), such Losses shall be disregarded for purposes of
computing subsequent allocations pursuant to this Section 8.1(a)(i);
(ii) SECOND, to Unitholders which own Class A Units in proportion
------
to, and to the extent of, any Losses allocated to them pursuant to
Section 8.1(b)(iii) for all prior Fiscal Years or other periods. To
the extent any allocation of Losses are offset pursuant to this
Section 8.1(a)(ii), such Losses shall be disregarded for purposes of
computing subsequent allocations pursuant to this Section 8.1(a)(ii);
30
<PAGE>
(iii) THIRD, to Unitholders which own Class A Units in proportion
-----
to, and to the extent of, the Unallocated Yield for any Class A Units
owned by each Unitholder;
(iv) FOURTH, to Unitholders which own Class B Units in
------
proportion to, and to the extent of, any Losses allocated to them
pursuant to Section 8.1(b) for all prior Fiscal Years or other
periods. However, Net Profits shall be allocated to each Unitholder
which owns Class B Units pursuant to this Section 8.1(a)(iv) only to
the extent necessary to eliminate any Adjusted Capital Account Deficit
for that Unitholder. To the extent any allocation of Losses are offset
pursuant to this Section 8.1(a)(iv), such Losses shall be disregarded
for purposes of computing subsequent allocations pursuant to this
Section 8.1(a)(iv); and
(v) FIFTH, (a) to the Unitholders which own Class A Units, in
-----
an amount as provided in the definition of Special Capital Account
Adjustment, and, then, to the extent that Net Profits remain after
such allocation, to (b) all Unitholders, pro rata according to the
number of Units owned by each Unitholder as a percentage of the total
number of Units outstanding.
(b) ALLOCATION FOR NET LOSS YEAR. For purposes of this Section 8.1,
----------------------------
subject to Section 8.2, if Losses exceed Profits for a Fiscal Year or other
period, the net amount for such period ("Net Losses") shall be allocated
----------
according to the following priorities:
(i) FIRST, to Unitholders which own Class A Units or Class B
-----
Units in proportion to, and to the extent of any Profits allocated to
them pursuant to Section 8.1(a)(v) for all prior Fiscal Years or other
periods, in reverse chronological order. To the extent any allocations
of Profits are offset pursuant to this Section 8.1(b)(i), such Profits
shall be disregarded for purposes of computing subsequent allocations
pursuant to this Section 8.1(b)(i);
(ii) SECOND, to Unitholders which own Class B Units, pro rata
------
according to the number of Class B Units owned by each such
Unitholder, and then only to the extent of each such Unitholder's
positive Capital Account balance;
(iii) THIRD, to Class A Unitholders in proportion to, and to the
-----
extent of, any Profits allocated to them pursuant to Sections
8.1(a)(ii) or (iii) for all prior Fiscal Years or other periods. To
the extent any allocations of Profits are offset pursuant to this
Section 8.1(b)(iii), such Profits shall be disregarded for purposes of
computing subsequent allocations pursuant to this Section 8.1(b)(iii);
(iv) FOURTH, to Unitholders which own Class A Units, pro rata
------
according to the number of Class A Units owned by each such
Unitholder, and then only to the extent of each such Unitholder's
positive Capital Account balance; and
31
<PAGE>
(v) FIFTH, to Unitholders which own Class B-2 Units, pro rata
-----
according to the number of Class B-2 Units owned by each such
Unitholder.
8.2 SPECIAL ALLOCATIONS.
-------------------
(a) NONRECOURSE DEBT. Losses attributable to a partner nonrecourse
----------------
debt (as defined in Treasury Regulation Section 1.704-2(b)(4)) will be
allocated in the manner required by Treasury Regulation Section 1.704-
2(i)). If there is a net decrease during a Fiscal Year in partner
nonrecourse debt minimum gain (as defined in Treasury Regulation Section
1.704-2(i)(3)), then Profits for such Fiscal Year (and, if necessary, for
subsequent Fiscal Years) will be allocated to the Unitholders in the
amounts and of such character as determined according to, and subject to
the exceptions contained in, Treasury Regulation Section 1.704-2(i)(4).
Losses attributable to nonrecourse deductions (as defined in Treasury
Regulation Section 1.704-2(b)(1)) will be allocated in the manner as Net
Profits are allocated pursuant to Section 8.1(a)(vi). If there is a net
decrease during a Fiscal Year in partnership minimum gain (as defined in
Treasury Regulation Section 1.704-2(f)(1)), then Profits for such Fiscal
Year (and, if necessary, for subsequent Fiscal Years) will be allocated to
the Unitholders in the amounts and of such character as determined
according to, and subject to the exceptions contained in, Treasury
Regulation Section 1.704-2(f). However, no allocation of profits pursuant
to this Section 8.2(a) shall be made to the extent that allocation of
Nonrecourse Deductions or Member Nonrecourse Deductions have previously
been offset with allocations of Net Profits pursuant to Section 8.1.
(b) MINIMUM GAIN CHARGEBACK. Except as otherwise provided in Section
-----------------------
8.2(a), if there is a net decrease in the Minimum Gain during any Fiscal
Year, then each Unitholder will be allocated Profits for such Fiscal Year
(and, if necessary, for subsequent Fiscal Years) in the amounts and of such
character as determined according to, and subject to the exceptions
contained in, Treasury Regulation Section 1.704-2(f), except that no
allocation of Profits pursuant to this Section 8.2(b) shall be made to the
extent that allocation of Nonrecourse Deductions or Member Nonrecourse
Deductions have previously been offset with allocations of Net Profits
pursuant to Section 8.1. This Section 8.2(b) is intended to be a minimum
gain chargeback provision that complies with the requirements of Treasury
Regulation Section 1.704-2(f), and will be interpreted in a manner
consistent with such intention.
(c) QUALIFIED INCOME OFFSET. If any Unitholder who unexpectedly
-----------------------
receives an adjustment, allocation, or distribution described in Treasury
Regulation Sections 1.704-1(b)(2)(ii)(d)(4), (5), and (6) has an Adjusted
- - - -
Capital Account Deficit as of the end of any Fiscal Year, computed after
the application of Sections 8.2(a) and 8.2(b) but before the application of
any other provision of Section 8.1 or Section 8.2, then Profits for such
Fiscal Year will be allocated to such Unitholder in proportion to, and to
the extent of, such Adjusted Capital Account Deficit. This Section 8.2(c)
is intended to be a qualified income offset
32
<PAGE>
provision as described in Treasury Regulation Section 1.704-1(b)(2)(ii)(d)
-
and will be interpreted in a manner consistent with such intention.
(d) ADJUSTMENT OF TAX BASIS. Profits and Losses described in Section
-----------------------
6.2(e) will be allocated in a manner consistent with the manner that the
adjustments to the Capital Accounts are required to be made pursuant to
Treasury Regulation Sections 1.704-1(b)(2)(iv)(j), (k) and (m).
- - -
(e) TRANSACTION WITH UNITHOLDER. If, and to the extent that, any
---------------------------
Unitholder is deemed to recognize any item of income, gain, loss, deduction
or credit as a result of any transaction between such Unitholder and the
Company pursuant to any of Code Sections 1272-1274, 7872, 483 and 482 or
any similar provision now or hereafter in effect, and the Tax Matters
Partner determines that any corresponding Profit or Loss of the Company
should be allocated to the Unitholder who recognized such item in order to
reflect the Unitholders' economic interests in the Company, then the
Company may so allocate such Profit or Loss.
(f) INCOME RELATING TO PREVIOUS TRANSACTIONS. To the extent that the
----------------------------------------
Company recognizes, in any Fiscal Year, gross income attributable to: (i)
transactions occurring before the formation of the Company, involving a
Person or its Affiliates who subsequently became a Member of the Company;
or (ii) the contribution of assets or liabilities to the Company pursuant
to the admission of the contributor as a Member, then such gross income
shall be allocated to the Member participating in such transactions or
contributions, as the case may be. This Section 8.2(a)(f) shall not apply
to items of income or gain from ordinary business operations of the
Company.
8.3 TAX ALLOCATIONS.
---------------
(a) GENERALLY. The income, gains, losses, deductions and credits of
---------
the Company will be allocated on a daily basis as if the Company closed its
books on a daily basis, for federal, state and local income tax purposes,
among the Unitholders in accordance with the allocation of such income,
gains, losses, deductions and credits among the Unitholders for computing
their Capital Accounts, except that if any such allocation is not permitted
-----------
by the Code or other applicable law, the Company's subsequent income,
gains, losses, deductions and credit will be allocated among the
Unitholders so as to reflect as nearly as possible the allocation set forth
in this Agreement in computing their Capital Accounts.
(b) DIFFERENCES BETWEEN BOOK VALUE AND TAX BASIS. Items of Company
--------------------------------------------
taxable income, gain, loss and deduction with respect to any property
contributed to the capital of the Company will be allocated among the
Unitholders in accordance with Code Section 704(c) using the traditional
method of Treasury Regulation Section 1.704-3(b) and the ceiling rule of
Treasury Regulation Section 1.704-3(b)(1) so as to take account of any
variation between the adjusted basis of such property to the Company for
federal income tax
33
<PAGE>
purposes and its Book Value. To the extent that in any year in which book
depreciation is allowed to both the Class A Units and the Class B Units,
and an amount of depreciation tax deductions is specially allocated for tax
purposes to the Class A Units pursuant to Treasury Regulation Section
1.704-3(b)(1) in excess of the amount of the applicable tax depreciation
deduction that the Class A Units would have been allocated if Treasury
Regulation Section 1.704-3(b)(1) had not been applied and depreciation tax
deductions had instead been allocated to the various Units in proportion to
the book depreciation allocation to such Units for that year, an amount of
the excess tax depreciation shall reduce the unpaid yield and be treated as
a guaranteed payment to such Unitholders for purposes of Article VIII of
this Agreement. The tax deductions for the guaranteed payment shall be
specially allocated to the Unitholders which own Class B Units who lost the
tax depreciation deductions pursuant to Treasury Regulation Section 1.704-
3(b)(1). The allocations made pursuant to this Section 8.3(b) shall be made
on a daily basis as if the Company closed its books on a daily basis. The
Tax Matters Partner will determine the allocation of the aggregate Fair
Market Value of the assets contributed to the Company among such assets.
(c) ADJUSTMENTS IN BOOK VALUE. If the Book Value of any Company asset
-------------------------
is adjusted pursuant to Section 6.2, then subsequent allocations of items
of taxable income, gain, loss and deduction with respect to such asset will
take into account any variation between the adjusted basis of such asset
for federal income tax purposes and its Book Value in the same manner as
under Code Section 704(c).
(d) ALLOCATIONS OF CREDITS AND THE LIKE. Allocations of tax credits,
-----------------------------------
tax credit recapture, and any items related thereto will be allocated to
the Unitholders according to their interests in such items as determined by
the Tax Matters Partner taking into account the principles of Treasury
Regulation Section 1.704-1(b)(4)(ii).
(e) NO EFFECT ON CAPITAL ACCOUNTS. Allocations pursuant to this
-----------------------------
Section 8.3 are solely for purposes of federal, state and local taxes and
will not affect, or in any way be taken into account in computing, any
Unitholder's Capital Account or share of Profits, Losses, Distributions or
other items pursuant to any provision of this Agreement.
8.4 CURATIVE ALLOCATIONS. If the Tax Matters Partner determines, after
--------------------
consultation with counsel experienced in income tax matters, that the allocation
of any item of Company income, gain, loss, deduction or credit (an "unallocated
-----------
item") is not specified in this Agreement or that the allocation of any item of
- ----
Company income, gain, loss, deduction or credit (a "misallocated item") under
-----------------
this Agreement is in the Managers' reasonable judgment inconsistent with the
Unitholders' economic interests in the Company (determined by reference to the
general principles of Treasury Regulation Section 1.704-1(b) and the factors set
forth in Treasury Regulation Section 1.704-1(b)(3)(ii) including any allocation
of any item of Company income, gain, loss deduction or credit that does not
result in Capital Accounts of each Unitholder that support, as nearly as
possible, the Distributions pursuant to Section 7.1 with respect to such
Unitholder), then the Company may allocate such unallocated items, or reallocate
such misallocated items, to reflect such
34
<PAGE>
economic interests; provided, that no such allocation will have any material
--------
effect on the amounts distributable to any Unitholder, including the amounts to
be distributed upon the complete liquidation of the Company and that no
allocations of Book item shall be made pursuant to this Section 8.4 unless such
allocations are of Net Profits or Net Losses; provided further, that no such
-------- -------
allocation or reallocation shall be made unless Members that hold a majority of
Class A Units held by Members consent in writing to such allocation or
reallocations, which consent shall not be unreasonably withheld.
ARTICLE IX
ELECTIONS AND REPORTS
---------------------
9.1 GENERALLY. The Company will keep appropriate books and records with
---------
respect to the Company's business, including all books and records necessary to
provide any information, lists and copies of documents required to be provided
pursuant to Section 9.2 or pursuant to applicable laws. The Members (subject to
reasonable confidentiality requirements that the Board may impose) shall have
such right to request and receive information concerning the Company and its
affairs as is required by the Act.
9.2 REPORTS. The Company will use reasonable efforts to deliver or cause
-------
to be delivered, by March 1 (and, in any event, will deliver not later than
March 31 of each year except that such date shall be May 31 with respect to the
Company's first Fiscal Year) to each Person who was a Unitholder at any time
during the previous Fiscal Year, all information necessary for the preparation
of such Person's United States federal income tax returns and any state, local
and foreign income tax returns which such Person is required to file as a result
of the Company being engaged in a trade or business within such state, local or
foreign jurisdiction, including a statement showing such Person's share of
income, gains, losses, deductions and credits for such year for United States
federal income tax purposes (and, if applicable, state, local or foreign income
tax purposes) and the amount of any Distributions made to or for the account of
such Person. Upon the written request of any such Person made not later than 30
days after the end of each Fiscal Year and at the sole expense of such Person,
the Company will use reasonable efforts to deliver or cause to be delivered any
additional information necessary for the preparation of any state, local and
foreign income tax returns which must be filed by such Person.
9.3 FINANCIAL STATEMENTS AND OTHER INFORMATION. The Company shall
------------------------------------------
deliver: (i) to Avalon Investors so long as Avalon Investors or any of its
Affiliates holds any Class A Units; or (ii) to a non-Affiliate transferee of
Avalon Investors so long as such transferee holds 25% or more of the Class A
Units outstanding immediately after the First Closing Date:
(a) as soon as available, but in any event within 90 days after the
end of each fiscal year of the Company, a copy of the audited combined
consolidated balance sheet of the Company and its consolidated Subsidiaries
as at the end of such year and the related audited combined consolidated
statements of income and of cash flows for such year, setting
35
<PAGE>
forth in each case in comparative form the figures for the previous year,
reported on without a "going concern" or like qualification or exception,
or qualification arising out of the scope of the audit, by
PricewaterhouseCoopers LLP or other independent certified public
accountants of nationally recognized standing, provided that the delivery
--------
of the Company's annual report on Form 10-K shall be deemed to satisfy the
requirements of this paragraph;
(b) as soon as available, but in any event not later than 45 days
after the end of each of the first three quarterly periods of each fiscal
year of the Company, the unaudited combined consolidated balance sheet of
the Company and its consolidated Subsidiaries, as at the end of such
quarter and the related unaudited combined consolidated statements of
income and of cash flows for such quarter and the portion of the fiscal
year through the end of such quarter, setting forth in each case in
comparative form the figures for the previous year, certified by the
Company's principal accounting officer as being fairly stated in all
material respects (subject to normal year-end audit adjustments and the
absence of certain footnotes), provided that the Company shall furnish such
--------
financial information for the quarter ended September 30, 1998 not later
than December 15, 1998, provided, further that the delivery of the
-------- -------
Company's quarterly report on Form 10-Q shall be deemed to satisfy the
requirements of this paragraph;
(c) as soon as available, but in any event not later than 45 days
after the end of each month occurring during each fiscal year of the
Company (other than the third, sixth, ninth and twelfth such month),
commencing with the month of November, 1998, the unaudited combined
consolidated balance sheets of the Company and its Subsidiaries as at the
end of such month and the related unaudited combined consolidated
statements of income and of cash flows for such month and the portion of
the fiscal year through the end of such month, setting forth in each case
in comparative form the figures for the previous year, certified by the
Company's principal accounting officer as being fairly stated in all
material respects (subject to normal year-end audit adjustments and the
absence of certain footnotes); provided that the Company shall furnish such
financial information for each month ending on or prior to March 31, 1999
not later than 60 days after the end of such month; provided, that all
--------
financial statements required under Sections 9.3(a), (b) and (c) shall be
complete and correct in all material respects and shall be prepared in
reasonable detail and in accordance with GAAP applied consistently
throughout the periods reflected therein and with prior periods (except as
approved by such accountants or officer, as the case may be, and disclosed
therein);
(d) promptly upon receipt thereof, a copy of such accounting firm's
annual management letter to the Managers;
(e) as soon as practicable (but in any event within thirty (30) days)
prior to the end of each fiscal year, an annual budget prepared on a
monthly basis for the Company and the Subsidiaries (if any) for the
succeeding fiscal year (reflecting anticipated statements of
36
<PAGE>
income, members' equity and cash flows and balance sheets) together with a
summary of the assumptions underlying such budget;
(f) as soon as practicable (but in any event within ten (10) days)
after transmission thereof, copies of registration statements and all
regular, special or periodic reports which it files with the Securities and
Exchange Commission or with any securities exchange on which any of its
securities are then listed, copies of all press releases and other
statements made available generally by the Company or any Subsidiary to the
public concerning material developments in the Business and any information
which the Company is required to supply to its lenders;
(g) annually (and in any event no later than ten (10) days after
adoption by the Managers or the officers of the Company) the financial plan
of the Company, in such manner and form as approved by the Managers, which
financial plan shall include at least a projection of income and a
projected cash flow statement for each fiscal quarter in such Fiscal Year
and a projected balance sheet as of the end of each fiscal quarter in such
Fiscal Year. Any material changes in such financial plan shall be
delivered to such holders of Class A Units as promptly as practicable after
such changes have been approved by the Managers;
(h) with reasonable promptness, such other information and data with
respect to the Company and its Subsidiaries as any such holder of Class A
Units may from time to time reasonably request; and
(i) the Company will use reasonable efforts to cause copies of draft
tax returns of the Company to be furnished to such holders of Class A Units
for review in advance of their filing; provided, however, that no such
-------- -------
holder of Class A Units shall have the right to approve or reject the
content of any such tax return. The Company, any Member or any Related
Party will not take a position in any such tax return that is inconsistent
with any treatment described in this Agreement or in any other document
relating to this Agreement and the Ancillary Agreements to which Avalon
Investors is a party. The Company will generally cooperate with Avalon
Investors and its representatives in providing information and data with
respect to the Company and its Subsidiaries and answer questions with
regard to Avalon Investors' completion of its annual appraisal of the
Company; provided, that such cooperation does not unreasonably interfere
--------
with the day-to-day operation of the Business.
9.4 TAX ELECTIONS. The taxable year will be the Fiscal Year, unless the
-------------
Tax Matters Partner determines otherwise in compliance with applicable laws.
The Tax Matters Partner will determine whether to make or revoke any available
election pursuant to the Code, except that the Tax Matters Partner shall make
all elections and shall take all necessary steps (assuming such elections and
steps are available under the federal income tax law then in effect) such that:
(i) the Company is taxed as a partnership for federal income tax purposes; and
(ii) Avalon Michigan LLC and Avalon New England LLC are either ignored as
separate entities for federal income tax
37
<PAGE>
purposes, or, if applicable, taxed as partnerships for federal income tax
purposes. Each Unitholder will upon request supply the information necessary to
give proper effect to any such election.
9.5 TAX CONTROVERSIES. Avalon Cable Michigan is designated the "Tax
----------------- ---
Matters Partner" (as defined in Code Section 6231) for the Company, and is
- ---------------
authorized and required to represent the Company (at the Company's expense) in
connection with all examinations of the Company's affairs by tax authorities,
including resulting administrative and judicial proceedings, and to expend
Company funds for professional services and costs associated therewith;
provided, that the Tax Matters Partner may be removed and/or replaced by action
- --------
of Members which own Units which represent a Majority in Voting Interest. The
Tax Matters Partner will at all times assure that any Member that holds a
majority of the Class A Units held by Members, is a Notice Partner (as defined
in section 6231(a)(8) of the Code) with respect to the Company. The Tax Matters
Partner will promptly (immediately by telephone and then by personal delivery
within 2 Business Days of notification or receipt of notice) (a) notify the
Class A Unitholder of any audit or other material tax matter which is brought to
the attention of the Tax Matters Partner, by notice from the Internal Revenue
Service, and (b) forward to all Class A Unitholders copies of any notices,
correspondence, reports or other instruments, communications or documents
received by the Tax Matters Partner in connection therewith. The Tax Matters
Partner, unless so approved by Members that hold a majority of the Class A Units
held by Members, will not have the right: (i) to extend any statute of
limitations or any period of limitations with respect to the Company or any
Unitholder in any matter; (ii) to agree on behalf of itself or others to any
settlement of any alleged tax deficiency or other tax matter, or to any
adjustment of taxable income or loss or any item included therein, affecting the
Company or any Unitholder; (iii) to file any petition for judicial review, or
any other judicial proceeding, with respect to the Company or any Unitholder in
any tax mater; or (iv) to file any requests for administrative review of
adjustment, or other administrative relief, on behalf of the Company or any
Unitholder in any tax matter. The Tax Matters Partner will provide each Class A
Unitholder at least 5 Business Days advance notice of any meeting, whether in
person, by telephone, or otherwise, with any representative of the Internal
Revenue Service or other revenue agency, and each Unitholder shall have the
right to have a representative of such Unitholder to be present at, or otherwise
involved in, such a meeting, except that the requirements of this sentence shall
not apply to meeting which are of a ministerial nature, or to meetings which
concerns matters that are not material to any Class A Unitholder. Any
deficiency for taxes imposed on any Unitholder (including penalties, additions
to tax or interest imposed with respect to such taxes) will be paid by such
Unitholder, and if required to be paid (and actually paid) by the Company, will
be recoverable from such Unitholder as provided in Section 7.2.
38
<PAGE>
ARTICLE X
DISSOLUTION AND TERMINATION
---------------------------
10.1 DISSOLUTION. The Company shall be dissolved only upon a Sale of the
-----------
Company and upon the first of the following to occur:
(a) Upon the election to dissolve the Company by action of Members
which own Units which represent a Majority in Voting Interest;
(b) Upon the retirement, resignation, expulsion, bankruptcy, legal
incapacity or dissolution of any Member who is at such time a Manager, or
the occurrence of any other event which terminates the continued membership
of any Member who is at such time a Manager, unless there is at least one
remaining Member and the business of the Company is continued by the action
of Members which own Units which represent a Majority in Voting Interest;
or
(c) Any other event that would cause the dissolution of a limited
liability company under the Act.
10.2 LIQUIDATION.
-----------
(a) LIQUIDATOR. Upon dissolution of the Company, the Managers will
----------
appoint a Person to act as the "Liquidator," and such Person shall act as
----------
the Liquidator unless and until a successor Liquidator is appointed as
provided in this Section 10.2. The Liquidator will agree not to resign at
any time without 30 days' prior written notice to the Members. The
Liquidator may be removed at any time, with or without cause, by notice of
removal and appointment of a successor Liquidator approved by Members which
own Units which represent a Majority in Voting Interest. Any successor
Liquidator will succeed to all rights, powers and duties of the former
Liquidator. The right to appoint a successor or substitute Liquidator in
the manner provided in this Section 10.2 will be recurring and continuing
for so long as the functions and services of the Liquidator are authorized
to continue under the provisions of this Agreement, and every reference in
this Agreement to the Liquidator will be deemed to refer also to any such
successor or substitute Liquidator appointed in the manner provided in this
Section 10.2. The Liquidator will receive as compensation for its services
(1) no additional compensation, if the Liquidator is an employee of the
Company or any of its Subsidiaries, or (2) if the Liquidator is not such an
employee, such compensation as the Managers may approve, plus, in either
case, reimbursement of the Liquidator's out-of-pocket expenses in
performing its duties.
(b) LIQUIDATING ACTIONS. The Liquidator will liquidate the assets of
-------------------
the Company and apply and distribute the proceeds of such liquidation, in
the following order of priority, unless otherwise required by mandatory
provisions of applicable law:
39
<PAGE>
(i) FIRST, to the payment of the Company's debts and
-----
obligations to its creditors, including sales commissions
and other expenses incident to any sale of the assets of
the Company.
(ii) SECOND, to the establishment of and additions to such
------
reserves as the Managers deem necessary or appropriate.
(iii) THIRD, to the Unitholders, pro rata in accordance with
-----
their positive Capital Account balances. In the case of a
liquidation of the Company pursuant to this Section 10.2,
prior to the distribution of the proceeds of liquidation,
the Capital Accounts of the Unitholders shall first be
revalued and adjusted pursuant to the provisions of
Treasury Regulation Sections 1.704-1(b)(2)(iv)(e)-(g).
The reserves established pursuant to clause (ii) above will be paid over by
the Liquidator to a bank or other financial institution, to be held in
escrow for the purpose of paying any contingent or unforeseen liabilities
or obligations and, at the expiration of such period as the Managers deem
advisable, such reserves will be distributed to the Unitholders in
accordance with Section 7.1.
(c) The Members which own Class B-2 Units shall in connection with
the liquidation of the Company be liable for the repayment to the Company,
in cash, of the amount (if any) by which the balance in such Member's
Capital Account is less than zero. Any such repayment shall be made before
the later of: (i) the end of the taxable year in which the date of the
liquidation of the Company occurs; or (ii) the 90th day after the date of
the liquidation of the Company. For purposes of this Section 10.2(c), the
date of the liquidation of the Company shall be the earlier of: (x) the
date the Company is terminated under Section 708(b)(1)(B) of the Code as a
result of transfers of 50% or more of the capital or profits interests in
the Company within a 12-month period; or (y) the date on which the Company
has ceased to be a going concern. In addition, for the purposes of this
Section 10.2(c), the Company shall not be deemed to have ceased to be going
concern until it has sold, distributed or otherwise disposed of
substantially all of its assets. Amounts returned to the Company pursuant
to this Section 10.2(c) by the Members which own Class B-2 Units shall be
paid to creditors of the Company or distributed to the other Members in
accordance with the positive balances in such other Members' Capital
Accounts.
(d) DISTRIBUTION IN KIND. The provisions of Section 10.2(b) which
--------------------
require the liquidation of the assets of the Company notwithstanding, but
subject to the order of priorities set forth in Section 10.2(b), if upon
dissolution of the Company the Managers and Members which own a majority of
the Class A Units held by Members determine that an immediate sale of part
or all of the Company's assets would be impractical or could cause undue
loss to the Unitholders, then the Managers may, only with the consent of
the Members which own a majority of the Class A Units held by Members,
defer the liquidation of any
40
<PAGE>
assets except those necessary to satisfy Company liabilities and reserves,
and may, only with the written consent of the Members which own a majority
of the Class A Units held by Members, distribute to the Unitholders, in
lieu of cash, as tenants in common and in accordance with the provisions of
Section 10.2(b), undivided interests in such Company assets as the
Liquidator deems not suitable for liquidation. Any such distribution in
kind will be subject to such conditions relating to the disposition and
management of such properties as the Liquidator deems reasonable and
equitable and to any agreements governing the operating of such properties
at such time. For purposes of any such distribution, the Managers and
Members which own a majority of the Class A Units held by Members will
determine the Fair Market Value of any property to be distributed in
accordance with any valuation procedure which the Managers reasonably deem
appropriate. In the case of a distribution in kind pursuant to the
provisions of this Section 10.2(d), the Capital Accounts of the Unitholders
shall first be revalued and adjusted pursuant to the provisions of Treasury
Regulation Sections 1.704-1(b)(2)(iv)(e)-(g).
(e) REASONABLE TIME FOR WINDING UP. A reasonable time will be allowed
------------------------------
for the orderly winding up of the business and affairs of the Company and
the liquidation of its assets pursuant to Section 10.2(b) in order to
minimize any losses otherwise attendant upon such winding up. Distributions
upon liquidation of the Company (or any Unitholder's interest in the
Company) and related adjustments will be made by the end of the Fiscal Year
of the liquidation (or, if later, within 90 days after the date of such
liquidation) or as otherwise permitted by Treasury Regulation Section
1.704-1(b)(2)(ii)(b).
-
ARTICLE XI
ISSUANCE OR TRANSFER OF MEMBERSHIP INTERESTS
--------------------------------------------
11.1 GENERALLY. Issuances and Transfers of Units shall be subject to the
---------
applicable terms of the Related Agreements, and in addition shall not be
effective unless all of the following conditions are satisfied:
(a) The issuance or Transfer, as applicable, shall comply with all
applicable laws, including any applicable securities laws.
(b) The issuance or Transfer, as applicable, shall not affect the
Company's existence or qualification as a limited liability company under
the Act.
(c) The issuance or Transfer, as applicable, shall not cause the
Company to be classified as other than a partnership for United States
federal income tax purposes.
(d) The issuance or Transfer, as applicable, shall not result in a
termination of the Company under Code Section 708, unless the Managers
determine that any such termination will not have a material adverse impact
on the Members.
41
<PAGE>
(e) The issuance or Transfer, as applicable, shall not cause the
application of the tax-exempt use property rules of Code Sections
168(g)(l)(B) and 168(h) to the Company or its Members.
(f) In the case of a Transfer, the Transferor Member shall pay the
Company a transfer fee in an amount established by the Managers to pay the
Company's reasonable expenses in connection with the Transfer.
(g) The acquiring Person shall have agreed to be bound by this
Agreement and shall have executed a counterpart signature page to this
Agreement, and shall have executed such documents or instruments as the
Managers determine to be necessary or appropriate to effect such Person's
admission as a Member, including, without limitation, the Members
Agreement.
11.2 ADDITIONAL MEMBERS. An Assignee shall be admitted to the Company as a
------------------
Member. Such admission shall become effective when the new Member has executed
and delivered to the Company a counterpart of this Agreement.
11.3 ASSIGNEE'S RIGHTS. A Transfer of a Unit permitted under this
-----------------
Agreement and the Members Agreement will be effective as of the date upon which
all conditions thereto referred to in this Agreement (including the Related
Agreements) have been satisfied, unless a later date is specified in the
relevant transfer documentation and prior notice of such later date is given to
the Company. Profits, Losses and other items will be allocated between the
transferor and the transferee according to Code Section 706. Unless and until
an Assignee becomes a Member in accordance with this Agreement, such Assignee
will not be entitled to any of the rights granted to a Member under this
Agreement or under applicable law, but will be entitled to the rights granted to
a Unitholder hereunder or thereunder. Further, any such Assignee will be bound
by any limitations and obligations contained therein with respect to Members.
11.4 WITHDRAWAL OF MEMBER. Upon the Transfer of all of the Units held by a
--------------------
Member (the "Transferor Member") to a Person in accordance with this Agreement
-----------------
(including the Related Agreements), the Transferor Member shall withdraw from
the Company and thereupon cease to be a Member.
11.5 TAX MATTERS. On the transfer of all or part of an interest in the
-----------
Company, at the request of the transferee of the interest, the Managers will, on
request of any Member (and without such request, upon the death of a Member)
cause the Company to elect, pursuant to Section 754 of the Code, to adjust the
tax basis of the Company's properties as provided by Sections 734 and 743 of the
Code.
42
<PAGE>
ARTICLE XII
MATTERS CONCERNING BRIDGE FACILITIES
------------------------------------
12.1 INTENTIONALLY OMITTED.
----------------------
12.2 INTENTIONALLY OMITTED.
----------------------
ARTICLE XII
MISCELLANEOUS PROVISIONS
------------------------
13.1 NOTICES.
-------
(a) All notices, requests, demands and other communications under or
in connection with this Agreement shall be given to or made upon (i) any Member,
at such Member's address set forth on the attached Schedule 1; and (ii) the
----------
Company, 201 East 69th Street, Penthouse G, New York, NY 10021, Attention: Joel
Cohen, President, with copies to ABRY Partners, Inc., 18 Newbury Street, Boston,
MA 02116, Attention: Jay Grossman, and to Kirkland & Ellis, 153 East 53rd
Street, New York, NY 10022, Attention: John L. Kuehn (or in any case to such
other address as the addressee may from time to time designate in writing to the
sender).
(b) All notices, requests, demands and other communications given or
made in accordance with the provisions of this Agreement shall be in writing,
and shall be deemed effectively given upon personal delivery or delivery by
courier to the party to be notified or three (3) business days after deposit
with the United States Post Office, by registered or certified mail, return
receipt requested, postage prepaid and addressed as provided in Section 13.1(a).
13.2 GOVERNING LAW. ALL ISSUES AND QUESTIONS CONCERNING THE APPLICATION,
-------------
CONSTRUCTION, VALIDITY, INTERPRETATION AND ENFORCEMENT OF THIS AGREEMENT AND THE
EXHIBITS AND SCHEDULES TO THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED IN
ACCORDANCE WITH, THE LAWS OF THE STATE OF DELAWARE, AND SPECIFICALLY THE ACT,
WITHOUT GIVING EFFECT TO ANY CHOICE OF LAW OR CONFLICT OF LAW RULES OR
PROVISIONS (WHETHER OF THE STATE OF DELAWARE OR ANY OTHER JURISDICTION)
43
<PAGE>
THAT WOULD CAUSE THE APPLICATION OF THE LAWS OF ANY JURISDICTION OTHER THAN THE
STATE OF DELAWARE.
13.3 NO ACTION FOR PARTITION. No Member shall have any right to maintain
-----------------------
any action for partition with respect to the property of the Company.
13.4 HEADINGS AND SECTIONS. The headings in this Agreement are inserted
---------------------
for convenience only and are in no way intended to describe, interpret, define,
or limit the scope, extent or intent of this Agreement or any provision of this
Agreement. Unless the context requires otherwise, all references in this
Agreement to Sections, Articles, Exhibits or Schedules shall be deemed to mean
and refer to Sections, Articles, Exhibits or Schedules of or to this Agreement.
13.5 AMENDMENTS. This Agreement and the certificate of formation of the
----------
Company shall not be amended, supplemented or restated without first obtaining
the written consent of: (i) Members which represent a Majority in Voting
Interest; and (ii) Members which own a majority of the Class A Units held by
Members; provided, that consent of the Members shall not be required under the
--------
preceding clause (ii) in the event that the proposed amendment, supplement or
restatement is made in connection with any issuance or proposed issuance of
Units not in violation of any provisions of this Agreement.
13.6 NUMBER AND GENDER. Where the context so indicates, the masculine
-----------------
shall include the feminine, the neuter shall include the masculine and feminine,
and the singular shall include the plural.
13.7 BINDING EFFECT. Except as otherwise provided to the contrary in this
--------------
Agreement, this Agreement shall be binding upon and inure to the benefit of the
Members, their distributees, heirs, legal representatives, executors,
administrators, successors and permitted assigns.
13.8 COUNTERPARTS. This Agreement may be executed in multiple
------------
counterparts, each of which shall be deemed to be an original and shall be
binding upon the Member who executed the same, but all of such counterparts
shall constitute the same agreement.
13.9 SEVERABILITY. Whenever possible, each provision of this Agreement
------------
shall be interpreted in such manner as to be effective and valid under
applicable law, but if any provision of this Agreement is held to be prohibited
by or invalid under applicable law, such provision shall be ineffective only to
the extent of such prohibition or invalidity, without invalidating the remainder
of this Agreement
13.10 REMEDIES. Each of the parties to this Agreement shall be entitled to
--------
enforce its rights under this Agreement specifically, to recover damages and
costs (including reasonable attorney's fees) caused by any breach of any
provision of this Agreement and to exercise all other rights existing in its
favor. The Unitholders agree and acknowledge that money damages may not be an
adequate remedy for any breach of the provisions of this Agreement and that any
party may in its
44
<PAGE>
sole discretion apply to any court of law or equity of competent jurisdiction
(without posting any bond or deposit) for specific performance and/or other
injunctive relief in order to enforce or prevent any violations of the
provisions of this Agreement.
13.11 BUSINESS DAYS. If any time period for giving notice or taking action
-------------
under this Agreement expires on a day which is a Saturday, Sunday or holiday in
the state in which the Company's chief executive office is located, the time
period shall be automatically extended to the business day immediately following
such Saturday, Sunday or holiday.
13.12 WAIVER OF JURY TRIAL. EACH PARTY TO THIS AGREEMENT HEREBY WAIVES, TO
--------------------
THE EXTENT PERMITTED BY APPLICABLE LAW, TRIAL BY JURY IN ANY LITIGATION IN ANY
COURT WITH RESPECT TO, IN CONNECTION WITH, OR ARISING OUT OF THIS AGREEMENT OR
THE VALIDITY, PROTECTION, INTERPRETATION, COLLECTION OR ENFORCEMENT THEREOF.
13.13 NO STRICT CONSTRUCTION. The parties to this Agreement have
----------------------
participated jointly in the negotiation and drafting of this Agreement. In the
event an ambiguity or question of intent or interpretation arises, this
Agreement shall be construed as if drafted jointly by the parties to this
Agreement, and no presumption or burden of proof shall arise favoring or
disfavoring any party by virtue of the authorship of any of the provisions of
this Agreement.
13.14 ENTIRE AGREEMENT. Except as otherwise expressly set forth in this
----------------
Agreement, this Agreement and the other agreements referred to in this Agreement
(including, without limitation, the Members Agreement and the Securities
Purchase Agreement) embody the complete agreement and understanding among the
parties to this Agreement with respect to the subject matter of this Agreement
and supersedes and preempts any prior understandings, agreements or
representations by or among the parties, written or oral, which may have related
to the subject matter of this Agreement in any way.
* * * *
45
<PAGE>
IN WITNESS WHEREOF, the undersigned, have executed this Amended and
Restated Limited Liability Company Agreement as of the date first written above.
AVALON CABLE LLC
By: _______________________________
Name: _____________________________
Its: _______________________________
AVALON CABLE OF NEW ENGLAND HOLDINGS, INC.
By: _______________________________
Name: _____________________________
Its: _______________________________
AVALON CABLE OF MICHIGAN, INC.
By: _______________________________
Name: _____________________________
Its: _______________________________
AVALON INVESTORS, L.L.C.
By: _______________________________
Name: _____________________________
Its: _______________________________
<PAGE>
AVALON CABLE LLC
A DELAWARE LIMITED LIABILITY COMPANY
SCHEDULE I
----------
NAMES AND UNIT OWNERSHIP
NAME AND ADDRESS FOR NOTICES UNIT OWNERSHIP
- ---------------------------- --------------
Avalon Cable of Michigan, Inc. 510,994 Class B-2 Units
201 East 69th Street, Penthouse G
New York, NY 10021
Attention: Joel Cohen - President
with a copy (which shall not constitute
---------------------------------------
notice) to:
----------
ABRY Broadcast Partners, III, L.P.
c/o ABRY Partners, Inc.
18 Newbury Street
Boston, MA 02116
Attention: Jay Grossman
and
Kirkland & Ellis
153 East 53rd Street
New York, NY 10022
Attn: John L. Kuehn
<PAGE>
Avalon Cable of New England Holdings, Inc. 64,696 Class B-1 Units
201 East 69th Street, Penthouse G
New York, NY 10021
Attention: Joel Cohen - President
with a copy (which shall not constitute
---------------------------------------
notice) to:
----------
ABRY Broadcast Partners, III, L.P.
c/o ABRY Partners, Inc.
18 Newbury Street
Boston, MA 02116
Attention: Jay Grossman
and
Kirkland & Ellis
153 East 53rd Street
New York, NY 10022
Attention: John L. Kuehn
Avalon Investors, L.L.C. 45,000 Class A Units
at such address of which it may give notice in
accordance with Section 13.1 hereof.
with a copy (which shall not constitute
---------------------------------------
notice) to:
----------
Cleary, Gottlieb, Steen & Hamilton
One Liberty Plaza
New York, NY 10006
Attention: Michael L. Ryan
<PAGE>
SCHEDULE II
-----------
OFFICERS OF THE COMPANY
-----------------------
David Unger Chairman and Assistant Secretary
Joel Cohen President, Chief Executive Officer and
Secretary
Peter Polimino Vice President of Finance
Peter Luscombe Vice President of Engineering
Peggy Koenig Vice President and Assistant Secretary
Jay Grossman Vice President and Assistant Secretary
<PAGE>
EXHIBIT A
---------
FORM OF NEW BRIDGE LOAN
-----------------------
__________, ____
THIS PROMISSORY NOTE IS SUBORDINATE TO AMOUNTS OUTSTANDING UNDER THE
LOANS OR EXCHANGE NOTES DEFINED IN THE BRIDGE LOAN AGREEMENT REFERRED TO BELOW
AND TO THE CLASS A UNITS (AS DEFINED IN THE LLC AGREEMENT REFERRED TO BELOW).
NOTWITHSTANDING ANY STATEMENT TO THE CONTRARY CONTAINED IN THIS PROMISSORY NOTE,
CASH PAYMENTS OF PRINCIPAL OR INTEREST OUTSTANDING UNDER THIS PROMISSORY NOTE
SHALL NOT BE MADE SO LONG AS: (A) THE LOANS OR EXCHANGE NOTES REMAIN
OUTSTANDING; (B) ANY PAYMENT DEFAULT ON THE LOANS OR EXCHANGE NOTES EXISTS; (C)
A PAYMENT BLOCKAGE IN RESPECT OF AMOUNTS OUTSTANDING UNDER THIS PROMISSORY NOTE
HAS BEEN IMPLEMENTED BY THE ADMINISTRATIVE AGENT OR EXCHANGE NOTE TRUSTEE; OR
(D) THE CLASS A UNITS HAVE ANY UNPAID YIELD OR UNRETURNED CAPITAL VALUE (AS SUCH
TERMS ARE DEFINED IN THE LIMITED LIABILITY COMPANY AGREEMENT OF THE MAKER, AS IN
EFFECT FROM TIME TO TIME, THE "LLC AGREEMENT"); PROVIDED, HOWEVER, THAT INTEREST
-------------
DUE AND PAYABLE ON PRINCIPAL MAY BE ADDED TO THE PRINCIPAL AMOUNT OUTSTANDING
UNDER THIS PROMISSORY NOTE RATHER THAN BEING PAID IN CASH.
AVALON CABLE LLC
PROMISSORY NOTE
The undersigned (the "Maker") hereby agrees to pay to Avalon Cable
-----
Holdings, LLC, a Delaware limited liability company, or the registered holder
hereof (in either case, the "Holder"), on _______________ (the "Maturity
------ --------
Date"), the unpaid principal sum of all loans made by the Holder to the Maker
- ----
from time to time, together with unpaid accrued interest thereon. Capitalized
terms used but not otherwise defined herein shall have the meanings ascribed to
them in the Bridge Loan Agreement (the "Bridge Loan Agreement") dated
---------------------
November 6, 1998 by and among, Avalon Cable LLC, a Delaware limited liability
company, Avalon Cable of Michigan Holdings, Inc., a Delaware corporation, Avalon
Cable Holdings Finance, Inc., a Delaware corporation, Lehman Brothers Inc. and
Lehman Commercial Paper, Inc., as in effect from time to time, an executed copy
of which has been delivered to the Holder.
Interest will accrue on the unpaid principal amount of this Promissory
Note from time to time at a rate per annum equal to the greater of (i) the
applicable federal rate published from time to time by the U.S. Internal revenue
Service for purposes of Section 1274(d) of the Internal Revenue Code of 1986, as
amended; or (ii) the Reference Rate (as defined in the LLC Agreement); provided,
--------
that at any time when there are amounts outstanding under the Bridge Loan
Agreement, such rate shall exceed the rate in effect under such loan plus 100
----
basis points. Such interest will compound on each anniversary of the date
hereof.
<PAGE>
Any payment in respect of this Promissory Note will be applied first to
the unpaid accrued interest hereon and second to the unpaid principal amount
hereof.
Loans to the Maker by the Holder, and repayments of any or all of the
principal amount thereof and/or accrued interest thereon will be recorded on the
attached schedule.
This instrument shall automatically convert into a quantity of Class B
Units of the Maker (as defined in the LLC Agreement) determined by dividing (x)
the sum of the unpaid principal sum of all loans made by the Holder to the Maker
hereunder from time to time and the amount of unpaid accrued interest thereon by
(y) $75.149 on the earlier of: (i) the Maturity Date; (ii) the date which is
eighteen (18) months after the date hereof; (iii) the date immediately prior to
the date on which a Distribution shall be made by the Maker in connection with a
Sale of the Company (as defined in the LLC Agreement) or liquidation; or (iv)
the occurrence of a Bankruptcy (as defined in the LLC Agreement); or (v) the day
after the date on which the Maker and the Holder otherwise agree.
This Promissory Note shall be governed by the internal laws of the State
of New York.
* * * * * * *
<PAGE>
IN WITNESS WHEREOF, the Maker has caused this Promissory Note to be
executed as of the date first set forth above.
AVALON CABLE LLC
By: _______________________________________
Name:
Title:
<PAGE>
EXHIBIT 3.6
BY-LAWS
OF
AVALON CABLE HOLDINGS FINANCE, INC.
A DELAWARE CORPORATION
ARTICLE I
---------
OFFICES
-------
Section 1. Registered Office. The registered office of the corporation in
--------- -----------------
the State of Delaware shall be located at 1209 Orange Street, Wilmington,
Delaware, County of New Castle. The name of the corporation's registered agent
at such address shall be The Corporation Trust Company. The registered office
and/or registered agent of the corporation may be changed from time to time by
action of the board of directors.
Section 2. Other Offices. The corporation may also have offices at such
--------- -------------
other places, both within and without the State of Delaware, as the board of
directors may from time to time determine or the business of the corporation may
require.
ARTICLE II
----------
MEETINGS OF STOCKHOLDERS
------------------------
Section 1. Place and Time of Meetings. An annual meeting of the
--------- --------------------------
stockholders shall be held each year within one hundred twenty (120) days after
the close of the immediately preceding fiscal year of the corporation for the
purpose of electing directors and conducting such other proper business as may
come before the meeting. The date, time and place of the annual meeting shall
be determined by the president of the corporation; provided, that if the
president does not act, the board of directors shall determine the date, time
and place of such meeting.
Section 2. Special Meetings. Special meetings of stockholders may be
--------- ----------------
called for any purpose and may be held at such time and place, within or without
the State of Delaware, as shall be stated in a notice of meeting or in a duly
executed waiver of notice thereof. Such meetings may be called at any time by
the board of directors or the president and shall be called by the president
upon the written request of holders of shares entitled to cast not less than a
majority of the votes at the meeting, such written request shall state the
purpose or purposes of the meeting and shall be delivered to the president.
<PAGE>
Section 3. Place of Meetings. The board of directors may designate any
--------- -----------------
place, either within or without the State of Delaware, as the place of meeting
for any annual meeting or for any special meeting called by the board of
directors. If no designation is made, or if a special meeting be otherwise
called, the place of meeting shall be the principal executive office of the
corporation.
Section 4. Notice. Whenever stockholders are required or permitted to
--------- ------
take action at a meeting, written or printed notice stating the place, date,
time, and, in the case of special meetings, the purpose or purposes, of such
meeting, shall be given to each stockholder entitled to vote at such meeting not
less than ten (10) nor more than sixty (60) days before the date of the meeting.
All such notices shall be delivered, either personally or by mail, by or at the
direction of the board of directors, the president or the secretary, and if
mailed, such notice shall be deemed to be delivered when deposited in the United
States mail, postage prepaid, addressed to the stockholder at his, her or its
address as the same appears on the records of the corporation. Attendance of a
person at a meeting shall constitute a waiver of notice of such meeting, except
when the person attends for the express purpose of objecting at the beginning of
the meeting to the transaction of any business because the meeting is not
lawfully called or convened.
Section 5. Stockholders List. The officer having charge of the stock
--------- -----------------
ledger of the corporation shall make, at least ten (10) days before every
meeting of the stockholders, a complete list of the stockholders entitled to
vote at such meeting arranged in alphabetical order, showing the address of each
stockholder and the number of shares registered in the name of each stockholder.
Such list shall be open to the examination of any stockholder, for any purpose
germane to the meeting, during ordinary business hours, for a period of at least
ten (10) days prior to the meeting, either at a place within the city where the
meeting is to be held, which place shall be specified in the notice of the
meeting or, if not so specified, at the place where the meeting is to be held.
The list shall also be produced and kept at the time and place of the meeting
during the whole time thereof, and may be inspected by any stockholder who is
present.
Section 6. Quorum. The holders of a majority of the outstanding shares of
--------- ------
capital stock, present in person or represented by proxy, shall constitute a
quorum at all meetings of the stockholders, except as otherwise provided by
statute or by the certificate of incorporation. If a quorum is not present, the
holders of a majority of the shares present in person or represented by proxy at
the meeting, and entitled to vote at the meeting, may adjourn the meeting to
another time and/or place.
Section 7. Adjourned Meetings. When a meeting is adjourned to another
--------- ------------------
time and place, notice need not be given of the adjourned meeting if the time
and place thereof are announced at the meeting at which the adjournment is
taken. At the adjourned meeting the corporation may transact any business which
might have been transacted at the original meeting. If the adjournment is for
more than thirty (30) days, or if after the adjournment a new record date is
fixed for the adjourned meeting, a notice of the adjourned meeting shall be
given to each stockholder of record entitled to vote at the meeting.
-2-
<PAGE>
Section 8. Vote Required. When a quorum is present, the affirmative vote
--------- -------------
of the majority of shares present in person or represented by proxy at the
meeting and entitled to vote on the subject matter shall be the act of the
stockholders, unless the question is one upon which by express provisions of an
applicable law or of the certificate of incorporation a different vote is
required, in which case such express provision shall govern and control the
decision of such question.
Section 9. Voting Rights. Except as otherwise provided by the General
--------- -------------
Corporation Law of the State of Delaware or by the certificate of incorporation
of the corporation or any amendments thereto and subject to Section 3 of Article
VI hereof, every stockholder shall at every meeting of the stockholders be
entitled to one (1) vote in person or by proxy for each share of common stock
held by such stockholder.
Section 10. Proxies. Each stockholder entitled to vote at a meeting of
---------- -------
stockholders or to express consent or dissent to corporate action in writing
without a meeting may authorize another person or persons to act for him or her
by proxy, but no such proxy shall be voted or acted upon after three (3) years
from its date, unless the proxy provides for a longer period. A duly executed
proxy shall be irrevocable if it states that it is irrevocable and if, and only
as long as, it is coupled with an interest sufficient in law to support an
irrevocable power. A proxy may be made irrevocable regardless of whether the
interest with which it is coupled is an interest in the stock itself or an
interest in the corporation generally. Any proxy is suspended when the person
executing the proxy is present at a meeting of stockholders and elects to vote,
except that when such proxy is coupled with an interest and the fact of the
interest appears on the face of the proxy, the agent named in the proxy shall
have all voting and other rights referred to in the proxy, notwithstanding the
presence of the person executing the proxy. At each meeting of the
stockholders, and before any voting commences, all proxies filed at or before
the meeting shall be submitted to and examined by the secretary or a person
designated by the secretary, and no shares may be represented or voted under a
proxy that has been found to be invalid or irregular.
Section 11. Action by Written Consent. Unless otherwise provided in the
---------- -------------------------
certificate of incorporation, any action required to be taken at any annual or
special meeting of stockholders of the corporation, or any action which may be
taken at any annual or special meeting of such stockholders, may be taken
without a meeting, without prior notice and without a vote, if a consent or
consents in writing, setting forth the action so taken and bearing the dates of
signature of the stockholders who signed the consent or consents, shall be
signed by the holders of outstanding stock having not less than the minimum
number of votes that would be necessary to authorize or take such action at a
meeting at which all shares entitled to vote thereon were present and voted and
shall be delivered to the corporation by delivery to its registered office in
the state of Delaware, or the corporation's principal place of business, or an
officer or agent of the corporation having custody of the book or books in which
proceedings of meetings of the stockholders are recorded. Delivery made to the
corporation's registered office shall be by hand or by certified or registered
mail, return receipt requested provided, however, that no consent or consents
delivered by certified or registered mail shall be deemed delivered until such
consent or consents are actually received at the registered office. All consents
properly delivered in accordance with this section shall be deemed to be
-3-
<PAGE>
recorded when so delivered. No written consent shall be effective to take the
corporate action referred to therein unless, within sixty (60) days of the
earliest dated consent delivered to the corporation as required by this section,
written consents signed by the holders of a sufficient number of shares to take
such corporate action are so recorded. Prompt notice of the taking of the
corporate action without a meeting by less than unanimous written consent shall
be given to those stockholders who have not consented in writing. Any action
taken pursuant to such written consent or consents of the stock holders shall
have the same force and effect as if taken by the stockholders at a meeting
thereof.
ARTICLE III
-----------
DIRECTORS
---------
Section 1. General Powers. The business and affairs of the corporation
--------- --------------
shall be managed by or under the direction of the board of directors.
Section 2. Number, Election and Term of Office. The number of directors
--------- -----------------------------------
which shall constitute the first board shall be five (5). Thereafter, the
number of directors shall be established from time to time by resolution of the
board. The directors shall be elected by a plurality of the votes of the shares
present in person or represented by proxy at the meeting and entitled to vote in
the election of directors. The directors shall be elected in this manner at the
annual meeting of the stockholders, except as provided in Section 4 of this
Article III. Each director elected shall hold office until a successor is duly
elected and qualified or until his or her earlier death, resignation or removal
as hereinafter provided.
Section 3. Removal and Resignation. Any director or the entire board of
--------- -----------------------
directors may be removed at any time, with or without cause, by the holders of a
majority of the shares then entitled to vote at an election of directors.
Whenever the holders of any class or series are entitled to elect one or more
directors by the provisions of the corporation's certificate of incorporation,
the provisions of this section shall apply, in respect to the removal without
cause of a director or directors so elected, to the vote of the holders of the
outstanding shares of that class or series and not to the vote of the
outstanding shares as a whole. Any director may resign at any time upon written
notice to the corporation.
Section 4. Vacancies. Vacancies and newly created directorships resulting
--------- ---------
from any increase in the authorized number of directors may be filled by a
majority of the directors then in office, though less than a quorum, or by a
sole remaining director. Each director so chosen shall hold office until a
successor is duly elected and qualified or until his or her earlier death,
resignation or removal as herein provided.
-4-
<PAGE>
Section 5. Annual Meetings. The annual meeting of each newly elected
--------- ---------------
board of directors shall be held without other notice than this by-law
immediately after, and at the same place as, the annual meeting of stockholders.
Section 6. Other Meetings and Notice. Regular meetings, other than the
--------- -------------------------
annual meeting, of the board of directors may be held without notice at such
time and at such place as shall from time to time be determined by resolution of
the board. Special meetings of the board of directors may be called by or at
the request of the president on at least twenty-four (24) hours notice to each
director, either personally, by telephone, by mail, or by telegraph.
Section 7. Quorum, Required Vote and Adjournment. A majority of the total
--------- -------------------------------------
number of directors shall constitute a quorum for the transaction of business.
The vote of a majority of directors present at a meeting at which a quorum is
present shall be the act of the board of directors. If a quorum shall not be
present at any meeting of the board of directors, the directors present thereat
may adjourn the meeting from time to time, without notice other than
announcement at the meeting, until a quorum shall be present.
Section 8. Committees. The board of directors may, by resolution passed
--------- ----------
by a majority of the whole board, designate one or more committees, each
committee to consist of one or more of the directors of the corporation, which
to the extent provided in such resolution or these by-laws shall have and may
exercise the powers of the board of directors in the management and affairs of
the corporation except as otherwise limited by law. The board of directors may
designate one or more directors as alternate members of any committee, who may
replace any absent or disqualified member at any meeting of the committee. Such
committee or committees shall have such name or names as may be determined from
time to time by resolution adopted by the board of directors. Each committee
shall keep regular minutes of its meetings and report the same to the board of
directors when required.
Section 9. Committee Rules. Each committee of the board of directors may
--------- ---------------
fix its own rules of procedure and shall hold its meetings as provided by such
rules, except as may otherwise be provided by a resolution of the board of
directors designating such committee. Unless otherwise provided in such a
resolution, the presence of at least a majority of the members of the committee
shall be necessary to constitute a quorum. In the event that a member and that
member's alternate, if alternates are designated by the board of directors as
provided in Section 8 of this Article III, of such committee is or are absent or
disqualified, the member or members thereof present at any meeting and not
disqualified from voting, whether or not such member or members constitute a
quorum, may unanimously appoint another member of the board of directors to act
at the meeting in place of any such absent or disqualified member.
Section 10. Communications Equipment. Members of the board of directors
---------- ------------------------
or any committee thereof may participate in and act at any meeting of such board
or committee through the use of a conference telephone or other communications
equipment by means of which all persons
-5-
<PAGE>
participating in the meeting can hear each other, and participation in the
meeting pursuant to this section shall constitute presence in person at the
meeting.
Section 11. Waiver of Notice and Presumption of Assent. Any member of the
---------- ------------------------------------------
board of directors or any committee thereof who is present at a meeting shall be
conclusively presumed to have waived notice of such meeting except when such
member attends for the express purpose of objecting at the beginning of the
meeting to the transaction of any business because the meeting is not lawfully
called or convened. Such member shall be conclusively presumed to have assented
to any action taken unless his or her dissent shall be entered in the minutes of
the meeting or unless his or her written dissent to such action shall be filed
with the person acting as the secretary of the meeting before the adjournment
thereof or shall be forwarded by registered mail to the secretary of the
corporation immediately after the adjournment of the meeting. Such right to
dissent shall not apply to any member who voted in favor of such action.
Section 12. Action by Written Consent. Unless otherwise restricted by the
---------- -------------------------
certificate of incorporation, any action required or permitted to be taken at
any meeting of the board of directors, or of any committee thereof, may be taken
without a meeting if all members of the board or committee, as the case may be,
consent thereto in writing, and the writing or writings are filed with the
minutes of proceedings of the board or committee.
ARTICLE IV
----------
OFFICERS
--------
Section 1. Number. The officers of the corporation shall be elected by
--------- ------
the board of directors and shall consist of a president, one or more vice-
presidents, secretary, a treasurer, and such other officers and assistant
officers as may be deemed necessary or desirable by the board of directors. Any
number of offices may be held by the same person. In its discretion, the board
of directors may choose not to fill any office for any period as it may deem
advisable, except that the offices of president and secretary shall be filled as
expeditiously as possible.
Section 2. Election and Term of Office. The officers of the corporation
--------- ---------------------------
shall be elected annually by the board of directors at its first meeting held
after each annual meeting of stockholders or as soon thereafter as conveniently
may be. The president shall be elected annually by the board of directors at
the first meeting of the board of directors held after each annual meeting of
stockholders or as soon thereafter as conveniently may be. The president shall
appoint other officers to serve for such terms as he or she deems desirable.
Vacancies may be filled or new offices created and filled at any meeting of the
board of directors. Each officer shall hold office until a successor is duly
elected and qualified or until his or her earlier death, resignation or removal
as hereinafter provided.
-6-
<PAGE>
Section 3. Removal. Any officer or agent elected by the board of
--------- -------
directors may be removed by the board of directors whenever in its judgment the
best interests of the corporation would be served thereby, but such removal
shall be without prejudice to the contract rights, if any, of the person so
removed.
Section 4. Vacancies. Any vacancy occurring in any office because of
--------- ---------
death, resignation, removal, disqualification or otherwise, may be filled by the
board of directors for the unexpired portion of the term by the board of
directors then in office.
Section 5. Compensation. Compensation of all officers shall be fixed by
--------- ------------
the board of directors, and no officer shall be prevented from receiving such
compensation by virtue of his or her also being a director of the corporation.
Section 6. The President. The president shall be the chief executive
--------- -------------
officer of the corporation; shall preside at all meetings of the stockholders
and board of directors at which he is present; subject to the powers of the
board of directors, shall have general charge of the business, affairs and
property of the corporation, and control over its officers, agents and
employees; and shall see that all orders and resolutions of the board of
directors are carried into effect. The president shall execute bonds, mortgages
and other contracts requiring a seal, under the seal of the corporation, except
where required or permitted by law to be otherwise signed and executed and
except where the signing and execution thereof shall be expressly delegated by
the board of directors to some other officer or agent of the corporation. The
president shall have such other powers and perform such other duties as may be
prescribed by the board of directors or as may be provided in these by-laws.
Section 7. Vice-presidents. The vice-president, or if there shall be more
--------- ---------------
than one, the vice-presidents in the order determined by the board of directors
or by the president, shall, in the absence or disability of the president, act
with all of the powers and be subject to all the restrictions of the president.
The vice-presidents shall also perform such other duties and have such other
powers as the board of directors, the president or these by-laws may, from time
to time, prescribe.
Section 8. The Secretary and Assistant Secretaries. The secretary shall
--------- ---------------------------------------
attend all meetings of the board of directors, all meetings of the committees
thereof and all meetings of the stockholders and record all the proceedings of
the meetings in a book or books to be kept for that purpose. Under the
president's supervision, the secretary shall give, or cause to be given, all
notices required to be given by these by-laws or by law; shall have such powers
and perform such duties as the board of directors, the president or these by-
laws may, from time to time, prescribe; and shall have custody of the corporate
seal of the corporation. The secretary, or an assistant secretary, shall have
authority to affix the corporate seal to any instrument requiring it and when so
affixed, it may be attested by his signature or by the signature of such
assistant secretary. The board of directors may give general authority to any
other officer to affix the seal of the corporation and to attest the affixing by
his signature. The assistant secretary, or if there be more than one, the
assistant secretaries in the order determined by the board of directors, shall,
in the absence or disability of the secretary, perform the duties and exercise
the powers of the secretary and shall perform such other duties and have such
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<PAGE>
other powers as the board of directors, the president, or secretary may, from
time to time, prescribe.
Section 9. The Treasurer and Assistant Treasurer. The treasurer shall
--------- -------------------------------------
have the custody of the corporate funds and securities; shall keep full and
accurate accounts of receipts and disbursements in books belonging to the
corporation; shall deposit all monies and other valuable effects in the name and
to the credit of the corporation as may be ordered by the board of directors;
shall cause the funds of the corporation to be disbursed when such disbursements
have been duly authorized, taking proper vouchers for such disbursements; and
shall render to the president and the board of directors, at its regular meeting
or when the board of directors so requires, an account of the corporation; shall
have such powers and perform such duties as the board of directors, the
president or these by-laws may, from time to time, prescribe. If required by
the board of directors, the treasurer shall give the corporation a bond (which
shall be rendered every six (6) years) in such sums and with such surety or
sureties as shall be satisfactory to the board of directors for the faithful
performance of the duties of the office of treasurer and for the restoration to
the corporation, in case of death, resignation, retirement, or removal from
office, of all books, papers, vouchers, money, and other property of whatever
kind in the possession or under the control of the treasurer belonging to the
corporation. The assistant treasurer, or if there shall be more than one, the
assistant treasurers in the order determined by the board of directors, shall in
the absence or disability of the treasurer, perform the duties and exercise the
powers of the treasurer. The assistant treasurers shall perform such other
duties and have such other powers as the board of directors, the president or
treasurer may, from time to time, prescribe.
Section 10. Other Officers, Assistant Officers and Agents. Officers,
---------- ---------------------------------------------
assistant officers and agents, if any, other than those whose duties are
provided for in these by-laws, shall have such authority and perform such duties
as may from time to time be prescribed by resolution of the board of directors.
Section 11. Absence or Disability of Officers. In the case of the absence
---------- ---------------------------------
or disability of any officer of the corporation and of any person hereby
authorized to act in such officer's place during such officer's absence or
disability, the board of directors may by resolution delegate the powers and
duties of such officer to any other officer or to any director, or to any other
person whom it may select.
ARTICLE V
---------
INDEMNIFICATION OF OFFICERS, DIRECTORS AND OTHERS
-------------------------------------------------
Section 1. Nature of Indemnity. Each person who was or is made a party or
--------- -------------------
is threatened to be made a party to or is involved in any action, suit or
proceeding, whether civil, criminal, administrative or investigative
(hereinafter a "proceeding"), by reason of the fact that he, or a person of whom
he is the legal representative, is or was a director or officer, of the
corporation or is or was serving at the request of the corporation as a
director, officer, employee, fiduciary, or agent of
-8-
<PAGE>
another corporation or of a partnership, joint venture, trust or other
enterprise, shall be indemnified and held harmless by the corporation to the
fullest extent which it is empowered to do so unless prohibited from doing so by
the General Corporation Law of the State of Delaware, as the same exists or may
hereafter be amended (but, in the case of any such amendment, only to the extent
that such amendment permits the corporation to provide broader indemnification
rights than said law permitted the corporation to provide prior to such
amendment) against all expense, liability and loss (including attorneys' fees
actually and reasonably incurred by such person in connection with such
proceeding) and such indemnification shall inure to the benefit of his heirs,
executors and administra tors; provided, however, that, except as provided in
Section 2 hereof, the corporation shall indemnify any such person seeking
indemnification in connection with a proceeding initiated by such person only if
such proceeding was authorized by the board of directors of the corporation. The
right to indemnification conferred in this Article V shall be a contract right
and, subject to Sections 2 and 5 hereof, shall include the right to be paid by
the corporation the expenses incurred in defending any such proceeding in
advance of its final disposition. The corporation may, by action of its board of
directors, provide indemnification to employees and agents of the corporation
with the same scope and effect as the foregoing indemnification of directors and
officers.
Section 2. Procedure for Indemnification of Directors and Officers. Any
--------- -------------------------------------------------------
indemnification of a director or officer of the corporation under Section 1 of
this Article V or advance of expenses under Section 5 of this Article V shall be
made promptly, and in any event within thirty (30) days, upon the written
request of the director or officer. If a determination by the corporation that
the director or officer is entitled to indemnification pursuant to this Article
V is required, and the corporation fails to respond within sixty (60) days to a
written request for indemnity, the corporation shall be deemed to have approved
the request. If the corporation denies a written request for indemnification or
advancing of expenses, in whole or in part, or if payment in full pursuant to
such request is not made within thirty (30) days, the right to indemnification
or advances as granted by this Article V shall be enforceable by the director or
officer in any court of competent jurisdiction. Such person's costs and
expenses incurred in connection with successfully establishing his right to
indemnification, in whole or in part, in any such action shall also be
indemnified by the corporation. It shall be a defense to any such action (other
than an action brought to enforce a claim for expenses incurred in defending any
proceeding in advance of its final disposition where the required undertaking,
if any, has been tendered to the corporation) that the claimant has not met the
standards of conduct which make it permissible under the General Corporation Law
of the State of Delaware for the corporation to indemnify the claimant for the
amount claimed, but the burden of such defense shall be on the corporation.
Neither the failure of the corporation (including its board of directors,
independent legal counsel, or its stockholders) to have made a determination
prior to the commencement of such action that indemnification of the claimant is
proper in the circumstances because he has met the applicable standard of
conduct set forth in the General Corporation Law of the State of Delaware, nor
an actual determination by the corporation (including its board of directors,
independent legal counsel, or its stockholders) that the claimant has not met
such applicable standard of conduct, shall be a defense to the action or create
a presumption that the claimant has not met the applicable standard of conduct.
-9-
<PAGE>
Section 3. Article Not Exclusive. The rights to indemnification and the
--------- ---------------------
payment of expenses incurred in defending a proceeding in advance of its final
disposition conferred in this Article V shall not be exclusive of any other
right which any person may have or hereafter acquire under any statute,
provision of the certificate of incorporation, by-law, agreement, vote of
stockholders or disinterested directors or otherwise.
Section 4. Insurance. The corporation may purchase and maintain insurance
--------- ---------
on its own behalf and on behalf of any person who is or was a director, officer,
employee, fiduciary, or agent of the corporation or was serving at the request
of the corporation as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise against any
liability asserted against him or her and incurred by him or her in any such
capacity, whether or not the corporation would have the power to indemnify such
person against such liability under this Article V.
Section 5. Expenses. Expenses incurred by any person described in Section
--------- --------
1 of this Article V in defending a proceeding shall be paid by the corporation
in advance of such proceeding's final disposition unless otherwise determined by
the board of directors in the specific case upon receipt of an undertaking by or
on behalf of the director or officer to repay such amount if it shall ultimately
be determined that he or she is not entitled to be indemnified by the
corporation. Such expenses incurred by other employees and agents may be so
paid upon such terms and conditions, if any, as the board of directors deems
appropriate.
Section 6. Employees and Agents. Persons who are not covered by the
--------- --------------------
foregoing provisions of this Article V and who are or were employees or agents
of the corporation, or who are or were serving at the request of the corporation
as employees or agents of another corporation, partnership, joint venture, trust
or other enterprise, may be indemnified to the extent authorized at any time or
from time to time by the board of directors.
Section 7. Contract Rights. The provisions of this Article V shall be
--------- ---------------
deemed to be a contract right between the corporation and each director or
officer who serves in any such capacity at any time while this Article V and the
relevant provisions of the General Corporation Law of the State of Delaware or
other applicable law are in effect, and any repeal or modification of this
Article V or any such law shall not affect any rights or obligations then
existing with respect to any state of facts or proceeding then existing.
Section 8. Merger or Consolidation. For purposes of this Article V,
--------- -----------------------
references to "the corporation" shall include, in addition to the resulting
corporation, any constituent corporation (including any constituent of a
constituent) absorbed in a consolidation or merger which, if its separate
existence had continued, would have had power and authority to indemnify its
directors, officers, and employees or agents, so that any person who is or was a
director, officer, employee or agent of such constituent corporation, or is or
was serving at the request of such constituent corporation as a director,
officer, employee or agent of another corporation, partnership, joint venture,
trust or other enterprise, shall stand in the same position under this Article V
with respect
-10-
<PAGE>
to the resulting or surviving corporation as he or she would have with respect
to such constituent corporation if its separate existence had continued.
ARTICLE VI
----------
CERTIFICATES OF STOCK
---------------------
Section 1. Form. Every holder of stock in the corporation shall be
--------- ----
entitled to have a certificate, signed by, or in the name of the corporation by
the president or a vice-president and the secretary or an assistant secretary of
the corporation, certifying the number of shares of a specific class or series
owned by such holder in the corporation. If such a certificate is countersigned
(1) by a transfer agent or an assistant transfer agent other than the
corporation or its employee or (2) by a registrar, other than the corporation or
its employee, the signature of any such president, vice-presi dent, secretary,
or assistant secretary may be facsimiles. In case any officer or officers who
have signed, or whose facsimile signature or signatures have been used on, any
such certificate or certificates shall cease to be such officer or officers of
the corporation whether because of death, resignation or otherwise before such
certificate or certificates have been delivered by the corporation, such
certificate or certificates may nevertheless be issued and delivered as though
the person or persons who signed such certificate or certificates or whose
facsimile signature or signatures have been used thereon had not ceased to be
such officer or officers of the corporation. All certificates for shares shall
be consecutively numbered or otherwise identified. The name of the person to
whom the shares represented thereby are issued, with the number of shares and
date of issue, shall be entered on the books of the corporation. Shares of
stock of the corporation shall only be transferred on the books of the
corporation by the holder of record thereof or by such holder's attorney duly
authorized in writing, upon surrender to the corporation of the certificate or
certificates for such shares endorsed by the appropriate person or persons, with
such evidence of the authenticity of such endorsement, transfer, authorization,
and other matters as the corporation may reasonably require, and accompanied by
all necessary stock transfer stamps. In that event, it shall be the duty of the
corporation to issue a new certificate to the person entitled thereto, cancel
the old certificate or certificates, and record the transaction on its books.
The board of directors may appoint a bank or trust company organized under the
laws of the United States or any state thereof to act as its transfer agent or
registrar, or both in connection with the transfer of any class or series of
securities of the corporation.
Section 2. Lost Certificates. The board of directors may direct a new
--------- -----------------
certificate or certificates to be issued in place of any certificate or
certificates previously issued by the corporation alleged to have been lost,
stolen, or destroyed, upon the making of an affidavit of that fact by the person
claiming the certificate of stock to be lost, stolen, or destroyed. When
authorizing such issue of a new certificate or certificates, the board of
directors may, in its discretion and as a condition precedent to the issuance
thereof, require the owner of such lost, stolen, or destroyed certificate or
certificates, or his or her legal representative, to give the corporation a bond
sufficient to indemnify
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<PAGE>
the corporation against any claim that may be made against the corporation on
account of the loss, theft or destruction of any such certificate or the
issuance of such new certificate.
Section 3. Fixing a Record Date for Stockholder Meetings. In order that
--------- ---------------------------------------------
the corporation may determine the stockholders entitled to notice of or to vote
at any meeting of stockholders or any adjournment thereof, the board of
directors may fix a record date, which record date shall not precede the date
upon which the resolution fixing the record date is adopted by the board of
directors, and which record date shall not be more than sixty (60) nor less than
ten (10) days before the date of such meeting. If no record date is fixed by
the board of directors, the record date for determining stockholders entitled to
notice of or to vote at a meeting of stockholders shall be the close of business
on the next day preceding the day on which notice is given, or if notice is
waived, at the close of business on the day next preceding the day on which the
meeting is held. A determination of stockholders of record entitled to notice
of or to vote at a meeting of stockholders shall apply to any adjournment of the
meeting; provided, however, that the board of directors may fix a new record
date for the adjourned meeting.
Section 4. Fixing a Record Date for Action by Written Consent. In order
--------- --------------------------------------------------
that the corporation may determine the stockholders entitled to consent to
corporate action in writing without a meeting, the board of directors may fix a
record date, which record date shall not precede the date upon which the
resolution fixing the record date is adopted by the board of directors, and
which date shall not be more than ten (10) days after the date upon which the
resolution fixing the record date is adopted by the board of directors. If no
record date has been fixed by the board of directors, the record date for
determining stockholders entitled to consent to corporate action in writing
without a meeting, when no prior action by the board of directors is required by
statute, shall be the first date on which a signed written consent setting forth
the action taken or proposed to be taken is delivered to the corporation by
delivery to its registered office in the State of Delaware, its principal place
of business, or an officer or agent of the corporation having custody of the
book in which proceedings of meetings of stockholders are recorded. Delivery
made to the corporation's registered office shall be by hand or by certified or
registered mail, return receipt requested. If no record date has been fixed by
the board of directors and prior action by the board of directors is required by
statute, the record date for determining stockholders entitled to consent to
corporate action in writing without a meeting shall be at the close of business
on the day on which the board of directors adopts the resolution taking such
prior action.
Section 5. Fixing a Record Date for Other Purposes. In order that the
--------- ---------------------------------------
corporation may determine the stockholders entitled to receive payment of any
dividend or other distribution or allotment or any rights or the stockholders
entitled to exercise any rights in respect of any change, conversion or exchange
of stock, or for the purposes of any other lawful action, the board of directors
may fix a record date, which record date shall not precede the date upon which
the resolution fixing the record date is adopted, and which record date shall be
not more than sixty (60) days prior to such action. If no record date is fixed,
the record date for determining stockholders for any such purpose shall be at
the close of business on the day on which the board of directors adopts the
resolution relating thereto.
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<PAGE>
Section 6. Registered Stockholders. Prior to the surrender to the
--------- -----------------------
corporation of the certificate or certificates for a share or shares of stock
with a request to record the transfer of such share or shares, the corporation
may treat the registered owner as the person entitled to receive dividends, to
vote, to receive notifications, and otherwise to exercise all the rights and
powers of an owner. The corporation shall not be bound to recognize any
equitable or other claim to or interest in such share or shares on the part of
any other person, whether or not it shall have express or other notice thereof.
Section 7. Subscriptions for Stock. Unless otherwise provided for in the
--------- -----------------------
subscription agreement, subscriptions for shares shall be paid in full at such
time, or in such installments and at such times, as shall be determined by the
board of directors. Any call made by the board of directors for payment on
subscriptions shall be uniform as to all shares of the same class or as to all
shares of the same series. In case of default in the payment of any installment
or call when such payment is due, the corporation may proceed to collect the
amount due in the same manner as any debt due the corporation.
ARTICLE VII
-----------
GENERAL PROVISIONS
------------------
Section 1. Dividends. Dividends upon the capital stock of the
--------- ---------
corporation, subject to the provisions of the certificate of incorporation, if
any, may be declared by the board of directors at any regular or special
meeting, pursuant to law. Dividends may be paid in cash, in property, or in
shares of the capital stock, subject to the provisions of the certificate of
incorporation. Before payment of any dividend, there may be set aside out of
any funds of the corporation available for dividends such sum or sums as the
directors from time to time, in their absolute discretion, think proper as a
reserve or reserves to meet contingencies, or for equalizing dividends, or for
repairing or maintaining any property of the corporation, or any other purpose
and the directors may modify or abolish any such reserve in the manner in which
it was created.
Section 2. Checks, Drafts or Orders. All checks, drafts, or other orders
--------- ------------------------
for the payment of money by or to the corporation and all notes and other
evidences of indebtedness issued in the name of the corporation shall be signed
by such officer or officers, agent or agents of the corporation, and in such
manner, as shall be determined by resolution of the board of directors or a duly
authorized committee thereof.
Section 3. Contracts. The board of directors may authorize any officer or
--------- ---------
officers, or any agent or agents, of the corporation to enter into any contract
or to execute and deliver any instrument in the name of and on behalf of the
corporation, and such authority may be general or confined to specific
instances.
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<PAGE>
Section 4. Loans. The corporation may lend money to, or guarantee any
--------- -----
obligation of, or otherwise assist any officer or other employee of the
corporation or of its subsidiary, including any officer or employee who is a
director of the corporation or its subsidiary, whenever, in the judgment of the
directors, such loan, guaranty or assistance may reasonably be expected to
benefit the corporation. The loan, guaranty or other assistance may be with or
without interest, and may be unsecured, or secured in such manner as the board
of directors shall approve, including, without limitation, a pledge of shares of
stock of the corporation. Nothing in this section contained shall be deemed to
deny, limit or restrict the powers of guaranty or warranty of the corporation at
common law or under any statute.
Section 5. Fiscal Year. The fiscal year of the corporation shall be fixed
--------- -----------
by resolution of the board of directors.
Section 6. Corporate Seal. The board of directors shall provide a
--------- --------------
corporate seal which shall be in the form of a circle and shall have inscribed
thereon the name of the corporation and the words "Corporate Seal, Delaware".
