<PAGE>
As filed with the Securities and Exchange Commission on May 28, 1999.
Registration No. 333-75453
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
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 OF MICHIGAN LLC
(Exact name of registrant as specified in its charter)
Delaware 4813 13-4029981
(State or other (Primary Standard (I.R.S. Employer
jurisdiction of Industrial Classification Identification No.)
incorporation or Code Number)
organization)
----------------
AVALON CABLE OF NEW ENGLAND LLC
Delaware 4813 22-3556161
(State or other (Primary Standard (I.R.S. Employer
jurisdiction of Industrial Classification Identification No.)
incorporation or Code Number)
organization)
----------------
AVALON CABLE FINANCE, INC.
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 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
- --------------------------------------------------------------------------------
[Logo of Avalon appears Here]
Exchange Offer for
$150,000,000
9 3/8 Senior Subordinated Notes due 2008
of Avalon Cable of Michigan LLC,
Avalon Cable of New England LLC and
Avalon Cable 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 13 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.............................................................. 13
The Company............................................................... 21
Use of Proceeds........................................................... 24
Capitalization............................................................ 25
Unaudited Pro Forma Combined Financial Data............................... 26
Selected Historical Financial and Other Data.............................. 34
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 43
Business.................................................................. 58
Regulation................................................................ 73
Management................................................................ 81
Certain Relationships and Related Transactions............................ 85
Security Ownership of Certain Beneficial Owners and Management............ 88
Description of Certain Debt............................................... 90
Exchange Offer............................................................ 94
Description of the Notes.................................................. 104
Certain United States Federal Income Tax Consequences..................... 139
Plan of Distribution...................................................... 143
Legal Matters............................................................. 144
Available Information..................................................... 144
Experts................................................................... 145
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 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 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, New York 10022 and the telephone number
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, as to 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 subordinated 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
subordinated notes, $196,000,000 principal amount at maturity of senior
discount notes were issued in a private placement by Avalon Cable LLC, which
directly or indirectly owns 100% of each of the issuers of the notes offered in
the exchange offer, and its wholly-owned subsidiary, Avalon Cable Finance
Holdings, Inc., as co-obligors. These senior discount notes are the subject of
a separate exchange offer being conducted substantially concurrently with this
exchange offer. We sometimes refer to Avalon Cable LLC and Avalon Cable Finance
Holdings, Inc. as the holding companies, since they have no separate operations
and own 100% of the issuers of the new notes offered hereby. Because the
issuers are subsidiaries of the holding companies, the provisions of the
indenture governing the senior discount notes also restrict their operations.
3
<PAGE>
The Exchange Offer
The Exchange Offer........
The issuers are offering to exchange $150,000,000
principal amount of 9 3/8% senior subordinated
notes which have been registered under the
Securities Act of 1933 for $150,000,000 of their
oustanding 9 3/8% senior subordinated 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.
4
<PAGE>
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.
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 of Michigan LLC, Avalon Cable of New
England LLC and Avalon Cable Finance, Inc.
Interest Rate............. 9 3/8% per year
Interest Payment Dates.... Interest will accrue on the new notes from the date
of issuance and will be payable semiannually in
arrears on June 1 and December 1, commencing June
1, 1999.
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 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 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 their
face amount, plus accrued and unpaid interest and
liquidated damages, if any, to the date of
purchase.
5
<PAGE>
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, if any,
. will rank on the same level, or "pari passu,"
with any existing and future senior subordinated
indebtedness of the issuers and
. will rank senior to all subordinated indebtedness
of the issuers.
The indenture governing the new notes permits the
issuers to incur additional indebtedness subject to
certain limitations. As of March 31, 1999, on a pro
forma basis:
. the outstanding senior indebtedness of the
issuers on a combined basis would have been
$328.5 million,
. the issuers would have had no senior subordinated
indebtedness other than the new notes and
. the issuers' subsidiaries would have had no debt
other than inter-company debt.
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 the ability of the issuers 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,
. incur indebtedness that is senior to the new
notes but junior to senior indebtedness and
. with respect to any restricted subsidiaries,
issue capital stock.
Guarantor................
Avalon Cable of Michigan, Inc. will guarantee the
obligations of Avalon Cable of Michigan LLC under
the new notes. Avalon Cable of Michigan, Inc. does
not, however, have any significant assets other
than its equity interest in Avalon Cable LLC. Thus,
holders should not expect the guarantor to have any
assets available to make principal and interest
payments on the new notes. For a description of the
relationship of the guarantor 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.
6
<PAGE>
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,
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, Inc., Cable
Michigan, the predecessor to Avalon Cable of Michigan, Inc., Avalon Cable of
New England LLC, AMRAC Clear View, the predecessor to Avalon Cable of New
England LLC, Pegasus Cable Television, Inc. and Pegasus Cable Television of
Connecticut, Inc., Taconic Technology 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 discount notes by the holdings companies
of the issuers, 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, Inc. as Avalon Michigan Inc.,
. Avalon Cable of Michigan LLC as Avalon Michigan LLC,
. 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 as Taconic, and
. Avalon Cable Finance, Inc. as Avalon Finance.
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
ended 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 Avalon Michigan Inc.,
Cable Michigan, Avalon Michigan LLC, Avalon New England, Amrac, Pegasus,
Taconic and Avalon Finance and the accompanying notes thereto included
elsewhere in this prospectus.
7
<PAGE>
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.
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>
Probable
Avalon Avalon Less: Transaction Unaudited
Michigan Michigan Avalon New Duplicate ----------- Pro Forma Pro Forma
Inc.(1) LLC(2) England(3) Period(4) Taconic(5) Adjustments(6) Combined
-------- -------- ---------- --------- ----------- -------------- ---------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Statement of operations
data
Revenue................. $ 22,368 $ 1,212 $ 2,339 $(1,342) $ 523 $ 949 $26,049
Operating expenses...... 12,130 654 1,292 (730) 340 728 14,414
Corporate overhead...... 376 21 37 (23) 6 17 434
Depreciation and
amortization........... 10,126 555 747 (597) 105 235 11,171
Non-recurring expenses.. -- -- -- -- -- -- --
-------- ------- ------- ------- ------ ------- -------
Operating (loss) income. (264) (18) 263 8 72 (31) 30
Interest expense, net... (8,422) (564) 92 558 -- (11) (8,347)
Other income (expense),
net.................... 3,206 -- -- -- (28) (3,178) --
-------- ------- ------- ------- ------ ------- -------
Net (loss) income....... $ (5,480) $ (582) $ 355 $ 566 $ 44 $(3,220) $(8,317)
======== ======= ======= ======= ====== ======= =======
Other financial data
Cash flow from
operations............. $ 10,108 $ 626 $ 1,275 $ (591) $ 19 $ -- $12,028
Cash flow from investing
activities............. (43,214) (450) (3,089) (19) (13,800) (60,572)
Cash flow from financing
activities............. 37,262 11,747 2,900 -- 574 52,483
EBITDA(14).............. 9,862 537 1,010 (589) 177 204 11,201
Adjusted EBITDA(15)..... 11,334
Adjusted EBITDA
margin(16)............. 43.5%
Ratio of debt to
adjusted EBITDA(17).... 7.2x
Capital expenditures.... 9,210 -- 141 (6,381) 19 2,989
Ratio of earnings to
fixed charges.......... 4.0x 1.0x
Deficiency of earnings
to fixed charges....... 8,686 546
Other operating data
(end of period)
Homes passed(18)........ 360,237 28,812 7,200 3,900 400,149
Basic subscribers(19)... 216,531 20,457 5,000 950 242,938
Basic penetration(20)... 60.1% 71.0% 69.4% 24.4% 60.7%
Premium units(21)....... 55,776 5,064 1,200 237 62,277
Premium penetration(22). 25.8% 24.8% 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)
8
<PAGE>
Summary Unaudited Pro Forma Combined Financial and Operating Data
For the Year Ended December 31, 1998
<TABLE>
<CAPTION>
Probable
Avalon Transaction Unaudited
Michigan Cable Avalon New ----------- Pro Forma Pro Forma
Inc.(7) Michigan(8) England(9) Amrac(10) Pegasus(11) Taconic(12) Adjustments(13) Combined
--------- ----------- ---------- --------- ----------- ----------- --------------- ---------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Statement of operations
data
Revenue................. $ 13,657 $ 74,521 $ 4,530 $779 $3,277 $2,086 $ 6,061 $ 104,911
Operating expenses...... 7,469 38,621 2,599 443 1,693 1,378 4,036 56,239
Corporate overhead...... 249 6,087 350 42 97 22 97 6,944
Depreciation and
amortization........... 6,554 28,098 1,569 47 835 426 7,299 44,828
Non-recurring expenses.. -- 5,764 -- -- -- -- -- 5,764
--------- -------- ------- ---- ------ ------ -------- ---------
Operating (loss) income. (615) (4,049) 12 247 652 260 (5,371) (8,864)
Interest expense, net... (4,537) (7,382) (860) -- (938) (17) (17,771) (31,505)
Other income (expense),
net.................... 31 897 (1,110) -- (22) (97) (2,280) (2,581)
--------- -------- ------- ---- ------ ------ -------- ---------
Net (loss) income....... $ (5,121) $(10,534) $(1,958) $247 $ (308) $ 146 $(25,422) $ (42,950)
========= ======== ======= ==== ====== ====== ======== =========
Other financial data
Cash flow from
operations............. (1,345) 15,028 613 276 1,705 104 17,750 34,131
Cash flow from investing
activities............. (436,302) (18,697) (53,193) (61) (117) (81) (32,116) (540,567)
Cash flow from financing
activities............. 439,418 (7,457) 52,797 (561) (971) (23) 5,078 488,281
EBITDA(14).............. $ 5,939 $ 29,813 $ 1,581 $294 $1,487 $ 686 $ 1,928 $ 41,728
Adjusted EBITDA(15)..... 48,775
Adjusted EBITDA
margin(16)............. 46.5%
Ratio of debt to
adjusted EBITDA(17).... 6.8x
Capital expenditures.... $ 4,673 $ 18,697 $ 32 $ 61 $ 114 $ 81 $ 165 $ 23,823
Deficiency of earnings
to fixed charges....... 5,128 303 8,864
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)
9
<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, Avalon Michigan Inc. results of
operations include the results of operations for itself. 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, including Avalon
Cable LLC's wholly-owned subsidiaries, Avalon Michigan LLC, Avalon New
England and Avalon Finance.
(2) Avalon Michigan LLC's results of operations include the actual historical
results for the period from contribution.
(3) Avalon New England results of operations include its results of operations
for the three months ended March 31, 1999, and the results of its wholly-
owned subsidiary, Avalon.com, LLC, from the date of inception (January 21,
1999) through March 31, 1999.
(4) 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
Avalon Michigan, Inc., Avalon Michigan LLC and Avalon New England due to
the reorganization.
(5) Taconic's results of operations includes the actual historical results of
operations for the period from January 1, 1999 through March 31, 1999.
(6) 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.
See Notes to Unaudited Pro Forma Combined Statements of Operations for a
further explanation of these pro forma adjustments.
(7) On November 6, 1998, Avalon Michigan merged with and into Cable Michigan,
the predecessor entity. Prior to this merger, 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.
(8) Cable Michigan's results of operations includes the actual historical
results of operations for the period from January 1, 1998 through November
5, 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 December 31, 1998.
(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) Pegasus' combined results of operations includes the actual historical
results of operations for the period from January 1, 1998 through June 30,
1998.
10
<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
(12) Taconic's results of operations includes the actual historical results of
operations 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 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, Novagate Communications and Hometown
TV.
(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 their merger into and with 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.
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
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 $41,728 $11,201
------- -------
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 ............................... $48,775 $11,334
======= =======
</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, respectively, 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 the 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 the company'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.
12
<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 $328.5 million and shareholders' equity of
approximately $142.3 million. In addition, on a pro forma basis, combined
interest expense for the issuers would have been $8.3 million for the quarter
ended March 31, 1999 and $31.5 million for the year ended December 31, 1998. On
a pro forma basis, the combined earnings of the issuers would have met the
fixed charges for the quarter ended March 31, 1999 and 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 $40.8
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 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 may incur
additional indebtedness, including senior 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;
13
<PAGE>
. the issuers 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 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 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.
You may lose part of your investment because the notes are subordinated to
other debt, which will have a senior claim on the issuers' assets.
The new notes will be general unsecured obligations of the issuers. Payments
on the new notes will rank subordinate in right of payment to all existing and
future senior indebtedness of the issuers, including debt under their credit
facility. In the event of the bankruptcy, liquidation, dissolution,
reorganization or other winding-up of the issuers, the issuers' assets will be
available to pay obligations on the new notes only after all senior
indebtedness has been paid in full. Accordingly, in such event, the issuers may
not have sufficient assets remaining to pay amounts due on the new notes. In
addition, certain senior indebtedness, including our credit facility, limits
our ability to purchase or redeem the new notes and limits payments on the new
notes if such indebtedness is in default or accelerated following an event of
default.
As of December 31, 1998, on a pro forma basis, the issuers would have had on
a combined basis approximately $180.2 million of senior indebtedness
outstanding, excluding $16.3 million of availability under the credit facility.
The issuers may incur additional senior indebtedness from time to time, subject
to applicable restrictions. For additional information, please refer to the
"Description of Certain Debt--The Credit Facility" and "Description of the
Notes" sections of this prospectus.
Covenants in our debt agreements restrict our business in many ways.
The indenture governing the old notes and the new notes, the issuers' senior
secured credit facility and indenture governing the senior discount notes
issued by the holding companies contain numerous restrictive covenants. These
covenants place significant restrictions on, among other things, the ability of
the issuers 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 to meet specified financial ratios and tests. Events beyond
the control of the issuers may affect their ability to meet these ratios and
tests. We cannot assure you that the issuers 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.
14
<PAGE>
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 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 issuers'
assets would be sufficient to repay the issuers' debt, including the new notes,
if the lenders under the credit facility accelerated their 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 these
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;
15
<PAGE>
. 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.
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
16
<PAGE>
. 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
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 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.
17
<PAGE>
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 their
principal amount, together with accrued and unpaid interest and liquidated
damages, if 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 holding companies 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 the senior discount notes of our holding companies.
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 the 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
18
<PAGE>
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 or at the time any
person became an additional obligor, any of the issuers or an additional
obligor:
(1) incurred the debt or assumed the obligations 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 or the obligations and
. was insolvent or was rendered insolvent by reason of the incurrence
of the debt or the obligations,
. 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 or the
additional obligor's obligations to you as a holder of the new notes, or
subordinate the issuer's or additional obligor's obligations to the holders to
other debt of the issuer or the additional obligor, 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 or an additional
obligor 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 conclusions.
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.
19
<PAGE>
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.
20
<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.
. 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 discount notes of the issuers' holding companies 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.
21
<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 of Michigan, Inc., Avalon Cable of New England LLC and Avalon Cable
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]
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 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 LLC became an additional obligor on the old
notes; and
. Avalon Cable of Michigan, Inc. ceased to be an obligor on the old notes
and became a guarantor of all of the obligations of Avalon Cable of
Michigan LLC under the old notes and the credit facility.
22
<PAGE>
Avalon Cable of Michigan, Inc. does not have any significant assets other
than its equity interests in Avalon Cable LLC. As a result, you should not
expect Avalon Cable of Michigan, Inc., as guarantor, 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]
23
<PAGE>
USE OF PROCEEDS
We will not receive any cash proceeds from the issuance of the new notes. We
used the proceeds of approximately $150.0 million from the offering of the old
notes and approximately $110.4 million from the offering of the senior discount
notes, which occurred at the same time, principally to:
. repay approximately $125.0 million under the issuers' 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 holding companies of 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."
24
<PAGE>
CAPITALIZATION
The following table sets forth:
. the unaudited capitalization as of March 31, 1999 of each of Avalon
Michigan LLC, Avalon New England and Avalon Finance, which were the
issuers under the old notes as 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
---------------------------------- Unaudited
Avalon Avalon Avalon Pro Forma Combined
Michigan LLC New England Finance March 31, 1999
------------- ------------ ------- ------------------
(dollars in thousands)
<S> <C> <C> <C> <C>
Long-term debt,
including current
portion
Credit facility....... $174,476 $ 2,900 $ -- $177,950(1)
New notes............. -- -- -- 150,000(2)
Old notes............. 150,000 -- -- --
Note payable--
affiliates........... 15,338 -- 15,338 --
Other................. -- 580 -- 580
-------- ------- ------- --------
Total debt.......... 339,814 3,480 15,338 328,530
Issuers' equity 201,637 51,198 -- 142,252
-------- ------- ------- --------
Total
capitalization..... $541,451 $54,678 $15,338 $470,782
======== ======= ======= ========
</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 $574.
(2) To reflect the exchange of old notes for new notes.
25
<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, Inc., Cable
Michigan, the predecessor to Avalon Cable of Michigan, Inc., Avalon Cable of
New England LLC, AMRAC Clear View, the predecessor to Avalon Cable of New
England, Pegasus Cable Television, Inc. and Pegasus Cable Television of
Connecticut, Inc., Taconic Technology Corporation and Avalon Cable 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
discount notes by the holding companies of the issuers, 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 ended 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 complete 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 of Michigan LLC as Avalon Michigan LLC,
. Avalon Cable of Michigan, Inc. as Avalon Michigan Inc.,
. 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, and
. Avalon Cable Finance, Inc. as Avalon Finance.
The following Unaudited Pro Forma Combined Balance Sheet as of December 31,
1998 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 Avalon Michigan Inc., Cable
Michigan, Avalon New England, Amrac, Pegasus, Taconic and Avalon Finance and
the accompanying notes thereto included elsewhere in this prospectus.
26
<PAGE>
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
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 December 31, 1998, 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.
27
<PAGE>
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
March 31, 1999
(dollars in thousands)
<TABLE>
<CAPTION>
Probable
Avalon Transaction Unaudited
Avalon New Avalon ----------- Pro Forma Pro Forma
ASSETS Michigan LLC England Finance Taconic Adjustments Combined
------ ------------ ------- ------- ----------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
Current assets:
Cash.................... $ 11,923 $ 1,303 $ -- $ -- $ (8,525)(a) $ --
(4,275)(b)
(1,000)(c)
574 (d)
Accounts receivable--
affiliates............. 568 -- -- -- 568
Accounts receivable,
net.................... 5,391 818 -- 32 -- 6,241
Prepaids and other
current assets......... 600 142 -- 626 -- 1,368
-------- ------- ------- ------ --------- --------
Total current assets.... 18,482 2,263 -- 658 (13,226) 8,177
Property, plant and
equipment, net......... 108,617 6,388 -- 1,713 1,612 (a) 118,330
150 (b) 150
1,000 (c) 1,000
Intangible assets, net.. 436,155 32,961 -- -- 4,803 (a) 473,919
4,125 (b) 4,125
Note receivable--
affiliate.............. -- 15,338 15,338 -- (30,676)(e) --
Other assets............ 62 -- -- 28 -- 90
-------- ------- ------- ------ --------- --------
Total assets............ $563,316 $56,950 $15,338 $2,399 $ (32,212) $605,791
======== ======= ======= ====== ========= ========
<CAPTION>
LIABILITIES AND EQUITY
----------------------
<S> <C> <C> <C> <C> <C> <C>
Current liabilities:
Current portion of long-
term debt.............. $ -- $ 20 $ -- $ 289 $ -- $ 309
Accounts payable and
accrued expenses....... 19,235 1,125 -- -- -- 20,360
Accounts payable--
affiliates............. -- 394 -- -- -- 394
Advance billings and
customer deposits...... 2,630 733 -- -- -- 3,363
-------- ------- ------- ------ --------- --------
Total current
liabilities............ 21,865 2,272 -- 289 -- 24,426
Credit facility......... 174,476 2,900 -- -- 574 (d) 177,950
Senior subordinated
notes.................. 150,000 -- -- -- (150,000)(g) --
New Notes............... -- -- -- -- 150,000 (g) 150,000
Long-term debt.......... -- 580 -- -- 580
Notes payable--
affiliate.............. 15,338 -- 15,338 -- (30,676)(e) --
(f)
Deferred credits and
other.................. -- -- -- 359 (359)(a) --
(h)
-------- ------- ------- ------ --------- --------
Total liabilities....... 361,679 5,752 15,338 648 (30,461) 352,956
Minority interest....... -- -- -- -- (b) --
Equity, net............. 201,637 51,198 -- 1,751 (1,751)(a) 252,835
(f)
(h)
-------- ------- ------- ------ --------- --------
Total liabilities and
equity, net......... $563,316 $56,950 $15,338 $2,399 $ (32,212) $605,791
======== ======= ======= ====== ========= ========
</TABLE>
(See Notes to Unaudited Pro Forma Combined Balance Sheet)
28
<PAGE>
NOTES TO UNAUDITED PRO FORMA COMBINED BALANCE SHEET
March 31, 1999
(a) To reflect the pending acquisition of Taconic Technology (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 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 Mercom acquisition and the Additional
Acquisitions..................................................... $4,275
======
</TABLE>
--------
(1) We have acquired 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 $574 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
Inc. payable to Avalon Finance and (ii) a note receivable, including
interest receivable, of $15,338 from Avalon Finance payable to Avalon New
England.
(f) To reflect the exchange of old notes for new notes.
29
<PAGE>
UNAUDITED PRO FORMA COMBINED STATEMENTS OF OPERATIONS
For the Three Months Ended March 31, 1999
<TABLE>
<CAPTION>
Probable
Transaction
-----------
Avalon Avalon Less Unaudited
Michigan Michigan Avalon New Duplicate Pro Forma Pro Forma
Inc.(1) LLC(2) England(3) Period(4) Taconic(5) Adjustments(6) Combined
-------- -------- ---------- --------- ----------- -------------- ---------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues................ $22,368 $1,212 $2,339 $(1,342) $523 $ 949(a) $26,049
Operating expenses...... 12,130 654 1,292 (730) 340 728(a) 14,414
Corporate overhead...... 376 21 37 (23) 6 17(a) 434
Depreciation and
amortization........... 10,126 555 747 (597) 105 235(b) 11,171
Non-recurring expenses.. -- -- -- -- -- -- --
------- ------ ------ ------- ---- ------- -------
Operating (loss) income. (264) (18) 263 8 72 (31) 30
Interest expense, net... (8,422) (564) 92 558 -- (11) (c) (8,347)
Other income (expense),
net.................... 3,206 -- -- -- (28) (3,178) (d) --
------- ------ ------ ------- ---- ------- -------
Net (loss) income....... $(5,480) $ (582) $ 355 $ 566 $ 44 $(3,220) $(8,317)
======= ====== ====== ======= ==== ======= =======
</TABLE>
UNAUDITED PRO FORMA COMBINED STATEMENTS OF OPERATIONS
For the Year Ended December 31, 1998
<TABLE>
<CAPTION>
Probable
Transaction
-----------
Avalon Unaudited
Michigan Cable Avalon New Pro Forma Pro Forma
Inc.(7) Michigan(8) England(9) Amrac(10) Pegasus(11) Taconic(12) Adjustments(13) Combined
-------- ----------- ---------- --------- ----------- ----------- --------------- ---------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues................ $13,657 $ 74,521 $ 4,530 $779 $3,277 $2,086 $ 6,061 (a) $104,911
Operating expenses...... 7,469 38,621 2,599 443 1,693 1,378 4,036 (a) 56,239
Corporate overhead...... 249 6,087 350 42 97 22 97 (a) 6,944
Depreciation and
amortization........... 6,554 28,098 1,569 47 835 426 7,299 (b) 44,828
Non-recurring expenses.. -- 5,764 -- -- -- -- -- 5,764
------- -------- ------- ---- ------ ------ -------- --------
Operating (loss) income. (615) (4,049) 12 247 652 260 (5,371) (8,864)
Interest expense, net... (4,537) (7,382) (860) -- (938) (17) (17,771)(c) (31,505)
Other income (expense),
net.................... 31 897 (1,110) -- (22) (97) (2,280)(d)(e) (2,581)
------- -------- ------- ---- ------ ------ -------- --------
Net (loss) income....... $(5,121) $(10,534) $(1,958) $247 $ (308) $ 146 $(25,422) $(42,950)
======= ======== ======= ==== ====== ====== ======== ========
</TABLE>
(See Notes to Unaudited Pro Forma Combined Statements of Operations)
30
<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, Avalon Michigan Inc. results of
operations include its results of operations. 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 and its
subsidiaries, Avalon Cable of Michigan LLC, Avalon New England, and Avalon
Finance from March 27, 1999 to March 31, 1999.
(2) Avalon Michigan LLC's results of operations includes the actual historical
results for the period from contribution (March 26, 1999) through March 31,
1999.
(3) Avalon New England results of operations include its results of operations
for the three months ended March 31, 1999, the results of its wholly-owned
subsidiary, Avalon.com, from the date of inception (January 21, 1999)
through March 31, 1999.
(4) 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
Avalon Michigan, Inc., Avalon Michigan LLC, and Avalon New England due to
the reorganization.
(5) Taconic's results of operations includes the actual historical results of
operations for the period from January 1, 1999 through March 31, 1999.
(6) 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 (dollars
in thousands) 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...................... $11,171
Historical depreciation and amortization..................... 10,936
-------
Pro forma adjustment......................................... $ 235
=======
</TABLE>
(c) Amount represents increase interest expense due to the financings for
acquisitions (dollars in thousands):
<TABLE>
<CAPTION>
Three Months
Ended
March 31,
1999
------------
<S> <C>
Additional borrowings........................................ $574
Credit facility interest rate................................ 8.0%
----
Pro forma adjustment......................................... $ 11
====
</TABLE>
(d) To remove tax benefits, net, since after reorganization, two of the
three issuers will treated as partnerships for federal income tax
purposes (dollars in thousands):
<TABLE>
<S> <C>
Taconic $ 28
Avalon Michigan, Inc. (3,206)
-------
Total tax benefit, net $(3,178)
=======
</TABLE>
31
<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
(7) 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.
(8) 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.
(9) On May 29, 1998, Avalon New England acquired Amrac. 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
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 reorganizations 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..................... 37,529
-------
Pro forma adjustment......................................... $ 7,299
=======
</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...................... $ 13,734
--------
Senior subordinated notes............................. $ 14,063
Credit facility (1)................................... 16,386
Other debt............................................ 122
Amortization of deferred financing fees............... 934
--------
Pro forma interest expense............................ 31,505
--------
Pro forma adjustment................................ $ 17,771
========
</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.
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
(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............................................... (1,909)
-------
Total tax (benefit), net................................. $(1,807)
=======
</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, Inc.