The seal may be used by causing it or a facsimile thereof to be impressed or
affixed or reproduced or otherwise.
Section 7. Voting Securities Owned By Corporation. Voting securities in
--------- --------------------------------------
any other corporation held by the corporation shall be voted by the president,
unless the board of directors specifically confers authority to vote with
respect thereto, which authority may be general or confined to specific
instances, upon some other person or officer. Any person authorized to vote
securities shall have the power to appoint proxies, with general power of
substitution.
Section 8. Inspection of Books and Records. Any stockholder of record, in
--------- -------------------------------
person or by attorney or other agent, shall, upon written demand under oath
stating the purpose thereof, have the right during the usual hours for business
to inspect for any proper purpose the corporation's stock ledger, a list of its
stockholders, and its other books and records, and to make copies or extracts
therefrom. A proper purpose shall mean any purpose reasonably related to such
person's interest as a stockholder. In every instance where an attorney or
other agent shall be the person who seeks the right to inspection, the demand
under oath shall be accompanied by a power of attorney or such other writing
which authorizes the attorney or other agent to so act on behalf of the
stockholder. The demand under oath shall be directed to the corporation at its
registered office in the State of Delaware or at its principal place of
business.
Section 9. Section Headings. Section headings in these by-laws are for
--------- ----------------
convenience of reference only and shall not be given any substantive effect in
limiting or otherwise construing any provision herein.
Section 10. Inconsistent Provisions. In the event that any provision of
---------- -----------------------
these by-laws is or becomes inconsistent with any provision of the certificate
of incorporation, the General Corporation Law of the State of Delaware or any
other applicable law, the provision of these by-laws shall not
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<PAGE>
be given any effect to the extent of such inconsistency but shall otherwise be
given full force and effect.
ARTICLE VIII
------------
AMENDMENTS
----------
These by-laws may be amended, altered, or repealed and new by-laws adopted
at any meeting of the board of directors by a majority vote. The fact that the
power to adopt, amend, alter, or repeal the by-laws has been conferred upon the
board of directors shall not divest the stockholders of the same powers.
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<PAGE>
EXHIBIT 3.7
BY-LAWS
-------
OF
--
AVALON CABLE OF MICHIGAN HOLDINGS, INC.
---------------------------------------
A DELAWARE CORPORATION
ARTICLE I
---------
OFFICES
-------
Section 1. Registered Office. The registered office of the corporation
--------- -----------------
in the State of Delaware shall be located at 1013 Centre Road, Wilmington
Delaware 19805, in the County of New Castle. The name of the corporation's
registered agent at such address shall be Corporation Service Company. The
registered office and/or registered agent of the corporation may be changed from
time to time by action of the board of directors.
Section 2. Other Offices. The corporation may also have offices at such
--------- -------------
other places, both within and without the State of Delaware, as the board of
directors may from time to time determine or the business of the corporation may
require.
ARTICLE II
----------
MEETINGS OF STOCKHOLDERS
------------------------
Section 1. Place and Time of Meetings. An annual meeting of the
--------- --------------------------
stockholders shall be held each year for the purpose of electing directors and
conducting such other proper business as may come before the meeting. The date,
time and place of the annual meeting may be determined by resolution of the
board of directors or as set by the president of the corporation.
Section 2. Special Meetings. Special meetings of stockholders may be
--------- ----------------
called for any purpose (including, without limitation, the filling of board
vacancies and newly created directorships), and may be held at such time and
place, within or without the State of Delaware, as shall be stated in a notice
of meeting or in a duly executed waiver of notice thereof. Such meetings may be
called at any time by two or more members of the board of directors or the
president and shall be called by the president upon the written request of
holders of shares entitled to cast not less than fifty percent (50%) of the
outstanding shares of any series or class of the corporation's Capital Stock.
<PAGE>
Section 3. Place of Meetings. The board of directors may designate any
--------- -----------------
place, either within or without the State of Delaware, as the place of meeting
for any annual meeting or for any special meeting called by the board of
directors. If no designation is made, or if a special meeting be otherwise
called, the place of meeting shall be the principal executive office of the
corporation.
Section 4. Notice. Whenever stockholders are required or permitted to take
--------- ------
action at a meeting, written or printed notice stating the place, date, time,
and, in the case of special meetings, the purpose or purposes, of such meeting,
shall be given to each stockholder entitled to vote at such meeting not less
than 10 nor more than 60 days before the date of the meeting. All such notices
shall be delivered, either personally or by mail, by or at the direction of the
board of directors, the president or the secretary, and if mailed, such notice
shall be deemed to be delivered when deposited in the United States mail,
postage prepaid, addressed to the stockholder at his, her or its address as the
same appears on the records of the corporation. Attendance of a person at a
meeting shall constitute a waiver of notice of such meeting, except when the
person attends for the express purpose of objecting at the beginning of the
meeting to the transaction of any business because the meeting is not lawfully
called or convened.
Section 5. Stockholders List. The officer having charge of the stock ledger
--------- -----------------
of the corporation shall make, at least 10 days before every meeting of the
stockholders, a complete list of the stockholders entitled to vote at such
meeting arranged in alphabetical order, showing the address of each stockholder
and the number of shares registered in the name of each stockholder. Such list
shall be open to the examination of any stockholder, for any purpose germane to
the meeting, during ordinary business hours, for a period of at least 10 days
prior to the meeting, either at a place within the city where the meeting is to
be held, which place shall be specified in the notice of the meeting or, if not
so specified, at the place where the meeting is to be held. The list shall also
be produced and kept at the time and place of the meeting during the whole time
thereof, and may be inspected by any stockholder who is present.
Section 6. Quorum. Except as otherwise provided by applicable law or by the
--------- ------
Certificate of Incorporation, a majority of the outstanding shares of the
corporation entitled to vote, represented in person or by proxy, shall
constitute a quorum at a meeting of stockholders. If less than a majority of the
outstanding shares are represented at a meeting, a majority of the shares so
represented may adjourn the meeting from time to time in accordance with Section
7 of this Article, until a quorum shall be present or represented.
Section 7. Adjourned Meetings. When a meeting is adjourned to another time
--------- ------------------
and place, notice need not be given of the adjourned meeting if the time and
place thereof are announced at the meeting at which the adjournment is taken. At
the adjourned meeting the corporation may transact any business which might have
been transacted at the original meeting. If the adjournment is for more than
thirty days, or if after the adjournment a new record date is fixed for the
adjourned meeting, a notice of the adjourned meeting shall be given to each
stockholder of record entitled to vote at the meeting.
-2-
<PAGE>
Section 8. Vote Required. When a quorum is present, the affirmative vote
--------- -------------
of the majority of shares present in person or represented by proxy at the
meeting and entitled to vote on the subject matter shall be the act of the
stockholders, unless the question is one upon which by express provisions of an
applicable law or of the certificate of incorporation a different vote is
required, in which case such express provision shall govern and control the
decision of such question. Where a separate vote by class is required, the
affirmative vote of the majority of shares of such class present in person or
represented by proxy at the meeting shall be the act of such class.
Section 9. Voting Rights. Except as otherwise provided by the General
--------- -------------
Corporation Law of the State of Delaware or by the certificate of incorporation
of the corporation or any amendments thereto and subject to Section 3 of the
Article VI hereof, every stockholder shall at every meeting of the stockholders
be entitled to one vote in person or by proxy for each share of common stock
held by such stockholder.
Section 10. Proxies. Each stockholder entitled to vote at a meeting of
---------- -------
stockholders or to express consent or dissent to corporate action in writing
without a meeting may authorize another person or persons to act for him, her or
it by proxy. Every proxy must be signed by the stockholder granting the proxy or
by his, her or its attorney-in-fact. No proxy shall be voted or acted upon after
three years from its date, unless the proxy provides for a longer period. A duly
executed proxy shall be irrevocable if it states that it is irrevocable and if,
and only as long as, it is coupled with an interest sufficient in law to support
an irrevocable power. A proxy may be made irrevocable regardless of whether the
interest with which it is coupled is an interest in the stock itself or an
interest in the Corporation generally.
Section 11. Action by Written Consent. Unless otherwise provided in the
---------- -------------------------
certificate of incorporation, any action required to be taken at any annual or
special meeting of stockholders of the corporation, or any action which may be
taken at any annual or special meeting of such stockholders, may be taken
without a meeting, without prior notice and without a vote, if a consent or
consents in writing, setting forth the action so taken and bearing the dates of
signature of the stockholders who signed the consent or consents, shall be
signed by the holders of outstanding stock having not less than a majority of
the shares entitled to vote, or, if greater, not less than the minimum number of
votes that would be necessary to authorize or take such action at a meeting at
which all shares entitled to vote thereon were present and voted and shall be
delivered to the corporation by delivery to its registered office in the state
of Delaware, or the corporation's principal place of business, or an officer or
agent of the corporation having custody of the book or books in which
proceedings of meetings of the stockholders are recorded. Delivery made to the
corporation's registered office shall be by hand or by certified or registered
mail, return receipt requested provided, however, that no consent or consents
delivered by certified or registered mail shall be deemed delivered until such
consent or consents are actually received at the registered office. All consents
properly delivered in accordance with this section shall be deemed to be
recorded when so delivered. No written consent shall be effective to take the
corporate action referred to therein unless, within sixty days of the earliest
dated consent delivered to the corporation as required by this section, written
consents signed by the holders of a sufficient number of shares to take such
corporate action
-3-
<PAGE>
are so recorded. Prompt notice of the taking of the corporate action without a
meeting by less than unanimous written consent shall be given to those
stockholders who have not consented in writing. Any action taken pursuant to
such written consent or consents of the stockholders shall have the same force
and effect as if taken by the stockholders at a meeting thereof.
ARTICLE III
-----------
DIRECTORS
---------
Section 1. General Powers. The business and affairs of the corporation
--------- --------------
shall be managed by or under the direction of the board of directors.
Section 2. Number, Election and Term of Office. The number of directors
--------- -----------------------------------
which shall constitute the first board shall be one (1). Thereafter, the number
of directors shall be established from time to time by resolution of the board.
The directors shall be elected by a plurality of the votes of the shares present
in person or represented by proxy at the meeting and entitled to vote in the
election of directors. The directors shall be elected in this manner at the
annual meeting of the stockholders, except as provided in Section 4 of this
Article III. Each director elected shall hold office until a successor is duly
elected and qualified or until his or her earlier death, resignation or removal
as hereinafter provided.
Section 3. Removal and Resignation. Any director or the entire board of
--------- -----------------------
directors may be removed at any time, with or without cause, by the holders of a
majority of the shares then entitled to vote at an election of directors.
Whenever the holders of any class or series are entitled to elect one or more
directors by the provisions of the corporation's certificate of incorporation,
the provisions of this section shall apply, in respect to the removal without
cause or a director or directors so elected, to the vote of the holders of the
outstanding shares of that class or series and not to the vote of the
outstanding shares as a whole. Any director may resign at any time upon written
notice to the corporation.
Section 4. Vacancies. Except as otherwise provided by the Certificate of
--------- ---------
Incorporation of the corporation or any amendments thereto, vacancies and newly
created directorships resulting from any increase in the authorized number of
directors may be filled by a majority vote of the holders of the corporation's
outstanding stock entitled to vote thereon. Each director so chosen shall hold
office until a successor is duly elected and qualified or until his or her
earlier death, resignation or removal as herein provided.
Section 5. Annual Meetings. The annual meeting of each newly elected board
--------- ---------------
of directors shall be held without other notice than this by-law immediately
after, and at the same place as, the annual meeting of stockholders.
Section 6. Other Meetings and Notice. Regular meetings, other than the
--------- -------------------------
annual meeting, of the board of directors may be held without notice at such
time and at such place as shall from time
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<PAGE>
to time be determined by resolution of the board. Special meetings of the board
of directors may be called by or at the request of the president or vice
president on at least 24 hours notice to each director, either personally, by
telephone, by mail, or by telegraph; in like manner and on like notice the
president must call a special meeting on the written request of at least a
majority of the directors.
Section 7. Quorum, Required Vote and Adjournment. A majority of the total
--------- -------------------------------------
number of directors shall constitute a quorum for the transaction of business.
The vote of a majority of directors present at a meeting at which a quorum is
present shall be the act of the board of directors. If a quorum shall not be
present at any meeting of the board of directors, the directors present thereat
may adjourn the meeting from time to time, without notice other than
announcement at the meeting, until a quorum shall be present.
Section 8. Committees. The board of directors may, by resolution passed
--------- ----------
by a majority of the whole board, designate one or more committees, each
committee to consist of one or more of the directors of the corporation, which
to the extent provided in such resolution or these by-laws shall have and may
exercise the powers of the board of directors in the management and affairs of
the corporation except as otherwise limited by law. The board of directors may
designate one or more directors as alternate members of any committee, who may
replace any absent or disqualified member at any meeting of the committee. Such
committee or committees shall have such name or names as may be determined from
time to time by resolution adopted by the board of directors. Each committee
shall keep regular minutes of its meetings and report the same to the board of
directors when required.
Section 9. Committee Rules. Each committee of the board of directors may
--------- ---------------
fix its own rules of procedure and shall hold its meetings as provided by such
rules, except as may otherwise be provided by a resolution of the board of
directors designating such committee. Unless otherwise provided in such a
resolution, the presence of at least a majority of the members of the committee
shall be necessary to constitute a quorum. In the event that a member and that
member's alternate, if alternates are designated by the board of directors as
provided in Section 8 of this Article III, of such committee is or are absent or
disqualified, the member or members thereof present at any meeting and not
disqualified from voting, whether or not such member or members constitute a
quorum, may unanimously appoint another member of the board of directors to act
at the meeting in place of any such absent or disqualified member.
Section 10. Communications Equipment. Members of the board of directors or
---------- ------------------------
any committee thereof may participate in and act at any meeting of such board or
committee through the use of a conference telephone or other communications
equipment by means of which all persons participating in the meeting can hear
each other, and participation in the meeting pursuant to this section shall
constitute presence in person at the meeting.
Section 11. Waiver of Notice and Presumption of Assent. Any member of the
---------- -----------------------------------------
board of directors or any committee thereof who is present at a meeting shall be
conclusively presumed to have waived notice of such meeting except when such
member attends for the express purpose of
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<PAGE>
objecting at the beginning of the meeting to the transaction of any business
because the meeting is not lawfully called or convened. Such member shall be
conclusively presumed to have assented to any action taken unless his or her
dissent shall be entered in the minutes of the meeting or unless his or her
written dissent to such action shall be filed with the person acting as the
secretary of the meeting before the adjournment thereof or shall be forwarded by
registered mail to the secretary of the corporation immediately after the
adjournment of the meeting. Such right to dissent shall not apply to any member
who voted in favor of such action.
Section 12. Action by Written Consent. Unless otherwise restricted by
---------- -------------------------
the certificate of incorporation, any action required or permitted to be taken
at any meeting of the board of directors, or of any committee thereof, may be
taken without a meeting if all members of the board or committee, as the case
may be, consent thereto in writing, and the writing or writings are filed with
the minutes of proceedings of the board or committee.
ARTICLE IV
----------
OFFICERS
--------
Section 1. Number. The officers of the corporation shall be elected
--------- ------
by the board of directors and shall consist of a chairman, if any is elected, a
president, a chief executive officer, one or more vice presidents, a secretary,
a treasurer, and such other officers and assistant officers as may be deemed
necessary or desirable by the board of directors. Any number of offices may be
held by the same person, except that no person may simultaneously hold the
office of president and secretary. In its discretion, the board of directors may
choose not to fill any office for any period as it may deem advisable.
Section 2. Election and Term of Office. The officers of the corporation
--------- ---------------------------
shall be elected annually by the board of directors at its first meeting held
after each annual meeting of stockholders or as soon thereafter as conveniently
may be. The president shall appoint other officers to serve for such terms as he
or she deems desirable. Vacancies may be filled or new offices created and
filled at any meeting of the board of directors. Each officer shall hold office
until a successor is duly elected and qualified or until his or her earlier
death, resignation or removal as hereinafter provided.
Section 3. Removal. Any officer or agent elected by the board of
--------- -------
directors may be removed by the board of directors whenever in its judgment the
best interests of the corporation would be served thereby, but such removal
shall be without prejudice to the contract rights, if any, of the person so
removed.
Section 4. Vacancies. Any vacancy occurring in any office because of
--------- ---------
death, resignation, removal, disqualification or otherwise, may be filled by the
board of directors for the unexpired portion of the term by the board of
directors then in office.
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<PAGE>
Section 5. Compensation. Compensation of all officers shall be fixed by the
--------- ------------
board of directors, and no officer shall be prevented from receiving such
compensation by virtue of his or her also being a director of the corporation.
Section 6. The Chairman of the Board. The Chairman of the Board, if one
--------- -------------------------
shall have been elected, shall be the chief executive officer of the
Corporation, shall be a member of the board, and, if present, shall preside at
each meeting of the board of directors or shareholders. The Chairman of the
Board shall, in the absence or disability of the president, act with all of the
powers and be subject to all the restrictions of the president. He shall advise
the president, and in the president's absence, other officers of the
Corporation, and shall perform such other duties as may from time to time be
assigned to him by the board of directors.
Section 7. The President. The President shall be the chief executive
--------- -------------
officer of the corporation. In the absence of the Chairman of the Board or if a
Chairman of the Board shall have not been elected, the president shall preside
at all meetings of the stockholders and board of directors at which he or she is
present; subject to the powers of the board of directors, shall have general
charge of the business, affairs and property of the corporation, and control
over its officers, agents and employees; and shall see that all orders and
resolutions of the board of directors are carried into effect. The president
shall have such other powers and perform such other duties as may be prescribed
by the board of directors or as may be provided in these by-laws.
Section 8. Vice-presidents. The vice-president, if any, or if there shall
--------- ---------------
be more than one, the vice-presidents in the order determined by the board of
directors shall, in the absence or disability of the president, act with all of
the powers and be subject to all the restrictions of the president. The vice-
presidents shall also perform such other duties and have such other powers as
the board of directors, the president or these by-laws may, from time to time,
prescribe.
Section 9. The Secretary and Assistant Secretaries. The secretary shall
--------- ---------------------------------------
attend all meetings of the board of directors, all meetings of the committees
thereof and all meetings of the stockholders and record all the proceedings of
the meetings in a book or books to be kept for that purpose. Under the
president's supervision, the secretary shall give, or cause to be given, all
notices required to be given by these by-laws or by law; shall have such powers
and perform such duties as the board of directors, the president or these by-
laws may, from time to time, prescribe; and shall have custody of the corporate
seal of the corporation. The secretary, or an assistant secretary, shall have
authority to affix the corporate seal to any instrument requiring it and when so
affixed, it may be attested by his or her signature or by the signature of such
assistant secretary. The board of directors may give general authority to any
other officer to affix the seal of the corporation and to attest the affixing by
his or her signature. The assistant secretary, or if there be more than one, the
assistant secretaries in the order determined by the board of directors, shall,
in the absence or disability of the secretary, perform the duties and exercise
the powers of the secretary and shall perform such other duties and have such
other powers as the board of directors, the president, or secretary may, from
time to time, prescribe.
-7-
<PAGE>
Section 10. The Treasurer and Assistant Treasurer. The treasurer shall have
---------- -------------------------------------
the custody of the corporate funds and securities; shall keep full and accurate
accounts of receipts and disbursements in books belonging to the corporation;
shall deposit all monies and other valuable effects in the name and to the
credit of the corporation as may be ordered by the board of directors; shall
cause the funds of the corporation to be disbursed when such disbursements have
been duly authorized, taking proper vouchers for such disbursements; and shall
render to the president and the board of directors, at its regular meeting or
when the board of directors so requires, an account of the corporation;
shall have such powers and perform such duties as the board of directors, the
president or these by-laws may, from time to time, prescribe. If required by the
board of directors, the treasurer shall give the corporation a bond (which shall
be rendered every six years) in such sums and with such surety or sureties as
shall be satisfactory to the board of directors for the faithful performance of
the duties of the office of treasurer and for the restoration to the
corporation, in case of death, resignation, retirement, or removal from office,
of all books, papers, vouchers, money and other property of whatever kind in the
possession or under the control of the treasurer belonging to the corporation.
The assistant treasurer, or if there shall be more than one, the assistant
treasurers in the order determined by the board of directors, shall in the
absence or disability of the treasurer, perform the duties and exercise the
powers of the treasurer. The assistant treasurers shall perform such other
duties and have such other powers as the board of directors, the president or
treasurer may, from to time, prescribe.
Section 11. Other Officers, Assistant Officers and Agents. Officers,
---------- ---------------------------------------------
assistant officers and agents, if any, other than those whose duties are
provided for in these by-laws, shall have such authority and perform such duties
as may from time to time be prescribed by resolution of the board of directors.
Section 12. Absence or Disability of Officers. In the case of the absence
---------- ---------------------------------
or disability of any officer of the corporation and of any person hereby
authorized to act in such officer's place during such officer's absence or
disability, the board of directors may be resolution delegate the powers and
duties of such officer to any other officer or to any director, or to any other
person whom it may select.
ARTICLE V
---------
INDEMNIFICATION OF OFFICERS, DIRECTORS AND OTHERS
-------------------------------------------------
Section 1. Nature of Indemnity. Each person who was or is made a party or
--------- -------------------
is threatened to be made a party to or is involved in any action, suit or
proceeding, whether civil, criminal, administrative or investigative
(hereinafter a "proceeding"), by reason of the fact that he or a person of whom
he is the legal representative, is or was a director or officer, of the
corporation or is or was serving at the request of the corporation as a
director, officer, employee, fiduciary, or agent of another corporation or of a
partnership, joint venture, trust or other enterprise, including service with
respect to employee benefit plans, whether the basis of such proceeding is
alleged action in an official capacity as a director, officer, employee,
fiduciary or agent or in any other capacity while serving as a director,
officer, employee, fiduciary or agent, shall be indemnified and held harmless
-8-
<PAGE>
by the corporation to the fullest extent which it is empowered to do so by the
General Corporation Law of the State of Delaware, as the same exists or may
hereafter be amended (but, in the case of any such amendment, only to the extent
that such amendment permits the corporation to provide broader indemnification
rights than said law permitted the corporation to provide prior to such
amendment) against all expense, liability and loss (including attorneys' fees
actually and reasonably incurred by such person in connection with such
proceeding and such indemnification shall inure to the benefit of his or her
heirs, executors and administrators; provided, however, that, except as provided
in Section 2 hereof, the corporation shall indemnify any such person seeking
indemnification in connection with a proceeding initiated by such person only if
such proceeding was authorized by the board of directors of the corporation. The
right to indemnification conferred in this Article V shall be a contract right
and, subject to Sections 2 and 5 hereof, shall include the right to be paid by
the corporation the expenses incurred in defending any such proceeding in
advance of its final disposition. The corporation may, by action of its board of
directors, provide indemnification to employees and agents of the corporation
with the same scope and effect as the foregoing indemnification of directors and
officers.
Section 2. Procedure for Indemnification of Directors and Officers. Any
- --------- -------------------------------------------------------
indemnification of a director or officer of the corporation under Section 1 of
this Article V or advance of expenses under Section 5 of this Article V shall be
made promptly, and in any event within 30 days, upon the written request of the
director or officer. If a determination by the corporation that the director or
officer is entitled to indemnification pursuant to this Article V is required,
and the corporation fails to respond within sixty days to a written request for
indemnity, the corporation shall be deemed to have approved the request. If the
corporation denies a written request for indemnification or advancing of
expenses, in whole or in part, or if payment in full pursuant to such request is
not made within 30 days, the right to indemnification or advances as granted by
this Article V shall be enforceable by the director or officer in any court of
competent jurisdiction. Such person's costs and expenses incurred in connection
with successfully establishing his or her right to indemnification, in whole or
in part, in any such action shall also be indemnified by the corporation. It
shall be a defense to any such action (other than an action brought to enforce a
claim for expenses incurred in defending any proceeding in advance of its final
disposition where the required undertaking, if any, has been tendered to the
corporation) that the claimant has not met the standards of conduct which make
it permissible under the General Corporation Law of the State of Delaware for
the corporation to indemnify the claimant for the amount claimed, but the burden
of such defense shall be on the corporation. Neither the failure of the
corporation (including its board of directors, independent legal counsel, or its
stockholders) to have made a determination prior to the commencement of such
action that indemnification of the claimant is proper in the circumstances
because he or she has met the applicable standard of conduct set forth in the
General Corporation Law of the State of Delaware, nor an actual determination by
the corporation (including its board of directors, independent legal counsel, or
its stockholders) that the claimant has not met such applicable standard of
conduct, shall be a defense to the action or create a presumption that the
claimant has not met the applicable standard of conduct.
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<PAGE>
Section 3. Nonexclusivity of Article V. The rights to indemnification and
--------- ---------------------------
the payment of expenses incurred in defending a proceeding in advance of its
final disposition conferred in this Article V shall not be exclusive of any
other right which any person may have or hereafter acquire under any statute,
provision of the certificate of incorporation, by-law, agreement, vote of
stockholders or disinterested directors or otherwise.
Section 4. Insurance. The corporation may purchase and maintain insurance on
--------- ---------
its own behalf and on behalf of any person who is or was a director, officer,
employee, fiduciary, or agent of the corporation or was serving at the request
of the corporation as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise against any
liability asserted against him or her and incurred by him or her in any such
capacity, whether or not the corporation would have the power to indemnify such
person against such liability under this Article V.
Section 5. Expenses. Expenses incurred by any person described in Section 1
--------- --------
of this Article V in defending a proceeding shall be paid by the corporation
in advance of such proceeding's final disposition unless otherwise determined by
the board of directors in the specific case upon receipt of an undertaking by or
on behalf of the director or officer to repay such amount if it shall ultimately
be determined that he or she is not entitled to be indemnified by the
corporation. Such expenses incurred by other employees and agents may be so paid
upon such terms and conditions, if any, as the board of directors deems
appropriate.
Section 6. Employees and Agents. Persons who are not covered by the
--------- --------------------
foregoing provisions if this Article V and who are or were employees or agents
of the corporation, or who are or were serving at the request of the corporation
as employees or agents of another corporation, partnership, joint venture, trust
or other enterprise, may be indemnified to the extent authorized at any time or
from time to time by the board of directors.
Section 7. Contract Rights. The provisions of this Article V shall be deemed
--------- ---------------
to be a contract right between the corporation and each director or officer who
serves in any such capacity at any time while this Article V and the relevant
provisions of the General Corporation Law of the State of Delaware or other
applicable law are in effect, and any repeal or modification of this Article V
or any such law shall not affect any rights or obligations then existing with
respect to any state of facts or proceeding then existing.
Section 8. Merger or Consolidation. For purposes of this Article V,
--------- -----------------------
references to "the corporation" shall include, in addition to the resulting
corporation, any constituent corporation (including any constituent of a
constituent) absorbed in a consolidation or merger which, if its separate
existence had continued, would have had power and authority to indemnify its
directors, officers, and employees or agents, so that any person who is or was a
director, officer, employee or agent of such constituent corporation, or is or
was serving at the request of such constituent corporation as a director,
officer, employee or agent of another corporation, partnership, joint venture,
trust or other enterprise, shall stand in the same position under this Article V
with respect
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<PAGE>
to the resulting or surviving corporation as he or she would have with respect
to the constituent corporation if its separate existence had continued.
ARTICLE IV
----------
CERTIFICATES OF STOCK
---------------------
Section 1. Form. Every holder of stock in the corporation shall be entitled
--------- ----
to have a certificate, signed by, or in the name of the corporation by the
chairman of the board, the president or a vice-president and the secretary or an
assistant secretary of the corporation, certifying the number of shares owned by
such holder in the corporation. If such a certificate is countersigned (1) by a
transfer agent or an assistant transfer agent other than the corporation or its
employee or (2) by a registrar, other than the corporation or its employee, the
signature of any such chairman of the board, president, vice-president,
secretary, or assistant secretary may be facsimiles. In case any officer or
officers who have signed, or whose facsimile signature or signatures have been
used on, any such certificate or certificates shall cease to be such officer or
officers of the corporation whether because of death, resignation or otherwise
before such certificate or certificates have been delivered by the corporation,
such certificate or certificates may nevertheless be issued and delivered as
though the person or persons who signed such certificate or certificates or
whose facsimile signature or signatures have been used thereon had not ceased to
be such officer or officers of the corporation. All certificates for shares
shall be consecutively numbered or otherwise identified. The name of the person
to whom the shares represented thereby are issued, with the number of shares and
date of issue, shall be entered on the books of the corporation. Shares of stock
of the corporation shall only be transferred on the books of the corporation by
the holder of record thereof or by such holder's attorney duly authorized in
writing, upon surrender to the corporation of the certificate or certificates
for such shares endorsed by the appropriate person or persons, with such
evidence of the authenticity of such endorsement, transfer, authorization, and
other matters as the corporation may be reasonably require, and accompanied by
all necessary stock transfer stamps. In that event, it shall be the duty of the
corporation to issue a new certificate to the person entitled thereto, cancel
the old certificate or certificates, and record the transaction on its books.
The board of directors may appoint a bank or trust company organized under the
laws of the United States or any state thereof to act as its transfer agent or
registrar, or both in connection with the transfer of any class or series of
securities of the corporation.
Section 2. Lost Certificates. The board of directors may direct a new
--------- -----------------
certificate or certificates to be issued in place of any certificate or
certificates previously issued by the corporation alleged to have been lost,
stolen, or destroyed, upon the making of an affidavit of that fact by the person
claiming the certificate of stock to be lost, stolen, or destroyed. When
authorizing such issue of a new certificate or certificates, the board of
directors may, in its discretion and as a condition precedent to the issuance
thereof, require the owner of such lost, stolen, or destroyed certificate or
certificates, or his or her legal representative, to give the corporation a bond
sufficient to indemnify
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<PAGE>
the corporation against any claim that may be made against the corporation on
account of the loss, theft or destruction of any such certificate or the
issuance of such new certificate.
Section 3. Fixing a Record Date for Stockholder Meetings. In order that the
--------- ---------------------------------------------
corporation may determine the stockholders entitled to notice of or to vote at
any meeting of stockholders or any adjournment thereof, the board of directors
may fix a record date, which record date shall not precede the date upon which
the resolution fixing the record date is adopted by the board of directors, and
which record date shall not be more than sixty nor less than ten days before the
date of such meeting. If no record date is fixed by the board of directors, the
record date for determining stockholders entitled to notice of or to vote at a
meeting of stockholders shall be the close of business on the next day preceding
the day on which notice is given, or if notice is waived, at the close of
business on the day next preceding the day on which the meeting is held. A
determination of stockholders of record entitled to notice of or to vote at a
meeting of stockholders shall apply to any adjournment of the meeting; provided,
however, that the board of directors may fix a new record date for the adjourned
meeting.
Section 4. Fixing a Record Date for Action by Written Consent. In order
--------- --------------------------------------------------
that the corporation may determine the stockholders entitled to consent to
corporate action in writing without a meeting, the board of directors may fix a
record date, which record date shall not precede the date upon which the
resolution fixing the record date is adopted by the board of directors, and
which date shall not be more than ten days after the date upon which the
resolution fixing the record date is adopted by the board of directors. If no
record date has been fixed by the board of directors, the record date for
determining stockholders entitled to consent to corporate action in writing
without a meeting, when no prior action by the board of directors is required by
statute, shall be the first date on which a signed written consent setting forth
the action taken or proposed to be taken is delivered to the corporation by
delivery to its registered office in the State of Delaware, its principal place
of business, or an officer or agent of the corporation having custody of the
book in which proceedings of meetings of stockholders are recorded. Delivery
made to the corporation's registered office shall be by hand or by certified or
registered mail, return receipt requested. If no record date has been fixed by
the board of directors and prior action by the board of directors is required by
statute, the record date for determining stockholders entitled to consent to
corporate action in writing without a meeting shall be at the close of business
on the day on which the board of directors adopts the resolution taking such
prior action.
Section 5. Fixing a Record Date for Other Purposes. In order that the
--------- ---------------------------------------
corporation may determine the stockholders entitled to receive payment of any
dividend or other distribution or allotment or any rights or the stockholders
entitled to exercise any rights in respect of any change, conversion or exchange
of stock, or for the purposes of any other lawful action, the board of directors
may fix a record date, which record date shall not precede the date upon which
the resolution fixing the date is adopted, and which record date shall be not
more than sixty days prior to such action. If no record date is fixed, the
record date for determining stockholders for any such purpose shall be at the
close of business on the day on which the board of directors adopts the
resolution relating thereto.
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Section 6. Subscriptions for Stock. Unless otherwise provided for in
--------- -----------------------
the subscription agreement, subscriptions for shares shall be paid in full at
such time, or in such installments and at such times, as shall be determined by
the board of directors. Any call made by the board of directors for payment on
subscriptions shall be uniform as to all shares of the same class or as to all
shares of the same series. In case of default in the payment of any installment
or call when such payment is due, the corporation may proceed to collect the
amount due in the same manner as any debt due the corporation.
ARTICLE VII
-----------
GENERAL PROVISIONS
------------------
Section 1. Dividends. Dividends upon the capital stock of
--------- ---------
corporation, subject to the provisions of the certificate of incorporation, if
any, may be declared by the board of directors at any regular or special
meeting, pursuant to law. Dividends may be paid in cash, in property, or in
shares of the capital stock, subject to the provisions of the certificate of
incorporation. Before payment of any dividend, there may be set aside out of any
funds of the corporation available for dividends such sum or sums as the
directors from time to time, in their absolute discretion, think proper as a
reserve or reserves to meet contingencies, or for equalizing dividends, or for
repairing or maintaining any property of the corporation, or any other purpose
and the directors may modify or abolish any such reserve in the manner in which
it was created.
Section 2. Checks, Drafts or Orders. All checks, drafts, or other
--------- ------------------------
orders for the payment of money by or to the corporation and all notes and other
evidences of indebtedness issued in the name of the corporation shall be signed
by such officer or officers, agent or agents of the corporation, and in such
manner, as shall be determined by resolution of the board of directors or a duly
authorized committee thereof.
Section 3. Contracts. The board of directors may authorize any officer
--------- ---------
or officers, or any agent or agents, of the corporation to enter into any
contract or to execute and deliver any instrument in the name of and on behalf
of the corporation, and such authority may be general or confined to specific
instances.
Section 4. Loans. The corporation may lend money to, or guarantee any
--------- -----
obligation of, or otherwise assist any officer or other employee of the
corporation or of its subsidiary, including any officer or employee who is a
director of the corporation or its subsidiary, whenever, in the judgment of the
directors, such loan, guaranty or assistance may reasonably be expected to
benefit the corporation. The loan, guaranty or other assistance may be with or
without interest, and may be unsecured, or secured in such manner as the board
of directors shall approve, including, without limitation, a pledge of shares of
stock of the corporation. Nothing in this section contained shall be deemed to
deny, limit or restrict the powers of guaranty or warranty of the corporation at
common law or under any statute.
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<PAGE>
Section 5. Fiscal Year. The fiscal year of the corporation shall be
--------- -----------
fixed by resolution of the board of directors.
Section 6. Corporate Seal. The board of directors may provide a
--------- --------------
corporate seal which shall be in the form of a circle and shall have inscribed
thereon the name of the corporation and the words "Corporate Seal, Delaware".
The seal may be used by causing it or a facsimile thereof to be impressed or
affixed or reproduced or otherwise.
Section 7. Voting Securities Owned By Corporation. Voting securities
--------- --------------------------------------
in any other corporation held by the corporation shall be voted by the
president, unless the board of directors specifically confers authority to vote
with respect thereto, which authority may be general or confined to specific
instances, upon some other person or officer. Any person authorized to vote
securities shall have the power to appoint proxies, with general power of
substitution.
Section 8. Inspection of Books and Records. Any stockholder of
--------- -------------------------------
record, in person or by attorney or other agent, shall, upon written demand
under oath stating the purpose thereof, have the right during the usual hours
for business to inspect for any proper purpose the corporation's stock ledger, a
list of its stockholders, and its other books and records, and to make copies or
extracts therefrom. A proper purpose shall mean any purpose reasonably related
to such person's interest as a stockholder. In every instance where an attorney
or other agent shall be the person who seeks the right to inspection, the demand
under oath shall be accompanied by a power of attorney or such other writing
which authorizes the attorney or other agent to so act on behalf of the
stockholder. The demand under oath shall be directed to the corporation at its
registered office in the State of Delaware or at its principal place of
business.
Section 9. Section Headings. Section headings in these by-laws are
--------- ----------------
for convenience of reference only and shall not be given any substantive effect
in limiting or otherwise construing any provision herein.
Section 10. Inconsistent Provisions. In the event that any provision
---------- -----------------------
of these by-laws is or becomes inconsistent with any provision of the
certificate of incorporation, the General Corporation Law of the State of
Delaware or any other applicable law, the provision of these by-laws shall not
be given any effect to the extent of such inconsistency but shall otherwise be
given full force and effect.
ARTICLE VIII
------------
AMENDMENTS
----------
These by-laws may be amended, altered, or repealed and new by-laws
adopted at any meeting of the board of directors by a majority vote. The fact
that the power to adopt, amend, alter, or repeal
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<PAGE>
the by-laws has been conferred upon the board of directors shall not divest the
stockholders of the same persons.
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<PAGE>
EXHIBIT 4.1
EXECUTION COPY
________________________________________________________________________________
AVALON CABLE OF MICHIGAN HOLDINGS, INC.,
AVALON CABLE LLC
AND
AVALON CABLE HOLDINGS FINANCE, INC.,
AS ISSUERS
11 7/8% SENIOR DISCOUNT NOTES DUE 2008
INDENTURE
Dated as of December 10, 1998
THE BANK OF NEW YORK,
as Trustee
________________________________________________________________________________
<PAGE>
CROSS-REFERENCE TABLE*
Trust Indenture Act Section Indenture Section
<TABLE>
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310(a)(1)................................................................ 7.10
(a)(2)................................................................. 7.10
(a)(3)................................................................. N.A.
(a)(4)................................................................. N.A.
(a)(5)................................................................. 7.10
(i)(b)................................................................. 7.10
(ii)(c)................................................................ N.A.
311(a)................................................................. 7.11
(b).................................................................... 7.11
(iii)(c)............................................................... N.A.
312(a)................................................................... 2.5
(b)(5)................................................................. 11.3
(iv)(c)................................................................ 11.3
313(a)................................................................... 7.6
(b)(1)................................................................. 10.3
(b)(2)................................................................. 7.7
(v)(c)................................................................. 7.6
11.2
(v)(d)................................................................. 7.6
314(a)................................................................... 4.3;
11.2
(A)(b)................................................................. 10.2
(c)(1)................................................................. 11.4
(c)(2)................................................................. 11.4
(c)(3)................................................................. N.A.
(vi)(e)................................................................ 11.5
(f).................................................................... N.A.
315(a)................................................................... 7.1
(b).................................................................... 7.5
11.2
(B)(c)................................................................. 7.1
(d).................................................................... 7.1
(e).................................................................... 6.11
316(a)(last sentence).................................................... 2.9
(a)(1)(A).............................................................. 6.5
(a)(1)(B).............................................................. 6.4
(a)(2)................................................................. N.A.
(b).................................................................... 6.7
(C)(c)................................................................. 2.12
317(a)(1)................................................................ 6.8
(a)(2)................................................................. 6.9
(b).................................................................... 2.2
318(a)................................................................... 11.1
</TABLE>
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<TABLE>
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(b).................................................................... N.A.
(c).................................................................... 11.1
</TABLE>
N.A. means not applicable.
*This Cross-Reference Table is not part of the Indenture.
2
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TABLE OF CONTENTS
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ARTICLE 1.
DEFINITIONS AND INCORPORATION BY REFERENCE............................. 1
SECTION 1.1 DEFINITIONS.................................................... 1
SECTION 1.2 OTHER DEFINITIONS.............................................. 22
SECTION 1.3 INCORPORATION BY REFERENCE OF TRUST INDENTURE ACT.............. 23
SECTION 1.4 RULES OF CONSTRUCTION.......................................... 24
SECTION 1.5 ONE CLASS OF SECURITIES........................................ 24
ARTICLE 2.
THE SENIOR DISCOUNT NOTES.............................................. 24
SECTION 2.1 FORM AND DATING................................................ 24
SECTION 2.2 EXECUTION AND AUTHENTICATION................................... 26
SECTION 2.3 REGISTRAR AND PAYING AGENT..................................... 26
SECTION 2.4 PAYING AGENT TO HOLD MONEY IN TRUST............................ 27
SECTION 2.5 HOLDER LISTS................................................... 27
SECTION 2.6 TRANSFER AND EXCHANGE.......................................... 28
SECTION 2.7 REPLACEMENT SENIOR DISCOUNT NOTES.............................. 41
SECTION 2.8 OUTSTANDING SENIOR DISCOUNT NOTES.............................. 42
SECTION 2.9 TREASURY SENIOR DISCOUNT NOTES................................. 42
SECTION 2.10 TEMPORARY SENIOR DISCOUNT NOTES................................ 42
SECTION 2.11 CANCELLATION................................................... 43
SECTION 2.12 DEFAULTED INTEREST............................................. 43
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SECTION 2.13 CUSIP NUMBERS.................................................. 43
SECTION 2.14 LIMITATION OF ISSUER'S AND ADDITIONAL OBLIGOR'S
LIABILITY...................................................... 44
ARTICLE 3.
REDEMPTION AND PREPAYMENT.............................................. 44
SECTION 3.1 NOTICES TO TRUSTEE............................................. 44
SECTION 3.2 SELECTION OF SENIOR DISCOUNT NOTES TO BE REDEEMED.............. 44
SECTION 3.3 NOTICE OF REDEMPTION........................................... 45
SECTION 3.4 EFFECT OF NOTICE OF REDEMPTION................................. 46
SECTION 3.5 DEPOSIT OF REDEMPTION PRICE.................................... 46
SECTION 3.6 SENIOR DISCOUNT NOTES REDEEMED IN PART......................... 47
SECTION 3.7 OPTIONAL REDEMPTION............................................ 47
SECTION 3.8 MANDATORY REDEMPTION........................................... 48
SECTION 3.9 OFFER TO PURCHASE BY APPLICATION OF EXCESS PROCEEDS............ 48
SECTION 3.10 MANDATORY PAYMENT OF ACCRUED INTEREST.......................... 50
ARTICLE 4.
COVENANTS.............................................................. 50
SECTION 4.1 PAYMENT OF SENIOR DISCOUNT NOTES............................... 50
SECTION 4.2 MAINTENANCE OF OFFICE OR AGENCY................................ 50
SECTION 4.3 REPORTS........................................................ 51
SECTION 4.4 COMPLIANCE CERTIFICATE......................................... 52
SECTION 4.5 TAXES.......................................................... 52
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SECTION 4.6 STAY, EXTENSION AND USURY LAWS................................. 53
SECTION 4.7 RESTRICTED PAYMENTS............................................ 53
SECTION 4.8 DIVIDEND AND OTHER PAYMENT RESTRICTIONS AFFECTING
RESTRICTED SUBSIDIARIES........................................ 56
SECTION 4.9 INCURRENCE OF INDEBTEDNESS AND ISSUANCE OF
PREFERRED STOCK................................................ 57
SECTION 4.10 ASSET SALES.................................................... 59
SECTION 4.11 TRANSACTIONS WITH AFFILIATES................................... 61
SECTION 4.12 LIENS.......................................................... 61
SECTION 4.13 BUSINESS ACTIVITIES............................................ 62
SECTION 4.14 CORPORATE EXISTENCE............................................ 62
SECTION 4.15 OFFER TO REPURCHASE UPON CHANGE OF CONTROL..................... 62
SECTION 4.16 [INTENTIONALLY OMITTED]........................................ 63
SECTION 4.17 GUARANTEES BY RESTRICTED SUBSIDIARIES.......................... 63
SECTION 4.18 PAYMENTS FOR CONSENT........................................... 64
SECTION 4.19 SALE AND LEASEBACK TRANSACTIONS................................ 64
SECTION 4.20 SALE OR ISSUANCE OF CAPITAL STOCK OF RESTRICTEDSUBSIDIARIES.... 64
ARTICLE 5.
SUCCESSORS............................................................. 65
SECTION 5.1 MERGER, CONSOLIDATION, OR SALE OF ASSETS....................... 65
SECTION 5.2 SUCCESSOR CORPORATION OR GUARANTORS SUBSTITUTED................ 65
</TABLE>
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ARTICLE 6.
EVENTS OF DEFAULT..................................................... 66
SECTION 6.1 EVENTS OF DEFAULT............................................. 66
SECTION 6.2 ACCELERATION.................................................. 68
SECTION 6.3 OTHER REMEDIES................................................ 69
SECTION 6.4 WAIVER OF PAST DEFAULTS....................................... 69
SECTION 6.5 CONTROL BY MAJORITY........................................... 69
SECTION 6.6 LIMITATION ON SUITS........................................... 69
SECTION 6.7 RIGHTS OF HOLDERS OF SENIOR DISCOUNT NOTES TO
RECEIVE PAYMENT............................................... 70
SECTION 6.8 COLLECTION SUIT BY TRUSTEE.................................... 70
SECTION 6.9 TRUSTEE MAY FILE PROOFS OF CLAIM.............................. 70
SECTION 6.10 PRIORITIES.................................................... 71
SECTION 6.11 FOR COSTS..................................................... 71
ARTICLE 7.
TRUSTEE............................................................... 72
SECTION 7.1 DUTIES OF TRUSTEE............................................. 72
SECTION 7.2 RIGHTS OF TRUSTEE............................................. 73
SECTION 7.3 INDIVIDUAL RIGHTS OF TRUSTEE.................................. 74
SECTION 7.4 TRUSTEES DISCLAIMER........................................... 74
SECTION 7.5 NOTICE OF DEFAULTS............................................ 75
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SECTION 7.6 REPORTS BY TRUSTEE TO HOLDERS OF THE SENIOR
SUBORDINATED NOTES............................................ 75
SECTION 7.7 COMPENSATION AND INDEMNITY.................................... 75
SECTION 7.8 REPLACEMENT OF TRUSTEE........................................ 76
SECTION 7.9 SUCCESSOR TRUSTEE BY MERGER, ETC.............................. 77
SECTION 7.10 ELIGIBILITY; DISQUALIFICATION................................. 77
SECTION 7.11 PREFERENTIAL COLLECTION OF CLAIMS AGAINST COMPANY............. 78
SECTION 7.12 OTHER CAPACITIES.............................................. 78
SECTION 7.13 TRUSTEE'S APPLICATION FOR INSTRUCTIONS FROM
THE ISSUER.................................................... 78
ARTICLE 8.
LEGAL DEFEASANCE AND COVENANT DEFEASANCE.............................. 79
SECTION 8.1 OPTION TO EFFECT LEGAL DEFEASANCE OR COVENANT
DEFEASANCE................................................... 79
SECTION 8.2 LEGAL DEFEASANCE AND DISCHARGE............................... 79
SECTION 8.3 COVENANT DEFEASANCE.......................................... 79
SECTION 8.4 CONDITIONS TO LEGAL OR COVENANT DEFEASANCE................... 80
SECTION 8.5 DEPOSITED MONEY AND GOVERNMENT SECURITIES TO BE
HELD IN TRUST; OTHER MISCELLANEOUS PROVISIONS................ 81
SECTION 8.6 REPAYMENT TO ISSUERS......................................... 82
SECTION 8.7 REINSTATEMENT................................................ 82
ARTICLE 9.
AMENDMENT, SUPPLEMENT AND WAIVER...................................... 83
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SECTION 9.1 WITHOUT CONSENT OF HOLDERS OF SENIOR DISCOUNT
NOTES........................................................ 83
SECTION 9.2 WITH CONSENT OF HOLDERS OF SENIOR DISCOUNT NOTES............. 84
SECTION 9.3 COMPLIANCE WITH TRUST INDENTURE ACT.......................... 85
SECTION 9.4 REVOCATION AND EFFECT OF CONSENTS............................ 85
SECTION 9.5 NOTATION ON OR EXCHANGE OF SENIOR DISCOUNT NOTES............. 86
SECTION 9.6 TRUSTEE TO SIGN AMENDMENTS, ETC.............................. 86
ARTICLE 10.
GUARANTEE............................................................. 86
SECTION 10.1 UNCONDITIONAL GUARANTEE...................................... 86
SECTION 10.2 SEVERABILITY................................................. 87
SECTION 10.3 LIMITATION OF GUARANTOR'S LIABILITY.......................... 87
SECTION 10.4 CONTRIBUTION................................................. 87
SECTION 10.5 SUBORDINATION OF SUBROGATION AND OTHER RIGHTS................ 88
ARTICLE 11.
MISCELLANEOUS......................................................... 88
SECTION 11.1 TRUST INDENTURE ACT CONTROLS................................. 88
SECTION 11.2 NOTICES...................................................... 88
SECTION 11.3 COMMUNICATION BY HOLDERS OF SENIOR SUBORDINATED
NOTES WITH OTHER HOLDERS OF SENIOR DISCOUNT NOTES............ 89
SECTION 11.4 CERTIFICATE AND OPINION AS TO CONDITIONS PRECEDENT........... 89
SECTION 11.5 STATEMENTS REQUIRED IN CERTIFICATE OR OPINION................ 90
SECTION 11.6 RULES BY TRUSTEE AND AGENTS.................................. 90
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SECTION 11.7 NO PERSONAL LIABILITY OF DIRECTORS, OFFICERS,
EMPLOYEES AND SHAREHOLDERS.....................................90
SECTION 11.8 GOVERNING LAW..................................................91
SECTION 11.9 NO ADVERSE INTERPRETATION OF OTHER AGREEMENTS..................91
SECTION 11.10 SUCCESSORS.....................................................91
SECTION 11.11 SEVERABILITY...................................................91
SECTION 11.12 COUNTERPART ORIGINALS..........................................91
SECTION 11.13 TABLE OF CONTENTS, HEADINGS, ETC...............................91
</TABLE>
EXHIBITS:
A Form of Senior Discount Notes
B Form of Certificate of Transfer
C Form of Certificate of Exchange
D Form of Supplemental Indenture
<PAGE>
INDENTURE dated as of December 10, 1998 among Avalon Cable of Michigan
Holdings, Inc., a Delaware corporation ("Michigan Holdings"), Avalon Cable LLC,
a Delaware limited liability company ("Avalon Holdings") and Avalon Cable
Holdings Finance, Inc., a Delaware corporation ("Finance Holdings") and The Bank
of New York, a New York banking corporation, as trustee (the "Trustee").
The Issuers, any Guarantors (as defined herein) and the Trustee agree as
follows for the benefit of the other parties and for the equal and ratable
benefit of the Holders of the 11% Senior Discount Notes due 2008 (the "Initial
Senior Discount Notes") and the 11% Senior Discount Notes due 2008 if and when
issued in the Exchange Offer (the "New Senior Discount Notes" and, together with
the Initial Senior Discount Notes and the Additional Senior Discount Notes, if
any, the "Senior Discount Notes"):
ARTICLE 1.
DEFINITIONS AND INCORPORATION BY REFERENCE
SECTION 1.1 DEFINITIONS.
"ABRY" means ABRY Partners, Inc.
"ABRY III" means ABRY Broadcast Partners III, L.P.
"ABRY Management Agreement" means the Management and Consulting Services
Agreement entered into as of May 29, 1998 and amended and restated as of
November 6, 1998 by and among ABRY Partners, Inc., Avalon Michigan and Avalon
New England and any successor agreement; provided that any such successor
agreement shall not modify the ABRY Management Agreement as in effect as of
November 6, 1998 in any material respect, taken as a whole, adverse to the
Issuers and their Subsidiaries or the Trustee.
"ABRY Subordinated Debt" means Indebtedness of the Issuers in principal
amount not to exceed $30.0 million in the aggregate at any time outstanding (a)
that is owed to Avalon, directly or indirectly, or to ABRY III, ABRY or any
other investment fund controlled by ABRY, (b) as to which the payment of
principal of (and premium, if any) and interest and other payment obligations in
respect of such Indebtedness shall be subordinate to the prior payment in full
of the Senior Discount Notes and the Senior Subordinated Notes to at least the
following extent: (i) no payments of principal (or premium, if any) or interest
on or otherwise due in respect of such Indebtedness may be permitted for so long
as any default in the payment of principal (or premium, if any) or interest on
the Senior Discount Notes and/or the Senior Subordinated Notes exists and (ii)
in the event that any other default that with the passing of time or the giving
of notice, or both, would constitute an event of default exists with respect to
the Senior Discount Notes and/or the Senior Subordinated Notes, upon notice by
25% or more in principal amount at maturity of the Senior Discount Notes and/or
the Senior Subordinated Notes, as appropriate, to the trustee under the Senior
Discount Notes and/or the Senior Subordinated Notes, such trustee or trustees
shall have the right to give notice to the Issuers and the holder of
<PAGE>
2
such Indebtedness (or trustees or agents therefor) of a payment blockage, and
thereafter no payments of principal of (or premium, if any) or interest on or
otherwise due in respect of such Indebtedness may be made for a period of 179
days from the date of such notice and (c) that shall automatically convert into
common equity of the Issuers within 18 months of the date of issuance thereof,
unless refinanced.
"Accreted Value" means as of any date prior to December 1, 2003, an
amount per $1,000 principal amount at maturity of the Senior Discount Notes that
is equal to the sum of (a) the initial offering price of each Senior Discount
Note and (b) the portion of the excess of the principal amount at maturity of
each Senior Discount Note over such initial offering price which shall have been
amortized through such date, such amount to be so amortized on a daily basis and
compounded semi-annually on each June 1, and December 1, at the rate of 11% per
annum from the Issue Date through the date of determination computed on the
basis of a 360-day year of twelve 30-day months.
"Acquired Debt" means, with respect to any specified Person, (i)
Indebtedness of any other Person existing at the time such other Person is
merged with or into or became a Restricted Subsidiary of such specified Person,
including, without limitation, Indebtedness incurred in connection with, or in
contemplation of, such other Person merging with or into or becoming a
Restricted Subsidiary of such specified Person, and (ii) Indebtedness secured by
a Lien encumbering any asset acquired by such specified Person.
"Acquisition Transactions" means the acquisition (i) by the Issuers
and their Subsidiaries of 1,822,810 outstanding shares of the common stock of
Mercom, (ii) by Avalon Michigan or Avalon Michigan LLC of a cable television
system from Cross Country Cable TV, Inc., (iii) by Avalon Michigan or Avalon
Michigan LLC of a cable television system from Nova Cablevision, Inc., Nova
Cablevision VI, L.P. and Nova Cablevision VII, L.P., (iv) by Avalon Michigan or
Avalon Michigan LLC of the assets of Traverse Internet, Inc. and (v) by Avalon
New England of all of the cable system assets of Taconic Technology Corp.
"Additional Senior Discount Notes" means an additional $50.0 million
in aggregate principal amount at issuance of Senior Discount Notes issued under
this Indenture after the Issue Date in accordance with Sections 2.2 and 4.9
hereof.
"Affiliate"' means, with respect to any specified Person, any other
Person controlling or controlled by or under common control with such specified
Person. For purposes of this definition, "control" (including, with correlative
meanings, the terms "controlling," "controlled by" and "under common control
with"), as used with respect to any Person, shall mean the possession, directly
or indirectly, of the power to direct or cause the direction of the management
or policies of such Person, whether through the ownership of voting securities,
by agreement or otherwise; provided that beneficial ownership of 10% or more of
the voting securities of a Person shall be deemed to be control.
<PAGE>
3
"Agent" means any Registrar, Paying Agent, co-registrar,
authenticating agent or securities custodian.
"Amrac" means Amrac Clear View, a Limited Partnership.
"Applicable Procedures" means, with respect to any transfer or
exchange of or for beneficial interests in any Global Note, the rules and
procedures of the Depositary, Euroclear and Cedel that apply to such transfer or
exchange.
"Asset Sale" means (i) the sale, lease, conveyance or other
disposition of any assets or rights (including, without limitation, by way of a
sale and leaseback) other than in the ordinary course of business (provided that
the sale, lease, conveyance or other disposition of all or substantially all of
the assets of the Issuers and their Restricted Subsidiaries taken as a whole
will be governed by Sections 4.15 and 5.1 and not by the provisions of Section
4.10, and (ii) the issue or sale by the Issuers or any of their Restricted
Subsidiaries of Equity Interests in any of their Restricted Subsidiaries, in the
case of either clause (i) or (ii), whether in a single transaction or a series
of related transactions (a) that have a fair market value in excess of $2.5
million or (b) for Net Cash Proceeds in excess of $2.5 million. Notwithstanding
the foregoing: (i) a transfer of assets by any of the Issuers to a Restricted
Subsidiary of any Issuer or by a Restricted Subsidiary of any Issuer to such
Issuer or to another Issuer or Restricted Subsidiary of an Issuer, (ii) an
issuance or sale of Equity Interests by a Restricted Subsidiary of an Issuer to
any Issuer or to another Issuer or Restricted Subsidiary of any Issuer, (iii) a
Restricted Payment that is permitted by the covenant described under Section 4.7
and (iv) transactions that are part of the Reorganization will not be deemed to
be Asset Sales.
"Attributable Debt" in respect of a sale and leaseback transaction
means, at the time of determination, the present value (discounted at the rate
of interest implicit in such transaction, determined in accordance with GAAP) of
the obligation of the lessee for net rental payments during the remaining term
of the lease included in such sale and leaseback transaction (including any
period for which such lease has been extended or may, at the option of the
lessor, be extended).
"Avalon" means Avalon Cable Holdings LLC, a Delaware limited
liability company.
"Avalon Michigan" means Avalon Cable of Michigan, Inc., a
Pennsylvania corporation.
"Avalon Michigan LLC" means Avalon Cable of Michigan LLC, a Delaware
limited liability company.
"Avalon New England" means Avalon Cable of New England LLC, a
Delaware limited liability company.
<PAGE>
4
"Bankruptcy Law" means Title 11, U.S. Code or any similar federal or
state law for the relief of debtors.
"Board of Directors" means, as to any Person, the board of directors
of such Person (or, if such Person is a limited liability company, the board of
managers of such Person) or similar governing body or any duly authorized
committee thereof.
"Broker-Dealer" has the meaning set forth in the Registration Rights
Agreement.
"Business Day" means a day other than a Saturday, Sunday or other day
on which commercial banks in New York City are authorized or required by law to
close.
"Cable Michigan" means Cable Michigan, Inc., a Pennsylvania
corporation.
"Capital Lease Obligation" means, as to any Person, the obligations
of such Person to pay rent or other amounts under any lease of (or other
arrangement conveying the right to use) real or personal property, or a
combination thereof, which obligations are required to be classified and
accounted for as capital leases on a balance sheet of such Person under GAAP,
and, for the purposes of the Indenture, the amount of such obligations at any
time shall be the capitalized amount thereof at such time determined in
accordance with GAAP.
"Capital Stock" means (i) in the case of a corporation, corporate
stock, (ii) in the case of an association or business entity, any and all
shares, interests, participations, rights or other equivalents (however
designated) of corporate stock and (iii) in the case of a partnership or limited
liability company, partnership or membership interests (whether general or
limited).
"Cash Equivalents" means (i) United States dollars, (ii) securities
issued or directly and fully guaranteed or insured by the United States
government or any agency or instrumentality thereof having maturities of not
more than one year from the date of acquisition, (iii) certificates of deposit
and Eurodollar time deposits with maturities of not more than one year from the
date of acquisition, bankers' acceptances with maturities of not more than one
year from the date of acquisition and overnight bank deposits, in each case with
(A) Brown Brothers Harriman or (B) any other domestic commercial bank having
capital and surplus in excess of $500 million and a Thompson Bank Watch Rating
of "B" or better, (iv) repurchase obligations with a term of not more than 30
days for underlying securities of the types described in clauses (ii) and (iii)
above entered into with any financial institution meeting the qualifications
specified in clause (iii) above, (v) commercial paper having the highest rating
obtainable from Moody's Investors Service, Inc. or one of the two highest
ratings from Standard & Poor's with maturities of not more than one year from
the date of acquisition and (vi) money market funds at least 95% of the assets
of which constitute Cash Equivalents of the kinds described in clauses (i)-(v)
of this definition.
"Cedel" means Cedel Bank, S.A.
<PAGE>
5
"Change of Control" means the occurrence of any of the following: (i)
the sale, lease, transfer, conveyance or other disposition (other than by way of
merger or consolidation), in one or a series of related transactions, of all or
substantially all of the combined assets of the Issuers and their Restricted
Subsidiaries, taken as a whole, or of all or substantially all of the, direct or
indirect, assets of Avalon, in either case, to any "person" (as such term is
used in Section 13(d)(3) of the Exchange Act) other than another Issuer, a
Restricted Subsidiary or an Additional Obligor; (ii) the adoption of a plan
relating to the liquidation or dissolution of an Issuer or Issuers which
individually or in the aggregate holds all or substantially all of the combined
assets of the Issuers; (iii) (A) the consummation of any transaction (including,
without limitation, any merger or consolidation) the result of which is that any
"person" (as defined above), other than the Principals, becomes the "beneficial
owner" (as such term is defined in Rule 13d-3 and Rule 13d-5 under the Exchange
Act, except that a person shall be deemed to have "beneficial ownership" of all
securities that such person has the right to acquire, whether such right is
currently exercisable or is exercisable only upon the occurrence of a subsequent
condition), directly or indirectly, of more than 35% of the Capital Stock of
Avalon (measured by voting power rather than number of shares) and (B) the
Principals "beneficially own" (as such term is defined in Rule 13d-3 and Rule
13d-5 under the Exchange Act, except that a person shall be deemed to have
"beneficial ownership" of all securities that such person has the right to
acquire, whether such right is currently exercisable or is exercisable only upon
the occurrence of a subsequent condition), directly or indirectly, in the
aggregate a lesser percentage of the Capital Stock of Avalon (measured by voting
power rather than number of shares) than such other person; (iv) the first day
on which a majority of the members of the Board of Directors of Avalon are not
Continuing Managers; or (v) (A) Avalon or an Issuer or Issuers which
individually or in the aggregate holds all or substantially all of the combined
assets of the Issuers, consolidates with, or merges with or into, any Person or
(B) any Person consolidates with, or merges with or into, Avalon or an Issuer or
Issuers which individually or in the aggregate holds all or substantially all of
the combined assets of the Issuers, in any such event pursuant to a transaction
in which any of the outstanding Voting Stock of such Issuer or Issuers or Avalon
is converted into or exchanged for cash, securities or other property, other
than any such transaction where the Voting Stock of such Issuer or Issuers or
Avalon outstanding immediately prior to such transaction is converted into or
exchanged for Voting Stock (other than Disqualified Stock) of the surviving or
transferee Person constituting a majority of the outstanding shares of such
Voting Stock of such surviving or transferee Person (immediately after giving
effect to such issuance); provided, however, that notwithstanding the foregoing,
the Reorganization shall not be deemed to be a Change of Control.
"Code" means the Internal Revenue Code of 1986, as amended.
"Commission" means the Securities and Exchange Commission.
"Company Issuers" means initially Avalon Michigan, Avalon New England
and Avalon Cable Finance, Inc. or any successor thereto; provided that
subsequent to the Reorganization, the Company Issuers shall be Avalon New
England, Avalon Michigan LLC, as successor to Avalon Michigan, and Avalon Cable
Finance, Inc. or any successor thereto.
<PAGE>
6
"Completed Acquisitions" means the acquisitions of Cable Michigan,
Amrac and Pegasus by Avalon or an Affiliate of Avalon.
"Consolidated Cash Flow" means, with respect to any Person for any
period, the Consolidated Net Income of such Person for such period plus (i) an
amount equal to any extraordinary loss plus any net loss realized in connection
with an Asset Sale (to the extent such losses were deducted in computing such
Consolidated Net Income), plus (ii) provision for taxes based on income or
profits of such Person and its Restricted Subsidiaries for such period, to the
extent that such provision for taxes was included in computing such Consolidated
Net Income, plus (iii) Consolidated Interest Expense of such Person for such
period, to the extent that any such expense was deducted in computing such
Consolidated Net Income, plus (iv) depreciation and amortization (including
amortization of goodwill and other intangibles but excluding amortization of
prepaid cash expenses that were paid in a prior period) of such Person and its
Restricted Subsidiaries for such period to the extent that such depreciation and
amortization were deducted in computing such Consolidated Net Income, plus (v)
other non-cash items decreasing such Consolidated Net Income, minus (vi) non-
cash items increasing such Consolidated Net Income for such period (other than
items that were accrued in the ordinary course of business), in each case, on a
consolidated basis and determined in accordance with GAAP.
"Consolidated Interest Expense" means, with respect to any Person for
any period, the sum, without duplication of (i) the consolidated interest
expense of such Person and its Restricted Subsidiaries for such period, whether
paid or accrued (including, without limitation, amortization of original issue
discount, non-cash interest payments, the interest component of any deferred
payment obligations, the interest component of all payments associated with
Capital Lease Obligations, imputed interest with respect to Attributable Debt,
commissions, discounts and other fees and charges incurred in respect of letter
of credit or bankers' acceptance financings, and net payments (if any) pursuant
to Hedging Obligations), (ii) the consolidated interest expense of such Person
and its Restricted Subsidiaries that was capitalized during such period, (iii)
any interest expense on Indebtedness of another Person that is guaranteed by
such Person or any of its Restricted Subsidiaries or secured by a Lien on assets
of such Person or any of its Restricted Subsidiaries (whether or not such
guarantee or Lien is called upon) and (iv) the product of (a) all cash dividend
payments (and non-cash dividend payments in the case of a Person that is a
Restricted Subsidiary) on any series of preferred stock of such Person or any of
its Restricted Subsidiaries, times (b) a fraction, the numerator of which is one
and the denominator of which is one minus the then current combined federal,
state and local statutory tax rate of such Person, expressed as a decimal, in
each case, on a consolidated basis and in accordance with GAAP.
"Consolidated Net Income" means, with respect to any Person for any
period, the aggregate of the Net Income of such Person and its Restricted
Subsidiaries (for such period, on a consolidated basis, determined in accordance
with GAAP); provided that (i) the Net Income (but not loss) of any Person that
is not a Restricted Subsidiary or that is accounted for by the equity method of
accounting shall be included only to the extent of the amount of dividends or
distributions paid in cash to the referent Person or a Restricted Subsidiary,
(ii) the Net Income of
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7
any Person acquired in a pooling of interests transaction for any period prior
to the date of such acquisition shall be excluded, (iii) the cumulative effect
of a change in accounting principles shall be excluded and (iv) the Net Income
of any Unrestricted Subsidiary shall be excluded whether or not distributed to
an Issuer or one of its Restricted Subsidiaries.
"Continuing Managers" means the managers of Avalon on the Issue Date
and each other manager, if, in each case, such other manager's nomination for
election to the board of managers of Avalon is recommended by at least
66 2/3% of the then Continuing Managers or such other manager receives the
vote of the Permitted Investors in his or her election by the equityholders of
Avalon.
"Control Investment Affiliate" means as to any Person, any other
Person which (a) directly or indirectly, is in control of, is controlled by, or
is under common control with, such Person and (b) is organized by such Person
primarily for the purpose of making equity or debt investments in one or more
companies. For purposes of this definition, "control" of a Person means the
power, directly or indirectly, to direct or cause the direction of the
management and policies of such Person whether by contract or otherwise.
"Corporate Trust Office of the Trustee" shall be at the address of the
Trustee specified in Section 11.2 hereof or such other address as to which the
Trustee may give notice to the Issuers.
"Credit Facility" means that certain Senior Credit Agreement, dated as
of November 5, 1998, by and among the Company Issuers, the lenders party
thereto, Lehman Commercial Paper Inc., as administrative agent, and other
parties thereto, including any related notes, guarantees, collateral documents,
instruments and agreements executed in connection therewith, and in each case as
amended, modified, renewed, refunded, replaced or refinanced from time to time.
"Custodian" means the Trustee, as custodian with respect to the Senior
Discount Notes in global form, or any successor entity thereto.
"Default" means any event that is or with the passage of time or the
giving of notice (or both) would be an Event of Default.
"Definitive Note" means a certificated Note registered in the name of
the Holder thereof and issued in accordance with Section 2.6 hereof, in the form
of Exhibit A hereto except that such Note shall not bear the Global Note Legend
and shall not have the "Schedule of Exchanges of Interests in the Global Note"
attached thereto.
"Depositary" means, with respect to the Senior Discount Notes issuable
or issued in whole or in part in global form, the Person specified in Section
2.3 hereof as the Depositary with respect to the Senior Discount Notes, and any
and all successors thereto
<PAGE>
8
appointed as depositary hereunder and having become such pursuant to the
applicable provision of this Indenture.
"Disqualified Stock" means any Capital Stock that, by its terms (or by
the terms of any security into which it is convertible or for which it is
exchangeable at the option of the holder thereof), or upon the happening of any
event, matures or is mandatorily redeemable, pursuant to a sinking fund
obligation or otherwise, or redeemable at the option of the holder thereof, in
whole or in part, on or prior to the date that is 91 days after the date on
which the Senior Discount Notes mature, except to the extent that such Capital
Stock is solely redeemable with, or solely exchangeable for, any Capital Stock
of such Person that is not Disqualified Stock; provided, however, that any
Capital Stock that would constitute Disqualified Stock solely because the
holders thereof have the right to require the Issuers or their Affiliates to
repurchase such Capital Stock upon the occurrence of a Change of Control or an
Asset Sale shall not constitute Disqualified Stock if the terms of such Capital
Stock provide that the Issuers or their Affiliates may not repurchase or redeem
any such Capital Stock pursuant to such provisions unless such repurchase or
redemption complies with Section 4.7.
"Equity Interests" means Capital Stock and all warrants, options or
other rights to acquire Capital Stock (but excluding any debt security that is
convertible into, or exchangeable for, Capital Stock).
"Equity Offering" means any public or private sale of Capital Stock of
any of the Issuers or Avalon or any Subsidiary of Avalon pursuant to which the
Issuers together receive net proceeds of at least $25.0 million, other than
issuances of Capital Stock pursuant to employee benefit plans or as compensation
to employees; provided that to the extent such Capital Stock is issued by Avalon
or any Subsidiary of Avalon, the Net Cash Proceeds thereof shall have been
contributed to one or more of the Issuers in the form of an equity contribution.
"Euroclear" means Morgan Guaranty Trust Company of New York, Brussels
office, as operator of the Euroclear system.
"Excess Proceeds" means any Net Cash Proceeds from Asset Sales that
are not applied or invested as provided in the first sentence of the third
paragraph under Section 4.10 within the applicable period.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Exchange Offer" has the meaning set forth in the Registration Rights
Agreement.
"Exchange Offer Registration Statement" has the meaning set forth in
the Registration Rights Agreement.
<PAGE>
9
"Existing Indebtedness" means up to $5.0 million in aggregate
principal amount of Indebtedness of the Issuers and their Restricted
Subsidiaries (other than Indebtedness under the Credit Facility and the Senior
Discount Notes) in existence on the Issue Date, until such amounts are repaid.
"Existing Michigan Indebtedness" means Indebtedness incurred by Avalon
Michigan or Mercom between the Issue Date and the completion of the
Reorganization that would be permitted to be incurred under the terms of this
Indenture, including any related notes, guarantees, collateral documents,
instruments and agreement executed in connection therewith, and in each case, as
amended, modified renewed, refunded, replaced or refinanced.
"Full Accretion Date" means December 1, 2003.
"GAAP" means generally accepted accounting principles in the United
States of America as in effect from time to time, except for the provisions
described above under Sections 4.7 and 4.9, GAAP shall be determined on the
basis of such principles in effect on the Issue Date.
"Global Notes" means, individually and collectively, each of the
Restricted Global Notes and the Unrestricted Global Notes, in the form of
Exhibit A hereto issued in accordance with Section 2.1, 2.6(b), 2.6(d) or 2.6(f)
hereof.
"Global Note Legend" means the legend set forth in Section 2.6(g)(ii),
which is required to be placed on all Global Notes issued under this Indenture.
"Governmental Authority" means any nation or government, any state or
other political subdivision thereof and any entity exercising executive,
legislative, judicial, regulatory or administrative functions of or pertaining
to government.
"Government Securities" means direct obligations of, or obligations
guaranteed by, the United States of America, and the payment for which the
United States pledges its full faith and credit.
"Guarantee" means a guarantee (other than by endorsement of negotiable
instruments for collection in the ordinary course of business), direct or
indirect, in any manner (including, without limitation, letters of credit and
reimbursement agreements in respect thereof), of all or any part of any
Indebtedness.
"Guarantors" means (i) Avalon Michigan and Michigan Holdings upon the
effective completion of the Reorganization and their execution of Guarantees of
the Senior Discount Notes in accordance with the provisions of this Indenture
and (ii) any Subsidiary that executes a Guarantee of the Senior Discount Notes
in accordance with the provisions of this Indenture, and their respective
successors and assigns.
<PAGE>
10
"Hedging Obligations" means, with respect to any Person, the net
payment Obligations of such Person under (i) interest rate swap agreements,
interest rate cap agreements and interest rate collar agreements and (ii) other
agreements or arrangements in the ordinary course of business designed to
protect such Person against fluctuations in commodity prices, interest rates or
currency exchange rates.
"Holder" means a Person in whose name a Senior Discount Note is
registered.
"IAI Global Note" means a global note in the form of Exhibit A hereto
bearing the Global Note Legend and the Private Placement Legend and deposited
with or on behalf of, and registered in the name of, the Depositary or its
nominee that will be issued in an initial denomination equal to $0 for resales
after the Issue Date to institutional "accredited investors" (as defined in Rule
501 under the Securities Act).
"Indebtedness" means, with respect to any Person, without duplication,
any indebtedness of such Person, whether or not contingent, in respect of
borrowed money or evidenced by bonds, notes, debentures or similar instruments
or letters of credit (or reimbursement agreements in respect thereof) or
banker's acceptances or representing Capital Lease Obligations or the balance
deferred and unpaid of the purchase price of any Property acquired by such
Person or representing any Hedging Obligations, except any such balance that
constitutes an accrued expense or trade or accounts payable, if and to the
extent any of the foregoing indebtedness (other than letters of credit and
Hedging Obligations) would appear as a liability upon a balance sheet of such
Person prepared in accordance with GAAP, as well as all Indebtedness of others
secured by a Lien on any asset of such Person (whether or not such Indebtedness
is assumed by such Person) and, to the extent not otherwise included, the
Guarantee by such Person of any Indebtedness of any other Person. The amount of
any Indebtedness outstanding as of any date shall be (i) the face amount
thereof, in the case of any Indebtedness with respect to acceptances, letters of
credit and similar facilities, (ii) the accreted value thereof in the case of
any Indebtedness that does not require current payments of interest and (ii) the
principal amount thereof, together with any interest thereon that is more than
30 days past due, in the case of any other Indebtedness; provided, however,
that, in each case, with respect to any Indebtedness of any Person secured by a
Lien on any asset of such Person and non-recourse to such Person, the amount of
such Indebtedness shall be the lesser of (A) the principal amount thereof and
(B) the fair market value of the Property subject to such Lien. Notwithstanding
the foregoing, the term "Indebtedness" shall not include Indebtedness of the
Issuers to Affiliates for which principal and interest payments are not required
to be made prior to the maturity of the Senior Discount Notes and which is
otherwise subordinated to the prior payment in full of the Senior Discount
Notes.
"Indenture" means this Indenture, as amended or supplemented from time
to time.
"Indirect Participant" means a Person who holds a beneficial interest
in a Global Note through a Participant.
<PAGE>
11
"Initial Purchasers" means Lehman Brothers Inc. and Barclays Capital
Inc.
"Initial Senior Discount Notes" means $196.0 million in aggregate
principal amount at maturity of Senior Discount Notes issued under this
Indenture on the date hereof.
"Investments" means, with respect to any Person, all investments by
such Person in other Persons (including Affiliates) in the forms of direct or
indirect loans (including Guarantees of Indebtedness or other Obligations),
advances of assets or capital contributions (excluding commission, travel and
entertainment, moving, and similar advances to officers and employees made in
the ordinary course of business), purchases or other acquisitions for
consideration of Indebtedness, Equity Interests or other securities, together
with all items that are or would be classified as investments on a balance sheet
prepared in accordance with GAAP. If any of the Issuers or any of their
Restricted Subsidiaries sells or otherwise disposes of any Equity Interests of
any direct or indirect Restricted Subsidiary of any Issuer such that, after
giving effect to any such sale or disposition, such Person is no longer a direct
or indirect Restricted Subsidiary of any Issuer, such Issuer or such Restricted
Subsidiary, as the case may be, shall be deemed to have made an Investment on
the date of any such sale or disposition equal to the fair market value of the
Equity Interests of such Restricted Subsidiary not sold or disposed of in an
amount determined as provided in the final paragraph of Section 4.7.
"Issue Date" means the date on which $196.0 million aggregate
principal amount at maturity of the Senior Discount Notes are originally issued.
"Issuers" means, initially, Michigan Holdings, Avalon Holdings and
Finance Holdings or any successor thereto; provided that subsequent to the
Reorganization, the Issuers shall be Avalon Holdings and Finance Holdings or any
successor thereto.
"Legal Holiday" means a Saturday, a Sunday or a day on which banking
institutions in the City of New York or at a place of payment are authorized by
law, regulation or executive order to remain closed. If a payment date is a
Legal Holiday at a place of payment, payment may be made at that place on the
next succeeding day that is not a Legal Holiday, and no interest shall accrue on
such payment for the intervening period.
"Letter of Transmittal" means the letter of transmittal to be prepared
by the Issuers and sent to all Holders of the Senior Discount Notes for use by
such Holders in connection with the Exchange Offer.
"Leverage Ratio" means the ratio of (i) the aggregate outstanding
amount of Indebtedness of each of the Issuers and their Restricted Subsidiaries
as of the date of calculation on a combined consolidated basis in accordance
with GAAP (subject to the terms described in the next paragraph) plus the
aggregate liquidation preference of all outstanding Disqualified Stock of the
Issuers and preferred stock of the Issuers' Restricted Subsidiaries (except
preferred stock issued to the Issuers or a Wholly Owned Subsidiary of the
Issuers) on such date to (ii) the
<PAGE>
12
aggregate Consolidated Cash Flow of the Issuers for the full fiscal quarter
ending on or prior to the date of determination multiplied by four.