On November 6, 1998, Avalon Cable of Michigan, Inc., a wholly owned
subsidiary of Avalon Cable of Michigan Holdings, 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 as of November 5, 1998 and 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 statement of
operations and balance sheet data of Avalon Cable of Michigan, 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, 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 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 necessarily 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, Months
Year Ended December 31, 1998 to 1998 to 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 12,131
Corporate overhead...... 3,372 1,562 6,284 7,075 7,204 6,087 249 374
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) (615) (264)
Interest (expense), net. (15,960) (15,767) (15,918) (15,052) (11,393) (7,382) (4,537) (8,422)
Gain on sale of Florida
cable system........... -- -- -- -- 2,571 -- -- --
Other (expense) income,
net.................... (496) (2,372) 4,645 6,127 3,429 897 31 3,206
-------- -------- -------- -------- -------- -------- --------- --------
Net loss................ $(29,143) $(26,226) $(10,501) $ (8,256) $ (4,358) $(10,534) $ (5,121) $ (5,480)
======== ======== ======== ======== ======== ======== ========= ========
Balance sheet data (end
of period)
Total assets............ $147,286 $116,972 $172,759 $149,200 $142,597 $131,220 $ 549,461 $611,055
Long-term debt
(excluding current
portion)............... -- -- 181,807 163,247 143,000 120,000 306,046 442,727
Net (deficit) equity.... (60,419) (76,931) (73,757) (79,741) (53,874) (63,865) 132,254 16,372
Cash flow data
Cash flow from operating
activities............. N/A 29,589 311 27,817 18,344 15,028 18,646 10,108
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 37,262
Other financial data
EBITDA (1).............. $ 20,010 $ 20,598 $ 25,926 $ 32,096 $ 33,117 $ 29,813 $ 5,939 $ 9,952
EBITDA margin (2)....... 41.1% 41.9% 42.7% 42.1% 40.7% 40.0% 43.5% 44.5%
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 5,128 8,686
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 flow from operating
activities............. 369 459 436 622 689 313 276
Cash flow from investing
activities............. (66) (64) (117) (75) (118) (56) (61)
Cash flow 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
Cable Television 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 liabilities that we will acquire from Taconic
Technology is being operated as part of Taconic Technology Corporation. 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 Taconic Technology's future results of operations or
financial position.
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, 1999 have been derived from the unaudited
consolidated financial statements of Taconic Technology, 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 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.................... $ N/A $ 521 $ 367 $ 104 $ 37 $ 19
Cash flows from investing
activities.................... N/A (238) (214) (81) (14) (19)
Cash flows from financing
activities.................... N/A (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 of New England
The selected historical statement of operations and balance sheet data of
Avalon Cable of New England shown below as of December 31, 1997 and 1998 and
for the period from September 4, 1997 (inception) through December 31, 1997 and
for the year ended December 31, 1998 have been derived from the financial
statements of Avalon Cable of New England which have been audited by
PricewaterhouseCoopers LLP, independent accountants. 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 Avalon Cable of New England, which in the opinon 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
financial statements of Avalon Cable of New England as of December 31, 1997 and
1998 and for the period from September 4, 1997 (inception) through December 31,
1997 and for the year ended December 31, 1998 are included 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 Months
Period from Year Ended
September 4, 1997 Ended March 31,
to December 31, December 31, -------------
1997 1998 1998 1999
----------------- ------------ ----- -------
<S> <C> <C> <C> <C>
Statement of operations data
Revenues......................... $ -- $ 4,530 $ -- $ 2,339
Operating expenses............... -- 2,599 -- 1,292
Corporate overhead............... -- 350 -- 37
Depreciation and amortization.... -- 1,569 -- 747
----- ------- ----- -------
Operating income................. -- 12 -- 263
Interest income (expense), net... 4 (860) 1 92
Other expense, net............... -- (1,110) -- --
----- ------- ----- -------
Net income (loss)................ $ 4 $(1,958) $ 1 $ 355
===== ======= ===== =======
Balance sheet data (end of
period)
Total assets..................... $ 504 $53,470 $ 505 $56,950
Long-term debt (excluding current
portion)........................ -- 3,921 -- 5,752
Member's interest................ 4 47,502 5 51,198
Cash flow data
Cash flows from operating
activities...................... $ -- $ 613 -- $ 1,275
Cash flows from investing
activities...................... (500) (53,193) -- (3,089)
Cash flows from financing
activities...................... 500 52,797 -- 2,900
Other financial data
EBITDA (1)....................... $ -- $ 1,581 -- 1,010
EBITDA margin (2)................ -- 34.9% -- 43.2%
Capital expenditures............. -- 32 -- 141
Ratio of earnings to fixed
charges (3)..................... -- -- -- 2.8x
Other operating data (end of
period)
Homes passed (4)................. -- 28,350 -- 28,812
Basic subscribers (5)............ -- 20,604 -- 20,457
Basic penetration (6)............ -- 72.7% -- 71.0%
Premium units (7)................ -- 4,912 -- 5,064
Premium penetration (8).......... -- 23.8% -- 24.8%
Average monthly revenue per basic
subscriber (9).................. -- $ 34.22 -- $ 36.08
</TABLE>
(See Notes to Selected Historical Financial and Other Data)
39
<PAGE>
Avalon Cable Finance
The selected historical consolidated statement of operations and balance
sheet data of Avalon Cable Finance 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 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 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 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 Finance, which in the opinon 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 Finance 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>
Period from Three Months
October 21, 1998 Ended
to 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
Stockholder's equity............................ -- --
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 LLC
The selected historical consolidated statement of operations and balance
sheet data of Avalon Cable of Michigan 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 of
Michigan 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 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
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 of Michigan 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 of
Michigan LLC 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>
Period from Three Months
October 21, 1998 Ended
to December 31, March 31,
1998 1999
----------------- ------------
<S> <C> <C>
Statement of operations data
Revenues........................................ $ -- $ 1,212
Operating expenses.............................. -- 654
Corporate overhead.............................. -- 21
Depreciation and amortization................... -- 555
----- --------
Operating (loss) income......................... -- (18)
Interest (expense), net......................... -- (564)
Other (expense) income, net..................... -- --
----- --------
Net loss........................................ $ -- $ (582)
===== ========
Balance sheet data (end of period)
Total assets.................................... -- $563,316
Long-term debt (excluding current portion)...... -- 339,814
Stockholder's Equity............................ -- 201,637
Cash flow data
Cash flows from operating activities............ -- 626
Cash flows from investing activities............ -- (450)
Cash flows from financing activities............ -- 11,747
Other financial data
EBITDA (1)...................................... $ -- 537
EBITDA margin (2)............................... -- 44.3%
Capital expenditures............................ -- --
Ratio of earnings to fixed charges (3).......... -- --
Amount of the deficiency of earnings to fixed
charges (3).................................... -- 546
Other operating data (end of period)
Homes passed (4)................................ -- 389,049
Basic subscribers (5)........................... -- 236,988
Basic penetration (6)........................... -- 60.9%
Premium units (7)............................... -- 60,840
Premium penetration (8)......................... -- 25.7%
Average monthly revenue per basic subscriber
(9)............................................ -- $ 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.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Overview
General. Members of our management and investors formed Avalon Cable
Holdings, LLC in 1997 to acquire, operate and develop cable television systems
in mid-sized suburban and exurban markets. Our present 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 5,000 basic subscribers as of March
31, 1999 and Hometown TV, Inc. 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
31, 1999 and certain cable system assets of Galaxy American Communications
which had approximately 550 basic subscribers as of March 31, 1999. We expect
that these pending acquisitions will close in the second quarter 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 31, 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 LLC became an additional obligor on the old
notes and the credit facility;
. Avalon Cable of Michigan, Inc. ceased to be an obligor on the old notes
and the credit facility and became a guarantor the obligations of Avalon
Cable of Michigan LLC under the old notes and the credit facility; and
. Avalon Cable of Michigan Holdings, Inc. ceased to be an obligor on the
senior discount notes and together with Avalon Cable of Michigan, Inc.
became a guarantor of the obligations of Avalon Cable LLC under the
senior discount notes.
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 senior discount notes
and their associated discount and deferred financing costs of Avalon
Cable of Michigan Holdings were transferred to Avalon Cable
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<PAGE>
of Michigan, 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 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 senior discount notes and associated discount and
deferred financing costs received from Avalon Cable of Michigan Holdings.
. Avalon Cable LLC contributed to Avalon Cable of Michigan LLC the assets
and liabilities received from Avalon Cable of Michigan, Inc., other than
the senior discount notes and associated discount and deferred financing
costs.
. 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 will be
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, Inc. is a guarantor of the obligations of
Avalon Cable of Michigan LLC under the new notes, its assets consist of its
equity interest in Avalon Cable LLC. As a result, you should not expect Avalon
Cable of Michigan, Inc., as guarantor, to have any assets available to make
interest and principal payments on the new notes since it does not have other
operations and will not have access to additional sources of cash flow other
than this investment.
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 the
"--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 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
44
<PAGE>
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 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 $34.1 million, $(540.6)
million, and $488.3 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.
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 $11.7 million and $41.7 million and pro forma Adjusted
EBITDA of $11.3 million and $48.8 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
45
<PAGE>
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 our completed and pending
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,
Inc. and Avalon Cable of New England LLC refer to their results of operations
for the quarter ended March 31, 1999 compared to the period from acquisition
(November 6, 1998) to December 31, 1998 for Avalon Cable of Michigan, Inc. and
to the fourth quarter of 1998 for Avalon Cable of New England LLC.
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.
On March 26, 1999 Avalon Cable of Michigan acquired the remaining minority
interest in 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 the aggregate.
In March 1999, Avalon Cable of Michigan, Inc. and its affiliates completed a
series of transactions to facilitate certain aspects of its financing. As a
result of these transactions:
. Avalon Cable of Michigan, Inc. contributed its assets and liabilities
excluding deferred tax liabilities, net to Avalon Cable LLC in exchange
for an approximate 88% voting interest in Avalon Cable LLC. Avalon Cable
LLC contributed these assets and liabilities to its wholly-owned
subsidiary, Avalon Cable of Michigan LLC.
. Avalon Cable of Michigan, Inc. became a guarantor of the obligations of
Avalon Cable of Michigan LLC under the old notes and the new notes. It
does not have significant assets, other than its investment in Avalon
Cable LLC.
46
<PAGE>
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) and the addition of employees offset by the discontinuance of
the RCN management fee and lower franchise fees due to a decrease in number of
subscribers.
Operating loss before depreciation and amortization , corporate overhead and
non-recurring expenses was $(0.3) million for the three months ended March 31,
1999, an increase 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 $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 and additional
interest on new borrowings.
Other (expense) income, net was $3.2 million for the three months ended
March 31, 1999, an increase of $3.2 million, 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.
There was a net loss of $5.5 million for the three months ended March 31,
1999, an increase of $0.4 million, or 8%, compared to a net loss of $5.1
million for the period from November 6 to December 31, 1998.
Avalon Cable of New England LLC
Revenues for the three months ended March 31, 1999 were $2.3 million, an
increase of $0.1 million, or 5%, as compared to revenues of $2.2 for the three
months ended December 31, 1998. This increase is primarily related to a rate
increase offset by a decrease in the number of subscribers.
Operating expenses excluding depreciation and amortization, corporate
overhead and non-recurring expenses were $1.3 million for the three months
ended March 31, 1999, a decrease of $0.3 million, or 19%, as compared to $1.6
million for the three months ended December 31, 1998. This decrease is
primarily due to tighter cost controls.
Operating income 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 $0.2 million, or 40%, 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
$0.7 million , a decrease of $0.2 million, or 22%, compared to $0.9 million for
the three months ended December 31, 1998. This increase is primarily related to
the effects of finalizing the purchase accounting for the acquisitions in the
fourth quarter of 1998.
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<PAGE>
Interest expense (income), net was $(0.1) million for the three months ended
March 31, 1999, an increase of $0.3 million, or 150%, compared to $0.2 million
for the three months ended December 31, 1998. This increase is due to the note
receivable being outstanding for the entire three months ended March 31, 1999
compared to 55 days for the three months ended December 31, 1998.
Other (expense) income, net was $0.0 million for the three months ended
March 31, 1999, an increase of $1.1, compared to $(1.1) million for the three
months ended December 31, 1998. This increase is from the three months ended
December 31, 1998 included an extraordinary loss on extinguishment of debt of
$(1.1) million.
Net income was $0.4 million for the three months ended March 31, 1999, an
increase of $2.1 million, or 124%, compared to a net loss of $1.7 million for
the three months ended December 31, 1998.
Avalon Cable of Michigan LLC
The results of operations for Avalon Cable of Michigan LLC include the
results from the date of contribution, March 26, through March 31, 1999. Net
loss was $0.6 million for the three months ended March 31, 1999.
Overview
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.
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. 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
48
<PAGE>
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.
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.
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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%.
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 $.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.
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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.
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.
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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.
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.
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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.
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 are 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. 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.
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, 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%.
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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.
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
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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.
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 discount note offering were
used principally to repay approximately:
. $125.0 million of borrowings under the credit facility,
. $105.0 million of borrowings under the bridge credit facility and
. $18.0 million of borrowings under the subordinated bridge facility,
together in each case with accrued interest.
After giving effect to the foregoing, the bridge credit facility was paid in
full and terminated and there were no amounts outstanding under the
subordinated bridge facility.