For purposes of this definition, (i) the amount of Indebtedness which
is issued at a discount shall be deemed to be the accreted value of such
Indebtedness at the end of the quarter, whether or not such amount is the amount
then reflected on a balance sheet prepared in accordance with GAAP, and (ii) the
aggregate outstanding principal amount of Indebtedness of the Issuers and their
Subsidiaries and the aggregate liquidation preference of all outstanding
preferred stock of the Issuers' Subsidiaries for which such calculation is made
shall be determined on a pro forma basis as if the Indebtedness and preferred
stock giving rise to the need to perform such calculation had been incurred and
issued and the proceeds therefrom had been applied, and all other transactions
in respect of which such Indebtedness is being incurred or preferred stock is
being issued had occurred, on the first day of the quarter. In addition to the
foregoing, for purposes of this definition, Consolidated Cash Flow shall be
calculated on a pro forma basis after giving effect to (i) the incurrence of the
Indebtedness of such Person and its Subsidiaries and the issuance of the
preferred stock of such Subsidiaries (and the application of the proceeds
therefrom) giving rise to the need to make such calculation and any incurrence
(and the application of the proceeds therefrom) or repayment of other
Indebtedness, at any time subsequent to the beginning of the quarter and on or
prior to the date of determination, as if such incurrence or issuance (and the
application of the proceeds thereof), or the repayment, as the case may be,
occurred on the first day of the quarter (except that, in making such
computation, the amount of Indebtedness under any revolving credit facility
shall be computed based upon the average balance of such Indebtedness at the end
of each month during such period) and (ii) any acquisition (including, without
limitation, the acquisitions of Cable Michigan, Amrac and Pegasus and any other
acquisition giving rise to the need to make such calculation as a result of such
Person or one of its Subsidiaries (including any Person that becomes a
Subsidiary as a result of such acquisition) incurring, assuming or otherwise
becoming liable for Indebtedness or such Person's Subsidiaries issuing preferred
stock) at any time on or subsequent to the first day of the quarter and on or
prior to the date of determination, as if such acquisition (including the
incurrence, assumption or liability for any such Indebtedness and the issuance
of such preferred stock and also including any Consolidated Cash Flow associated
with such acquisition) occurred on the first day of the quarter, giving pro
forma effect to any non-recurring expenses, non-recurring costs and cost
reductions within the first year after such acquisition the Issuers anticipate
if the Issuers deliver to the Trustee an officer's certificate executed by the
chief financial or accounting officer of any of the Issuers certifying to and
describing and quantifying with reasonable specificity such non-recurring
expenses, non-recurring costs and cost reductions. Furthermore, in calculating
Consolidated Interest Expense for purposes of the calculation of Consolidated
Cash Flow, (a) interest on Indebtedness determined on a fluctuating basis as of
the date of determination (including Indebtedness actually incurred on the date
of the transaction giving rise to the need to calculate the Leverage Ratio) and
which will continue to be so determined thereafter shall be deemed to have
accrued at a fixed rate per annum equal to the rate of interest on such
Indebtedness as in effect on the date of determination and (b) notwithstanding
(a) above, interest determined on a fluctuating basis, to the extent such
interest is covered by
<PAGE>
13
Hedging Obligations, shall be deemed to accrue at the rate per annum resulting
after giving effect to the operation of such agreements.
"Lien" means, with respect to any asset, any mortgage, lien, pledge,
charge, security interest or encumbrance of any kind in respect of such asset,
whether or not filed, recorded or otherwise perfected under applicable law
(including any conditional sale or other title retention agreement, any lease in
the nature thereof, any option or other agreement to sell or give a security
interest in any asset and any filing of or agreement to give any financing
statement under the Uniform Commercial Code (or equivalent statutes) of any
jurisdiction).
"Liquidated Damages" means all liquidated damages then owing pursuant
to Section 5 of the Registration Rights Agreement.
"Mercom" means Mercom, Inc., a Delaware corporation.
"Mercom Intercompany Loan" means the Term Credit Agreement between
Mercom and Cable Michigan, Inc. originally dated as of November 26, 1989,
amended and restated as of August 16, 1995, further amended and restated as of
September 29, 1997 and as may be further amended from time to time; provided
that any such further amendment shall not modify the Mercom Intercompany Loan as
in effect as of September 29, 1997 in any material respect, taken as a whole,
adverse to the Issuers and their Subsidiaries or the Trustee or the Holders.
"Mercom Management Agreement" means the Management Agreement between
Mercom and Cable Michigan, Inc. dated as of January 1, 1997, as may be amended
from time to time; provided that any such amendment shall not modify the Mercom
Management Agreement as in effect as of January 1, 1997 in any material respect.
"Merger" means the merger of Avalon Cable Michigan, Inc. with and
into Cable Michigan, Inc.
"Net Cash Proceeds" means (a) with respect to any Asset Sale, the
aggregate cash proceeds or Cash Equivalents received by the Issuers or any of
their Restricted Subsidiaries in respect of any Asset Sale (including, without
limitation, any cash received upon the sale or other disposition of any non-cash
consideration received in any Asset Sale), net of (i) all costs relating to such
Asset Sale (including, without limitation, legal, accounting, investment banking
and brokers fees, and sales and underwriting commissions) and any relocation
expenses incurred as a result thereof, taxes paid or payable as a result thereof
(after taking into account any available tax credits or deductions and any tax
sharing arrangements), (ii) any reserve established in accordance with GAAP or
amounts deposited in escrow for adjustment in respect of the sale price of such
asset or assets or for indemnities with respect to any Asset Sale (provided that
such amounts shall be Net Cash Proceeds to the extent and at the time released
or not required to be reserved) and (iii) amounts required to be applied to the
repayment of Indebtedness secured by a Lien which is expressly permitted
hereunder on any asset that is the subject of such Asset Sale
<PAGE>
14
and (b) with respect to transactions or events other than Asset Sales, the
aggregate cash proceeds or Cash Equivalents received by the Issuers or any of
their Restricted Subsidiaries in connection therewith less the reasonable fees,
commissions and other out-of-pocket expenses incurred by the Issuers or any of
their Restricted Subsidiaries in connection with such transaction or event and
less any taxes paid or payable as a result thereof (after taking into account
any available tax credits or deductions and any tax sharing arrangements).
"Net Income" means, with respect to any Person, the net income (loss)
of such Person, determined in accordance with GAAP and before any reduction in
respect of preferred stock dividends, excluding, however, (i) any gain (but not
loss), together with any related provision for taxes on such gain (but not
loss), realized in connection with (a) any Asset Sale (including, without
limitation, dispositions pursuant to sale and leaseback transactions) or (b) the
disposition of any securities by such Person or any of its Restricted
Subsidiaries or the extinguishment of any Indebtedness of such Person or any of
its Restricted Subsidiaries and (ii) any extraordinary gain (but not loss),
together with any related provision for taxes on such extraordinary gain (but
not loss).
"New Senior Discount Notes" has the meaning assigned to it in the
preamble to this Indenture.
"Non-Recourse Debt" means Indebtedness (i) as to which none of the
Issuers nor any of their Restricted Subsidiaries (a) provides credit support of
any kind (including any undertaking, agreement or instrument that would
constitute Indebtedness), (b) is directly or indirectly liable (as a guarantor
or otherwise) or (c) constitutes the lender; and (ii) no default with respect to
which (including any rights that the holders thereof may have to take
enforcement action against an Unrestricted Subsidiary) would permit (upon
notice, lapse of time or both) any holder of any Indebtedness (other than the
Senior Discount Notes being offered hereby) of any of the Issuers or their
Restricted Subsidiaries to declare a default on such other Indebtedness or cause
the payment thereof to be accelerated or payable prior to its stated maturity;
and (iii) as to which the lender have been notified in writing that they will
not have any recourse to the stock or assets of any of the Issuers or their
Restricted Subsidiaries.
"Non-US. Person" means a Person who is not a U.S. Person.
"Obligations" means any principal, premium, if any, interest
(including interest accruing on or after the filing of any petition in
bankruptcy or for reorganization relating to any Issuer or any of their
Restricted Subsidiaries whether or not a claim for post-filing interest is
allowed in such proceeding), penalties, fees, charges, expenses,
indemnifications, reimbursement obligations, damages (including Liquidated
Damages), guarantees and other liabilities or amounts payable under the
documentation governing any Indebtedness or in respect thereof.
"Offering" means the offering of the Initial Senior Discount Notes by
the Issuers.
<PAGE>
15
"Officer" means, with respect to any Person, the Chairman of the
Board, the Chief Executive Officer, the President, the Chief Operating Officer,
the Chief Financial Officer, the Treasurer, any Assistant Treasurer, the
Controller, the Secretary or any Vice President of such Person.
"Officers' Certificate" means a certificate that meets the
requirements of Section 11.5 hereof and is signed on behalf of any Person by any
two of the following Officers: the Chief Executive Officer, the President, the
Chief Operating Officer, the Chief Financial Officer, the Treasurer or any Vice
President.
"144A Global Note" means a global note in the form of Exhibit A hereto
bearing the Global Note Legend and the Private Placement Legend and deposited
with or on behalf of, and registered in the name of, the Depositary or its
nominee that will be issued in a denomination equal to the outstanding principal
amount of the Senior Discount Notes sold in reliance on Rule 144A.
"Opinion of Counsel" means a written opinion from legal counsel that
meets the requirements of Section 11.5 hereof. The counsel may be an employee
of or counsel to the Issuers, any Subsidiary of the Issuers or the Trustee.
"Parent Guarantors" means Avalon Michigan and Michigan Holdings upon
the effective completion of the Reorganization and their execution of Guarantees
of the Senior Discount Notes in accordance with the provisions of this
Indenture.
"Participant" means, with respect to the Depositary, Euroclear or
Cedel, a Person who has an account with the Depositary, Euroclear or Cedel,
respectively (and, with respect to The Depository Trust Company, shall include
Euroclear and Cedel).
"Pegasus" means, collectively, Pegasus Cable Television, Inc. and
Pegasus Cable Television of Connecticut, Inc.
"Permitted Business" means any business engaged in by the Issuers or
their Restricted Subsidiaries as of the Issue Date or any business reasonably
related, ancillary or complementary thereto.
"Permitted Investments" means (a) any Investment in any Issuer or in
any Restricted Subsidiary of the Issuers; (b) any Investment in Cash Equivalents
constituting Cash Equivalents at the time made; (c) any Investment by the
Issuers or any of their Restricted Subsidiaries in a Person engaged in a
Permitted Business, if as a result of such Investment (i) such Person becomes a
Wholly-Owned Subsidiary of any Issuer or (ii) such Person is merged,
consolidated or amalgamated with or into, or transfers or conveys substantially
all of its assets to, or is liquidated into, any of the Issuers or any of their
Restricted Subsidiaries; (d) any Restricted Investment made as a result of the
receipt of non-cash consideration from an Asset Sale that was made in compliance
with Section 4.10; (e) any acquisition of assets solely in exchange for the
<PAGE>
16
issuance of Equity Interests (other than Disqualified Stock) of any of the
Issuers; (f) other Investments by the Issuers or any of their Restricted
Subsidiaries in any Person having an aggregate fair market value (measured as of
the date made and without giving effect to subsequent changes in value), when
taken together with all other Investments made pursuant to this clause (f) that
are at the time outstanding, not to exceed $10.0 million; (g) Investments
arising in connection with Hedging Obligations that are incurred in the ordinary
course of business, for the purpose of fixing or hedging currency, commodity or
interest rate risk (including with respect to any floating rate Indebtedness
that is permitted by the terms of the Indenture to be outstanding) in connection
with the conduct of the business of the Issuers and their Restricted
Subsidiaries; (h) prior to the completion of the Mercom Acquisition, the Mercom
Intercompany Loan; and (i) any Investment existing on the Issue Date and any
amendment, modification, restatement, supplement, extension, renewal, refunding,
replacement, refinancing, in whole or in part, thereof.
"Permitted Investors" means the collective reference to ABRY and its
Control Investment Affiliates, including ABRY III.
"Permitted Liens" means (i) Liens securing Indebtedness under the
Credit Facility or other senior Indebtedness if such Indebtedness was permitted
by the terms of the Indenture to be incurred, (ii) Liens securing Indebtedness
of any Restricted Subsidiary of any of the Issuers if such Indebtedness was
permitted by the terms of the Indenture to be incurred; (iii) Liens securing
Hedging Obligations with respect to Indebtedness permitted by the Indenture to
be incurred; (iv) Liens on property of a Person existing at the time such Person
is merged into or consolidated with any of the Issuers or any of their
Restricted Subsidiaries; provided that such Liens were not created in
contemplation of such merger or consolidation and do not extend to any assets
other than those of the Person merged into or consolidated with such Issuer; (v)
Liens on property existing at the time of acquisition thereof by any of the
Issuers or any of their Restricted Subsidiaries, provided that such Liens were
not created in contemplation of such acquisition and only extend to the property
so acquired; (vi) Liens existing on the Issue Date; (vii) Liens to secure any
Permitted Refinancing Indebtedness incurred to refinance any Indebtedness
secured by any Lien referred to in the foregoing clauses (ii) through (vi), as
the case may be, at the time the original Lien became a Permitted Lien; (viii)
Liens in favor of any of the Issuers or any of their Restricted Subsidiaries;
(ix) Liens incurred in the ordinary course of business of the Issuers or any of
their Restricted Subsidiaries with respect to obligations that do not exceed the
greater of $15.0 million or 5% of Total Assets in the aggregate at any one time
outstanding and that (a) are not incurred in connection with the borrowing of
money or the obtaining of advances or credit (other than trade credit in the
ordinary course of business) and (b) do not in the aggregate materially detract
from the value of the property or materially impair the use thereof in the
operation of business by such Issuer or such Restricted Subsidiary; (x) Liens to
secure the performance of statutory obligations, surety or appeal bonds,
performance bonds, deposits to secure the performance of bids, trade contracts,
government contracts, leases or licenses or other obligations of a like nature
incurred in the ordinary course of business (including, without limitation,
landlord Liens on leased properties); (xi) Liens for taxes, assessments or
governmental charges or claims that are not yet delinquent or that are being
<PAGE>
17
contested in good faith by appropriate proceedings promptly instituted and
diligently prosecuted, provided that any reserve or other appropriate provision
as shall be required to conform with GAAP shall have been made therefor; (xii)
Liens to secure Indebtedness (including Capital Lease Obligations) permitted by
clause (vi) of the second paragraph of Section 4.9 covering only the assets
acquired with such Indebtedness; (xiii) carriers', warehousemen's, mechanics',
landlords', materialmen's, repairmen's or other like Liens arising in the
ordinary course of business in respect of obligations not overdue for a period
in excess of 60 days or which are being contested in good faith by appropriate
proceedings promptly instituted and diligently prosecuted; provided that any
reserve or other appropriate provision as shall be required to conform with GAAP
shall have been made therefor; (xiv) easements, rights-of-way, zoning and
similar restrictions and other similar encumbrances or title defects incurred,
or leases or subleases granted to others, in the ordinary course of business,
which do not in any case materially detract from the value of the Property
subject thereto or do not interfere with or adversely affect in any material
respect the ordinary conduct of the business of the Issuers and their Restricted
Subsidiaries taken as a whole; (xv) Liens in favor of customs and revenue
authorities to secure payment of customs duties in connection with the
importation of goods in the ordinary course of business and other similar Liens
arising in the ordinary course of business; (xvi) leases or subleases granted to
third Persons not materially interfering with the ordinary course of business of
the Issuers or any of their Restricted Subsidiaries; (xvii) Liens (other than
any Lien imposed by ERISA or any rule or regulation promulgated thereunder)
incurred or deposits made in the ordinary course of business in connection with
workers' compensation, unemployment insurance, and other types of social
security; (xviii) deposits made in the ordinary course of business to secure
liability to insurance carriers; (xix) Liens to secure Indebtedness permitted
under Section 4.9; provided, that any such Lien encumbers only the assets so
purchased with the proceeds thereof; (xx) any attachment or judgment Lien not
constituting an Event of Default under clause (vii) of the first paragraph of
Section 6.1; (xxi) any interest or title of a lessor or sublessor under any
operating lease; (xxii) Liens under licensing agreements for use of Intellectual
Property entered into in the ordinary course of business; (xxiii) Liens
encumbering deposits made to secure obligations arising from statutory,
regulatory, contractual, or warranty requirements of any of the Issuers or any
of their Restricted Subsidiaries, including rights of offset and set-off; (xxiv)
bankers' Liens in respect of deposit accounts; (xxv) Liens created under this
Indenture; (xxvi) Liens imposed by law incurred by the Issuers or their
Restricted Subsidiaries in the ordinary course of business; and (xxvii) any
renewal of or substitution for any Lien permitted by clauses (i) through (xxvi),
provided, however, that with respect to Liens incurred pursuant to this clause
(xxvii), the principal amount secured has not increased nor the Liens extended
to any additional property (other than proceeds of the property in question).
"Permitted Refinancing Indebtedness" means any Indebtedness of any of
the Issuers or any of their Restricted Subsidiaries issued in exchange for, or
the net proceeds of which are used to extend, refinance, renew, replace, defease
or refund other Indebtedness of such Issuer or such Restricted Subsidiary (other
than intercompany Indebtedness); provided that either: (A) the principal amount
(or accreted value, if applicable) of such Permitted Refinancing Indebtedness
does not exceed the principal amount of (or accreted value, if applicable), plus
accrued and unpaid interest on, any Indebtedness so extended, refinanced,
renewed, replaced,
<PAGE>
18
defeased or refunded (plus the amount of reasonable fees and expenses incurred
in connection therewith); (B) for Indebtedness other than Indebtedness incurred
pursuant to the Credit Facility, such Permitted Refinancing Indebtedness has a
final maturity date the same as or later than the final maturity date of, and
has a Weighted Average Life to Maturity equal to or greater than the Weighted
Average Life to Maturity of, the Indebtedness being extended, refinanced,
renewed, replaced, defeased or refunded; (C) if the Indebtedness being extended,
refinanced, renewed, replaced, defeased or refunded is subordinated in right of
payment to the Senior Discount Notes, such Permitted Refinancing Indebtedness
has a final maturity date later than the final maturity date of, and is
subordinated in right of payment to, the Senior Discount Notes on terms at least
as favorable to the Holders of Senior Discount Notes as those contained in the
documentation governing the Indebtedness being extended, refinanced, renewed,
replaced, defeased or refunded; and (D) such Indebtedness is incurred either by
the Issuer or the Restricted Subsidiary who is the obligor on the Indebtedness
being extended, refinanced, renewed, replaced, defeased or refunded or by the
parent company of such obligor.
"Person" means any individual, corporation, partnership, limited
liability company, joint venture, association, joint-stock company, trust,
unincorporated organization, Governmental Authority or any other entity.
"Principal" means (i) Permitted Investors and (ii) the members of
management of the Issuers or any of the Subsidiaries of the Issuers as of the
Issue Date, in each case, together with any spouse or immediate family member
(including adoptive children), estate, heirs, executors, personal
representatives and administrators of such Person.
"Private Placement Legend" means the legend set forth in Section
2.6(g)(i) to be placed on all Senior Discount Notes issued under this Indenture
except where otherwise permitted by the provisions of this Indenture.
"QIB" means a "qualified institutional buyer" as defined in Rule
144A.
"Registration Rights Agreement" means the Registration Rights
Agreement, dated as of December 10, 1998, by and among the Issuers and the
Initial Purchasers, as such agreement may be amended, modified or supplemented
from time to time.
"Regulation S" means Regulation S promulgated under the Securities
Act.
"Regulation S Global Note" means a Regulation S Temporary Global Note
or Regulation S Permanent Global Note, as appropriate.
"Regulation S Permanent Global Note" means a permanent global Note in
the form of Exhibit A hereto bearing the Global Note Legend and the Private
Placement Legend and deposited with or on behalf of and registered in the name
of the Depositary or its nominee, issued in a denomination equal to the
outstanding principal amount of the Regulation S Temporary Global Note upon
expiration of the Restricted Period.
<PAGE>
19
"Regulation S Temporary Global Note" means a temporary global Note in
the form of Exhibit A hereto bearing the Private Placement Legend and deposited
with or on behalf of and registered in the name of the Depositary or its
nominee, issued in a denomination equal to the outstanding principal amount of
the Senior Discount Notes initially sold in reliance on Rule 903 of Regulation
S.
"Representative" means the indenture trustee or other trustee, agent
or representative for any Senior Indebtedness.
"Reorganization" means the related series of substantially
simultaneous transactions pursuant to which (i) substantially all the assets of
Avalon Michigan (other than, at the option of Avalon Michigan, the Capital Stock
of Mercom and any Subsidiary of Avalon Michigan organized for purposes of
consummating the Mercom Acquisition) and Mercom (other than, at the option
Avalon Michigan, the Capital Stock of Wholly-Owned Subsidiaries of Mercom) are
transferred to Avalon Michigan LLC; (ii) substantially all of the liabilities of
Avalon Michigan and Mercom (other than liabilities hereunder and, at the option
of Avalon Michigan, intercompany debt) are transferred to Avalon Michigan LLC;
(iii) Michigan Holdings ceases to be an Issuer and together with Avalon Michigan
becomes a guarantor under the Indenture and (iv) certain Indebtedness of Avalon
New England shall be assumed by Avalon Michigan.
"Responsible Officer," when used with respect to the Trustee, means
any officer within the Corporate Trust Office of the Trustee (or any successor
group of the Trustee) or any other officer of the Trustee customarily performing
functions similar to those performed by any of the above designated officers and
also means, with respect to a particular corporate trust matter, any other
officer to whom such matter is referred because of his knowledge of and
familiarity with the particular subject.
"Restricted Definitive Note" means a Definitive Note bearing the
Private Placement Legend.
"Restricted Global Note" means a Global Note bearing the Private
Placement Legend.
"Restricted Investment" means any Investment other than a Permitted
Investment.
"Restricted Period" means the 40-day distribution compliance period as
defined in Regulation S.
"Restricted Subsidiary" of a Person means any Subsidiary of the
referent Person that is not an Unrestricted Subsidiary; provided that, on the
Issue Date, all Subsidiaries of each of the Issuers shall be Restricted
Subsidiaries of each such Issuer.
<PAGE>
20
"Rule 144" means Rule 144 promulgated under the Securities Act.
"Rule 144A" means Rule 144A promulgated under the Securities Act.
"Rule 903" means Rule 903 promulgated under the Securities Act.
"Rule 904" means Rule 904 promulgated under the Securities Act.
"SEC" means the Securities and Exchange Commission.
"Securities Act" means the Securities Act of 1933, as amended.
"Senior Discount Note Guarantee" means the supplemental indenture, in
the form of Exhibit D hereto, executed and delivered to the Trustee pursuant to
which each Guarantor will guarantee payment of the Senior Discount Notes.
"Senior Discount Notes" has the meaning assigned to it in the preamble
to this Indenture.
"Senior Subordinated Notes" means the Senior Subordinated Notes issued
by the Company Issuers, as co-obligors, under an indenture dated as of December
10, 1998 among the Company Issuers and the Bank of New York, as trustee.
"Shelf Registration Statement" means the Shelf Registration Statement
as defined in the Registration Rights Agreement.
"Significant Subsidiary" means any Subsidiary that would be a
"significant subsidiary"as defined in Article 1 Rule 1-02 of Regulation S-X,
promulgated pursuant to the Act, as such Regulation is in effect on the Issue
Date.
"Stated Maturity" means, with respect to any installment of interest
or principal on any series of Indebtedness, the date on which such payment of
interest or principal was scheduled to be paid in the credit agreement or other
original documentation governing such Indebtedness, and shall not include any
contingent obligations to repay, redeem or repurchase any such interest or
principal prior to the date originally scheduled for the payment thereof.
"Strategic Equity Investment" means a cash contribution to the equity
capital of any of the Issuers or a purchase from any such Issuer of common
Equity Interests (other than Disqualified Stock), in either case by or from a
Strategic Equity Investor and for aggregate cash consideration of at least $25.0
million.
"Strategic Equity Investor" means, as of any date, any Person (other
than an Affiliate of any of the Issuers) engaged in a Permitted Business.
<PAGE>
21
"Subsidiary" means, with respect to any Person, (i) any corporation,
association or other business entity of which more than 50% of the total voting
power of shares of Capital Stock entitled (without regard to the occurrence of
any contingency) to vote in the election of directors, managers or trustees
thereof is at the time owned or controlled, directly or indirectly, by such
Person and (ii) any partnership (a) the sole general partner or the managing
general partner of which is such Person or an entity described in clause (i) and
related to such Person or (b) the only general partners of which are such Person
or of one or more entities described in clause (i) and related to such Person
(or any combination thereof).
"TIA" means the Trust Indenture Act of 1939 (15 U.S.C. (S)(S) 77aaa-
77bbbb) as in effect on the date on which this Indenture is qualified under the
TIA.
"Total Assets" means the total combined consolidated assets of the
Issuers and their Restricted Subsidiaries, as shown on the most recent balance
sheets (excluding the footnotes thereto) of the Issuers.
"Total Revenues" means the total combined consolidated revenues of the
Issuers and their Restricted Subsidiaries, as shown on the most recent balance
sheets (excluding the footnotes thereto) of the Issuers.
"Trustee" means the party named as such above until a successor
replaces it in accordance with the applicable provisions of this Indenture and
thereafter means the successor serving hereunder.
"Unrestricted Global Note" means a permanent global Note in the form
of Exhibit A attached hereto that bears the Global Note Legend and that has the
"Schedule of Exchanges of Interests in the Global Note" attached thereto, and
that is deposited with or on behalf of and registered in the name of the
Depositary, representing a series of Senior Discount Notes that does not bear
the Private Placement Legend.
"Unrestricted Definitive Note" means one or more Definitive Notes that
do not bear and are not required to bear the Private Placement Legend.
"Unrestricted Subsidiary" means (i) any Subsidiary that is designated
by the Board of Directors of the applicable Issuer as an Unrestricted Subsidiary
pursuant to a Board Resolution; but only to the extent that such Subsidiary: (a)
has no Indebtedness other than Non-Recourse Debt; (b) is not party to any
agreement, contract, arrangement or understanding with such Issuer or any
Restricted Subsidiary of such Issuer unless the terms of any such agreement,
contract, arrangement or understanding are no less favorable to such Issuer or
such Restricted Subsidiary than those that might be obtained at the time from
Persons who are not Affiliates of such Issuer; (c) is a Person with respect to
which none of the Issuers nor any of their Restricted Subsidiaries has any
direct or indirect obligation (x) to subscribe for additional Equity Interests
or (y) to maintain or preserve such Person's financial condition or to cause
such Person to achieve any specified levels of operating results; and (d) has
not guaranteed or otherwise directly
<PAGE>
22
or indirectly provided credit support for any Indebtedness of the Issuers or any
of their Restricted Subsidiaries. The Board of Directors of the Issuers may at
any time designate any Unrestricted Subsidiary to be a Restricted Subsidiary;
provided that such designation shall be deemed to be an incurrence of
Indebtedness by a Restricted Subsidiary of the Issuers of any outstanding
Indebtedness of such Unrestricted Subsidiary and such designation shall only be
permitted if (i) such Indebtedness is permitted pursuant to Section 4.9,
calculated on a pro forma basis as if such designation had occurred at the
beginning of the reference period, and (ii) no Default or Event of Default would
be in existence following such designation.
For purposes of the applicable Board of Directors making a
determination that a Restricted Subsidiary is an Unrestricted Subsidiary, all
outstanding Investments by each Issuer and its Restricted Subsidiaries (except
to the extent repaid in cash) in the Subsidiary so designated will be deemed to
be Restricted Payments at the time of such designation and will reduce the
amount available for Restricted Payments under the first paragraph of Section
4.7. All such outstanding Investments will be deemed to constitute Investments
in an amount equal to the fair market value of such Investments at the time of
such designation. Such designation will only be permitted if such Restricted
Payment would be permitted at such time and if such Restricted Subsidiary
otherwise meets the requirements contained in the definition of an Unrestricted
Subsidiary.
Any designation of an Unrestricted Subsidiary by the applicable Board
of Directors shall be evidenced to the Trustee by filing with the Trustee a
certified copy of the resolutions of the Board of Directors of the applicable
Issuer giving effect to such designation and an Officers' Certificate of the
applicable Issuer certifying that such designation complied with the terms of
the Indenture governing the designation of Unrestricted Subsidiaries and was
permitted by Section 4.7. If, at any time, any Unrestricted Subsidiary fails to
meet the foregoing requirements as an Unrestricted Subsidiary, it shall
thereafter cease to be an Unrestricted Subsidiary for purposes of the Indenture
and any Indebtedness of such Subsidiary shall be deemed to be incurred by a
Restricted Subsidiary of the applicable Issuer as of such date (and, if such
Indebtedness is not permitted to be incurred as of such date under the covenant
described under Section 4.9 hereof, such Issuer shall be in default of such
covenant).
"U.S. Person" means a U.S. person as defined in Rule 902(k) under the
Securities Act.
"Voting Stock" of any Person as of any date means the Capital Stock of
such Person that is at the time entitled to vote in the election of the Board of
Directors of such Person.
"Weighted Average Life to Maturity" means, when applied to any
Indebtedness at any date, the number of years obtained by dividing (i) the sum
of the products obtained by multiplying (a) the amount of each then remaining
installment, sinking fund, serial maturity or other required payments of
principal, including payment at final maturity, in respect thereof, by (b) the
number of years (calculated to the nearest one-twelfth) that will elapse between
such date
<PAGE>
23
and the making of such payment, by (ii) the then outstanding principal amount of
such Indebtedness.
"Wholly Owned Subsidiary of any Person" means a Restricted Subsidiary
of such Person all of the outstanding Capital Stock and other Equity Interests
of which shall at the time be owned by such Person or by one or more Wholly
Owned Subsidiaries of such Person.
SECTION 1.2 OTHER DEFINITIONS.
<TABLE>
<CAPTION>
Defined in
Term Section
<S> <C>
"Accreted Interest Redemption Amount"..................... 3.10
"Affiliate Transaction"................................... 4.11
"Asset Sale Offer"........................................ 4.10
"Authentication Order".................................... 2.2
"Change of Control Offer"................................. 4.15
"Change of Control Payment"............................... 4.15
"Change of Control Payment Date".......................... 4.15
"Covenant Defeasance"..................................... 8.3
"DTC"..................................................... 2.3
"Event of Default"........................................ 6.1
"Excess Proceeds"......................................... 4.10
"Funding Guarantor"....................................... 10.4
"incur"................................................... 4.9
"Legal Defeasance"........................................ 8.2
"Offer Amount"............................................ 3.9
"Offer Period"............................................ 3.9
"Paying Agent"............................................ 2.3
"Payment Default"......................................... 6.1
"Permitted Debt".......................................... 4.9
"Purchase Date"........................................... 3.9
"Redemption Date"......................................... 3.7
"Registrar"............................................... 2.3
"Restricted Payments"..................................... 4.7
"Successor Guarantor"..................................... 5.2
</TABLE>
SECTION 1.3 INCORPORATION BY REFERENCE OF TRUST INDENTURE ACT.
Whenever this Indenture refers to a provision of the TIA, the
provision is incorporated by reference in and made a part of this Indenture.
The following TIA terms used in this Indenture have the following
meanings:
<PAGE>
24
"indenture securities" means the Senior Discount Notes and the
Senior Discount Note Guarantees;
"indenture security Holder" means a Holder of a Security;
"indenture to be qualified" means this Indenture;
"indenture trustee" or "institutional trustee" means the Trustee;
and
"Obligor" on the indenture securities means the Issuers, the
Guarantors and any successor obligor upon the indenture securities.
All other terms used in this Indenture that are defined by the TIA,
defined by TIA reference to another statute or defined by SEC rule under the TIA
have the meanings so assigned to them.
SECTION 1.4 RULES OF CONSTRUCTION.
Unless the context otherwise requires:
(1) a term has the meaning assigned to it;
(2) an accounting term not otherwise defined has the meaning
assigned to it in accordance with GAAP;
(3) or is not exclusive;
(4) words in the singular include the plural, and in the plural
include the singular;
(5) provisions apply to successive events and transactions; and
(6) references to sections of or rules under the Securities Act
shall be deemed to include substitute, replacement or successor sections or
rules adopted by the SEC from time to time.
SECTION 1.5 ONE CLASS OF SECURITIES.
The Initial Senior Discount Notes, the New Senior Discount Notes and
the Additional Senior Discount Notes, if any, shall vote and consent together on
all matters as one class and none of the Initial Senior Discount Notes, the New
Senior Discount Notes or the
<PAGE>
25
Additional Senior Discount Notes shall have the right to vote or consent as a
separate class on any matter.
ARTICLE 2.
THE SENIOR DISCOUNT NOTES
SECTION 2.1 FORM AND DATING.
(a) General.
The Senior Discount Notes and the Trustee's certificate of
authentication shall be substantially in the forms as in Exhibit A hereto. The
Senior Discount Notes may have notations, legends or endorsements required by
law, stock exchange rule or usage. Each Senior Discount Note shall be dated the
date of its authentication. The Senior Discount Notes shall be in denominations
of $1,000 and integral multiples thereof.
The terms and provisions contained in the Senior Discount Notes
shall constitute, and are hereby expressly made, a part of this Indenture and
the Issuers, any Guarantor and the Trustee, by their execution and delivery of
this Indenture, expressly agree to such terms and provisions and to be bound
thereby. However, to the extent any provision of any Senior Discount Note
conflicts with the express provisions of this Indenture, the provisions of this
Indenture shall govern and be controlling.
(b) Global Notes.
Senior Discount Notes issued in global form shall be substantially
in the form of Exhibit A attached hereto (including the Global Note Legend
thereon and the "Schedule of Exchanges of Interests in the Global Note" attached
thereto). Senior Discount Notes issued in definitive form shall be substantially
in the form of Exhibit A attached hereto (but without the Global Note Legend
thereon and without the "Schedule of Exchanges of Interests in the Global Note"
attached thereto). Each Global Note shall represent such of the outstanding
Senior Discount Notes as shall be specified therein and each shall provide that
it shall represent the aggregate principal amount at maturity of outstanding
Senior Discount Notes from time to time endorsed thereon and that the aggregate
principal amount at maturity of outstanding Senior Discount Notes represented
thereby may from time to time be reduced or increased, as appropriate, to
reflect exchanges and redemptions. Any endorsement of a Global Note to reflect
the amount of any increase or decrease in the aggregate principal amount at
maturity of outstanding Senior Discount Notes represented thereby shall be made
by the Trustee or the Custodian, at the direction of the Issuers, in accordance
with written instructions given by the Holder thereof as required by Section 2.6
hereof.
(c) Temporary Global Notes
<PAGE>
26
Senior Discount Notes offered and sold in reliance on Regulation S
shall be issued initially in the form of the Regulation S Temporary Global Note,
which shall be deposited on behalf of the purchasers of the Senior Discount
Notes represented thereby with the Trustee, at its New York office, as custodian
for the Depositary, and registered in the name of the Depositary or the nominee
of the Depositary for the accounts of designated agents holding on behalf of
Euroclear or Cedel Bank, duly executed by the Issuers and authenticated by the
Trustee as hereinafter provided. The Restricted Period shall be terminated upon
the receipt by the Trustee of (i) a written certificate from the Depositary,
together with copies of certificates from Euroclear and Cedel Bank certifying
that they have received certification of non-United States beneficial ownership
of 100% of the aggregate principal amount at maturity of the Regulation S
Temporary Global Note (except to the extent of any beneficial owners thereof who
acquired an interest therein during the Restricted Period pursuant to another
exemption from registration under the Securities Act and who will take delivery
of a beneficial ownership interest in a 144A Global Note or an IAI Global Note
bearing a Private Placement Legend, all as contemplated by Section 2.6(b)(ii)
hereof), and (ii) an Officers' Certificate from the Issuers. Following the
termination of the Restricted Period, beneficial interests in the Regulation S
Temporary Global Note shall be exchanged for beneficial interests in Regulation
S Permanent Global Notes pursuant to the Applicable Procedures. Simultaneously
with the authentication of Regulation S Permanent Global Notes, the Trustee
shall cancel the Regulation S Temporary Global Note. The aggregate principal
amount at maturity of the Regulation S Temporary Global Note and the Regulation
S Permanent Global Notes may from time to time be increased or decreased by
adjustments made on the records of the Trustee and the Depositary or its
nominee, as the case may be, in connection with transfers of interest as
hereinafter provided.
(d) Euroclear Cedel Procedures Applicable.
The provisions of the "Operating Procedures of the Euroclear System"
and "Terms and Conditions Governing Use of Euroclear" and the "General Terms and
Conditions of Cedel Bank" and "Customer Handbook" of Cedel Bank shall be
applicable to transfers of beneficial interests in the Regulation S Temporary
Global Note and the Regulation S Global Notes that are held by Participants
through Euroclear or Cedel Bank.
SECTION 2.2 EXECUTION AND AUTHENTICATION.
Two Officers shall sign the Senior Discount Notes for each of the
Issuers by manual or facsimile signature. The Issuers' seals, if any, may be
reproduced on the Senior Discount Notes and may be in facsimile form.
If an Officer whose signature is on a Senior Discount Note no longer
holds that office at the time a Senior Discount Note is authenticated, the
Senior Discount Note shall nevertheless be valid.
<PAGE>
27
A Senior Discount Note shall not be valid until authenticated by the
manual signature of the Trustee. The signature shall be conclusive evidence
that the Senior Discount Note has been authenticated under this Indenture.
The Trustee shall, upon a written order of each of the Issuers
signed by two Officers of each Issuer (an "Authentication Order"), (i)
authenticate Senior Discount Notes for original issue up to the aggregate
principal amount at issuance of $110,410,720 (such Senior Discount Notes
authenticated in the aggregate principal amount at maturity of $196,000,000) and
(ii) authenticate Additional Senior Discount Notes for issue up to the aggregate
principal amount at issuance of $50,000,000 (such Senior Discount Notes
authenticated in the aggregate principal amount of maturity as determined at
such time). The aggregate principal amount at issuance of Senior Discount Notes
outstanding at any time may not exceed $160,410,720 except as provided in
Section 2.7 hereof. The Trustee shall also authenticate the Senior Discount
Notes as required by Section 2.6 hereof.
The Trustee may (at the expense of the Issuers) appoint an
authenticating agent acceptable to the Issuers to authenticate Senior Discount
Notes. An authenticating agent may authenticate Senior Discount Notes whenever
the Trustee may do so. Each reference in this Indenture to authentication by
the Trustee includes authentication by such agent. An authenticating agent has
the same rights as an Agent to deal with Holders or an Affiliate of the Issuers
and has the same protections under Article 7 herein.
SECTION 2.3 REGISTRAR AND PAYING AGENT.
The Issuers shall maintain an office or agency where Senior Discount
Notes may be presented for registration of transfer or for exchange
("Registrar") and an office or agency where Senior Discount Notes may be
presented for payment ("Paying Agent"). The Registrar shall keep a register of
the Senior Discount Notes and of their transfer and exchange. The Issuers may
appoint one or more co-registrars and one or more additional paying agents. The
term "Registrar" includes any co-registrar and the term "Paying Agent" includes
any additional paying agent. The Issuers may change any Paying Agent or
Registrar without notice to any Holder. The Issuers shall promptly notify the
Trustee in writing of the name and address of any Agent not a party to this
Indenture. If the Issuers fail to appoint or maintain another entity as
Registrar or Paying Agent, the Trustee shall act as such. The Issuers, any of
their Subsidiaries or any Guarantor may act as Paying Agent or Registrar.
The Issuers initially appoint The Depository Trust Company ("DTC")
to act as Depositary with respect to the Global Notes.
The Issuers initially appoint the Trustee to act as the Registrar
and Paying Agent and to act as Custodian with respect to the Global Notes.
<PAGE>
28
SECTION 2.4 PAYING AGENT TO HOLD MONEY IN TRUST.
The Issuers shall require each Paying Agent other than the Trustee
or the Issuers, any of their Subsidiaries or any Guarantor to agree in writing
that the Paying Agent will hold in trust for the benefit of Holders or the
Trustee all money held by the Paying Agent for the payment of principal, premium
or Liquidated Damages, if any, or interest on the Senior Discount Notes, and
will notify the Trustee in writing of any default by the Issuers in making any
such payment. While any such default continues, the Trustee may require a Paying
Agent to pay all money held by it to the Trustee. The Issuers at any time may
require a Paying Agent to pay all money held by it to the Trustee. Upon payment
over to the Trustee, the Paying Agent shall have no further liability for the
money so paid over. If an Issuer, a Subsidiary or a Guarantor acts as Paying
Agent, it shall segregate and hold in a separate trust funds for the benefit of
the Holders all money held by it as Paying Agent. Upon any bankruptcy or
reorganization proceedings relating to the Issuers, the Trustee shall serve as
Paying Agent for the Senior Discount Notes.
SECTION 2.5 HOLDER LISTS.
The Trustee shall preserve in as current a form as is reasonably
practicable the most recent list available to it of the names and addresses of
all Holders and shall otherwise comply with TIA (S) 312(a). If the Trustee is
not the Registrar, the Issuers shall furnish to the Trustee at least seven
Business Days before each interest payment date and at such other times as the
Trustee may request in writing, a list in such form and as of such date as the
Trustee may reasonably require of the names and addresses of the Holders of
Senior Discount Notes and the Issuers shall otherwise comply with TIA (S)
312(a).
SECTION 2.6 TRANSFER AND EXCHANGE.
(a) Transfer and Exchange of Global Notes.
A Global Note may not be transferred as a whole except by the
Depositary to a nominee of the Depositary, by a nominee of the Depositary to the
Depositary or to another nominee of the Depositary, or by the Depositary or any
such nominee to a successor Depositary or a nominee of such successor
Depositary. All Global Notes will be exchanged by the Issuers for Definitive
Notes if (i) the Issuers deliver to the Trustee written notice from the
Depositary that it is unwilling or unable to continue to act as Depositary or
that it is no longer a clearing agency registered under the Exchange Act and, in
either case, a successor Depositary is not appointed by the Issuers within 120
days after the date of such notice from the Depositary; (ii) the Issuers in
their sole discretion determine that the Global Notes (in whole but not in part)
should be exchanged for Definitive Notes and deliver a written notice to such
effect to the Trustee or (iii) there shall have occurred and be continuing a
Default or Event of Default with respect to the Senior Discount Notes; provided
that in no event shall the Regulation S Temporary Global Note be exchanged by
the Issuers for Definitive Notes prior to (x) the expiration of the Restricted
Period and (y) the receipt by the Registrar of any certificates required
pursuant to Rule 903(b)(3)(ii)(B) under the Securities Act. Upon the occurrence
of either of the preceding events
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in (i) or (ii) above, Definitive Notes shall be issued in such names as the
Depositary shall instruct the Trustee in writing. Global Notes also may be
exchanged or replaced, in whole or in part, as provided in Sections 2.7 and 2.10
hereof. Every Senior Discount Note authenticated and delivered in exchange for,
or in lieu of, a Global Note or any portion thereof, pursuant to this Section
2.6 or Section 2.7 or 2.10 hereof, shall be authenticated and delivered in the
form of, and shall be, a Global Note. A Global Note may not be exchanged for
another Senior Discount Note other than as provided in this Section 2.6(a),
however, beneficial interests in a Global Note may be transferred and exchanged
as provided in Section 2.6(b),(c) or (f) hereof.
(b) Transfer and Exchange of Beneficial Interests in the Global Notes.
The transfer and exchange of beneficial interests in the Global Notes
shall be effected through the Depositary, in accordance with the provisions of
this Indenture and the Applicable Procedures. Beneficial interests in the
Restricted Global Notes shall be subject to restrictions on transfer comparable
to those set forth herein to the extent required by the Securities Act.
Transfers of beneficial interests in the Global Notes also shall require
compliance with either subparagraph (i) or (ii) below, as applicable, as well as
one or more of the other following subparagraphs, as applicable:
(i) Transfer of Beneficial Interests in the Same Global Note.
Beneficial interests in any Restricted Global Note may be transferred to
Persons who take delivery thereof in the form of a beneficial interest in
the same Restricted Global Note in accordance with the transfer
restrictions set forth in the Private Placement Legend; provided, however,
that prior to the expiration of the Restricted Period, transfers of
beneficial interests in the Temporary Regulation S Global Note may not be
made to a U.S. Person or for the account or benefit of a U.S. Person (other
than an Initial Purchaser). Beneficial interests in any Unrestricted Global
Note may be transferred to Persons who take delivery thereof in the form of
a beneficial interest in an Unrestricted Global Note. No written orders or
instructions shall be required to be delivered to the Registrar to effect
the transfers described in this Section 2.6(b)(i).
(ii) All Other Transfers and Exchanges of Beneficial Interests in
Global Notes. In connection with all transfers and exchanges of beneficial
interests that are not subject to Section 2.6(b)(i) above, the transferor
of such beneficial interest must deliver to the Registrar either (A) (1) a
written order from a Participant or an Indirect Participant given to the
Depositary in accordance with the Applicable Procedures directing the
Depositary to credit or cause to be credited a beneficial interest in
another Global Note in an amount equal to the beneficial interest to be
transferred or exchanged and (2) written instructions given in accordance
with the Applicable Procedures containing information regarding the
Participant account to be credited with such increase or (B) (1) a written
order from a Participant or an Indirect Participant given to the Depositary
in accordance with the Applicable Procedures directing the Depositary to
cause to be issued a Definitive Note in an amount equal to the beneficial
interest to be transferred or exchanged and (2) instructions given by the
Depositary to the Registrar containing information regarding the
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30
Person in whose name such Definitive Note shall be registered to effect the
transfer or exchange referred to in (1) above; provided that in no event
shall Definitive Notes be issued upon the transfer or exchange of
beneficial interests in the Regulation S Temporary Global Note prior to (x)
the expiration of the Restricted Period and (y) the receipt by the
Registrar of any certificates required pursuant to Rule 903 under the
Securities Act. Upon consummation of an Exchange Offer by the Issuers and
any Guarantors in accordance with Section 2.6(f) hereof, the requirements
of this Section 2.6(b)(ii) shall be deemed to have been satisfied upon
receipt by the Registrar of the instructions contained in the Letter of
Transmittal delivered by the Holder of such beneficial interests in the
Restricted Global Notes. Upon satisfaction of all of the requirements for
transfer or exchange of beneficial interests in Global Notes contained in
this Indenture and the Senior Discount Notes or otherwise applicable under
the Securities Act, the Trustee shall adjust the principal amount of the
relevant Global Note(s) pursuant to Section 2.6(h) hereof.
(iii) Transfer of Beneficial Interests to Another Restricted Global
Note. A beneficial interest in any Restricted Global Note may be
transferred to a Person who takes delivery thereof in the form of a
beneficial interest in another Restricted Global Note if the transfer
complies with the requirements of Section 2.6(b)(ii) above and the
Registrar receives the following:
(A) if the transferee will take delivery in the form of a
beneficial interest in the 144A Global Note, then the transferor must
deliver a certificate in the form of Exhibit B hereto, including the
certifications in item (1) thereof;
(B) if the transferee will take delivery in the form of a
beneficial interest in the Regulation S Temporary Global Note or the
Regulation S Global Note, then the transferor must deliver a
certificate in the form of Exhibit B hereto, including the
certifications in item (2) thereof; and
(C) if the transferee will take delivery in the form of a
beneficial interest in the IAI Global Note, then the transferor must
deliver a certificate in the form of Exhibit B hereto, including the
certifications and certificates and Opinion of Counsel required by
item (3) thereof, if applicable.
(iv) Transfer and Exchange of Beneficial Interests in a Restricted
Global Note for Beneficial Interests in the Unrestricted Global Note. A
beneficial interest in any Restricted Global Note may be exchanged by any
holder thereof for a beneficial interest in an Unrestricted Global Note or
transferred to a Person who takes delivery thereof in the form of a
beneficial interest in an Unrestricted Global Note if the exchange or
transfer complies with the requirements of Section 2.6(b)(ii) above and:
(A) such exchange or transfer is effected pursuant to the
Exchange Offer in accordance with the Registration Rights Agreement
and the holder of the
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31
beneficial interest to be transferred, in the case of an exchange, or
the transferee, in the case of a transfer, certifies in the applicable
Letter of Transmittal that it is not (1) a Broker-Dealer, (2) a Person
participating in the distribution of the New Senior Discount Notes or
(3) a Person who is an affiliate (as defined in Rule 144) of the
Issuers;
(B) such transfer is effected pursuant to the Shelf Registration
Statement in accordance with the Registration Rights Agreement;
(C) such transfer is effected by a Broker-Dealer pursuant to the
Exchange Offer Registration Statement in accordance with the
Registration Rights Agreement; or
(D) the Registrar receives the following:
(1) if the holder of such beneficial interest in a
Restricted Global Note proposes to exchange such beneficial
interest for a beneficial interest in an Unrestricted Global
Note, a certificate from such holder in the form of Exhibit C
hereto, including the certifications in item (1)(a) thereof; or
(2) if the holder of such beneficial interest in a
Restricted Global Note proposes to transfer such beneficial
interest to a Person who shall take delivery thereof in the form
of a beneficial interest in an Unrestricted Global Note, a
certificate from such holder in the form of Exhibit B hereto,
including the certifications in item (4) thereof;
and, in each such case set forth in this subparagraph (D), if the Registrar
so requests or if the Applicable Procedures so require, an Opinion of
Counsel to the effect that such exchange or transfer is in compliance with
the Securities Act and that the restrictions on transfer contained herein
and in the Private Placement Legend are no longer required in order to
maintain compliance with the Securities Act.
If any such transfer is effected pursuant to subparagraph (B) or (D)
above at a time when an Unrestricted Global Note has not yet been issued, the
Issuers shall issue and, upon receipt of an Authentication Order in accordance
with Section 2.2 hereof, the Trustee shall authenticate one or more Unrestricted
Global Notes in an aggregate principal amount at maturity equal to the aggregate
principal amount of beneficial interests transferred pursuant to subparagraph
(B) or (D) above.
Beneficial interests in an Unrestricted Global Note cannot be
exchanged for, or transferred to Persons who take delivery thereof in the form
of, a beneficial interest in a Restricted Global Note.
(c)Transfer or Exchange of Beneficial Interests for Definitive Notes.
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32
(i) Beneficial Interests in Restricted Global Notes to Restricted
Definitive Notes. If any holder of a beneficial interest in a Restricted
Global Note proposes to exchange such beneficial interest for a Restricted
Definitive Note or to transfer such beneficial interest to a Person who
takes delivery thereof in the form of a Restricted Definitive Note, then,
upon receipt by the Registrar of the following documentation:
(A) if the holder of such beneficial interest in a Restricted
Global Note proposes to exchange such beneficial interest for a
Restricted Definitive Note, a certificate from such holder in the form
of Exhibit C hereto, including the certifications in item (2)(a)
thereof;
(B) if such beneficial interest is being transferred to a QIB in
accordance with Rule 144A under the Securities Act, a certificate to
the effect set forth in Exhibit B hereto, including the certifications
in item (1) thereof;
(C) if such beneficial interest is being transferred to a Non-
U.S. Person in an offshore transaction in accordance with Rule 903 or
Rule 904 under the Securities Act, a certificate to the effect set
forth in Exhibit B hereto, including the certifications in item (2)
thereof;
(D) if such beneficial interest is being transferred pursuant to
an exemption from the registration requirements of the Securities Act
in accordance with Rule 144 under the Securities Act, a certificate to
the effect set forth in Exhibit B hereto, including the certifications
in item (3)(a) thereof;
(E) if such beneficial interest is being transferred to the
Issuers or any of their Subsidiaries, a certificate to the effect set
forth in Exhibit B hereto, including the certifications in item (3)(b)
thereof; or
(F) if such beneficial interest is being transferred pursuant to
an effective registration statement under the Securities Act, a
certificate to the effect set forth in Exhibit B hereto, including the
certifications in item (3)(c) thereof,
the Trustee shall cause the aggregate principal amount at maturity of the
applicable Global Note to be reduced accordingly pursuant to Section 2.6(h)
hereof, and the Issuers shall execute and the Trustee shall upon receipt by
a Responsible Officer of an Authentication Order authenticate and deliver
to the Person designated in the instructions a Definitive Note in the
appropriate principal amount. Any Definitive Note issued in exchange for a
beneficial interest in a Restricted Global Note pursuant to this Section
2.6(c) shall be registered in such name or names and in such authorized
denomination or denominations as the holder of such beneficial interest
shall instruct the Registrar in writing through instructions from the
Depositary and the Participant or Indirect Participant. The Trustee shall
(at the expense of the Issuers) deliver such Definitive Notes to the
Persons in whose names such Senior Discount Notes are so registered. Any
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33
Definitive Notes issued in exchange for a beneficial interest in a
Restricted Global Note pursuant to this Section 2.6(c)(i) shall bear the
Private Placement Legend and shall be subject to all restrictions on
transfer contained therein.
(ii) Notwithstanding Sections 2.6(c)(i)(A) and (C) hereof, a
beneficial interest in the Regulation S Temporary Global Note may not be
exchanged for a Definitive Note or transferred to a Person who takes
delivery thereof in the form of a Definitive Note prior to (x) the
expiration of the Restricted Period and (y) the receipt by the Registrar of
any certificates required pursuant to Rule 903(b)(3)(ii)(B) under the
Securities Act, except in the case of a transfer pursuant to an exemption
from the registration requirements of the Securities Act other than Rule
903 or Rule 904.
(iii) Beneficial Interests in Restricted Global Notes to Unrestricted
Definitive Notes. A holder of a beneficial interest in a Restricted Global
Note may exchange such beneficial interest for an Unrestricted Definitive
Note or may transfer such beneficial interest to a Person who takes
delivery thereof in the form of an Unrestricted Definitive Note only if:
(A) such exchange or transfer is effected pursuant to the
Exchange Offer in accordance with the Registration Rights Agreement
and the holder of such beneficial interest, in the case of an
exchange, or the transferee, in the case of a transfer, certifies in
the applicable Letter of Transmittal that it is not (1) a Broker-
Dealer, (2) a Person participating in the distribution of the New
Senior Discount Notes or (3) a Person who is an affiliate (as defined
in Rule 144) of the Issuers;
(B) such transfer is effected pursuant to the Shelf
Registration Statement in accordance with the Registration Rights
Agreement;
(C) such transfer is effected by a Broker-Dealer pursuant to
the Exchange Offer Registration Statement in accordance with the
Registration Rights Agreement; or
(D) the Registrar receives the following:
(1) if the holder of such beneficial interest in a
Restricted Global Note proposes to exchange such beneficial
interest for a Definitive Note that does not bear the Private
Placement Legend, a certificate from such holder in the form of
Exhibit C hereto, including the certifications in item (1)(b)
thereof; or
(2) if the holder of such beneficial interest in a
Restricted Global Note proposes to transfer such beneficial
interest to a Person who shall take delivery thereof in the form
of a Definitive Note that does not bear the
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34
Private Placement Legend, a certificate from such holder in the
form of Exhibit B hereto, including the certifications in item
(4) thereof,
and, in each such case set forth in this subparagraph (D), if the
Registrar so requests or if the Applicable Procedures so require, an
Opinion of Counsel in form reasonably acceptable to the Registrar to
the effect that such exchange or transfer is in compliance with the
Securities Act and that the restrictions on transfer contained herein
and in the Private Placement Legend are no longer required in order to
maintain compliance with the Securities Act.
(iv) Beneficial Interests in Unrestricted Global Notes to Unrestricted
Definitive Notes. If any holder of a beneficial interest in an Unrestricted
Global Note proposes to exchange such beneficial interest for a Definitive
Note or to transfer such beneficial interest to a Person who takes delivery
thereof in the form of a Definitive Note, then, upon satisfaction of the
conditions set forth in Section 2.6(b)(ii) hereof, the Trustee shall cause
the aggregate principal amount at maturity of the applicable Global Note to
be reduced accordingly pursuant to Section 2.6(h) hereof, and the Issuers
shall execute and the Trustee shall upon receipt of an Authentication Order
authenticate and (at the expense of the Issuers) deliver to the Person
designated in the instructions a Definitive Note in the appropriate
principal amount. Any Definitive Note issued in exchange for a beneficial
interest pursuant to this Section 2.6(c)(iv) shall be registered in such
name or names and in such authorized denomination or denominations as the
holder of such beneficial interest shall instruct the Registrar through
instructions from the Depositary and the Participant or Indirect
Participant. The Trustee shall (at the expense of the Issuers) deliver such
Definitive Notes to the Persons in whose names such Senior Discount Notes
are so registered. Any Definitive Note issued in exchange for a beneficial
interest pursuant to this Section 2.6(c)(iv) shall not bear the Private
Placement Legend.
(d) Transfer and Exchange of Definitive Notes for Beneficial
Interests.
(i) Restricted Definitive Notes to Beneficial Interests in Restricted
Global Notes. If any Holder of a Restricted Definitive Note proposes to
exchange such Senior Discount Note for a beneficial interest in a
Restricted Global Note or to transfer such Restricted Definitive Note to a
Person who takes delivery thereof in the form of a beneficial interest in a
Restricted Global Note, then, upon receipt by the Registrar of the
following documentation:
(A) if the Holder of such Restricted Definitive Note proposes to
exchange such Senior Discount Note for a beneficial interest in a
Restricted Global Note, a certificate from such Holder in the form of
Exhibit C hereto, including the certifications in item (2)(b) thereof;
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35
(B) if such Restricted Definitive Note is being transferred to a
QIB in accordance with Rule 144A under the Securities Act, a
certificate to the effect set forth in Exhibit B hereto, including the
certifications in item (1) thereof;
(C) if such Restricted Definitive Note is being transferred to a
Non-U.S. Person in an offshore transaction in accordance with Rule 903
or Rule 904 under the Securities Act, a certificate to the effect set
forth in Exhibit B hereto, including the certifications in item (2)
thereof;
(D) if such Restricted Definitive Note is being transferred
pursuant to an exemption from the registration requirements of the
Securities Act in accordance with Rule 144 under the Securities Act, a
certificate to the effect set forth in Exhibit B hereto, including the
certifications in item (3)(a) thereof;
(E) if such Restricted Definitive Note is being transferred to
an institutional accredited investor in reliance on an exemption from
the registration requirements of the Securities Act other than those
listed in subparagraphs (B) through (D) above, a certificate to the
effect set forth in Exhibit B hereto, including the certifications,
certificates and Opinion of Counsel required by item (3)(d) thereof,
if applicable;
(F) if such Restricted Definitive Note is being transferred to
the Issuers or any of their Subsidiaries, a certificate to the effect
set forth in Exhibit B hereto, including the certifications in item
(3)(b) thereof; or
(G) if such Restricted Definitive Note is being transferred
pursuant to an effective registration statement under the Securities
Act, a certificate to the effect set forth in Exhibit B hereto,
including the certifications in item (3)(c) thereof,
the Trustee shall cancel the Restricted Definitive Note, increase or cause
to be increased the aggregate principal amount at maturity of, in the case
of clause (A) above, the appropriate Restricted Global Notes, in the case
of clause (B) above, the 144A Global Notes, and in the case of clause (C)
above, the Regulation S Global Note, and in all other cases if applicable,
the IAI Global Note.
(ii) Restricted Definitive Notes to Beneficial Interests in
Unrestricted Global Notes. A Holder of a Restricted Definitive Note may
exchange such Senior Discount Note for a beneficial interest in an
Unrestricted Global Note or transfer such Restricted Definitive Note to a
Person who takes delivery thereof in the form of a beneficial interest in
an Unrestricted Global Note only if:
(A) such exchange or transfer is effected pursuant to the
Exchange Offer in accordance with the Registration Rights Agreement
and the Holder, in the
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36
case of an exchange, or the transferee, in the case of a transfer,
certifies in the applicable Letter of Transmittal that it is not (1) a
Broker-Dealer, (2) a Person participating in the distribution of the
New Senior Discount Notes or (3) a Person who is an affiliate (as
defined in Rule 144) of the Issuers;
(B) such transfer is effected pursuant to the Shelf Registration
Statement in accordance with the Registration Rights Agreement;
(C) such transfer is effected by a Broker-Dealer pursuant to the
Exchange Offer Registration Statement in accordance with the
Registration Rights Agreement; or
(D) the Registrar receives the following:
(1) if the Holder of such Definitive Note proposes to
exchange such Senior Discount Note for a beneficial interest in
the Unrestricted Global Note, a certificate from such Holder in
the form of Exhibit C hereto, including the certifications in
item (1)(c) thereof; or
(2) if the Holder of such Definitive Note proposes to
transfer such Senior Discount Note to a Person who shall take
delivery thereof in the form of a beneficial interest in the
Unrestricted Global Note, a certificate from such Holder in the
form of Exhibit B hereto, including the certifications in item
(4) thereof;
and, in each such case set forth in this subparagraph (D), if the
Registrar so requests or if the Applicable Procedures so require, an
Opinion of Counsel to the effect that such exchange or transfer is in
compliance with the Securities Act and that the restrictions on
transfer contained herein and in the Private Placement Legend are no
longer required in order to maintain compliance with the Securities
Act.
Upon satisfaction of the conditions of any of the subparagraphs in
this Section 2.6(d)(ii), the Trustee shall cancel the Definitive Notes
and increase or cause to be increased the aggregate principal amount
at maturity of the Unrestricted Global Note.
(iii) Unrestricted Definitive Notes to Beneficial Interests in
Unrestricted Global Notes. A Holder of an Unrestricted Definitive Note may
exchange such Note for a beneficial interest in an Unrestricted Global Note
or transfer such Definitive Note to a Person who takes delivery thereof in
the form of a beneficial interest in an Unrestricted Global Note at any
time. Upon receipt of a written request for such an exchange or transfer,
the Trustee shall cancel the applicable Unrestricted Definitive Note and
increase
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37
or cause to be increased the aggregate principal amount at maturity of one
of the Unrestricted Global Note.
If any such exchange or transfer from a Definitive Note to a
beneficial interest is effected pursuant to subparagraphs (ii)(B), (ii)(D) or
(iii) above at a time when an Unrestricted Global Note has not yet been issued,
the Issuers shall issue and, upon receipt of an Authentication Order in
accordance with Section 2.2 hereof, the Trustee shall authenticate one or more
Unrestricted Global Notes in an aggregate principal amount at maturity equal to
the principal amount of Definitive Notes so transferred.
(e) Transfer and Exchange of Definitive Notes for Definitive Notes.
Upon request by a Holder of Definitive Notes and such Holder's
compliance with the provisions of this Section 2.6(e), the Registrar shall
register the transfer or exchange of Definitive Notes. Prior to such
registration of transfer or exchange, the requesting Holder shall present or
surrender to the Registrar the Definitive Notes duly endorsed or accompanied by
a written instruction of transfer duly executed by such Holder or by his
attorney, duly authorized in writing. In addition, the requesting Holder shall
provide any additional certifications, documents and information, as applicable,
required pursuant to the following provisions of this Section 2.6(e).
(i) Restricted Definitive Notes to Restricted Definitive Notes. Any
Restricted Definitive Notes may be transferred to and registered in the
name of Persons who take delivery thereof in the form of a Restricted
Definitive Notes if the Registrar receives the following:
(A) if the transfer will be made pursuant to Rule 144A under the
Securities Act, then the transferor must deliver a certificate in the
form of Exhibit B hereto, including the certifications in item (1)
thereof;
(B) if the transfer will be made pursuant to Rule 903 or Rule
904, then the transferor must deliver a certificate in the form of
Exhibit B hereto, including the certifications in item (2) thereof;
and
(C) if the transfer will be made pursuant to any other exemption
from the registration requirements of the Securities Act, then the
transferor must deliver a certificate in the form of Exhibit B hereto,
including the certifications, certificates and Opinion of Counsel
required by item (3) thereof, if applicable.
(ii) Restricted Definitive Notes to Unrestricted Definitive Notes. Any
Restricted Definitive Note may be exchanged by the Holder thereof for an
Unrestricted Definitive Note or transferred to a Person or Persons who take
delivery thereof in the form of an Unrestricted Definitive Note if:
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38
(A) such exchange or transfer is effected pursuant to the
Exchange Offer in accordance with the Registration Rights Agreement
and the Holder, in the case of an exchange, or the transferee, in the
case of a transfer, certifies in the applicable Letter of Transmittal
that it is not (1) a Broker-Dealer, (2) a Person participating in the
distribution of the New Senior Discount Notes or (3) a Person who is
an affiliate (as defined in Rule 144) of the Issuers;
(B) any such transfer is effected pursuant to the Shelf
Registration Statement in accordance with the Registration Rights
Agreement;
(C) any such transfer is effected by a Broker-Dealer pursuant
to the Exchange Offer Registration Statement in accordance with the
Registration Rights Agreement; or
(D) the Registrar receives the following:
(1) if the Holder of such Restricted Definitive Note
proposes to exchange such Senior Discount Note for an
Unrestricted Definitive Note, a certificate from such Holder in
the form of Exhibit C hereto, including the certifications in
item (1)(d) thereof; or
(2) if the Holder of such Restricted Definitive Note
proposes to transfer such Senior Discount Note to a Person who
shall take delivery thereof in the form of an Unrestricted
Definitive Note, a certificate from such Holder in the form of
Exhibit B hereto, including the certifications in item (4)
thereof;
and, in each such case set forth in this subparagraph (D), an Opinion
of Counsel to the effect that such exchange or transfer is in
compliance with the Securities Act and that the restrictions on
transfer contained herein and in the Private Placement Legend are no
longer required in order to maintain compliance with the Securities
Act.
(iii) Unrestricted Definitive Notes to Unrestricted Definitive Notes.
A Holder of Unrestricted Definitive Note may transfer such Senior Discount
Note to a Person who takes delivery thereof in the form of an Unrestricted
Definitive Note. Upon receipt of a request to register such a transfer,
the Registrar shall register the Unrestricted Definitive Note pursuant to
the instructions from the Holder thereof.
(f) Exchange Offer.
Upon the occurrence of the Exchange Offer in accordance with the
Registration Rights Agreement, the Issuers shall issue and, upon receipt of an
Authentication Order in accordance with Section 2.2, the Trustee shall
authenticate (i) one or more Unrestricted Global
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39
Notes in an aggregate principal amount at maturity equal to the principal amount
of the beneficial interests in the Restricted Global Notes tendered for
acceptance by Persons that certify in the applicable Letters of Transmittal that
(x) they are not Broker-Dealers, (y) they are not participating in a
distribution of the New Senior Discount Notes and (z) they are not affiliates
(as defined in Rule 144) of the Issuers, and accepted for exchange in the
Exchange Offer and (ii) Definitive Notes in an aggregate principal amount at
maturity equal to the principal amount of the Restricted Definitive Notes
accepted for exchange in the Exchange Offer. Concurrently with the issuance of
such Senior Discount Notes, the Trustee shall cause the aggregate principal
amount at maturity of the applicable Restricted Global Notes to be reduced
accordingly, and the Issuers shall execute and the Trustee shall authenticate
and (at the expense of the Issuers) deliver to the Persons designated by the
Holders of Definitive Notes so accepted Definitive Notes in the appropriate
principal amount.
(g) Legends.
The following legends shall appear on the face of all Global Notes and
Definitive Notes issued under this Indenture unless specifically stated
otherwise in the applicable provisions of this Indenture.
(i) Private Placement Legend.
(A) Except as permitted by subparagraph (B) below, each Global Note
and each Definitive Note (and all Senior Discount Notes issued in exchange
therefor or substitution thereof) shall bear the legend in substantially the
following form:
"THE SECURITY (OR ITS PREDECESSOR) EVIDENCED HEREBY WAS ORIGINALLY ISSUED
IN A TRANSACTION EXEMPT FROM REGISTRATION UNDER SECTION 5 OF THE UNITED
STATES SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), AND THE
SECURITY EVIDENCED HEREBY MAY NOT BE OFFERED, SOLD OR OTHERWISE TRANSFERRED
IN THE ABSENCE OF SUCH REGISTRATION OR AN APPLICABLE EXEMPTION THEREFROM.
EACH PURCHASER OF THE SECURITY EVIDENCED HEREBY IS HEREBY NOTIFIED THAT THE
SELLER MAY BE RELYING ON THE EXEMPTION FROM THE PROVISION OF SECTION 5 OF
THE SECURITIES ACT PROVIDED BY RULE 144A THEREUNDER. THE HOLDER OF THE
SECURITY EVIDENCED HEREBY AGREES FOR THE BENEFIT OF THE ISSUERS THAT (A)
SUCH SECURITY MAY BE RESOLD, PLEDGED OR OTHERWISE TRANSFERRED, ONLY (I) (a)
TO A PERSON WHO THE SELLER REASONABLY BELIEVES IS A QUALIFIED INSTITUTIONAL
BUYER (AS DEFINED IN RULE 144A OF THE SECURITIES ACT) IN A TRANSACTION
MEETING THE REQUIREMENTS OF RULE 144A, (b) IN A TRANSACTION MEETING THE
REQUIREMENTS OF RULE 144 UNDER THE SECURITIES ACT, (c) OUTSIDE THE UNITED
STATES TO A FOREIGN PERSON IN A TRANSACTION MEETING THE REQUIREMENTS OF
RULE 903 OR 904 UNDER THE SECURITIES ACT OR
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40
(d) IN ACCORDANCE WITH ANOTHER EXEMPTION FROM THE REGISTRATION REQUIREMENTS
OF THE SECURITIES ACT (AND BASED UPON AN OPINION OF COUNSEL IF THE ISSUERS
SO REQUEST), (2) TO EITHER ISSUER OR (3) PURSUANT TO AN EFFECTIVE
REGISTRATION STATEMENT AND, IN EACH CASE, IN ACCORDANCE WITH ANY APPLICABLE
SECURITIES LAWS OF ANY STATE OF THE UNITED STATES OR ANY OTHER APPLICABLE
JURISDICTION AND (B) THE HOLDER WILL, AND EACH SUBSEQUENT HOLDER IS
REQUIRED TO, NOTIFY ANY PURCHASER FROM IT OF THE SECURITY EVIDENCED HEREBY
OF THE RESALE RESTRICTIONS SET FORTH IN (A) ABOVE."
(B) Notwithstanding the foregoing, any Global Note or Definitive
Note issued pursuant to subparagraphs (b)(iv), (c)(iii), (c)(iv), (d)(ii),
(d)(iii), (e)(ii), (e)(iii) or (f) to this Section 2.6 (and all Senior Discount
Notes issued in exchange therefor or substitution thereof) shall not bear the
Private Placement Legend .
(ii) Global Note Legend. Each Global Note shall bear a legend in
substantially the following form:
"THIS GLOBAL NOTE IS HELD BY THE DEPOSITARY (AS DEFINED IN THE INDENTURE
GOVERNING THIS NOTE) OR ITS NOMINEE IN CUSTODY FOR THE BENEFIT OF THE
BENEFICIAL OWNERS HEREOF, AND IS NOT TRANSFERABLE TO ANY PERSON UNDER ANY
CIRCUMSTANCES EXCEPT THAT (I) THE TRUSTEE MAY MAKE SUCH NOTATIONS HEREON AS
MAY BE REQUIRED PURSUANT TO SECTION 2.7 OF THE INDENTURE, (II) THIS GLOBAL
NOTE MAY BE EXCHANGED IN WHOLE BUT NOT IN PART PURSUANT TO SECTION 2.6(a)
OF THE INDENTURE, (III) THIS GLOBAL NOTE MAY BE DELIVERED TO THE TRUSTEE
FOR CANCELLATION PURSUANT TO SECTION 2.11 OF THE INDENTURE AND (IV) THIS
GLOBAL NOTE MAY BE TRANSFERRED TO A SUCCESSOR DEPOSITARY WITH THE PRIOR
WRITTEN CONSENT OF THE ISSUERS."
(iii) Regulation S Temporary Global Note Legend. The Regulation S
Temporary Global Note shall bear a legend in substantially the following form:
"THE RIGHTS ATTACHING TO THIS REGULATION S TEMPORARY GLOBAL NOTE, AND THE
CONDITIONS AND PROCEDURES GOVERNING ITS EXCHANGE FOR CERTIFICATED NOTES,
ARE AS SPECIFIED IN THE INDENTURE (AS DEFINED HEREIN). NEITHER THE HOLDER
NOR THE BENEFICIAL OWNERS OF THIS REGULATION S TEMPORARY GLOBAL NOTE SHALL
BE ENTITLED TO RECEIVE PAYMENT OF INTEREST HEREON."
<PAGE>
41
(iv) Original Issue Discount Legend. Each Global Note and each
Definitive Note (and all Senior Discount Notes issued in exchange therefor or
substitution thereof) shall bear the legend in substantially the following form:
"THIS NOTE WAS ISSUED WITH ORIGINAL ISSUE DISCOUNT, FOR PURPOSES OF
SECTIONS 1272, 1273 AND 1275 OF THE UNITED STATES INTERNAL REVENUE CODE OF
1986, AS AMENDED, THE ISSUE PRICE OF THIS NOTE IS 56.332% OF ITS PRINCIPAL
AMOUNT AT MATURITY, THE AMOUNT OF ORIGINAL ISSUE DISCOUNT IS $436.68 PER
$1,000 OF PRINCIPAL AMOUNT AT MATURITY, THE ISSUE DATE IS DECEMBER 10, 1998
AND THE YIELD TO MATURITY IS 11 7/8%."
(h) Cancellation and/or Adjustment of Global Notes.
At such time as all beneficial interests in a particular Global Note
have been exchanged for Definitive Notes or a particular Global Note has been
redeemed, repurchased or canceled in whole and not in part, each such Global
Note shall be returned to or retained and canceled by the Trustee in accordance
with Section 2.11 hereof. At any time prior to such cancellation, if any
beneficial interest in a Global Note is exchanged for or transferred to a Person
who will take delivery thereof in the form of a beneficial interest in another
Global Note or for Definitive Notes, the principal amount of Senior Discount
Notes represented by such Global Note shall be reduced accordingly and an
endorsement shall be made on such Global Note by the Trustee or by the
Depositary at the direction of the Trustee to reflect such reduction; and if the
beneficial interest is being exchanged for or transferred to a Person who will
take delivery thereof in the form of a beneficial interest in another Global
Note, such other Global Note shall be increased accordingly and an endorsement
shall be made on such Global Note by the Trustee or by the Depositary at the
direction of the Trustee to reflect such increase.
(i) General Provisions Relating to Transfers and Exchanges.
(i) To permit registrations of transfers and exchanges, the Issuers
shall execute and the Trustee shall authenticate Global Notes and
Definitive Notes upon receipt of an Authentication Order in accordance with
Section 2.2 hereof or upon receipt of a written request of the Registrar.
(ii) No service charge shall be made to a holder of a beneficial
interest in a Global Note or to a Holder of a Definitive Note for any
registration of transfer or exchange, but the Issuers may require payment
of a sum sufficient to cover any transfer tax or similar governmental
charge payable in connection therewith (other than any such transfer taxes
or similar governmental charge payable upon exchange or transfer pursuant
to Sections 2.10, 3.6, 3.9, 4.10, 4.15 and 9.5 hereof).
<PAGE>
42
(iii) All Global Notes and Definitive Notes issued upon any
registration of transfer or exchange of Global Notes or Definitive Notes
shall be the legal, valid and binding obligations of the Issuers,
evidencing the same debt, and entitled to the same benefits under this
Indenture, as the Global Notes or Definitive Notes surrendered upon such
registration of transfer or exchange.
(iv) Neither the Issuers nor the Registrar, as applicable, shall be
required (A) to issue, to register the transfer of or to exchange any
Senior Discount Notes during a period beginning at the opening of business
15 days before the day of any selection of Senior Discount Notes for
redemption under Section 3.2 hereof and ending at the close of business on
the day of selection, (B) to register the transfer of or to exchange any
Senior Discount Note so selected for redemption in whole or in part, except
the unredeemed portion of any Senior Discount Note being redeemed in part
or (C) to register the transfer of or to exchange a Senior Discount Note
between a record date and the next succeeding interest payment date.
(v) Prior to due presentment for the registration of a transfer of
any Senior Discount Note, the Trustee, any Agent and the Issuers may deem
and treat the Person in whose name any Senior Discount Note is registered
as the absolute owner of such Note for the purpose of receiving payment of
principal of and interest on such Senior Discount Notes and for all other
purposes, and none of the Trustee, any Agent or the Issuers shall be
affected by notice to the contrary.
(vi) The Trustee shall authenticate Global Notes and Definitive
Notes in accordance with the provisions of Section 2.2 hereof.
(vii) All certifications, certificates and Opinions of Counsel
required to be submitted to the Registrar pursuant to this Section 2.6 to
effect a registration of transfer or exchange may be submitted by
facsimile.
SECTION 2.7 REPLACEMENT SENIOR DISCOUNT NOTES.
If any mutilated Senior Discount Note is surrendered to the Trustee
or the Issuers and the Trustee receives evidence to its satisfaction of the
destruction, loss or theft of any Senior Discount Note, the Issuers shall issue
and the Trustee, upon receipt of an Authentication Order, shall authenticate a
replacement Senior Discount Note if the Trustee's requirements are met. If
required by the Trustee or the Issuers, an indemnity bond must be supplied by
the Holder that is sufficient in the judgment of the Trustee and the Issuers to
protect the Issuers, the Trustee, any Agent and any authenticating agent from
any loss that any of them may suffer if a Senior Discount Note is replaced. The
Issuers and the Trustee may charge for their expenses (including reasonable fees
and expenses of its agents and counsel) in replacing a Senior Discount Note.
<PAGE>
43
Every replacement Senior Discount Note is an additional obligation
of the Issuers and shall be entitled to all of the benefits of this Indenture
equally and proportionately with all other Senior Discount Notes duly issued
hereunder.
SECTION 2.8 OUTSTANDING SENIOR DISCOUNT NOTES.
The Senior Discount Notes outstanding at any time are all the Senior
Discount Notes authenticated by the Trustee except for those canceled by it,
those delivered to it for cancellation, those reductions in the interest in a
Global Note effected by the Trustee in accordance with the provisions hereof,
and those described in this Section as not outstanding. Except as set forth in
Section 2.9 hereof, a Senior Discount Note does not cease to be outstanding
because the Issuers or an Affiliate of the Issuers holds the Senior Discount
Note.
If a Senior Discount Note is replaced pursuant to Section 2.7
hereof, it ceases to be outstanding unless the Trustee receives proof
satisfactory to it that the replaced Senior Discount Note is held by a bona fide
purchaser.
If the principal amount of any Senior Discount Note is considered
paid under Section 4.1 hereof, it ceases to be outstanding and interest on it
ceases to accrue.
If the Paying Agent (other than an Issuer, a Subsidiary or an
Affiliate of any thereof) holds, on a redemption date or maturity date, money
sufficient to pay Senior Discount Notes payable on that date, then on and after
that date such Senior Discount Notes shall be deemed to be no longer outstanding
and shall cease to accrue interest.
SECTION 2.9 TREASURY SENIOR DISCOUNT NOTES.
In determining whether the Holders of the required principal amount
of Senior Discount Notes have concurred in any direction, waiver or consent,
Senior Discount Notes owned by the Issuers or any Guarantor, or by any Person
directly or indirectly controlling or controlled by or under direct or indirect
common control with the Issuers or any Guarantor shall be considered as though
not outstanding, except that for the purposes of determining whether the Trustee
shall be protected in relying on any such direction, waiver or consent, only
Senior Discount Notes that a Responsible Officer of the Trustee actually knows
are so owned shall be so disregarded.
SECTION 2.1 TEMPORARY SENIOR DISCOUNT NOTES.
Until certificates representing Senior Discount Notes are ready for
delivery, the Issuers may prepare and the Trustee, upon receipt of an
Authentication Order, shall authenticate temporary Senior Discount Notes.
Temporary Senior Discount Notes shall be substantially in the form of
certificated Senior Discount Notes but may have variations that the Issuers
consider appropriate for temporary Senior Discount Notes.
<PAGE>
44
Without unreasonable delay, the Issuers shall prepare and the
Trustee shall authenticate Definitive Notes in exchange for temporary Senior
Discount Notes.
Holders of temporary Senior Discount Notes shall be entitled to all
of the benefits of this Indenture.
SECTION 2.11 CANCELLATION.
The Issuers at any time may deliver Senior Discount Notes to the
Trustee for cancellation. The Registrar and Paying Agent shall forward to the
Trustee any Senior Discount Notes surrendered to them for registration of
transfer, exchange or payment. The Trustee and no one else shall cancel all
Senior Discount Notes surrendered for registration of transfer, exchange,
payment, replacement or cancellation and shall return such canceled Senior
Discount Notes (subject to the record retention requirement of the Exchange
Act). Certification of the destruction of all canceled Senior Discount Notes
shall be delivered (at the expense of the Issuers) to the Issuers. The Issuers
may not issue new Senior Discount Notes to replace Senior Discount Notes that it
has paid or that have been delivered to the Trustee for cancellation (except as
otherwise provided herein).
SECTION 2.12 DEFAULTED INTEREST.
If the Issuers default in a payment of interest on the Senior
Discount Notes, they shall pay the defaulted interest in any lawful manner plus,
to the extent lawful, interest payable on the defaulted interest, to the Persons
who are Holders on a subsequent special record date, in each case at the rate
provided in the Senior Discount Notes and in Section 4.1 hereof. The Issuers
shall notify the Trustee in writing of the amount of defaulted interest proposed
to be paid on each Senior Discount Note and the date of the proposed payment.
The Issuers shall fix or cause to be fixed each such special record date and
payment date, provided that no such special record date shall be less than 10
days prior to the related payment date for such defaulted interest. At least 15
days before the special record date, the Issuers (or, upon the written request
of the Issuers, the Trustee in the name and at the expense of the Issuers) shall
mail or cause to be mailed to Holders a notice that states the special record
date, the related payment date and the amount of such interest to be paid.
SECTION 2.13 CUSIP NUMBERS.
The Issuers in issuing the Senior Discount Notes may use "CUSIP"
numbers (if then generally in use) and, if so, the Trustee shall use "CUSIP"
numbers in notices of redemption as a convenience to Holders, provided, however,
that any such notice may state that no representation is made as to the
correctness of such numbers either as printed on the Senior Discount Notes or as
contained in any notice of a redemption and that reliance may be placed only on
the other identification numbers printed on the Senior Discount Notes, and any
such redemption shall not be affected by any defect in or omission of such
numbers. The Issuers shall promptly notify the Trustee of any change in the
CUSIP numbers.
<PAGE>
45
In the event that the Issuers shall issue and the Trustee shall
authenticate any Additional Senior Discount Notes pursuant to this Indenture,
the Issuers shall use their best efforts to obtain the same CUSIP number for
such Additional Senior Discount Notes as is printed on the Senior Discount Notes
outstanding at such time; provided, however, that if any Additional Senior
Discount Notes is determined, pursuant to an Opinion of Counsel, to be a
different class of security than the Senior Discount Notes outstanding at such
time for federal income tax purposes, the Issuers may obtain a CUSIP number for
such Additional Senior Discount Notes that is different from the CUSIP number
printed on the Senior Discount Notes then outstanding.
SECTION 2.14 LIMITATION OF ISSUER'S AND ADDITIONAL OBLIGOR'S LIABILITY.
Each Issuer and Additional Obligor, if any, and by its acceptance
hereof each Holder and the Trustee, hereby confirms that it is the intention of
all such parties that the obligations under this Indenture and the Senior
Discount Notes not constitute a fraudulent transfer or conveyance for purposes
of Title 11 of the United States Code, as amended, the Uniform Fraudulent
Conveyance Act, the Uniform Fraudulent Transfer Act or any similar U.S. Federal
or state or other applicable law. To effectuate the foregoing intention, the
Holders and each Issuer or Additional Obligor hereby irrevocably agree that the
obligations of each Issuer and Additional Obligor under the Indenture and the
Senior Discount Notes shall be limited to the maximum amount as will, after
giving effect to all other contingent and fixed liabilities of such Issuer or
Additional Obligor and after giving effect to any collections from or payments
made by or on behalf of any other Issuer or Additional Obligor in respect of the
obligations of such other Issuer or Additional Obligor pursuant to this
Indenture or the Senior Discount Notes, result in the obligations of such Issuer
or Additional Obligor not constituting such a fraudulent transfer or conveyance.
ARTICLE 3.
REDEMPTION AND PREPAYMENT
SECTION 3.1 NOTICES TO TRUSTEE.
If the Issuers elect to redeem Senior Discount Notes pursuant to
the optional redemption provisions of Section 3.7 hereof, they shall furnish to
the Trustee, at least 30 days but not more than 60 days before a redemption
date, an Officers' Certificate setting forth (i) the clause of this Indenture
pursuant to which the redemption shall occur, (ii) the redemption date, (iii)
the principal amount of Senior Discount Notes to be redeemed and (iv) the
redemption price.
SECTION 3.2 SELECTION OF SENIOR DISCOUNT NOTES TO BE REDEEMED.
<PAGE>
46
If less than all of the Senior Discount Notes are to be redeemed or
purchased in an offer to purchase at any time, the Trustee shall select the
Senior Discount Notes to be redeemed or purchased among the Holders of the
Senior Discount Notes in compliance with the requirements of the principal
national securities exchange, if any, on which the Senior Discount Notes are
listed or, if the Senior Discount Notes are not so listed, on a pro rata basis,
by lot or in accordance with any other customary method. In the event of
partial redemption by lot, the particular Senior Discount Notes to be redeemed
shall be selected, unless otherwise provided herein, not less than 30 nor more
than 60 days prior to the redemption date by the Trustee from the outstanding
Senior Discount Notes not previously called for redemption.
The Trustee shall promptly notify the Issuers of the Senior
Discount Notes selected for redemption and, in the case of any Senior Discount
Note selected for partial redemption, the principal amount thereof to be
redeemed. Senior Discount Notes and portions of Senior Discount Notes selected
shall be in amounts of $1,000 or whole multiples of $1,000; except that if all
of the Senior Discount Notes of a Holder are to be redeemed, the entire
outstanding amount of Senior Discount Notes held by such Holder, even if not a
multiple of $1,000, shall be redeemed. Except as provided in the preceding
sentence, provisions of this Indenture that apply to Senior Discount Notes
called for redemption also apply to portions of Senior Discount Notes called for
redemption.
SECTION 3.3 NOTICE OF REDEMPTION.
Subject to the provisions of Section 3.9 hereof, at least 30 days
but not more than 60 days before a redemption date, the Issuers shall mail or
cause to be mailed, by first class mail, a notice of redemption to each Holder
whose Senior Discount Notes are to be redeemed at its registered address.
The notice shall identify the Senior Discount Notes to be redeemed
and shall state:
(a) the redemption date;
(b) the redemption price;
(c) if any Senior Discount Note is being redeemed in part, the
portion of the principal amount of such Senior Discount Note to be redeemed and
that, after the redemption date upon surrender of such Senior Discount Note, a
new Senior Discount Note or Senior Discount Notes in principal amount equal to
the unredeemed portion shall be issued upon cancellation of the original Senior
Discount Note;
(d) the name and address of the Paying Agent;
(e) that Senior Discount Notes called for redemption must be
surrendered to the Paying Agent to collect the redemption price;
<PAGE>
47
(f) that, unless the Issuers default in making such redemption
payment, interest on Senior Discount Notes called for redemption ceases to
accrue on and after the redemption date;
(g) the paragraph of the Senior Discount Notes and/or Section of
this Indenture pursuant to which the Senior Discount Notes called for redemption
are being redeemed; and
(h) that no representation is made as to the correctness or
accuracy of the CUSIP number, if any, listed in such notice or printed on the
Senior Discount Notes.
At the Issuers' request, the Trustee shall give the notice of
redemption in the Issuers' name and at their expense; provided, however, that
the Issuers shall have delivered to the Trustee, at least 45 days prior to the
redemption date, an Officers' Certificate requesting that the Trustee give such
notice and setting forth the information to be stated in such notice as provided
in the preceding paragraph.
SECTION 3.4 EFFECT OF NOTICE OF REDEMPTION.
Once notice of redemption is mailed in accordance with Section 3.3
hereof, Senior Discount Notes called for redemption become irrevocably due and
payable on the redemption date at the redemption price. A notice of redemption
may not be conditional.
SECTION 3.5 DEPOSIT OF REDEMPTION PRICE.
One Business Day prior to the redemption date, the Issuers shall
deposit with the Trustee or with the Paying Agent money sufficient to pay the
redemption price of and accrued interest on all Senior Discount Notes to be
redeemed on that date. The Trustee or the Paying Agent shall promptly return to
the Issuers any money deposited with the Trustee or the Paying Agent by the
Issuers in excess of the amounts necessary to pay the redemption price of, and
accrued interest on, all Senior Discount Notes to be redeemed.
If the Issuers comply with the provisions of the preceding
paragraph, on and after the redemption date, interest shall cease to accrue on
the Senior Discount Notes or the portions of Senior Discount Notes called for
redemption. If a Senior Discount Note is redeemed on or after an interest record
date but on or prior to the related interest payment date, then any accrued and
unpaid interest shall be paid to the Person in whose name such Senior Discount
Note was registered at the close of business on such record date. If any Senior
Discount Note called for redemption shall not be so paid upon surrender for
redemption because of the failure of the Issuers to comply with the preceding
paragraph, interest shall be paid on the unpaid principal, from the redemption
date until such principal is paid, and to the extent lawful on any interest not
paid on such unpaid principal, in each case at the rate provided in the Senior
Discount Notes and in Section 4.1 hereof.
<PAGE>
48
SECTION 3.6 SENIOR DISCOUNT NOTES REDEEMED IN PART.
Upon surrender of a Senior Discount Note that is redeemed in part,
the Issuers shall issue and, upon receipt of an Authentication Order, the
Trustee shall authenticate for the Holder at the expense of the Issuers a new
Senior Discount Note equal in principal amount to the unredeemed portion of the
Senior Discount Note surrendered.
SECTION 3.7 OPTIONAL REDEMPTION.
(a) Except as described in clause (b) of this Section 3.7, the
Senior Discount Notes will not be redeemable at the Issuers' option prior to
December 1, 2003. Thereafter, the Senior Discount Notes will be subject to
redemption at any time at the option of the Issuers, in whole or in part, upon
not less than 30 nor more than 60 days notice, at the redemption prices
(expressed as percentages of principal amount) set forth below plus accrued and
unpaid interest, if any, and Liquidated Damages, if any, thereon to the
applicable redemption date, if redeemed during the twelve-month period beginning
on December 1 of the years indicated below:
<TABLE>
<CAPTION>
YEAR PERCENTAGE
---- ----------
<S> <C>
2003............................. 105.938%
2004............................. 103.958%
2005............................. 101.979%
2006 and thereafter.............. 100.000%
</TABLE>
(b) Notwithstanding the provisions of clause (a) of this Section
3.7, at any time prior to December 1, 2001, the Issuers may on any one or more
occasions redeem up to 35% of the aggregate principal amount at maturity of
Senior Discount Notes originally issued under the Indenture at a redemption
price equal to 111.875% of the Accreted Value at the date of redemption, plus
Liquidated Damages, if any, to the redemption date, with the Net Cash Proceeds
of any Equity Offering and/or the Net Cash Proceeds of a Strategic Equity
Investment; provided that at least 65% of the aggregate principal amount at
maturity of Senior Discount Notes originally issued remain outstanding
immediately after each occurrence of such redemption; and provided, further,
that each such redemption shall occur within 45 days of the date of the closing
of such Equity Offering and/or Strategic Equity Investment.
(c) Any redemption pursuant to this Section 3.7 shall be made
pursuant to the provisions of Section 3.1 through 3.6 hereof.
<PAGE>
49
SECTION 3.8 MANDATORY REDEMPTION.
Except pursuant to Sections 3.10, 4.10 or 4.15, the Issuers shall
not be required to make mandatory redemption or sinking fund payments with
respect to the Senior Discount Notes.
SECTION 3.9 OFFER TO PURCHASE BY APPLICATION OF EXCESS PROCEEDS.
In the event that, pursuant to Section 4.10 hereof, the Issuers
shall be required to commence an Asset Sale Offer, they shall follow the
procedures specified below.
The Asset Sale Offer shall remain open for a period of 20 Business
Days following its commencement and no longer, except to the extent that a
longer period is required by applicable law (the "Offer Period"). No later than
five Business Days after the termination of the Offer Period (the "Purchase
Date"), the Issuers shall purchase the principal amount of Senior Discount Notes
required to be purchased pursuant to Section 4.10 hereof (the "Offer Amount")
or, if less than the Offer Amount has been tendered, all Senior Discount Notes
tendered in response to the Asset Sale Offer. Payment for any Senior Discount
Notes so purchased shall be made in the same manner as interest payments are
made.
If the Purchase Date is on or after an interest record date and on
or before the related interest payment date, any accrued and unpaid interest
shall be paid to the Person in whose name a Senior Discount Note is registered
at the close of business on such record date, and no additional interest shall
be payable to Holders who tender Senior Discount Notes pursuant to the Asset
Sale Offer.
Upon the commencement of an Asset Sale Offer, the Issuers shall
send, by first class mail, a written notice to the Trustee and to each of the
Holders. The notice shall contain all instructions and materials necessary to
enable such Holders to tender Senior Discount Notes pursuant to the Asset Sale
Offer. The Asset Sale Offer shall be made to all Holders. The notice, which
shall govern the terms of the Asset Sale Offer, shall state:
(a) that the Asset Sale Offer is being made pursuant to this Section
3.9 and Section 4.10 hereof and the length of time the Asset Sale Offer
shall remain open;
(b) the Offer Amount, the purchase price and the Purchase Date;
(c) that any Senior Discount Note not tendered or accepted for
payment shall continue to accrete or accrue interest;
(d) that, unless the Issuers default in making such payment, any
Senior Discount Note accepted for payment pursuant to the Asset Sale Offer
shall cease to accrete or accrue interest after the Purchase Date;
<PAGE>
50
(e) that Holders electing to have a Senior Discount Note purchased
pursuant to an Asset Sale Offer may only elect to have all of such Senior
Discount Note purchased and may not elect to have only a portion of such
Senior Discount Note purchased;
(f) that Holders electing to have a Senior Discount Note purchased
pursuant to any Asset Sale Offer shall be required to surrender the Senior
Discount Note, with the form entitled "Option of Holder to Elect Purchase"
on the reverse of the Senior Discount Note completed, or transfer by book-
entry transfer, to the Issuers, a depositary, if appointed by the Issuers,
or a Paying Agent at the address specified in the notice at least three
days before the Purchase Date;
(g) that Holders shall be entitled to withdraw their election if the
Issuers, the depositary or the Paying Agent, as the case may be, receives,
not later than the expiration of the Offer Period, a telegram, telex,
facsimile transmission or letter setting forth the name of the Holder, the
principal amount of the Senior Discount Note the Holder delivered for
purchase and a statement that such Holder is withdrawing his election to
have such Senior Discount Note purchased;
(h) that, if the aggregate principal amount at maturity of Senior
Discount Notes surrendered by Holders exceeds the Offer Amount, the Issuers
shall select the Senior Discount Notes to be purchased on a pro rata basis,
by lot or by any other customary method (with such adjustments as may be
deemed appropriate by the Issuers so that only Senior Discount Notes in
denominations of $1,000, or integral multiples thereof, shall be
purchased); and
(i) that Holders whose Senior Discount Notes were purchased only in
part shall be issued new Senior Discount Notes equal in principal amount to
the unpurchased portion of the Senior Discount Notes surrendered (or
transferred by book-entry transfer).
On or before the Purchase Date, the Issuers shall, to the extent
lawful, accept for payment, as described in (h) above, to the extent necessary,
the Offer Amount of Senior Discount Notes or portions thereof tendered pursuant
to the Asset Sale Offer, or if less than the Offer Amount has been tendered, all
Senior Discount Notes tendered, and shall deliver to the Trustee an Officers'
Certificate stating that such Senior Discount Notes or portions thereof were
accepted for payment by the Issuers in accordance with the terms of this Section
3.9. The Issuers, the Depositary or the Paying Agent, as the case may be, shall
promptly (but in any case not later than five days after the Purchase Date) mail
or deliver to each tendering Holder an amount equal to the purchase price of the
Senior Discount Notes tendered by such Holder and accepted by the Issuers for
purchase, and the Issuers shall promptly issue a new Senior Discount Note, and
the Trustee, upon receipt of an Authentication Order from the Issuers shall
authenticate and mail or deliver such new Senior Discount Note to such Holder,
in a principal amount equal to any unpurchased portion of the Senior Discount
Note surrendered. Any Senior Discount Note not so accepted shall be promptly
mailed or delivered by the Issuers to the Holder thereof. The Issuers shall
publicly announce the results of the Asset Sale Offer on the Purchase Date.
<PAGE>
51
Other than as specifically provided in this Section 3.9, any
purchase pursuant to this Section 3.9 shall be made pursuant to the provisions
of Sections 3.1 through 3.6 hereof.
SECTION 3.1 MANDATORY PAYMENT OF ACCRUED INTEREST.
On December 1, 2003, the Issuers shall be required to redeem an
amount equal to $369.79 per $1,000 principal amount at maturity of each Senior
Discount Note then outstanding (the "Accreted Interest Redemption Amount") on a
pro rata basis at a redemption price of 100% of the principal amount at maturity
of the Senior Discount Notes so redeemed.
ARTICLE 4.
COVENANTS
SECTION 4.1 PAYMENT OF SENIOR DISCOUNT NOTES.
The Issuers shall pay or cause to be paid the principal of, premium,
if any, and interest and Liquidated Damages, if any, on the Senior Discount
Notes on the dates and in the manner provided in the Senior Discount Notes.
Principal, premium, if any, and interest and Liquidated Damages, if any, shall
be considered paid on the date due if the Paying Agent, if other than the
Issuers or a Subsidiary thereof, holds as of 10:00 a.m. Eastern Time on the due
date money deposited by the Issuers in immediately available funds and
designated for and sufficient to pay all principal, premium, if any, and
interest and Liquidated Damages, if any, then due. The Issuers shall pay all
Liquidated Damages, if any, in the same manner on the dates and in the amounts
set forth in the Registration Rights Agreement.
The Issuers shall pay interest (including post-petition interest in
any proceeding under any Bankruptcy Law) on overdue principal at the rate equal
to 1% per annum in excess of the then applicable interest rate on the Senior
Discount Notes to the extent lawful; they shall pay interest (including post-
petition interest in any proceeding under any Bankruptcy Law) on overdue
installments of interest and Liquidated Damages (without regard to any
applicable grace period) at the same rate to the extent lawful.
SECTION 4.2 MAINTENANCE OF OFFICE OR AGENCY.
The Issuers shall maintain in the Borough of Manhattan, The City of
New York, an office or agency (which may be an office of the Trustee or an
affiliate of the Trustee, Registrar or co-registrar) where Senior Discount Notes
may be surrendered for registration of transfer or for exchange and where
notices and demands to or upon the Issuers in respect of the Senior Discount
Notes and this Indenture may be served. The Issuers shall give prompt written
notice to the Trustee of the location, and any change in the location, of such
office or agency. If at any time the Issuers shall fail to maintain any such
required office or agency or shall fail to furnish the Trustee with the address
thereof, such presentations, surrenders, notices and demands may be made or
served at the Corporate Trust Office of the Trustee.
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The Issuers may also from time to time designate one or more other
offices or agencies where the Senior Discount Notes may be presented or
surrendered for any or all such purposes and may from time to time rescind such
designations; provided, however, that no such designation or rescission shall in
any manner relieve the Issuers of their obligation to maintain an office or
agency in the Borough of Manhattan, The City of New York for such purposes. The
Issuers shall give prompt written notice to the Trustee of any such designation
or rescission and of any change in the location of any such other office or
agency.
The Issuers hereby designate the Corporate Trust Office of the
Trustee as one such office or agency of the Issuers in accordance with Section
2.3.
SECTION 4.3 REPORTS.
(a) Whether or not the Issuers are required by the rules and
regulations of the Commission, so long as any Senior Discount Notes are
outstanding, the Issuers, on a combined consolidated basis, will furnish to each
of the Holders of Senior Discount Notes (i) quarterly and annual financial
statements substantially equivalent to financial statements that would have been
included in a filing with the Commission on Forms 10-Q and 10-K if the Issuers
were required to file such financial information, including a "Management's
Discussion and Analysis of Financial Condition and Results of Operations" that
describes the financial condition and results of operations of the Issuers and,
with respect to the annual information only, reports thereon by the Issuers'
independent public accountants (which shall be firm(s) of established national
reputation) and (ii) all information that would be required to be filed with the
Commission on Form 8-K if the Issuers were required to file such reports. All
such information and reports shall be provided on or prior to the dates on which
such filings would have been required to be made had such Issuer been subject to
the rules and regulations of the Commission. In addition, the Issuers shall make
such information available to securities analysts and prospective investors upon
request. In addition, following the consummation of the exchange offer
contemplated by the Registration Rights Agreement, whether or not required by
the rules and regulations of the SEC, the Issuers shall file a copy of all such
information and reports with the SEC for public availability within the time
periods specified in the SEC's rules and regulations unless the SEC will not
accept such a filing) and make such information available to securities analysts
and prospective investors upon request.
(b) For so long as any Senior Discount Notes remain outstanding, the
Issuers shall furnish to the Holders and to securities analysts and prospective
investors, upon their request, the information required to be delivered pursuant
to Rule 144A(d)(4) under the Securities Act.
Delivery of such reports, information and documents to the Trustee
is for informational purposes only and the Trustee's receipt of such shall not
constitute constructive notice of any information contained therein or
determinable from information contained therein, including the Issuers'
compliance with any of its covenants hereunder (as to which the Trustee is
entitled to rely exclusively on Officers' Certificates).
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SECTION 4.4 COMPLIANCE CERTIFICATE.
(a) The Issuers and any Guarantor (to the extent that such
Guarantor is so required under the TIA) shall deliver to the Trustee, within 90
days after the end of each fiscal quarter, an Officers' Certificate stating that
a review of the activities of the Issuers and their Subsidiaries during the
preceding fiscal year has been made under the supervision of the signing
Officers with a view to determining whether the Issuers have kept, observed,
performed and fulfilled their obligations under this Indenture, and further
stating, as to each such Officer signing such certificate, that to the best of
his or her knowledge the Issuers have kept, observed, performed and fulfilled
each and every covenant contained in this Indenture and are not in default in
the performance or observance of any of the terms, provisions and conditions of
this Indenture (or, if a Default or Event of Default shall have occurred,
describing all such Defaults or Events of Default of which he or she may have
knowledge and what action the Issuers are taking or propose to take with respect
thereto) and that to the best of his or her knowledge no event has occurred and
remains in existence by reason of which payments on account of the principal of
or interest, if any, on the Senior Discount Notes is prohibited or if such event
has occurred, a description of the event and what action the Issuers are taking
or propose to take with respect thereto.
(b) So long as not contrary to the then current recommendations of
the American Institute of Certified Public Accountants, the year-end financial
statements delivered pursuant to Section 4.3(a) above shall be accompanied by a
written statement of the Issuers' independent public accountants (who shall be a
firm of established national reputation) that in making the examination
necessary for certification of such financial statements, nothing has come to
their attention that would lead them to believe that the Issuers have violated
any provisions of Article 4 or Article 5 hereof, as they relate to accounting
and financial matters, or, if any such violation has occurred, specifying the
nature and period of existence thereof, it being understood that such
accountants shall not be liable directly or indirectly to any Person for any
failure to obtain knowledge of any such violation.
(c) The Issuers shall, so long as any of the Senior Discount Notes
are outstanding, deliver to the Trustee, forthwith upon any Officer becoming
aware of any Default or Event of Default, an Officers' Certificate specifying
such Default or Event of Default and what action the Issuers are taking or
propose to take with respect thereto.
SECTION 4.5 TAXES.
The Issuers shall pay, and shall cause each of their Subsidiaries to
pay, prior to delinquency, all material taxes, assessments, and governmental
levies except such as are contested in good faith and by appropriate proceedings
or where the failure to effect such payment is not adverse in any material
respect to the Holders of the Senior Discount Notes.
SECTION 4.6 STAY, EXTENSION AND USURY LAWS.
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Each of the Issuers and any Guarantor covenants (to the extent that
it may lawfully do so) that it shall not at any time insist upon, plead, or in
any manner whatsoever claim or take the benefit or advantage of, any stay,
extension or usury law wherever enacted, now or at any time hereafter in force,
that may affect the covenants or the performance of this Indenture; and the
Issuers and any Guarantor (to the extent that they may lawfully do so) hereby
expressly waive all benefit or advantage of any such law, and covenant that they
shall not, by resort to any such law, hinder, delay or impede the execution of
any power herein granted to the Trustee, but shall suffer and permit the
execution of every such power as though no such law had been enacted.
SECTION 4.7 RESTRICTED PAYMENTS.
The Issuers will not, and will not permit any of their Restricted
Subsidiaries to, directly or indirectly: (i) declare or pay any dividend or make
any other payment or distribution on account of the Issuers' or any of their
Restricted Subsidiaries' Equity Interests (including, without limitation, any
payment in connection with any merger or consolidation involving any Issuer) or
to the direct or indirect holders of the Issuers' or any of their Restricted
Subsidiaries' Equity Interests in their capacity as such (other than dividends
or distributions payable in Equity Interests (other than Disqualified Stock) of
any Issuer and other than dividends or distributions payable to any Issuer or
another Restricted Subsidiary and if such Restricted Subsidiary has equity
holders other than any of the Issuers or other Restricted Subsidiaries, to its
other equity holders on a pro rata basis); (ii) purchase, redeem or otherwise
acquire or retire for value (including without limitation, in connection with
any merger or consolidation involving any Issuer) any Equity Interests of any
Issuer or any direct or indirect parent of any Issuer or other Affiliate of any
Issuer; (iii) make any payment on or with respect to, or purchase, redeem,
defease or otherwise acquire or retire for value any Indebtedness of any Issuer
that is subordinated to the Senior Discount Notes, except a payment of interest
or principal at Stated Maturity, or a payment of interest made through the
issuance of additional Indebtedness of the same kind as the Indebtedness on
which such interest shall have accrued or payment on Indebtedness owed to
another Issuer and except any payment in respect of the ABRY Subordinated Debt;
or (iv) make any Restricted Investment (all such payments and other actions set
forth in clauses (i) through (iv) above being collectively referred to as
"Restricted Payments"), unless, at the time of and after giving effect to such
Restricted Payment:
(a) no Default or Event of Default shall have occurred and be
continuing or would occur as a consequence thereof; and
(b) the Issuers would, at the time of such Restricted Payment and
after giving pro forma effect thereto as if such Restricted Payment had been
made at the beginning of the applicable quarter, have been permitted to incur at
least $1.00 of additional Indebtedness pursuant to the test set forth in the
Section 4.9; and
(c) such Restricted Payment, together with the aggregate amount of
all other Restricted Payments made by the Issuers and their Restricted
Subsidiaries after the Issue Date
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55
(excluding Restricted Payments permitted by clauses (ii), (iii), (iv), (vii),
(viii), (ix), (x), (xi), (xii) and (xiii) of the next succeeding paragraph), is
less than the sum of (i)(A) 100% of the aggregate Consolidated Cash Flow of the
Issuers (or, in the event such Consolidated Cash Flow shall be a deficit, minus
100% of such deficit) accrued for the period beginning on the first day of the
Issuers' first fiscal quarter commencing after the Issue Date and ending on the
last day of the Issuers' most recent calendar month for which financial
information is available to the Issuers ending prior to the date of such
proposed Restricted Payment, taken as one accounting period, less (B) 1.4 times
Consolidated Interest Expense for the same period, plus (ii) 100% of the
aggregate Net Cash Proceeds received by the Issuers as a contribution to the
equity capital of the Issuers or from the issue or sale since the Issue Date of
Equity Interests of the Issuers (other than Disqualified Stock), or of
Disqualified Stock or debt securities (including the ABRY Subordinated Debt) of
the Issuers that have been converted into such Equity Interests (other than
Equity Interests (or Disqualified Stock or convertible debt securities) sold to
a Restricted Subsidiary of the Issuers and other than Disqualified Stock or
convertible debt securities that have been converted into Disqualified Stock),
plus (iii) to the extent that any Restricted Investment that was made after the
Issue Date is sold for cash or otherwise liquidated or repaid for cash, the
amount of such Net Cash Proceeds plus (iv) to the extent that any Unrestricted
Subsidiary is redesignated as a Restricted Subsidiary after the Issue Date, the
fair market value of the Investment of the applicable Issuer or Restricted
Subsidiary of such Issuer in such Subsidiary as of the date of such
redesignation.
The foregoing provisions shall not prohibit (i) the payment of any
dividend within 60 days after the date of declaration thereof, if at said date
of declaration such payment would have complied with the provisions of the
Indenture; (ii) the redemption, repurchase, retirement, defeasance or other
acquisition of any Indebtedness of any of the Issuers which is subordinated to
the Senior Discount Notes or Equity Interests of any of the Issuers in exchange
for, or out of the Net Cash Proceeds of the substantially concurrent sale (other
than to a Restricted Subsidiary of any of the Issuers) of, other Equity
Interests of any of the Issuers (other than any Disqualified Stock) or capital
contributions to any of the Issuers; provided that the amount of any such Net
Cash Proceeds that are utilized for any such redemption, repurchase, retirement,
defeasance or other acquisition shall be excluded from clause (c) (ii) of the
preceding paragraph; (iii) the defeasance, redemption, repurchase or other
acquisition of Indebtedness of any of the Issuers which is subordinated to the
Senior Discount Notes with the Net Cash Proceeds from an incurrence of Permitted
Refinancing Indebtedness; (iv) the payment of any dividend or distribution by a
Restricted Subsidiary of any of the Issuers to the holders of its common Equity
Interests so long as the applicable Issuer or such Restricted Subsidiary
receives at least its pro rata share of such dividend or distribution in
accordance with its Equity Interests; (v) the repurchase, redemption or other
acquisition or retirement for value of any Equity Interests of any of the
Issuers or the payment of a dividend to any Affiliates of the Issuers to effect
the repurchase, redemption, acquisition or retirement of an Affiliate's equity
interest, that are held by any member of any of the Issuers' (or any of their
respective Restricted Subsidiaries) management pursuant to any management equity
subscription or purchase agreement or stock option agreement or similar
agreement; provided that the aggregate price paid for all such repurchased,
redeemed, acquired or retired Equity Interests shall not exceed $2 million in
any
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fiscal year; (vi) from and after the time that the aggregate Consolidated Cash
Flow of the Issuers (calculated on a pro forma basis as described in the
definition of "Leverage Ratio") for any full fiscal quarter mutliplied by four
exceeds $60 million, payments or distributions to any Affiliate of the Issuers
to permit such Affiliate to pay for the performance of management functions by
any Affiliate of the Issuers in an aggregate amount not to exceed the greater of
(A) $250,000 in any fiscal year and (B) 0.25% of Total Revenues for such year;
(vii) any payments or distributions or other transactions to be made in
connection with the Merger, the Mercom Acquisition or the Reorganization
(including fees and expenses incurred in connection therewith); (viii) payments
to Affiliates of the Issuers and holders of Equity Interests in the Issuers in
amounts equal to the amounts required to pay any Federal, state or local income
taxes to the extent that (A) such income taxes are attributable to the income of
the Issuers and their Restricted Subsidiaries (but limited, in the case of taxes
based upon taxable income, to the extent that cumulative taxable net income
subsequent to the Issue Date is positive) and (B) such taxes are related to
Indebtedness between or among any of the Issuers and any of their Restricted
Subsidiaries or Avalon or any of its Restricted Subsidiaries; (ix) Restricted
Investments received in connection with an Asset Sale that complies with Section
4.10; (x) payments on the ABRY Subordinated Debt (including all accrued interest
thereon) in accordance with the terms thereof; (xi) payments or distributions to
dissenting stockholders pursuant to transactions permitted under the terms of
the Indenture; (xii) the distribution by Avalon Holdings to the holders of its
Capital Stock of all the Equity Interests held by Avalon Holdings in any of its
Subsidiaries; provided that, substantially simultaneously with such
distribution, such Equity Interests, and/or option to purchase all such Equity
Interests, are sold to a third party for consideration in an amount at least
equal to the fair market value of such Equity Interests and Avalon Holdings
receives an amount equal to the Net Cash Proceeds of such sale and any other
consideration received in connection therewith; and (xiii) other Restricted
Payments in an aggregate amount not to exceed $5.0 million; provided, however,
that at the time of, and after giving effect to, any Restricted Payment
permitted under clauses (v), (vi), (x) and (xiii) above, no Default or Event of
Default shall have occurred and be continuing or would occur as a consequence
thereof.
The amount of all Restricted Payments (other than cash) shall be the
fair market value on the date of the Restricted Payment of the asset(s) or
securities proposed to be transferred or issued by the applicable Issuer or the
Restricted Subsidiary of such Issuer, pursuant to the Restricted Payment. The
fair market value of any non-cash Restricted Payment shall be determined by the
Board of Directors of such Issuer or Restricted Subsidiary, as the case may be,
whose resolution with respect thereto shall be delivered to the Trustee, such
determination shall be conclusive and shall be based upon an opinion or
appraisal issued by an appraisal, accounting or investment banking firm of
national standing if such fair market value exceeds $10.0 million. Not later
than the date of making any Restricted Payment, such Issuer or Restricted
Subsidiary, as the case may be, shall deliver to the Trustee an Officers'
Certificate stating that such Restricted Payment is permitted and setting forth
the basis upon which the calculations required by this Section 4.7 were
computed, together with a copy of any opinion or appraisal required by the
Indenture.
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SECTION 4.8 DIVIDEND AND OTHER PAYMENT RESTRICTIONS AFFECTING RESTRICTED
SUBSIDIARIES.
The Issuers will not, and will not permit any of their Restricted
Subsidiaries to, directly or indirectly, create or otherwise cause or suffer to
exist or become effective any encumbrance or restriction on the ability of any
Restricted Subsidiary to (i)(x) pay dividends or make any other distributions to
the Issuers or any of their Restricted Subsidiaries (1) on its Capital Stock or
(2) with respect to any other interest or participation in, or measured by, its
profits, or (y) pay any Indebtedness owed to the Issuers or any of their
Restricted Subsidiaries, (ii) make loans or advances to the Issuers or any of
their Restricted Subsidiaries or (iii) transfer any of its properties or assets
to the Issuers or any of their Restricted Subsidiaries, except for such
encumbrances or restrictions existing under or by reason of (a) Existing
Indebtedness as in effect on the Issue Date, (b) the Credit Facility as in
effect on the date of the Indenture, and any amendments, modifications,
restatements, renewals, increases, supplements, refundings, replacements or
refinancings thereof; provided that such amendments, modifications,
restatements, renewals, increases, supplements, refundings, replacements or
refinancings are no more restrictive with respect to such dividends and other
payments restrictions than those contained in the Credit Facility as in effect
on the date of the Indenture, (c) the terms of any Indebtedness permitted by the
Indenture to be incurred by any Restricted Subsidiary of any of the Issuers, (d)
the Indenture and the Senior Discount Notes, (e) the Indenture under which the
Senior Subordinated Notes will be issued and the Senior Subordinated Notes, (f)
any instrument governing Indebtedness or Capital Stock of a Person acquired by
the Issuers or any of their Restricted Subsidiaries as in effect at the time of
such acquisition (except to the extent such Indebtedness was incurred in
connection with or in contemplation of such acquisition), which encumbrance or
restriction is not applicable to any Person, or the properties or assets of any
Person, other than the Person, or the property or assets of the Person, so
acquired, provided that, in the case of Indebtedness, such Indebtedness was
permitted by the terms of the Indenture to be incurred, (g) by reason of
customary non-assignment provisions in leases entered into in the ordinary
course of business, (h) purchase money obligations (including Capital Lease
Obligations) for property acquired in the ordinary course of business that
impose restrictions of the nature described in clause (iii) above on the
property so acquired, (i) Permitted Refinancing Indebtedness, provided that the
restrictions contained in the agreements governing such Permitted Refinancing
Indebtedness are no more restrictive, taken as a whole, than those contained in
the agreements governing the Indebtedness being refinanced, (j) contracts for
the sale of assets, including, without limitation, customary restrictions with
respect to a Subsidiary pursuant to an agreement that has been entered into for
the sale or disposition of all or substantially all of the Capital Stock or
assets of such Subsidiary or (k) applicable law or any applicable rule,
regulation or order.
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SECTION 4.9 INCURRENCE OF INDEBTEDNESS AND ISSUANCE OF PREFERRED STOCK.
The Issuers will not, and will not permit any of their Restricted
Subsidiaries to, directly or indirectly, create, incur, issue, assume, guarantee
or otherwise become directly or indirectly liable, contingently or otherwise,
with respect to (collectively, "incur") any Indebtedness (including Acquired
Debt) other than Permitted Debt and the Issuers will not issue any Disqualified
Stock and will not permit any of their Restricted Subsidiaries to issue any
shares of preferred stock (other than to an Issuer or another Restricted
Subsidiary); provided, however, that the Issuers may incur Indebtedness
(including Acquired Debt) or issue shares of Disqualified Stock and any of the
Issuers' Restricted Subsidiaries may incur Indebtedness or issue shares of
preferred stock if the Issuers' Leverage Ratio at the time of incurrence of such
Indebtedness or the issuance of such Disqualified Stock or such preferred stock,
as the case may be, after giving pro forma effect to such incurrence or issuance
and to the use of the proceeds therefrom would have been no greater than (a) 7.0
to 1, if such incurrence or issuance is on or prior to December 31, 2000, and
(b) 6.5 to 1, if such incurrence or issuance is after December 31, 2000.
The Issuers will not incur any Indebtedness that is contractually
subordinated in right of payment to any other Indebtedness of the Issuers unless
such Indebtedness is also contractually subordinated in right of payment to the
Senior Discount Notes on substantially identical terms; provided, however, that
no Indebtedness of the Issuers shall be deemed to be contractually subordinated
in right of payment to any other Indebtedness of the Issuers solely by virtue of
being unsecured.
The provisions of the first paragraph of this covenant shall not
apply to the incurrence of any of the following items of Indebtedness
(collectively, "Permitted Debt"):
(i) the incurrence by the Issuers or their Restricted Subsidiaries
of Indebtedness under the Credit Facility, letters of credit (with letters
of credit being deemed to have a principal amount equal to the maximum
potential liability of the Issuers and their Restricted Subsidiaries
thereunder) and related Guarantees under the Credit Facility; provided that
the aggregate principal amount of all Indebtedness of the Issuers and their
Restricted Subsidiaries outstanding under the Credit Facility after giving
effect to such incurrence, including all Permitted Refinancing Indebtedness
incurred to refund, refinance or replace any other Indebtedness incurred
pursuant to this clause (i) does not exceed an amount equal to $345,888,000
less the aggregate amount applied by the Issuers and their Restricted
Subsidiaries to permanently reduce the availability of Indebtedness under
the Senior Credit Facility pursuant to the provisions described under
Section 4.10;
(ii) the incurrence by the Issuers of the ABRY Subordinated Debt;
(iii) the incurrence by the Issuers and their Restricted
Subsidiaries of Existing Indebtedness;
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(iv) the incurrence by the Issuers of the Existing Michigan
Indebtedness and the Mercom Intercompany Loan;
(v) the incurrence by the Issuers of Indebtedness represented by
the Senior Discount Notes and the incurrence by the Company Issuers of
Indebtedness represented by the Senior Subordinated Notes in an aggregate
principal amount of $150 million outstanding on the date of the Indenture;
(vi) the incurrence by the Issuers or any of their Restricted
Subsidiaries of Indebtedness represented by Capital Lease Obligations,
mortgage financings or purchase money obligations, in each case incurred
for the purpose of financing all or any part of the purchase price or cost
of construction or improvement of property, plant or equipment used in the
business of the Issuers or such Restricted Subsidiary, in an aggregate
principal amount, including all Indebtedness incurred to refund, refinance
or replace Indebtedness incurred pursuant to this clause (vi), not to
exceed $10.0 million at any time outstanding;
(vii) the incurrence by the Issuers or any of their Restricted
Subsidiaries of Permitted Refinancing Indebtedness;
(viii) the incurrence by the Issuers or any of their Restricted
Subsidiaries of intercompany Indebtedness between or among any of the
Issuers and any of their Restricted Subsidiaries; provided, however, that
(i) if one of the Issuers is the obligor on such Indebtedness, such
Indebtedness is expressly subordinated to the prior payment in full in cash
of all Obligations with respect to the Senior Discount Notes and the
Indenture, and (ii)(A) any subsequent event or issuance or transfer of
Equity Interests that results in any such Indebtedness being held by a
Person other than one of the Issuers or a Restricted Subsidiary thereof and
(B) any sale or other transfer of any such Indebtedness to a Person that is
not any one of the Issuers or a Restricted Subsidiary thereof shall be
deemed, in each case, to constitute an incurrence of such Indebtedness by
such Issuer or such Restricted Subsidiary, as the case may be, that was not
permitted by this clause (viii);
(ix) the incurrence by the Issuers or any of their Restricted
Subsidiaries of Hedging Obligations that are incurred in the ordinary
course of business for the purpose of fixing or hedging currency, commodity
or interest rate risk (including with respect to any floating rate
Indebtedness that is permitted by the terms of the Indenture to be
outstanding) in connection with the conduct of their respective businesses
and not for speculative purposes;
(x) the guarantee by the Issuers of Indebtedness of any of their
Restricted Subsidiaries so long as the incurrence of such Indebtedness by
such Restricted Subsidiary is permitted to be incurred by another provision
of this Section 4.9;
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(xi) the guarantee by any Restricted Subsidiary of Indebtedness
of any of the Issuers so long as such guarantee by such Restricted
Subsidiary complies with the provisions under Section 4.17;
(xii) Indebtedness consisting of customary indemnification,
adjustments of purchase price or similar obligations, in each case,
incurred or assumed in connection with the acquisition of any business or
assets; and
(xiii) the incurrence by the Issuers or any of their Restricted
Subsidiaries of additional Indebtedness in an aggregate principal amount
(or accreted value, as applicable) at any time outstanding, including all
Permitted Refinancing Indebtedness incurred to refund, refinance or replace
any other Indebtedness incurred pursuant to this clause (xiii), not to
exceed $15.0 million.
For purposes of determining compliance with this covenant, in the
event that an item of proposed Indebtedness meets the criteria of more than one
of the categories of Permitted Debt described in clauses (i) through (xiii)
above as of the date of incurrence thereof or is entitled to be incurred
pursuant to the first paragraph of this covenant as of the date of incurrence
thereof, the Issuers shall, in their sole discretion, classify or reclassify
such item of Indebtedness in any manner that complies with this covenant.
Accrual of interest, the accretion of accreted value and the payment of interest
in the form of additional Indebtedness will not be deemed to be an incurrence of
Indebtedness for purposes of this covenant and the payment of dividends on
Disqualified Stock in the form of additional shares of the same class of
Disqualified Stock will not be deemed an issuance of Disqualified Stock.
SECTION 4.10 ASSET SALES.
The Issuers will not, and will not permit any of their Restricted
Subsidiaries to, consummate an Asset Sale unless (i) such Issuer or such
Restricted Subsidiary receives consideration at the time of such Asset Sale at
least equal to the fair market value (evidenced by a resolution of its Board of
Directors, whose determination shall be conclusive, set forth in an Officers'
Certificate delivered to the Trustee) of the assets or Equity Interests issued
or sold or otherwise disposed of and (ii) at least 75% of the consideration
therefor received by such Issuer or such Restricted Subsidiary is in the form of
cash or Cash Equivalents; provided that the amount of (x) any liabilities (as
shown on such Issuer's or such Restricted Subsidiary's most recent balance
sheet), of such Issuer or any of its Restricted Subsidiaries (other than
contingent liabilities and liabilities that are by their terms subordinated to
the Senior Discount Notes) that are assumed by the transferee of any such assets
and (y) any securities, notes or other obligations received by such Issuer or
any such Restricted Subsidiary from such transferee that are promptly converted
by such Issuer or such Restricted Subsidiary into cash (to the extent of the
cash received), shall be deemed to be cash for purposes of the foregoing and the
next paragraph.
Notwithstanding the immediately preceding paragraph, the Issuers and
their Restricted Subsidiaries will be permitted to consummate an Asset Sale
without complying with
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the prior paragraph if (i) such Issuer or such Restricted Subsidiary receives
consideration at the time of such Asset Sale at least equal to the fair market
value of the assets or other property sold, issued or otherwise disposed of (as
evidenced by a resolution of its Board of Directors, which shall be conclusive,
set forth in an Officers' Certificate delivered to the Trustee) and (ii) at
least 75% of the consideration for such Asset Sale constitutes a controlling
interest in a Permitted Business, assets used or useful in a Permitted Business
and/or cash or Cash Equivalents; provided that any cash (other than any amount
deemed cash under clause (ii)(x) of the preceding paragraph) or Cash Equivalents
received by such Issuer or such Restricted Subsidiary in connection with any
Asset Sale permitted to be consummated under this paragraph shall constitute Net
Cash Proceeds subject to the provisions of the next paragraph.
Within 360 days after the receipt of any Net Cash Proceeds from an
Asset Sale, the Issuer or such Restricted Subsidiary, as the case may be, may
apply such Net Cash Proceeds, at its option, (a) to repay Indebtedness of the
Company Issuers (and to correspondingly permanently reduce the commitments with
respect thereto under the Credit Facility) or (b) to the acquisition of a
controlling interest in a Permitted Business, the making of a capital
expenditure or the acquisition of assets used or useful in a Permitted Business.
Pending the final application of any such Net Cash Proceeds, the Issuers or such
Restricted Subsidiary, as the case may be, may temporarily reduce revolving
credit borrowings or otherwise invest such Net Cash Proceeds in any manner that
is not prohibited by the Indenture. Any Net Cash Proceeds from Asset Sales that
are not applied or invested as provided in the first sentence of this paragraph
within the applicable period shall be deemed to constitute "Excess Proceeds."
When the aggregate amount of Excess Proceeds exceeds $10.0 million, the Issuers
shall be required, to the extent permitted by the Senior Subordinated Note
Indenture, to make an offer to all Holders of Senior Discount Notes and all
holders of other pari passu Indebtedness of the Issuers containing provisions
similar to those set forth in this Indenture with respect to offers to purchase
or redeem with the proceeds or sales of assets (an "Asset Sale Offer") to
purchase the maximum principal amount of Senior Discount Notes and such other
pari passu Indebtedness of the Issuers that may be purchased out of the Excess
Proceeds, at an offer price in cash in an amount equal to 100% of the principal
amount thereof plus accrued and unpaid interest and Liquidated Damages thereon,
if any, to the date of repurchase (or, in the case of repurchases of Senior
Discount Notes prior to the Full Accretion Date, at a purchase price equal to
100% of the Accreted Value thereof as of the date of repurchase), in accordance
with Section 3.9 and such other Indebtedness. To the extent that any Excess
Proceeds remain after consummation of an Asset Sale Offer, the Issuers may use
such Excess Proceeds for any purpose not otherwise prohibited by the Indenture.
If the aggregate principal amount at maturity or Accreted Value (as applicable)
of the Senior Discount Notes and such other Indebtedness tendered into such
Asset Sale Offer exceeds the amount of Excess Proceeds, the Trustee shall select
the Senior Discount Notes and such other Indebtedness to be purchased on a pro
rata basis, by lot or by any other customary method; provided that no Senior
Discount Notes of $1,000 or less shall be redeemed in part. Upon completion of
such offer to purchase, the amount of Excess Proceeds shall be reset at zero.
The Issuers will comply with the requirements of Rule 14e-1 under the
Exchange Act and any other securities laws and regulations thereunder to the
extent such laws
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and regulations are applicable in connection with the repurchase of Senior
Discount Notes pursuant to an Asset Sale Offer.
SECTION 4.11 TRANSACTIONS WITH AFFILIATES.
The Issuers will not, and will not permit any of their Restricted
Subsidiaries to, make any payment to, or sell, lease, transfer or otherwise
dispose of any properties or assets to, or purchase any property or assets from,
or enter into or make or amend any transaction, contract, agreement,
understanding, loan, advance or Guarantee with, or for the benefit of, any
Affiliate of any such Person (each of the foregoing, an "Affiliate
Transaction"), unless (i) such Affiliate Transaction is on terms that are no
less favorable to such Issuer or the relevant Restricted Subsidiary than those
that would have been obtained in a comparable transaction by such Issuer or such
Restricted Subsidiary with an unrelated Person and (ii) such Issuer delivers to
the Trustee (a) with respect to any Affiliate Transaction or series of related
Affiliate Transactions involving aggregate consideration in excess of $2.5
million, a resolution of its Board of Directors set forth in an Officers'
Certificate certifying that such Affiliate Transaction complies with clause (i)
above and that such Affiliate Transaction has been approved by a majority of the
members of its Board of Directors and (b) with respect to any Affiliate
Transaction or series of related Affiliate Transactions involving aggregate
consideration in excess of $10.0 million, an opinion as to the fairness to the
Holders of such Affiliate Transaction from a financial point of view issued by
an investment banking, appraisal or accounting firm of national standing;
provided that none of the following shall be deemed to be Affiliate
Transactions: (1) any employment agreement entered into by any of the Issuers or
any of their Restricted Subsidiaries or Avalon in the ordinary course of
business, (2) transactions between or among any of the Issuers and/or their
Restricted Subsidiaries, (3) any sale or other issuance of Equity Interests
(other than Disqualified Stock) of any of the Issuers, (4) Restricted Payments
that are permitted by Section 4.7 (5) fees and compensation paid to members of
the Boards of Directors of the Issuers and their Restricted Subsidiaries or
Avalon in their capacity as such, to the extent such fees and compensation are
reasonable and customary, (6) advances to employees for moving, entertainment
and travel expenses, drawing accounts and similar expenditures in the ordinary
course of business, (7) fees and compensation paid to, and indemnity provided on
behalf of, officers, directors or employees of the Issuers or any of their
Restricted Subsidiaries or Avalon, as determined by the Board of Directors of
such Person, to the extent such fees and compensation are reasonable and
customary, (8) all transactions associated with the Reorganization and the
Mercom Acquisition, (9) the Mercom Intercompany Loan, the ABRY Management
Agreement and the Mercom Management Agreement and (10) Indebtedness permitted
under this Indenture.
SECTION 4.12 LIENS.
The Issuers will not, and will not permit any of their Restricted
Subsidiaries to, create, incur, assume or otherwise cause or suffer to exist or
become effective any Lien (other than Permitted Liens) of any kind securing
Indebtedness, Attributable Debt, or trade payables upon any of their property or
assets, now owned or hereafter acquired, unless all payments due under the
Indenture and the Senior Discount Notes are secured on an equal and ratable
basis with
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the obligations so secured until such time as such obligations are no longer
secured by a Lien; provided that, with respect to any Indebtedness which by its
terms is subordinate to the Senior Discount Notes, any Lien securing such
Indebtedness shall be subordinate to the Liens securing the Senior Discount
Notes and all payments due under the Indenture and the Senior Discount Notes.
SECTION 4.13 BUSINESS ACTIVITIES.
The Issuers shall not, and shall not permit any Restricted
Subsidiary to, engage in any line of business other than Permitted Businesses,
except to such extent as would not be material to the Issuers and their
Restricted Subsidiaries taken as a whole, and Finance Holdings shall not own any
operating assets or other properties or conduct any business other than to serve
as an Issuer and obligor on the Senior Discount Notes.
SECTION 4.14 CORPORATE EXISTENCE.
Subject to Article 5 hereof, the Issuers shall do or cause to be
done all things necessary to preserve and keep in full force and effect (i)
their limited liability company or corporate existence, and the corporate,
partnership, limited liability company or other existence of each of their
Subsidiaries, in accordance with the respective organizational documents (as the
same may be amended from time to time) of the Issuers or any such Subsidiary and
(ii) the rights (charter and statutory), licenses and franchises of the Issuers
and their Subsidiaries; provided, however, that the Issuers shall not be
required to preserve any such right, license or franchise, or the corporate,
partnership, limited liability company or other existence of any of their
Subsidiaries or of the Issuers holding less than substantially all of the assets
of the Issuers on a combined basis, if the Board of Directors shall determine
that the loss thereof is not adverse in any material respect to the conduct of
the business of the Issuers and their Subsidiaries taken as a whole or to the
Holders.
SECTION 4.15 OFFER TO REPURCHASE UPON CHANGE OF CONTROL.
(a) Upon the occurrence of a Change of Control, each Holder of
Senior Discount Notes will have the right to require the Issuers to repurchase
all or any part (equal to $1,000 or an integral multiple thereof) of such
Holder's Senior Discount Notes pursuant to a Change of Control Offer (as defined
below) at an offer price in cash equal to 101% of the aggregate principal amount
at maturity thereof plus accrued and unpaid interest and Liquidated Damages
thereon, if any, to the date of purchase (or, in the case of repurchases of
Senior Discount Notes prior to the Full Accretion Date, at a purchase price
equal to 101% of the Accreted Value thereof as of the date of purchase)
(collectively, the "Change of Control Payment"). Within 20 days following any
Change of Control, the Issuers will mail a notice to each Holder describing the
transaction or transactions that constitute the Change of Control and offer (a
"Change of Control Offer") to repurchase Senior Discount Notes on the date
specified in such notice, which date shall be no earlier than 30 days and no
later than 60 days from the date such notice is mailed (the "Change of Control
Payment Date"), pursuant to the procedures
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required by this Indenture and described in such notice. The Issuers will comply
with the requirements of Rule 14e-1 under the Exchange Act and any other
securities laws and regulations thereunder to the extent such laws and
regulations are applicable in connection with the repurchase of the Senior
Discount Notes as a result of a Change of Control.
(b) On the Change of Control Payment Date, the Issuers will, to the
extent lawful, (1) accept for payment all Senior Discount Notes or portions
thereof properly tendered pursuant to the Change of Control Offer, (2) deposit
with the Paying Agent an amount equal to the Change of Control Payment in
respect of all Senior Discount Notes or portions thereof so tendered and (3)
deliver or cause to be delivered to the Trustee the Senior Discount Notes so
accepted together with an Officers' Certificate stating the aggregate principal
amount at maturity of Senior Discount Notes or portions thereof being purchased
by the Issuers. The Paying Agent will promptly mail to each Holder of Senior
Discount Notes so tendered the Change of Control Payment for such Senior
Discount Notes, and the Trustee will promptly authenticate and mail (or cause to
be transferred by book entry) to each Holder a new Senior Discount Note equal in
principal amount to any unpurchased portion of the Senior Discount Notes
surrendered, if any; provided that each such new Senior Discount Note will be in
a principal amount of $1,000 or an integral multiple thereof. Prior to
complying with the provisions of this covenant, but in any event within 90 days
following a Change of Control, the Issuers will either repay all outstanding
Senior Indebtedness or obtain the requisite consents, if any, under all
agreements governing outstanding Senior Indebtedness to permit the repurchase of
Senior Discount Notes required by this covenant. The Issuers will publicly
announce the results of the Change of Control Offer on or as soon as practicable
after the Change of Control Payment Date.
(c) The Issuers will not be required to make a Change of Control
Offer upon a Change of Control if a third party makes the Change of Control
Offer in the manner, at the times and otherwise in compliance with the
requirements set forth in this Indenture applicable to a Change of Control Offer
made by the Issuers and purchases all Senior Discount Notes validly tendered and
not withdrawn under such Change of Control Offer.
(d) The Change of Control provisions described above will be
applicable whether or not any other provisions of this Indenture are applicable.
SECTION 4.16 [INTENTIONALLY OMITTED].
SECTION 4.17 GUARANTEES BY RESTRICTED SUBSIDIARIES.
The Issuers will not permit any of their Restricted Subsidiaries,
directly or indirectly, to Guarantee, assume or in any other manner become
liable for the payment of any Indebtedness of the Issuers (other than as part of
the Reorganization) unless: (i) such Restricted Subsidiary simultaneously
executes and delivers a supplemental indenture providing for a Senior Discount
Note Guarantee of payment of the Senior Discount Notes by such Restricted
Subsidiary, and (ii) such Restricted Subsidiary waives, and will not in any
manner whatsoever claim or take the benefit or advantage of, any rights of
reimbursement, indemnity or subrogation
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or any other rights against the Issuers or any other Restricted Subsidiary as a
result of any payment by such Restricted Subsidiary under its Senior Discount
Note Guarantee until the Senior Discount Notes have been paid in full.
SECTION 4.18 PAYMENTS FOR CONSENT.
Neither the Issuers nor any of their Subsidiaries shall, directly
or indirectly, pay or cause to be paid any consideration, whether by way of
interest, fee or otherwise, to any Holder of any Senior Discount Notes for or as
an inducement to any consent, waiver or amendment of any of the terms or
provisions of this Indenture or the Senior Discount Notes unless such
consideration is offered to be paid or is paid to all Holders of the Senior
Discount Notes that consent, waive or agree to amend in the time frame set forth
in the solicitation documents relating to such consent, waiver or agreement.
SECTION 4.19 SALE AND LEASEBACK TRANSACTIONS.
The Issuers will not, and will not permit any of their Restricted
Subsidiaries to, enter into any sale and leaseback transaction; provided that
the Issuers or any of their Restricted Subsidiaries may enter into a sale and
leaseback transaction if (i) such Issuer or Restricted Subsidiary could have
incurred Indebtedness in an amount equal to the Attributable Debt relating to
such sale and leaseback transaction pursuant to the test set forth in the first
paragraph of Section 4.9, (ii) the gross cash proceeds of such sale and
leaseback transaction are at least equal to the fair market value (as determined
in good faith by the Board of Directors of such Issuer or Restricted Subsidiary,
whose determination shall be conclusive, and set forth in an Officers'
Certificate delivered to the Trustee) of the property that is the subject of
such sale and leaseback transaction and (iii) the transfer of assets in such
sale and leaseback transaction is permitted by, and such Issuer or Restricted
Subsidiary applies the proceeds of such transaction in compliance with, Section
4.10.
SECTION 4.20 SALE OR ISSUANCE OF CAPITAL STOCK OF RESTRICTED SUBSIDIARIES.
Other than pursuant to the Reorganization, the Issuers (i) will
not, and will not permit any of their Restricted Subsidiaries to, transfer,
convey, sell, lease or otherwise dispose of any Equity Interests in any such
Restricted Subsidiary to any Person (other than an Issuer or a Restricted
Subsidiary of an Issuer), unless (a)(1) such transfer, conveyance, sale, lease
or other disposition is of all the Equity Interests in such Restricted
Subsidiary or (2) after giving effect thereto, such Restricted Subsidiary will
still constitute a Restricted Subsidiary and (b) the Net Cash Proceeds from such
transfer, conveyance, sale, lease or other disposition are applied in accordance
with Section 4.10, and (ii) will not permit any of their Restricted Subsidiaries
to issue any of its Equity Interests (other than, if necessary, shares of its
Capital Stock constituting directors' qualifying shares) to any Person other
than to such Issuer or a Wholly Owned Restricted Subsidiary of such Issuer if,
after giving effect thereto, such Restricted Subsidiary will not be a direct or
indirect Subsidiary of an Issuer.
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ARTICLE 5.
SUCCESSORS
SECTION 5.1 MERGER, CONSOLIDATION, OR SALE OF ASSETS.
The Issuer or Issuers holding all or substantially all of the assets
of the Issuers on a combined basis will not, directly or indirectly, consolidate
or merge with or into (whether or not such Issuer is the surviving corporation),
or sell, assign, transfer, convey or otherwise dispose of all or substantially
all of the properties or assets of the Issuers on a combined basis in one or
more related transactions, to another Person unless (i) such Issuer is the
surviving corporation or the Person formed by or surviving any such
consolidation or merger (if other than such Issuer) or to which such sale,
assignment, transfer, conveyance or other disposition shall have been made is a
Person organized or existing under the laws of the United States, any state
thereof or the District of Columbia; provided that the Issuers agree that so
long as the Senior Discount Notes are outstanding at least one of the Issuers
shall be a corporation organized or existing under the laws of the United
States, any state thereof or the District of Columbia; (ii) the Person formed by
or surviving any such consolidation or merger (if other than such Issuer) or the
Person to which such sale, assignment, transfer, conveyance or other disposition
shall have been made assumes all the obligations of such Issuer under the Senior
Discount Notes and the Indenture pursuant to a supplemental indenture in a form
reasonably satisfactory to the Trustee; (iii) immediately before and after such
transaction no Default or Event of Default shall have occurred; and (iv) except
in the case of a merger of such Issuer with or into a Restricted Subsidiary of
such Issuer, the Issuer or the Person formed by or surviving any such
consolidation or merger (if other than such Issuer), or to which such sale,
assignment, transfer, conveyance or other disposition shall have been made,
together with the surviving Issuers, will, immediately before and after such
transaction after giving pro forma effect thereto and any related financing
transactions as if the same had occurred at the beginning of the applicable
quarter, be permitted to incur at least $1.00 of additional Indebtedness
pursuant to the test set forth in the first paragraph of Section 4.9. None of
the Issuers may, directly or indirectly, lease all or substantially all of its
properties or assets, in one or more related transactions, to any other Person.
Notwithstanding the foregoing, (a) any or all of the Issuers may
merge or consolidate with or transfer substantially all of its assets to an
Affiliate that has no significant assets or liabilities and was formed solely
for the purpose of changing the jurisdiction of organization of such Issuer or
the form of organization of such Issuer, provided that the amount of
Indebtedness of such Issuer and its Restricted Subsidiaries is not increased
thereby and provided, further, that the successor assumes all obligations of
such Issuer under the Indenture and the Registration Rights Agreement and (b)
nothing in this Section 5.1 shall be deemed to prevent the consummation of the
Reorganization.
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SECTION 5.2 SUCCESSOR CORPORATION OR GUARANTORS SUBSTITUTED.
(a) Upon any consolidation or merger, or any sale, assignment,
transfer, lease, conveyance or other disposition of all or substantially all of
the properties or assets of the Issuers in accordance with this covenant, the
successor corporation formed by such consolidation or into or with which an
Issuer or Issuers are merged or to which such sale, assignment, transfer, lease,
conveyance or other disposition is made shall succeed to, and be substituted for
and may exercise every right and power of such Issuer or Issuers under this
Indenture with the same effect as if such successor Person had been named as
such Issuer or Issuers therein (so that from and after the date of such
consolidation, merger, sale, lease, conveyance or other disposition, the
provisions of the Indenture referring to the "Issuers" shall refer instead to
the successor corporation and not to such Issuer or Issuers), and may exercise
every right and power of such Issuer or Issuers under this Indenture with the
same effect as if such successor Person had been named as such Issuer or Issuers
therein; provided, however, that the predecessor Issuer shall not be relieved
from the obligation to pay the principal of and interest on the Senior Discount
Notes except in the case of a sale, assignment, transfer, conveyance or other
disposition of all or substantially all of the properties or assets of the
Issuers on a combined basis that meets the requirements of this Article 5.
(b) Each Guarantor which is a Restricted Subsidiary, if any, shall
not, and the Issuers will not permit a Guarantor which is a Restricted
Subsidiary to, consolidate or merge with or into or wind up into (whether or not
such Guarantor is the surviving corporation), or sell, assign, transfer, lease,
convey or otherwise dispose of all or substantially all of its properties or
assets in one or more related transactions to, any Person unless (i) such
Guarantor is the surviving corporation or the Person formed by or surviving any
such consultation or merger (if other than such Guarantor) or to which such
sale, assignment, transfer, lease, conveyance or other disposition will have
been made is a corporation, partnership or limited liability company organized
or existing under the laws of the United States, any state thereof, the District
of Columbia, or any territory thereof (such Guarantor or such Person, as the
case may be, being herein called the "Successor Guarantor"); (ii) the Successor
Guarantor (if other than such Guarantor) expressly assumes all the obligations
of such Guarantor under this Indenture and such Guarantor's Senior Discount Note
Guarantee pursuant to a supplemental indenture or other documents or instruments
in form reasonably satisfactory to the Trustee; and (iii) if such merger or
consolidation is with a Person other than the Issuers or a Restricted
Subsidiary, (x) immediately after such transaction no Default or Event of
Default shall have occurred and be continuing any (y) the Issuers will, at the
time of such transaction after giving pro forma effect thereto, be permitted to
incur at least $1.00 of additional Indebtedness pursuant to the first paragraph
of Section 4.9 hereof. The Successor Guarantor will succeed to, and be
substituted for, such Guarantor under this Indenture and such Guarantor's Senior
Discount Note Guarantee.
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ARTICLE 6.
EVENTS OF DEFAULT
SECTION 6.1 EVENTS OF DEFAULT.
An "Event of Default" occurs if:
(a) the Issuers default in the payment when due of interest on, or
Liquidated Damages, if any, with respect to, the Senior Discount Notes and
such default continues for a period of 30 days;
(b) the Issuers default in the payment when due of the Accreted
Value of or the principal of or premium, if any, on the Senior Discount
Notes;
(c) the Issuers or any of their Restricted Subsidiaries fail to
comply with any of the provisions of Sections 4.7, 4.9 or 5.1 hereof;
(d) the Issuers or any of their Restricted Subsidiaries fail for 30
days after written notice by the Trustee or the Holders of at least 25% in
principal amount at maturity of the then outstanding Senior Discount Notes
to comply with the provisions of Sections 4.10 or 4.15;
(e) the Issuers, any of their Restricted Subsidiaries or any
Guarantor which is a Restricted Subsidiary, fails to observe or perform any
other covenant, representation, warranty or other agreement in this
Indenture or the Senior Discount Notes for 60 days after written notice to
the Issuers by the Trustee or the Holders of at least 25% in aggregate
principal amount at maturity of the Senior Discount Notes then outstanding;
(f) the Issuers or any of their Restricted Subsidiaries default
under any mortgage, indenture or instrument under which there may be issued
or by which there may be secured or evidenced any Indebtedness for money
borrowed by any of the Issuers or any of their Restricted Subsidiaries (or
the payment of which is guaranteed by any of the Issuers or any of their
Restricted Subsidiaries) whether such Indebtedness or guarantee now exists,
or is created after the Issue Date, which default (a) is caused by a
failure to pay principal of or premium, if any, or interest on such
Indebtedness prior to the expiration of the grace period provided in such
Indebtedness on the date of such default (a "Payment Default") or (b)
results in the acceleration of such Indebtedness prior to its express
maturity and, in each case, the principal amount of any such Indebtedness,
together with the principal amount of any other such Indebtedness under
which there has been a Payment Default or the maturity of which has been so
accelerated, aggregates without duplication $5.0 million or more;
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(g) the Issuers or any of its Subsidiaries fail to pay a final
judgment or final judgments for the payment of money which are entered by a
court or courts of competent jurisdiction against the Issuers or any of
their Subsidiaries and such judgment or judgments remain undischarged for a
period (during which execution shall not be effectively stayed) of 60 days,
provided that the aggregate of all such undischarged judgments (without
duplication) exceeds $5.0 million (excluding amounts covered by insurance);
and
(h) the Issuers or any of their Restricted Subsidiaries that
constitute a Significant Subsidiary, or any group of Restricted
Subsidiaries that, taken together, would constitute a Significant
Subsidiary pursuant to or within the meaning of Bankruptcy Law:
(i) commence a voluntary case,
(ii) consent to the entry of an order for relief against them in
an involuntary case,
(iii) consent to the appointment of a custodian of them or for
all or substantially all of their property,
(iv) make a general assignment for the benefit of their
creditors, or
(v) generally are not paying their debts as they become due; or
(i) a court of competent jurisdiction enters an order or decree
under any Bankruptcy Law that:
(i) is for relief against the Issuers or any of their
Restricted Subsidiaries that constitute a Significant Subsidiary, or
any group of Restricted Subsidiaries that, taken together, would
constitute a Significant Subsidiary in an involuntary case;
(ii) appoints a custodian of the Issuers or any of their
Restricted Subsidiaries that constitute a Significant Subsidiary, or
any group of Restricted Subsidiaries that, taken together, would
constitute a Significant Subsidiary or for all or substantially all of
the property of the Issuers or any of their Restricted Subsidiaries
that constitute a Significant Subsidiary, or any group of Restricted
Subsidiaries that, taken together, would constitute a Significant
Subsidiary; or
(iii) orders the liquidation of the Issuers or any of their
Restricted Subsidiaries that constitute a Significant Subsidiary, or
any group of Restricted Subsidiaries that, taken together, would
constitute a Significant Subsidiary;
and the order or decree remains unstayed and in effect for 60 consecutive
days.
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SECTION 6.2 ACCELERATION.
If any Event of Default occurs and is continuing, the Trustee or
the Holders of at least 25% in principal amount at maturity of the then
outstanding Senior Discount Notes may declare all the Senior Discount Notes to
be due and payable immediately; provided that so long as any Indebtedness
permitted to be incurred pursuant to the Senior Credit Facility shall be
outstanding, such acceleration shall not be effective until the earlier of (i)
an acceleration of such Indebtedness under the Senior Credit Facility and (ii)
five business days after receipt by the Issuers of written notice of such
acceleration of the Senior Discount Notes. Notwithstanding the foregoing, in the
case of an Event of Default arising from Section 6.1(h) or 6.1(i), with respect
to any of the Issuers or any of their Restricted Subsidiaries, all outstanding
Senior Discount Notes will become due and payable without further action or
notice. Holders of the Senior Discount Notes may not enforce the Indenture or
the Senior Discount Notes except as provided in the Indenture. Subject to
certain limitations within this Indenture or the TIA, Holders of a majority in
principal amount at maturity of the then outstanding Senior Discount Notes may
direct the Trustee in its exercise of any trust or power. The Trustee may
withhold from Holders of the Senior Discount Notes notice of any continuing
Default or Event of Default (except a Default or Event of Default relating to
the payment of principal or interest) if it determines that withholding notice
is in their interest.
SECTION 6.3 OTHER REMEDIES.
If an Event of Default occurs and is continuing, the Trustee may
pursue any available remedy to collect the payment of principal, premium, if
any, interest and Liquidated Damages, if any, on the Senior Discount Notes or to
enforce the performance of any provision of the Senior Discount Notes or this
Indenture.
The Trustee may maintain a proceeding even if it does not possess
any of the Senior Discount Notes or does not produce any of them in the
proceeding. A delay or omission by the Trustee or any Holder of a Senior
Discount Note in exercising any right or remedy accruing upon an Event of
Default shall not impair the right or remedy or constitute a waiver of or
acquiescence in the Event of Default. All remedies are cumulative to the extent
permitted by law.
SECTION 6.4 WAIVER OF PAST DEFAULTS.
The Holders of a majority in aggregate principal amount at maturity
of the Senior Discount Notes then outstanding by notice to the Trustee may on
behalf of the Holders of all of the Senior Discount Notes waive any existing
Default or Event of Default and its consequences under this Indenture except a
continuing Default or Event of Default in the payment of interest on, or the
Accreted Value or principal of, the Senior Discount Notes.
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SECTION 6.5 CONTROL BY MAJORITY.
Holders of a majority in principal amount at maturity of the then
outstanding Senior Discount Notes may direct the time, method and place of
conducting any proceeding for exercising any remedy available to the Trustee or
exercising any trust or power conferred on it. However, the Trustee may refuse
to follow any direction that conflicts with law or this Indenture or that may be
unduly prejudicial to the rights of other Holders of Senior Discount Notes or
that may involve the Trustee in personal liability. The Trustee may take any
other action consistent with this Indenture relating to any such direction.
SECTION 6.6 LIMITATION ON SUITS.
A Holder of a Senior Discount Note may pursue a remedy with respect
to this Indenture or the Senior Discount Notes only if:
(a) the Holder of a Senior Discount Note gives to the Trustee
written notice of a continuing Event of Default;
(b) the Holders of at least 25% in principal amount at maturity of
the then outstanding Senior Discount Notes make a written request to the Trustee
to pursue the remedy;
(c) such Holder of a Senior Discount Note or Holders of Senior
Discount Notes offer and, if requested, provide to the Trustee security and
indemnity satisfactory to the Trustee against any loss, liability or expense;
(d) the Trustee does not comply with the request within 60 days
after receipt of the request and the offer and, if requested, the provision of
security and indemnity; and
(e) during such 60-day period the Holders of a majority in
principal amount at maturity of the then outstanding Senior Discount Notes do
not give the Trustee a direction inconsistent with the request.
A Holder of a Senior Discount Note may not use this Indenture to
prejudice the rights of another Holder of a Senior Discount Notes or to obtain a
preference or priority over another Holder of a Senior Discount Notes.
SECTION 6.7 RIGHTS OF HOLDERS OF SENIOR DISCOUNT NOTES TO RECEIVE PAYMENT.
Notwithstanding any other provision of this Indenture, the right of
any Holder of a Senior Discount Note to receive payment of principal, premium
and Liquidated Damages, if any, and interest on the Senior Discount Note, on or
after the respective due dates expressed in the Senior Discount Notes (including
in connection with an offer to purchase), or to bring suit for the
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enforcement of any such payment on or after such respective dates, shall not be
impaired or affected without the consent of such Holder.
SECTION 6.8 COLLECTION SUIT BY TRUSTEE.
If an Event of Default specified in Section 6.1(a) or (b) occurs and
is continuing, the Trustee is authorized to recover judgment in its own name and
as trustee of an express trust against the Issuers for the whole amount of
principal of, premium and Liquidated Damages, if any, and interest remaining
unpaid on the Senior Discount Notes and interest on overdue principal and, to
the extent lawful, interest and such further amount as shall be sufficient to
cover the costs and expenses of collection, including the compensation, fees,
expenses, disbursements and advances of the Trustee, its agents and counsel.
SECTION 6.9 TRUSTEE MAY FILE PROOFS OF CLAIM.
The Trustee is authorized to file such proofs of claim and other
papers or documents as may be necessary or advisable in order to have the claims
of the Trustee (including any claim for the compensation, fees, expenses,
disbursements and advances of the Trustee, its agents and counsel) and the
Holders of the Senior Discount Notes allowed in any judicial proceedings
relative to the Issuers (or any other obligor upon the Senior Discount Notes),
its creditors or its property and shall be entitled and empowered to collect,
receive and distribute any money or other property payable or deliverable on any
such claims and any custodian in any such judicial proceeding is hereby
authorized by each Holder to make such payments to the Trustee, and in the event
that the Trustee shall consent to the making of such payments directly to the
Holders, to pay to the Trustee any amount due to it for the compensation, fees,
expenses, disbursements and advances of the Trustee, its agents and counsel, and
any other amounts due the Trustee under or in connection with this Indenture.
To the extent that the payment of any such compensation, fees, expenses,
disbursements and advances of the Trustee, its agents and counsel, and any other
amounts due the Trustee under or in connection with this Indenture out of the
estate in any such proceeding, shall be denied for any reason, payment of the
same shall be secured by a perfected, first priority Lien on, and shall be paid
out of, any and all distributions, dividends, money, securities and other
properties that the Holders may be entitled to receive in such proceeding
whether in liquidation or under any plan of reorganization or arrangement or
otherwise, and such Lien in favor of a predecessor Trustee shall be senior to
the Lien in favor of the current Trustee. Nothing herein contained shall be
deemed to authorize the Trustee to authorize or consent to or accept or adopt on
behalf of any Holder any plan of reorganization, arrangement, adjustment or
composition affecting the Senior Discount Notes or the rights of any Holder, or
to authorize the Trustee to vote in respect of the claim of any Holder in any
such proceeding.
SECTION 6.1 PRIORITIES.
If the Trustee collects any money pursuant to this Article, it shall
pay out the money in the following order:
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First: to the Trustee (including any predecessor Trustee), its
agents and attorneys for amounts due under Section 7.7 hereof, including payment
of all compensation, fees, expenses and liabilities incurred, and all advances
made, by the Trustee and the costs and expenses of collection;
Second: to Holders of Senior Discount Notes for amounts due and
unpaid on the Senior Discount Notes for principal, premium and Liquidated
Damages, if any, and interest, ratably, without preference or priority of any
kind, according to the amounts due and payable on the Senior Discount Notes for
principal, premium and Liquidated Damages, if any and interest, respectively;
and
Third: to the Issuers.
The Trustee may fix a record date and payment date for any payment
to Holders of Senior Discount Notes pursuant to this Section 6.10.
SECTION 6.11 FOR COSTS.