As of December 31, 1998, on a pro forma basis, after giving effect to all
completed and pending acquisitions and the reorganization, the issuers would
have had $328.5 million of indebtedness outstanding and $21.0 million of trade
payables and other liabilities outstanding. Such indebtedness includes $177.9
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 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 Avalon Cable LLC, Avalon Cable
Holdings Finance, Avalon Cable Holdings and Avalon Cable of New England
Holdings, Inc. The credit facility
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is secured by substantially all of the assets of the issuers 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 issuers are wholly owned subsidiaries of the holding companies. The
holding companies have no significant assets other than their investment in the
issuers. The primary source of funds for the holding companies, including funds
required to make payments of interest on the senior discount notes, will be
dividends and other advances and transfers from the issuers. The issuers'
ability to make dividends and other advances and transfers of funds is subject
to certain restrictions under the credit facility, the indenture governing the
old notes and new notes and other agreements to which the issuers become a
party. A payment default under the indenture governing the senior discount
notes would constitute an event of default under the credit facility, and could
result in the acceleration of the indebtedness thereunder.
The credit facility, the indenture governing the old notes and the new
notes, and the senior discount note indenture contain financial and other
covenants that restrict, among other things, the ability of the issuers and
certain of their affiliates:
. to incur additional indebtedness,
. incur liens,
. 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 the issuers'
debt service, capital expenditure and working capital requirements for the
foreseeable future. We will require additional financing if our plans
materially change in an adverse manner or prove to be materially inaccurate, or
if we engage in any significant acquisitions. We cannot assure you that this
financing, if permitted under the terms of the indenture governing the old
notes and the new notes or other then applicable agreements, will be available
on terms acceptable to us or at all. 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
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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 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 served 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 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 acquisitions of Nova Cablevision in
March 1999 and Cross Country Cable TV in January 1999. In addition, we
completed the acquisitions of the assets of Novagate Communications Corp., an
Internet service provider and of 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, Inc., an Internet service provider which had
approximately 4,500 Internet subscribers as of March 31, 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, Inc. 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
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acquisitions, and exchanges of systems with other cable operators to create a
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 25,857 242,958
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
certain assets related to Nova Cablevision's cable systems 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 April of 1999.
Traverse City ISP. On April 1, 1999, we completed our acquisition of
Traverse Internet which served approximately 4,500 residential Internet
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 Internet 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, including all
completed and pending acquisitions except the Galaxy American Communications
acquisition.
<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 our
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).
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
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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 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 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 for TV 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
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carrying hundreds of video, data and voice channels over extended distances
without the extensive signal 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 our success to date, we acquired the assets of Novagate
Communications 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, whch 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>
1998-2001................ 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 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.
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. Direct broadcast
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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 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 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 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
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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 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 television 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 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. For additional
information, please refer to the "--Rapid Technological Change" section of this
prospectus.
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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 regulations have
undergone significant changes since 1993. The FCC will likely continue to
modify its rate regulations. Principal components of FCC rate regulation
include:
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. 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 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.
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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.
. 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
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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 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
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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 multipoint, multichannel
distribution service 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 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 local exchange carrier
entry into cable markets, it also opens the local exchange markets to
competition. The Telecommunications Act of 1996 removes barriers
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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.
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
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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 1996 Telecom Act 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,
. 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.
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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. 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
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 of New England and Avalon Cable of
Michigan LLC and a director of Avalon Cable Finance. 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 Avalon Cable LLC Members Agreement 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 ("Muzak"), 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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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 in August
1998, 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's Cable Holdings' New
England operations since July 1998. Prior to joining Avalon Cable Holdings in
July 1998, 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 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.
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
Cable Holdings owned by these executives will vest under the terms of the
Management Securities Purchase Agreements, which 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 his 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 his
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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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 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).
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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 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 employer 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
Avalon Cable of Michigan LLC and Avalon Cable of New England are wholly
owned subsidiaries of Avalon Cable LLC, Avalon Cable Finance is a wholly owned
subsidiary of Avalon Cable Holdings Finance, Inc., which is wholly owned by
Avalon Cable LLC. Avalon Cable Holdings owns a controlling interest in Avalon
Cable LLC.
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, 1999 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>
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................................... 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.
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.
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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 units is paid to each holder thereof. In addition to
these priority distributions, each holder of Class A 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
The issuers are controlled by Avalon Cable LLC. Avalon Cable LLC has
authorized two classes of equity units: Class A units and Class B units. These
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 Avalon Cable LLC Class A unit is paid to the holders thereof. So long as
any portion of these 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 Avalon Cable LLC units then outstanding.
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 Avalon Cable LLC units then outstanding.
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DESCRIPTION OF CERTAIN DEBT
The following description of material provisions of certain indebtedness of
the issuers and their affiliates, and 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 terminated 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 thereof, for the first year and second year, respectively, and the
issuers must reimburse certain of the senior lenders' costs under certain
conditions.
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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 holding companies of
amounts to pay the Accreted Interest Redemption Amount on the senior discount
notes as described below and other interest payments on the senior discount
notes, capital expenditures, investments, optional payments and modifications
of debt instruments, including the indenture governing the old notes and new
notes, transactions with affiliates and sales and leasebacks. In particular,
under the credit facility, the issuers may pay cash dividends to the holding
companies to allow payments of interest, including the Accreted Interest
Redemption Amount, on the senior discount 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 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 Discount Notes
On December 3, 1998, Avalon Cable LLC, Avalon Cable of Michigan Holdings,
Inc., and Avalon Cable Holdings Finance, Inc. issued $196.0 million aggregate
principal amount at maturity of their 11 7/8% senior discount notes due 2008.
The senior discount notes were issued under an indenture dated as of December
10, 1998 by and among Avalon Cable of Michigan Holdings, Avalon Cable LLC and
Avalon Cable Finance Holdings, and The Bank of New York, as trustee.
In the reorganization, (a) Avalon Cable of Michigan Holdings ceased to be
obligated as an issuer of the senior discount notes and (b) Avalon Cable of
Michigan, Inc. and Avalon Cable of Michigan Holdings became guarantors of
Avalon Cable LLC's obligations under the senior discount notes. Neither Avalon
Cable of Michigan, Inc. nor Avalon Cable of Michigan Holdings has any
significant assets or liabilities other than, with respect to Avalon Cable of
Michigan, Inc., its equity interest in Avalon Cable LLC, and, with respect to
Avalon Cable of Michigan Holdings, its equity interest in Avalon Cable of
Michigan, Inc.
The senior discount notes are general unsecured obligations of the holding
companies and rank pari passu in right of payment with all current and future
senior indebtedness of the holding companies. However, the operations of the
holding companies are conducted through their subsidiaries and, therefore, the
holding companies are dependent upon the cash flow of their subsidiaries to
meet their obligations, including their obligations under the senior discount
notes. The senior discount notes are effectively subordinated to all
indebtedness and other liabilities and commitments, including trade payables
and lease obligations, of the issuers. At any one time, up to an additional
aggregate principal amount at issuance of $50.0 million of senior discount
notes may be issued from time to time, subject to certain covenants in the
senior discount note indenture.
The senior discount notes were issued at a substantial discount from their
principal amount at maturity, to generate gross proceeds of approximately
$110.4 million. Interest on the senior discount notes will accrue but not be
payable before December 1, 2003. Thereafter, interest on the senior discount
notes will accrue on the principal amount at maturity 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, commencing December 1, 2003, to holders of record on the immediately
preceding May 15, and November 15. Prior to December 1, 2003, the accreted
value of the senior discount notes will increase, representing amortization of
original issue discount, between the date of original issuance
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<PAGE>
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.
Subject to the satisfaction of certain conditions in the credit facility and
the indenture governing the old notes and the new notes, the issuers may pay
cash dividends to their holding companies to permit their holding companies to
pay the Accreted Interest Redemption Amount described below and other interest
payments on the senior discount notes. For additional information, please refer
to the "Description of the Notes--Certain Covenants" section of this
prospectus.
On December 1, 2003, the holding companies of 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 on a pro rata basis at a redemption
price of 100% of the principal amount at maturity of the senior discount notes
so redeemed. This amount, which we refer to as the "Accredited Interest
Redemption Amount," would be $72,479,000 in aggregate principal amount at
maturity of the senior discount notes, assuming all of the senior discount
notes remain outstanding on such date. The Accreted Interest Redemption Amount
represents:
. the excess of the aggregate accreted principal amount of all senior
discount 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 senior discount notes at a rate per annum
equal to the stated interest rate on the senior discount notes.
On or after December 1, 2003, the senior discount notes will be subject to
redemption at any time at the option of the holding companies, in whole or in
part, upon not less than 30 nor more than 60 days notice, at the redemption
prices, which are expressed as percentages of principal amount, shown 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 before December 1, 2001, the
holding companies 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 senior discount note 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. 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 discount
notes will have the right to require the holding companies to repurchase all or
any part of such holder's senior discount notes pursuant to a change of control
offer 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. As used in this paragraph, "change of control"
has substantially the same meaning as in the indenture governing the old notes
and new notes.
The senior discount note indenture contains covenants that, among other
things, limit the ability of the holding companies and their restricted
subsidiaries, including the issuers, to:
. incur additional indebtedness,
. pay dividends or make certain other restricted payments,
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. 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 discount notes but junior
to senior indebtedness and,
. with respect to the restricted subsidiaries, including the issuers, issue
capital stock.
Under certain circumstances, to the extent permitted by the indenture
governing the old notes and new notes, the holding companies will be required
to make an offer, with the proceeds of certain asset sales, to purchase senior
discount 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, or, in the cases of repurchase before the
December 1, 2003, at a purchase price equal to 100% of the accreted value
thereof to the date of repurchase. The senior discount note indenture contains
certain customary events of default, including the failure to pay principal,
interest and liquidated damages, the failure to comply with covenants, cross-
defaults on indebtedness, the failure to pay on final judgment in excess of a
threshhold 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., Prudential Securities Incorporated, BancBoston Robertson Stephens Inc.,
Fleet Securities Inc., and SG Cowen Securities Corporation 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 the Shelf
Registration Statement and to provide comments on the Shelf Registration
Statement within the time
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<PAGE>
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 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 of old notes.
All accrued liquidated damages will be payable to holders of the old notes
in cash on each June 1 and December 1, 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.
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,
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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 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, $150,000,000 aggregate principal
amount 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.
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.
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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.
Interest on the new notes
The new notes will bear interest from their date of issuance. Holders of old
notes that are accepted for exchange will receive, in cash, accrued interest
thereon to, but not including, the date of issuance of the new notes. Such
interest will be paid with the first interest payment on the new notes on June
1, 1999 to persons who are registered holders of the new notes on May 15, 1999.
Interest on the old notes accepted for exchange will cease to accrue upon
issuance of the new notes.
Interest on the new notes is payable semi-annually on each June 1 and
December 1, commencing on June 1, 1999.
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.
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
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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 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.
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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 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.
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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.
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.
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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 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.
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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, Inc., which is referred to as "Avalon Michigan Inc.",
Avalon Cable of New England, LLC, which is referred to as "Avalon New England",
and Avalon Cable Finance, Inc., which is referred to as "Avalon Finance", as
joint and several obligors, and The Bank of New York, as trustee, in a private
transaction that was not subject to the registration requirements of the
Securities Act. In the reorganization, (a) Avalon Cable of Michigan LLC
("Avalon Michigan LLC") became an obligor under the old notes and the
Indenture, and (b) Avalon Michigan Inc. ceased to be obligated as an issuer,
and became a guarantor of Avalon Michigan LLC's obligations under the new notes
and the Indenture. Avalon Michigan Inc. does not have significant assets or
liabilities, other than its equity interest in Avalon Holdings LLC. See "The
Company--Corporate Structure" and "--Avalon Michigan Guarantee." Thus,
currently, the "Issuers" under the Indenture are Avalon Michigan LLC, Avalon
New England, and Avalon Finance. 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 be subordinated in right of payment to all current and
future Senior Indebtedness of the Issuers, including Indebtedness under the
Senior Credit Facility. The new notes, like the old notes, will rank pari passu
in right of payment with all other senior subordinated Indebtedness of the
Issuers issued in the future, if any, and senior in the right of payment to all
subordinated Indebtedness of the Issuers issued in the future, if any. As of
December 31, 1998, on a pro forma basis giving effect to the pending
transactions and the Reorganization, the Issuers would have had on a combined
basis Senior Indebtedness of approximately $180.2 million (exclusive of unused
commitments of $16.3 million under the Senior Credit Facility) and would have
had additional liabilities (including trade payables and lease obligations but
excluding the old notes) aggregating approximately $21.1 million. The Indenture
will permit the incurrence of additional Senior Indebtedness in the future.
None of the Issuers currently have any Subsidiaries. Under certain
circumstances, the Issuers will be able to designate future Subsidiaries as
Unrestricted Subsidiaries. Unrestricted Subsidiaries will not be subject to any
of the restrictive covenants set forth in the Indenture.
Principal, Maturity and Interest
The Notes will be limited in aggregate principal amount to $200.0 million,
of which $150.0 million were issued in the initial offering, and will mature on
December 1, 2008. Interest on the Notes will accrue at the rate of 9.375% 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
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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 date of original issuance. 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.
Subordination
The payment of principal of, premium, if any, and interest on the Notes will
be subordinated in right of payment, as set forth in the Indenture, to the
prior payment in full of all Senior Indebtedness, whether outstanding on the
date of the Indenture or thereafter incurred.