In any suit for the enforcement of any right or remedy under this
Indenture or in any suit against the Trustee for any action taken or omitted by
it as a Trustee, a court in its discretion may require the filing by any party
litigant in the suit of an undertaking to pay the costs of the suit, and the
court in its discretion may assess reasonable costs, including reasonable
attorneys' fees and expenses, against any party litigant in the suit, having due
regard to the merits and good faith of the claims or defenses made by the party
litigant. This Section 6.11 does not apply to a suit by the Trustee, a suit by
a Holder of a Senior Discount Notes pursuant to Section 6.7 hereof, or a suit by
Holders of more than 10% in principal amount at maturity of the then outstanding
Senior Discount Notes.
ARTICLE 7.
TRUSTEE
SECTION 7.1 DUTIES OF TRUSTEE.
(a) If an Event of Default has occurred and is continuing, the
Trustee shall exercise such of the rights and powers vested in it by this
Indenture, and use the same degree of care and skill in its exercise, as a
prudent man would exercise or use under the circumstances in the conduct of his
own affairs.
(b) Except during the continuance of an Event of Default:
(i) the duties of the Trustee shall be determined solely by
the express provisions of this Indenture and the Trustee need perform
only those duties that are specifically set forth in this Indenture
and no others, and no implied
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covenants or obligations shall be read into this Indenture against
the Trustee; and
(ii) in the absence of bad faith on its part, the Trustee may
conclusively rely, as to the truth of the statements and the
correctness of the opinions expressed therein, upon certificates or
opinions furnished to the Trustee and conforming to the requirements
of this Indenture.
(c) The Trustee may not be relieved from liabilities for its own
negligent action, its own negligent failure to act, or its own willful
misconduct or bad faith, except that:
(i) this paragraph does not limit the effect of paragraph (b)
of this Section;
(ii) the Trustee shall not be liable for any error of judgment
made in good faith by a Responsible Officer, unless it is proved
that the Trustee was negligent in ascertaining the pertinent facts;
and
(iii) the Trustee shall not be liable with respect to any action
it takes or omits to take in good faith in accordance with a
direction received by it pursuant to Section 6.5 hereof.
(d) Whether or not therein expressly so provided, every provision
of this Indenture that in any way relates to the Trustee is subject to
paragraphs (a), (b), (c), (e) and (f) of this Section.
(e) No provision of this Indenture shall require the Trustee to
expend or risk its own funds or incur any liability. The Trustee shall be under
no obligation to exercise any of its rights and powers under this Indenture at
the request or direction of any Holders, unless such Holder shall have provided
to the Trustee security and indemnity satisfactory to it against any loss,
liability or expense.
(f) The Trustee shall not be liable for interest on any money
received by it except as the Trustee may agree in writing with the Issuers.
Money held in trust by the Trustee need not be segregated from other funds
except to the extent required by law.
SECTION 7.2 RIGHTS OF TRUSTEE.
(a) The Trustee may conclusively rely upon any document believed by
it to be genuine and to have been signed or presented by the proper Person. The
Trustee need not investigate any fact or matter stated in the document, but the
Trustee, in its discretion, may make such further inquiry or investigation into
such facts or matters as it may see fit, and if the Trustee shall determine to
make such further inquiry or investigation, it shall be entitled to examine the
books, records and premises of the Issuers, personally or by agent or attorney
at the sole expense
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of the Issuers and shall incur no liability or additional liability of any kind
by reason of such inquiry or investigation.
(b) Before the Trustee acts or refrains from acting, it shall be
entitled to receive an Officers' Certificate or an Opinion of Counsel or both.
The Trustee shall not be liable for any action it takes or omits to take in good
faith in reliance on such Officers' Certificate or Opinion of Counsel. The
Trustee may consult with counsel of its own selection and the advice of such
counsel or any Opinion of Counsel shall be full and complete authorization and
protection from liability in respect of any action taken, suffered or omitted by
it hereunder in good faith and in reliance thereon.
(c) The Trustee may act through its attorneys and agents and shall
not be responsible for the misconduct or negligence or bad faith of any agent
appointed with due care.
(d) The Trustee shall not be liable for any action it takes or omits
to take in good faith that it believes to be authorized or within the rights or
powers conferred upon it by this Indenture.
(e) Unless otherwise specifically provided in this Indenture, any
demand, request, direction or notice from the Issuers shall be sufficient if
signed by an Officer of each of the Issuers.
(f) The Trustee shall be under no obligation to exercise any of the
rights or powers vested in it by this Indenture at the request or direction of
any of the Holders unless such Holders shall have provided to the Trustee
security or indemnity satisfactory to it against the costs, expenses and
liabilities that might be incurred by it in compliance with such request or
direction.
(g) No permissive right of the Trustee to act hereunder shall be
construed as a duty.
(h) Whenever in the administration of this Indenture the Trustee
shall deem it desirable that a matter be proved or established prior to taking,
suffering or omitting any action hereunder, the Trustee (unless other evidence
be herein specifically prescribed) may, in the absence of willful misconduct or
bad faith on its part, conclusively rely upon an Officers' Certificate, an
Opinion of Counsel, or both.
(i) Except with respect to Section 4.1 hereof, the Trustee shall have
no duty to inquire as to the performance of the Issuers' covenants in Article 4
hereof. In addition, the Trustee shall not be deemed to have knowledge
(including actual knowledge) of any Default or Event of Default except (i) any
Event of Default occurring pursuant to Sections 6.1(a) and 6.1(b) hereof or (ii)
any Default or Event of Default of which the Trustee shall have received written
notification or obtained actual knowledge.
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(j) The Trustee shall not be deemed to have notice or knowledge
(including actual knowledge) of any matter unless a Responsible Officer has
actual knowledge thereof or unless written notice thereof is actually received
by a Responsible Officer of the Trustee at the Corporate Trust Office of the
Trustee and such notice references the Senior Discount Notes generally, the
Issuers or this Indenture.
SECTION 7.3 INDIVIDUAL RIGHTS OF TRUSTEE.
The Trustee in its individual or any other capacity may become the
owner or pledgee of Senior Discount Notes and may otherwise deal with the
Issuers or any Affiliate of the Issuers with the same rights it would have if it
were not Trustee. However, in the event that the Trustee acquires any
conflicting interest it must eliminate such conflict within 90 days, apply to
the SEC for permission to continue as trustee or resign. Any Agent may do the
same with like rights and duties. The Trustee is also subject to Sections 7.10
and 7.11 hereof.
SECTION 7.4 TRUSTEES DISCLAIMER.
The Trustee shall not be responsible for and makes no
representation as to the validity or adequacy of this Indenture, the Senior
Discount Notes, the Registration Rights Agreement or the Offering Memorandum; it
shall not be accountable for the Issuers' use of the proceeds from the Senior
Discount Notes or any money paid to the Issuers or upon the Issuers' direction
under any provision of this Indenture; it shall not be responsible for the use
or application of any money received by any Paying Agent other than the Trustee,
and it shall not be responsible for any statement or recital herein or any
statement in the Senior Discount Notes or any other document in connection with
the sale of the Senior Discount Notes or pursuant to this Indenture other than
its certificate of authentication.
SECTION 7.5 NOTICE OF DEFAULTS.
If a Default or Event of Default occurs and is continuing and if the
Trustee receives written notice thereof, the Trustee shall (at the expense of
the Issuers) mail to Holders of Senior Discount Notes a notice of the Default or
Event of Default within 90 days after it occurs. Except in the case of a Default
or Event of Default in payment of principal of, premium, if any, Liquidated
Damages, if any, or interest on any Senior Discount Notes, the Trustee may
withhold the notice if and so long as a committee of its Responsible Officers in
good faith determines that withholding the notice is in the interests of the
Holders of the Senior Discount Notes.
SECTION 7.6 REPORTS BY TRUSTEE TO HOLDERS OF THE SENIOR SUBORDINATED NOTES.
Within 60 days after each November 15 beginning with the November 15
following the date of this Indenture, and for so long as Senior Discount Notes
remain outstanding, the Trustee shall (at the expense of the Issuers) mail to
the Holders of the Senior Discount Notes a brief report dated as of such
reporting date that complies with TIA (S) 313(a)
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(but if no event described in TIA (S) 313(a) has occurred within the twelve
months preceding the reporting date, no report need be transmitted). The Trustee
also shall comply with TIA (S) 313(b)(2). The Trustee shall also transmit by
mail all reports as required by TIA (S) 313(c).
A copy of each report at the time of its mailing to the Holders of
Senior Discount Notes shall be mailed to the Issuers and filed with the SEC and
each stock exchange on which the Senior Discount Notes are listed in accordance
with TIA (S) 313(d). The Issuers shall promptly notify the Trustee when the
Senior Discount Notes are listed on any stock exchange or delisted therefrom.
SECTION 7.7 COMPENSATION AND INDEMNITY.
The Issuers jointly and severally agree to pay to the Trustee from
time to time such compensation as agreed upon in writing by the Trustee and the
Issuers, and, in the absence of any such agreement, reasonable compensation for
its acceptance of this Indenture and services hereunder. The Trustee's
compensation shall not be limited by any law on compensation of a trustee of an
express trust. The Issuers shall reimburse the Trustee promptly upon request
for all disbursements, advances and expenses incurred or made by it in addition
to the compensation for its services. Such expenses shall include the
compensation, disbursements and expenses of the Trustee's agents and counsel.
The Issuers shall fully indemnify the Trustee against any and all
losses, liabilities, claims, damages or expenses (including taxes other than
taxes based on the income of the Trustee) incurred by it arising out of or in
connection with the acceptance or administration of its duties under this
Indenture, including the costs and expenses of enforcing this Indenture against
the Issuers and the Guarantors (including this Section 7.7) and defending itself
against any claim (whether asserted by the Issuers, the Guarantors or any Holder
or any other person) or liability in connection with, relating to, or arising
out of (i) the exercise or performance of any of its powers or duties hereunder,
or in connection herewith, and (ii) the validity, invalidity, adequacy or
inadequacy of this Indenture, the Senior Discount Note Guarantees, the Senior
Discount Notes, the Registration Rights Agreement and the Offering Memorandum,
except to the extent any such loss, liability, claim, damage or expense may be
attributable to its negligence, willful misconduct or bad faith. The Trustee
shall notify the Issuers promptly of any claim for which it intends to seek
indemnity. Failure by the Trustee to so notify the Issuers shall not relieve
the Issuers and the Guarantors of their obligations hereunder. The Issuers
shall defend the claim and the Trustee shall cooperate in the defense. The
Trustee may have separate counsel and the Issuers shall pay the fees and
expenses of such counsel. The Issuers need not pay for any settlement made
without their consent, which consent shall not be unreasonably withheld.
The obligations of the Issuers to the Trustee under this Indenture
shall survive the satisfaction and discharge of this Indenture and shall be
secured by a Lien as provided in Section 6.9 hereof.
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To secure the Issuers' payment obligations in this Section, the
Trustee shall have a Lien prior to the Senior Discount Notes on all money or
property held or collected by the Trustee, except that held in trust to pay
principal and interest on particular Senior Discount Notes. Such Lien shall
survive the satisfaction and discharge of this Indenture.
When the Trustee incurs expenses or renders services after an Event
of Default specified in Section 6.1(g) or (h) hereof occurs, the expenses and
the compensation for the services (including the fees and expenses of its agents
and counsel) are intended to constitute expenses of administration under any
Bankruptcy Law.
The Trustee shall comply with the provisions of TIA (S) 313(b)(2) to
the extent applicable.
SECTION 7.8 REPLACEMENT OF TRUSTEE.
A resignation or removal of the Trustee and appointment of a
successor Trustee shall become effective only upon the successor Trustee's
acceptance of appointment as provided in this Section.
The Trustee may resign in writing at any time and be discharged from
the trust hereby created by so notifying the Issuers. The Holders of Senior
Discount Notes of a majority in principal amount at maturity of the then
outstanding Senior Discount Notes may remove the Trustee by so notifying the
Trustee and the Issuers in writing. The Issuers may by a board resolution
remove the Trustee if:
(a) the Trustee fails to comply with Section 7.10 hereof;
(b) the Trustee is adjudged a bankrupt or an insolvent or an order
for relief is entered with respect to the Trustee under any Bankruptcy Law;
(c) a custodian or public officer takes charge of the Trustee or
its property; or
(d) the Trustee becomes incapable of acting.
If the Trustee resigns or is removed or if a vacancy exists in the
office of Trustee for any reason, the Issuers shall promptly appoint a successor
Trustee. Within one year after the successor Trustee takes office, the Holders
of a majority in principal amount at maturity of the then outstanding Senior
Discount Notes may appoint a successor Trustee to replace the successor Trustee
appointed by the Issuers.
If a successor Trustee does not take office within 60 days after the
retiring Trustee resigns or is removed, the retiring Trustee, the Issuers, or
the Holders of Senior Discount Notes of at least 10% in principal amount at
maturity of the then outstanding Senior Discount
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Notes may petition, at the expense of the Issuers, any court of competent
jurisdiction for the appointment of a successor Trustee.
If the Trustee, after receiving a written request by any Holder of
a Senior Discount Notes who has been a bona fide Holder of a Senior Discount
Notes for at least six months, fails to comply with Section 7.10, such Holder of
a Senior Discount Notes may petition any court of competent jurisdiction for the
removal of the Trustee and the appointment of a successor Trustee.
A successor Trustee shall deliver a written acceptance of its
appointment to the retiring Trustee and to the Issuers. Thereupon, the
resignation or removal of the retiring Trustee shall become effective, and the
successor Trustee shall have all the rights, powers and duties of the Trustee
under this Indenture. The successor Trustee shall mail a notice of its
succession to Holders of the Senior Discount Notes. The retiring Trustee shall
promptly transfer all property held by it as Trustee to the successor Trustee,
provided all sums owing to the Trustee (and its agents and counsel) hereunder
have been paid and subject to the Lien provided for in Section 7.7 hereof.
Notwithstanding replacement of the Trustee pursuant to this Section 7.8, the
Issuers' obligations under Section 7.7 hereof shall continue for the benefit of
the retiring Trustee.
SECTION 7.9 SUCCESSOR TRUSTEE BY MERGER, ETC.
If the Trustee or any Agent consolidates, merges or converts into,
or transfers all or substantially all of its corporate trust business to,
another corporation, the successor corporation without any further act shall be
the successor Trustee or Agent, as the case may be.
SECTION 7.10 ELIGIBILITY; DISQUALIFICATION.
There shall at all times be a Trustee hereunder that is a
corporation organized and doing business under the laws of the United States of
America or of any state thereof that is authorized under such laws to exercise
corporate trustee power, that is subject to supervision or examination by
federal or state authorities and that together with its direct parent, if any,
or in the case of a corporation included in a bank holding company system, its
related bank holding company, has a combined capital and surplus of at least $50
million as set forth in its most recent published annual report of condition.
This Indenture shall always have a Trustee who satisfies the
requirements of TIA (S) 310(a)(1), (2) and (5). The Trustee is subject to TIA
(S) 310(b).
SECTION 7.11 PREFERENTIAL COLLECTION OF CLAIMS AGAINST COMPANY.
The Trustee is subject to TIA (S) 311(a), excluding any creditor
relationship listed in TIA (S) 311(b). A Trustee who has resigned or been
removed shall be subject to TIA (S) 311(a) to the extent indicated therein.
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SECTION 7.12 OTHER CAPACITIES.
All references in this Indenture to the Trustee shall be deemed to
refer to the Trustee in its capacity as Trustee and in its capacities as any
Agent, to the extent acting in such capacities, and every provision of this
Indenture relating to the conduct or affecting the liability or offering
protection, immunity or indemnity to the Trustee shall be deemed to apply with
the same force and effect to the Trustee acting in its capacities as any Agent.
SECTION 7.13 TRUSTEE'S APPLICATION FOR INSTRUCTIONS FROM THE ISSUER.
Any application by the Trustee for written instructions from the
Issuers may, at the option of the Trustee, set forth in writing any action
proposed to be taken or omitted by the Trustee under this Indenture and the date
on and/or after which such action shall be taken or such omission shall be
effective. The Trustee shall not be liable for any action taken by, or omission
of, the Trustee in accordance with a proposal included in such application on or
after the date specified in such application (which date shall not be less than
three Business Days after the date any officer of the Issuers actually receives
such application, unless any such officer shall have consented in writing to any
earlier date) unless prior to taking any such action (or the effective date in
the case of an omission), the Trustee shall have received written instructions
in response to such application specifying the action to be taken or omitted.
ARTICLE 8.
LEGAL DEFEASANCE AND COVENANT DEFEASANCE
SECTION 8.1 OPTION TO EFFECT LEGAL DEFEASANCE OR COVENANT DEFEASANCE.
The Issuers may, at their option and at any time, elect to have
either Section 8.2 or 8.3 hereof be applied to all outstanding Senior Discount
Notes and the Senior Discount Note Guarantees, if any, upon compliance with the
conditions set forth below in this Article 8.
SECTION 8.2 LEGAL DEFEASANCE AND DISCHARGE.
Upon the Issuers' exercise under Section 8.1 hereof of the option
applicable to this Section 8.2, the Issuers shall, subject to the satisfaction
of the conditions set forth in Section 8.4 hereof, be deemed to have been
discharged from their obligations with respect to all outstanding Senior
Discount Notes and to have each Guarantor's obligations discharged with respect
to its Senior Discount Note Guarantee on the date the conditions set forth below
are satisfied (hereinafter, "Legal Defeasance"). For this purpose, Legal
Defeasance means that the Issuers shall be deemed to have paid and discharged
the entire Indebtedness represented by the outstanding Senior Discount Notes,
which shall thereafter be deemed to be "outstanding" only for the purposes of
Section 8.5 hereof and the other sections of this Indenture referred to in (a)
and (b) below, and to have satisfied all its other obligations under such Senior
Discount Notes and this Indenture (and the Trustee, on demand of and at the
expense of the Issuers, shall execute
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proper instruments acknowledging the same), except for the following provisions
which shall survive until otherwise terminated or discharged hereunder: (a) the
rights of Holders of outstanding Senior Discount Notes to receive solely from
the trust fund described in Section 8.4 hereof, and as more fully set forth in
such Section, payments in respect of the principal of, premium, if any, and
interest and Liquidated Damages, if any, on such Senior Discount Notes when such
payments are due, (b) the Issuers' obligations with respect to such Senior
Discount Notes under Article 2 and Section 4.2 hereof, (c) the rights, powers,
trusts, duties and immunities of the Trustee and any Agent hereunder and the
Issuers' and any Guarantors' obligations in connection therewith, including,
without limitation, Article 7 and Section 8.5 and 8.7 hereunder, and (d) this
Article 8. Subject to compliance with this Article 8, the Issuers may exercise
their option under this Section 8.2 notwithstanding the prior exercise of its
option under Section 8.3 hereof.
SECTION 8.3 COVENANT DEFEASANCE.
Upon the Issuers' exercise under Section 8.1 hereof of the option
applicable to this Section 8.3, the Issuers and each Guarantor shall, subject to
the satisfaction of the conditions set forth in Section 8.4 hereof, be released
from its obligations under the covenants contained in Sections 4.7, 4.8, 4.9,
4.10, 4.11, 4.12, 4.13, 4.14, 4.15, 4.17, 4.18, 4.19, 4.20, and 5.1 hereof with
respect to the outstanding Senior Discount Notes on and after the date the
conditions set forth in Section 8.4 are satisfied (hereinafter, "Covenant
Defeasance"), and the Senior Discount Notes shall thereafter be deemed not
"outstanding" for the purposes of any direction, waiver, consent or declaration
or act of Holders (and the consequences of any thereof) in connection with such
covenants, but shall continue to be deemed "outstanding" for all other purposes
hereunder (it being understood that such Senior Discount Notes shall not be
deemed outstanding for accounting purposes). For this purpose, Covenant
Defeasance means that, with respect to the outstanding Senior Discount Notes,
the Issuers may omit to comply with and shall have no liability in respect of
any term, condition or limitation set forth in any such covenant, whether
directly or indirectly, by reason of any reference elsewhere herein to any such
covenant or by reason of any reference in any such covenant to any other
provision herein or in any other document and such omission to comply shall not
constitute a Default or an Event of Default under Section 6.1 hereof, but,
except as specified above, the remainder of this Indenture and such Senior
Discount Notes shall be unaffected thereby. In addition, upon the Company's
exercise under Section 8.1 hereof of the option applicable to this Section 8.3
hereof, subject to the satisfaction of the conditions set forth in Section 8.4
hereof, Sections 6.1(c) through 6.1(f) hereof shall not constitute Events of
Default.
SECTION 8.4 CONDITIONS TO LEGAL OR COVENANT DEFEASANCE.
The following shall be the conditions to the application of either
Section 8.2 or 8.3 hereof to the outstanding Senior Discount Notes:
In order to exercise either Legal Defeasance or Covenant
Defeasance:
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(a) the Issuers must irrevocably deposit with the Trustee, in trust,
for the benefit of the Holders, cash in United States dollars, non-callable
Government Securities, or a combination thereof, in such amounts as will be
sufficient, in the opinion of a nationally recognized firm of independent public
accountants, to pay the principal of, premium, if any, and interest and
Liquidated Damages, if any, on the outstanding Senior Discount Notes on the
stated maturity or on the applicable redemption date, as the case may be, and
the Issuers must specify whether the Senior Discount Notes are being defeased to
maturity or to a particular redemption date;
(b) in the case of an election under Section 8.2 hereof, the Issuers
shall have delivered to the Trustee an Opinion of Counsel in the United States
confirming that (A) the Issuers have received from, or there has been published
by, the Internal Revenue Service a ruling or (B) since the date of this
Indenture, there has been a change in the applicable federal income tax law, in
either case to the effect that, and based thereon such Opinion of Counsel shall
confirm that, the Holders of the outstanding Senior Discount Notes will not
recognize income, gain or loss for federal income tax purposes as a result of
such Legal Defeasance and will be subject to federal income tax on the same
amounts, in the same manner and at the same times as would have been the case if
such Legal Defeasance had not occurred;
(c) in the case of an election under Section 8.3 hereof, the Issuers
shall have delivered to the Trustee an Opinion of Counsel in the United States
confirming that the Holders of the outstanding Senior Discount Notes will not
recognize income, gain or loss for federal income tax purposes as a result of
such Covenant Defeasance and will be subject to federal income tax on the same
amounts, in the same manner and at the same times as would have been the case if
such Covenant Defeasance had not occurred;
(d) no Default or Event of Default shall have occurred and be
continuing on the date of such deposit (other than a Default or Event of Default
resulting from the borrowing of funds to be applied to such deposit) or insofar
as Sections 6.1(h) or 6.1(i) hereof are concerned, at any time in the period
ending on the 91st day after the date of deposit;
(e) such Legal Defeasance or Covenant Defeasance will not result in a
breach or violation of, or constitute a default under, any material agreement or
instrument (other than this Indenture) to which any of the Issuers or any of
their Subsidiaries is a party or by which any of the Issuers or any of their
Restricted Subsidiaries is bound;
(f) the Issuers must have delivered to the Trustee an Opinion of
Counsel (subject to customary qualifications and assumptions) to the effect that
on the 91st day following the deposit, the trust funds will not be subject to
the effect of any applicable bankruptcy, insolvency, reorganization or similar
laws affecting creditors' rights generally;
(g) the Issuers must have delivered to the Trustee an Officers'
Certificate stating that the deposit was not made by the Issuers with the intent
of preferring the Holders of Senior
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Discount Notes over the other creditors of the Issuers or with the intent of
defeating, hindering, delaying or defrauding creditors of the Issuers or others;
(h) the Issuers must have delivered to the Trustee an Officers'
Certificate and an Opinion of Counsel, each stating that all conditions
precedent provided for or relating to the Legal Defeasance or the Covenant
Defeasance have been complied with; and
(i) the Trustee shall have received such other documents,
assurances and Opinion of Counsel as are necessary.
SECTION 8.5 DEPOSITED MONEY AND GOVERNMENT SECURITIES TO BE HELD IN TRUST;
OTHER MISCELLANEOUS PROVISIONS.
Subject to Section 8.6 hereof, all money and non-callable Government
Securities (including the proceeds thereof) deposited with the Trustee (or other
qualifying trustee, collectively for purposes of this Section 8.5, the
"Trustee") pursuant to Section 8.4 hereof in respect of the outstanding Senior
Discount Notes shall be held in trust and applied by the Trustee, in accordance
with the provisions of such Senior Discount Notes and this Indenture, to the
payment, either directly or through any Paying Agent (including an Issuer acting
as Paying Agent), to the Holders of such Senior Discount Notes of all sums due
and to become due thereon in respect of principal, premium, if any, Liquidated
Damages, if any, and interest, but such money need not be segregated from other
funds except to the extent required by law.
The Issuers jointly and severally agree to pay and indemnify the
Trustee against any tax, fee or other charge imposed on or assessed against the
cash or non-callable Government Securities deposited pursuant to Section 8.4
hereof or the principal and interest received in respect thereof other than any
such tax, fee or other charge which by law is for the account of the Holders of
the outstanding Senior Discount Notes.
Anything in this Article 8 to the contrary notwithstanding, the
Trustee shall deliver or pay to the Issuers from time to time upon the request
of the Issuers any money or non-callable Government Securities held by it as
provided in Section 8.4 hereof which, in the opinion of a nationally recognized
firm of independent public accountants expressed in a written certification
thereof delivered to the Trustee (which may be the opinion delivered under
Section 8.4(a) hereof), are in excess of the amount thereof that would then be
required to be deposited to effect an equivalent Legal Defeasance or Covenant
Defeasance.
SECTION 8.6 REPAYMENT TO ISSUERS.
Any money deposited with the Trustee or any Paying Agent, or then
held by the Issuers, in trust for the payment of the principal of, premium, if
any, Liquidated Damages, if any, or interest on any Senior Discount Notes and
remaining unclaimed for two years after such principal, and premium, if any,
Liquidated Damages, if any, or interest has become due and
<PAGE>
84
payable shall be paid to the Issuers on their request or (if then held by the
Issuers) shall be discharged from such trust; and the Holder of such Senior
Discount Notes shall thereafter, as a secured creditor, look only to the Issuers
for payment thereof, and all liability of the Trustee or such Paying Agent with
respect to such trust money, and all liability of the Issuers as trustee
thereof, shall thereupon cease; provided, however, that the Trustee or such
Paying Agent, before being required to make any such repayment, may at the
expense of the Issuers cause to be published once, in The New York Times and The
Wall Street Journal (national edition), notice that such money remains unclaimed
and that, after a date specified therein, which shall not be less than 30 days
from the date of such notification or publication, any unclaimed balance of such
money then remaining will be repaid to the Issuers.
SECTION 8.7 REINSTATEMENT.
If the Trustee or Paying Agent is unable to apply any United States
dollars or noncallable Government Securities in accordance with Section 8.2 or
8.3 hereof, as the case may be, by reason of any order or judgment of any court
or governmental authority enjoining, restraining or otherwise prohibiting such
application, then the Issuers' obligations under this Indenture and the Senior
Discount Notes shall be revived and reinstated as though no deposit had occurred
pursuant to Section 8.2 or 8.3 hereof until such time as the Trustee or Paying
Agent is permitted by such court or governmental authority to apply all such
money in accordance with Section 8.2 or 8.3 hereof, as the case may be;
provided, however, that, if the Issuers make any payment of principal of,
premium, if any, Liquidated Damages, if any, or interest on any Senior Discount
Notes following the reinstatement of their obligations, the Issuers shall be
subrogated to the rights of the Holders of such Senior Discount Notes to receive
such payment from the money held by the Trustee or Paying Agent.
ARTICLE 9.
AMENDMENT, SUPPLEMENT AND WAIVER
SECTION 9.1 WITHOUT CONSENT OF HOLDERS OF SENIOR DISCOUNT NOTES.
Notwithstanding Section 9.2 of this Indenture, the Issuers, any
Guarantors and the Trustee may amend or supplement this Indenture, any Senior
Discount Note Guarantees or the Senior Discount Notes without the consent of any
Holder of a Note:
(a) to cure any ambiguity, omission, defect or inconsistency;
(b) to provide for uncertificated Senior Discount Notes in addition
to or in place of certificated Senior Discount Notes or to alter the provisions
of Article 2 hereof (including the related definitions) in a manner that does
not materially adversely affect any Holder;
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85
(c) to provide for the assumption of the Issuers' obligations to
the Holders of the Senior Discount Notes by a successor to the Issuers pursuant
to Article 5 hereof or in the Reorganization;
(d) to add additional guarantees with respect to the Senior
Discount Notes, including any Senior Discount Note Guarantees;
(e) to make any change that would provide any additional rights or
benefits to the Holders of the Senior Discount Notes or that does not adversely
affect the legal rights hereunder of any Holder of the Senior Discount Notes; or
(f) to comply with requirements of the SEC in order to effect or
maintain the qualification of this Indenture under the TIA.
Upon the request of the Issuers accompanied by a resolution of their
respective Board of Directors authorizing the execution of any such amended or
supplemental Indenture, and upon receipt by the Trustee of the documents
described in Section 7.2 hereof, the Trustee shall join with the Issuers in the
execution of any amended or supplemental Indenture authorized or permitted by
the terms of this Indenture and to make any further appropriate agreements and
stipulations that may be therein contained, but the Trustee shall not be
obligated to enter into such amended or supplemental Indenture that affects its
own rights, duties or immunities under this Indenture or otherwise.
SECTION 9.2 WITH CONSENT OF HOLDERS OF SENIOR DISCOUNT NOTES.
Except as provided below in this Section 9.2, the Issuers and the
Trustee may amend or supplement this Indenture (including Sections 3.9, 4.10 and
4.15 hereof) and the Senior Discount Notes and any Senior Discount Note
Guarantees may be amended or supplemented with the consent of the Holders of at
least a majority in principal amount at maturity of the Senior Discount Notes
then outstanding voting as a single class (including consents obtained in
connection with a tender offer or exchange offer for, or purchase of, the Senior
Discount Notes), and, subject to Sections 6.4 and 6.7 hereof, any existing
Default or Event of Default (other than a Default or Event of Default in the
payment of the principal of, premium, if any, Liquidated Damages, if any, or
interest on the Senior Discount Notes, except a payment default resulting from
an acceleration that has been rescinded) or compliance with any provision of
this Indenture, the Senior Discount Notes or any Senior Discount Note Guarantees
may be waived with the consent of the Holders of a majority in principal amount
at maturity of the then outstanding Senior Discount Notes voting as a single
class (including consents obtained in connection with a tender offer or exchange
offer for, or purchase of, the Senior Discount Notes). Section 2.8 hereof shall
determine which Senior Discount Notes are considered to be "outstanding" for
purposes of this Section 9.2.
<PAGE>
86
Upon the request of the Issuers accompanied by a resolution of their
respective Board of Directors authorizing the execution of any such amended or
supplemental Indenture, and upon receipt by the Trustee of evidence satisfactory
to the Trustee of the consent of the Holders of Senior Discount Notes as
aforesaid, and upon receipt by the Trustee of the documents described in Section
7.2 hereof, the Trustee shall join with the Issuers in the execution of such
amended or supplemental Indenture unless such amended or supplemental Indenture
directly affects the Trustee's own rights, duties or immunities under this
Indenture or otherwise, in which case the Trustee may in its discretion, but
shall not be obligated to, enter into such amended or supplemental Indenture.
It shall not be necessary for the consent of the Holders of Senior
Discount Notes under this Section 9.2 to approve the particular form of any
proposed amendment or waiver, but it shall be sufficient if such consent
approves the substance thereof.
After an amendment, supplement or waiver under this Section becomes
effective, the Issuers shall mail to the Holders of Senior Discount Notes
affected thereby a notice briefly describing the amendment, supplement or
waiver. Any failure of the Issuers to mail such notice, or any defect therein,
shall not, however, in any way impair or affect the validity of any such amended
or supplemental Indenture or waiver. Subject to Sections 6.4 and 6.7 hereof,
the Holders of a majority in aggregate principal amount at maturity of the
Senior Discount Notes then outstanding voting as a single class may waive
compliance in a particular instance by the Issuers with any provision of this
Indenture or the Senior Discount Notes. However, without the consent of each
Holder affected, an amendment or waiver under this Section 9.2 may not (with
respect to any Senior Discount Notes held by a non-consenting Holder):
(a) reduce the principal amount of Senior Discount Notes whose
Holders must consent to an amendment, supplement or waiver;
(b) reduce the Accreted Value or principal of or change the fixed
maturity of any Senior Discount Note or alter the provisions with respect to the
redemption of the Senior Discount Notes except as provided above with respect to
Sections 3.9, 4.10 and 4.15 hereof;
(c) reduce the rate of or change the time for payment of interest,
including default interest, on any Senior Discount Notes;
(d) waive a Default or Event of Default in the payment of principal
of or premium, if any, or interest or Liquidated Damages, if any, on the Senior
Discount Notes (except a rescission of acceleration of the Senior Discount Notes
by the Holders of at least a majority in aggregate principal amount at maturity
of the then outstanding Senior Discount Notes and a waiver of the payment
default that resulted from such acceleration);
(e) make any Senior Discount Notes payable in money other than that
stated in the Senior Discount Notes;
<PAGE>
87
(f) make any change in the provisions of this Indenture relating to
waivers of past Defaults or the rights of Holders of Senior Discount Notes to
receive payments of principal of or premium, if any, or interest or Liquidated
Damages, if any, on the Senior Discount Notes;
(g) waive a redemption payment with respect to any Senior Discount
Notes (other than a payment required by one of the covenants described in
Sections 4.10 and 4.15); or
(h) make any change in the foregoing amendment and waiver
provisions.
SECTION 9.3 COMPLIANCE WITH TRUST INDENTURE ACT.
Every amendment or supplement to this Indenture or the Senior
Discount Notes shall be set forth in an amended or supplemental Indenture that
complies with the TIA as then in effect.
SECTION 9.4 REVOCATION AND EFFECT OF CONSENTS.
Until an amendment, supplement or waiver becomes effective, a
consent to it by a Holder of a Senior Discount Notes is a continuing consent by
the Holder of a Senior Discount Notes and every subsequent Holder of a Senior
Discount Notes or portion of a Senior Discount Notes that evidences the same
debt as the consenting Holder's Senior Discount Notes, even if notation of the
consent is not made on any Senior Discount Notes. However, any such Holder of a
Senior Discount Notes or subsequent Holder of a Senior Discount Notes may revoke
the consent as to its Senior Discount Notes if the Trustee receives written
notice of revocation before the date the waiver, supplement or amendment becomes
effective. An amendment, supplement or waiver becomes effective in accordance
with its terms and thereafter binds every Holder.
SECTION 9.5 NOTATION ON OR EXCHANGE OF SENIOR DISCOUNT NOTES.
The Trustee may place an appropriate notation about an amendment,
supplement or waiver on any Senior Discount Notes thereafter authenticated. The
Issuers in exchange for all Senior Discount Notes may issue and the Trustee
shall, upon receipt of an Authentication Order, authenticate new Senior Discount
Notes that reflect the amendment, supplement or waiver.
Failure to make the appropriate notation or issue a new Senior
Discount Notes shall not affect the validity and effect of such amendment,
supplement or waiver.
SECTION 9.6 TRUSTEE TO SIGN AMENDMENTS, ETC.
The Trustee shall sign any amended or supplemental Indenture
authorized pursuant to this Article Nine if the amendment or supplement does not
adversely affect the rights, duties, liabilities or immunities of the Trustee.
The Issuers may not sign an amendment or
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88
supplemental Indenture until the Board of Directors approves it. In executing
any amended or supplemental indenture, the Trustee shall be entitled to receive
and (subject to Section 7.1 hereof) shall be fully protected in relying upon, in
addition to the documents required by Section 11.4 hereof, an Officer's
Certificate and an Opinion of Counsel stating that the execution of such amended
or supplemental indenture is authorized or permitted by this Indenture.
ARTICLE 10.
GUARANTEE
SECTION 10.1 UNCONDITIONAL GUARANTEE.
Any Guarantor will unconditionally, jointly and severally,
guarantee to each Holder of a Senior Discount Notes authenticated by the Trustee
and to the Trustee and its successors and assigns that: the principal of,
interest and Liquidated Damages, if any, on the Senior Discount Notes will be
promptly paid in full when due, subject to any applicable grace period, whether
at maturity, by acceleration or otherwise, and interest on the overdue principal
and interest on any overdue interest on the Senior Discount Notes and all other
obligations of the Issuers to the Holders or the Trustee hereunder or under the
Senior Discount Notes will be promptly paid in full or performed, all in
accordance with the terms hereof and thereof; subject, however, to the
limitations set forth in Section 10.3. Any Guarantor will agree that its
obligations hereunder shall be unconditional, irrespective of the validity,
regularity or enforceability of the Senior Discount Notes or this Indenture, the
absence of any action to enforce the same, any waiver or consent by any Holder
of the Senior Discount Notes with respect to any provisions hereof or thereof,
the recovery of any judgment against the Issuers, any action to enforce the same
or any other circumstance which might otherwise constitute a legal or equitable
discharge or defense of a Guarantor. Any Guarantor will waive diligence,
presentment, demand of payment, filing of claims with a court in the event of
insolvency or bankruptcy of an Issuer, any right to require a proceeding first
against an Issuer, protest, notice and all demands whatsoever and covenants that
each Senior Discount Note Guarantee, as the case may be, will not be discharged
except by complete performance of the obligations contained in the Senior
Discount Notes and this Indenture. If any Holder or the Trustee is required by
any court or otherwise to return to an Issuer or any Guarantor, or any
custodian, trustee, liquidator or other similar official acting in relation to
an Issuer or any Guarantor, any amount paid by an Issuer or any Guarantor to the
Trustee or such Holder, each Senior Discount Note Guarantee, to the extent
theretofore discharged, shall be reinstated in full force and effect. Any
Guarantor will agree that, as between any Guarantor, on the one hand, and the
Holders and the Trustee, on the other hand, (x) the maturity of the obligations
guaranteed hereby may be accelerated as provided in Article 6 for the purpose of
each Senior Discount Note Guarantee, notwithstanding any stay, injunction or
other prohibition preventing such acceleration in respect of the obligations
guaranteed hereby, and (y) in the event of any acceleration of such obligations
as provided in Article 6, such obligations (whether or not due and payable)
shall become due and payable by any Guarantor for the purpose of each Senior
Discount Note Guarantee.
<PAGE>
89
SECTION 10.2 SEVERABILITY.
In case any provision of this Article 10 shall be invalid, illegal
or unenforceable, the validity, legality and enforceability of the remaining
provisions shall not in any way be affected or impaired thereby.
SECTION 10.3 LIMITATION OF GUARANTOR'S LIABILITY.
Each Guarantor, and by its acceptance hereof each Holder and the
Trustee, hereby confirms that it is the intention of all such parties that each
Senior Discount Note Guarantee not constitute a fraudulent transfer or
conveyance for purposes of Title 11 of the United States Code, as amended, the
Uniform Fraudulent Conveyance Act, the Uniform Fraudulent Transfer Act or any
similar U.S. Federal or state or other applicable law. To effectuate the
foregoing intention, the Holders and each Guarantor hereby irrevocably agree
that the obligations of each Guarantor under each Senior Discount Note Guarantee
shall be limited to the maximum amount as will, after giving effect to all other
contingent and fixed liabilities of such Guarantor and after giving effect to
any collections from or payments made by or on behalf of any other Guarantor in
respect of the obligations of such other Guarantor pursuant to Section 10.4,
result in the obligations of such Guarantor not constituting such a fraudulent
transfer or conveyance.
SECTION 10.4 CONTRIBUTION.
In order to provide for just and equitable contribution among the
Guarantors, the Guarantors agree, inter se, that in the event any payment or
distribution is made by any Guarantor (a "Funding Guarantor") under a Senior
Discount Note Guarantee, as the case may be, such Funding Guarantor shall be
entitled to a contribution from all other Guarantors (if any) in a pro rata
amount, based on the net assets of each Guarantor (including the Funding
Guarantor), determined in accordance with GAAP, subject to Section 10.3, for all
payments, damages and expenses incurred by such Funding Guarantor in discharging
the Issuers' obligations with respect to the Senior Discount Notes or any other
Guarantor's obligations under a Senior Discount Note Guarantee, as the case may
be.
SECTION 10.5 SUBORDINATION OF SUBROGATION AND OTHER RIGHTS.
Each Guarantor hereby agrees that any claim against an Issuer that
arises from the payment, performance or enforcement of such Guarantor's
obligations under a Senior Discount Note Guarantee or this Indenture, including,
without limitation, any right of subrogation, shall be subject and subordinate
to, and no payment with respect to any such claim of such Guarantor shall be
made before, the payment in full in cash of all outstanding Senior Discount
Notes in accordance with the provisions provided therefor in this Indenture.
<PAGE>
90
ARTICLE 11.
MISCELLANEOUS
SECTION 11.1 TRUST INDENTURE ACT CONTROLS.
If any provision of this Indenture limits, qualifies or conflicts
with the duties imposed by TIA (S) 318(c), the imposed duties shall control.
SECTION 11.2 NOTICES.
Any notice or communication by the Issuers, the Guarantors or the
Trustee to the others is duly given if in writing and delivered in Person or
mailed by first class mail (registered or certified, return receipt requested),
telecopier or overnight air courier guaranteeing next day delivery, to the
others' address.
If to the Issuers and/or any Guarantor:
Avalon Cable of Michigan Holdings, Inc.
Avalon Cable of New England, LLC
Avalon Cable Holdings Finance, Inc.
800 Third Avenue, Suite 3100
New York, New York 10022
Attn: President
ABRY Partners, Inc.
18 Newbury Street
Boston, MA 02166
Attn: Jay Grossman
If to the Trustee:
The Bank of New York
101 Barclay Street, Floor 21 West
New York, New York 10286
Telecopier No.: (212) 815-5915
Attn: Corporate Trust Administration
The Issuers, the Guarantors or the Trustee, by notice to the others
may designate additional or different addresses for subsequent notices or
communications.
All notices and communications (other than those sent to Holders)
shall be deemed to have been duly given: at the time delivered by hand, if
personally delivered; five
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91
Business Days after being deposited in the mail, postage prepaid, if mailed;
when receipt acknowledged, if telecopied; and the next Business Day after timely
delivery to the courier, if sent by overnight air courier guaranteeing next day
delivery.
Any notice or communication to a Holder shall be mailed by first
class mail, certified or registered, return receipt requested, or by overnight
air courier guaranteeing next day delivery to its address shown on the register
kept by the Registrar. Any notice or communication shall also be so mailed to
any Person described in TIA (S) 313(c), to the extent required by the TIA.
Failure to mail a notice or communication to a Holder or any defect in it shall
not affect its sufficiency with respect to other Holders.
If a notice or communication is mailed in the manner provided above
within the time prescribed, it is duly given, whether or not the addressee
receives it, except for notices or communications to the Trustee, which shall be
effective only upon actual receipt thereof.
If the Issuers mail a notice or communication to Holders, it shall
mail a copy to the Trustee and each Agent at the same time.
SECTION 11.3 COMMUNICATION BY HOLDERS OF SENIOR SUBORDINATED NOTES WITH OTHER
HOLDERS OF SENIOR DISCOUNT NOTES.
Holders may communicate pursuant to TIA (S) 312(b) with other
Holders with respect to their rights under this Indenture or the Senior Discount
Notes. The Issuers, the Trustee, the Registrar and anyone else shall have the
protection of TIA (S) 312(c).
SECTION 11.4 CERTIFICATE AND OPINION AS TO CONDITIONS PRECEDENT.
Upon any request or application by the Issuers to the Trustee to
take any action under this Indenture, the Issuers shall furnish to the Trustee:
(a) an Officers' Certificate (which shall include the statements
set forth in Section 11.5 hereof) stating that, in the opinion of the signers,
all conditions precedent and covenants, if any, provided for in this Indenture
relating to the proposed action have been satisfied; and
(b) an Opinion of Counsel (which shall include the statements set
forth in Section 11.5 hereof) stating that, in the opinion of such counsel, all
such conditions precedent and covenants have been satisfied.
<PAGE>
92
SECTION 11.5 STATEMENTS REQUIRED IN CERTIFICATE OR OPINION.
Each certificate or opinion with respect to compliance with a
condition or covenant provided for in this Indenture (other than a certificate
provided pursuant to TIA (S) 314(a)(4)) shall comply with the provisions of TIA
(S) 314(e) and shall include:
(a) a statement that the Person making such certificate or opinion
has read such covenant or condition;
(b) a brief statement as to the nature and scope of the
examination or investigation upon which the statements or opinions contained in
such certificate or opinion are based;
(c) a statement that, in the opinion of such Person, he or she has
made such examination or investigation as is necessary to enable him or her to
express an informed opinion as to whether or not such covenant or condition has
been satisfied; and
(d) a statement as to whether or not, in the opinion of such
Person, such condition or covenant has been satisfied.
SECTION 11.6 RULES BY TRUSTEE AND AGENTS.
The Trustee may make reasonable rules for action by or at a meeting
of Holders. The Registrar or Paying Agent may make reasonable rules and set
reasonable requirements for its functions.
SECTION 11.7 NO PERSONAL LIABILITY OF DIRECTORS, OFFICERS, EMPLOYEES AND
SHAREHOLDERS.
No director, officer, employee, incorporator, member, manager or
stockholder of any Person who is or was an Issuer or Parent Guarantor, as such,
shall have any liability for any obligations under the Senior Discount Notes,
the Senior Discount Note Guarantees, this Indenture or for any claim based on,
in respect of, or by reason of, such obligations or their creation. Each Holder
of Senior Discount Notes by accepting a Senior Discount Notes waives and
releases all such liability. The waiver and release are part of the
consideration for issuance of the Senior Discount Notes. Such waiver may not be
effective to waive liabilities under the federal securities laws and it is the
view of the SEC that such a waiver is against public policy.
SECTION 11.8 GOVERNING LAW.
THE LAW OF THE STATE OF NEW YORK SHALL GOVERN THIS INDENTURE, THE
SENIOR DISCOUNT NOTES AND ANY SENIOR DISCOUNT NOTE GUARANTEES.
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93
SECTION 11.9 NO ADVERSE INTERPRETATION OF OTHER AGREEMENTS.
This Indenture may not be used to interpret any other indenture,
loan or debt agreement of the Issuers or its Subsidiaries or of any other
Person. Any such indenture, loan or debt agreement may not be used to interpret
this Indenture.
SECTION 11.10 SUCCESSORS.
All agreements of the Issuers in this Indenture and the Senior
Discount Notes shall bind its successors. All agreements of the Trustee in this
Indenture shall bind its successors.
SECTION 11.11 SEVERABILITY.
In case any provision in this Indenture or in the Senior Discount
Notes shall be invalid, illegal or unenforceable, the validity, legality and
enforceability of the remaining provisions shall not in any way be affected or
impaired thereby.
SECTION 11.12 COUNTERPART ORIGINALS.
The parties may sign any number of copies of this Indenture. Each
signed copy shall be an original, but all of them together represent the same
agreement.
SECTION 11.13 TABLE OF CONTENTS, HEADINGS, ETC.
The Table of Contents, Cross-Reference Table and Headings of the
Articles and Sections of this Indenture have been inserted for convenience of
reference only, are not to be considered a part of this Indenture and shall in
no way modify or restrict any of the terms or provisions hereof.
[Signatures on following page]
<PAGE>
94
SIGNATURES
Dated as of December 10, 1998
AVALON CABLE OF MICHIGAN
HOLDINGS, INC.
By: /s/ Joel C. Cohen
---------------------------------
Name: Joel C. Cohen
Title: President, Chief Executive
Officer and Secretary
AVALON CABLE OF NEW ENGLAND, LLC
By: /s/ Joel C. Cohen
---------------------------------
Name: Joel C. Cohen
Title: President, Chief Executive
Officer and Secretary
AVALON CABLE HOLDINGS FINANCE, INC.
By: /s/ Joel C. Cohen
---------------------------------
Name: Joel C. Cohen
Title: President, Chief Executive
Officer and Secretary
THE BANK OF NEW YORK
By: /s/ Mary La Gumina
---------------------------------
Name: Mary La Gumina
Title: Assistant Vice President
<PAGE>
EXHIBIT A
(Face of Note)
[Insert the Regulation S Temporary Global Note Legend, if applicable pursuant to
the provisions of the Indenture]
[Insert the Global Note Legend, if applicable pursuant to the provisions of the
Indenture]
[Insert the Private Placement Legend, if applicable pursuant to the provisions
of the Indenture]
[Insert the Original Issue Discount Legend pursuant to the provisions of the
Indenture]
11 7/8% Senior Discount Notes due 2008
CUSIP/CINS_________
No.______ $_________
AVALON CABLE OF MICHIGAN HOLDINGS, INC.
AVALON CABLE LLC
AVALON CABLE HOLDINGS FINANCE, INC.
promises to pay to __________________________________________________________
or registered assigns,
the principal sum of________________________________________________
Dollars on December 1, 2008.
Interest Payment Dates: June 1 and December 1
Record Dates: May 15 and November 15
AVALON CABLE OF MICHIGAN HOLDINGS,
INC.
By:__________________________________
Name:
Title:
By:__________________________________
Name:
Title:
A-1
<PAGE>
AVALON CABLE LLC
By:___________________________________
Name:
Title:
By:___________________________________
Name:
Title:
AVALON CABLE HOLDINGS FINANCE, INC.
By:___________________________________
Name:
Title:
By:___________________________________
Name:
Title:
This is one of the Notes
referred to in the
within-mentioned Indenture:
THE BANK OF NEW YORK,
By:__________________________
Name:
Title:
Dated:
A-2
<PAGE>
(Back of Note)
11 7/8% Senior Discount Notes due 2008
Capitalized terms used herein shall have the meanings assigned to them in
the Indenture referred to below unless otherwise indicated.
1. Interest. Avalon Cable of Michigan Holdings, Inc. a Delaware corporation,
Avalon Cable LLC, a Delaware limited liability company, and Avalon Cable
Holdings Finance, Inc., a Delaware corporation (collectively the "Issuers")
promise to pay interest on the principal amount of this Senior Discount Note at
11 7/8% per annum as described below and shall pay the Liquidated Damages, if
any, payable pursuant to Section 5 of the Registration Rights Agreement referred
to below. Until December 1, 2003, interest will not be paid currently on the
Senior Discount Notes, but the Accreted Value will increase (representing
amortization of original issue discount) between the date of original issuance
and December 1, 2003, on a semi-annual basis using a 360-day year comprised of
twelve 30-day months, such that the Accreted Value shall be equal to the full
principal amount at maturity of the Senior Discount Notes on December 1, 2003
(the "Full Accretion Date"). Beginning on the Full Accretion Date, interest on
the Senior Discount Notes will accrue at the rate of 11 7/8% per annum and will
be payable semi-annually in arrears on June 1 and December 1 of each year, to
Holders of record on the immediately preceding May 15 and November 15. The
Issuers shall pay interest and Liquidated Damages, if any, semi-annually on June
1 and December 1 of each year, or if any such day is not a Business Day, on the
next succeeding Business Day (each an "Interest Payment Date"). Interest on the
Senior Discount Notes will accrue from the most recent date to which interest
has been paid or, if no interest has been paid, from the Full Accretion Date;
provided that if there is no existing Default in the payment of interest, and if
this Senior Discount Note is authenticated between a record date referred to on
the face hereof and the next succeeding Interest Payment Date, interest shall
accrue from such next succeeding Interest Payment Date; provided, further, that
the first Interest Payment Date shall be June 1, 2004. The Issuers shall pay
interest (including post-petition interest in any proceeding under any
Bankruptcy Law) on overdue principal and premium, if any, from time to time on
demand at a rate that is 1% per annum in excess of the rate then in effect; they
shall pay interest (including post-petition interest in any proceeding under any
Bankruptcy Law) on overdue installments of interest and Liquidated Damages, if
any (without regard to any applicable grace periods) from time to time on demand
at the same rate to the extent lawful. Interest will be computed on the basis of
a 360-day year of twelve 30-day months.
2. Method of Payment. After the Full Accretion Date, the Issuers will pay
interest on the Senior Discount Notes (except defaulted interest) and Liquidated
Damages, if any, to the Persons who are registered Holders of Senior Discount
Notes at the close of business on the May 15 or November 15 next preceding the
Interest Payment Date, even if such Senior Discount Notes are canceled after
such record date and on or before such Interest Payment Date, except as provided
in Section 2.12 of the Indenture (as herein defined) with respect to defaulted
interest. The Senior Discount Notes will be payable as to principal, premium and
Liquidated Damages, if any, and
A-3
<PAGE>
interest at the office or agency of the Issuers maintained for such purpose
within the City and State of New York, or, at the option of the Issuers, payment
of interest and Liquidated Damages, if any, may be made by check mailed to the
Holders at their addresses set forth in the register of Holders, and provided
that all payments of $1,000 or more principal, premium, if any, interest and
Liquidated Damages, if any, with respect to Senior Discount Notes the Holders of
which have given wire transfer instructions to the Issuers at least ten business
days prior to the applicable payment date will be required to be made by wire
transfer of immediately available funds to the accounts specified by the Holders
thereof. Such payment shall be in such coin or currency of the United States of
America as at the time of payment is legal tender for payment of public and
private debts.
3. Mandatory Payment of Accrued Interest. Prior to December 1, 2003, interest
on the Senior Discount Notes will accrete at an annual rate of 11 7/8% per
annum, compounded semi-annually, but will not be paid until December 1, 2003. On
December 1, 2003, the Issuers will be required to redeem an amount equal to
$369.79 per $1,000 principal amount at maturity of each Senior Discount Note
then outstanding (the "Accreted Interest Redemption Amount") on a pro rata basis
at a redemption price of 100% of the principal amount at maturity of the Senior
Discount Notes so redeemed.
4. Paying Agent and Registrar. Initially, The Bank of New York, the Trustee
under the Indenture, will act as Paying Agent and Registrar. The Issuers may
change any Paying Agent or Registrar without notice to any Holder. The Issuers,
any of their Subsidiaries or any Guarantor may act in any such capacity.
5. Indenture.
The Issuers issued the Senior Discount Notes under an Indenture dated as of
December 10, 1998, as amended or supplemented from time to time ("Indenture"),
among the Issuers and the Trustee. The terms of the Senior Discount Notes
include those stated in the Indenture and those made part of the Indenture by
reference to the Trust Indenture Act of 1939, as amended (15 U.S. Code (S)(S)
77aaa-77bbbb). The Senior Discount Notes are subject to all such terms, and
Holders are referred to the Indenture and such Act for a statement of such
terms. To the extent any provision of this Senior Discount Note conflicts with
the express provisions of the Indenture, the provisions of the Indenture shall
govern and be controlling. The Senior Discount Notes are obligations of the
Issuers limited to $160.4 million in aggregate principal amount at issuance.
Upon completion of the Reorganization, it is anticipated that (i) the
Issuers will be (a) Finance Holdings and (b) Avalon Holdings, (ii) Michigan
Holdings will cease to be obligated as an Issuer and (iii) Avalon Cable of
Michigan, Inc. ("Avalon Michigan") and Michigan Holdings (collectively with
Avalon Michigan, the "Parent Guarantors") will become guarantors of Avalon
Holdings' obligations under the Senior Discount Notes.
6. Optional Redemption.
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<PAGE>
(a) Except as described in subparagraph (b) of this Paragraph 6, the Senior
Discount Notes will not be redeemable at the Issuers' option prior to December
1, 2003. Thereafter, the Senior Discount Notes will be subject to redemption at
any time at the option of the Issuers, in whole or in part, upon not less than
30 nor more than 60 days notice, at the redemption prices (expressed as
percentages of principal amount) set forth below plus accrued and unpaid
interest and Liquidated Damages, if any, thereon to the applicable redemption
date, if redeemed during the twelve-month period beginning on December 1 of the
years indicated below:
<TABLE>
<CAPTION>
Year Redemption Price
- ---- -----------------
<S> <C>
2003................... 105.938%
2004................... 103.958%
2005................... 101.979%
2006 and thereafter.... 100.000%
</TABLE>
(b) Notwithstanding the provisions of subparagraph (a) of this Paragraph 5,
at any time prior to December 1, 2001, the Issuers may on any one or more
occasions redeem up to 35% of the aggregate principal amount at maturity of
Senior Discount Notes originally issued under the Indenture at a redemption
price equal to 111.875% of the Accreted Value at the date of redemption, plus
Liquidated Damages, if any, to the redemption date, with the Net Cash Proceeds
of any Equity Offering and/or the Net Cash Proceeds of a Strategic Equity
Investment; provided that at least 65% of the aggregate principal amount at
maturity of Senior Discount Notes originally issued remain outstanding
immediately after each occurrence of such redemption; and provided further that
each such redemption shall occur within 45 days of the date of the closing of
such Equity Offering and/or Strategic Equity Investment.
"Equity Offering" means any public or private sale of Capital Stock of any
of the Issuers or Avalon or any Subsidiary of Avalon pursuant to which the
Issuers together receive net proceeds of at least $25.0 million, other than
issuances of Capital Stock pursuant to employee benefit plans or as compensation
to employees; provided that to the extent such Capital Stock is issued by Avalon
or any Subsidiary of Avalon, the Net Cash Proceeds thereof shall have been
contributed to one or more of the Issuers in the form of an equity contribution.
7. Mandatory Redemption.
Except as set forth in paragraph 3 or 8 of this Senior Discount Note, the
Issuers are not required to make mandatory redemption or sinking fund payments
with respect to the Senior Discount Notes.
8. Repurchase at the Option of Holders.
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<PAGE>
(a) Upon the occurrence of a Change of Control, each Holder of Senior
Discount Notes will have the right to require the Issuers to repurchase all or
any part (equal to $1,000 or an integral multiple thereof) of such Holder's
Senior Discount Notes pursuant to a Change of Control Offer (as defined below)
at an offer price in cash equal to 101% of the aggregate principal amount at
maturity thereof plus accrued and unpaid interest and Liquidated Damages
thereon, if any, to the date of purchase (or, in the case of repurchases of
Senior Discount Notes prior to the Full Accretion Date, at a purchase price
equal to 101% of the Accreted Value thereof as of the date of purchase)
(collectively, the "Change of Control Payment"). Within 20 days following any
Change of Control, the Issuers will mail a notice to each Holder describing the
transaction or transactions that constitute the Change of Control and offer (a
"Change of Control Offer") to repurchase Senior Discount Notes on the date
specified in such notice, which date shall be no earlier than 30 days and no
later than 60 days from the date such notice is mailed (the "Change of Control
Payment Date"), pursuant to the procedures required by this Indenture and
described in such notice. The Issuers will comply with the requirements of Rule
14e-1 under the Exchange Act and any other securities laws and regulations
thereunder to the extent such laws and regulations are applicable in connection
with the repurchase of the Senior Discount Notes as a result of a Change of
Control.
(b) When the aggregate amount of Excess Proceeds from Asset Sales by the
Issuers and their Restricted Subsidiaries exceeds $10.0 million, to the extent
permitted by the Senior Subordinated Note Indenture, the Issuers shall commence
an offer to all Holders of Senior Discount Notes and all holders of other pari
passu Indebtedness of the Issuers containing provisions similar to those set
forth in the Indenture with respect to offers to purchase or redeem with the
proceeds of sales of assets (an "Asset Sale Offer") pursuant to Section 3.9 of
the Indenture to purchase the maximum principal amount of Senior Discount Notes
and such other pari passu Indebtedness of the Issuers that may be purchased out
of the Excess Proceeds at an offer price in cash in an amount equal to 100% of
the principal amount thereof plus accrued and unpaid interest and Liquidated
Damages thereon, if any, to the date of purchase (or, in the case of repurchases
of Senior Discount Notes prior to the Full Accretion Date, at a purchase price
equal to 100% of the Accreted Value thereof as of the date of purchase), in
accordance with the procedures set forth in the Indenture and such other
Indebtedness. To the extent that any Excess Proceeds remain after consummation
of an Asset Sale Offer, the Issuers may use such Excess Proceeds for any purpose
not otherwise prohibited by the Indenture. If the aggregate principal amount at
maturity or Accreted Value (as applicable) of Senior Discount Notes tendered
into such Asset Sale surrendered by Holders thereof exceeds the amount of Excess
Proceeds, the Trustee shall select the Senior Discount Notes to be purchased on
a pro rata basis, by lot or other customary method; provided that no Senior
Discount Notes of $1,000 or less shall be redeemed in part. Upon completion of
such offer to purchase, the amount of Excess Proceeds shall be reset at zero.
(c) Holders of Senior Discount Notes that are the subject of a Change of
Control Offer or an Asset Sale Offer, as the case may be, may elect to have such
Senior Discount Notes purchased by completing the form entitled "Option of
Holder to Elect Purchase" on the reverse of the Senior Discount Notes.
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<PAGE>
9. Notice of Redemption. Subject to Section 3.9 of the Indenture, notices of
redemption shall be mailed by first class mail at least 30 but not more than 60
days before the redemption date to each Holder of Senior Discount Notes to be
redeemed at its registered address. Notices of redemption may not be
conditional. If any Senior Discount Note is to be redeemed in part only, the
notice of redemption that relates to such Senior Discount Note shall state the
portion of the principal amount thereof to be redeemed. On and after the
redemption date, interest ceases to accrue on Senior Discount Notes or portions
of them called for redemption.
10. Denominations, Transfer, Exchange. The Senior Discount Notes are in
registered form without coupons in denominations of $1,000 and integral
multiples thereof. A Holder may transfer or exchange Senior Discount Notes in
accordance with the Indenture. The Registrar and the Trustee may require a
Holder, among other things, to furnish appropriate endorsements and transfer
documents and the Issuers may require a Holder to pay any taxes and fees
required by law or permitted by the Indenture. The Issuers are not required to
transfer or exchange any Senior Discount Notes selected for redemption. Also,
the Issuers are not required to transfer or exchange any Senior Discount Notes
for a period of 15 business days before a selection of Senior Discount Notes to
be redeemed or during the period between a record date and the next succeeding
Interest Payment Date.
11. Persons Deemed Owners. The registered Holder of a Senior Discount Note may
be treated as its owner for all purposes.
12. Amendment, Supplement and Waiver. Subject to certain exceptions, the
Indenture, or the Senior Discount Notes may be amended or supplemented with the
consent of the Holders of at least a majority in principal amount at maturity of
the then outstanding Senior Discount Notes voting as a single class, and any
existing default or compliance with any provision of the Indenture or the Senior
Discount Notes may be waived with the consent of the Holders of a majority in
principal amount at maturity of the then outstanding Senior Discount Notes
voting as a single class. Without the consent of any Holder of a Senior Discount
Note, the Indenture or the Senior Discount Notes may be amended or supplemented
to cure any ambiguity, omission, defect or inconsistency, to provide for
uncertificated Senior Discount Notes in addition to or in place of certificated
Senior Discount Notes, to provide for the assumption of the Issuers' obligations
to Holders of the Senior Discount Notes in case of a merger, consolidation or
sale of assets (including the Reorganization), to add additional guarantees with
respect to the Senior Discount Notes, to make any change that would provide any
additional rights or benefits to the Holders of the Senior Discount Notes or
that does not adversely affect the legal rights under the Indenture of any such
Holder, or to comply with the requirements of the Commission in order to effect
or maintain the qualification of the Indenture under the Trust Indenture Act.
13. Defaults and Remedies.
The Indenture provides that each of the following constitutes an Event of
Default: (i) default for 30 days in the payment when due of interest on, or
Liquidated Damages with respect to, the Senior Discount Notes; (ii) default in
payment when due of the Accreted Value of or the
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<PAGE>
principal of or premium, if any, on the Senior Discount Notes; (iii) failure by
any of the Issuers or any of their Restricted Subsidiaries to comply with the
covenants contained in Sections 4.7, 4.9 or 5.1; (iv) failure by any of the
Issuers or any of their Restricted Subsidiaries for 30 days after notice to
comply with the covenants contained in Sections 4.10 or 4.15; (v) failure by any
of the Issuers or any of their Restricted Subsidiaries for 60 days after notice
to comply with any of its other agreements in the Indenture or the Senior
Discount Notes; (vi) default under any mortgage, indenture or instrument under
which there may be issued or by which there may be secured or evidenced any
Indebtedness for money borrowed by any of the Issuers or any of their Restricted
Subsidiaries (or the payment of which is guaranteed by any of the Issuers or any
of their Restricted Subsidiaries) whether such Indebtedness or guarantee now
exists, or is created after the Issue Date, which default (a) is caused by a
failure to pay principal of or premium, if any, or interest on such Indebtedness
prior to the expiration of the grace period provided in such Indebtedness on the
date of such default (a "Payment Default") or (b) results in the acceleration of
such Indebtedness prior to its express maturity and, in each case, the principal
amount of any such Indebtedness, together with the principal amount of any other
such Indebtedness under which there has been a Payment Default or the maturity
of which has been so accelerated, aggregates without duplication $5.0 million or
more; (vii) failure by any of the Issuers or any of their Restricted
Subsidiaries to pay final judgments aggregating in excess of $5.0 million
(excluding amounts covered by insurance), which judgments are not paid,
discharged or stayed for a period of 60 days; and (viii) certain events of
bankruptcy or insolvency with respect to any of the Issuers or any of their
Restricted Subsidiaries that constitute a Significant Subsidiary, or any group
of Restricted Subsidiaries that, taken together, would constitute a Significant
Subsidiary.
If any Event of Default occurs and is continuing, the Trustee or the
Holders of at least 25% in principal amount at maturity of the then outstanding
Senior Discount Notes may declare all the Senior Discount Notes to be due and
payable immediately; provided that so long as any Indebtedness permitted to be
incurred pursuant to the Senior Credit Facility shall be outstanding, such
acceleration shall not be effective until the earlier of (i) an acceleration of
such Indebtedness under the Senior Credit Facility and (ii) five business days
after receipt by the Issuers of written notice of such acceleration of the
Senior Discount Notes. Notwithstanding the foregoing, in the case of an Event of
Default arising from certain events of bankruptcy or insolvency, with respect to
any of the Issuers or any of their Restricted Subsidiaries, all outstanding
Senior Discount Notes will become due and payable without further action or
notice. Holders of the Senior Discount Notes may not enforce the Indenture or
the Senior Discount Notes except as provided in the Indenture. Subject to
certain limitations, Holders of a majority in principal amount at maturity of
the then outstanding Senior Discount Notes may direct the Trustee in its
exercise of any trust or power. The Trustee may withhold from Holders of the
Senior Discount Notes notice of any continuing Default or Event of Default
(except a Default or Event of Default relating to the payment of principal or
interest) if it determines that withholding notice is in their interest.
The Holders of a majority in aggregate principal amount at maturity of the
Senior Discount Notes then outstanding by notice to the Trustee may on behalf of
the Holders of all of the Senior Discount Notes waive any existing Default or
Event of Default and its consequences
A-8
<PAGE>
under the Indenture except a continuing Default or Event of Default in the
payment of interest on, or the Accreted Value or principal of, the Senior
Discount Notes.
The Issuers are required to deliver to the Trustee annually a statement
regarding compliance with the Indenture, and the Issuers are required upon
becoming aware of any Default or Event of Default that is continuing, to deliver
to the Trustee a statement specifying such Default or Event of Default.
14. Trustee Dealings With Issuers. The Trustee, in its individual or any other
capacity, may make loans to, accept deposits from, and perform services for the
Issuers or their Affiliates, and may otherwise deal with the Issuers or their
Affiliates, as if it were not the Trustee.
15. No Recourse Against Others. No past, present or future director, officer,
employee, incorporator, manager, member or stockholder of any Person who is or
was an Issuer or Parent Guarantor, as such, shall have any liability for any
obligations of the Issuers under the Senior Discount Notes or the Indenture or
any related documents or for any claim based on, in respect of, or by reason of,
such obligations or their creation. Each Holder of Senior Discount Notes by
accepting a Senior Discount Note waives and releases all such liability. The
waiver and release are part of the consideration for issuance of the Senior
Discount Notes. Such waiver may not be effective to waive liabilities under the
federal securities laws and it is the view of the Commission that such a waiver
is against public policy.
16. Authentication. This Senior Discount Note shall not be valid until
authenticated by the manual signature of the Trustee or an authenticating agent.
17. Abbreviations. Customary abbreviations may be used in the name of a Holder
or an assignee, such as: TEN COM (= tenants in common), TEN ENT (= tenants by
the entireties), JT TEN (= joint tenants with right of survivorship and not as
tenants in common), CUST (= custodian), and U/G/M/A (= Uniform Gifts to Minors
Act).
18. Additional Rights of Holders of Restricted Global Notes and Restricted
Definitive Notes. In addition to the rights provided to Holders of Senior
Discount Notes under the Indenture, Holders of Restricted Global Notes and
Restricted Definitive Notes shall have all the rights set forth in the
Registration Rights Agreement dated as of December 10, 1998, among the Issuers
and the parties named on the signature pages thereof or, in the case of
Additional Senior Discount Notes, Holders of Restricted Global Notes and
Restricted Definitive Notes shall have the rights set forth in one or more
registration rights agreements, if any, between the Issuers and the other
parties thereto, relating to rights given by the Issuers to the purchasers of
any Additional Senior Discount Notes (collectively, the "Registration Rights
Agreement").
19. CUSIP Numbers.
Pursuant to a recommendation promulgated by the Committee on Uniform
Security Identification Procedures, the Issuers have caused CUSIP numbers to be
printed on the Senior
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<PAGE>
Discount Notes and the Trustee may use CUSIP numbers in notices of redemption as
a convenience to Holders. No representation is made as to the accuracy of such
numbers either as printed on the Senior Discount Notes or as contained in any
notice of redemption and reliance may be placed only on the other identification
numbers placed thereon.
In the event that the Issuers shall issue and the Trustee shall
authenticate any Additional Senior Discount Notes pursuant to the Indenture, the
Issuers shall use their best efforts to obtain the same CUSIP number for such
Additional Senior Discount Notes as is printed on the Senior Discount Notes
outstanding at such time; provided, however, that if any series of Additional
Senior Discount Notes is determined, pursuant to an Opinion of Counsel, to be a
different class of security than the Senior Discount Notes outstanding at such
time for federal income tax purposes, the Issuers may obtain a CUSIP number for
such series of Additional Senior Discount Notes that is different from the CUSIP
number printed on the Senior Discount Notes then outstanding.
20. Guarantees. This Senior Discount Note may be entitled to the benefits of
certain Guarantees made for the benefit of the Holders. Reference is hereby made
to the Indenture for a statement of the respective rights, limitations of
rights, duties and obligations thereunder of the Guarantors, the Trustee and the
Holders.
The Issuers will furnish to any Holder upon written request and without
charge a copy of the Indenture and/or the Registration Rights Agreement.
Requests may be made to:
Avalon Cable of Michigan Holdings, Inc.
Avalon Cable LLC
Avalon Cable Holdings Finance, Inc.
800 Third Avenue, Suite 3100
New York, New York 10022
Attention: Vice President--Finance
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<PAGE>
Assignment Form
To assign this Senior Discount Note, fill in the form below: (I) or (we) assign
and transfer this Senior Discount Note to
- ------------------------------------------------------------------------------
(Insert assignee's soc. sec. or tax I.D. no.)
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
(Print or type assignee's name, address and zip code)
and irrevocably appoint_______________________________________________________
to transfer this Senior Discount Note on the books of the Issuers. The agent may
substitute another to act for him.
- ------------------------------------------------------------------------------
Date: _______________________
Your Signature:________________________________
(Sign exactly as your name appears on the face of
this Senior Discount Note)
Tax Identification No.:________________________
SIGNATURE GUARANTEE:
-----------------------------------------------
Signatures must be guaranteed by an "eligible
guarantor institution" meeting the requirements
of the Registrar, which requirements include
membership or participation in the Security
Transfer Agent Medallion Program ("STAMP") or
such other "signature guarantee program" as may
be determined by the Registrar in addition to, or
in substitution for, STAMP, all in accordance
with the Securities Exchange Act of 1934, as
amended.
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<PAGE>
Option of Holder to Elect Purchase
If you want to elect to have this Senior Discount Note purchased by
the Issuers pursuant to Section 4.10 or 4.15 of the Indenture, check the box
below:
[_] Section 4.10 [_] Section 4.15
If you want to elect to have only part of the Senior Discount Note
purchased by the Issuers pursuant to Section 4.10 or Section 4.15 of the
Indenture, state the amount you elect to have purchased: $________
Date: _________________
Your Signature:__________________________________
(Sign exactly as your name appears on the face of
this Senior Discount Note)
Tax Identification No.:__________________________
SIGNATURE GUARANTEE:
________________________
Signatures must be guaranteed by an "eligible
guarantor institution" meeting the requirements of
the Registrar, which requirements include
membership or participation in the Security
Transfer Agent Medallion Program ("STAMP") or such
other "signature guarantee program" as may be
determined by the Registrar in addition to, or in
substitution for, STAMP, all in accordance with
the Securities Exchange Act of 1934, as amended.
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<PAGE>
SCHEDULE OF EXCHANGES OF INTERESTS IN THE GLOBAL NOTE/(1)/
The following exchanges of a part of this Global Note for an interest
in another Global Note or for a Definitive Note, or exchanges of a part of
another Global Note or Definitive Note for an interest in this Global Note, have
been made:
<TABLE>
<CAPTION>
Principal Amount Signature of
Amount of Amount of increase of this Global Note authorized
decrease in in Principal following such signatory
Principal Amount Amount of this decrease (or of Trustee or Note
Date of Exchange of this Global Note Global Note increase) Custodian
- ---------------- ------------------- ----------- --------- ---------
<S> <C> <C> <C> <C>
</TABLE>
- ------------------------
/(1)/ This should be included only if the Senior Discount Note is issued in
global form.
A-13
<PAGE>
EXHIBIT B
FORM OF CERTIFICATE OF TRANSFER
Avalon Cable of Michigan Holdings, Inc.
Avalon Cable LLC
Avalon Cable Holdings Finance, Inc.
800 Third Avenue, Suite 3100
New York, NY 10022
Attention:
The Bank of New York
101 Barclay Street, Floor 21 West
New York, NY 10286
Attention: Corporate Trust Administration
Re: 11 7/8% Senior Subordinated Senior Discount Notes due 2008
----------------------------------------------------------
Reference is hereby made to the Indenture, dated as of December 10,
1998 (the "Indenture"), among Avalon Cable of Michigan Holdings, Inc. ("Michigan
Holdings"), Avalon Cable LLC ("Avalon Holdings"), Avalon Cable Holdings
Finance, Inc. ("Finance Holdings") and The Bank of New York, as trustee.
Initially, Michigan Holdings, Avalon Holdings and Finance Holdings or any
successor thereto will be the Issuers of the Senior Discount Notes (the
"Issuers"); provided that subsequent to the Reorganization, the Issuers shall be
Avalon Holdings, as successor to Michigan Holdings, and Finance Holdings or any
successor thereto. Capitalized terms used but not defined herein shall have the
meanings given to them in the Indenture.
__________________ (the "Transferor") owns and proposes to transfer
the Senior Discount Note[s] or interest in such Senior Discount Note[s]
specified in Annex A hereto, in the principal amount of $____ in such Senior
Discount Note[s] or interests (the "Transfer"), to ______ (the "Transferee"), as
further specified in Annex A hereto. In connection with the Transfer, the
Transferor hereby certifies that:
[CHECK ALL THAT APPLY]
1. [_] Check if Transferee will take delivery of a beneficial interest in the
144A Global Note or a Definitive Note Pursuant to Rule 144A. The Transfer is
being effected pursuant to and in accordance with Rule 144A under the United
States Securities Act of 1933, as amended (the "Securities Act"), and,
accordingly, the Transferor hereby further certifies that the beneficial
interest or Definitive Note is being transferred in a transaction meeting the
requirements of Rule 144A to a Person that the Transferor reasonably believed
and believes is purchasing the beneficial interest or Definitive Note for its
own account, or for one or more accounts with respect to which
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such Person exercises sole investment discretion, and such Person and each such
account is a "qualified institutional buyer" within the meaning of Rule 144A and
such Transfer is in compliance with any applicable blue sky securities laws of
any state of the United States. Upon consummation of the proposed Transfer in
accordance with the terms of the Indenture, the transferred beneficial interest
or Definitive Note will be subject to the restrictions on transfer enumerated in
the Private Placement Legend printed on the 144A Global Note and/or the
Definitive Note and in the Indenture and the Securities Act.
2. [_] Check if Transferee will take delivery of a beneficial interest in the
Temporary Regulation S Global Note, the Regulation S Global Note or a Definitive
Note pursuant to Regulation S. The Transfer is being effected pursuant to and in
accordance with Rule 903 or Rule 904 under the Securities Act and, accordingly,
the Transferor hereby further certifies that (i) the Transfer is not being made
to a person in the United States and (x) at the time the buy order was
originated, the Transferee was outside the United States or such Transferor and
any Person acting on its behalf reasonably believed and believes that the
Transferee was outside the United States or (y) the transaction was executed in,
on or through the facilities of a designated offshore securities market and
neither such Transferor nor any Person acting on its behalf knows that the
transaction was prearranged with a buyer in the United States, (ii) no directed
selling efforts have been made in contravention of the requirements of Rule
903(b) or Rule 904(b) of Regulation S under the Securities Act, (iii) the
transaction is not part of a plan or scheme to evade the registration
requirements of the Securities Act and (iv) if the proposed transfer is being
made prior to the expiration of the Restricted Period, the transfer is not being
made to a U.S. Person or for the account or benefit of a U.S. Person (other than
an Initial Purchaser). Upon consummation of the proposed transfer in accordance
with the terms of the Indenture, the transferred beneficial interest or
Definitive Note will be subject to the restrictions on Transfer enumerated in
the Private Placement Legend printed on the Regulation S Global Note, the
Temporary Regulation S Global Note and/or the Definitive Note and in the
Indenture and the Securities Act.