Upon any distribution to creditors of any of the Issuers in a liquidation or
dissolution of such Issuer or in a bankruptcy, reorganization, insolvency,
receivership or similar proceeding relating to such Issuer or its property, in
an assignment for the benefit of creditors or any marshaling of such Issuer's
assets and liabilities, the holders of Senior Indebtedness of such Issuer will
be entitled to receive payment in full of all Obligations due in respect of
such Senior Indebtedness (including interest after the commencement of any such
proceeding at the rate specified in the applicable Senior Indebtedness) before
the Holders of Notes will be entitled to receive any payment with respect to
the Notes, and until all Obligations with respect to such Senior Indebtedness
are paid in full, any distribution by such Issuer to which the Holders of Notes
would be entitled shall be made to the holders of such Senior Indebtedness
(except that Holders of Notes may receive and retain (i) Permitted Junior
Securities and (ii) payments made from the trust described under "--Legal
Defeasance and Covenant Defeasance").
The Issuers also may not make any payment upon or in respect of the Notes
(except in Permitted Junior Securities or from the trust described under "--
Legal Defeasance and Covenant Defeasance") if (i) a default in the payment of
the principal of, premium, if any, or interest on Designated Senior Debt occurs
and is continuing beyond any applicable period of grace or (ii) any other
default occurs and is continuing with respect to Designated Senior Debt that
permits holders of the Designated Senior Debt as to which such default relates
to accelerate its maturity and the Trustee receives a notice of such default (a
"Payment Blockage Notice") from any of the Issuers or the holders of any
Designated Senior Debt. Payments on the Notes may and shall be resumed (a) in
the case of a payment default, upon the date on which such default is cured or
waived and (b) in case of a nonpayment default, the earlier of the date on
which such nonpayment default is cured or waived or 179 days after the date on
which the applicable Payment Blockage Notice is received, unless the maturity
of any Designated Senior Debt has been accelerated. No new period of payment
blockage may be commenced unless and until (i) 360 days have elapsed since the
effectiveness of the immediately prior Payment Blockage Notice and (ii) all
scheduled payments of principal, premium, if any, and interest on the Notes
that have come due have been paid in full in cash. No nonpayment default that
existed or was continuing on the date of delivery of any Payment Blockage
Notice to the Trustee shall be, or be made, the basis for a subsequent Payment
Blockage Notice unless such default shall have been waived for a period of not
less than 180 days.
The Indenture further requires that the Issuers promptly notify holders of
Senior Indebtedness if payment of the Notes is accelerated because of an Event
of Default.
As a result of the subordination provisions described above, in the event of
a liquidation or insolvency, Holders of Senior Subordinated Notes may recover
less ratably than creditors of the Issuers who are holders of
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Senior Indebtedness. On a pro forma basis, after giving effect to the pending
acquisitions and the Reorganization, the principal amount of Senior
Indebtedness outstanding at December 31, 1998 would have been approximately
$180.2 million. The Indenture will limit, subject to certain financial tests,
the amount of additional Indebtedness, including Senior Indebtedness, that the
Issuers and their Subsidiaries can incur. See "--Certain Covenants--Incurrence
of Indebtedness and Issuance of Preferred Stock."
Additional Obligors
The Issuers may designate additional Persons as obligors under the Notes
("Additional Obligors"). Each Additional Obligor will execute and deliver to
the Trustee a supplement to the Indenture pursuant to which such Additional
Obligor will agree to become jointly and severally liable for all obligations
relating to the Notes and agree to be bound as an Issuer by all the terms and
conditions of the Indenture, including all payment obligations in respect of
the Notes, and thereafter the term Issuers shall include in all respects such
Additional Obligor.
Avalon Michigan Guarantee
As part of the Reorganization, Avalon Michigan LLC became an Issuer instead
of Avalon Michigan Inc. and Avalon Michigan Inc. agreed to guarantee the
payment obligations of Avalon Michigan LLC under the Notes (the "Avalon
Michigan Guarantee"). The Avalon Michigan Guarantee was issued in connection
with the Reorganization to avoid certain adverse tax consequences in respect of
the Reorganization. Avalon Michigan Inc. does not have any significant business
operations or assets, other than its equity interest in Avalon Cable LLC, and
does not have any revenues. As a result, holders of the Notes should not expect
Avalon Michigan Inc. (as Guarantor) to participate in servicing the interest,
principal obligations and Liquidated Damages, if any, on the Notes. The
obligations of Avalon Michigan Inc. under the Avalon Michigan Guarantee will be
limited so as not to constitute a fraudulent conveyance under applicable law.
See "Risk Factors."
Maximum Amount of Obligations
The obligations of each Issuer, each Additional Obligor and Avalon Michigan
Inc. (under the Avalon Michigan Guarantee) will be limited to the maximum
amount as will, after giving effect to all other contingent and fixed
liabilities of such Issuer, such Additional Obligor or Avalon Michigan Inc., 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, any other Additional Obligor
or Avalon Michigan Inc., as the case may be, in respect of the obligations of
such other Issuer, such other Additional Obligor or Avalon Michigan Inc., as
the case may be, under its obligations under the Indenture, result in the
obligations of such Issuer, such Additional Obligor or Avalon Michigan Inc., 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
"Risk Factors."
Optional Redemption
Except as described below, the Notes will not be redeemable at the Issuers'
option prior to December 1, 2003. Thereafter, the 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........................................................... 104.688%
2004........................................................... 103.125%
2005........................................................... 101.563%
2006 and thereafter............................................ 100.000%
</TABLE>
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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 of 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, 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 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 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 (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 Securities 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.
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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 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 Senior Credit Facility limits the ability of the Issuers to purchase any
Notes and provides that certain change of control events with respect to the
Issuers or Avalon would constitute a default thereunder. Any future credit
agreements or other agreements relating to Senior Indebtedness to which the
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 prohibited from
purchasing Notes, the Issuers could seek the consent of its lenders to the
purchase of Notes or could attempt to refinance the borrowings that contain
such prohibition. If the Issuers do not obtain such a consent or repay such
borrowings, the Issuers will remain prohibited from purchasing the 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 Senior Credit Facility. In such circumstances, the subordination
provisions in the Indenture would likely restrict payments to the Holders of
Notes. In addition, certain change of control events would constitute an event
of default under the Bridge Credit Agreement and other agreements to which
Avalon and its Subsidiaries are or may become party.
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.
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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:
(1) 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
(2) 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 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 under the
Senior Credit Facility (and to correspondingly permanently reduce the
commitments with respect thereto) 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
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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 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, 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 of the 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. After the 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 Holding Companies may be required to make a similar offer to purchase the
Senior Discount Notes (and any pari passu Indebtedness) from the holders
thereof. In such event, the Issuers and Holding Companies may make simultaneous
similar offers to purchase the Notes (and any pari passu Indebtedness) and the
Senior Discount Notes (and any pari passu Indebtedness containing similar
provisions), respectively. If such simultaneous offers are made, the Excess
Proceeds shall first be utilized to redeem any Notes (and any pari passu
Indebtedness) tendered pursuant to such offer by the Issuers. To the extent
that any Excess Proceeds are remaining after such offer by the Issuers and to
the extent permitted by the Indenture, such remaining Excess Proceeds will be
utilized to redeem a pro rata portion of the Senior Discount Notes and any pari
passu Indebtedness containing similar terms.
The Issuers will comply with the requirements of Rule 14e-1 under the
Securities 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; or
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. 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), (13), (14) or (15) of the next succeeding paragraph), is less
than the sum of
. (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
. 100% of the aggregate Net Cash Proceeds received by the Issuers as
a contribution to the equity capital of the Issuers other than a
contribution to the equity capital of the Issuers from a capital
contribution contemplated by clause (15) of the next succeeding
paragraph or the proceeds of the ABRY Subordinated Debt incurred
by the Holding Companies (unless and until converted to equity) 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 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;
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(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);
(8) payments to Affiliates of the Issuers and holders of the 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 or distributions to dissenting stockholders pursuant to
transactions permitted under the terms of the Indenture;
(11) payments to the Holding Companies from the Net Cash Proceeds of the
Offering, in an amount not to exceed $20.1 million, to permit
repayment of a portion of the borrowings under the Bridge Credit
Agreement;
(12) payments to the Holding Companies to permit repayment of funds on the
ABRY Subordinated Debt (including all interest accrued thereon) in
accordance with the terms thereof;
(13) payments to the Holding Companies to permit cash payments to holders
of Senior Discount Notes in an amount sufficient to enable the Holding
Companies to make payments of interest required to be made in respect
of the Senior Discount Notes when due to be paid in accordance with
the terms thereof; provided such interest payments are made with the
proceeds of such payment;
(14) any Issuer may pay any dividend or make any distribution so long as
simultaneously therewith a capital contribution in an equal amount is
made to another Issuer and
(15) 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),
(11), (12), (13) and (15) above, no Default or Event of Default shall
have occurred and be continuing or would occur as a consequence
thereof.
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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) 6.5 to 1, if such incurrence or issuance is on or prior to
December 31, 2000, and (b) 6.0 to 1, if such incurrence or issuance is after
December 31, 2000.
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 Senior 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 Senior Credit
Facility; provided that the aggregate principal amount of all Indebtedness
of the Issuers and their Restricted Subsidiaries outstanding under the
Senior 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 Senior Credit Facility
pursuant to the provisions described under the caption "--Certain
Covenants--Asset Sales;" provided, further, that the aggregate principal
amount of Indebtedness (excluding guarantees by Restricted Subsidiaries
under the Senior Credit Facility and under any Permitted Refinancing
Indebtedness) incurred by Restricted Subsidiaries of the Issuers pursuant
to this clause (1) does not exceed $25 million at any one time outstanding;
(2) the incurrence by the Issuers and their Restricted Subsidiaries of
Existing Indebtedness;
(3) the incurrence by the Issuers of the Existing Michigan Indebtedness
and the Mercom Intercompany Loan;
(4) the incurrence by the Issuers of Indebtedness represented by the
Notes in an aggregate principal amount of $150 million outstanding on the
date of the Indenture;
(5) 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
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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 (5), not to exceed
$10.0 million at any time outstanding;
(6) the incurrence by the Issuers or any of their Restricted
Subsidiaries of Permitted Refinancing Indebtedness;
(7) 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 (7);
(8) 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;
(9) 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";
(10) 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";
(11) 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
(12) 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 (12), not to exceed
$15.0 million.
For purposes of determining compliance with this covenant, if an item of
proposed Indebtedness meets the criteria of more than one of the categories of
Permitted Debt described in clauses (1) through (12) 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.
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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,
. the Senior 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 Senior 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,
. 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,
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. 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.
No Senior Subordinated Debt
The Indenture provides that, notwithstanding any other provision thereof,
the Issuers will not incur, create, issue, assume, guarantee or otherwise
become liable, directly or indirectly, for any Indebtedness (including Acquired
Debt) that is subordinate or junior in right of payment to any Senior
Indebtedness and senior in any respect in right of payment to the Notes.
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
(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 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.
Future Additional Obligors
The Issuers may designate additional Persons as Additional Obligors under
the Notes. The Issuers will cause each Additional Obligor to execute and
deliver to the Trustee an amendment and supplement to the Indenture pursuant to
which such Additional Obligor will agree to be bound by all the terms and
conditions of the Indenture, including all payment obligations in respect of
the Notes, and thereafter the term Issuers shall include in all respects such
Additional Obligor.
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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.
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:
. 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 will also provide 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:
. 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
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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
. 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 with, or for the benefit of, any
Affiliate of any such Person (each of the foregoing, an "Affiliate
Transaction"), unless:
(1) 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
(2) 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 (1) 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, the Holding Companies 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, the Holding Companies
or Avalon in their capacity as such, to the extent such fees and
compensation are reasonable and customary,
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. 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, the Holding Companies 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" and
. 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."
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 (whether or not prohibited by the
subordination provisions of the Indenture);
. default in payment when due of 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;
. 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
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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 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 Senior Credit Facility
shall be outstanding, such acceleration shall not be effective until the
earlier of:
. an acceleration of such Indebtedness under the Senior Credit Facility and
. 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 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 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 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
guarantor under the Notes, 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.
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,
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. 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;
. 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;
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. 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 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 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.
In addition, any amendment to the provisions of Article 10 of the Indenture
(which relate to subordination) will require the consent of the Holders of at
least 75% in aggregate principal amount of the Notes then outstanding if such
amendment would adversely affect the rights of Holders of Notes.
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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 provide for Additional Obligors, to make 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 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, and 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.
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 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.
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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 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.
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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 Holding Companies 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 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 Holding Companies within 18 months of the date of
issuance thereof, unless refinanced.
"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 Cable of New England LLC of all of the cable system assets of
Taconic Technology Corp.
"Administrative Agent" means Lehman Commercial Paper Inc.
"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
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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 Inc." means Avalon Cable of Michigan, Inc., a Pennsylvania
corporation.
"Avalon Michigan LLC" means Avalon Cable of Michigan 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.
"Bridge Credit Agreement" means the Bridge Credit Agreement, dated as of
November 5, 1998, among the Holding Companies, the lenders named therein,
Lehman Brothers Inc. and Lehman Commercial Paper Inc., including any related
notes, guarantees, collateral documents, instruments and agreements executed
in connection therewith, and in each case, as amended, restated, supplemented,
modified, renewed, refunded, replaced or refinanced from time to time.
"Bridge Lenders" means the several banks and other financial institutions
or entities from time to time parties to the Bridge Credit 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
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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.
"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
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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.
"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.
"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.
"Designated Senior Debt" means (i) any Indebtedness outstanding under the
Senior Credit Facility and (ii) any other Senior Indebtedness permitted
hereunder the principal amount of which is $25.0 million or more and that has
been designated by the Issuers as "Designated Senior Debt."
"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.
"Exchange Notes" means those certain notes of the Holding Companies, placed
in escrow on November 6, 1998, that may be issued if the terms of the Bridge
Credit Agreement so require.
"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 Senior 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.