3. [_] Check and complete if Transferee will take delivery of a beneficial
interest in the IAI Global Note or a Definitive Note pursuant to any provision
of the Securities Act other than Rule 144A or Regulation S. The Transfer is
being effected in compliance with the transfer restrictions applicable to
beneficial interests in Restricted Global Notes and Restricted Definitive Notes
and pursuant to and in accordance with the Securities Act and any applicable
blue sky securities laws of any state of the United States, and accordingly the
Transferor hereby further certifies that (check one):
(a) [_] such Transfer is being effected pursuant to and in accordance
with Rule 144 under the Securities Act;
or
(b) [_] such Transfer is being effected to the Issuers or a
subsidiary thereof;
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<PAGE>
or
(c) [_] such Transfer is being effected pursuant to an effective
registration statement under the Securities Act and in compliance with the
prospectus delivery requirements of the Securities Act;
or
(d) [_] such Transfer is being effected to an institutional
"accredited investor" and pursuant to an exemption from the registration
requirements of the Securities Act other than Rule 144A, Rule 144 or Rule 904,
and the Transferor hereby further certifies that it has not engaged in any
general solicitation within the meaning of Regulation D under the Securities Act
and the Transfer complies with the transfer restrictions applicable to
beneficial interests in a Restricted Global Note or Restricted Definitive Notes
and the requirements of the exemption claimed, which certification is supported
by (1) a certificate executed by the Transferee and (2) if such Transfer is in
respect of a principal amount of Senior Discount Notes at the time of transfer
of less than $250,000, an Opinion of Counsel provided by the Transferor or the
Transferee (a copy of which the Transferor has attached to this certification),
to the effect that such Transfer is in compliance with the Securities Act. Upon
consummation of the proposed transfer in accordance with the terms of the
Indenture, the transferred beneficial interest or Definitive Note will be
subject to the restrictions on transfer enumerated in the Private Placement
Legend printed on the IAI Global Note and/or the Definitive Notes and in the
Indenture and the Securities Act.
4. [_] Check if Transferee will take delivery of a beneficial interest in an
Unrestricted Global Note or of an Unrestricted Definitive Note.
(a) [_] Check if Transfer is Pursuant to Rule 144. (i) The Transfer
is being effected pursuant to and in accordance with Rule 144 under the
Securities Act and in compliance with the transfer restrictions contained in the
Indenture and any applicable blue sky securities laws of any state of the United
States and (ii) the restrictions on transfer contained in the Indenture and the
Private Placement Legend are not required in order to maintain compliance with
the Securities Act. Upon consummation of the proposed Transfer in accordance
with the terms of the Indenture, the transferred beneficial interest or
Definitive Note will no longer be subject to the restrictions on transfer
enumerated in the Private Placement Legend printed on the Restricted Global
Notes, on Restricted Definitive Notes and in the Indenture.
(b) [_] Check if Transfer is Pursuant to Regulation S. (i) The
Transfer is being effected pursuant to and in accordance with Rule 903 or Rule
904 under the Securities Act and in compliance with the transfer restrictions
contained in the Indenture and any applicable blue sky securities laws of any
state of the United States and (ii) the restrictions on transfer contained in
the Indenture and the Private Placement Legend are not required in order to
maintain
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<PAGE>
compliance with the Securities Act. Upon consummation of the proposed Transfer
in accordance with the terms of the Indenture, the transferred beneficial
interest or Definitive Note will no longer be subject to the restrictions on
transfer enumerated in the Private Placement Legend printed on the Restricted
Global Notes, on Restricted Definitive Notes and in the Indenture.
(c) [_] Check if Transfer is Pursuant to Other Exemption. (i) The
Transfer is being effected pursuant to and in compliance with an exemption from
the registration requirements of the Securities Act other than Rule 144, Rule
903 or Rule 904 and in compliance with the transfer restrictions contained in
the Indenture and any applicable blue sky securities laws of any State of the
United States and (ii) the restrictions on transfer contained in the Indenture
and the Private Placement Legend are not required in order to maintain
compliance with the Securities Act. Upon consummation of the proposed Transfer
in accordance with the terms of the Indenture, the transferred beneficial
interest or Definitive Note will not be subject to the restrictions on transfer
enumerated in the Private Placement Legend printed on the Restricted Global
Notes or Restricted Definitive Notes and in the Indenture.
This certificate and the statements contained herein are made for your
benefit and the benefit of the Issuers.
_____________________________
[Insert Name of Transferor]
By:__________________________
Name:
Title:
Dated: ___________________
B-4
<PAGE>
ANNEX A TO CERTIFICATE OF TRANSFER
1. The Transferor owns and proposes to transfer the following:
[CHECK ONE OF (a) OR (b)]
(a) [_] a beneficial interest in the:
(i) [_] 144A Global Note (CUSIP _____), or
(ii [_] Regulation S Global Note (CUSIP _____), or
(iii) [_] IAI Global Note (CUSIP _____); or
(b) a Restricted Definitive Note.
2. After the Transfer the Transferee will hold:
[CHECK ONE]
(a) [_] a beneficial interest in the:
(i) [_] 144A Global Note (CUSIP _____), or
(ii [_] Regulation S Global Note (CUSIP _____), or
(iii) [_] a IAI Global Note (CUSIP _____), or
(iv) [_] Unrestricted Global Note (CUSIP _____); or
(b) [_] a Restricted Definitive Note; or
(c) [_] an Unrestricted Definitive Note,
in accordance with the terms of the Indenture.
B-5
<PAGE>
EXHIBIT C
FORM OF CERTIFICATE OF EXCHANGE
Avalon Cable of Michigan Holdings, Inc.
Avalon Cable LLC
Avalon Cable Holdings Finance, Inc.
800 Third Avenue, Suite 3100
New York, NY 10022
Attention: Vice President--Finance
The Bank of New York
101 Barclay Street, Floor 21 West
New York, NY 10286
Attention: Corporate Trust Administration
Re: 11 7/8% Senior Subordinated Senior Discount Notes due 2008
----------------------------------------------------------
(CUSIP ____________________)
Reference is hereby made to the Indenture, dated as of December __,
1998 (the "Indenture"), among Avalon Cable of Michigan Holdings, Inc. ("Michigan
Holdings"), Avalon Cable LLC ("Avalon Holdings"), Avalon Cable Holdings
Finance, Inc. ("Finance Holdings") and The Bank of New York, as trustee.
Initially, Michigan Holdings, Avalon Holdings and Finance Holdings or any
successor thereto will be the Issuers of the Senior Discount Notes (the
"Issuers"); provided that subsequent to the Reorganization, the Issuers shall be
Avalon Holdings, as successor to Michigan Holdings, and Finance Holdings or any
successor thereto. Capitalized terms used but not defined herein shall have
the meanings given to them in the Indenture.
________________ (the "Owner") owns and proposes to exchange the
Senior Discount Note[s] or interest in such Senior Discount Note[s] specified
herein, in the principal amount of $______, for the Senior Discount Note[s] or
interests specified herein (the "Exchange"). In connection with the Exchange,
the Owner hereby certifies that:
1. Exchange of Restricted Definitive Notes or Beneficial Interests in a
Restricted Global Note for Unrestricted Definitive Notes or Beneficial Interests
in an Unrestricted Global Note
(a) [_] Check if Exchange is from beneficial interest in a Restricted
Global Note to beneficial interest in an Unrestricted Global Note. In connection
with the Exchange of the Owner's beneficial interest in a Restricted Global Note
for a beneficial interest in an Unrestricted Global Note in an equal principal
amount, the Owner hereby certifies (i) the beneficial interest is being acquired
for the Owner's own account without transfer, (ii) such
C-1
<PAGE>
Exchange has been effected in compliance with the transfer restrictions
applicable to the Global Notes and pursuant to and in accordance with the United
States Securities Act of 1933, as amended (the "Securities Act"), (iii) the
restrictions on transfer contained in the Indenture and the Private Placement
Legend are not required in order to maintain compliance with the Securities Act
and (iv) the beneficial interest in an Unrestricted Global Note is being
acquired in compliance with any applicable blue sky securities laws of any state
of the United States.
(b) [_] Check if Exchange is from beneficial interest in a Restricted
Global Note to Unrestricted Definitive Note. In connection with the Exchange of
the Owner's beneficial interest in a Restricted Global Note for an Unrestricted
Definitive Note, the Owner hereby certifies (i) the Definitive Note is being
acquired for the Owner's own account without transfer, (ii) such Exchange has
been effected in compliance with the transfer restrictions applicable to the
Restricted Global Notes and pursuant to and in accordance with the Securities
Act, (iii) the restrictions on transfer contained in the Indenture and the
Private Placement Legend are not required in order to maintain compliance with
the Securities Act and (iv) the Definitive Note is being acquired in compliance
with any applicable blue sky securities laws of any state of the United States.
(c) [_] Check if Exchange is from Restricted Definitive Note to
beneficial interest in an Unrestricted Global Note. In connection with the
Owner's Exchange of a Restricted Definitive Note for a beneficial interest in an
Unrestricted Global Note, the Owner hereby certifies (i) the beneficial interest
is being acquired for the Owner's own account without transfer, (ii) such
Exchange has been effected in compliance with the transfer restrictions
applicable to Restricted Definitive Notes and pursuant to and in accordance with
the Securities Act, (iii) the restrictions on transfer contained in the
Indenture and the Private Placement Legend are not required in order to maintain
compliance with the Securities Act and (iv) the beneficial interest is being
acquired in compliance with any applicable blue sky securities laws of any state
of the United States.
(d) [_] Check if Exchange is from Restricted Definitive Note to
Unrestricted Definitive Note. In connection with the Owner's Exchange of a
Restricted Definitive Note for an Unrestricted Definitive Note, the Owner hereby
certifies (i) the Unrestricted Definitive Note is being acquired for the Owner's
own account without transfer, (ii) such Exchange has been effected in compliance
with the transfer restrictions applicable to Restricted Definitive Notes and
pursuant to and in accordance with the Securities Act, (iii) the restrictions on
transfer contained in the Indenture and the Private Placement Legend are not
required in order to maintain compliance with the Securities Act and (iv) the
Unrestricted Definitive Note is being acquired in compliance with any applicable
blue sky securities laws of any state of the United States.
2. Exchange of Restricted Definitive Notes or Beneficial Interests in
Restricted Global Notes for Restricted Definitive Notes or Beneficial Interests
in Restricted Global Notes
C-2
<PAGE>
(a) [_] Check if Exchange is from beneficial interest in a Restricted
Global Note to Restricted Definitive Note. In connection with the Exchange of
the Owner's beneficial interest in a Restricted Global Note for a Restricted
Definitive Note with an equal principal amount, the Owner hereby certifies that
the Restricted Definitive Note is being acquired for the Owner's own account
without transfer. Upon consummation of the proposed Exchange in accordance with
the terms of the Indenture, the Restricted Definitive Note issued will continue
to be subject to the restrictions on transfer enumerated in the Private
Placement Legend printed on the Restricted Definitive Note and in the Indenture
and the Securities Act.
(b) [_] Check if Exchange is from Restricted Definitive Note to
beneficial interest in a Restricted Global Note. In connection with the Exchange
of the Owner's Restricted Definitive Note for a beneficial interest in the
[CHECK ONE] [_] 144A Global Note, [_] Regulation S Global Note, [_] IAI Global
Note with an equal principal amount, the Owner hereby certifies (i) the
beneficial interest is being acquired for the Owner's own account without
transfer and (ii) such Exchange has been effected in compliance with the
transfer restrictions applicable to the Restricted Global Notes and pursuant to
and in accordance with the Securities Act, and in compliance with any applicable
blue sky securities laws of any state of the United States. Upon consummation of
the proposed Exchange in accordance with the terms of the Indenture, the
beneficial interest issued will be subject to the restrictions on transfer
enumerated in the Private Placement Legend printed on the relevant Restricted
Global Note and in the Indenture and the Securities Act.
This certificate and the statements contained herein are made for your
benefit and the benefit of the Issuers.
_________________________
[Insert Name of Owner]
By:______________________
Name:
Title:
Dated:______________________
C-3
<PAGE>
EXHIBIT D
FORM OF SUPPLEMENTAL INDENTURE
TO BE DELIVERED BY SUBSEQUENT GUARANTORS
SUPPLEMENTAL INDENTURE (this "Supplemental Indenture"), dated as of
_______________, among _______________ (the "Guarantor"), a __________ of
_____________________________________________________, as issuers under the
indenture referred to below, the other Guarantors (as defined in the indenture
referred to herein) and The Bank of New York, as trustee under the indenture
referred to below (the "Trustee").
W I T N E S S E T H
WHEREAS, the Issuers have heretofore executed and delivered to the
Trustee an indenture (the "Indenture"), dated as of December 10, 1998 providing
for the issuance of an aggregate principal amount at issuance of up to $160.4
million of 11 7/8% Senior Discount Notes due 2008 (the "Senior Discount
Notes");
WHEREAS, the Indenture provides that under certain circumstances the
Guarantor shall execute and deliver to the Trustee a supplemental indenture
pursuant to which the Guarantor shall unconditionally guarantee all of the
Issuers' Obligations under the Senior Discount Notes and the Indenture on the
terms and conditions set forth herein (the "Senior Discount Note Guarantee");
and
WHEREAS, pursuant to Section 9.1 of the Indenture, the Trustee is
authorized to execute and deliver this Supplemental Indenture.
NOW THEREFORE, in consideration of the foregoing and for other good
and valuable consideration, the receipt of which is hereby acknowledged, the
Guarantor and the Trustee mutually covenant and agree for the equal and ratable
benefit of the Holders of the Senior Discount Notes as follows:
1. Capitalized Terms. Capitalized terms used herein without
definition shall have the meanings assigned to them in the Indenture.
2. Agreement to Guarantee. The Guarantor hereby agrees as follows:
(a) Along with all Guarantors named in the Indenture, to jointly and
severally Guarantee to each Holder of a Senior Discount Note
authenticated and delivered by the Trustee and to the Trustee and
its successors and assigns, irrespective of the validity and
enforceability of the Indenture, the Senior Discount Notes or the
obligations of the Issuers hereunder or thereunder, that:
D-1
<PAGE>
(i) the principal of and interest on the Senior Discount Notes
will be promptly paid in full when due, whether at
maturity, by acceleration, redemption or otherwise, and
interest on the overdue principal of and interest on the
Senior Discount Notes, if any, if lawful, and all other
obligations of the Issuers to the Holders or the Trustee
hereunder or thereunder will be promptly paid in full or
performed, all in accordance with the terms hereof and
thereof; and
(ii) in case of any extension of time of payment or renewal of
any Senior Discount Notes or any of such other obligations,
that same will be promptly paid in full when due or
performed in accordance with the terms of the extension or
renewal, whether at stated maturity, by acceleration or
otherwise. Failing payment when due of any amount so
guaranteed or any performance so guaranteed for whatever
reason, the Guarantors shall be jointly and severally
obligated to pay the same immediately.
(b) The obligations hereunder shall be unconditional, irrespective of
the validity, regularity or enforceability of the Senior Discount
Notes or the Indenture, the absence of any action to enforce the
same, any waiver or consent by any Holder of the Senior Discount
Notes with respect to any provisions hereof or thereof, the
recovery of any judgment against the Issuers, any action to
enforce the same or any other circumstance which might otherwise
constitute a legal or equitable discharge or defense of a
Guarantor.
(c) The following is hereby waived: diligence, presentment, demand of
payment, filing of claims with a court in the event of insolvency
or bankruptcy of the Issuers, any right to require a proceeding
first against the Issuers, protest, notice and all demands
whatsoever.
(d) This Senior Discount Note Guarantee shall not be discharged
except by complete performance of the obligations contained in
the Senior Discount Notes and the Indenture.
(e) If any Holder or the Trustee is required by any court or
otherwise to return to the Issuers, the Guarantors, or any
custodian, Trustee, liquidator or other similar official acting
in relation to either the Issuers or the Guarantors, any amount
paid by either to the Trustee or such Holder, this Senior
Discount Note Guarantee, to the extent theretofore discharged,
shall be reinstated in full force and effect.
D-2
<PAGE>
(f) The Guarantor shall not be entitled to any right of subrogation
in relation to the Holders in respect of any obligations
guaranteed hereby until payment in full of all obligations
guaranteed hereby.
(g) As between the Guarantors, on the one hand, and the Holders and
the Trustee, on the other hand, (x) the maturity of the
obligations guaranteed hereby may be accelerated as provided in
Article 6 of the Indenture for the purposes of this Senior
Discount Note Guarantee, notwithstanding any stay, injunction or
other prohibition preventing such acceleration in respect of the
obligations guaranteed hereby, and (y) in the event of any
declaration of acceleration of such obligations as provided in
Article 6 of the Indenture, such obligations (whether or not due
and payable) shall forthwith become due and payable by the
Guarantors for the purpose of this Senior Discount Note
Guarantee.
(h) Each Guarantor, and by its acceptance hereof each Holder and the
Trustee, hereby confirms that it is the intention of all such
parties that each Senior Discount Note Guarantee not constitute a
fraudulent transfer or conveyance for purposes of Title 11 of the
United States Code, as amended, the Uniform Fraudulent Conveyance
Act, the Uniform Fraudulent Transfer Act or any similar U.S.
Federal or state or other applicable law. To effectuate the
foregoing intention, the Holders and each Guarantor hereby
irrevocably agree that the obligations of each Guarantor under
each Senior Discount Note Guarantee shall be limited to the
maximum amount as will, after giving effect to all other
contingent and fixed liabilities of such Guarantor and after
giving effect to any collections from or payments made by or on
behalf of any other Guarantor in respect of the obligations of
such other Guarantor pursuant to Section 2(i), result in the
obligations of such Guarantor not constituting such a fraudulent
transfer or conveyance.
(i) In order to provide for just and equitable contribution among the
Guarantors, the Guarantors agree, inter se, that in the event any
payment or distribution is made by any Guarantor (a "Funding
Guarantor") under a Senior Discount Note Guarantee, as the case
may be, such Funding Guarantor shall be entitled to a
contribution from all other Guarantors (if any) in a pro rata
amount, based on the net assets of each Guarantor (including the
Funding Guarantor), determined in accordance with GAAP, subject
to Section 2(h), for all payments, damages and expenses incurred
by such Funding Guarantor in discharging the Issuers' obligations
with respect to the Senior Discount Notes or any other
Guarantor's obligations under a Senior Discount Note Guarantee,
as the case may be.
D-3
<PAGE>
(j) This Senior Discount Note Guarantee inures to the benefit of and
is enforceable by the Trustee, the Holders and their successors,
transferees and assigns.
3. Execution and Delivery. Each Guarantor agrees that the Senior
Discount Note Guarantees shall remain in full force and effect notwithstanding
any failure to endorse on each Senior Discount Note a notation of such Senior
Discount Note Guarantee.
4. Guarantor May Consolidate, Etc. on Certain Terms. Each Guarantor
which is a Restricted Subsidiary, if any, shall not, and the Issuers will not
permit a Guarantor which is a Restricted Subsidiary to, consolidate or merge
with or into or wind up into (whether or not such Guarantor is the surviving
corporation), or sell, assign, transfer, lease, convey or otherwise dispose of
all or substantially all of its properties or assets in one or more related
transactions to, any Person unless (i) such Guarantor is the surviving
corporation or the Person formed by or surviving any such consultation or merger
(if other than such Guarantor) or to which such sale, assignment, transfer,
lease, conveyance or other disposition will have been made is a corporation,
partnership or limited liability company organized or existing under the laws of
the United States, any state thereof, the District of Columbia, or any territory
thereof (such Guarantor or such Person, as the case may be, being herein called
the "Successor Guarantor"); (ii) the Successor Guarantor (if other than such
Guarantor) expressly assumes all the obligations of such Guarantor under this
Indenture and such Guarantor's Senior Discount Note Guarantee pursuant to a
supplemental indenture or other documents or instruments in form reasonably
satisfactory to the Trustee; and (iii) if such merger or consolidation is with a
Person other than the Issuers or a Restricted Subsidiary, (x) immediately after
such transaction no Default or Event of Default shall have occurred and be
continuing any (y) the Issuers will, at the time of such transaction after
giving pro forma effect thereto, be permitted to incur at least $1.00 of
additional Indebtedness pursuant to the first paragraph of Section 4.9 of the
Indenture. The Successor Guarantor will succeed to, and be substituted for, such
Guarantor under this Indenture, the Registration Rights Agreement and such
Guarantor's Senior Discount Note Guarantee.
5. Releases.
(a) In the event of a sale or other disposition of all of the assets
of any Guarantor, by way of merger, consolidation or otherwise,
or a sale or other disposition of all to the capital stock of any
Guarantor, then such Guarantor (in the event of a sale or other
disposition, by way of merger, consolidation or otherwise, of all
of the capital stock of such Guarantor) or the corporation
acquiring the property (in the event of a sale or other
disposition of all or substantially all of the assets of such
Guarantor) will be released and relieved of any obligations under
its Senior Discount Note Guarantee; provided that the Net
Proceeds of such sale or other disposition in the case of a
Restricted Subsidiary are applied in accordance with the
applicable provisions of the Indenture, including without
limitation Section
D-4
<PAGE>
4.10 of the Indenture. Upon delivery by the Issuers to the
Trustee of an Officers' Certificate and an Opinion of Counsel to
the effect that such sale or other disposition was made by the
Issuers in accordance with the provisions of the Indenture,
including without limitation Section 4.10 of the Indenture, the
Trustee shall execute any documents reasonably required in order
to evidence the release of any Guarantor from its obligations
under its Senior Discount Note Guarantee.
(b) Any Guarantor not released from its obligations under its Senior
Discount Note Guarantee shall remain liable for the full amount
of principal of and interest on the Senior Discount Notes.
6. No Recourse Against Others. No past, present or future director,
officer, employee, incorporator, manager, member or stockholder of any Person
who is or was an Issuer or guarantor under the Senior Discount Notes, as such,
shall have any liability for any obligations of the Issuers under the Senior
Discount Notes or the Indenture or hereunder or any related documents or for any
claim based on, in respect of, or by reason of, such obligations or their
creation. Each Holder of Senior Discount Notes by accepting a Senior Discount
Note waives and releases all such liability. The waiver and release are part of
the consideration for issuance of the Senior Discount Notes. Such waiver may not
be effective to waive liabilities under the federal securities laws and it is
the view of the Commission that such a waiver is against public policy.
7. Fees and Expenses. The Guarantor hereby agrees to pay any and
all expenses (including reasonable counsel fees and expenses) incurred by the
Trustee or the Holders in enforcing any rights under this Senior Discount Note
Guarantee.
8. NEW YORK LAW TO GOVERN. THE LAW OF THE STATE OF NEW YORK SHALL
GOVERN AND BE USED TO CONSTRUE THIS SUPPLEMENTAL INDENTURE.
9. Counterparts. The parties may sign any number of copies of this
Supplemental Indenture. Each signed copy shall be an original, but all of them
together represent the same agreement.
10. Effect of Headings. The Section headings herein are for
convenience only and shall not affect the construction hereof.
11. The Trustee. The Trustee shall not be responsible in any manner
whatsoever for or in respect of the validity or sufficiency of this Supplemental
Indenture or for or in respect of the recitals contained herein, all of which
recitals are made solely by the Guarantor and the Issuers.
D-5
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Supplemental
Indenture to be duly executed and attested, all as of the date first above
written.
Dated: __________ [Guarantor]
By:_______________________
Name:
Title:
THE BANK OF NEW YORK, as
Trustee
By:_______________________
Name:
Title:
D-6
<PAGE>
EXHIBIT 4.2
SUPPLEMENTAL INDENTURE
----------------------
SUPPLEMENTAL INDENTURE (this "Supplemental Indenture"), dated as of
March 26, 1999, by and among Avalon Cable LLC, a Delaware limited liability
company ("Avalon LLC"), Avalon Cable of Michigan Holdings, Inc., a Delaware
corporation ("Michigan Holdings"), Avalon Cable Holdings Finance, Inc., a
Delaware corporation ("Avalon Finance"), Avalon Cable of Michigan, Inc., a
Pennsylvania corporation ("Avalon Michigan Inc."), and The Bank of New York, a
New York banking corporation, as trustee under the indenture referred to below
(the "Trustee").
W I T N E S S E T H
WHEREAS, Avalon LLC, Michigan Holdings and Avalon Finance have
heretofore executed and delivered to the Trustee an indenture (the "Indenture")
dated as of December 10, 1998 providing for the issuance of an aggregate
principal amount at issuance of up to $160.4 million of 11 7/8% Senior Discount
Notes due 2008 (the "Senior Discount Notes");
WHEREAS, the Reorganization (as defined in the Indenture) has
occurred;
WHEREAS, pursuant to the Reorganization, Avalon Michigan Inc. assumed
the obligations of Michigan Holdings under the Indenture and the Senior Discount
Notes;
WHEREAS, immediately thereafter and pursuant to the Reorganization,
Avalon LLC assumed the liabilities and obligations of Avalon Michigan Inc. under
the Indenture and the Senior Discount Notes;
WHEREAS, in connection with the foregoing and as contemplated by the
Indenture, Michigan Holdings and Avalon Michigan Inc. shall guarantee the
obligations of Avalon LLC under the Indenture and Senior Discount Notes after
the Reorganization;
WHEREAS, as a result of a foregoing and as contemplated by the
Indenture, the Issuers for purposes of the Indenture are now Avalon LLC and
Avalon Finance; and
WHEREAS, pursuant to Section 9.1 of the Indenture, the Trustee is
authorized to execute and deliver this Supplemental Indenture.
NOW THEREFORE, in consideration of the foregoing and for other good
and valuable consideration, the receipt of which is hereby acknowledged, the
parties hereto mutually covenant and agree for the equal and ratable benefit of
the Holders of the Senior Discount Notes as follows:
1. CAPITALIZED TERMS. Capitalized terms used herein without
definition shall have the meanings assigned to them in the Indenture.
<PAGE>
2. AGREEMENT TO GUARANTEE. Each of Michigan Holdings and Avalon
Michigan Inc. hereby agrees as follows:
(a) Along with all other Guarantors (if any) named from time to time
in the Indenture, to jointly and severally Guarantee, to the
extent of the obligation of Avalon LLC therefor, to each Holder
of a Senior Discount Note authenticated and delivered by the
Trustee and to the Trustee and its successors and assigns,
irrespective of the validity and enforceability of the Indenture,
the Senior Discount Notes or the obligations of the Issuers
hereunder or thereunder, that:
(i) the principal of and interest on the Senior Discount Notes
will be promptly paid in full when due, subject to any
applicable grace period, whether at maturity, by
acceleration, redemption or otherwise, and interest on the
overdue principal of and interest on the Senior Discount
Notes, if any, if lawful, and all other obligations of
Avalon LLC to the Holders or the Trustee hereunder or
thereunder will be promptly paid in full or performed, all
in accordance with the terms hereof and thereof, subject to
the limitations set forth in Section 2 (h) below; and
(ii) in case of any extension of time of payment or renewal of
any Senior Discount Notes or any of such other obligations,
that same will be promptly paid in full when due or
performed in accordance with the terms of the extension or
renewal, whether at stated maturity, by acceleration or
otherwise.
Failing payment when due of any amount so guaranteed or any
performance so guaranteed for whatever reason each of
Michigan Holdings and Avalon Michigan Inc., to the extent of
the obligation of Avalon LLC therefor, and the other
Guarantors shall be jointly and severally obligated to pay
the same immediately.
(b) The obligations hereunder shall be unconditional, irrespective of
the validity, regularity or enforceability of the Senior Discount
Notes or the Indenture, the absence of any action to enforce the
same, any waiver or consent by any Holder of the Senior Discount
Notes with respect to any provisions hereof or thereof, the
recovery of any judgment against the Issuers, any action to
enforce the same or any other circumstance which might otherwise
constitute a legal or equitable discharge or defense of a
Guarantor.
(c) The following is hereby waived: diligence, presentment, demand of
payment, filing of claims with a court in the event of insolvency
or
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<PAGE>
bankruptcy of the Issuers, any right to require a proceeding
first against the Issuers, protest, notice and all demands
whatsoever.
(d) This Senior Discount Note Guarantee shall not be discharged
except by complete performance of the obligations contained in
the Senior Discount Notes and the Indenture.
(e) If any Holder or the Trustee is required by any court or
otherwise to return to the Issuers, the Guarantors, or any
custodian, trustee, liquidator or other similar official acting
in relation to any of the Issuers or the Guarantors, any amount
paid by any of them to the Trustee or such Holder, this Senior
Discount Note Guarantee, to the extent theretofore discharged,
shall be reinstated in full force and effect.
(f) Michigan Holdings and Avalon Michigan Inc. shall not be entitled
to any right of subrogation in relation to the Holders in respect
of any obligations guaranteed hereby until payment in full of all
obligations guaranteed hereby.
(g) As between the Guarantors, on the one hand, and the Holders and
the Trustee, on the other hand, (x) the maturity of the
obligations guaranteed hereby may be accelerated as provided in
Article 6 of the Indenture for the purposes of this Senior
Discount Note Guarantee, notwithstanding any stay, injunction or
other prohibition preventing such acceleration in respect of the
obligations guaranteed hereby, and (y) in the event of any
declaration of acceleration of such obligations as provided in
Article 6 of the Indenture, such obligations (whether or not due
and payable) shall forthwith become due and payable by the
Guarantors for the purpose of this Senior Discount Note
Guarantee.
(h) Michigan Holdings and Avalon Michigan Inc., and by its acceptance
hereof each Holder and the Trustee, hereby confirms that it is
the intention of all such parties that each Senior Discount Note
Guarantee not constitute a fraudulent transfer or conveyance for
purposes of Title 11 of the United States Code, as amended, the
Uniform Fraudulent Conveyance Act, the Uniform Fraudulent
Transfer Act or any similar U.S. Federal or state or other
applicable law. To effectuate the foregoing intention, the
Holders, Michigan Holdings and Avalon Michigan Inc. hereby
irrevocably agree that the obligations of each Guarantor under
each Senior Discount Note Guarantee shall be limited to the
maximum amount as will, after giving effect to all other
contingent and fixed liabilities of such Guarantor and after
giving effect to any collections from or payments made by or on
behalf of any other Guarantor in respect of the obligations of
such other Guarantor pursuant to Section 2(i), result in the
obligations of such Guarantor not constituting such a fraudulent
transfer or conveyance.
3
<PAGE>
(i) In order to provide for just and equitable contribution among the
Guarantors, the Guarantors agree, inter se, that in the event any
payment or distribution is made by any Guarantor (a "Funding
Guarantor") under a Senior Discount Note Guarantee, as the case
may be, such Funding Guarantor shall be entitled to a
contribution from all other Guarantors (if any) in a pro rata
amount, based on the net assets of each Guarantor (including the
Funding Guarantor), determined in accordance with GAAP, subject
to Section 2(h), for all payments, damages and expenses incurred
by such Funding Guarantor in discharging the Issuers' obligations
with respect to the Senior Discount Notes or any other
Guarantor's obligations under a Senior Discount Note Guarantee,
as the case may be.
(j) Each Guarantor agrees, and the Trustee and each Holder of the
Senior Discount Notes, whether upon original issue or upon
transfer, assignment or exchange thereof, accepts and agrees that
all claims against an Issuer that arise from payments of the
principal of and interest on the Senior Discount Notes pursuant
to each Senior Discount Note Guarantee made by or on behalf of
each Guarantor shall be subject and subordinated to, and no
payment with respect to any such claim of such Guarantor shall be
made before, the payment in full in cash of all outstanding
Senior Discount Notes in accordance with the provisions provided
therefor in the Indenture.
(k) This Supplemental Indenture shall constitute a Senior Discount
Note Guarantee of each of Michigan Holdings and Avalon Michigan
Inc. for purposes of the Indenture.
(l) This Supplemental Indenture inures to the benefit of and is
enforceable by the Trustee, the Holders and their successors,
transferees and assigns.
3. EXECUTION AND DELIVERY. Each of Michigan Holdings and Avalon
Michigan Inc. agrees that this Senior Discount Note Guarantee shall remain in
full force and effect notwithstanding any failure to endorse on each Senior
Discount Note a notation of such Senior Discount Note Guarantee.
4. RELEASE. In the event of a sale or other disposition of all of
the assets of each of Michigan Holdings or Avalon Michigan Inc., by way of
merger, consolidation or otherwise, or a sale or other disposition of all to the
capital stock thereof, then Michigan Holdings or Avalon Michigan Inc., as
applicable (in the event of a sale or other disposition, by way of merger,
consolidation or otherwise, of all of the capital stock thereof) or the
corporation acquiring the property (in the event of a sale or other disposition
of all or substantially all of the assets thereof) will, upon notice to the
Trustee of its intention to be so released, be released and relieved of any
obligations under its Senior Discount Note Guarantee.
4
<PAGE>
5. THE ISSUERS. As of the date hereof and after giving effect to the
Reorganization, as contemplated by the Indenture, the Issuers are Avalon LLC and
Avalon Finance.
6. NO RECOURSE AGAINST OTHERS. No past, present or future director,
officer, employee, incorporator, manager, member or stockholder of any Person
who is or was an Issuer or Guarantor under the Senior Discount Notes, as such,
shall have any liability for any obligations under the Senior Discount Notes,
the Senior Discount Note Guarantees or the Indenture or any related documents or
for any claim based on, in respect of, or by reason of, such obligations or
their creation. Each Holder of Senior Discount Notes by accepting a Senior
Discount Note waives and releases all such liability. The waiver and release are
part of the consideration for issuance of the Senior Discount Notes. Such waiver
may not be effective to waive liabilities under the federal securities laws and
it is the view of the SEC that such a waiver is against public policy.
7. FEES AND EXPENSES. Avalon Holdings and Avalon Michigan Inc.
hereby agrees to pay any and all expenses (including reasonable counsel fees and
expenses) incurred by the Trustee or the Holders in enforcing any rights under
this Senior Discount Note Guarantee.
8. NEW YORK LAW TO GOVERN. THE LAW OF THE STATE OF NEW YORK SHALL
GOVERN AND BE USED TO CONSTRUE THIS SUPPLEMENTAL INDENTURE.
9. COUNTERPARTS. The parties may sign any number of copies of this
Supplemental Indenture. Each signed copy shall be an original, but all of them
together represent the same agreement.
10. EFFECT ON INDENTURE. Except as expressly supplemented by this
Supplemental Indenture, the provisions of the Indenture shall remain unchanged
and in full force and effect. From and after the date of this Supplemental
Indenture, any reference in the Indenture to the Indenture shall be deemed to be
a reference to the Indenture as supplemented by this Supplemental Indenture.
11. EFFECT OF HEADINGS. The Section headings herein are for
convenience only and shall not affect the construction hereof.
12. THE TRUSTEE. The Trustee shall not be responsible in any manner
whatsoever for or in respect of the validity or sufficiency of this Supplemental
Indenture or for or in respect of the recitals contained herein, all of which
recitals are made solely by Michigan Holdings, Avalon Michigan Inc. and the
Issuers.
* * * * *
5
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Supplemental
Indenture to be duly executed, all as of the date first above written.
AVALON CABLE LLC
By: /s/ Joel C. Cohen
-------------------------
Name: Joel C. Cohen
Title: President
AVALON CABLE HOLDINGS FINANCE, INC.
By: /s/ Joel C. Cohen
-------------------------
Name: Joel C. Cohen
Title: President
AVALON CABLE OF MICHIGAN
HOLDINGS, INC., as a Guarantor
By: /s/ Joel C. Cohen
-------------------------
Name: Joel C. Cohen
Title: President
AVALON CABLE OF MICHIGAN, INC., as
a Guarantor
By: /s/ Joel C. Cohen
-------------------------
Name: Joel C. Cohen
Title: President
THE BANK OF NEW YORK, as Trustee
By: /s/ Mary La Gumina
--------------------------------
Name: Mary La Gumina
Title: Assistant Vice President
<PAGE>
EXHIBIT 4.3
EXECUTION COPY
$196,000,000
AVALON CABLE LLC
AVALON CABLE OF MICHIGAN HOLDINGS, INC.
AVALON CABLE HOLDINGS FINANCE, INC.
11 7/8% Senior Discount Notes due 2008
PURCHASE AGREEMENT
------------------
December 3, 1998
LEHMAN BROTHERS INC.
BARCLAYS CAPITAL INC.
c/o Lehman Brothers Inc.
Three World Financial Center
New York, New York 10285
Dear Sirs:
Avalon Cable LLC, a Delaware limited liability company ("Avalon
Holdings"), Avalon Cable of Michigan Holdings, Inc., a Delaware corporation
("Michigan Holdings" and, together with Avalon Holdings, the "Companies"),
Avalon Cable Holdings Finance, Inc., a Delaware corporation ("Finance
Holdings" and, together with the Companies, the "Issuers") propose to issue and
sell to you (the "Initial Purchasers") $110,410,720 in aggregate principal
amount at issuance of their 11 7/8% Senior Discount Notes due 2008 (the "Initial
Notes") to be issued pursuant to the terms of an Indenture (the "Indenture")
among the Issuers and The Bank of New York, as trustee (the "Trustee"), relating
to the Initial Notes. Capitalized terms used but not defined herein shall have
the meanings given to such terms in the Offering Memorandum.
The Initial Notes will be offered and sold to you pursuant to
exemptions from the registration requirements under the Securities Act of 1933,
as amended (the "Securities Act"). The Issuers have prepared a preliminary
offering memorandum, dated November 24, 1998 (the "Preliminary Offering
Memorandum"), and a final offering memorandum (the "Offering Memorandum"), dated
December 3, 1998, relating to the Issuers and the Initial Notes. As described
in the Offering Memorandum, the Issuers will use the net proceeds from the
offering of the Initial Notes to: (i) refinance certain existing indebtedness;
and (ii) pay related fees and expenses (each as more fully described in the
Offering Memorandum).
Upon original issuance thereof, and until such time as the same is no
longer required under the applicable requirements of the Securities Act, the
Initial Notes (and all
<PAGE>
2
securities issued in exchange therefor or in substitution thereof) shall bear
the following legend:
"THE SECURITY (OR ITS PREDECESSOR) EVIDENCED HEREBY WAS ORIGINALLY
ISSUED IN A TRANSACTION EXEMPT FROM REGISTRATION UNDER SECTION 5 OF
THE UNITED STATES SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES
ACT"), AND THE SECURITY EVIDENCED HEREBY MAY NOT BE OFFERED, SOLD OR
OTHERWISE TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR AN
APPLICABLE EXEMPTION THEREFROM. EACH PURCHASER OF THE SECURITY
EVIDENCED HEREBY IS HEREBY NOTIFIED THAT THE SELLER MAY BE RELYING ON
THE EXEMPTION FROM THE PROVISION OF SECTION 5 OF THE SECURITIES ACT
PROVIDED BY RULE 144A THEREUNDER. THE HOLDER OF THE SECURITY
EVIDENCED HEREBY AGREES FOR THE BENEFIT OF THE ISSUERS THAT (A) SUCH
SECURITY MAY BE RESOLD, PLEDGED OR OTHERWISE TRANSFERRED, ONLY (1) (a)
TO A PERSON WHO THE SELLER REASONABLY BELIEVES IS A QUALIFIED
INSTITUTIONAL BUYER (AS DEFINED IN RULE 144A UNDER THE SECURITIES ACT)
IN A TRANSACTION MEETING THE REQUIREMENTS OF RULE 144A, (b) IN A
TRANSACTION MEETING THE REQUIREMENTS OF RULE 144 UNDER THE SECURITIES
ACT, (c) OUTSIDE THE UNITED STATES TO A FOREIGN PERSON IN A
TRANSACTION MEETING THE REQUIREMENTS OF RULE 903 OR 904 UNDER THE
SECURITIES ACT OR (d) IN ACCORDANCE WITH ANOTHER EXEMPTION FROM THE
REGISTRATION REQUIREMENTS OF THE SECURITIES ACT (AND BASED UPON AN
OPINION OF COUNSEL IF THE ISSUERS SO REQUEST), (2) TO THE ISSUERS OR
(3) PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT AND, IN EACH CASE,
IN ACCORDANCE WITH ANY APPLICABLE SECURITIES LAWS OF ANY STATE OF THE
UNITED STATES OR ANY OTHER APPLICABLE JURISDICTION AND (B) THE HOLDER
WILL, AND EACH SUBSEQUENT HOLDER IS REQUIRED TO, NOTIFY ANY PURCHASER
FROM IT OF THE SECURITY EVIDENCED HEREBY OF THE RESALE RESTRICTIONS
SET FORTH IN (A) ABOVE."
You have advised the Issuers that you will make offers (the "Exempt
Resales") of the Initial Notes purchased by you hereunder on the terms set forth
in the Offering Memorandum, as amended or supplemented, solely to (i) persons
whom you reasonably believe to be "qualified institutional buyers," as defined
in Rule 144A under the Securities Act ("QIBs"), and (ii) to persons other than
U.S. Persons in offshore transactions meeting the requirements of Rule 903 and
904 of Regulation S ("Regulation S") under the Securities Act (such persons
specified in clauses (i) and (ii) being referred to herein as the "Eligible
Purchasers"). As used herein, the terms "offshore transaction" and "U.S.
person" have the respective meanings given to them in Regulation S. You will
offer the Initial Notes to Eligible Purchasers initially at a price equal to
100% of the principal amount at issuance thereof. Such price may be changed at
any time without notice.
Holders (including subsequent transferees) of the Initial Notes will
have the registration rights set forth in the registration rights agreement (the
"Registration Rights
<PAGE>
3
Agreement"), to be dated December 10, 1998 (the "Closing Date"), in the form of
Exhibit A hereto, for so long as such Initial Notes constitute "Transfer
Restricted Securities" (as defined in the Registration Rights Agreement).
Pursuant to the Registration Rights Agreement, the Issuers will agree to file
with the Securities and Exchange Commission (the "Commission") under the
circumstances set forth therein, (i) a registration statement under the
Securities Act (the "Exchange Offer Registration Statement") relating to the
Issuers' 11 7/8% Senior Discount Notes due 2008 (the "New Notes" and, together
with the Initial Notes, the "Notes") to be offered in exchange for the Initial
Notes (such offer to exchange being referred to collectively as the "Exchange
Offer") and (ii) if necessary, a shelf registration statement pursuant to Rule
415 under the Securities Act (the "Shelf Registration Statement," and together
with the Exchange Offer Registration Statement, the "Registration Statements")
relating to the resale of the Initial Notes by certain holders of such Notes,
and to use their best efforts to cause such Registration Statements to be
declared effective. This Agreement, the Indenture and the Registration Rights
Agreement are hereinafter referred to collectively as the "Operative Documents."
1. Representations, Warranties and Agreements of the Issuers. Each
of the Issuers represents, warrants and agrees as follows:
(a) The Preliminary Offering Memorandum and the Offering Memorandum
have been prepared by the Issuers for use by the Initial Purchasers in
connection with the Exempt Resales. No order or decree preventing the use of
the Preliminary Offering Memorandum or the Offering Memorandum, or any order
asserting that the transactions contemplated by this Agreement are subject to
the registration requirements of the Securities Act, has been issued and no
proceeding for that purpose has commenced or is pending or, to the knowledge of
the Issuers is contemplated.
(b) The Preliminary Offering Memorandum and the Offering Memorandum
as of their respective dates did not, and the Offering Memorandum as of the
Closing Date will not, contain an untrue statement of a material fact or omit to
state a material fact necessary in order to make the statements contained
therein, in light of the circumstances under which they were made, not
misleading, except that this representation and warranty does not apply to
statements in or omissions from the Preliminary Offering Memorandum and the
Offering Memorandum relating to the Initial Purchasers and made in reliance upon
and in conformity with information furnished to the Issuers in writing by or on
behalf of the Initial Purchasers expressly for use therein.
(c) The market-related and industry-related data and estimates
included in the Preliminary Offering Memorandum and the Offering Memorandum are
based on or derived from sources which the Issuers believe to be reliable and
accurate in all material respects.
(d) Each of Issuers and each of their respective subsidiaries is a
limited liability company or corporation, as the case may be, duly formed or
incorporated, as the case may be, and validly existing and in good standing
under the laws of the State of Delaware with all requisite limited liability
company or corporate, as the case may be, power and authority to own, lease and
operate its properties and to conduct its business
<PAGE>
4
as described in the Preliminary Offering Memorandum and the Offering Memorandum,
and is duly registered and qualified to conduct its business and is in good
standing in each jurisdiction or place where the nature of its properties or the
conduct of its business requires such registration or qualification, except
where the failure so to register or qualify or to be in good standing would not
have a material adverse effect on the condition (financial or other), business,
properties, or results of operations of the Issuers and their subsidiaries,
taken as a whole (a "Material Adverse Effect").
(e) Each of the Issuers has all requisite limited liability company
or corporate, as the case may be, power and authority to execute, deliver and
perform its obligations under this Agreement, the Indenture, the Notes and the
Registration Rights Agreement, as applicable.
(f) This Agreement has been duly and validly authorized, executed and
delivered by each of the Issuers and assuming due authorization, execution and
delivery by the Initial Purchasers, constitutes the valid and binding agreement
of each of the Issuers, enforceable against the Issuers in accordance with its
terms (subject to applicable bankruptcy, insolvency, reorganization, moratorium,
fraudulent transfer and other similar laws affecting creditors' rights generally
from time to time in effect and to general principles of equity, including,
without limitation, concepts of materiality, reasonableness, good faith and fair
dealing, regardless of whether in a proceeding in equity or at law).
(g) The Registration Rights Agreement has been duly and validly
authorized by each of the Issuers and, upon its execution and delivery by each
of the Issuers and, assuming due authorization, execution and delivery by the
Initial Purchasers, will constitute the valid and binding agreement of each of
the Issuers, enforceable against the Issuers in accordance with its terms
(subject to applicable bankruptcy, insolvency, reorganization, moratorium,
fraudulent transfer and other similar laws affecting creditors' rights generally
from time to time in effect and to general principals of equity, including,
without limitation, concepts of materiality, reasonableness, good faith and fair
dealing, regardless of whether in a proceeding in equity or at law).
(h) The Indenture has been duly and validly authorized by each of the
Issuers, and upon its execution and delivery by each of the Issuers and,
assuming due authorization, execution and delivery by the Trustee, will
constitute the valid and binding agreement of each of the Issuers, enforceable
against the Issuers in accordance with its terms (subject to applicable
bankruptcy, insolvency, reorganization, moratorium, fraudulent transfer and
other similar laws affecting creditors' rights generally from time to time in
effect and to general principles of equity, including, without limitation,
concepts of materiality, reasonableness, good faith and fair dealing, regardless
of whether in a proceeding in equity or at law); no qualification of the
Indenture under the Trust Indenture Act of 1939 ("TIA") is required in
connection with the offer and sale of the Initial Notes contemplated hereby or
in connection with the Exempt Resales in accordance with the terms hereof.
(i) The Initial Notes have been duly and validly authorized by the
Issuers and when duly executed by the Issuers in accordance with the terms of
the Indenture and, assuming due authentication of the Initial Notes by the
Trustee, upon delivery to the Initial
<PAGE>
5
Purchasers against payment therefor in accordance with the terms hereof, will
have been validly issued and delivered, and will constitute valid and binding
obligations of the Issuers entitled to the benefits of the Indenture,
enforceable against the Issuers in accordance with their terms (subject to
applicable bankruptcy, insolvency, reorganization, moratorium, fraudulent
transfer and other similar laws affecting creditors' rights generally from time
to time in effect and to general principals of equity, including, without
limitation, concepts of materiality, reasonableness, good faith and fair
dealing, regardless of whether in a proceeding in equity or at law).
(j) The New Notes have been duly and validly authorized by the
Issuers and if and when duly issued and authenticated in accordance with the
terms of the Indenture and, assuming due authentication of the New Notes by the
Trustee, upon delivery in accordance with the Exchange Offer provided for in the
Registration Rights Agreement, will constitute valid and binding obligations of
the Issuers entitled to the benefits of the Indenture, enforceable against the
Issuers in accordance with their terms (subject to applicable bankruptcy,
insolvency, reorganization, moratorium, fraudulent transfer and other similar
laws affecting creditors' rights generally from time to time in effect and to
general principals of equity, including, without limitation, concepts of
materiality, reasonableness, good faith and fair dealing, regardless of whether
in a proceeding in equity or at law).
(k) All the limited liability company units of the Companies and all
the shares of Avalon Finance outstanding prior to the issuance of the Initial
Notes have been duly authorized and validly issued and are fully paid and
nonassessable, and the authorized capitalization of each of the Issuers conforms
in all material respects to the description thereof under the caption "Security
Ownership of Certain Beneficial Owners and Management" in the Offering
Memorandum.
(l) None of the Issuers nor any of their subsidiaries own capital
stock or other equity interests of any corporation or entity other than as
disclosed in the Offering Memorandum (other than a subsidiary organized for
purposes of the Mercom Acquisition and subsidiaries of Mercom). Each of the
subsidiaries is a limited liability company or corporation duly formed or
incorporated, as the case may be, and validly existing and in good standing
under the laws of the jurisdiction of its formation or incorporation, as the
case may be, with all requisite corporate power and authority to own, lease and
operate its properties and to conduct its business as described in the Offering
Memorandum, and is duly registered and qualified to conduct its business and is
in good standing in each jurisdiction or place where the nature of its
properties or the conduct of its business requires such registration or
qualification, except where the failure to so register or qualify or be in good
standing would not have a Material Adverse Effect. All the outstanding shares
of capital stock of each of the Issuers' subsidiaries have been duly authorized
and validly issued, are fully paid and nonassessable, and are wholly owned by
the Issuers directly, or indirectly through one of its other subsidiaries, free
and clear of any lien, adverse claim, security interest, equity or other
encumbrance, except as specifically described in the Offering Memorandum
(including the pledges under the Credit Facility).
<PAGE>
6
(m) There are no legal or governmental proceedings pending or, to the
knowledge of the Issuers or their subsidiaries, threatened against the Issuers
or any of their subsidiaries or to which any of their respective properties is
subject, that are not disclosed in the Offering Memorandum and which, are
reasonably likely to have a Material Adverse Effect, or to materially affect the
issuance of the Notes or the consummation of any of the other transactions
contemplated by the Operative Documents. None of the Issuers nor any of their
subsidiaries are involved in any material strike, job action or labor dispute
with any group of employees, and, to the knowledge of the Issuers or any of
their subsidiaries, no such action or dispute is threatened.
(n) Except as described in the Offering Memorandum, no material
relationship, direct or indirect, exists between or among the Issuers or any of
their subsidiaries on the one hand, and the directors, officers, stockholders,
affiliates, customers or suppliers of the Issuers or any of their subsidiaries
on the other hand.
(o) The execution, delivery and performance of this Agreement and the
other Operative Documents and the issuance of the Initial Notes and the New
Notes and the consummation of the transactions contemplated hereby and thereby
will not conflict with, or result in a breach or violation of any of the terms
or provisions of, or (including with the giving of notice or the lapse of time
or both) constitute a default under (i) any indenture, mortgage, deed of trust,
loan agreement or other agreement or instrument to which the Issuers or any of
their subsidiaries is a party or by which the Issuers or any of their
subsidiaries is bound or to which any of the properties or assets of the Issuers
or any of their subsidiaries is subject, (ii) the provisions of the charter, by-
laws or other organizational documents of the Issuers or any of their
subsidiaries or (iii) any statute or any order, rule or regulation of any court
or governmental agency or body having jurisdiction over the Issuers or any of
their subsidiaries or any of their properties or assets, except in the cases of
clause (i) or (iii), such breaches, violations or defaults that in the aggregate
would not have a Material Adverse Effect, and no consent, approval,
authorization or order of, or filing or registration with, any court or
governmental agency or body is required for the execution, delivery and
performance of this Agreement and the other Operative Documents and the issuance
of the Initial Notes and the New Notes except as may be required by the
securities or Blue Sky laws of any state of the United States in connection with
the sale of the Initial Notes and the New Notes and except as contemplated by
the Registration Rights Agreement.
(p) The accountants, PricewaterhouseCoopers LLP, KPMG Peat Marwick
LLP and Greenfield, Altman, Brown, Berger & Katz, P.C., who have certified
certain of the financial statements included as part of the Offering Memorandum,
are independent public accountants under Rule 101 of the Code of Professional
Conduct of the American Institute of Certified Public Accountants (the "AICPA"),
and its interpretation and rulings.
(q) The historical financial statements, together with the related
notes thereto, set forth in the Offering Memorandum comply as to form in all
material respects with the requirements of Regulation S-X under the Securities
Act applicable to registration statements on Form S-1 under the Securities Act.
Such historical financial statements fairly present in all material respects the
financial positions of the Issuers, their respective
<PAGE>
7
predecessors, as applicable, at the respective dates indicated and the results
of operations and cash flows for the respective periods indicated, in each case
in accordance with generally accepted accounting principles ("GAAP")
consistently applied throughout such periods (subject, in certain cases, to
normal year-end audit adjustments and the absence of footnote disclosure). The
pro forma financial statements contained in the Offering Memorandum have been
prepared on a basis consistent with such historical statements, except for the
pro forma adjustments specified therein, include all material adjustments to the
historical financial data required by Rule 11-02 of Regulation S-X to reflect
the completed Acquisitions, the Acquisition Transactions, the Initial Financing
and the Offering (each as defined in the Offering Memorandum), give effect to
assumptions made on a reasonable basis and present fairly in all material
respects; on a pro forma basis; the historical and proposed transactions
contemplated by the Offering Memorandum and this Agreement. The other financial
and statistical information and data included in the Offering Memorandum are, in
all material respects, accurately presented and prepared on a basis consistent
with such financial statements and the books and records of the Issuers, their
respective predecessors, as applicable.
(r) Except as disclosed in or contemplated by the Offering
Memorandum, since the date of the latest audited financial statements of each of
the Issuers, their respective predecessors, as applicable, and their respective
subsidiaries included in the Offering Memorandum, to the Issuers' knowledge,
after due inquiry, (i) none of the Issuers or any of their subsidiaries has
incurred any liability or obligation, direct or contingent, or entered into any
transaction, in each case not in the ordinary course of business, that is
material to the Issuers, taken as a whole, and their subsidiaries, (ii) there
has been no development or event involving a Material Adverse Effect or any
prospective Material Adverse Effect with respect to the Issuers, taken as a
whole, and (iii) there has been no (A) dividend or distribution of any kind
declared, paid or made by the Issuers, on any class of their capital stock or
units, as the case may be, (B) issuance of securities (other than the Initial
Notes offered hereby) or (C) material increase in short-term or long-term debt
of any of the Issuers.
(s) The Issuers and each of their subsidiaries maintain a system of
internal accounting controls sufficient to provide reasonable assurance that (i)
transactions are executed in accordance with management's general or specific
authorization, (ii) transactions are recorded as necessary to permit preparation
of financial statements in conformity with GAAP and to maintain accountability
for assets, (iii) access to assets is permitted only in accordance with
management's general or specific authorization and (iv) the recorded
accountability for assets is compared with existing assets at reasonable
intervals and appropriate action is taken with respect to any differences.
(t) Each of the Issuers and each of their subsidiaries has good and
marketable title to all property (real and personal) described in the Offering
Memorandum as being owned by them, free and clear of all liens, claims, security
interests or other encumbrances except such as are described in the Offering
Memorandum, and all the material property described in the Offering Memorandum
as being held under lease by the Issuers and their subsidiaries is held by them
under valid, subsisting and enforceable leases, with only such exceptions as
would not in the aggregate, have a Material Adverse
<PAGE>
8
Effect. In addition, except as described in the Offering Memorandum, the
consummation of the transactions contemplated by this Agreement will not give
rise to any third party rights of first refusal under any material agreement as
to which the Issuers and any of their subsidiaries or any of their property or
assets may be subject.
(u) Each of the Issuers and each of their subsidiaries owns or
possesses all patents, trademarks, trademark registrations, service marks,
service mark registrations, trade names, copyrights, licenses, inventions, trade
secrets and related rights described in the Offering Memorandum as being owned
by any of them or necessary for the conduct of their respective businesses, and
none of the Issuers nor any of their subsidiaries are aware of any claim to the
contrary or any challenge by any other person to the rights of the Issuers or
any of their subsidiaries with respect to such rights that would in the
aggregate have a Material Adverse Effect.
(v) Each of the Issuers and each of their subsidiaries has such
permits, licenses, franchises, certificates, consents, orders and other
approvals or authorizations of any governmental or regulatory authority
("Permits"), as are necessary under applicable law to own their respective
properties and to conduct their respective businesses in the manner described in
the Offering Memorandum, except to the extent that the failure to have such
Permits would not have a Material Adverse Effect. Each of the Issuers and each
of their subsidiaries has fulfilled and performed, in all material respects, all
their respective obligations with respect to the Permits, and no event has
occurred which allows, or after notice or lapse of time would allow, revocation
or termination thereof or results in any other material impairment of the rights
of the holders of any Permit, subject in each case to such qualification as may
be set forth in the Offering Memorandum and except to the extent that any such
revocation or termination would not have a Material Adverse Effect.
(w) None of the Issuers nor any of their subsidiaries nor any
director, officer, agent, employee or other person associated with or acting on
behalf of the Issuers or any of their subsidiaries, have used any corporate
funds for any unlawful contribution, gift, entertainment or other unlawful
expense relating to political activity; made any direct or indirect unlawful
payment to any foreign or domestic government official or employee from
corporate funds; violated or is in violation of any provision of the Foreign
Corrupt Practices Act of 1977; or made any bribe, rebate, payoff, influence
payment, kickback or other unlawful payment.
(x) None of the Issuers nor any of their subsidiaries are currently
or will be, upon sale of the Initial Notes in accordance herewith and the
application of the net proceeds therefrom as described in the Offering
Memorandum under the caption "Use of Proceeds," an "investment company" within
the meaning of the Investment Company Act of 1940, as amended.
(y) None of the Issuers nor any affiliate (as defined in Rule 501(b)
of Regulation D ("Regulation D") under the Securities Act) of any of the Issuers
has directly, or through any agent (provided that no representation is made as
to the Initial Purchasers or any person acting on their behalf), (i) sold,
offered for sale, solicited offers to buy or otherwise negotiated in respect of,
any security (as defined in the Securities Act) which is or would be integrated
with the offering and sale of the Notes in a manner that would
<PAGE>
9
require the registration of the Initial Notes under the Securities Act or (ii)
engaged in any form of general solicitation or general advertising (within the
meaning of Regulation D, including, but not limited to, advertisements,
articles, notices or other communications published in any newspaper, magazine,
or similar medium or broadcast over television or radio, or any seminar or
meeting whose attendees have been invited by any general solicitation or general
advertising) in connection with the offering of the Initial Notes. No securities
of the same class as the Initial Notes have been issued and sold by the Issuers
within the six-month period immediately prior to the date hereof.
(z) Except as permitted by the Securities Act, the Issuers have not
distributed and, prior to the later to occur of the Closing Date and completion
of the distribution of the Initial Notes, will not distribute any offering
material in connection with the offering and sale of the Initial Notes other
than the Preliminary Offering Memorandum and Offering Memorandum.
(aa) When the Initial Notes are issued and delivered pursuant to this
Agreement, such Initial Notes will not be of the same class (within the meaning
of Rule 144A under the Securities Act) as securities of the Issuers that are
listed on a national securities exchange registered under Section 6 of the
Securities Exchange Act of 1934, as amended (the "Exchange Act") or that are
quoted in a United States automated inter-dealer quotation system.
(bb) Assuming (i) that your representations and warranties in Section
2 are true, (ii) compliance by you with your covenants set forth in Section 2
and (iii) that each of the Eligible Purchasers is either (A) an entity that you
reasonably believe to be a QIB or (B) a person who is not a "U.S. person" and
who acquires the Initial Notes outside the United States in an "offshore
transaction" (within the meaning of Regulation S), the purchase of the Initial
Notes by you pursuant hereto and the resale of the Initial Notes pursuant to the
Exempt Resales is exempt from the registration requirements of the Securities
Act.
(cc) Each of the Issuers and each of their subsidiaries is in
compliance in all material respects with all presently applicable provisions of
the Employee Retirement Income Security Act of 1974, as amended, including the
regulations and published interpretations thereunder ("ERISA"), no "reportable
event" (as defined in ERISA) has occurred with respect to any "pension plan" (as
defined in ERISA) for which the Issuers would have any liability; the Issuers
have not incurred and do not except to incur liability under (i) Title IV of
ERISA with respect to termination of, or withdrawal from, any "pension plan" or
(ii) Sections 412 or 4971 of the Internal Revenue Code of 1986, as amended,
including the regulations and published interpretations thereunder (the "Code");
each "pension plan" for which the Issuers would have any liability that is
intended to be qualified under Section 401(a) of the Code is so qualified in all
material respects and nothing has occurred, whether by action or by failure to
act, which would cause the loss of such qualification; and the statements set
forth in the Offering Memorandum under the caption "Notice to Investors" do not
include any untrue statements of material facts and do not omit any material
facts necessary in order to make such statements, in light of the circumstances
under which they were made, not misleading.
<PAGE>
10
(dd) The execution and delivery of this Agreement, the other
Operative Documents and the sale of the Initial Notes to be purchased by the
Eligible Purchasers will not involve any prohibited transaction within the
meaning of Section 406 of ERISA or Section 4975 of the Code. The representation
made by the Issuers in the preceding sentence is made in reliance upon and
subject to the accuracy of, and compliance with, the representations and
covenants made or deemed made by the Eligible Purchasers as set forth in the
Offering Memorandum under the section entitled "Notice to Investors."
(ee) Except as described in the Offering Memorandum (including the
registration rights agreement for the Senior Subordinated Notes), there are no
contracts, agreements or understandings between the Issuers or any of their
subsidiaries and any person granting such person the right to require the
Issuers or any of their subsidiaries to file a registration statement under the
Securities Act with respect to any securities of the Issuers and their
subsidiaries owned or to be owned by such person or to require the Issuers or
any of their subsidiaries to include such securities in the securities
registered pursuant to the Registration Statements or in any securities being
registered pursuant to any other registration statement filed by the Issuers or
any of their subsidiaries under the Securities Act.
(ff) Each of the Issuers and each of their subsidiaries carries, or
are covered by, insurance in such amounts and covering such risks as is
reasonably adequate for the conduct of their businesses and the value of their
properties and as is customary for companies engaged in similar businesses in
similar industries.
(gg) Each of the Issuers and each of their subsidiaries has filed all
material federal, state and local income and franchise tax returns required to
be filed through the date hereof and has paid all taxes due thereon, and no tax
deficiency has been determined adversely to the Issuers or any of their
subsidiaries nor do the Issuers or any of their subsidiaries have any knowledge
of any tax deficiency which, if determined adversely to the Issuers, would have
a Material Adverse Effect.
(hh) There has been no storage, disposal, generation, manufacture,
refinement, transportation, handling or treatment of toxic wastes, hazardous
wastes or hazardous substances by the Issuers or any of their subsidiaries (or,
to the knowledge of the Issuers, any of their predecessors in interest) at, upon
or from any of the property now or previously owned or leased by the Issuers or
any of their subsidiaries in violation of any applicable law, ordinance, rule,
regulation, order, judgement, decree or permit or which would require remedial
action under any applicable law, ordinance, rule, regulation, order, judgement,
decree or permit, except for any violation or remedial action which would not
have, or could not be reasonably likely to have, singularly or in the aggregate,
a Material Adverse Effect; there has been no material spill, discharge, leak,
emission, injection, escape, dumping or release of any kind onto such property
or into the environment surrounding such property of any toxic wastes, medical
wastes, solid wastes, hazardous wastes or hazardous substances due to or caused
by the Issuers or any of their subsidiaries or with respect to which the Issuers
or any of their subsidiaries have knowledge, except for any such spill,
discharge, leak, emission, injection, escape, dumping or release which would not
have or would not be reasonably likely to have, singularly or in the aggregate,
a Material Adverse Effect; and the terms "hazardous wastes," "toxic wastes,"
"hazardous
<PAGE>
11
substances" and "medical wastes" shall have the meanings specified in any
applicable local, state, federal and foreign laws or regulations with respect to
environmental protection.
(ii) None of the Issuers or any of their affiliates or any person
acting on their behalf has engaged or will engage during the applicable
restricted period in any directed selling efforts within the meaning of Rule
902(b) of Regulation S with respect to the Notes, and the Issuers and their
affiliates and all persons acting on their behalf (provided that no
representation is made as to the Initial Purchasers or any person acting on
their behalf) have complied with and will comply with the offering restriction
requirements of Regulation S in connection with the offering of the Notes
outside the United States.
(jj) The sale of the Initial Notes pursuant to Regulation S are
"offshore transactions" and are not part of a plan or scheme to evade the
registration provisions of the Securities Act.
(kk) None of the Issuers nor any of their subsidiaries has taken or
may take, directly or indirectly, any action designed to cause or result in, or
which has constituted or which might reasonably be expected to constitute, the
stabilization or manipulation of the price of the Notes to facilitate the sale
or resale of the Notes (provided that no representation is made as to the
Initial Purchasers or any person acting on their behalf).
(ll) On and immediately after the Closing Date, each of the Companies
(after giving effect to the issuance of the Notes and to the other transactions
related thereto as described in the Offering Memorandum) will be Solvent. As
used in this paragraph, the term "Solvent" means, with respect to a particular
date, that on such date (i) the present fair market value (or present fair
saleable value) of the assets of each of the Companies is not less than the
total amount required to pay the probable liabilities of each of the Companies
on its total existing debts and liabilities (including contingent liabilities)
as they become absolute and matured, (ii) each of the Companies is able to
realize upon its assets and pay its debts and other liabilities, contingent
obligations and commitments as they mature and become due in the normal course
of business, (iii) assuming the sale of the Notes as contemplated by this
Agreement and the Offering Memorandum, neither of the Companies is incurring
debts or liabilities beyond its ability to pay as such debts and liabilities
mature and (iv) neither of the Companies is engaged in any business or
transaction, or is about to engage in any business or transaction, for which its
property would constitute unreasonably small capital after giving due
consideration to the prevailing practice in the industry in which the Companies
are engaged. In computing the amount of such contingent liabilities at any
time, it is intended that such liabilities will be computed at the amount that,
in the light of all the facts and circumstances existing at such time,
represents the amount that can reasonably be expected to become an actual or
matured liability.
2. Representations, Warranties and Agreements of the Initial
Purchasers. The Initial Purchasers represent, warrant and agree that:
<PAGE>
12
(a) The Initial Purchasers are QIBs with such knowledge and
experience in financial and business matters as are necessary in order to
evaluate the merits and risks of an investment in the Notes.
(b) The Initial Purchasers (i) are not acquiring the Initial Notes
with a view to any distribution thereof or with any present intention of
offering or selling any of the Initial Notes in a transaction that would violate
the Securities Act or the securities laws of any State of the United States or
any other applicable jurisdiction; (ii) in connection with the Exempt Resales,
will solicit offers to buy the Notes only from and will offer to sell the Notes
only to, the Eligible Purchasers in accordance with this Agreement and on the
terms contemplated by the Offering Memorandum; and (iii) will not offer or sell
the Notes pursuant to, nor have they offered or sold the Notes by, or otherwise
engaged in, any form of general solicitation or general advertising (within the
meaning of Regulation D; including, but not limited to, advertisements,
articles, notices or other communications published in any newspaper, magazine
or similar medium or broadcast over television or radio, or any seminar or
meeting whose attendees have been invited by any general solicitation or general
advertising).
(c) The Initial Purchasers, shall not, except as otherwise permitted
by this Agreement, offer, sell or deliver the Initial Notes (i) as part of their
distribution at any time or (ii) otherwise until 40 days after the later of the
commencement of the Exempt Resales and the original issue date of the Initial
Notes, within the United States to, or for the account or benefit of, U.S.
Persons, and that they will send to each distributor, dealer, or other person
receiving a selling concession or similar fee to which they sell the Initial
Notes in reliance on Regulation S during the 40-day distribution compliance
period a confirmation or other notice setting forth the restrictions on offers
and sales of the Initial Notes within the United States or to, or for the
account or benefit of, U.S. Persons.
(d) The Initial Purchasers understand that the Issuers and, for
purposes of the opinions to be delivered to you pursuant to Section 7 hereof,
counsel to the Issuers and counsel to the Initial Purchasers, will rely upon the
accuracy and truth of the representations and agreements in this Section 2 and
you hereby consent to such reliance.
The terms used in this Section 2 that have meanings assigned to them
in Regulation S are used herein as so defined.
The Initial Purchasers further agree that, in connection with the
Exempt Resales, they will solicit offers to buy the Initial Notes only from, and
will offer to sell the Initial Notes only to, the Eligible Purchasers in Exempt
Resales.
3. Purchase of the Notes by the Initial Purchasers. On the basis of
the representations and warranties contained in, and subject to the terms and
conditions of, this Agreement, the Issuers agree to sell $110,410,720 in
aggregate principal amount at issuance of Initial Notes to the Initial
Purchasers and the Initial Purchasers, severally and not jointly, will purchase
the aggregate principal amount at issuance of Initial Notes set forth next to
such Initial Purchaser's name on Schedule I hereto at an aggregate purchase
price equal to 96.75% of the principal amount at issuance thereof (the "Purchase
Price").
<PAGE>
13
The Issuers shall not be obligated to deliver any of the Initial Notes
to be delivered, except upon payment of all the Initial Notes to be purchased on
such Closing Date as provided herein.
4. Delivery and Payment of the Notes.
(a) Delivery to the Initial Purchasers of and payment for the Initial
Notes shall be made at 9:30 a.m., New York City time, on the Closing Date at the
offices of Simpson Thacher & Bartlett, 425 Lexington Avenue, New York, New York
10017, or such other place or time as you and the Issuers shall designate.
(b) One or more Initial Notes in definitive form, registered in the
name of Cede & Co., as nominee of The Depository Trust Company ("DTC"), or such
other names as the Initial Purchasers may request upon at least one business
day's notice to the Issuers, having an aggregate principal amount at maturity
corresponding to the aggregate principal amount of Initial Notes (collectively,
the "Global Notes"), shall be delivered by the Issuers to the Initial
Purchasers, against payment by the Initial Purchasers of the purchase price
thereof by wire transfer of immediately available funds as the Issuers may
direct by written notice delivered to you one business day prior to the Closing
Date. The Global Notes in definitive form shall be made available to you for
inspection on the business day immediately preceding the Closing Date.
5. Further Agreements of the Issuers. Each of the Issuers agrees:
(a) To advise you promptly and, if requested by you, to confirm such
advice in writing, of (i) the issuance by any state securities commission of any
stop order suspending the qualification or exemption from qualification of any
Notes for offering or sale in any jurisdiction, or the initiation of any
proceeding for such purpose by the Commission or any state securities commission
or other regulatory authority, and (ii) the happening of any event that makes
any statement of a material fact made in the Offering Memorandum untrue or that
requires the making of any additions to or changes in the Offering Memorandum in
order to make the statements therein, in light of the circumstances under which
they were made, not misleading. The Issuers shall use their best efforts to
prevent the issuance of any stop order or order suspending the qualification or
exemption of the Notes under any state securities or Blue Sky laws and, if at
any time any state securities commission shall issue any stop order suspending
the qualification or exemption of the Notes under any state securities or Blue
Sky laws, the Issuers shall use every reasonable effort to obtain the withdrawal
or lifting of such order at the earliest possible time.
(b) To furnish to you, without charge, as many copies of the
Preliminary Offering Memorandum and the Offering Memorandum, and any amendments
or supplements thereto, as you may reasonably request. The Issuers have
authorized you to use the Preliminary Offering Memorandum to make offers of the
Initial Notes. The Issuers consent to the use of the Offering Memorandum, and
any amendments and supplements thereto required pursuant to this Agreement, by
you in connection with the Exempt Resales that are in compliance with this
Agreement.
<PAGE>
14
(c) Not to amend or supplement the Offering Memorandum prior to the
Closing Date or during the period referred to in the next sentence unless you
shall previously have been advised of, and shall not have reasonably objected
to, such amendment or supplement within a reasonable time, but in any event not
longer than five days after being furnished a copy of such amendment or
supplement. If, in connection with any Exempt Resales or market making
transactions after the date of this Agreement, any event shall occur that, in
the judgement of the Issuers or in the judgement of counsel to you, makes any
statement of a material fact in the Offering Memorandum untrue or that requires
the making of any additions to or changes in the Offering Memorandum in order to
make the statements in the Offering Memorandum, in light of the circumstances at
the time that the Offering Memorandum is delivered to prospective Eligible
Purchasers, not misleading, or if it is necessary to amend or supplement the
Offering Memorandum to comply with any applicable laws, the Issuers shall
promptly notify you of such event and prepare an appropriate amendment or
supplement to the Offering Memorandum so that (i) the statements in the Offering
Memorandum as amended or supplemented will, in light of the circumstances at the
time that the Offering Memorandum is delivered to prospective Eligible
Purchasers, not be misleading and (ii) the Offering Memorandum will comply with
applicable law.
(d) To cooperate with you and your counsel in connection with the
qualification of the Initial Notes for offer and sale by you and by dealers
under the state securities or Blue Sky laws of such jurisdictions as you may
request (provided, however, that none of the Issuers shall be obligated to
register or qualify as a foreign corporation in any jurisdiction in which it is
not now so registered or qualified or to take any action that would subject it
to general consent to service of process or taxation in any jurisdiction in
which it is not now so subject). The Issuers shall continue such qualification
in effect so long as required by law for distribution of the Initial Notes and
shall file such consents to service of process or other documents as may be
necessary in order to effect such qualification.
(e) Prior to the Closing Date, to furnish to you, any internal
financial statements of the Companies that have been prepared by or furnished to
the Issuers for any period subsequent to the period covered by the financial
statements appearing in the Offering Memorandum.
(f) To use its reasonable best efforts to do and perform all things
required to be done and performed under this Agreement by it prior to or after
the Closing Date and to satisfy all conditions precedent on its part to the
delivery of the Initial Notes.
(g) Not to sell, offer for sale or solicit offers to buy or otherwise
negotiate in respect of any security (as defined in the Securities Act) that
would be integrated with the sale of the Initial Notes in a manner that would
require the registration under the Securities Act of the sale to you or the
Eligible Purchasers of the Initial Notes; provided no statement is made as to
actions by the Initial Purchasers or persons acting on their behalf.
(h) For a period of 120 days from the date of the Offering Memorandum,
not to, directly or indirectly, sell, contract to sell, grant any option to
purchase, issue any
<PAGE>
15
instrument convertible into or exchangeable for, or otherwise transfer or
dispose of, any debt securities of the Issuers or any of their subsidiaries
having a maturity of more than one year from the date of issue of such
securities, except (i) for the Senior Subordinated Notes including the notes
issued in the exchange offer related to such Senior Subordinated Notes, (ii) for
the New Notes in connection with the Exchange Offer or (iii) with the prior
consent of Lehman Brothers Inc.
(i) For the period that is two years after the Closing Date or for so
long as necessary to comply with Rule 144A in connection with resales by
registered holders or beneficial owners of Initial Notes, whichever is longer,
to make available to such registered holder or beneficial owner of Initial Notes
in connection with any sale thereof and any prospective purchaser of such
Initial Notes from such registered holder or beneficial owner, the information
required by Rule 144A(d)(4) under the Securities Act (or any successor provision
thereto).
(j) To comply with the agreements in the Registration Rights
Agreement, and all agreements set forth in the representation letters of the
Issuers' to DTC relating to the approval of the Notes by DTC for "book-entry"
transfer.
(k) To use its best efforts to effect the inclusion of the Notes in
the National Association of Securities Dealers, Inc. Automated Quotation System
- - PORTAL ("PORTAL").
(l) To apply the net proceeds from the sale of the Initial Notes
being sold by the Issuers as set forth in the Offering Memorandum under the
caption "Use of Proceeds."
6. Expenses. Each of the Issuers agrees, jointly and severally,
that, whether or not the transactions contemplated by this Agreement are
consummated or this Agreement becomes effective or is terminated, to pay all
costs, expenses, fees and taxes incident to and in connection with: (i) the
preparation, printing, filing and distribution of the Preliminary Offering
Memorandum and the Offering Memorandum (including, without limitation, financial
statements) and all amendments and supplements thereto (but not, however, legal
fees and expenses of your counsel incurred in connection therewith), (ii) the
preparation, printing (including, without limitation, word processing and
duplication costs) and delivery of this Agreement, the Indenture and any Blue
Sky Memoranda, (iii) the issuance and delivery by the Issuers of the Notes, (iv)
the qualification of the Notes for offer and sale under the securities or Blue
Sky laws of the several states (including, without limitation, the reasonable
fees and disbursements of your counsel relating to such registration or
qualification in an amount not to exceed $10,000), (v) furnishing such copies of
the Preliminary Offering Memorandum and the Offering Memorandum, and all
amendments and supplements thereto, as may be reasonably requested by the
Initial Purchasers for use in connection with the initial Exempt Resales, (vi)
the preparation of certificates for the Notes including, without limitation,
printing and engraving, (vii) the fees, disbursements and expenses of the
Issuers' counsel and accountants, (viii) all expenses and listing fees in
connection with the application for quotation of the Initial Notes in PORTAL,
(ix) all fees and expenses (including fees and expenses of counsel) of the
Issuers in connection with the approval of the Notes by DTC for "book-entry"
transfer
<PAGE>
16
and (x) the performance by the Issuers of their other obligations under this
Agreement to the extent not provided for above.
7. Conditions of Initial Purchasers' Obligations. The obligations
of the Initial Purchasers hereunder are subject to the accuracy, when made and
again on the Closing Date (as if made again on and as of such date), of the
representations and warranties of the Issuers contained herein, to the
performance by the Issuers of their obligations hereunder and to each of the
following additional terms and conditions:
(a) The consummation of the Senior Subordinated Note Offering (as
defined in the Offering Memorandum) shall have occurred.
(b) The Offering Memorandum shall have been printed and copies made
available to you not later than 6:00 p.m., New York City time, on the day
following the date of this Agreement, or at such later date and time as you may
approve in writing.
(c) The Initial Purchasers shall not have discovered and disclosed to
the Issuers on or prior to such Closing Date that the Offering Memorandum or the
most recent amendment or supplement thereto contains an untrue statement of a
fact which, in the opinion of Simpson Thacher & Bartlett, counsel for the
Initial Purchasers, is material or omits to state a fact which, in the opinion
of such counsel, is material and is necessary to make the statements, in light
of the circumstances under which they were made, not misleading.
(d) All corporate proceedings and other legal matters incident to the
authorization, form and validity of this Agreement, the other Operative
Documents, the Offering Memorandum and all other legal matters relating to this
Agreement and the transactions contemplated hereby shall be reasonably
satisfactory in all material respects to counsel for the Initial Purchasers, and
the Issuers shall have furnished to such counsel all documents and information
that they may reasonably request to enable them to pass upon such matters.
(e) Kirkland & Ellis shall have furnished to the Initial Purchasers,
its written opinion, as counsel to the Issuers, addressed to the Initial
Purchasers and dated as of the Closing Date, in form and substance reasonably
satisfactory to the Initial Purchasers and its counsel, to the effect that:
(i) Each of the Issuers is a limited liability company or
corporation, as the case may be, duly formed or incorporated, as the case may
be. Each of the Issuers is validly existing and in good standing under the laws
of the state of its formation or incorporation, as the case may be.
(ii) Each of the Issuers has all requisite limited liability
company or corporate, as the case may be, power to own and lease its respective
properties and to conduct its respective business as described in the Offering
Memorandum. Each of the Issuers has all requisite limited liability company or
corporate, as the case may be, power and authority to execute, deliver and
perform their respective
<PAGE>
17
obligations under this Agreement, the Indenture and the Registration Rights
Agreement, and to authorize, issue and sell the Notes as contemplated by this
Agreement.
(iii) This Agreement has been duly authorized, executed and
delivered by each of the Issuers.
(iv) The Indenture has been duly authorized, executed and
delivered by each of the Issuers and constitutes a valid and binding obligation
of each of the Issuers, enforceable against the Issuers in accordance with its
terms (subject to applicable bankruptcy, insolvency, reorganization, moratorium,
fraudulent transfer and other similar laws affecting creditors' rights generally
from time to time in effect and to general principles of equity, including,
without limitation, concepts of materiality, reasonableness, good faith and fair
dealing, regardless of whether in a proceeding in equity or at law).
(v) The Registration Rights Agreement has been duly authorized,
executed and delivered by each of the Issuers and constitutes a valid and
binding obligation of each of the Issuers, enforceable against the Issuers in
accordance with its terms (subject to applicable bankruptcy, insolvency,
reorganization, moratorium, fraudulent transfer and other similar laws affecting
creditors' rights generally from time to time in effect and to general
principles of equity, including, without limitation, concepts of materiality,
reasonableness, good faith and fair dealing, regardless of whether in a
proceeding in equity or at law and provided that such counsel shall not express
an opinion as to the validity of the indemnification or contribution provisions
of such Registration Rights Agreement).
(vi) The Initial Notes have been duly authorized, executed and
delivered by each of the Issuers and, when paid for by the Initial Purchasers in
accordance with the terms of this Agreement (assuming the due authorization,
execution and delivery of the Indenture by the Trustee and due authentication
and delivery of the Notes by the Trustee in accordance with the Indenture), will
constitute Notes under the terms of the Indenture, will constitute the valid and
binding obligations of each of the Issuers entitled to the benefits of the
Indenture, and will be enforceable against each of the Issuers in accordance
with their terms. (subject to applicable bankruptcy, insolvency, reorganization,
moratorium, fraudulent transfer and other similar laws affecting creditors'
rights generally from time to time in effect and to general principles of
equity, including, without limitation, concepts of materiality, reasonableness,
good faith and fair dealing, regardless of whether in a proceeding in equity or
at law. The New Notes have been duly authorized by the Issuers and when duly
executed and delivered and authenticated by the Issuers pursuant to the terms of
the Indenture and the Registration Rights Agreement (assuming the due
authorization, execution and delivery of the Indenture by the Trustee and due
authentication, execution and delivery of the New Notes by the Trustee in
accordance with the Indenture), will constitute New Notes under the terms of the
Indenture, will constitute the valid and binding obligations of each of the
Issuers entitled to the benefits of the Indenture, and will be enforceable
against each of the Issuers in accordance with their terms (subject to
applicable bankruptcy, insolvency, reorganization, moratorium, fraudulent
transfer and other similar laws affecting creditors' rights generally from time
to time in effect and to general principles of equity, including,
<PAGE>
18
without limitation, concepts of materiality, reasonableness, good faith and fair
dealing, regardless of whether in a proceeding in equity or at law).
(vii) All the limited liability company units or shares
of capital stock, as the case may be, of the Issuers outstanding prior to the
issuance of the Initial Notes have been duly authorized and validly issued and,
in the case of capital stock, are fully paid and nonassessable.
(viii) The Issuers' execution, delivery and performance of their
respective obligations under this Agreement, the Indenture and the Registration
Rights Agreement and the Issuers' sale of the Initial Notes to the Initial
Purchasers in accordance with this Agreement and performance of their respective
obligations under each do not (i) violate Avalon Holding's Certificate of
Formation or Limited Liability Company Agreement or Michigan Holdings' or
Finance Holding's Certificate of Incorporation or by-laws or (ii) constitute a
violation by the Issuers of any applicable provision of any law, statute or
regulation (except that no opinion is expressed as to compliance with any
disclosure requirement or any prohibition against fraud or misrepresentation or
as to whether performance of the indemnification or contribution provisions in
this Agreement would be permitted or any FCC or franchise law) or any order or
decree known to such counsel of any court or government agency or (iii) breach,
or result in a default under, any existing obligation of the Issuers under any
of the agreements listed on Schedule II to such opinion (and which the Issuers
have represented lists all material agreements and instruments to which the
Issuers and their subsidiaries or by which the Issuers and their subsidiaries
are bound or by which their property or assets are subject provided that no
opinion is expressed as to compliance with any financial test or cross-default
provision in any such agreement).
(ix) The Issuers' were not required to obtain any consent,
approval, authorization or order of or registration or filing with, any court,
regulatory body, administrative agency or other governmental agency for the
issuance, delivery and sale of the Initial Notes under this Agreement or the
performance by the Issuers of the Registration Rights Agreement except for an
order of the Commission declaring the registration statements, to be filed
pursuant to the Registration Rights Agreement, effective or any filings required
under Blue Sky laws.
(x) Subject to compliance by the Initial Purchasers with the
procedures set forth in this Agreement, it is not necessary in connection with
the sale of the Initial Notes to the Initial Purchasers in accordance with this
Agreement or in connection with the resale of the Notes in the Exempt Resales
contemplated by this Agreement to register the Notes under the Securities Act or
to qualify the Indenture under the TIA.
(xi) When the Initial Notes are issued and delivered pursuant to
this Agreement, such Initial Notes will not be of the same class (within the
meaning of Rule 144A under the Securities Act) as securities of the Issuers that
are listed on a national securities exchange registered under Section 6 of the
Exchange Act or that are quoted in a United States automated inter-dealer
quotation system.
<PAGE>
19
(xii) The information in the Offering Memorandum under the
heading "Description of the Senior Subordinated Notes" and "Certain United
States Federal Income Tax Consequences" to the extent that it summarizes laws,
governmental rules or regulations or documents is correct is all material
respects.
In addition, such counsel shall also state that such counsel has
participated in conferences with officers of the Issuers and with the
independent public accountants for the Issuers concerning the preparation of the
Offering Memorandum and, although such counsel has made certain inquiries and
investigations in connection with the preparation of the Offering Memorandum, it
is not passing upon and does not assume any responsibility for the accuracy,
completeness or fairness of the statements contained in the Offering Memorandum,
but that, on the basis of the foregoing such counsel's work in connection with
this matter, relying as to questions of fact material to such opinion upon the
opinions and statements of officers of the Issuers, nothing has come to such
counsel's attention to cause such counsel to believe that the Offering
Memorandum, as of its date or as of the Closing Date, included or includes an
untrue statement of a material fact or omitted or omits to state a material fact
necessary to make the statements therein, in light of the circumstances under
which they were made, not misleading (it being understood that such counsel need
express no belief or opinion with respect to the financial statements, notes and
schedules and other financial and statistical data included therein or omitted
therefrom).
The opinion of such counsel may be limited to the laws of the state of
New York, the General Corporation Law and Limited Liability Company Act of the
State of Delaware, and the federal laws of the United States.
(f) Bienstock & Clark shall have furnished to the Initial Purchasers,
its written opinion, as special counsel to the Issuers, addressed to the Initial
Purchasers and dated as of the Closing Date, in form and substance reasonably
satisfactory to the Initial Purchasers and its counsel, to the effect that:
(i) The issuance and sale of the Notes and the consummation by
the Issuers of all of the transactions contemplated by the Purchase Agreement
will not result in a violation of the Communications Act of 1934, as amended by
the Telecommunications Act of 1996 (the "Communications Act"), or any order,
rule or regulation of the Federal Communications Commission (the "FCC"), as
pertaining to the operations of the Issuers.
(ii) No consent, approval, authorization, order, registration or
qualification of or with the FCC is required under the Communications Act or the
rules and regulations of the FCC for the issuance and sale of the Notes or the
consummation by the Issuers of the transactions contemplated by this Agreement.
(iii) To the best of its knowledge after due inquiry, the Issuers
have the right to use or manage all of the FCC licenses including grants of
special temporary authorities listed in Schedule I to such opinion (the "FCC
Licenses"), except as any impairment in the right to use such FCC Licenses,
taken in the aggregate, would not materially or adversely affect: (a) the
condition (financial or other), business, prospects,
<PAGE>
20
properties, net worth or results of operations of the Issuers and their
subsidiaries, taken as a whole, or (b) the ability of the Issuers to perform
their obligations under this Agreement. To the best of its knowledge based on
information provided by the Issuers, its employees, agents, other attorneys or
advisors, the FCC Licenses are in full force and effect and such counsel are not
aware of any other FCC licenses required by the Issuers or their subsidiaries to
conduct their businesses as now operated.
(iv) Except as described in the Offering Memorandum, to the best
of its knowledge based on information provided by the Issuers, its employees,
agents, other attorneys or advisors, such counsel do not know of any material
proceedings threatened, pending or contemplated before the FCC against or
involving the FCC Licenses of the Issuers or their subsidiaries.
(v) To the best of its knowledge after due inquiry, subject to
the qualification in (iv) above, no event has occurred that permits, or with
notice or lapse of time or both would permit the revocation or termination of
any of the FCC Licenses or that might result in any other material impairment of
the rights of the Issuers or their subsidiaries to use the FCC Licenses.
(vi) As of the date of the Offering Memorandum, the statements
made in the Offering Memorandum under the captions "Risk Factors--Non-Exclusive
Franchises; Non-Renewal or Termination of Franchises," "Risk Factors--Regulation
of the Cable Television Industry; Pending Legislation," "Business--Franchises,"
"Business-- Competition" and "Regulation," insofar as such statements purport to
constitute summaries of relevant federal communications laws or related legal
and governmental proceedings, constitute accurate summaries of the terms of such
laws and proceedings in all material respects as they relate to the business of
the Issuers.
The opinion of such counsel may be limited to the Communications Act,
and the rules, regulations and published opinions of the FCC relating thereto,
as pertaining to the operations of the Issuers.
(g) The Initial Purchasers shall have received from Simpson Thacher &
Bartlett, counsel for the Initial Purchasers, such opinion or opinions, dated as
of the Closing Date, with respect to the issuance and sale of the Initial Notes,
the Offering Memorandum and other related matters as the Initial Purchasers may
reasonably require, and the Issuers shall have furnished to such counsel such
documents as they reasonably request for the purpose of enabling them to pass
upon such matters.
(h) The Issuers and the Trustee shall have entered into the Indenture
and the Initial Purchasers shall have received counterparts, conformed as
executed, thereof.
(i) The Issuers and the Initial Purchasers shall have entered into
the Registration Rights Agreement and the Initial Purchasers shall have received
counterparts, conformed as executed, thereof.
(j) With respect to the letter of PricewaterhouseCoopers LLP, KPMG
Peat Marwick LLP and Greenfield, Altman, Brown, Berger & Katz, P.C. delivered to
the Initial
<PAGE>
21
Purchasers concurrently with the execution of this Agreement (the "initial
letter"), the Issuers shall have furnished to the Initial Purchasers a letter
(as used in this paragraph, the "bring-down letter") of such accountant,
addressed to the Initial Purchasers and dated as of the Closing Date (i)
confirming that it is an independent public accountant under the guidelines of
the American Institute of Certified Public Accountant, (ii) stating, as of the
date of the bring-down letter (or, with respect to matters involving changes or
developments since the respective dates as of which specified financial
information is given in the Offering Memorandum, as of a date not more than two
days prior to the date of the bring-down letter), the conclusions and findings
of such firm with respect to the financial information and other matters covered
by the initial letter and (iii) confirming in all material respects the
conclusions and findings set forth in the initial letter.
(k) Each of the Issuers shall have furnished to the Initial
Purchasers a certificate, dated as of the Closing Date, of its Chief Executive
Officer or President and its Vice President--Finance stating that:
(i) The representations and warranties of the Issuers in
Section 1 are true and correct as of such Closing Date and after giving effect
to the consummation of the transactions contemplated by this Agreement; the
Issuers have complied in all material respects with all their agreements
contained herein, and the condition set forth in Section 7(l) has been
fulfilled; and
(ii) They have carefully examined the Preliminary Offering
Memorandum and the Offering Memorandum and, in their opinion (i) as of their
respective dates and as of the Closing Date, the Preliminary Offering Memorandum
and the Offering Memorandum did not include any untrue statement of a material
fact and did not omit to state a material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstances under
which they were made, not misleading, and (ii) since the date of the Offering
Memorandum, no event has occurred which should have been set forth in a
supplement or amendment to the Offering Memorandum.
(l) None of the Issuers nor any of their subsidiaries shall have
sustained since the date of the latest audited financial statements included in
the Offering Memorandum (i) any loss or interference with their business from
fire, explosion, flood or other calamity, whether or not covered by insurance,
or from any labor dispute or court or governmental action, order or decree,
otherwise than as set forth or contemplated in the Offering Memorandum or (ii)
any change in the capital stock or units, as the case may be, or long-term debt
of the Issuers or any of their subsidiaries or any change, or any development
involving a prospective change, that would have a Material Adverse Effect,
otherwise than as set forth or contemplated in the Offering Memorandum, the
effect of which, in any such case described in clause (i) or (ii), is, in the
judgment of the Initial Purchasers, so material and adverse as to make it
impracticable or inadvisable to proceed with the payment for and delivery of the
Initial Notes being delivered on such Closing Date on the terms and in the
manner contemplated in the Offering Memorandum.
(m) Simpson Thacher & Bartlett shall have been furnished with such
other documents and opinions, in addition to those set forth above, as they may
reasonably
<PAGE>
22
require for the purpose of enabling them to review or pass upon the matters
referred to in this Agreement and in order to evidence the accuracy,
completeness or satisfaction in all material respects of any of the
representations, warranties or conditions herein contained.
(n) Subsequent to the execution and delivery of this Agreement (i) no
downgrading shall have occurred in the rating accorded the Issuers' debt
securities by any "nationally recognized statistical rating organization," as
that term is defined by the Commission for purposes of Rule 436(g)(2) under the
Securities Act and (ii) no such organization shall have publicly announced that
it has under surveillance or review, with possible negative implications, its
rating of any of the Issuers' debt securities.
(o) Subsequent to the execution and delivery of this Agreement there
shall not have occurred any of the following: (i) trading in securities
generally on the New York Stock Exchange or the American Stock Exchange or in
the over-the-counter market, or trading in any securities of the Issuers on any
exchange or in the over-the-counter market, shall have been suspended or minimum
prices shall have been established on any such exchange or such market by the
Commission, by such exchange or by any other regulatory body or governmental
authority having jurisdiction, (ii) a banking moratorium shall have been
declared by Federal or state authorities, (iii) the United States shall have
become engaged in hostilities, there shall have been an escalation in
hostilities involving the United States or there shall have been a declaration
of a national emergency or war by the United States or (iv) there shall have
occurred such a material adverse change in general economic, political or
financial conditions (or the effect of international conditions on the financial
markets in the United States shall be such) as to make it, in the judgment of
the Initial Purchasers, impracticable or inadvisable to proceed with the public
offering or delivery of the Notes being delivered on such Closing Date on the
terms and in the manner contemplated in the Offering Memorandum.
(p) The Initial Notes shall have been approved by the National
Association of Securities Dealers, Inc. for trading in the PORTAL market.
All opinions, letters, evidence and certificates mentioned above or
elsewhere in this Agreement shall be deemed to be in compliance with the
provisions hereof only if they are in form and substance reasonably satisfactory
to counsel of the Initial Purchasers.
8. Indemnification and Contribution.
(a) Each of the Issuers hereby jointly and severally agrees to
indemnify and hold harmless the Initial Purchasers, their officers and employees
and each person, if any, who controls the Initial Purchasers within the meaning
of the Securities Act, from and against any loss, claim, damage or liability,
joint or several, or any action in respect thereof (including, but not limited
to, any loss, claim, damage, liability or action relating to purchases and sales
of Notes), to which the Initial Purchasers, officer, employee or controlling
person may become subject, under the Securities Act or otherwise, insofar as
such loss, claim, damage, liability or action arises out of, or is based upon,
(i) any untrue statement or alleged untrue statement of a material fact
contained in any Preliminary Offering Memorandum or the Offering Memorandum (in
each case as amended or
<PAGE>
23
supplemented) and (ii) the omission or alleged omission to state in any
Preliminary Offering Memorandum or the Offering Memorandum (in each case as
amended or supplemented) any material fact required to be stated therein or
necessary to make the statements therein not misleading; and shall reimburse the
Initial Purchasers and each such officer, employee or controlling person
promptly upon demand with reasonable documentation for any legal or other
expenses reasonably incurred by the Initial Purchasers, officer, employee or
controlling person in connection with investigating or defending or preparing to
defend against any such loss, claim, damage, liability or action as such
expenses are incurred; provided, however, that the Issuers shall not be liable
in any such case to the extent that any such loss, claim, damage, liability or
expense arises out of or is based upon an untrue statement or alleged untrue
statement or omission or alleged omission in the Preliminary Offering
Memorandum, if such untrue statement or alleged untrue statement or omission or
alleged omission is corrected in all material respects in the Offering
Memorandum or an amendment or supplement to the Offering Memorandum, as
applicable, and the Initial Purchasers thereafter fails to deliver such Offering
Memorandum as so amended or supplemented, as applicable, prior to or
concurrently with the sale of the Initial Notes to the person asserting such
loss, claim, damage, liability or expense after the Issuers had furnished such
Initial Purchaser with a sufficient number of copies of the same; provided,
further, that the Issuers shall not be liable in any such case to the extent
that any such loss, claim, damage, liability or action arises out of, or is
based upon, any untrue statement or alleged untrue statement or omission or
alleged omission made in any Preliminary Offering Memorandum or the Offering
Memorandum (in each case as amended or supplemented) in reliance upon and in
conformity with written information provided by the Initial Purchasers
specifically for inclusion therein. The foregoing indemnity agreement is in
addition to any liability which the Issuers and their subsidiaries may otherwise
have to the Initial Purchasers or to any officer, employee or controlling person
of the Initial Purchasers.
(b) The Initial Purchasers shall indemnify and hold harmless the
Issuers, their respective directors, managers, officers, employees or agents,
and each person, if any, who controls the Issuers within the meaning of the
Securities Act, from and against any loss, claim, damage, liability, expense or
any action in respect thereof, to which the Issuers or any such director,
officer or controlling person may become subject, under the Securities Act or
otherwise, insofar as such loss, claim, damage, liability, expense or action
arises out of, or is based upon, (i) any untrue statement or alleged untrue
statement of a material fact contained in any Preliminary Offering Memorandum or
the Offering Memorandum (in each case as amended or supplemented) or (ii) the
omission or alleged omission to state in any Preliminary Offering Memorandum or
the Offering Memorandum (in each case as amended or supplemented) any material
fact required to be stated therein or necessary to make the statements therein
not misleading, but in each case only to the extent that the untrue statement or
alleged untrue statement or omission or alleged omission was made in reliance
upon and in conformity with written information concerning the Initial
Purchasers furnished to the Issuers by or on behalf of the Initial Purchasers
specifically for inclusion therein, and shall reimburse the Issuers and any such
director, manager, officer, employee, agent or controlling person for any legal
or other expenses reasonably incurred by the Issuers or any such director,
manager, officer, employee, agent or controlling person in connection with
investigating or defending or preparing to defend against any such loss, claim,
damage, liability, expense or action as
<PAGE>
24
such expenses are incurred. The foregoing indemnity agreement is in addition to
any liability which any Initial Purchasers may otherwise have to the Issuers or
any such director, manager, officer, employee, agent or controlling person.
(c) Promptly after receipt by an indemnified party under this Section
8 of the notice of any claim or the commencement of any action, the indemnified
party shall, if a claim in respect thereof is to be made against the
indemnifying party under this Section 8, notify the indemnifying party in
writing of the claim or the commencement of that action; provided, however, that
the failure to notify the indemnifying party shall not relieve it from any
liability which it may have under this Section 8 except to the extent it has
been materially prejudiced by such failure and, provided, however, that the
failure to notify the indemnifying party shall not relieve it from any liability
which it may have to an indemnified party otherwise than under this Section 8.
If any such claim or action shall be brought against an indemnified party, and
it shall have notified the indemnifying party thereof, the indemnifying party
shall be entitled to participate therein and, to the extent that it wishes,
jointly with any other similarly notified indemnifying party, to assume the
defense thereof with counsel reasonably satisfactory to the indemnified party.
After notice from the indemnifying party to the indemnified party of its
election to assume the defense of such claim or action, the indemnifying party
shall not be liable to the indemnified party under this Section 8 for any legal
or other expenses subsequently incurred by the indemnified party in connection
with the defense thereof other than reasonable costs of investigation; provided,
however, that the indemnified party shall have the right to employ separate
counsel to represent jointly the indemnified party and the Initial Purchasers
and their respective officers, managers, employees, agents and controlling
persons who may be subject to liability arising out of any claim in respect of
which indemnity may be sought by the Initial Purchasers against the indemnifying
party under this Section 8 if, in the reasonable judgment of the indemnified
party it is advisable for the indemnified party and the Initial Purchasers,
officers, managers, employees, agents and controlling persons to be jointly
represented by separate counsel, and in that event the fees and expenses of such
separate counsel shall be paid by the indemnifying party only if (i) the
indemnifying party has agreed to pay such fees or expenses, (ii) the
indemnifying party has failed to assume the defense of such claim or (iii) in
the reasonable judgment of any such person, based upon written advice of its
counsel, a conflict of interest may exist between such person and the
indemnifying party with respect to such claims and the representation of both
would be inappropriate (in which case, if the person notifies the indemnifying
party in writing that such person elects to employ separate counsel at the
expense of the indemnifying party, the indemnifying party shall not have the
right to assume the defense of such claim on behalf of such person). In no
event shall the indemnifying parties be liable for the fees and expenses of more
than one counsel (in addition to local counsel). Each indemnified party, as a
condition of the indemnity agreements contained in Section 8, shall use its best
efforts to cooperate with the indemnifying party in the defense of any such
action or claim. No indemnifying party shall (i) without the prior written
consent of the indemnified parties (which consent shall not be unreasonably
withheld), settle or compromise or consent to the entry of any judgment with
respect to any pending or threatened claim, action, suit or proceeding in
respect of which indemnification or contribution may be sought hereunder
(whether or not the indemnified parties are actual or potential parties to such
claim or action) unless such settlement, compromise or consent includes an
unconditional release of each indemnified
<PAGE>
25
party from all liability arising out of such claim, action, suit or proceeding,
or (ii) be liable for any settlement of any such action effected without its
written consent (which consent shall not be unreasonably withheld), but if
settled with the consent of the indemnifying party or if there be a final
judgment of the plaintiff in any such action, the indemnifying party agrees to
indemnify and hold harmless any indemnified party from and against any loss or
liability by reason of such settlement or judgment.
(d) If the indemnification provided for in this Section 8 shall for
any reason be unavailable to or insufficient to hold harmless an indemnified
party under Section 8(a) or 8(b) in respect of any loss, claim, damage or
liability, or any action in respect thereof, referred to therein, then each
indemnifying party shall, in lieu of indemnifying such indemnified party,
contribute to the amount paid or payable by such indemnified party as a result
of such loss, claim, damage or liability, or action in respect thereof, (i) in
such proportion as shall be appropriate to reflect the relative benefits
received by the Issuers on the one hand and the Initial Purchasers on the other
from the offering of the Initial Notes or (ii) if the allocation provided by
clause (i) above is not permitted by applicable law, in such proportion as is
appropriate to reflect not only the relative benefits referred to in clause (i)
above but also the relative fault of the Issuers on the one hand and the Initial
Purchasers on the other with respect to the statements or omissions which
resulted in such loss, claim, damage or liability, or action in respect thereof,
as well as any other relevant equitable considerations. The relative benefits
received by the Issuers on the one hand and the Initial Purchasers on the other
with respect to such offerings shall be deemed to be in the same proportion as
the total net proceeds from the offering of the Initial Notes purchased under
this Agreement (before deducting expenses) received by the Issuers on the one
hand, and the total discounts and commissions received by the Initial Purchasers
with respect to the Initial Notes purchased under this Agreement, on the other
hand, bear to the total gross proceeds from the offering of the Initial Notes
under this Agreement, in each case as set forth in the table on the cover page
of the Offering Memorandum. The relative fault shall be determined by reference
to whether the untrue or alleged untrue statement of a material fact or omission
or alleged omission to state a material fact relates to information supplied by
the Issuers or the Initial Purchasers, the intent of the parties and their
relative knowledge, access to information and opportunity to correct or prevent
such statement or omission. The Issuers and the Initial Purchasers agree that it
would not be just and equitable if contributions pursuant to this Section 8(d)
were to be determined by pro rata allocation or by any other method of
allocation which does not take into account the equitable considerations
referred to herein. The amount paid or payable by an indemnified party as a
result of the loss, claim, damage or liability, or action in respect thereof,
referred to above in this Section shall be deemed to include, for purposes of
this Section 8(d), any legal or other expenses reasonably incurred by such
indemnified party in connection with investigating or defending any such action
or claim. Notwithstanding the provisions of this Section 8(d), the Initial
Purchasers shall not be required to contribute any amount in excess of the
amount by which the total price at which the Initial Notes purchased by it were
resold to Eligible Purchasers exceeds the amount of any damages which the
Initial Purchasers has otherwise paid or become liable to pay by reason of any
untrue or alleged untrue statement or omission or alleged omission. No person
guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of
the Securities Act) shall be entitled to contribution from any person who was
not guilty of such fraudulent misrepresentation.
<PAGE>
26
(e) The Initial Purchasers confirm and the Issuers acknowledge that
the last paragraph on the cover page, the stabilization legend on page iii, and
the second, third, fifth, sixth, ninth, tenth, eleventh and twelfth paragraphs
of the section entitled "Plan of Distribution" constitute the only information
concerning the Initial Purchasers furnished in writing to the Issuers by or on
behalf of the Initial Purchasers specifically for inclusion in the Preliminary
Offering Memorandum or the Offering Memorandum.
9. Termination. The obligations of the Initial Purchasers hereunder
may be terminated by Lehman Brothers Inc. by notice given to any of the Issuers
prior to delivery of and payment for the Initial Notes if, prior to that time,
any of the events described in Sections 7(l), 7(n) or 7(o) shall have occurred
or if the Initial Purchasers shall decline to purchase the Initial Notes for any
reason permitted under this Agreement.
10. Reimbursement of Initial Purchasers' Expenses. If the Issuers
shall fail to tender the Initial Notes for delivery to the Initial Purchasers by
reason of any failure, refusal or inability on the part of the Issuers to
perform any agreement on their part to be performed, or because any other
condition of the Initial Purchasers' obligations hereunder required to be
fulfilled by the Issuers is not fulfilled, the Issuers will reimburse the
Initial Purchasers for all reasonable and documented out-of-pocket expenses
(including the fees and disbursements of their counsel) incurred by the Initial
Purchasers in connection with this Agreement and the proposed purchase of the
Initial Notes, and upon demand the Issuers shall pay the full amount thereof to
Lehman Brothers Inc.
11. Notices, etc. All statements, requests, notices and agreements
hereunder shall be in writing, and:
(a) If to the Initial Purchasers, shall be delivered or sent by mail,
telex or facsimile transmission to Lehman Brothers Inc., Three World Financial
Center, New York, New York 10285, Attention: Syndicate Department (Fax: 212-526-
6588), with a copy to Simpson Thacher & Bartlett, 425 Lexington Avenue, New
York, New York 10017, Attention: John B. Tehan, Esq. (Fax: 212-455-2502); and
(b) If to Issuers shall be delivered or sent by mail, telex or
facsimile transmission to Avalon Cable LLC, 201 East 69th Street, Suite PH-G,
New York, New York, 10021, Attention: President (Fax 212-501-8695), with a copy
to Kirkland & Ellis, 200 East Randolph Drive, Chicago, Illinois 60601,
Attention: Jill Sugar Factor, Esq. (Fax 312-861-2200).
Any such statements, requests, notices or agreements shall take effect
at the time of receipt thereof. The Issuers shall be entitled to act and rely
upon any request, consent, notice or agreement given or made on behalf of the
Initial Purchasers. Any notice of a change of address or facsimile transmission
number must be given by the Issuers or by the Initial Purchasers, as the case
may be, in writing, at least three days in advance of such change.
12. Persons Entitled to Benefit of Agreement. This Agreement shall
inure to the benefit of and be binding upon the Initial Purchasers and their
successors. This
<PAGE>
27
Agreement and the terms and provisions hereof are for the sole benefit of only
the Issuers and the Initial Purchasers, except that the representations,
warranties, indemnities and agreements of the Issuers contained in this
Agreement shall also be deemed to be for the benefit of the person or persons,
if any, entitled to indemnification and contribution thereunder.
Nothing in this Agreement shall supersede the provisions of the
engagement letter among ABRY Partners, Inc., Spartacus Holdings Co., Spartacus
Acquisition Co. and Lehman Brothers Inc. dated as of June 3, 1998.
13. Survival. The respective indemnities, representations, warranties
and agreements of the Initial Purchasers and the Issuers contained in this
Agreement or made by or on behalf of them, respectively, pursuant to this
Agreement, shall survive the delivery of and payment for the Initial Notes and
shall remain in full force and effect, regardless of any investigation made by
on behalf of any of them or any person controlling any of them.
14. Definition of the Terms "Business Day." For purposes of this
Agreement "business day" means any day on which the New York Stock Exchange,
Inc. is open for trading.
15. Governing Law. This Agreement shall be governed by and construed
in accordance with the laws of New York.
16. Counterparts. This Agreement may be executed in one or more
counterparts and, if executed in more than one counterpart, the executed
counterparts shall each be deemed to be an original but all such counterparts
shall together constitute one and the same instrument.
17. Headings. The headings herein are inserted for convenience of
reference only and are not intended to be part of, or to affect the meaning or
interpretation of, this Agreement.
[signature page follows]
<PAGE>
28
If the foregoing correctly sets forth the agreement between the Initial
Purchasers and the Issuers, please indicate your acceptance in the space
provided for the purpose below.
Very truly yours,
AVALON CABLE LLC
By: /s/ Jay M. Grossman
----------------------------------
Name: Jay M. Grossman
Title: Vice President & Assistant
Secretary
AVALON CABLE OF MICHIGAN HOLDINGS, INC.
By: /s/ Jay M. Grossman
----------------------------------
Name: Jay M. Grossman
Title: Vice President & Assistant
Secretary
AVALON CABLE HOLDINGS FINANCE, INC.
By: /s/ Jay M. Grossman
----------------------------------
Name: Jay M. Grossman
Title: Vice President & Assistant
Secretary
Accepted:
LEHMAN BROTHERS INC.,
on behalf of the Initial Purchasers
By: /s/ Edward B. McGeough
--------------------------------
Name: Edward B. McGeough
Title: Managing Director
<PAGE>
SCHEDULE 1
Initial Purchaser Principal Amount at Maturity of Notes
- ----------------- -------------------------------------
Lehman Brothers Inc. $166,600,000
Barclays Capital Inc. 29,400,000
------------
Total $196,000,000
============
<PAGE>
EXHIBIT 4.4
________________________________________________________________________________
________________________________________________________________________________
REGISTRATION RIGHTS AGREEMENT
Dated as of December 10, 1998
Among
AVALON CABLE LLC
AVALON CABLE OF MICHIGAN HOLDINGS, INC.
AVALON CABLE HOLDINGS FINANCE, INC.
as Issuers
and
LEHMAN BROTHERS INC.
BARCLAYS CAPITAL
as Initial Purchasers
________________________________________________________________________________
________________________________________________________________________________
<PAGE>
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
Page
----
<S> <C>
1. Definitions............................................................. 1
2. Securities Subject to This Agreement.................................... 3
3. Registered Exchange Offer............................................... 3
4. Shelf Registration...................................................... 5
5. Liquidated Damages...................................................... 6
6. Registration Procedures................................................. 7
7. Registration Expenses................................................... 14
8. Indemnification and Contribution........................................ 15
9. Rule 144A............................................................... 17
10. Participation in Underwritten Registrations............................. 17
11. Selection of Underwriters............................................... 18
12. Miscellaneous........................................................... 18
</TABLE>
i
<PAGE>
This Registration Rights Agreement (this "Agreement") is made and
entered into as of December 10, 1998 by and among Avalon Cable LLC, a Delaware
limited liability corporation ("Avalon Holdings"), Avalon Cable of Michigan
Holdings, Inc., a Delaware corporation ("Michigan Holdings "), Avalon Cable
Holdings Finance, Inc., a Delaware corporation ("Finance Holdings"), and Lehman
Brothers Inc. and Barclays Capital ("Barclays" and, together with Lehman, the
"Initial Purchasers").
This Agreement is entered into in connection with the Purchase
Agreement, dated as of December 3, 1998, among the Issuers and the Initial
Purchasers (the "Purchase Agreement"), which provides for the sale by the
Issuers to the Initial Purchasers of $196,000,000 aggregate principal amount at
maturity of the Issuers' 11 7/8% Senior Discount Notes due 2008 (the "Senior
Discount Notes"). In order to induce the Initial Purchasers to enter into the
Purchase Agreement, the Issuers have agreed to provide the registration rights
set forth in this Agreement for the benefit of the Initial Purchasers and their
direct and indirect transferees and assigns. The execution and delivery of this
Agreement is a condition to the Initial Purchasers' obligations to purchase the
Senior Discount Notes under the Purchase Agreement. Capitalized terms used but
not specifically defined herein have the respective meanings ascribed thereto in
the Purchase Agreement.
The parties hereby agree as follows:
1. Definitions. As used in this Agreement, the following capitalized
terms shall have the following meanings:
Broker-Dealer: Any broker or dealer registered under the
-------------
Exchange Act.
Closing Date: The date on which the Senior Discount Notes were
------------
sold.
Commission: The Securities and Exchange Commission.
----------
Consummate: A registered Exchange Offer shall be deemed
----------
"Consummated" for purposes of this Agreement upon the occurrence of (i) the
filing and effectiveness under the Securities Act of the Exchange Offer
Registration Statement relating to the New Notes to be issued in the
Exchange Offer, (ii) the maintenance of such Registration Statement
continuously effective and the keeping of the Exchange Offer open for a
period not less than the minimum period required pursuant to Section 3(b)
hereof and (iii) the delivery by the Issuers of the New Notes in the same
aggregate principal amount as the aggregate principal amount of Transfer
Restricted Securities that were validly tendered by Holders thereof
pursuant to the Exchange Offer.
Effectiveness Target Date: As defined in Section 5(a) hereof.
-------------------------
Event Date: As defined in Section 5(b) hereof.
----------
Exchange Act: The Securities Exchange Act of 1934, as amended.
------------
Exchange Offer: The registration by the Issuers under the
--------------
Securities Act of the New Notes pursuant to a Registration Statement
pursuant to which the Issuers offer the Holders of all outstanding Transfer
Restricted Securities the opportunity to exchange all such outstanding
Transfer Restricted Securities held by such Holders for New Notes in an
aggregate principal
<PAGE>
amount equal to the aggregate principal amount of the Transfer Restricted
Securities tendered in such exchange offer by such Holders.
Exchange Offer Registration Statement: The Registration
-------------------------------------
Statement relating to the Exchange Offer, including the Prospectus which
forms a part thereof.
Exempt Resales: The transactions in which the Initial Purchasers
--------------
propose to sell the Senior Discount Notes, pursuant to the Purchase
Agreement, solely to (i) persons whom the Initial Purchasers reasonably
believe to be "qualified institutional buyers," as such term is defined in
Rule 144A under the Securities Act, and (ii) to persons other than U.S.
Persons in offshore transactions meeting the requirements of Rule 903 and
Rule 904 of Regulation S under the Securities Act.
Filing: As defined in Section 3(a)(i) hereof.
------
Holder: As defined in Section 2(b) hereof.
------
Indenture: The Indenture, dated as of December 10, 1998, among
---------
the Issuers and The Bank of New York, as trustee (the "Trustee"), pursuant
to which the Senior Discount Notes are to be issued, as such Indenture is
amended or supplemented from time to time in accordance with the terms
thereof.
Initial Purchasers: As defined in the preamble hereto.
------------------
Issuers: Initially, Michigan Holdings, Avalon Holdings and
-------
Finance Holdings; provided that, subsequent to the Reorganization (as
defined in the Indenture), the Issuers shall be Avalon Holdings and Finance
Holdings.
Liquidated Damages: As defined in Section 5(a) hereof.
------------------
NASD: National Association of Securities Dealers, Inc.
----
New Notes: The New Senior Discount Notes to be issued pursuant to
--------
the Indenture in the Exchange Offer.
Participant: As defined in Section 8(a) hereof.
-----------
Person: An individual, partnership, corporation, limited
------
liability company, trust or unincorporated organization, or a government or
agency or political subdivision thereof.
Prospectus: The prospectus included in a Registration Statement,
----------
as amended or supplemented by any prospectus supplement and by all other
amendments thereto, including post-effective amendments, and all material
incorporated by reference into such Prospectus.
Registration Default: As defined in Section 5(a) hereof.
--------------------
Registration Statement: Any registration statement of the
----------------------
Issuers relating to (a) an offering of New Notes pursuant to an Exchange
Offer or (b) the registration for resale of Transfer Restricted Securities
pursuant to the Shelf Registration Statement, in either case, which is
filed pursuant to the provisions of this Agreement and including the
Prospectus included
<PAGE>
3
therein, all amendments and supplements thereto (including post-effective
amendments) and all exhibits and material incorporated by reference
therein.
Securities Act: The Securities Act of 1933, as amended.
--------------
Shelf Filing Deadline: As defined in Section 4(a) hereof.
---------------------
Shelf Registration Statement: As defined in Section 4(a) hereof.
----------------------------
TIA: The Trust Indenture Act of 1939 (15 U.S.C. Section 77aaa-
---
77bbbb), as amended.
Transfer Restricted Securities: Each Note, until the earliest to
------------------------------
occur of (a) the date on which such Note has been exchanged by a person
other than a Broker-Dealer for a New Note in the Exchange Offer, (b)
following the exchange by a Broker-Dealer in the Exchange Offer of a Note
for a New Note, the date on which such New Note is sold to a purchaser who
receives from such Broker-Dealer on or prior to the date of such sale a
copy of the prospectus contained in the Exchange Offer Registration
Statement, (c) the date on which such Note has been effectively registered
under the Securities Act and disposed of in accordance with the Shelf
Registration Statement and (d) the date on which such Note is eligible to
be distributed to the public pursuant to Rule 144 under the Securities Act.
Underwritten Registration or Underwritten Offering: A
------------------------- ---------------------
registration in which securities of the Issuers are sold to an underwriter
for reoffering to the public.
2. Securities Subject to This Agreement.
(a) Transfer Restricted Securities. The securities entitled to
------------------------------
the benefits of this Agreement are the Transfer Restricted Securities.
(b) Holders of Transfer Restricted Securities. A Person is
-----------------------------------------
deemed to be a holder of Transfer Restricted Securities (each, a "Holder")
whenever such Person owns Transfer Restricted Securities.
3. Registered Exchange Offer.
<PAGE>
4
(a) The Issuers shall (i) cause to be filed with the Commission
(the "Filing") on or prior to March 31, 1999, an Exchange Offer
Registration Statement under the Securities Act relating to the New Notes
and the Exchange Offer, (ii) use their best efforts to cause such Exchange
Offer Registration Statement to be declared effective by the Commission on
or prior to 90 days after the date of the Filing, (iii) in connection with
the foregoing, file (A) all pre-effective amendments to such Exchange Offer
Registration Statement as may be necessary in order to cause such Exchange
Offer Registration Statement to be declared effective by the Commission,
(B) if applicable, a post-effective amendment to such Registration
Statement pursuant to Rule 430A under the Securities Act and (C) cause all
necessary filings in connection with the registration and qualification of
the New Notes to be made under the Blue Sky laws of such jurisdictions as
are necessary to permit Consummation of the Exchange Offer and (iv) unless
the Exchange Offer would not be permitted by applicable law or Commission
policy, the Issuers will commence the Exchange Offer and use their best
efforts to issue on or prior to 30 business days after the date on which
such Registration Statement was declared effective by the Commission, New
Notes in exchange for all Senior Discount Notes tendered prior thereto in
the Exchange Offer. The Exchange Offer shall be on the appropriate form
permitting registration of the New Notes to be offered in exchange for the
Transfer Restricted Securities and to permit resales of New Notes held by
Broker-Dealers as contemplated by Section 3(c) below. The date referred to
in (i) of this Section 3(a) shall be changed to account for, and the
business day periods referred to in (ii) and (iv) of this Section 3(a)
shall not be deemed to include, any period during which the Issuers are
pursuing a Commission ruling pursuant to Section 6(a)(i) below.
(b) The Issuers shall use their best efforts to cause the
Exchange Offer Registration Statement to be effective continuously and
shall keep the Exchange Offer open for a period of not less than the
minimum period required under applicable federal and state securities laws
to Consummate the Exchange Offer; provided, however, that in no event shall
such period be less than 20 business days. The Issuers shall cause the
Exchange Offer to comply in all material respects with all applicable
federal and state securities laws. No securities other than the New Notes
shall be included in the Exchange Offer Registration Statement. The
Issuers shall use their best efforts to cause the Exchange Offer to be
Consummated on the earliest practicable date after the Exchange Offer
Registration Statement has been declared effective by the Commission, but
in no event later than 30 business days thereafter.
(c) The Issuers shall indicate in a "Plan of Distribution"
section contained in the Prospectus contained in the Exchange Offer
Registration Statement that any Broker-Dealer who holds Securities that are
Transfer Restricted Securities and that were acquired for its own account
as a result of market-making activities or other trading activities (other
than Transfer Restricted Securities acquired directly from the Issuers),
may exchange such Securities pursuant to the Exchange Offer; provided,
however, such Broker-Dealer may be deemed to be an "underwriter" within the
meaning of the Securities Act and must, therefore, deliver a prospectus
meeting the requirements of the Securities Act in connection with any
resales of the New Notes received by such Broker-Dealer in the Exchange
Offer, which prospectus delivery requirement may be satisfied by the
delivery by such Broker-Dealer of the Prospectus contained in the Exchange
Offer Registration Statement. Such "Plan of Distribution" section shall
also contain all other information with respect to such resales by Broker-
Dealers that the Commission may require in order to permit such resales
pursuant thereto, but such "Plan of Distribution" shall not name any such
Broker-Dealer or disclose the amount of New Notes held by any such Broker-
<PAGE>
5
Dealer except to the extent required by the Commission as a result of a
change in policy announced after the date of this Agreement.
The Issuers shall use their best efforts to keep the Exchange Offer
Registration Statement continuously effective, supplemented and amended as
required by the provisions of Section 6(c) below to the extent necessary to
ensure that it is available for resales of New Notes acquired by Broker-Dealers
for their own accounts as a result of market-making activities or other trading
activities and to ensure that it conforms with the requirements of this
Agreement, the Securities Act and the policies, rules and regulations of the
Commission as announced from time to time, for a period of 180 days from the
date on which the Exchange Offer Registration Statement is declared effective.
The Issuers shall provide sufficient copies of the latest version of
such Prospectus to Broker-Dealers promptly upon request at any time during such
180-day period in order to facilitate such resales.
4. Shelf Registration.
(a) Shelf Registration. If (i) the Issuers are not permitted to
------------------
consummate the Exchange Offer because the Exchange Offer is not permitted
by applicable law or Commission policy (after the procedures set forth in
Section 6(a) below have been complied with) or (ii) if any Holder of
Transfer Restricted Securities that is a "qualified institutional buyer"
(as defined in Rule 144A under the Securities Act) or an institutional
"accredited investor" (as defined in Rule 501(A)(1), (2), (3) or (7) under
the Securities Act) shall notify the Issuers prior to the 20th day
following the Consummation of the Exchange Offer (A) that such Holder is
prohibited by applicable law or Commission policy from participating in the
Exchange Offer or (B) that such Holder may not resell the New Notes
acquired by it in the Exchange Offer to the public without delivering a
prospectus and that the Prospectus contained in the Exchange Offer
Registration Statement is not appropriate or available for such resales by
such Holder or (C) that such Holder is a Broker-Dealer and holds Senior
Discount Notes acquired directly from the Issuers or one of their
affiliates, then the Issuers shall in lieu of, or in the event of (ii)
above, in addition to, effecting the registration of the New Notes pursuant
to the Exchange Offer Registration Statement use their best efforts to:
(x) cause to be filed a shelf registration statement
pursuant to Rule 415 under the Securities Act, which may be an
amendment to the Exchange Offer Registration Statement (in either
event, the "Shelf Registration Statement"), on or prior to the earlier
to occur of (1) the 45th day after the date on which the Issuers
determine that they are not required to file the Exchange Offer
Registration Statement or (2) the 45th day after the date on which the
Issuers receive notice from a Holder of Transfer Restricted Securities
as contemplated by clause (ii) above (such earlier date being the
"Shelf Filing Deadline"), which Shelf Registration Statement shall
provide for resales of all Transfer Restricted Securities the Holders
of which shall have provided the information required pursuant to
Section 4(b) hereof; and
<PAGE>
6
(y) cause such Shelf Registration Statement to be declared
effective by the Commission on or before the 90th day after the Shelf
Filing Deadline.
The Issuers shall use their best efforts to keep such Shelf Registration
Statement continuously effective, supplemented and amended as required by
the provisions of Sections 6(b) and (c) hereof to the extent necessary to
ensure that it is available for resales of Senior Discount Notes by the
Holders of Transfer Restricted Securities entitled to the benefit of this
Section 4(a) and to ensure that it conforms with the requirements of this
Agreement, the Securities Act and the policies, rules and regulations of
the Commission as announced from time to time, for a period ending on the
second anniversary of the Closing Date.
(b) Provision by Holders of Certain Information in Connection
---------------------------------------------------------
with the Shelf Registration Statement. No Holder of Transfer Restricted
-------------------------------------
Securities may include any of its Transfer Restricted Securities in any
Shelf Registration Statement pursuant to this Agreement unless and until
such Holder furnishes to the Issuers in writing, within 20 business days
after receipt of a request therefor, such information as the Issuers may
reasonably request for use in connection with any Shelf Registration
Statement or Prospectus or preliminary Prospectus included therein. No
Holder of Transfer Restricted Securities shall be entitled to Liquidated
Damages pursuant to Section 5 hereof unless and until such Holder shall
have used its best efforts to provide all such reasonably requested
information. Each Holder as to which any Shelf Registration Statement is
being effected agrees to furnish promptly to the Issuers all information
required to be disclosed in order to make the information previously
furnished to the Issuers by such Holder not materially misleading.
5. Liquidated Damages
(a) If (a) any of the Registration Statements required by this
Agreement is not filed with the Commission on or prior to the date specified for
such filing in this Agreement, (b) any of such Registration Statements has not
been declared effective by the Commission on or prior to the date specified for
such effectiveness in this Agreement (the "Effectiveness Target Date"), (c) the
Exchange Offer has not been Consummated within 30 business days after the
Effectiveness Target Date with respect to the Exchange Offer Registration
Statement or (d) any Registration Statement required by this Agreement is filed
and declared effective but shall thereafter cease to be effective or fail to be
usable for its intended purpose during the period specified in Section 3 or 4 of
this Agreement, as applicable, without being succeeded within two business days
by a post-effective amendment to such Registration Statement that cures such
failure and that is itself immediately declared effective (each such event
referred to in clauses (a) through (d), a "Registration Default"), additional
cash interest ("Liquidated Damages") shall accrue to each Holder of the Senior
Discount Notes in an amount equal to, with respect to the first 90-day period
immediately following the occurrence of the first Registration Default, $.05 per
week per $1,000 principal amount at maturity of Senior Discount Notes held by
such Holder. The amount of Liquidated Damages will increase by an additional
$.05 per week per $1,000 principal amount at maturity of Senior Discount Notes
with respect to each subsequent 90-day period until all Registration Defaults
have been cured, up to a maximum amount of Liquidated Damages for all
Registration Defaults of $.50 per week per $1,000 principal amount at maturity
of Senior Discount Notes. All accrued Liquidated Damages shall be paid to
Holders by the Issuers on semi-annual payment dates that correspond to the
accretion dates (or, on or after December 1, 2003, the semi-annual interest
payment
<PAGE>
7
date) pursuant to the Indenture. Following the cure of all Registration
Defaults relating to any particular Transfer Restricted Securities, the accrual
of Liquidated Damages with respect to such Transfer Restricted Securities will
cease.
All obligations of the Issuers set forth in the preceding paragraph
that have accrued and are outstanding with respect to any Transfer Restricted
Security at the time such security ceases to be a Transfer Restricted Security
shall survive until such time as all such obligations with respect to such
Transfer Restricted Security shall have been satisfied in full.
(b) The Issuers shall notify the Trustee within one business day after
each and every date on which an event occurs in respect of which Liquidated
Damages are required to be paid (an "Event Date"). Liquidated Damages shall be
paid by depositing Liquidated Damages with the Trustee, in trust, for the
benefit of the Holders of the Senior Discount Notes, on or before the applicable
semi-annual payment dates that correspond to the accretion dates (or, on or
after December 1, 2003, the semi-annual interest payment date) (whether or not
any payment other than Liquidated Damages is payable on such Senior Discount
Notes), in immediately available funds in sums sufficient to pay the Liquidated
Damages then due to such Holders. Each obligation to pay Liquidated Damages
shall be deemed to accrue from the applicable date of the occurrence of the
Registration Default.
6. Registration Procedures.
(a) Exchange Offer Registration Statement. In connection with
-------------------------------------
the Exchange Offer, the Issuers shall comply with all of the provisions of
Section 6(c) below to the extent applicable, shall use their best efforts
to effect such exchange to permit the sale of Transfer Restricted
Securities being sold in accordance with the intended method or methods of
distribution thereof, and shall comply with all of the following
provisions:
(i) If in the reasonable opinion of counsel to the Issuers,
there is a question as to whether the Exchange Offer is permitted by
applicable law, the Issuers hereby agree to seek a no-action letter or
other favorable decision from the Commission allowing the Issuers to
Consummate an Exchange Offer for such Senior Discount Notes. The
Issuers hereby agree to pursue the issuance of such a decision to the
Commission staff level but shall not be required to take commercially
unreasonable action to effect a change of Commission policy. The
Issuers hereby agree, however, to (A) participate in telephonic
conferences with the Commission, (B) deliver to the Commission staff
an analysis prepared by counsel to the Issuers setting forth the legal
bases, if any, upon which such counsel has concluded that such an
Exchange Offer should be permitted and (C) diligently pursue a
resolution (which need not be favorable) by the Commission staff of
such submission.
(ii) As a condition to its participation in the Exchange
Offer pursuant to the terms of this Agreement, each Holder of Transfer
Restricted Securities shall furnish, upon the request of the Issuers,
prior to the Consummation thereof, a written representation to the
Issuers (which may be contained in the letter of transmittal
contemplated by the Exchange Offer Registration Statement) to the
effect that (A) it is not an affiliate of the Issuers, (B) it is not
engaged in, and does not intend to engage in, and has no arrangement
or understanding with any person to participate in, a distribution of
the New Notes to be issued in the Exchange Offer and (C) it is
acquiring the New Notes in its ordinary course of business. In
addition, all such Holders of Transfer Restricted Securities shall
otherwise cooperate in the Issuers' preparations for the Exchange
Offer. Each Holder hereby acknowledges and agrees that any Broker-
Dealer and any such Holder using the Exchange Offer to participate in
a distribution
<PAGE>
8
of the securities to be acquired in the Exchange Offer (1) could not under
Commission policy as in effect on the date of this Agreement rely on the
position of the Commission enunciated in Morgan Stanley and Co., Inc.
----------------------------
(available June 5, 1991) and Exxon Capital Holdings Corporation (available
----------------------------------
May 13, 1988), as interpreted in the Commission's letter to Shearman &
Sterling dated July 2, 1993, and similar no-action letters (including Brown
-----
& Wood LLP (available February 7, 1997), and any no-action letter obtained
----------
pursuant to clause (i) above) and (2) must comply with the registration and
prospectus delivery requirements of the Securities Act in connection with a
secondary resale transaction and that such a secondary resale transaction
should be covered by an effective registration statement containing the
selling security holder information required by Item 507 or 508, as
applicable, of Regulation S-K if the resales are of New Notes obtained by
such Holder in exchange for Senior Discount Notes acquired by such Holder
directly from the Issuers.
(iii) Prior to the effectiveness of the Exchange Offer
Registration Statement, the Issuers shall provide a supplemental letter to
the Commission (A) stating that the Issuers are registering the Exchange
Offer in reliance on the position of the Commission enunciated in Exxon
-----
Capital Holdings Corporation (available May 13, 1988), Morgan Stanley and
---------------------------- ------------------
Co., Inc. (available June 5, 1991), Brown & Wood LLP (available February 7,
--------- ----------------
1997) and, if applicable, any no-action letter obtained pursuant to clause
(i) above and (B) including a representation that the Issuers have not
entered into any arrangement or understanding with any Person to distribute
the New Notes to be received in the Exchange Offer and that, to the best of
the Issuers' information and belief, each Holder participating in the
Exchange Offer is acquiring the New Notes in its ordinary course of
business and has no arrangement or understanding with any Person to
participate in the distribution of the New Notes received in the Exchange
Offer.
(b) Shelf Registration Statement. In connection with the Shelf
----------------------------
Registration Statement, (i) the Issuers shall comply with all the provisions of
Section 6(c) below to the extent applicable and shall use their best efforts to
effect such registration to permit the sale of the Transfer Restricted
Securities being sold in accordance with the intended method or methods of
distribution thereof, and pursuant thereto the Issuers will as expeditiously as
possible prepare and file with the Commission a Registration Statement relating
to the registration on any appropriate form under the Securities Act, which form
shall be available for the sale of the Transfer Restricted Securities in
accordance with the intended method or methods of distribution thereof and (ii)
the Issuers shall not be required to undertake an underwritten offering unless
(A) a Holder or Holders requesting to participate in such underwritten offering,
individually or in the aggregate, hold at least $50,000,000 aggregate principal
amount at maturity of Senior Discount Notes and/or New Notes, as the case may
be, and (B) such Holder or Holders request that at least $50,000,000 aggregate
principal amount at maturity of Senior Discount Notes and/or New Notes, as the
case may be, be included in such underwritten offering.
<PAGE>
9
(c) General Provisions. In connection with any Registration
------------------
Statement and any Prospectus required by this Agreement to permit the sale or
resale of Transfer Restricted Securities (including, without limitation, any
Registration Statement and the related Prospectus required to permit resales of
Senior Discount Notes by Broker-Dealers), the Issuers shall:
(i) use their best efforts to keep such Registration
Statement continuously effective and provide all requisite financial
statements for the period specified in Section 3 or 4 of this Agreement, as
applicable; upon the occurrence of any event that would cause any such
Registration Statement or the Prospectus contained therein (A) to contain a
material misstatement or omission or (B) not to be effective and usable for
resale of Transfer Restricted Securities during the period required by this
Agreement, the Issuers shall file promptly an appropriate amendment to such
Registration Statement, in the case of clause (A), correcting any such
misstatement or omission, and, in the case of either clause (A) or (B), use
their best efforts to cause such amendment to be declared effective and
such Registration Statement and the related Prospectus to become usable for
their intended purpose(s) as soon as practicable thereafter;
(ii) prepare and file with the Commission such amendments
and post-effective amendments to the Registration Statement as may be
necessary to keep the Registration Statement effective for the applicable
period set forth in Section 3 or 4 hereof, as applicable, or such shorter
period as will terminate when all Transfer Restricted Securities covered by
such Registration Statement have been sold or otherwise cease to be
Transfer Restricted Securities; cause the Prospectus to be supplemented by
any required Prospectus supplement, and as so supplemented to be filed
pursuant to Rule 424 under the Securities Act, and to comply fully with the
applicable provisions of Rules 424 and 430A under the Securities Act in a
timely manner; and comply with the provisions of the Securities Act with
respect to the disposition of all securities covered by such Registration
Statement during the applicable period in accordance with the intended
method or methods of distribution by the sellers thereof set forth in such
Registration Statement or supplement to the Prospectus;
(iii) in the case of a Shelf Registration, advise the
underwriter(s), if any, and selling Holders promptly and, if requested by
such Persons, to confirm such advice in writing, (A) when the Prospectus or
any Prospectus supplement or post-effective amendment has been filed, and,
with respect to any Registration Statement or any post-effective amendment
thereto, when the same has been declared effective by the Commission, (B)
of any request by the Commission for amendments to the Registration
Statement or amendments or supplements to the Prospectus or for additional
information relating thereto, (C) of the issuance by the Commission of any
stop order suspending the effectiveness of the Registration Statement under
the Securities Act or of the suspension by any state securities commission
of the qualification of the Transfer Restricted Securities for offering or
sale in any jurisdiction, or the initiation of any proceeding for any of
the preceding purposes, (D) if at any time the representations and
warranties of the Issuers contemplated by paragraph (xi) below cease to be
true and correct or (E) of the existence of any fact or the happening of
any event that makes any statement of a material fact made in the
Registration Statement, the Prospectus, any amendment or
<PAGE>
10
supplement thereto, or any document incorporated by reference therein
untrue, or that requires the making of any additions to or changes in the
Registration Statement or the Prospectus in order to make the statements
therein not misleading. If at any time the Commission shall issue any stop
order suspending the effectiveness of the Registration Statement, or any
state securities commission or other regulatory authority shall issue an
order suspending the qualification or exemption from qualification of the
Transfer Restricted Securities under state securities or Blue Sky laws, the
Issuers shall use their best efforts to obtain the withdrawal or lifting of
such order at the earliest possible time;
(iv) in the case of a Shelf Registration, furnish to each of the
selling or exchanging Holders and each of the underwriter(s), if any,
before filing with the Commission, copies of any Registration Statement or
any Prospectus included therein or any amendments or supplements to any
such Registration Statement or Prospectus (excluding all documents
incorporated by reference after the initial filing of such Registration
Statement, if any), which documents will be subject to the review of such
Holders and underwriter(s), if any, for a period of at least five business
days, and the Issuers will not file any such Registration Statement or
Prospectus or any amendment or supplement to any such Registration
Statement or Prospectus to which selling Holders of a majority in aggregate
principal amount of Transfer Restricted Securities covered by such
Registration Statement or the underwriter(s), if any, shall reasonably
object within five business days after the receipt thereof. A selling
Holder or underwriter, if any, may reasonably object to such filing if such
Registration Statement, amendment, Prospectus or supplement, as applicable,
as proposed to be filed, contains a material misstatement or omission;
(v) in the case of a Shelf Registration, promptly prior to the
filing of any document that is to be incorporated by reference into a
Registration Statement or Prospectus, if any, provide copies of such
document to the selling Holders and to the underwriter(s), if any, make the
Issuers' representatives available for discussion of such document and
other customary due diligence matters, and include such information in such
document prior to the filing thereof as such selling Holders or
underwriter(s), if any, reasonably may request;
(vi) in the case of a Shelf Registration, make available at
reasonable times during normal business hours for inspection by the selling
Holders, any underwriter participating in any disposition pursuant to such
Registration Statement, and any attorney or accountant retained by such
selling Holders or any of the underwriter(s), all financial and other
records, pertinent corporate documents and properties of the Issuers and
cause the Issuers' officers, directors, managers and employees to supply
all information reasonably requested by any such Holder, underwriter,
attorney or accountant in connection with such Registration Statement
subsequent to the filing thereof and prior to its effectiveness;
(vii) in the case of a Shelf Registration, if requested
by any selling Holders or the underwriter(s), if any, promptly incorporate
in any Registration Statement or Prospectus, pursuant to a supplement or
post-effective amendment if necessary, such information as such selling
Holders and underwriter(s), if any, may reasonably request to
<PAGE>
11
have included therein, including, without limitation, information relating
to the "Plan of Distribution" of the Transfer Restricted Securities,
information with respect to the principal amount of Transfer Restricted
Securities being sold to such underwriter(s), the purchase price being paid
therefor and any other terms of the offering of the Transfer Restricted
Securities to be sold in such offering, and make all required filings of
such Prospectus supplement or post-effective amendment as soon as
practicable after the Issuers are notified of the matters to be
incorporated in such Prospectus supplement or post-effective amendment;
(viii) cause the Transfer Restricted Securities covered
by the Registration Statement to be rated with the appropriate rating
agencies, if so requested by the Holders of a majority in aggregate
principal amount of Senior Discount Notes covered thereby or the
underwriter(s), if any;
(ix) in the case of a Shelf Registration, furnish to each
selling Holder and each of the underwriter(s), if any, without charge, at
least one copy of the Registration Statement, as first filed with the
Commission, and of each amendment thereto, including all documents
incorporated by reference therein, if any, and all exhibits (including
exhibits incorporated therein by reference);
(x) in the case of a Shelf Registration, deliver to each
selling Holder and each of the underwriter(s), if any, without charge, as
many copies of the Prospectus (including each preliminary prospectus) and
any amendment or supplement thereto as such Persons reasonably may request;
the Issuers hereby consent to the use of the Prospectus and any amendment
or supplement thereto by each of the selling Holders and each of the
underwriter(s), if any, in connection with the offering and the sale of the
Transfer Restricted Securities covered by the Prospectus or any amendment
or supplement thereto;
(xi) in the case of a Shelf Registration, enter into such
agreements (including an underwriting agreement) and make such
representations and warranties and take all such other actions in
connection therewith in order to expedite or facilitate the disposition of
the Transfer Restricted Securities pursuant to any Registration Statement
contemplated by this Agreement, all to such extent as may reasonably be
requested by any purchaser or by any Holder of Transfer Restricted
Securities or underwriter in connection with any sale or resale pursuant to
any Registration Statement contemplated by this Agreement, and in
connection with an Underwritten Registration, the Issuers shall:
(A) upon request, furnish to each selling Holder and each
underwriter, if any, in such substance and scope as they may
reasonably request and as are customarily made by issuers to
underwriters in primary underwritten offerings, upon the date of the
effectiveness of the Shelf Registration Statement:
(1) a certificate, dated the date of the effectiveness
of the Shelf Registration Statement, signed by (x) the Chief
Executive Officer or the President and (y) the Vice President-
Finance of the
<PAGE>
12
Issuers, confirming, as of the date thereof, such matters as such
parties may reasonably request;
(2) an opinion, dated the date of the effectiveness of
the Shelf Registration Statement, of counsel for the Issuers,
covering such matters as such parties may reasonably request, and
in any event including a statement to the effect that such
counsel has participated in conferences with officers of the
Issuers and with the independent public accountants for the
Issuers concerning the preparation of such Registration Statement
and the related Prospectus and, although such counsel has made
certain inquiries and investigations in connection with the
preparation of such Registration Statement and the related
Prospectus, it is not passing upon and does not assume any
responsibility for the accuracy, fairness or completeness of the
statements contained in such Registration Statement and the
related Prospectus, and on the basis of the foregoing such
counsel's work in connection with this matter, relying as to
questions of fact material to such opinion upon the opinions and
statements of officers of the Issuers, nothing came to such
counsel's attention to cause such counsel to believe that the
applicable Registration Statement, at the time such Registration
Statement or any post-effective amendment thereto became
effective, included or includes an untrue statement of a material
fact or omitted or omits to state a material fact necessary to
make the statements therein, in light of the circumstances under
which they were made, not misleading or that the Prospectus
contained in such Registration Statement as of its date, included
or includes an untrue statement of a material fact or omitted or
omits to state a material fact necessary to make the statements
therein, in light of the circumstances under which they were
made, not misleading (it being understood that such counsel need
express no belief or opinion with respect to the financial
statements, notes and schedules and other financial and
statistical data included therein or omitted therefrom).
(3) an opinion, dated the date of effectiveness of the
Shelf Registration Statement, of special counsel for the Issuers,
covering such regulatory matters as such parties may reasonably
request, concerning the Communications Act of 1934, as amended by
the Telecommunications Act of 1996, or any order, rule or
regulation of the Federal Communications Commission, as
pertaining to the operations of the Issuers; and
(4) a customary comfort letter, dated the date of the
effectiveness of the Shelf Registration Statement, from the
Issuers' independent accountants, in the customary form and
covering matters of the type customarily covered in comfort
letters by underwriters in connection with primary underwritten
offerings.
<PAGE>
13
(B) set forth in full or incorporate by reference in
the underwriting agreement, if any, the indemnification
provisions and procedures of Section 8 hereof with respect to all
parties to be indemnified pursuant to said Section; and
(C) deliver such other documents and certificates as
may be reasonably requested by such parties to evidence
compliance with clause (A) above and with any customary
conditions contained in the underwriting agreement or other
agreement entered into by the Issuers pursuant to this clause
(xi), if any.
If at any time the representations and warranties of the
Issuers contemplated in clause (A)(1) above cease to be true and
correct, the Issuers shall so advise the Initial Purchasers and the
underwriter(s), if any, and each selling Holder promptly and, if
requested by such Persons, shall confirm such advice in writing.
(xii) in the case of a Shelf Registration, prior to any
public offering of Transfer Restricted Securities, cooperate with the
selling Holders, the underwriter(s), if any, and their respective
counsel in connection with the registration and qualification of the
Transfer Restricted Securities under the securities or Blue Sky laws
of such jurisdictions as the selling Holders or underwriter(s) may
reasonably request and do any and all other acts or things necessary
or advisable to enable the disposition in such jurisdictions of the
Transfer Restricted Securities covered by the Shelf Registration
Statement; provided, however, that none of the Issuers shall be
required to register or qualify as a foreign corporation where it is
not now so registered or qualified or to take any action that would
subject it to the service of process in suits or to taxation, other
than as to matters and transactions relating to the Registration
Statement, in any jurisdiction where it is not now so subject;
(xiii) in the case of a Shelf Registration, shall issue,
upon the request of any Holder of Senior Discount Notes covered by the
Shelf Registration Statement, New Notes in the same amount as the
Senior Discount Notes surrendered to the Issuers by such Holder in
exchange therefor or being sold by such Holder, such New Notes to be
registered in the name of such Holder or in the name of the
purchaser(s) of such Senior Discount Notes, as the case may be; in
return, the Senior Discount Notes held by such Holder shall be
surrendered to the Issuers for cancellation;
(xiv) in the case of a Shelf Registration, cooperate with
the selling Holders and the underwriter(s), if any, to facilitate the
timely preparation and delivery of certificates representing Transfer
Restricted Securities to be sold and not bearing any restrictive
legends and enable such Transfer Restricted Securities to be in such
denominations and registered in such names as the Holders or the
underwriter(s), if any, may request at least two business days prior
to any sale of Transfer Restricted Securities made by such
underwriter(s);
(xv) use their best efforts to cause the Transfer
Restricted Securities covered by the Registration Statement to be
registered with or approved by such other
<PAGE>
14
governmental agencies or authorities as may be necessary to enable the
seller or sellers thereof or the underwriter(s), if any, to consummate
the disposition of such Transfer Restricted Securities, subject to the
proviso contained in clause (xii) above;
(xvi) if any fact or event contemplated by clause
(c)(iii)(E) above shall exist or have occurred, prepare a supplement
or post-effective amendment to the Registration Statement or related
Prospectus or any document incorporated therein by reference or file
any other required document so that, as thereafter delivered to the
purchasers of Transfer Restricted Securities, the Prospectus will not
contain an untrue statement of a material fact or omit to state any
material fact necessary to make the statements therein not misleading;
(xvii) provide CUSIP numbers for all Transfer Restricted
Securities not later than the effective date of the Registration
Statement and provide certificates for the Transfer Restricted
Securities;
(xviii) cooperate and assist in any filings required to be
made with the NASD and in the performance of any due diligence
investigation by any underwriter (including any "qualified independent
underwriter") that is required to be retained in accordance with the
rules and regulations of the NASD, and use their best efforts to cause
such Registration Statement to be declared effective by the Commission
and approved by such governmental agencies or authorities as may be
necessary to enable the Holders selling Transfer Restricted Securities
to consummate the disposition of such Transfer Restricted Securities;
provided, however, that none of the Issuers shall be required to
register or qualify as a foreign corporation where it is not now so
registered or qualified or to take any action that would subject it to
service of process in suits or to taxation, other than as to matters
and transactions relating to the Registration Statement, in any
jurisdiction where it is not now so subject;
(xix) otherwise use their best efforts to comply with all
applicable rules and regulations of the Commission, and make generally
available to their security holders, as soon as practicable, a
consolidated earning statement meeting the requirements of Rule 158
(which need not be audited) for the twelve-month period (A) commencing
at the end of any fiscal quarter in which Transfer Restricted
Securities are sold to underwriters in a firm or best efforts
Underwritten Offering or (B) if not sold to underwriters in such an
offering, beginning with the first month of the respective Issuers'
first fiscal quarter commencing after the effective date of the
Registration Statement;
(xx) cause the Indenture to be qualified under the TIA not
later than the effective date of the first Registration Statement
required by this Agreement, and, in connection therewith, cooperate
with the Trustee and the Holders of Senior Discount Notes to effect
such changes to the Indenture as may be required for such Indenture to
be so qualified in accordance with the terms of the TIA, and execute
and use their best efforts to cause the Trustee to execute all
documents that may be required to effect such changes and all other
forms and documents required to be filed with the Commission to enable
such Indenture to be so qualified in a timely manner; and
<PAGE>
15
(xxi) provide promptly to each Holder upon request each
document filed with the Commission pursuant to the requirements of
Section 13 and Section 15 of the Exchange Act.
Each Holder agrees by acquisition of a Transfer Restricted
Security that, upon receipt of any notice from the Issuers of the existence
of any fact of the kind described in Section 6(c)(iii)(E) hereof, such
Holder will forthwith discontinue disposition of Transfer Restricted
Securities pursuant to the applicable Registration Statement until such
Holder's receipt of the copies of the supplemented or amended Prospectus
contemplated by Section 6(c)(xvi) hereof, or until it is advised in writing
(the "Advice") by the Issuers that the use of the Prospectus may be
resumed, and has received copies of any additional or supplemental filings
that are incorporated by reference in the Prospectus. If so directed by
the Issuers, each Holder will deliver to the Issuers (at the Issuers'
expense) all copies, other than permanent file copies then in such Holder's
possession, of the Prospectus covering such Transfer Restricted Securities
that was current at the time of receipt of such notice. In the event the
Issuers shall give any such notice, the time period regarding the
effectiveness of such Registration Statement set forth in Section 3 or 4
hereof, as applicable, shall be extended by the number of days during the
period from and including the date of the giving of such notice pursuant to
Section 6(c)(iii)(E) hereof to and including the date when each selling
Holder covered by such Registration Statement shall have received the
copies of the supplemented or amended Prospectus contemplated by Section
6(c)(xvi) hereof or shall have received the Advice.
7. Registration Expenses.
All expenses incident to the Issuers' performance of or
compliance with this Agreement will be borne by the Issuers, regardless of
whether a Registration Statement becomes effective, including without
limitation: (i) all registration and filing fees and expenses (including
filings made by any purchaser or Holder with the NASD (and, if applicable,
the fees and expenses of any "qualified independent underwriter" and its
one counsel that may be required by the rules and regulations of the
NASD)); (ii) all fees and expenses of compliance with federal securities
and state Blue Sky or securities laws (including reasonable and documented
fees and disbursements of counsel for the underwriters or selling Holders
in connection with Blue Sky qualifications of the Transfer Restricted
Securities under the laws of such jurisdictions as the managing
underwriters or Holders of a majority in aggregate principal amount of the
Transfer Restricted Securities being sold may reasonably designate); (iii)
all expenses of printing (including printing certificates for the New Notes
to be issued in the Exchange Offer and printing of Prospectuses), and
associated messenger and delivery services and telephone; (iv) all fees and
disbursements of counsel for the Issuers; (v) all application and filing
fees in connection with listing Senior Discount Notes on a national
securities exchange or automated quotation system, and the obtaining of a
rating of the Senior Discount Notes, if applicable; (vi) all fees and
disbursements of independent certified public accountants of the Issuers
(including the expenses of any special audit and comfort letters required
by or incident to such performance) and (vii) fees and expenses of other
Persons retained by the Issuers.
The Issuers will, in any event, bear their internal expenses
(including, without limitation, all salaries and expenses of their officers
and employees performing legal or
<PAGE>
16
accounting duties), the expenses of any annual audit and the fees and
expenses of any Person, including special experts, retained by the Issuers.
8. Indemnification and Contribution.
(a) In connection with a Shelf Registration Statement or in
connection with any delivery of a Prospectus contained in an Exchange Offer
Registration Statement by any participating Broker-Dealer or the Initial
Purchaser, as applicable, who seeks to sell New Notes, the Issuers, jointly and
severally, shall indemnify and hold harmless each Holder of Transfer Restricted
Securities included within any such Shelf Registration Statement and each
participating Broker-Dealer or the Initial Purchasers selling New Notes, and
each person, if any, who controls any such person within the meaning of Section
15 of the Securities Act (each, a "Participant") from and against any loss,
claim, damage, liability and expense reasonably incurred by such Participant, or
any action in respect thereof (including, but not limited to, any loss, claim,
damage, liability, expense or action relating to purchases and sales of Senior
Discount Notes and New Notes) to which such Participant or controlling person
may become subject, under the Securities Act or otherwise, insofar as such loss,
claim, damage, liability, expense or action arises out of, or is based upon, (i)
any untrue statement or alleged untrue statement of a material fact contained in
any such Registration Statement or any prospectus forming part thereof or in any
amendment or supplement thereto or (ii) the omission or alleged omission to
state therein a material fact required to be stated therein or necessary to make
the statements therein not misleading, and shall reimburse each Participant
promptly upon demand with reasonable documentation for any legal or other
expenses reasonably incurred by such Participant in connection with
investigating or defending or preparing to defend against any such loss, claim,
damage, liability, expense or action as such expenses are incurred; provided,
however, that (i) the Issuers shall not be liable in any such case to the extent
that any such loss, claim, damage, liability, expense or action arises out of,
or is based upon, any untrue statement or alleged untrue statement or omission
or alleged omission made in any such Registration Statement or any prospectus
forming part thereof or in any such amendment or supplement in reliance upon and
in conformity with written information furnished to the Issuers by or on behalf
of any Participant specifically for inclusion therein; and provided further that
as to any preliminary Prospectus or Prospectus, the indemnity agreement
contained in this Section 8(a) shall not inure to the benefit of any such
Participant or any controlling person of such Participant on account of any
loss, claim, damage, liability, expense or action arising from the sale of the
New Notes to any person by that Participant if (i) that Participant failed to
send or give a copy of the Prospectus, as the same may be amended or
supplemented, to that person within the time required by the Securities Act and
(ii) the untrue statement or alleged untrue statement of a material fact or
omission or alleged omission to state a material fact in such preliminary
Prospectus or Prospectus was corrected in the Prospectus (including amendments
thereto), unless, in each case, such failure resulted from non-compliance by the
Issuers with Section 6(c)(x). The foregoing indemnity agreement is in addition
to any liability which the Issuers may otherwise have to any Participant or to
any controlling person of that Participant.
(b) Each Participant, severally and not jointly, shall indemnify and
hold harmless the Issuers, their respective directors, managers, officers,
employees or agents and each person, if any, who controls the Issuers within the
meaning of Section 15 of the Securities Act, from and against any loss, claim,
damage, liability, and expense reasonably incurred by such Person, or any action
in respect thereof, to which the Issuers or any such director, manager, officer,
employees or agents or controlling person may become subject, under the
Securities Act or otherwise, insofar as such loss, claim, damage, liability,
expense or action arises out of, or is based upon, (i) any untrue statement or
alleged untrue
<PAGE>
17
statement of a material fact contained in any preliminary Prospectus,
Registration Statement or Prospectus or in any amendment or supplement thereto
or (ii) the omission or alleged omission to state therein a material fact
required to be stated therein or necessary to make the statements therein not
misleading, but in each case only to the extent that the untrue statement or
alleged untrue statement or omission or alleged omission was made in reliance
upon and in conformity with written information furnished to the Issuers by or
on behalf of that Participant specifically for inclusion herein, and shall
reimburse the Issuers and any such director, manager, officer, employee or agent
or controlling person for any legal or other expenses reasonably incurred by the
Issuers or any such director, manager, officer, employee or agent or controlling
person in connection with investigating or defending or preparing to defend
against any such loss, claim, damage, liability or action as such expenses are
incurred. The foregoing indemnity agreement is in addition to any liability
which any Participant may otherwise have to the Issuers or any such director,
manager, officer or controlling person.
(c) Promptly after receipt by an indemnified party under this Section
8 of notice of any claim or the commencement of any action, the indemnified
party shall, if a claim in respect thereof is to be made against the
indemnifying party under this Section 8, notify the indemnifying party in
writing of the claim or the commencement of that action; provided, however, that
the failure to notify the indemnifying party shall not relieve it from any
liability which it may have under this Section 8 except to the extent it has
been materially prejudiced by such failure and, provided further, that the
failure to notify the indemnifying party shall not relieve it from any liability
which it may have to an indemnified party otherwise than under this Section 8.
If any such claim or action shall be brought against an indemnified party, and
it shall have notified the indemnifying party thereof, the indemnifying party
shall be entitled to participate therein and, to the extent that it wishes,
jointly with any other similarly notified indemnifying party, to assume the
defense thereof with counsel reasonably satisfactory to the indemnified party.