"Holding Companies" means initially Avalon Cable of Michigan Holdings, Inc.,
Avalon Cable LLC and Avalon Cable Holdings Finance, Inc. or any successor
thereto; provided that subsequent to the Reorganization, the Holding Companies
shall be Avalon Cable LLC, as successor to Avalon Michigan Inc., and Avalon
Cable Holdings Finance or any successor thereto.
"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."
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"Issue Date" means the date on which the Notes are originally issued.
"Issuers" means, initially, Avalon Michigan Inc., Avalon New England and
Avalon Finance or any successor thereto; provided that subsequent to the
Reorganization, the Issuers shall be Avalon New England, Avalon Finance and
Avalon Michigan LLC, as successor to Avalon Michigan Inc. or any successor
thereto.
"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
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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.
"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
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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 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 Junior Securities" means Equity Interests in or debt securities
of any Issuer that are issued pursuant to a plan of reorganization of such
Issuer and are subordinated to all Senior Indebtedness (and any debt securities
issued in exchange for Senior Indebtedness) to substantially the same extent
as, or to a greater extent than, the Notes are subordinated to Senior
Indebtedness pursuant to the Indenture so long as (i) the effect of the
issuance of such Equity Interests or debt securities is not to cause the Notes
to be treated as part of the same class of claims or any class of claims pari
passu with, or senior to, such Senior Indebtedness pursuant to such plan of
reorganization and (ii) the rights of the holders of such Senior Indebtedness
are not altered or impaired without their consent.
"Permitted Liens" means (i) Liens securing Indebtedness under the Senior
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
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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 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 (v) 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
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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 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) Avalon Michigan Inc. ceases to be an
Issuer and 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 Credit Facility" means that certain Senior Credit Agreement, dated
as of November 5, 1998, by and among the 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.
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"Senior Discount Notes" means the Senior Discount Notes due 2008 issued by
the Holding Companies, as co-obligors, under the Indenture dated as of December
10, 1998.
"Senior Indebtedness" means (i) all Indebtedness outstanding under the
Senior Credit Facility permitted under clause (i) of the second paragraph of
the covenant described above under the caption "--Certain Covenants--Incurrence
of Indebtedness and Issuance of Preferred Stock," (ii) any other Indebtedness
permitted to be incurred by the Issuers under the terms of the Indenture,
unless the instrument under which such Indebtedness is incurred expressly
provides that it is on a parity with or subordinated in right of payment to the
Notes and (iii) all Obligations with respect to the foregoing. Notwithstanding
anything to the contrary in the foregoing, Senior Indebtedness will not include
(w) any liability for federal, state, local or other taxes owed or owing by the
Issuers, (x) any Indebtedness of the Issuers to any of their Subsidiaries or
other Affiliates, (y) any trade payables or (z) any Indebtedness that is
incurred in violation of the Indenture.
"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 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)
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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 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.
Payments of Interest
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,
. 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.
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
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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 described under the "The Exchange
Offer--Purpose and Effect of the Exchange Offer" above. 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.
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, reduced by any cash payments on the new
note other than qualified stated interest. 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, other than
amounts attributable to accrued qualified stated interest not yet taken into
income which will be taxed as ordinary income, 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,
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(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
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 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 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 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 and interest 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.
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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.
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.
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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, 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.
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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 our company, that file electronically with the SEC.
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EXPERTS
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, 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 each of the
two years in the period ended December 31, 1997 and for the period from January
1, 1998 through November 5, 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 Avalon Cable of New England LLC as of December
31, 1997 and 1998 and for the period from September 4, 1997 (inception) through
December 31, 1997 and for the year ended 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, 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, 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 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 financial statements of Avalon Cable of Michigan LLC as of 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.
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INDEX TO THE FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Avalon Cable of Michigan, Inc. and Subsidiaries
Report of Independent Accountants ...................................... F-3
Consolidated Balance Sheet as of December 31, 1998 ..................... F-4
Consolidated Statement of Operations.................................... F-5
Consolidated Statement of Changes in Shareholders' Equity for the period
from June 2, 1998 (inception) through December 31, 1998................ F-6
Consolidated Statement of Cash Flows for the period from June 2, 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-17
Consolidated Statement of Operations for the quarter ended March 31,
1999................................................................... F-18
Consolidated Statement of Changes in Shareholders' Equity for the
quarter ended March 31, 1999........................................... F-19
Consolidated Statement of Cash Flows for the quarter ended March 31,
1999................................................................... F-20
Notes to Consolidated Financial Statements.............................. F-21
Cable Michigan, Inc. and Subsidiaries
Report of Independent Accountants....................................... F-24
Consolidated Balance Sheets as of December 31, 1997 and November 5,
1998................................................................... F-25
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-26
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-27
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-28
Notes to Consolidated Financial Statements.............................. F-30
Avalon Cable of New England LLC and Subsidiaries
Report of Independent Accountants ...................................... F-43
Balance Sheets as of December 31, 1997 and 1998......................... F-44
Statements of Operations for the period from September 4, 1997
(inception) through
December 31, 1997 and the year ended December 31, 1998................. F-45
Statements of Changes in Member's Interest for the period from September
4, 1997 (inception) through December 31, 1997 and for the year ended
December 31, 1998...................................................... F-46
Statements of Cash Flows for the period from September 4, 1997
(inception) through
December 31, 1997 and the year ended December 31, 1998................. F-47
Notes to Financial Statements........................................... F-48
Consolidated Balance Sheets as of March 31, 1998 and 1999............... F-53
Consolidated Statement of Operations for the quarters ended March 31,
1998 and 1999.......................................................... F-54
Consolidated Statement of Changes in Members' Interest for the quarters
ended March 31, 1998 and 1999.......................................... F-55
Consolidated Statement of Cash Flows for the quarters ended March 31,
1998 and 1999.......................................................... F-56
Notes to Consolidated Financial Statements.............................. F-57
Amrac Clear View, A Limited Partnership
Report of Independent Accountants....................................... F-59
Balance Sheet as of May 28, 1998........................................ F-60
Statement of Operations for the period from January 1, 1998 through May
28, 1998............................................................... F-61
Statement of Changes in Partners' Equity (Deficit) for the period from
January 1, 1998 through
May 28, 1998........................................................... F-62
Statement of Cash Flows for the period from January 1, 1998 through May
28, 1998............................................................... F-63
Notes to Financial Statements........................................... F-64
</TABLE>
F-1
<PAGE>
INDEX TO THE FINANCIAL STATEMENTS--(Continued)
<TABLE>
<CAPTION>
Page
-----
<S> <C>
Amrac Clear View, A Limited Partnership
Independent Auditors' Report........................................... F-68
Balance Sheets as of December 31, 1996 and 1997........................ F-69
Statements of Net Earnings for the years ended December 31, 1995, 1996
and 1997.............................................................. F-70
Statements of Changes in Partners' Equity (Deficit) for the years ended
December 31, 1995, 1996 and 1997...................................... F-71
Statements of Cash Flows for the years ended December 31, 1995, 1996
and 1997.............................................................. F-72
Notes to Financial Statements.......................................... F-73
Pegasus Cable Television, Inc.
Report of Independent Accountants...................................... F-77
Combined Balance Sheets at December 31, 1996 and 1997 and June 30,
1998.................................................................. F-78
Combined Statement of Operations for the years ended December 31, 1995,
1996 and 1997 and the six months ended June 30, 1998.................. F-79
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-80
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-81
Notes to Combined Financial Statements................................. F-82
Taconic Technology Corp.
Independent Auditors' Report........................................... F-88
Balance Sheets at December 31, 1997 and 1998 and March 31, 1999
(unaudited)........................................................... F-89
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-90
Statements of Cash Flows for the years ended December 31, 1997 and 1998
and three months ended March 31, 1998 and 1999 (unaudited)............ F-91
Notes to Financial Statements.......................................... F-92
Avalon Cable Finance, Inc.
Report of Independent Accountants ..................................... F-96
Balance Sheet as of December 31, 1998 ................................. F-97
Statement of Operations for the period from October 21, 1998
(inception) through
December 31, 1998..................................................... F-98
Statement of Cash Flows for the period from October 21, 1998
(inception) through
December 31, 1998..................................................... F-99
Notes to Financial Statements.......................................... F-100
Balance Sheet as of March 31, 1999..................................... F-103
Statement of Operations for the quarter ended March 31, 1999........... F-104
Statement of Cash Flows for the quarter ended March 31, 1999........... F-105
Notes to Financial Statements.......................................... F-106
Avalon Cable of Michigan LLC and Subsidiaries
Report of Independent Accountants ..................................... F-107
Balance Sheet as of December 31, 1998 ................................. F-108
Notes to Financial Statements.......................................... F-109
Consolidated Balance Sheet as of March 31, 1999........................ F-110
Consolidated Statement of Operations for the quarter ended March 31,
1999.................................................................. F-111
Consolidated Statement of Changes in Members' Interest for the quarter
ended March 31, 1999.................................................. F-112
Consolidated Statement of Cash Flows for the quarter ended March 31,
1999.................................................................. F-113
Notes to Consolidated Financial Statements............................. F-114
</TABLE>
F-2
<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-3
<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-4
<PAGE>
AVALON CABLE OF MICHIGAN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT 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-5
<PAGE>
AVALON CABLE OF MICHIGAN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN 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-6
<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 in 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-7
<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-8
<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-9
<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-10
<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-11
<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-12
<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-13
<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-14
<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-15
<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-16
<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-17
<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-18
<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-19
<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-20
<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-21
<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-22
<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-23
<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-24
<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-25
<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-26
<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-27
<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-28
<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-29
<PAGE>
CABLE MICHIGAN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands Except per Share Data)
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-30
<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-31
<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 for 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-32
<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-33
<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>
F-34
<PAGE>
CABLE MICHIGAN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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>
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>
F-35
<PAGE>
CABLE MICHIGAN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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>
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
F-36
<PAGE>
CABLE MICHIGAN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 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
F-37
<PAGE>
CABLE MICHIGAN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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.
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-38
<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-39
<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:
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
The following assumptions were used in the determination of the consolidated
projected benefit obligation and net periodic pension cost (credit) for
December 31, 1996:
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%
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-40
<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-41
<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-42
<PAGE>
Report of Independent Accountants
To the Board of Managers
of Avalon Cable of New England LLC
In our opinion, the accompanying balance sheets and the related statements
of operations, changes in member's interest and of cash flows present fairly,
in all material respects, the financial position of Avalon Cable of New England
LLC (the "Company"), as of December 31, 1997 and 1998 and the results of its
operations, changes in member's interest and its cash flows for the period from
September 4, 1997 (inception) through December 31, 1997 and for the year ended
December 31, 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-43
<PAGE>
AVALON CABLE OF NEW ENGLAND LLC
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
------------
ASSETS 1997 1998
------ ---- -------
In thousands
<S> <C> <C>
Current assets:
Cash........................................................... $-- $ 217
Restricted cash................................................ 500 --
Subscriber receivables, less allowance for doubtful accounts of
$0 and $70.................................................... -- 847
Prepaid expenses and other current assets...................... 4 121
---- -------
Total current assets......................................... 504 1,185
Property, plant and equipment, net............................... -- 6,310
Note receivable--affiliate....................................... -- 15,171
Intangible assets, net........................................... -- 30,804
---- -------
Total assets................................................. $504 $53,470
==== =======
<CAPTION>
LIABILITIES AND MEMBER'S INTEREST
---------------------------------
<S> <C> <C>
Current liabilities:
Current portion of notes payable............................... $-- $ 20
Current portion of notes payable-affiliate..................... 500 --
Accounts payable and accrued expenses.......................... -- 908
Accounts payable, net--affiliate............................... -- 281
Deferred revenue............................................... -- 717
Accrued interest............................................... -- 121
---- -------
Total current liabilities.................................... 500 2,047
Notes payable, net of current portion............................ -- 580
Note payable-affiliate........................................... -- 3,341
---- -------
Total liabilities............................................ 500 5,968
---- -------
Commitments and contingencies (Note 9)
Member's interest:
Member's capital............................................... -- 67,662
Retained earnings/(accumulated deficit)........................ 4 (20,160)
---- -------
Total member's interest...................................... 4 47,502
==== =======
Total liabilities and member's interest...................... $504 $53,470
==== =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-44
<PAGE>
AVALON CABLE OF NEW ENGLAND LLC
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the Period For the
from September 4, 1997 Year Ended
(inception) through December 31,
December 31, 1997 1998
---------------------- ------------
In thousands
<S> <C> <C>
Revenue:
Basic services........................... $ -- $ 3,857
Premium services......................... -- 432
Other.................................... -- 241
------ -------
Total revenues......................... -- 4,530
Operating expenses:
Selling, general and administrative...... -- 1,433
Programming.............................. -- 1,283
Technical and operations................. -- 233
Depreciation and amortization............ -- 1,569
------ -------
Loss from operations....................... -- 12
Other income (expense):
Interest income.......................... 4 177
Interest (expense)....................... -- (1,037)
------ -------
Net income (loss) before the extraordinary
loss on early extinguishment of debt...... 4 (848)
Extraordinary loss on early extinguishment
of debt................................... -- (1,110)
------ -------
Net income (loss)...................... $ 4 $(1,958)
====== =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-45
<PAGE>
AVALON CABLE OF NEW ENGLAND LLC
STATEMENTS OF CHANGES IN MEMBER'S INTEREST
<TABLE>
<CAPTION>
Retained
Earnings/ Total
Member's (Accumulated Member's
Capital Deficit) Interest
-------- ------------ --------
In thousands
<S> <C> <C> <C>
Balance at September 4, 1997 (inception)........ $ -- $ -- $ --
Net income...................................... -- 4 4
------- -------- --------
Balance at December 31, 1997.................... -- 4 4
Capital contribution from Holdings.............. 4,862 -- 4,862
Capital contribution from the Parent............ 62,800 -- 62,800
Dividends paid to the Parent.................... -- (18,206) (18,206)
Net loss........................................ -- (1,958) (1,958)
------- -------- --------
Balance at December 31, 1998.................... $67,662 $(20,160) $(47,502)
======= ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-46
<PAGE>
AVALON CABLE OF NEW ENGLAND LLC
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the Period For the
from September 4, 1997 Year Ended
(inception) through December 31,
December 31, 1997 1998
---------------------- ------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss)........................ $ 4 $(1,958)
Adjustments to reconcile net income to
net cash provided by operating
activities..............................
Depreciation and amortization.......... -- 1,569
Changes in operating assets and
liabilities
Increase in subscriber and other
receivables........................... -- (51)
Increase in prepaid expenses and other
assets................................ (4) (150)
Increase in accounts payable and
accrued expenses...................... -- 794
Increase in accounts payable, net--
affiliate............................. -- 281
Increase in accrued interest........... -- 121
Increase in deferred revenue........... -- 7
---- -------
Net cash provided by operating
activities.......................... -- 613
---- -------
Cash flows from investing activities:
Payments for acquisitions (Note 3)....... -- (38,591)
Receipts of note receivable--affiliate... -- (15,070)
(Increase) decrease in restricted cash... (500) 500
Capital expenditures..................... -- (32)
---- -------
Net cash used in investing
activities.......................... (500) (53,193)
---- -------
Cash flows from financing activities:
Proceeds from issuance of note payable--
affiliate............................... 500 3,341
Proceeds from the issuance of the term
loans and revolving credit facility..... -- 29,600
Payments made on the term loans and
revolving credit facility............... -- (29,600)
Dividends paid to the Parent............. -- (18,206)
Capital contributions.................... -- 67,662
---- -------
Net cash provided by financing
activities.......................... 500 52,797
---- -------
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. $-- $ 916
==== =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-47
<PAGE>
AVALON CABLE OF NEW ENGLAND LLC
NOTES TO FINANCIAL STATEMENTS
(in thousands)
1. Basis of Presentation and Description of Business
Avalon Cable of New England LLC (the "Company") was formed in Delaware in
September 1997, as a wholly owned subsidiary of Avalon Cable of New England
Holdings, Inc. ("Avalon New England Holdings"). Operations commenced in May
1998 in conjunction with the acquisition of AMRAC Clear View, A Limited
Partnership ("Amrac") (Note 3).
Avalon New England Holdings contributed $4,862 in cash to the Company in May
and July, 1998, in order to partially fund the acquisitions of Amrac and
Pegasus (as defined below) (Note 3). On November 15, 1998, Avalon New England
Holdings contributed its 100% interest in the Company to Avalon Cable LLC (the
"Parent") in exchange for a membership interest in the Parent. In November
1998, the Parent made a $62,800 cash contribution to the Company, which was
used to retire the Term Loans and revolving credit facility (Note 8) and to
fund the loan to Avalon Cable Finance, Inc. ("Avalon Finance") (Note 10).
The Company provides cable television service to the western New England
area. The Company's cable television systems offer customer packages of basic
and premium cable programming services which are offered at a per channel
charge or are packaged together to form a tier of services offered at a
discount from the combined channel rate. The Company's cable television systems
also provide premium television services to their customers for an extra
monthly charge. Customers generally pay initial connection charges and fixed
monthly fees for cable programming and premium television services, which
constitute the principal sources of revenue for the Company.
The Parent provided substantial support services such as finance, accounting
and human resources to the Company and Avalon Michigan. 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.
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.
Revenue recognition
Revenue is recognized as cable television services are provided.
Installation fee revenue is recognized in the period in which the installation
occurs.
Advertising costs
Advertising costs are charged to operations as incurred. Advertising costs
were $43 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.
F-48
<PAGE>
AVALON CABLE OF NEW ENGLAND LLC
NOTES TO FINANCIAL STATEMENTS--(Continued)
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 following
lives:
<TABLE>
<S> <C>
Cable television 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 net 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.
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 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.
F-49
<PAGE>
AVALON CABLE OF NEW ENGLAND LLC
NOTES TO FINANCIAL STATEMENTS--(Continued)
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. Acquisitions
On May 29, 1998, the Company acquired certain assets of Amrac for
consideration of $8,124, including acquisition costs of $589. The acquisition
was accounted for using the purchase method of accounting. Accordingly, the
consideration was allocated to the net assets acquired based on the fair market
values at the date of acquisition as determined through the use of an
independent appraisal. The excess of the consideration paid over the estimated
fair market value of the net assets acquired was $256, and is being amortized
using the straight-line method over 15 years its estimated useful life.
On July 21, 1998, the Company acquired certain assets and liabilities from
Pegasus Cable Television, Inc. and Pegasus Cable Television of Connecticut,
Inc. (collectively, "Pegasus") for consideration of $30,467, including
acquisition costs of $175. The acquisition was accounted for using the purchase
method of accounting. Accordingly, the consideration was allocated to the net
assets acquired based on the fair market values at the date of acquisition as
determined through use of an independent appraisal. The excess of the
consideration paid over the estimated fair market value of the net assets
acquired was $977 and is being amortized using the straight-line method over 15
years.
Unaudited pro forma results of operations of the Company for the year ended
December 31, 1998, as if the acquisitions occurred on January 1, 1998.
<TABLE>
<CAPTION>
December 31, 1998
-----------------
(Unaudited)
<S> <C>
Revenues................................................ $ 8,573
=======
Loss from operations.................................... $ (628)
=======
Net loss................................................ $(5,310)
=======
</TABLE>
In September 1998, the Company entered into 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 Company incurred $41 of transaction costs related to the acquisition of
Taconic. This merger is expected to close in the second quarter of 1999.
4. Prepaid Expenses and Other Current Assets
Prepaid expenses and other current assets consist of the following:
<TABLE>
<CAPTION>
December 31,
-------------
1997 1998
------ ------
<S> <C> <C>
Installation supplies...................................... $ -- $ 51
Deferred transaction costs................................. -- 41
Other...................................................... 4 29
------ ------
$ 4 $ 121
====== ======
</TABLE>
F-50
<PAGE>
AVALON CABLE OF NEW ENGLAND LLC
NOTES TO FINANCIAL STATEMENTS--(Continued)
5. Property, Plant and Equipment
Property, plant and equipment consists of the following:
<TABLE>
<CAPTION>
December 31,
--------------
1997 1998
------- ------
<S> <C> <C>
Cable plant and equipment................................. $ -- $6,435
Vehicles.................................................. -- 97
Office furniture and fixtures............................. -- 35
Buildings and improvements................................ -- 82
------- ------
-- 6,649
Less: accumulated depreciation............................ -- (339)
------- ------
$ -- $6,310
======= ======
</TABLE>
6. Intangible Assets
Intangible assets consist of the following:
<TABLE>
<CAPTION>
December 31,
--------------
1997 1998
------ -------
<S> <C> <C>
Cable television franchises............................... $ -- $30,711
Goodwill ................................................. -- 1,223
Non-compete agreement..................................... -- 100
------ -------
32,034
Less: accumulated amortization............................ -- (1,230)
------ -------
$ -- $30,804
====== =======
7. Accounts Payable and Accrued Expenses
Accounts payable and accrued expenses consist of the following:
<CAPTION>
December 31,
--------------
1997 1998
------ -------
<S> <C> <C>
Accrued programming costs................................. $ -- $ 564
Taxes payable............................................. -- 276
Other..................................................... -- 68
------ -------
$ -- $ 908
====== =======
</TABLE>
8. Debt
Credit Facilities
On May 28, 1998, the Company 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 (Note 3) and to provide for the
Company's working capital requirements.
In December 1998, the Company retired the Term Loans and revolving credit
agreement through the proceeds of a capital contribution from the Parent. The
fees and associated costs relating to the early retirement of this debt was
$1,110.
F-51
<PAGE>
AVALON CABLE OF NEW ENGLAND LLC
NOTES TO FINANCIAL STATEMENTS--(Continued)
On November 6, 1998, the Company 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 amortization 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. The Company 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 on upon the consolidated leverage ratio of the Co-
Borrowers. The interest rate for 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 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 Michigan Holdings, Inc., Avalon Cable Finance
Holdings, Inc., Avalon New England Holdings, Avalon Holdings and the Parent.
Subordinated Debt
In December 1998, the Company became a co-issuer of a $150,000 principal
balance, Senior Subordinated Notes ("Subordinated Notes") offering and the
Parent become a co-issuer of a $196,000, accreted value, Senior Discount Notes
("Senior Discount Notes") offering. In conjunction with these financings, the
Company received $18,130 from Avalon Finance as a partial payment against the
Company's note receivable--affiliate. Avalon Finance paid $75 in interest
during the period ended December 31, 1998. The cash proceeds received of
$18,206 was paid to the Parent as a dividend.
F-52
<PAGE>
AVALON CABLE OF NEW ENGLAND LLC
NOTES TO FINANCIAL STATEMENTS--(Continued)
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
In conjunction with the Amrac acquisition, the Company issued a note payable
to Amrac for $500 which is due on May 29, 2003, and bears interest at a rate of
7% per annum (which approximates the Company's incremental borrowing rate)
payable annually. Additionally, the Company entered into $100 non-compete
agreement with the President of Amrac. The agreement calls for five annual
payments of $20, commencing on May 29, 1999.
9. 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 $15 for the year ended December 31, 1998. Future minimum payments
on equipment and office facilities leased under non-cancelable operating lease
commitments approximates $25, $21, $14, $9 and $9 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.
10. Related Party Transactions and Balances
For the period ended December 31, 1998, allocated charges for Parent support
services was $350. At December 31, 1998, the Company had an accounts payable,
net--affiliate balance of $281. This balance is comprised of an account
receivable balance from Avalon Cable Holdings of $407 and accounts payable
balances of $340 and $348 with Avalon Cable Michigan and the Parent,
respectively.
In November 1998, the Company loaned $33,200 to Avalon Cable Finance, Inc.
("Avalon Finance"). This note is recorded as 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 of $18,130 with the remainder payable on December 31, 2001. Accrued
interest receivable of $102 has been recorded in connection with this note at
December 31, 1998.
In order to complete the acquisition of Amrac and Pegasus, the Company
received $3,341 from Avalon Holdings. In consideration for this amount, the
Company 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 the Company has recorded accrued
interest on this note of $100 at December 31, 1998.
F-53
<PAGE>
AVALON CABLE OF NEW ENGLAND LLC AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(In thousands)
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
----------- ------------
(unaudited)
<S> <C> <C>
Assets
Current assets
Cash................................................ $ 1,303 $ 217
Subscriber receivables, less allowance for doubtful
accounts of $70 and $81............................ 818 847
Prepaid expenses and other current assets........... 142 121
-------- --------
Total current assets.............................. 2,263 1,185
Property, plant and equipment, net.................... 6,388 6,310
Note receivable--affiliate............................ 15,338 15,171
Intangible assets, net................................ 32,961 30,804
-------- --------
Total assets $ 56,950 $ 53,470
======== ========
Liabilities and Members' Interest
Current liabilities
Current portion of notes payable...................... $ 20 $ 20
Accounts payable and accrued expenses............... 996 908
Accounts payable, net--affiliate.................... 394 281
Deferred revenue.................................... 733 717
Accrued interest.................................... 129 121
-------- --------
Total current liabilities......................... 2,272 2,047
Notes payable, net of current portion................. 3,480 580
Note payable--affiliate -- 3,341
-------- --------
Total liabilities................................. 5,752 5,968
-------- --------
Commitments and contingencies (Note 5)
Members' interest
Members' capital.................................... 71,003 67,662
Accumulated deficit................................. (19,805) (20,160)
-------- --------
Total members' interest........................... 51,198 47,502
-------- --------
Total liabilities and members' interest........... $ 56,950 $ 53,470
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-54
<PAGE>
AVALON CABLE OF NEW ENGLAND LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(In thousands)
<TABLE>
<CAPTION>
For the For the
Quarter Ended Quarter Ended
March 31, 1999 March 31, 1998
-------------- --------------
(unaudited)
<S> <C> <C>
Revenue
Basic services.................................. $1,983 $--
Premium services................................ 164 --
Other........................................... 192 --
------ ----
Total revenues................................ 2,339 --
Operating expenses
Selling, general and administrative............. 450 --
Programming..................................... 557 --
Technical and operations........................ 322 --
Depreciation and amortization................... 747 --
------ ----
Income from operations............................ 263 --
Other income (expense)
Interest income................................. 167 1
Interest expense................................ (75) --
------ ----
Net income.................................... $ 355 $ 1
====== ====
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-55
<PAGE>
AVALON CABLE OF NEW ENGLAND LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN MEMBERS' INTEREST
(In thousands)
<TABLE>
<CAPTION>
Total
Members' (Accumulated Members'
Capital Deficit) Interest
-------- ------------ --------
(unaudited)
<S> <C> <C> <C>
Balance at December 31,
1998................... $67,662 $(20,160) $47,502
Cancellation of note
payable to Parent...... 3,341 -- 3,341
Net income for the
quarter ended March 31,
1999................... -- 355 355
------- -------- -------
Balance at March 31,
1999................... $71,003 $(19,805) $51,198
======= ======== =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-56
<PAGE>
AVALON CABLE OF NEW ENGLAND LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Quarter Ended Quarter Ended
March 31, 1999 March 31, 1998
-------------- --------------
(unaudited) (unaudited)
<S> <C> <C>
Cash flows from operating activities
Net income..................................... $ 355 $ 1
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation and amortization................ 747 --
Changes in operating assets and liabilities
Decrease in subscriber and other receivables. 135 --
Increase in prepaid expenses and other
assets...................................... (177) (1)
Increase in accounts payable and accrued
expenses.................................... 245 --
Increase in accounts payable, net--affiliate. 113 --
Increase in accrued interest................. 8 --
Increase in deferred revenue................. 16 --
Increase in note receivable.................. (167) --
------- --------
Net cash provided by operating activities.. 1,275 --
------- --------
Cash flows from investing activities
Payments for acquisition....................... (2,948) --
Capital expenditures........................... (141) --
------- --------
Net cash used in investing activities...... (3,089) --
------- --------
Cash flows from financing activities
Proceeds from the issuance of long-term debt... 2,900 --
------- --------
Net cash provided by financing activities.. 2,900 --
------- --------
Increase in cash................................. 1,086 --
Cash, beginning of period........................ 217 --
------- --------
Cash, end of period.............................. $ 1,303 $ --
======= ========
Non-cash investing and financing activities
Cancellation of note payable--affiliate......... $ 3,341 $ --
======= ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-57
<PAGE>
AVALON CABLE OF NEW ENGLAND LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands)
1. Description of Business
Avalon Cable of New England LLC (the "Company") was formed in Delaware in
September 1997, and is a wholly owned subsidiary of Avalon Cable LLC (the
"Parent").