After notice from the indemnifying party to the indemnified party of its
election to assume the defense of such claim or action, the indemnifying party
shall not be liable to the indemnified party under this Section 8 for any legal
or other expenses subsequently incurred by the indemnified party in connection
with the defense thereof other than reasonable costs of investigation; provided,
however, that the indemnified party shall have the right to employ separate
counsel to represent jointly the indemnified party and those other Participants
and their respective officers, employees and controlling persons who may be
subject to liability arising out of any claim in respect of which indemnity may
be sought by the Participants against the indemnifying party under this Section
8 if, in the reasonable judgment of the indemnified party it is advisable for
the indemnified party and those Participants, officers, employees and
controlling persons to be jointly represented by separate counsel, and in that
event the fees and expenses of such separate counsel shall be paid by the
indemnifying party only if (i) the indemnifying party has agreed to pay such
fees or expenses, (ii) the indemnifying party has failed to assume the defense
of such claim or (iii) in the reasonable judgment of any such Person, based upon
written advice of its counsel, a conflict of interest may exist between such
Person and the indemnifying party with respect to such claims and the
representation of both would be inappropriate (in which case, if the Person
notifies the indemnifying party in writing that such Person elects to employ
separate counsel at the expense of the indemnifying party, the indemnifying
party shall not have the right to assume the defense of such claim on behalf of
such Person). In no event shall the indemnifying parties be liable for the fees
and expenses of more than one counsel (in addition to local counsel). Each
indemnified party, as a condition of the indemnity agreements contained in
Section 8, shall use its best efforts to cooperate with the indemnifying party
in the defense of any such action or claim. No indemnifying party shall (i)
without the prior written consent of the indemnified parties (which consent
shall not be unreasonably withheld), settle or compromise or consent to the
entry of any judgment with respect to any pending or
<PAGE>
18
threatened claim, action, suit or proceeding in respect of which indemnification
or contribution may be sought hereunder (whether or not the indemnified parties
are actual or potential parties to such claim or action) unless such settlement,
compromise or consent includes an unconditional release of each indemnified
party from all liability arising out of such claim, action, suit or proceeding
or (ii) be liable for any settlement of any such action effected without its
written consent (which consent shall not be unreasonably withheld), but if
settled with its written consent or if there be a final judgment of the
plaintiff in any such action, the indemnifying party agrees to indemnify and
hold harmless any indemnified party from and against any loss or liability by
reason of such settlement or judgment.
(d) If the indemnification provided for in this Section 8 shall for
any reason be unavailable to or insufficient to hold harmless an indemnified
party under Section 8(a) or 8(b) in respect of any loss, claim, damage or
liability, or any action in respect thereof, referred to therein, then each
indemnifying party shall, in lieu of indemnifying such indemnified party,
contribute to the amount paid or payable by such indemnified party as a result
of such loss, claim, damage or liability, or action in respect thereof, in such
proportion as shall be appropriate to reflect the relative fault of the Issuers
on the one hand and the Participants on the other with respect to the statements
or omissions which resulted in such loss, claim, damage or liability, or action
in respect thereof, as well as any other relevant equitable considerations. The
relative fault shall be determined by reference to whether the untrue or alleged
untrue statement of a material fact or omission or alleged omission to state a
material fact relates to information supplied by the Issuers or the
Participants, the intent of the parties and their relative knowledge, access to
information and opportunity to correct or prevent such statement or omission.
The Issuers and the Participants agree that it would not be just and equitable
if contributions pursuant to this Section 8(d) were to be determined by pro rata
allocation (even if the Participants were treated as one entity for such
purpose) or by any other method of allocation which does not take into account
the equitable considerations referred to herein. The amount paid or payable by
an indemnified party as a result of the loss, claim, damage or liability, or
action in respect thereof, referred to above in this Section 8(d) shall be
deemed to include, for purposes of this Section 8(d), any legal or other
expenses reasonably incurred by such indemnified party in connection with
investigating or defending any such action or claim. Notwithstanding the
provisions of this Section 8(d), no Participant shall be required to contribute
any amount in excess of the amount by which proceeds received by such
Participant from an offering of the Senior Discount Notes exceeds the amount of
any damages which such Participant has otherwise paid or become liable to pay by
reason of any untrue or alleged untrue statement or omission or alleged
omission. No person guilty of fraudulent misrepresentation (within the meaning
of Section 11(f) of the Securities Act) shall be entitled to contribution from
any person who was not guilty of such fraudulent misrepresentation. The
Participants' obligations to contribute as provided in this Section 8(d) are
several and not joint.
9. Rule 144A.
Each of the Issuers hereby agrees with each Holder, for so long as any
Transfer Restricted Securities remain outstanding, to make available to any
Holder or beneficial owner of Transfer Restricted Securities in connection with
any sale thereof and any prospective purchaser of such Transfer Restricted
Securities from such Holder or beneficial owner, the information required by
Rule 144A(d)(4) under the Securities Act in order to permit resales of such
Transfer Restricted Securities pursuant to Rule 144A.
<PAGE>
19
10. Participation in Underwritten Registrations.
No Holder may participate in any Underwritten Registration hereunder
unless such Holder (a) agrees to sell such Holder's Transfer Restricted
Securities on the basis provided in any underwriting arrangements approved by
the Persons entitled hereunder to approve such arrangements and (b) completes
and executes all reasonable questionnaires, powers of attorney, indemnities,
underwriting agreements, lock-up letters and other documents required under the
terms of such underwriting arrangements.
11. Selection of Underwriters.
The Holders of Transfer Restricted Securities covered by the Shelf
Registration Statement who desire to do so may sell such Transfer Restricted
Securities in an Underwritten Offering. In any such Underwritten Offering, the
investment banker or investment bankers and manager or managers that will
administer the offering will be selected by the Holders of a majority in
aggregate principal amount of the Transfer Restricted Securities included in
such offering; provided that such investment bankers and managers must be
reasonably satisfactory to the Issuers.
12. Miscellaneous.
(a) Remedies. The Issuers agree that monetary damages (including
--------
Liquidated Damages) would not be adequate compensation for any loss
incurred by reason of a breach by it of the provisions of this Agreement
and hereby agree to waive the defense in any action for specific
performance that a remedy at law would be adequate.
(b) No Inconsistent Agreements. The Issuers will not on or after
--------------------------
the date of this Agreement enter into any agreement with respect to their
securities that is inconsistent with the rights granted to the Holders in
this Agreement or otherwise conflicts with the provisions hereof. The
Issuers have not previously entered into any agreement granting any
registration rights with respect to their securities to any Person. The
rights granted to the Holders hereunder do not in any way conflict with and
are not inconsistent with the rights granted to the holders of the Issuers'
securities under any agreement in effect on the date hereof.
(c) Adjustments Affecting the Senior Discount Notes. The Issuers
-----------------------------------------------
will not take any action, or permit any change to occur, with respect to
Senior Discount Notes that would materially and adversely affect the
ability of the Holders to Consummate any Exchange Offer unless such action
or change is required by applicable law.
(d) Amendments and Waivers. The provisions of this Agreement may
----------------------
not be amended, modified or supplemented, and waivers or consents to or
departures from the provisions hereof may not be given unless the Issuers
have obtained the written consent of Holders of a majority of the
outstanding principal amount of then outstanding Transfer Restricted
Securities. Notwithstanding the foregoing, a waiver or consent to
departure from the provisions hereof that relates exclusively to the rights
of Holders whose securities are being tendered pursuant to the Exchange
Offer and that does not affect directly or indirectly the rights of other
Holders whose securities are not being tendered pursuant to such Exchange
Offer may
<PAGE>
20
be given by the Holders of a majority of the outstanding principal amount
of then outstanding Transfer Restricted Securities being tendered or
registered.
(e) Notices. All notices and other communications provided for
-------
or permitted hereunder shall be made in writing by hand-delivery, first-
class mail (registered or certified, return receipt requested), telex,
telecopier, or air courier guaranteeing overnight delivery:
(i) if to a Holder, at the address of such Holder maintained
by the Registrar under the Indenture; and
(ii) if to the Issuers:
Avalon Cable LLC
Avalon Cable of Michigan Holdings, Inc.
800 Third Avenue, Suite 3100
New York, New York 10022
Facsimile: 212-501-8695
With a copy to:
ABRY Partners, Inc.
18 Newbury Street
Boston, Massachusetts 02166
Facsimile: 617-859-8797
With a copy to:
Jill Sugar Factor
Kirkland & Ellis
200 East Randolph Drive
Chicago, Illinois 60601
Facsimile: 312-861-2200
All such notices and communications shall be deemed to have been
duly given: at the time delivered by hand, if personally delivered; five
business days after being deposited in the mail, postage prepaid, if
mailed; when answered back, if telexed; when receipt acknowledged, if
telecopied; and on the next business day, if timely delivered to an air
courier guaranteeing overnight delivery.
Copies of all such notices, demands or other communications shall
be concurrently delivered by the Person giving the same to the Trustee at
the address specified in the Indenture.
(f) Successors and Assigns. This Agreement shall inure to the
----------------------
benefit of and be binding upon the successors and assigns of each of the
parties, including without limitation and without the need for an express
assignment, subsequent Holders of Transfer
<PAGE>
21
Restricted Securities; provided, however, that this Agreement shall not
inure to the benefit of or be binding upon a successor or assign of a
Holder unless and to the extent such successor or assign acquired Transfer
Restricted Securities from such Holder.
(g) Counterparts. This Agreement may be executed in any number
------------
of counterparts and by the parties hereto in separate counterparts, each of
which when so executed shall be deemed to be an original and all of which
taken together shall constitute one and the same agreement.
(h) Headings. The headings in this Agreement are for convenience
--------
of reference only and shall not limit or otherwise affect the meaning
hereof.
(i) Governing Law. THIS AGREEMENT SHALL BE GOVERNED BY AND
-------------
CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK.
(j) Severability. In the event that any one or more of the
------------
provisions contained herein, or the application thereof in any
circumstance, is held invalid, illegal or unenforceable, the validity,
legality and enforceability of any such provision in every other respect
and of the remaining provisions contained herein shall not be affected or
impaired thereby.
(k) Entire Agreement. This Agreement together with the other
----------------
transaction documents is intended by the parties as a final expression of
their agreement and intended to be a complete and exclusive statement of
the agreement and understanding of the parties hereto in respect of the
subject matter contained herein. There are no restrictions, promises,
warranties or undertakings, other than those set forth or referred to
herein with respect to the registration rights granted by the Issuers with
respect to the Transfer Restricted Securities. This Agreement supersedes
all prior agreements and understandings between the parties with respect to
such subject matter.
(l) Required Consents. Whenever the consent or approval of
-----------------
Holders of a specified percentage of Transfer Restricted Securities is
required hereunder, Transfer Restricted Securities held by the Issuers or
its affiliates (as such term is defined in Rule 405 under the Securities
Act) shall not be counted in determining whether such consent or approval
was given by the Holders of such required percentage.
<PAGE>
22
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first written above.
AVALON CABLE LLC
/S/ Joel C. Cohen
By:-----------------------------
Name: Joel C. Cohen
Title: President, Chief Executive
Officer and Secretary
AVALON CABLE OF MICHIGAN
HOLDINGS, INC.
/S/ Joel C. Cohen
By:-----------------------------
Name: Joel C. Cohen
Title: President, Chief Executive
Officer and Secretary
AVALON CABLE HOLDINGS FINANCE, INC.
/S/ Joel C. Cohen
By:-----------------------------
Name: Joel C. Cohen
Title: President, Chief Executive
Officer and Secretary
Accepted as of the date thereof:
LEHMAN BROTHERS INC.,
on behalf of the Initial Purchasers
By: /S/ Raymond A. Cubero
--------------------------
Name: Raymond A. Cubereo
Title: Sr. Vice President
<PAGE>
EXHIBIT 5.1
KIRKLAND & ELLIS
PARTNERSHIPS INCLUDING PROFESSIONAL CORPORATIONS
200 East Randolph Drive
Chicago, Illinois 60601
To Call Writer Direct: 312 861-2000 Facsimile:
312 861-2000 312 861-2200
May 26, 1999
Avalon Cable LLC,
Avalon Cable Holdings Finance, Inc.,
Avalon Cable of Michigan Holdings, Inc.,
Avalon Cable of Michigan, Inc.
800 Third Street
Suite 3100
New York, NY 10022
Re: Avalon Cable LLC,
Avalon Cable Holdings Finance, Inc.,
Avalon Cable of Michigan Holdings, Inc., and
Avalon Cable of Michigan, Inc.
Registration Statement on Form S-4
Registration No. 333-75415
---------------------------------------------
Ladies and Gentlemen:
We are issuing this opinion letter in our capacity as special legal counsel
to Avalon Cable LLC, a Delaware limited liability company ("Avalon Holdings"),
and Avalon Cable Holdings Finance, Inc., a Delaware corporation ("Holdings
Finance" and, together with Avalon Holdings, the "Issuers") and Avalon Cable of
Michigan Holdings, Inc., a Delaware corporation ("Michigan Holdings"), and
Avalon Cable of Michigan, Inc., a Pennsylvania corporation, ("Avalon Michigan"
and, together with Michigan Holdings, the "Guarantors" and, together with the
Issuers, the "Registrants"), in connection with the proposed registration by the
Issuers of up to $196,000,000 in aggregate principal amount of the Issuers'
11 7/8% Series B Senior Discount Notes due 2008 (the "Exchange Notes"), pursuant
to a Registration Statement on Form S-4 (Registration No. 333-75415) originally
filed with the Securities and Exchange Commission (the "Commission") on March
31, 1999, under the Securities Act of 1933, as amended (the "Act") (such
Registration Statement, as amended or supplemented, is hereinafter referred to
as the "Registration Statement"). The obligations of Avalon Holdings under the
Exchange Notes will be guaranteed by the Guarantors (the
<PAGE>
KIRKLAND & ELLIS
May 26, 1999
Page 2
"Guarantees"). The Exchange Notes are to be issued pursuant to the Indenture (as
supplemented, the "Indenture"), dated as of December 10, 1998, among Avalon
Holdings, Michigan Holdings and Holdings Finance, as issuers, and The Bank of
New York, as trustee, as supplemented by the Supplemental Indenture (the
"Supplemental Indenture"), dated as of March 26, 1999, among Avalon Holdings,
Michigan Holdings and Holdings Finance, as issuers, Avalon Michigan, as
guarantor, and The Bank of New York, as trustee. The Guarantees are to be issued
pursuant to the Supplemental Indenture. The Exchange Notes and the Guarantees
are to be issued in exchange for and in replacement of the Issuers' outstanding
11 7/8% Senior Discount Notes due 2008 (the "Old Notes"), of which $196,000,000
in aggregate principal amount is outstanding.
In that connection, we have examined originals, or copies certified or
otherwise identified to our satisfaction, of such documents, corporate records
and other instruments as we have deemed necessary for the purposes of this
opinion, including (i) the Certificate of Incorporation and By-Laws or limited
liability company agreement, as applicable, of the Registrants, (ii) minutes and
records of the corporate or limited liability company proceedings of the
Registrants with respect to the issuance of the Exchange Notes and the
Guarantees, (iii) the Registration Statement, and (iv) the Registration Rights
Agreement, dated December 10, 1998, among Avalon Holdings, Michigan Holdings,
Finance Holdings, Lehman Brothers Inc. and Barclays Capital.
For purposes of this opinion, we have assumed the authenticity of all
documents submitted to us as originals, the conformity to the originals of all
documents submitted to us as copies and the authenticity of the originals of all
documents submitted to us as copies. We have also assumed the genuineness of
the signatures of persons signing all documents in connection with which this
opinion is rendered, the authority of such persons signing on behalf of the
parties thereto other than the Registrants and the due authorization, execution
and delivery of all documents by the parties thereto other than the Registrants.
As to any facts material to the opinions expressed herein which we have not
independently established or verified, we have relied upon statements and
representations of officers and other representatives of the Registrants and
others. In rendering the opinion below regarding Avalon Michigan, we have relied
on the opinion of Kirkpatrick & Lockhart LLP, which is filed as Exhibit 99.4 to
the Registration Statement.
Our opinion expressed below is subject to the qualifications that we
express no opinion as to the applicability of, compliance with, or effect of (i)
any bankruptcy, insolvency, reorganization,
<PAGE>
KIRKLAND & ELLIS
May 26, 1999
Page 3
fraudulent transfer, fraudulent conveyance, moratorium or other similar law
affecting the enforcement of creditors' rights generally, (ii) general
principles of equity (regardless of whether enforcement is considered in a
proceeding in equity or at law), (iii) public policy considerations which may
limit the rights of parties to obtain certain remedies and (iv) any laws except
the laws of the State of New York, the General Corporation Law of the State of
Delaware and the Delaware case law decided thereunder, the Limited Liability
Company Act of the State of Delaware and the federal laws of the United States
of America.
Based upon and subject to the assumptions, qualifications, assumptions and
limitations and the further limitations set forth below, we are of the opinion
that when (i) the Registration Statement becomes effective, (ii) the Indenture
has been duly qualified under the Trust Indenture Act of 1939, as amended, and
(iii) the Exchange Notes have been duly executed and authenticated in accordance
with the provisions of the Indenture and duly delivered to the purchasers
thereof in exchange for the Old Notes, the Exchange Notes and the Guarantees
will be validly issued and binding obligations of the Registrants.
We hereby consent to the filing of this opinion with the commission as
Exhibit 5.1 to the Registration Statement. We also consent to the reference to
our firm under the heading "Legal Matters" in the Registration Statement. In
giving this consent, we do not thereby admit that we are in the category of
persons whose consent is required under Section 7 of the Act or the rules and
regulations of the Commission.
<PAGE>
KIRKLAND & ELLIS
May 26, 1999
Page 4
This opinion is limited to the specific issues addressed herein, and no
opinion may be inferred or implied beyond that expressly stated herein. We
assume no obligation to revise or supplement this opinion should the present
laws of the States of New York or Delaware or the federal law of the United
States be changed by legislative action, judicial decision or otherwise.
This opinion is furnished to you in connection with the filing of the
Registration Statement and is not to be used, circulated, quoted or otherwise
relied upon for any other purpose.
Sincerely,
Kirkland & Ellis
<PAGE>
EXHIBIT 12.1
Avalon Cable LLC
----------------
Computation of Ratio of Earnings to
-----------------------------------
Fixed Charges
-------------
<TABLE>
<CAPTION>
For the period
from inception For the
(October 21, 1998) to three months
December 31, 1998 ended March 31, 1999
-------------------- --------------------
<S> <C> <C>
Pre-Tax Income (loss) from continuing operations 42 173
------ ------
Adjustments to net income(loss)
- -------------------------------
Interest Expense 785 472
Rent Expense 23 29
------ ------
Total Fixed Charges 808 501
====== ======
Income from operations plus Fixed Charges 850 674
------ ------
Ratio of earnings to fixed charges 1.05 1.35
Amount of the deficiency of earnings to fixed charges N/A N/A
------ ------
</TABLE>
<PAGE>
EXHIBIT 12.2
Avalon Cable of Michigan Holdings, Inc.
--------------------------------------
Computation of Ratio of Earnings to
-----------------------------------
Fixed Charges
-------------
<TABLE>
<CAPTION>
For the period
from inception For the
(June 2, 1998) to three months
December 31, 1998 ended March 31, 1999
----------------- --------------------
<S> <C> <C>
Pre-Tax Income (loss) from continuing operations (675) (264)
------ ------
Adjustments to net income (loss)
- -------------------------------
Interest Expense 6,784 11,518
Rent Expense 43 250
------ ------
Total Fixed Charges 6,827 11,768
====== ======
Income from operations plus Fixed Charges 6,152 11,504
------ ------
Ratio of earnings to fixed charges -- --
Amount of the deficiency of earnings to fixed charges 675 264
</TABLE>
<PAGE>
EXHIBIT 23.1
Consent of Independent Accountants
We hereby consent to the use in the Prospectus constituting part of this
Amendment No. 1 to the Registration Statement on Form S-4 (No. 333-75415) of
Avalon Cable LLC, Avalon Cable Holdings Finance, Inc., Avalon Cable of Michigan
Holdings, Inc. and Avalon Cable of Michigan, Inc. of (i) our report dated March
30, 1999 relating to the consolidated financial statements of Avalon Cable of
Michigan Holdings, Inc. and Subsidiaries as of December 31, 1998 and for the
period from June 2, 1998 (inception) through December 31, 1998, (ii) our report
dated March 30, 1999 relating to the consolidated financial statements of Avalon
Cable of Michigan, Inc. and Subsidiaries as of December 31, 1998 and for the
period from June 2, 1998 (inception) through December 31, 1998, (iii) our report
dated March 30, 1999 relating to the consolidated financial statements of Cable
Michigan, Inc. and Subsidiaries as of December 31, 1997 and November 5, 1998 and
for each of the two years in the period ended December 31, 1997 and for the
period from January 1, 1998 through November 5, 1998, (iv) our report dated
March 30, 1999 relating to the consolidated financial statements of Avalon Cable
LLC and Subsidiaries as of December 31, 1998 and for the period from October 21,
1998 (inception) through December 31, 1998, and (v) our report dated March 30,
1999 relating to the consolidated financial statements of Avalon Cable Holdings
Finance, Inc. and Subsidiary as of December 31, 1998 and for the period from
October 21, 1998 (inception) through December 31, 1998 which appear in such
Prospectus. We also consent to the references to us under the headings "Experts"
and "Selected Historical Financial and Other Data" in such Prospectus. However,
it should be noted that PricewaterhouseCoopers LLP has not prepared or certified
such "Selected Historical Financial and Other Data."
/s/PRICEWATERHOUSECOOPERS LLP
PRICEWATERHOUSECOOPERS LLP
New York, New York
May 26, 1999
<PAGE>
Consent of Independent Accountants
We hereby consent to the use in the Prospectus constituting part of this
Amendment No. 1 to the Registration Statement on Form S-4 (No. 333-75415) of
Avalon Cable LLC, Avalon Cable Holdings Finance, Inc., Avalon Cable of Michigan
Holdings, Inc. and Avalon Cable of Michigan, Inc. of our report dated September
11, 1998 relating to the financial statements of Amrac Clear View, a Limited
Partnership as of May 28, 1998 and for the period from January 1, 1998 through
May 28, 1998 which appear in such Prospectus. We also consent to the references
to us under the headings "Experts" and "Selected Historical Financial and Other
Data" in such Prospectus. However, it should be noted that
PricewaterhouseCoopers LLP has not prepared or certified such "Selected
Historical Financial and Other Data."
/s/PRICEWATERHOUSECOOPERS LLP
PRICEWATERHOUSECOOPERS LLP
Boston, Massachusetts
May 26, 1999
<PAGE>
Consent of Independent Accountants
We hereby consent to the use in the Prospectus constituting part of this
Amendment No. 1 to the Registration Statement on Form S-4 (No. 333-75415) of
Avalon Cable LLC, Avalon Cable Holdings Finance, Inc., Avalon Cable of Michigan
Holdings, Inc. and Avalon Cable of Michigan, Inc. of our report dated March 30,
1998 relating to the combined financial statements of the Combined Operations of
Pegasus Cable Television of Connecticut, Inc. and the Massachusetts Operations
of Pegasus Cable Television, Inc. as of December 31, 1996, 1997 and June 30,
1998 and for each of the three years in the period ended December 31, 1997 and
for the period from January 1, 1998 through June 30, 1998 which appear in such
Prospectus. We also consent to the references to us under the headings "Experts"
and "Selected Historical Financial and Other Data" in such Prospectus. However,
it should be noted that PricewaterhouseCoopers LLP has not prepared or certified
such "Selected Historical Financial and Other Data."
/s/PRICEWATERHOUSECOOPERS LLP
PRICEWATERHOUSECOOPERS LLP
Philadelphia, Pennsylvania
May 26, 1999
<PAGE>
Exhibit 23.2
------------
Consent of Independent Accountants
We hereby consent to the use in the Prospectus constituting part of this
Amendment No. 1 to the Registration Statement on Form S-4 (No. 333-75415) of
Avalon Cable of Michigan Holdings, Inc., Avalon Cable LLC, Avalon Cable Holdings
Finance, Inc. and Avalon Cable of Michigan, Inc. of our report dated February
13, 1998 relating to the financial statements of Amrac Clear View, a Limited
Partnership, which appears in such Prospectus. We also consent to the references
to us under the headings "Experts" and "Selected Historical Financial and Other
Data" in such Prospectus. However, it should be noted that Greenfield, Altman,
Brown & Katz, P.C. has not prepared or certified such "Selected Historical
Financial and Other Data."
/s/ Greenfield, Altman, Brown, Berger & Katz, P.C.
Greenfield, Altman, Brown, Berger & Katz, P.C.
Canton, Massachusetts
May 26, 1999
<PAGE>
Exhibit 23.3
CONSENT OF INDEPENDENT ACCOUNTANTS
----------------------------------
The Board of Directors
Taconic Technology Corp.
We consent to the use of our reports included on page F-101 herein and to the
reference to our firm under the heading "Experts" in Amendment No. 1 to the Form
S-4 Registration Statement filed by Avalon Cable LLC, Avalon Cable Holdings
Finance, Inc., Avalon Cable of Michigan Holdings, Inc., Avalon Cable of
Michigan, Inc.
Albany, New York
May 28, 1999
<PAGE>
EXHIBIT 25.1
================================================================================
FORM T-1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
STATEMENT OF ELIGIBILITY
UNDER THE TRUST INDENTURE ACT OF 1939 OF A
CORPORATION DESIGNATED TO ACT AS TRUSTEE
CHECK IF AN APPLICATION TO DETERMINE
ELIGIBILITY OF A TRUSTEE PURSUANT TO
SECTION 305(b)(2) [_]
----------------------
THE BANK OF NEW YORK
(Exact name of trustee as specified in its charter)
New York 13-5160382
(State of incorporation (I.R.S. employer
if not a U.S. national bank) identification no.)
One Wall Street, New York, N.Y. 10286
(Address of principal executive offices) (Zip code)
____________
AVALON CABLE LLC
(Exact name of obligor as specified in its charter)
Delaware 13-4029965
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
----------------------
AVALON CABLE HOLDINGS FINANCE, INC.
(Exact name of obligor as specified in its charter)
Delaware 13-4029969
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
______________________
AVALON CABLE OF MICHIGAN HOLDINGS, INC.
(Exact name of obligor as specified in its charter)
Delaware 04-3423309
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
________________
<PAGE>
______________________
AVALON CABLE OF MICHIGAN, INC.
(Exact name of obligor as specified in its charter)
Pennsylvania 23-2566891
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
800 Third Avenue, Suite 3100
New York, New York 10022
(Address of principal executive offices) (Zip code)
______________________
Series B 11-7/8% Senior Discount Notes due 2008
(Title of the indenture securities)
=================================
===============================================
-2-
<PAGE>
1. General information. Furnish the following information as to the Trustee:
(a) Name and address of each examining or supervising authority to which it
is subject.
- ---------------------------------------------------
Name Address
- ---------------------------------------------------
Superintendent of Banks of the State of 2 Rector Street, New York,
New York N.Y. 10006, and Albany, N.Y.
12203
Federal Reserve Bank of New York 33 Liberty Plaza, New York,
N.Y. 10045
Federal Deposit Insurance Corporation Washington, D.C. 20429
New York Clearing House
Association New York, New York 10005
(b) Whether it is authorized to exercise corporate trust powers.
Yes.
2. Affiliations with Obligor.
If the obligor is an affiliate of the trustee, describe each such
affiliation.
None.
16. List of Exhibits.
Exhibits identified in parentheses below, on file with the Commission, are
incorporated herein by reference as an exhibit hereto, pursuant to Rule 7a-
29 under the Trust Indenture act of 1939 (the "Act") and 17 C.F.R.
229.10(d).
1. A copy of the Organization Certificate of The Bank of New York (formerly
Irving Trust Company) as now in effect, which contains the authority to
commence business and a grant of powers to exercise corporate trust
powers. (Exhibit 1 to Amendment No. 1 to Form T-1 filed with
Registration Statement No. 33-6215, Exhibits 1a and 1b to Form T-1 filed
with Registration Statement No. 33-21672 and Exhibit 1 to Form T-1 filed
with Registrati
on Statement No. 33-29637.)
4. A copy of the existing By-laws of the Trustee. (Exhibit 4 to Form T-1
filed with Registration Statement No. 33-31019.)
6. The consent of the Trustee required by Section 321(b) of the Act.
(Exhibit 6 to Form T-1 filed with Registration Statement No. 33-44051.)
7. A copy of the latest report of condition of the Trustee published
pursuant to law or to the requirements of its supervising or examining
authority.
<PAGE>
SIGNATURE
Pursuant to the requirements of the Act, the Trustee, The Bank of New York,
a corporation organized and existing under the laws of the State of New York,
has duly caused this statement of eligibility to be signed on its behalf by the
undersigned, thereunto duly authorized, all in The City of New York, and State
of New York, on the 20th day of May, 1999.
THE BANK OF NEW YORK
By: /s/REMO J. REALE
-----------------------------------
Name: REMO J. REALE
Title: ASSISTANT VICE PRESIDENT
- -4-
<PAGE>
EXHIBIT 7
Consolidation Report of Condition of
THE BANK OF NEW YORK
of One Wall Street, New York, N.Y. 10286
And Foreign and Domestic Subsidiaries,
a member of the Federal Reserve System, at the close of business December 31,
1998, published in accordance with a call made by the Federal Reserve Bank of
this District pursuant to the provisions of the Federal Reserve Act.
<TABLE>
<CAPTION>
Dollar Amounts
ASSETS in Thousands
<S>
<C>
Cash and balances due from depository
institutions:
Noninterest-bearing balances and currency and
coin $ 3,951,273
Interest-bearing balances 4,134,162
Securities:
Held-to-maturity securities 932,468
Available-for-sale securities 4,279,246
Federal funds sold and Securities purchased
under agreements to resell 3,161,626
Loans and lease financing receivables:
Loans and leases, net of unearned
income 37,861,802
LESS: Allowance for loan and
lease losses 619,791
LESS: Allocated
transfer risk
reserve 3,572
Loans and leases, net of unearned income,
allowance, and reserve 37,238,439
Trading Assets 1,551,556
Premises and fixed assets (including capitalized
leases) 684,181
</TABLE>
<PAGE>
<TABLE>
<S> <C>
Other real estate owned 10,404
Investments in unconsolidated subsidiaries and
associated companies 196,032
Customers' liability to this bank on acceptances
outstanding 895,160
Intangible assets 1,127,375
Other assets 1,915,742
-------------
Total assets $60,077,664
=============
LIABILITIES
Deposits:
In domestic offices $27,020,578
Noninterest-bearing 11,271,304
Interest-bearing 15,749,274
In foreign offices, Edge and Agreement
subsidiaries, and IBFs 17,197,743
Noninterest-bearing 103,007
Interest-bearing 17,094,736
Federal funds purchased and Securities sold
under agreements to repurchase 1,761,170
Demand notes i
ssued to the U.S.Treasury 125,423
Trading liabilities 1,625,632
Other borrowed money:
With remaining maturity of one year or less 1,903,700
With remaining maturity of more than one year
through three years 0
With remaining maturity of more than three years. 31,639
</TABLE>
<PAGE>
<TABLE>
<S> <C>
Bank's liability on acceptances executed and
outstanding 900,390
Subordinated notes and debentures 1,308,000
Other liabilities 2,708,852
------------
Total liabilities 54,583,127
============
EQUITY CAPITAL
Common stock
1,135,284
Surplus 764,443
Undivided profits and capital reserves 3,542,168
Net unrealized holding gains (losses) on
available-for-sale securities 82,367
Cumulative foreign currency translation
adjustments (29,725)
------------
Total equity capital 5,494,537
------------
Total liabilities and equity capital $60,077,664
============
<
/TABLE>
I, Thomas J. Mastro, Senior Vice President and Comptroller of the above-
named bank do hereby declare that this Report of Condition has been prepared in
conformance with the instructions issued by the Board of Governors of the
Federal Reserve System and is true to the best of my knowledge and belief.
Thomas J. Mastro
We, the undersigned directors, attest to the correctness of this Report of
Condition and declare that it has been examined by us and to the best of our
knowledge and belief has been prepared in conformance with the instructions
issued by the Board of Governors of the Federal Reserve System and is true and
correct.
<PAGE>
Thomas A. Reyni
Gerald L. Hassell Directors
Alan R. Griffith
</TABLE>
<PAGE>
EXHIBIT 99.1
LETTER OF TRANSMITTAL
To Tender for Exchange
Series B 11 7/8% Senior Discount Notes due 2008
of
AVALON CABLE LLC
AND
AVALON CABLE HOLDINGS FINANCE, INC.
Pursuant to the Prospectus Dated , 1999
THE EXCHANGE OFFER AND WITHDRAWAL RIGHTS WILL EXPIRE AT 5:00 P.M., NEW
YORK CITY TIME, ON [ ], 1999 UNLESS EXTENDED (THE "EXPIRATION DATE").
PLEASE READ CAREFULLY THE ATTACHED INSTRUCTIONS
If you desire to accept the Exchange Offer, this Letter of Transmittal
should be completed, signed, and submitted to the Exchange Agent:
By Registered or Certified Mail or Overnight Courier:
The Bank of New York
101 Barclay Street
Floor 21 West
New York, New York 10286
Attn: Corporate Trust Trustee Administration
By Facsimile:
(For Eligible Institutions only)
(212) 815-5915
Confirm by telephone: ( ) - [name]
DELIVERY OF THIS LETTER OF TRANSMITTAL TO AN ADDRESS, OR TRANSMISSION VIA
FACSIMILE, OTHER THAN AS SET FORTH ABOVE WILL NOT CONSTITUTE A VALID DELIVERY.
FOR ANY QUESTIONS REGARDING THIS LETTER OF TRANSMITTAL OR FOR ANY ADDITIONAL
INFORMATION, YOU MAY CONTACT THE EXCHANGE AGENT BY TELEPHONE AT (800)
OR BY FACSIMILE AT (212) 815-5915.
The undersigned hereby acknowledges receipt of the Prospectus dated
[ ], 1999 (the "Prospectus") of Avalon Cable LLC, a Delaware limited
liability company (the "Avalon Holdings") and Avalon Cable Holdings Finance,
Inc. ("Holdings Finance" and, together with Avalon Holdings, the "Issuers"),
and this Letter of Transmittal (the "Letter of Transmittal"), that together
constitute the Issuers' offer (the "Exchange Offer") to exchange $1,000 in
principal amount of its Series B 11 7/8% Senior Discount Notes due 2008 (the
"New Notes"), which have been registered under the Securities Act of 1933, as
amended (together with the rules and regulations promulgated thereunder, the
"Securities Act"), pursuant to a Registration Statement for each $1,000 in
principal amount of its outstanding 11 7/8% Senior Discount Notes due 2008 (the
"Notes"), of which $196,000,000 aggregate principal amount at maturity is
outstanding.
This Letter of Transmittal is to be used by holders of Notes if (i)
certificates representing Notes are to be physically delivered to the Exchange
Agent herewith by such holders; (ii) tender of Notes is to be made by book-
entry transfer to the Exchange Agent's account at the Depository Trust Company
(the "Book-Entry Transfer Facility") pursuant to the procedures set forth under
the caption "The Exchange Offer--Procedures
<PAGE>
for Tendering" in the Prospectus; or (iii) tender of Notes is to be made
according to the guaranteed delivery procedures set forth under the caption
"The Exchange Offer--Guaranteed Delivery Procedures" in the Prospectus; and, in
each case, instructions are not being transmitted through the DTC Automated
Tender Offer Program ("ATOP").
Holders of Notes that are tendering by book-entry transfer to the Exchange
Agent's account at the Book-Entry Transfer Facility can execute the tender
through ATOP for which the transaction will be eligible. The Book-Entry
Transfer Facility participants that are accepting the Exchange Offer must
transmit their acceptances to the Book-Entry Transfer Facility which will
verify the acceptance and execute a book-entry delivery to the Exchange Agent's
account at the Book-Entry Transfer Facility. The Book-Entry Transfer Facility
will then send an Agent's Message to the Exchange Agent for its acceptance.
Delivery of the Agent's Message by the Book-Entry Transfer Facility will
satisfy the terms of the Exchange Offer as to execution and delivery of a
Letter of Transmittal by the participant identified in the Agent's Message.
The undersigned hereby tenders the Notes described in Box 1 below (the
"Tendered Notes") pursuant to the terms and conditions described in the
Prospectus and this Letter of Transmittal. The undersigned is the registered
owner of all the Tendered Notes and the undersigned represents that it has
received from each beneficial owner of the Tendered Notes ("Beneficial
Owners"), as described in Box 2 below, a duly completed and executed form of
"Instructions to Registered Holder and/or Book-Entry Transfer Facility
Participant from Beneficial Owner" accompanying this Letter of Transmittal,
instructing the undersigned to take the action described in this Letter of
Transmittal.
Subject to, and effective upon, the acceptance for exchange of the Tendered
Notes, the undersigned hereby exchanges, assigns, and transfers to, or upon the
order of, the Issuers, all right, title, and interest in, to, and under the
Tendered Notes.
Please issue the New Notes exchanged for Tendered Notes in the name(s) of
the undersigned. Similarly, unless otherwise indicated under "Special Delivery
Instructions" below (Box 3), please send or cause to be sent the certificates
for the New Notes (and accompanying documents, as appropriate) to the
undersigned at the address shown below in Box 1.
The undersigned hereby irrevocably constitutes and appoints the Exchange
Agent as the true and lawful agent and attorney in fact of the undersigned with
respect to the Tendered Notes, with full power of substitution (such power of
attorney being deemed to be an irrevocable power coupled with an interest), to
(i) deliver the Tendered Notes to the Issuers or cause ownership of the
Tendered Notes to be transferred to, or upon the order of, the Issuers, on the
books of the registrar for the Notes and deliver all accompanying evidences of
transfer and authenticity to, or upon the order of, the Issuers upon receipt by
the Exchange Agent, as the undersigned's agent, of the New Notes to which the
undersigned is entitled upon acceptance by the Issuers of the Tendered Notes
pursuant to the Exchange Offer, and (ii) receive all benefits and otherwise
exercise all rights of beneficial ownership of the Tendered Notes, all in
accordance with the terms of the Exchange Offer.
The undersigned understands that tenders of Notes pursuant to the procedures
described under the caption "The Exchange Offer" in the Prospectus and in the
instructions hereto will constitute a binding agreement between the undersigned
and the Issuers upon the terms and subject to the conditions of the Exchange
Offer, subject only to withdrawal of such tenders on the terms set forth in the
Prospectus under the caption "The Exchange Offer--Withdrawal of Tenders." All
authority herein conferred or agreed to be conferred shall survive the death or
incapacity of the undersigned and any Beneficial Owner(s), and every obligation
of the undersigned or any Beneficial Owners hereunder shall be binding upon the
heirs, representatives, successors, and assigns of the undersigned and such
Beneficial Owner(s).
The undersigned hereby represents and warrants that the undersigned has full
power and authority to tender, exchange, assign, and transfer the Tendered
Notes and that the Issuers will acquire good and unencumbered title thereto,
free and clear of all liens, restrictions, charges, encumbrances, and adverse
claims
2
<PAGE>
when the Tendered Notes are acquired by the Issuers as contemplated herein.
The undersigned and each Beneficial Owner will, upon request, execute and
deliver any additional documents reasonably requested by the Issuers or the
Exchange Agent as necessary or desirable to complete and give effect to the
transactions contemplated hereby.
The undersigned hereby represents and warrants that the information set
forth in Box 2 is true and correct.
By accepting the Exchange Offer, the undersigned hereby represents and
warrants that (i) the New Notes to be acquired by the undersigned and any
Beneficial Owner(s) in connection with the Exchange Offer are being acquired
by the undersigned and any Beneficial Owner(s) in the ordinary course of
business of the undersigned and any Beneficial Owner(s), (ii) the undersigned
and each Beneficial Owner are not engaging, do not intend to engage, and have
no arrangement or understanding with any person to participate, in the
distribution of the New Notes, (iii) except as otherwise disclosed in writing
herewith, neither the undersigned nor any Beneficial Owner is an "affiliate,"
as defined in Rule 405 under the Securities Act, of the Issuers, and (iv) the
undersigned and each Beneficial Owner acknowledge and agree that any person
participating in the Exchange Offer with the intention or for the purpose of
distributing the New Notes must comply with the registration and prospectus
delivery requirements of the Securities Act in connection with a secondary
resale of the New Notes acquired by such person and cannot rely on the
position of the Staff of the Securities and Exchange Commission (the
"Commission") set forth in the no-action letters that are discussed in the
section of the Prospectus entitled "The Exchange Offer--Resale of the Old
Notes." In addition, by accepting the Exchange Offer, the undersigned hereby
(i) represents and warrants that, if the undersigned or any Beneficial Owner
of the Notes is a Participating Broker-Dealer, such Participating Broker-
Dealer acquired the Notes for its own account as a result of market-making
activities or other trading activities and has not entered into any
arrangement or understanding with either of the Issuers or any affiliate of
either of the Issuers (within the meaning of Rule 405 under the Securities
Act) to distribute the New Notes to be received in the Exchange Offer, and
(ii) acknowledges that, by receiving New Notes for its own account in exchange
for Notes, where such Notes were acquired as a result of market-making
activities or other trading activities, such Participating Broker-Dealer will
deliver a prospectus meeting the requirements of the Securities Act in
connection with any resale of such New Notes.
[_]CHECK HERE IF TENDERED NOTES ARE BEING DELIVERED HEREWITH.
[_]CHECK HERE IF TENDERED NOTES ARE BEING DELIVERED PURSUANT TO A NOTICE OF
GUARANTEED DELIVERY PREVIOUSLY DELIVERED TO THE EXCHANGE AGENT AND COMPLETE
"Use of Guaranteed Delivery" BELOW (Box 4).
[_]CCHECK HERE IF TENDERED NOTES ARE BEING DELIVERED BY BOOK-ENTRY TRANSFER
MADE TO THE ACCOUNT MAINTAINED BY THE EXCHANGE AGENT WITH THE BOOK-ENTRY
TRANSFER FACILITY AND COMPLETE "Use of Book-Entry Transfer" BELOW (Box 5).
3
<PAGE>
PLEASE READ THIS ENTIRE LETTER OF TRANSMITTAL CAREFULLY BEFORE COMPLETING THE
BOXES
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
BOX 1
DESCRIPTION OF NOTES TENDERED
(Attach additional signed pages, if necessary)
- ----------------------------------------------------------------------------------------------------------
Name(s) and Address(es) of Registered Note Aggregate
Holder(s), exactly as name(s) appear(s) on Certificate Principal Amount Aggregate
Note Certificate(s) Number(s) of Represented by Principal Amount
(Please fill in, if blank) Notes* Certificates Tendered**
<S> <C>
----------------------------------------------------------
----------------------------------------------------------
----------------------------------------------------------
----------------------------------------------------------
Total
- ----------------------------------------------------------------------------------------------------------
</TABLE>
* Need not be completed by persons tendering by book-entry transfer.
** The minimum permitted tender is $1,000 in principal amount of Notes. All
other tenders must be in integral multiples of $1,000 of principal
amount. Unless otherwise indicated in this column, the principal amount
of all Note Certificates identified in this Box 1 or delivered to the
Exchange Agent herewith shall be deemed tendered. See Instruction 4.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
BOX 2
BENEFICIAL OWNER(S)
- ------------------------------------------------------------------------------------------------------------------------
State of Principal Residence of Each Beneficial Owner of Principal Amount of Tendered Notes Held for Account of
Tendered Notes Beneficial Owner
- ------------------------------------------------------------------------------------------------------------------------
<S> <C>
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
4
<PAGE>
BOX 3
SPECIAL DELIVERY INSTRUCTIONS
(SEE INSTRUCTIONS 5, 6 AND 7)
To be completed ONLY if New Notes exchanged for Notes and untendered Notes
are to be sent to someone other than the undersigned, or to the undersigned
at an address other than that shown above.
Mail New Note(s) and any untendered Notes to: _______________________________
Name(s): ____________________________________________________________________
(please print)
Address: ____________________________________________________________________
_____________________________________________________________________________
_____________________________________________________________________________
(include Zip Code)
Tax Identification or Social Security No.: __________________________________
BOX 4
USE OF GUARANTEED DELIVERY
(SEE INSTRUCTION 2)
To be completed ONLY if notes are being tendered by means of a notice of
guaranteed delivery.
Name(s) of Registered Holder(s): ____________________________________________
Date of Execution of Notice of Guaranteed Delivery: _________________________
Name of Institution which Guaranteed Delivery: ______________________________
BOX 5
USE OF BOOK-ENTRY TRANSFER
(SEE INSTRUCTION 1)
To be completed ONLY if delivery of tendered notes is to be made by book-
entry transfer.
Name of Tendering Institution: ______________________________________________
Account Number: _____________________________________________________________
Transaction Code Number: ____________________________________________________
5
<PAGE>
BOX 6
TENDERING HOLDER SIGNATURE
(SEE INSTRUCTIONS 1 AND 5)
IN ADDITION, COMPLETE SUBSTITUTE FORM W-9
X ___________________________________________________________________________
X ___________________________________________________________________________
(Signature of Registered Holder(s) or Authorized Signatory)
Note: The above lines must be signed by the registered holder(s) of Notes
as their name(s) appear(s) on the Notes or by persons(s) authorized to
become registered holder(s) (evidence of which authorization must be
transmitted with this Letter of Transmittal). If signature is by a trustee,
executor, administrator, guardian, attorney-in-fact, officer, or other
person acting in a fiduciary or representative capacity, such person must
set forth his or her full title below. See Instruction 5.
Name: _______________________________________________________________________
(please print)
Title: ______________________________________________________________________
Address: ____________________________________________________________________
_____________________________________________________________________________
_____________________________________________________________________________
(include Zip Code)
Area Code and Telephone Number: _____________________________________________
Signature Guarantee
(If required by Instruction 5)
X ___________________________________________________________________________
(Authorized Signature)
Name of Firm: _______________________________________________________________
(Must be an Eligible Institution as defined in Instruction 2)
Name(s): ____________________________________________________________________
Capacity: _______________________________________ Dated: ___________________
Street Address: _____________________________________________________________
_____________________________________________________________________________
(include Zip Code)
6
<PAGE>
BOX 7
BROKER-DEALER STATUS
Area Code and Telephone Number: _____________________________________________
[_]Check this box if the Beneficial Owner of the Notes is a Participating
Broker-Dealer and such Participating Broker-Dealer acquired the Notes for
its own account as a result of market-making activities or other trading
activities.
Tax Identification or Social Security Number: _______________________________
PAYORS' NAMES: AVALON CABLE OF MICHIGAN LLC,
AVALON CABLE OF NEW ENGLAND LLC AND
AVALON CABLE FINANCE, INC.
- --------------------------------------------------------------------------------
Part 1--PLEASE PROVIDE YOUR Social Security
SUBSTITUTE TAXPAYER IDENTIFICATION NUMBER Number
("TIN") IN THE BOX AT RIGHT AND or TIN
CERTIFY BY SIGNING AND DATING
BELOW.
Form W-9
Department of the Treasury / /
Internal Revenue Service
------------------------------------------------------
Payer's Request for
Taxpayer Identification Part 2--Check the box if you are NOT subject to
Number (TIN) backup withholding under the provisions of section
3406(a)(1)(C) of the Internal Revenue Code because
(1) you have not been notified that you are subject
to backup withholding as a result of failure to
report all interest or dividends or (2) the
Internal Revenue Service has notified you that you
are no longer subject to backup withholding. [_]
------------------------------------------------------
CERTIFICATION--UNDER THE PENALTIES OF
PERJURY, I CERTIFY THAT THE INFORMATION
PROVIDED ON THIS FORM IS TRUE, CORRECT,
AND COMPLETE.
Part 3
SIGNATURE:
DATE: Awaiting
TIN(right
arrow) [_]
------------------------------------------------------
Name (if joint names, list first and circle the
name of the person or entity whose number you enter
in Part 1 below. See instructions if your name has
changed.)
------------------------------------------------------
Address:
------------------------------------------------------
City, State and ZIP Code
------------------------------------------------------
List account number(s) here (optional)
------------------------------------------------------
NOTE: FAILURE TO COMPLETE AND RETURN THIS FORM MAY RESULT IN BACKUP WITHHOLDING
OF 31% OF ANY PAYMENTS MADE TO YOU PURSUANT TO THE EXCHANGE OFFER. PLEASE
REVIEW THE ENCLOSED GUIDELINES FOR CERTIFICATION OF TAXPAYER
IDENTIFICATION NUMBER ON SUBSTITUTE FORM W-9 FAILURE TO COMPLETE AND
RETURN THIS FORM MAY RESULT IN BACKUP FOR ADDITIONAL DETAILS.
7
<PAGE>
INSTRUCTIONS TO LETTER OF TRANSMITTAL
FORMING PART OF THE TERMS AND CONDITIONS
OF THE EXCHANGE OFFER
1. Delivery of this Letter of Transmittal and Notes. A properly completed
and duly executed copy of this Letter of Transmittal, including Substitute Form
W-9, and any other documents required by this Letter of Transmittal must be
received by the Exchange Agent at its address set forth herein, and either
certificates for Tendered Notes must be received by the Exchange Agent at its
address set forth herein or such Tendered Notes must be transferred pursuant to
the procedures for book-entry transfer described in the Prospectus under the
caption "The Exchange Offer--Procedures for Tendering" (and a confirmation of
such transfer received by the Exchange Agent), in each case prior to 5:00 p.m.,
New York City time, on the Expiration Date. The method of delivery of
certificates for Tendered Notes, this Letter of Transmittal and all other
required documents to the Exchange Agent is at the election and risk of the
tendering holder and the delivery will be deemed made only when actually
received by the Exchange Agent. If delivery is by mail, registered mail with
return receipt requested, properly insured, is recommended. Instead of delivery
by mail, it is recommended that the Holder use an overnight or hand delivery
service. In all cases, sufficient time should be allowed to assure timely
delivery. No Letter of Transmittal or Notes should be sent to the Issuers.
Neither the Issuers nor the registrar is under any obligation to notify any
tendering holder of the Issuers' acceptance of Tendered Notes prior to the
closing of the Exchange Offer.
2. Guaranteed Delivery Procedures. Holders who wish to tender their Notes
but whose Notes are not immediately available, and who cannot deliver their
Notes, this Letter of Transmittal or any other documents required hereby to the
Exchange Agent, or who cannot complete the procedures for book-entry transfer,
prior to the Expiration Date, must tender their Notes according to the
guaranteed delivery procedures set forth below, including completion of Box 4.
Pursuant to such procedures: (i) such tender must be made by or through a firm
which is a member of a recognized Medallion Program approved by the Securities
Transfer Association Inc. (an "Eligible Institution") and the Notice of
Guaranteed Delivery must be signed by the holder; (ii) prior to the Expiration
Date, the Exchange Agent must have received from the holder and the Eligible
Institution a properly completed and duly executed Notice of Guaranteed
Delivery (by facsimile transmission, mail or hand delivery) setting forth the
name and address of the holder, the certificate number(s) of the Tendered Notes
and the principal amount of Tendered Notes, stating that the tender is being
made thereby and guaranteeing that, within three New York Stock Exchange
trading days after the Expiration Date, this Letter of Transmittal, or
facsimile thereof, or in the case of a book-entry transfer, an agent's message,
together with the certificate(s) representing the Tendered Notes, or a
confirmation of book-entry transfer of such notes into the Exchange Agent's
account at the Book-Entry Transfer Facility, and any other documents required
by this Letter of Transmittal will be deposited by the Eligible Institution
with the Exchange Agent; and (iii) such properly completed and duly executed
Letter of Transmittal, or facsimile thereof, with any required signature
guarantees, or in the case of a book-entry transfer, an agent's message, as
well as all other documents required by this Letter of Transmittal together
with the certificate(s) representing all Tendered Notes in proper form for
transfer, or a confirmation of a book-entry transfer of such Tendered Notes
into the Exchange Agent's account at the Book Entry Transfer Facility, must be
received by the Exchange Agent within three New York Stock Exchange trading
days after the Expiration Date. Any holder who wishes to tender Notes pursuant
to the guaranteed delivery procedures described above must ensure that the
Exchange Agent receives the Notice of Guaranteed Delivery relating to such
Notes prior to 5:00 p.m., New York City time, on the Expiration Date. Failure
to complete the guaranteed delivery procedures outlined above will not, of
itself, affect the validity or effect a revocation of any Letter of Transmittal
form properly completed and executed by an Eligible Holder who attempted to use
the guaranteed delivery process.
3. Beneficial Owner Instructions to Registered Holders. Only a holder in
whose name Tendered Notes are registered on the books of the registrar (or the
legal representative or attorney-in-fact of such registered holder) may execute
and deliver this Letter of Transmittal. Any Beneficial Owner of Tendered Notes
who is not the registered holder must arrange promptly with the registered
holder to execute and deliver this
8
<PAGE>
Letter of Transmittal on his or her behalf through the execution and delivery
to the registered holder of the Instructions to Registered Holder and/or Book-
Entry Transfer Facility Participant from Beneficial Owner form accompanying
this Letter of Transmittal.
4. Partial Tenders. Tenders of Notes will be accepted only in integral
multiples of $1,000 in principal amount. If less than the entire principal
amount of Notes held by the holder is tendered, the tendering holder should
fill in the principal amount tendered in the columns labeled "Aggregate
Principal Amount Tendered" of the box entitled "Description of Notes Tendered"
(Box 1) above. The entire principal amount of Notes delivered to the Exchange
Agent will be deemed to have been tendered unless otherwise indicated. If the
entire principal amount of all Notes held by the holder is not tendered, then
Notes for the principal amount of Notes not tendered and New Notes issued in
exchange for any Notes tendered and accepted will be sent to the Holder at his
or her registered address, unless a different address is provided in the
appropriate box on this Letter of Transmittal, as soon as practicable following
the Expiration Date.
5. Signatures on the Letter of Transmittal; Bond Powers and Endorsements;
Guarantee of Signatures. If this Letter of Transmittal is signed by the
registered holder(s) of the Tendered Notes, the signature must correspond with
the name(s) as written on the face of the Tendered Notes without alteration,
enlargement or any change whatsoever.
If any of the Tendered Notes are owned of record by two or more joint
owners, all such owners must sign this Letter of Transmittal. If any Tendered
Notes are held in different names, it will be necessary to complete, sign and
submit as many separate copies of the Letter of Transmittal as there are
different names in which Tendered Notes are held.
If this Letter of Transmittal is signed by the registered holder(s) of
Tendered Notes, and New Notes issued in exchange therefor are to be issued (and
any untendered principal amount of Notes is to be reissued) in the name of the
registered holder(s), then such registered holder(s) need not and should not
endorse any Tendered Notes, nor provide a separate bond power. In any other
case, such registered holder(s) must either properly endorse the Tendered Notes
or transmit a properly completed separate bond power with this Letter of
Transmittal, with the signature(s) on the endorsement or bond power guaranteed
by an Eligible Institution.
If this Letter of Transmittal is signed by a person other than the
registered holder(s) of any Tendered Notes, such Tendered Notes must be
endorsed or accompanied by appropriate bond powers, in each case, signed as the
name(s) of the registered holder(s) appear(s) on the Tendered Notes, with the
signature(s) on the endorsement or bond power guaranteed by an Eligible
Institution.
If this Letter of Transmittal or any Tendered Notes or bond powers are
signed by trustees, executors, administrators, guardians, attorneys-in-fact,
officers of corporations, or others acting in a fiduciary or representative
capacity, such persons should so indicate when signing and, unless waived by
the Issuers, evidence satisfactory to the Issuers of their authority to so act
must be submitted with this Letter of Transmittal.
Endorsements on Tendered Notes or signatures on bond powers required by this
Instruction 5 must be guaranteed by an Eligible Institution.
Signatures on this Letter of Transmittal must be guaranteed by an Eligible
Institution unless the Tendered Notes are tendered (i) by a registered holder
who has not completed the box set forth herein entitled "Special Delivery
Instructions" (Box 3) or (ii) by an Eligible Institution.
6. Special Delivery Instructions. Tendering holders should indicate, in the
applicable box (Box 3), the name and address to which the New Notes and/or
substitute Notes for principal amounts not tendered or not accepted for
exchange are to be sent, if different from the name and address of the person
signing this Letter of Transmittal. In the case of issuance in a different
name, the taxpayer identification or social security number of the person named
must also be indicated.
9
<PAGE>
7. Transfer Taxes. The Issuers will pay all transfer taxes, if any,
applicable to the exchange of Tendered Notes pursuant to the Exchange Offer.
If, however, a transfer tax is imposed for any reason other than the transfer
and exchange of Tendered Notes pursuant to the Exchange Offer, then the amount
of any such transfer taxes (whether imposed on the registered holder or on any
other person) will be payable by the tendering holder. If satisfactory evidence
of payment of such taxes or exemption therefrom is not submitted with this
Letter of Transmittal, the amount of such transfer taxes will be billed
directly to such tendering holder.
Except as provided in this Instruction 7, it will not be necessary for
transfer tax stamps to be affixed to the Tendered Notes listed in this Letter
of Transmittal.
8. Tax Identification Number. Federal income tax law requires that the
holder(s) of any Tendered Notes which are accepted for exchange must provide
the Issuers (as payor) with their correct taxpayer identification number
("TIN"), which, in the case of a holder who is an individual, is his or her
social security number. If the Issuers are not provided with the correct TIN,
the Holder may be subject to backup withholding and a $50 penalty imposed by
the Internal Revenue Service. (If withholding results in an over-payment of
taxes, a refund may be obtained.) Certain holders (including, among others, all
corporations and certain foreign individuals) are not subject to these backup
withholding and reporting requirements. See the enclosed "Guidelines for
Certification of Taxpayer Identification Number on Substitute Form W-9" for
additional instructions.
To prevent backup withholding, each holder of Tendered Notes must provide
such holder's correct TIN by completing the Substitute Form W-9 set forth
herein, certifying that the TIN provided is correct (or that such holder is
awaiting a TIN), and that (i) the holder has not been notified by the Internal
Revenue Service that such holder is subject to backup withholding as a result
of failure to report all interest or dividends or (ii) the Internal Revenue
Service has notified the holder that such holder is no longer subject to backup
withholding. If the Tendered Notes are registered in more than one name or are
not in the name of the actual owner, consult the "Guidelines for Certification
of Taxpayer Identification Number on Substitute Form W-9" for information on
which TIN to report.
The Issuers reserve the right in their sole discretion to take whatever
steps are necessary to comply with the Issuers' obligation regarding backup
withholding.
9. Validity of Tenders. All questions as to the validity, form, eligibility
(including time of receipt), acceptance and withdrawal of Tendered Notes will
be determined by the Issuers in their sole discretion, which determination will
be final and binding. The Issuers reserve the absolute right to reject any and
all Notes not properly tendered or any Notes the Issuers' acceptance of which
would, in the opinion of the Issuers' counsel, be unlawful. The Issuers also
reserve the right to waive any defects, irregularities or conditions of tender
as to particular Notes. The Issuers may not waive any condition to the Exchange
Offer unless such condition is legally waiveable. In the event such a waiver by
the Issuers gives rise to the legal requirement to do so, the Issuers will hold
the Exchange Offer open for at least five business days thereafter. The
Issuers' interpretation of the terms and conditions of the Exchange Offer
(including the instructions in this Letter of Transmittal) will be final and
binding on all parties. Unless waived, any defects or irregularities in
connection with tenders of Notes must be cured within such time as the Issuers
shall determine. Although the Issuers intend to notify holders of defects or
irregularities with respect to tenders of Notes, neither the Issuers, the
Exchange Agent nor any other person shall incur any liability for failure to
give such notification. Tenders of Notes will not be deemed to have been made
until such defects or irregularities have been cured or waived. Any Notes
received by the Exchange Agent that are not properly tendered and as to which
the defects or irregularities have not been cured or waived will be returned by
the Exchange Agent to the tendering holders, unless otherwise provided in this
Letter of Transmittal, as soon as practicable following the Expiration Date.
10. Waiver of Conditions. The Issuers reserve the absolute right to amend,
waive or modify any of the conditions in the Exchange Offer in the case of any
Tendered Notes.
10
<PAGE>
11. No Conditional Tender. No alternative, conditional, irregular, or
contingent tender of Notes or transmittal of this Letter of Transmittal will be
accepted.
12. Mutilated, Lost, Stolen or Destroyed Notes. Any tendering Holder whose
Notes have been mutilated, lost, stolen or destroyed should contact the
Exchange Agent at the address indicated herein for further instructions.
13. Requests for Assistance or Additional Copies. Questions and requests for
assistance and requests for additional copies of the Prospectus or this Letter
of Transmittal may be directed to the Exchange Agent at the address indicated
herein. Holders may also contact their broker, dealer, commercial bank, trust
company or other nominee for assistance concerning the Exchange Offer.
14. Acceptance of Tendered Notes and Issuance of Notes; Return of Notes.
Subject to the terms and conditions of the Exchange Offer, the Issuers will
accept for exchange all validly tendered Notes as soon as practicable after the
Expiration Date and will issue New Notes therefor as soon as practicable
thereafter. For purposes of the Exchange Offer, the Issuers shall be deemed to
have accepted tendered Notes when, as and if the Issuers have given written or
oral notice (immediately followed in writing) thereof to the Exchange Agent. If
any Tendered Notes are not exchanged pursuant to the Exchange Offer for any
reason, such unexchanged Notes will be returned, without expense, to the
undersigned at the address shown in Box 1 or at a different address as may be
indicated herein under "Special Delivery Instructions" (Box 3).
15. Withdrawal. Tenders may be withdrawn only pursuant to the procedures set
forth in the Prospectus under the caption "The Exchange Offer--Withdrawal of
Tenders."
11
<PAGE>
EXHIBIT 99.2
NOTICE OF GUARANTEED DELIVERY
With Respect to
11 7/8% Senior Discount Notes due 2008
of
AVALON CABLE LLC
AND
AVALON CABLE HOLDINGS FINANCE, INC.
Pursuant to the Prospectus Dated , 1999
This form must be used by a holder of 11 7/8% Senior Discount Notes due 2008
(the "Notes") of Avalon Cable LLC, a Delaware limited liability company
("Avalon Holdings") and Avalon Cable Holdings Finance, Inc., a Delaware
corporation ("Holdings Finance" and, together with Avalon Holdings, the
"Issuers"), who wish to tender Notes to the Exchange Agent pursuant to the
guaranteed delivery procedures described in "The Exchange Offer--Guaranteed
Delivery Procedures" of the Issuers' Prospectus, dated [ ], 1999 (the
"Prospectus") and in Instruction 2 to the related Letter of Transmittal. Any
holder who wishes to tender Notes pursuant to such guaranteed delivery
procedures must ensure that the Exchange Agent receives this Notice of
Guaranteed Delivery prior to the Expiration Date of the Exchange Offer.
Capitalized terms used but not defined herein have the meanings ascribed to
them in the Prospectus or the Letter of Transmittal.
THE EXCHANGE OFFER AND WITHDRAWAL RIGHTS WILL EXPIRE AT 5:00 P.M., NEW
YORK CITY TIME, ON [ ], 1999 UNLESS EXTENDED (THE "EXPIRATION DATE").
To: The Bank of New York
(the "Exchange Agent")
By Registered or Certified Mail or Overnight Courier:
The Bank of New York
101 Barclay Street
Floor 21 West
New York, New York 10286
Attn: Corporate Trust Trustee Administration
By Facsimile:
(For Eligible Institutions only)
(212) 815-5915
Confirm by telephone: ( ) -- [name]
DELIVERY OF THIS INSTRUMENT TO AN ADDRESS, OR TRANSMISSION VIA FACSIMILE,
OTHER THAN AS SET FORTH ABOVE WILL NOT CONSTITUTE A VALID DELIVERY.
This form is not to be used to guarantee signatures. If a signature on a
Letter of Transmittal is required to be guaranteed by an "Eligible Institution"
under the instructions thereto, such signature guarantee must appear in the
applicable space provided in the signature box on the Letter of Transmittal.
<PAGE>
LADIES AND GENTLEMEN:
The undersigned hereby tenders to the Issuers, upon the terms and subject to
the conditions set forth in the Prospectus and the related Letter of
Transmittal, receipt of which is hereby acknowledged, the principal amount of
Notes set forth below pursuant to the guaranteed delivery procedures set forth
in the Prospectus and in Instruction 2 of the Letter of Transmittal.
The undersigned hereby tenders the Notes listed below:
Certificate Number(s) (if known) of Aggregate Principal Aggregate Principal
Notes or Account Number at the Book- Amount Represented Amount Tendered
entry Facility
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PLEASE SIGN AND COMPLETE
- --------------------------------------------------------------------------------
Signatures of Registered Holder(s)
or Authorized Signatory: ____________ Date: , 1999
------------------------------------- Address: ____________________________
------------------------------------- -------------------------------------
Name(s) of Registered Holder(s): ____ Area Code and Telephone No. _________
-------------------------------------
-------------------------------------
This Notice of Guaranteed Delivery must be signed by the Holder(s)
exactly as their name(s) appear on certificates for Notes or on a security
position listing as the owner of Notes, or by person(s) authorized to become
Holder(s) by endorsements and documents transmitted with this Notice of
Guaranteed Delivery. If signature is by a trustee, executor, administrator,
guardian, attorney-in-fact, officer or other person acting in a fiduciary or
representative capacity, such person must provide the following information.
Please print name(s) and address(es)
Name(s): ____________________________________________________________________
-----------------------------------------------------------------------------
Capacity: ___________________________________________________________________
Address(es): _______________________________________________________________
-----------------------------------------------------------------------------
2
<PAGE>
GUARANTEE
(Not to be used for signature guarantee)
The undersigned, a firm which is a member of a registered national
securities exchange or of the National Association of Securities Dealers,
Inc., or is a commercial bank or trust company having an office or
correspondent in the United States, or is otherwise an "eligible guarantor
institution" within the meaning of Rule 17Ad-15 under the Securities
Exchange Act of 1934, as amended, guarantees deposit with the Exchange Agent
of the Letter of Transmittal (or facsimile thereof), together with the Notes
tendered hereby in proper form for transfer (or confirmation of the book-
entry transfer of such Notes into the Exchange Agent's account at the Book-
Entry Transfer Facility described in the Prospectus under the caption "The
Exchange Offer--Guaranteed Delivery Procedures" and in the Letter of
Transmittal) and any other required documents, all by 5:00 p.m., New York
City time, on the third New York Stock Exchange trading day following the
Expiration Date.
Name of Firm: _______________________ -------------------------------------
(Authorized Signature)
Address: ____________________________ Name: _______________________________
------------------------------------- (Please Print)
(Include Zip Code) Title: ______________________________
Area Code and Tel. No.: _____________
Dated: , 1999
DO NOT SEND SECURITIES WITH THIS FORM. ACTUAL SURRENDER OF SECURITIES MUST BE
MADE PURSUANT TO, AND BE ACCOMPANIED BY, AN EXECUTED LETTER OF TRANSMITTAL.
3
<PAGE>
INSTRUCTIONS FOR NOTICE OF GUARANTEED DELIVERY
1. Delivery of this Notice of Guaranteed Delivery. A properly completed and
duly executed copy of this Notice of Guaranteed Delivery and any other
documents required by this Notice of Guaranteed Delivery must be received by
the Exchange Agent at its address set forth herein prior to the Expiration
Date. The method of delivery of this Notice of Guaranteed Delivery and any
other required documents to the Exchange Agent is at the election and sole risk
of the holder, and the delivery will be deemed made only when actually received
by the Exchange Agent. If delivery is by mail, registered mail with return
receipt requested, properly insured, is recommended. As an alternative to
delivery by mail, the holders may wish to consider using an overnight or hand
delivery service. In all cases, sufficient time should be allowed to assure
timely delivery. For a description of the guaranteed delivery procedures, see
Instruction 2 of the Letter of Transmittal.
2. Signatures on this Notice of Guaranteed Delivery. If this Notice of
Guaranteed Delivery is signed by the registered holder(s) of the Notes referred
to herein, the signature must correspond with the name(s) written on the face
of the Notes without alteration, enlargement, or any change whatsoever. If this
Notice of Guaranteed Delivery is signed by a participant of the Book-Entry
Transfer Facility whose name appears on a security position listing as the
owner of the Notes, the signature must correspond with the name shown on the
security position listing as the owner of the Notes.
If this Notice of Guaranteed Delivery is signed by a person other than the
registered holder(s) of any Notes listed or a participant of the Book-Entry
Transfer Facility, this Notice of Guaranteed Delivery must be accompanied by
appropriate bond powers, signed as the name of the registered holder(s) appears
on the Notes or signed as the name of the participant shown on the Book-Entry
Transfer Facility's security position listing.
If this Notice of Guaranteed Delivery is signed by a trustee, executor,
administrator, guardian, attorney-in-fact, officer of a corporation, or other
person acting in a fiduciary or representative capacity, such person should so
indicate when signing and submit with the Letter of Transmittal evidence
satisfactory to the Issuers of such person's authority to so act.
3. Requests for Assistance or Additional Copies. Questions and requests for
assistance and requests for additional copies of the Prospectus may be directed
to the Exchange Agent at the address specified in the Prospectus. Holders may
also contact their broker, dealer, commercial bank, trust company, or other
nominee for assistance concerning the Exchange Offer.
4
<PAGE>
EXHIBIT 99.3
INSTRUCTIONS TO REGISTERED HOLDER AND/OR
BOOK-ENTRY TRANSFER FACILITY PARTICIPANT FROM BENEFICIAL OWNER
of
AVALON CABLE LLC
AND
AVALON CABLE HOLDINGS FINANCE, INC.
11 7/8% Senior Discount Notes Due 2008
To Registered Holder and/or Participant of the Book-Entry Transfer Facility:
The undersigned hereby acknowledges receipt of the Prospectus, dated
[ ], 1999 (the "Prospectus") of Avalon Cable LLC, a Delaware limited
liability company ("Avalon Holdings") and Avalon Cable Holdings Finance, Inc.
("Holdings Finance" and, together with Avalon Holdings, the "Issuers"), and the
accompanying Letter of Transmittal (the "Letter of Transmittal"), that together
constitute the Issuers' offer (the "Exchange Offer"). Capitalized terms used
but not defined herein have the meanings ascribed to them in the Prospectus.
This will instruct you, the registered holder and/or book-entry transfer
facility participant, as to action to be taken by you relating to the Exchange
Offer with respect to the 11 7/8% Senior Discount Notes due 2008 (the "Notes")
held by you for the account of the undersigned.
The aggregate face amount of the Notes held by you for the account of the
undersigned is (FILL IN AMOUNT):
$ of the 11 7/8% Senior Subordinated Notes due 2008.
With respect to the Exchange Offer, the undersigned hereby instructs you
(CHECK APPROPRIATE BOX):
[_]TO TENDER the following Notes held by you for the account of the
undersigned (INSERT PRINCIPAL AMOUNT OF NOTES TO BE TENDERED, IF ANY):
$
[_]NOT TO TENDER any Notes held by you for the account of the undersigned.
If the undersigned instruct you to tender the Notes held by you for the
account of the undersigned, it is understood that you are authorized (a) to
make, on behalf of the undersigned (and the undersigned, by its signature
below, hereby makes to you), the representation and warranties contained in the
Letter of Transmittal that are to be made with respect to the undersigned as a
beneficial owner, including but not limited to the representations that (i) the
undersigned's principal residence is in the state of (fill in state) ,
(ii) the undersigned is acquiring the New Notes in the ordinary course of
business of the undersigned, (iii) the undersigned is not engaging, does not
engage, and has no arrangement or understanding with any person to participate
in the distribution of the New Notes, (iv) the undersigned acknowledges that
any person participating in the Exchange Offer for the purpose of distributing
the New Notes must comply with the registration and prospectus delivery
requirements of the Securities Act of 1933, as amended (the "Act"), in
connection with a secondary resale transaction of the New Notes acquired by
such person and cannot rely on the position of the Staff of the Securities and
Exchange Commission set forth in no-action letters that are discussed in the
section of the Prospectus entitled "The Exchange Offer--Resales of the New
Notes," and (v) the undersigned is not an "affiliate," as defined in Rule 405
under the Act, of any of the Issuers; (b) to agree, on behalf of the
undersigned, as set forth in the Letter of Transmittal; and (c) to take such
other action as necessary under the Prospectus or the Letter of Transmittal to
effect the valid tender of such Notes.
<PAGE>
SIGN HERE
Name of beneficial owner(s): ________________________________________________
Signature(s): _______________________________________________________________
Name (please print): ________________________________________________________
Address: ____________________________________________________________________
-----------------------------------------------------------------------------
-----------------------------------------------------------------------------
Telephone number: ___________________________________________________________
Taxpayer Identification or Social Security Number: __________________________
Date: _______________________________________________________________________
2
<PAGE>
EXHIBIT 99.4
KIRKPATRICK & LOCKHART LLP
1500 Oliver Building
Pittsburgh, Pennsylvania 15222-2312
Telephone (412) 355-6500
Facsimile (412) 355-6501`
www.kl.com
May 26, 1999
Avalon Cable of Michigan, Inc.
800 Third Street, Suite 3100
New York, New York 10022
Ladies and Gentlemen:
You have requested our opinion concerning the matters set forth below
relating to the Supplemental Indenture dated as of March 26, 1999 (the
"Supplemental Indenture"), by and among Avalon Cable LLC, a Delaware limited
liability company ("Avalon LLC"), Avalon Cable of Michigan Holdings, Inc., a
Delaware corporation ("Michigan Holdings"), Avalon Cable Holdings Finance, Inc.,
a Delaware corporation ("Avalon Finance"), Avalon Cable of Michigan, Inc., a
Pennsylvania corporation ("Avalon-Pennsylvania"), and The Bank of New York, a
New York banking corporation, as trustee (the "Trustee") under the Indenture
dated as of December 10, 1998, by and among Michigan Holdings, Avalon LLC,
Avalon Finance, and the Trustee, providing for the issuance of an aggregate
principal amount at issuance of up to $160.4 million of 11-7/8% Senior Discount
Notes due 2008 (the "Notes").
In connection with rendering the opinions set forth below, we have examined
the Supplemental Indenture. As to certain matters of fact that are material to
our opinions we have also examined and relied on certificates of public
officials and certificates of the Chief Executive Officer, President and
Secretary of Avalon-Pennsylvania (the "Officer's Certificates"). Copies of the
Officer's Certificates have previously been furnished to you. We have not
independently established any of the facts so relied on. With your permission,
we have made no factual investigation other than our review of the documents
referenced above.
We have assumed that each document submitted to us is accurate and
complete, that each such document that is an original is authentic, that each
such document that is a copy conforms to an authentic original, that all
signatures on each such document are genuine, and that no changes in the facts
certified in the Officer's Certificates or certificates of public officials have
occurred or will occur after their respective dates. We have assumed that
Avalon-Pennsylvania's Articles of Incorporation and Bylaws (the "Charter
Documents") and all amendments to such Charter Documents have been adopted in
accordance with all applicable legal requirements. We have also assumed that
each natural person who has taken any action relevant to any of our opinions in
the
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Avalon Cable of Michigan, Inc.
May 26, 1999
Page 2
capacity of director or officer was duly elected to that director or officer
position and held that position when such action was taken. We have not
verified any of those assumptions.
The opinions expressed in this opinion letter are limited to the laws of
the Commonwealth of Pennsylvania. We are not opining on, and we assume no
responsibility with respect to, the applicability to or effect on any of the
matters covered herein of the laws of any other jurisdiction, Federal law, or
the local laws of any jurisdiction. In this regard we note that the Indenture
and the Supplemental Indenture provide that they are to be governed by New York
law. Except to the extent expressly set forth below, we express no opinion as
to the enforceability of the Indenture or the Supplemental Indenture. We
express no opinion as to whether any of the transactions or arrangements
constituting the Reorganization constitute deemed distributions to or for the
benefit of shareholders as defined in the Pennsylvania Business Corporation Law
of 1988, as amended, or as to the application of Pennsylvania statutes or rules
of law relating to fraudulent transfers or as to the adequacy of the
consideration for any of the transactions constituting the Reorganization. We
also express no opinion as to the applicability or effect, if any, on the
opinions rendered herein of the litigation described in Note 3 of the Notes to
Condensed Consolidated Financial Statements of Cable Michigan, Inc. included in
the Offering Memorandum dated December 3, 1998 relating to the Notes.
Based on the foregoing, and subject to the foregoing and the additional
qualifications and other matters set forth below, it is our opinion that:
1. Avalon-Pennsylvania is a corporation duly incorporated and validly
subsisting under the laws of the Commonwealth of Pennsylvania.
2. Avalon-Pennsylvania (a) has the requisite corporate power to execute,
deliver, and perform its obligations under the Supplemental Indenture, (b) has
taken all necessary corporate action to authorize the execution, delivery, and
performance of the Supplemental Indenture, and (c) has duly executed and
delivered the Supplemental Indenture.
3. The execution and delivery by Avalon-Pennsylvania of, and the
performance by Avalon-Pennsylvania of its obligations under, the Supplemental
Indenture do not violate Avalon-Pennsylvania's Articles of Incorporation or By-
laws.
4. The execution and delivery by Avalon-Pennsylvania of, and the
performance by Avalon-Pennsylvania of its obligations under, the Supplemental
Indenture do not violate the Pennsylvania Business Corporation Law of 1988, as
amended, or any other law, rule or regulation of the Commonwealth of
Pennsylvania (except that we express no opinion as to compliance with any laws,
rules or regulations governing or regulating securities matters).
We are furnishing this opinion letter to you solely in connection with the
Supplemental Indenture. You may not rely on this opinion letter in any other
connection, and it may not be
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Avalon Cable of Michigan, Inc.
May 26, 1999
Page 3
furnished to or relied upon by any other person for any purpose, without our
specific prior written consent, except that (i) you may furnish a copy to your
counsel, Kirkland & Ellis, who may rely upon this opinion letter as if this
letter were addressed to it, and (ii) we hereby consent to the filing of this
opinion letter as an exhibit to the registration statement that you have advised
us you intend to file under the Securities Act of 1933 relating to the Notes.
The foregoing opinions are rendered as of the date of this letter. We
assume no obligation to update or supplement any of our opinions to reflect any
changes of law or fact that may occur.
Yours truly,
/s/ KIRKPATRICK & LOCKHART LLP
KIRKPATRICK & LOCKHART LLP