The Company commenced operations in May 1998 and provides cable television
service to the western New England area. The Company's cable television systems
offer customer packages of basic and premium cable programming services which
are offered at a per channel charge or are packaged together to form a tier of
services offered at a discount from the combined channel rate. The Company's
cable television systems also provide premium television services to their
customers for an extra monthly charge. Customers generally pay initial
connection charges and fixed monthly fees for cable programming and premium
television services, which constitute the principal sources of revenue for the
Company.
In the first quarter of 1999, the Company 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 the Company or Avalon Cable of
Michigan LLC, a wholly-owned subsidiary of the Parent.
The Parent provides substantial support services such as finance, accounting
and human resources to the Company and Avalon Cable of Michigan, Inc. 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 Parent 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.
2. Basis of Presentation
Pursuant to the rules and regulations of the Securities and Exchange
Commission, certain financial information has been condensed and certain
footnote disclosures have been omitted. Such information and disclosures are
normally included in financial statements prepared in accordance with generally
accepted accounting principles.
The consolidated financial statements herein include the accounts of the
Company and its wholly owned subsidiary Avalon.com LLC which was formed on
January 21, 1999.
These condensed financial statements should be read in conjunction with the
Company's audited financial statements at December 31, 1998 and the notes
thereto included elsewhere herein.
The financial statements as of March 31, 1999 and for the three month
periods ended March 31, 1999 and 1998 are unaudited; however, in the opinion of
management, such statements include all adjustments necessary to present fairly
the financial information included therein.
3. Acquisitions
On March 11, 1999, the Company through its wholly owned subsidiary,
Avalon.com LLC, acquired Novagate Communication Corporation ("Novagate") for a
purchase price of $2,900 through advances from the credit facility.
The acquisition has been accounted for as a purchase and the results of
Novagate have been included in the accompanying financial statements since the
date of the acquisition. Accordingly, the consideration was
F-58
<PAGE>
AVALON CABLE OF NEW ENGLAND LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(In thousands)
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 $2,687 and is being amortized using the straight line
method over 15 years.
4. Note payable--affiliate
In 1998 the Company received $3,341 from Avalon Cable Holdings LLC, an
affiliated company under common control, to fund certain acquisitions. In
consideration for this amount, the Company executed a note payable to Avalon
Cable Holdings LLC. In March 1999, pursuant to a plan of reorganization by the
Company and affiliated companies under common control, the note payable was
canceled in exchange for equity in the Company.
5. Commitments and Contingencies
Pending Acquisition
In September 1998, the Company entered into a definitive agreement to
purchase all of the cable systems of Taconic Technology Corporation ("Taconic")
for approximately $8,525 (excluding transaction fees). This Merger is expected
to close in the second quarter of 1999.
Legal Matters
The Company is subject to the provisions of the Cable Television Consumer
Protection and Competition Act of 1992, as amended, and the Telecommunications
Act of 1996. The Company has either settled challenges or accrued for
anticipated exposures related to rate regulation; however, there is no
assurance that there will not be further additional challenges to its rates.
From time to time, the Company is also involved with claims that arise in
the normal course of business. In the opinion of management, the ultimate
liability with respect to these claims will not have a material adverse effect
on the operations, cash flows or financial position of the Company.
6. 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 Communications is subject to regulatory approvals. We expect to
consummate this transaction in the fourth quarter of 1999.
This agreement, if closed, would constitute a change in control under the
Indenture pursuant to which the Senior Subordinated Notes (the "Notes") were
issued. The Indenture provides that upon the occurrence of a change of control
of the Company (a "Change of Control") each holder of the Notes has the right
to require the Company to purchase all or any part (equal to $1,000 or an
integral multiple thereof) of such holder's Notes at an offer price in cash
equal to 101% of the aggregate principal amount thereon plus accrued and unpaid
interest and Liquidated Damages (as defined in the 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.
On April 1, 1999, Avalon.com completed the purchase of Traverse Internet for
$2,400.
F-59
<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-60
<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-61
<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-62
<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-63
<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-64
<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-65
<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-66
<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-67
<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-68
<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-69
<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-70
<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-71
<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-72
<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-73
<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-74
<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-75
<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-76
<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-77
<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-78
<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-79
<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-80
<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-81
<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-82
<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-83
<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-84
<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-85
<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-86
<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-87
<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-88
<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-89
<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-90
<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-91
<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-92
<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-93
<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>
Three 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-94
<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-95
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
of Avalon Cable Finance, Inc.
In our opinion, the accompanying balance sheet and the related statement of
operations and cash flows present fairly, in all material respects, the
financial position of Avalon Cable Finance, Inc. (the "Company") as of December
31, 1998, and the results of its operations and its cash flows for the period
from October 21, 1998 (inception) through December 31, 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 audit. We conducted our
audit of these statements in accordance with generally accepted auditing
standards which requires 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-96
<PAGE>
AVALON CABLE FINANCE, INC.
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 financial statements.
F-97
<PAGE>
AVALON CABLE FINANCE, INC.
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 financial statements.
F-98
<PAGE>
AVALON CABLE FINANCE, INC.
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
Receipt of 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 financial statements.
F-99
<PAGE>
AVALON CABLE FINANCE, INC.
NOTES TO FINANCIAL STATEMENTS
(in thousands)
1. Basis of Presentation and Description of Business
Avalon Cable Finance, Inc. (the "Company") was formed in October 1998,
pursuant to the laws of Delaware, as a wholly owned subsidiary of Avalon Cable
Holdings Finance, Inc. ("Holdings"), 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
Use of estimates
The preparation of the 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.
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, the Company received $33,200 from Avalon Cable of New
England LLC ("Avalon New England"). In consideration for this amount, the
Company 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 balance sheet at December 31, 1998. The Company has recorded
accrued interest payable on this note of $102 at 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 2001. This note is recorded as note receivable--affiliate on the
balance sheet at December 31, 1998. Accrued interest receivable of $102 has
been recorded in connection with this note at December 31, 1998.
F-100
<PAGE>
AVALON CABLE FINANCE, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
4. Debt
Credit Facility
On November 6, 1998, the Company 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 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 subject to minimum quarterly
amortization payments commencing on January 31, 2001 with substantially all of
the 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. In conjunction with the
issuance of the subordinated debt (as described below) of $18,205 was received
and used to make a principal payment of $18,130 on the note payable.
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. The 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 fund 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
quarter 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 the
Avalon Cable LLC.
F-101
<PAGE>
AVALON CABLE FINANCE, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Subordinated Debt
In December 1998, the Company became a co-issuer of an $150,000 principal
balance, Senior Subordinated Notes ("Subordinated Notes") offering and Holdings
became a co-issuer of an $196,000, accreted value, Senior Discount Notes
("Senior Discounts Notes") offering. In conjunction with these financings, the
Company 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 the
Company 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-102
<PAGE>
AVALON CABLE FINANCE, INC.
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 financial statements.
F-103
<PAGE>
AVALON CABLE FINANCE, INC.
STATEMENT OF OPERATIONS
(in thousands)
<TABLE>
<CAPTION>
For the
Quarter Ended
March 31, 1999
--------------
(Unaudited)
<S> <C>
Revenues......................................................... $ --
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 financial statements.
F-104
<PAGE>
AVALON CABLE FINANCE, INC.
STATEMENT OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
For the
Quarter Ended
March 31, 1999
--------------
(Unaudited)
<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 financial statements.
F-105
<PAGE>
AVALON CABLE FINANCE, INC.
NOTES TO FINANCIAL STATEMENTS
1. Description of Business
Avalon Cable Finance, Inc. (the "Company") was formed in October 1998,
pursuant to the laws of Delaware, as a wholly owned subsidiary of Avalon Cable
Holdings Finance, Inc., for the sole purpose of facilitating financings
associated with the acquisitions of various cable television companies. The
Company conducts no other activities.
2. Basis of Presentation
Pursuant to the rules and regulations of the Securities and Exchange
Commission, certain financial information has been condensed and certain
footnote disclosures have been omitted. Such information and disclosures are
normally included in financial statements prepared in accordance with generally
accepted accounting principles.
These condensed financial statements should be read in conjunction with the
Company's audited financial statements at December 31, 1998 and notes thereto
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. 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 Communications is subject to regulatory approvals. We expect to
consummate this transaction in the fourth quarter of 1999.
This agreement, if closed, would constitute a change 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 data) plus accrued and unpaid
interest and Liquidated Damages (as defined in the Indenture) thereof, if any,
to the date or 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.
F-106
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
of Avalon Cable of Michigan LLC
In our opinion, the accompanying balance sheet presents fairly, in all
material respects, the financial position of Avalon Cable of Michigan LLC (the
"Company") at December 31, 1998, in conformity with generally accepted
accounting principles. This financial statement is the responsibility of the
Company's management; our responsibility is to express an opinion on this
financial statement based on our audit. We conducted our audit of this
statement in accordance with generally accepted auditing standards which
requires that we plan and perform the audit to obtain reasonable assurance
about whether the balance sheet is free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the balance sheet, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall balance
sheet 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-107
<PAGE>
AVALON CABLE OF MICHIGAN LLC
BALANCE SHEET
<TABLE>
<CAPTION>
December 31,
1998
------------
<S> <C>
Assets
Cash............................................................... $ 1
----
Total assets..................................................... $ 1
====
Liabilities and Member's Interest
Liabilities........................................................ $--
Member's capital................................................... 1
----
Total liabilities and member's interest.......................... $ 1
====
</TABLE>
The accompanying notes are an integral part of this financial statement.
F-108
<PAGE>
AVALON CABLE OF MICHIGAN LLC
NOTES TO THE FINANCIAL STATEMENT
DECEMBER 31, 1998
1. Basis of Presentation and Description of Business
Avalon Cable of Michigan LLC (the "Company") was formed in October 1998,
pursuant to the laws of Delaware, as a wholly owned subsidiary of Avalon Cable
LLC, for the purpose of acquiring, operating and developing cable television
systems in mid-sized suburban and exurban markets. The Company was formed to
facilitate the organization of Avalon Cable LLC and to operate the Michigan
cluster after the contemplated reorganization.
2. Summary of Significant Accounting Policies
Use of estimates
The preparation of the consolidated balance sheet 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
balance sheet. Actual results may vary from estimates used.
3. Subsequent Events
In March 1999, after the acquisition of Mercom, Inc., Avalon Cable of
Michigan Inc. completed a series of transactions to facilitate certain aspects
of its financing. As a result of these transactions:
. The Company has become the operator of the Michigan cluster replacing
Avalon Cable of Michigan, Inc.;
. The Company is an obligor on the Senior Subordinated Notes replacing
Avalon Cable of Michigan, Inc.; and
. Avalon Cable of Michigan, Inc. is a guarantor of the obligations of the
Company under the Senior Subordinated Notes. Avalon Cable of Michigan,
Inc. does not have significant assets, other than its investment in
Avalon Cable LLC.
F-109
<PAGE>
AVALON CABLE OF MICHIGAN LLC AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
----------- ------------
(unaudited)
<S> <C> <C>
Current Assets
Cash................................................ $ 11,923 $--
Accounts receivable, net of allowance for doubtful
accounts of $906 and $0............................ 5,391 --
Prepayments and other current assets................ 600 --
Accounts receivable--affiliates..................... 568 --
-------- ----
Current assets.................................... 18,482 --
Property, plant and equipment, net.................... 108,617 --
Intangible assets, net................................ 436,155 --
Other assets.......................................... 62 --
-------- ----
Total assets...................................... $563,316 $--
======== ====
Liabilities and Members' Interest
Accounts payable and accrued expenses............... $ 19,235 $--
Advance billings and customer deposits.............. 2,630 --
-------- ----
Current liabilities............................... 21,865 --
Long-term debt........................................ 324,476 --
Notes payable--affiliate.............................. 15,338 --
-------- ----
Total liabilities................................. 361,679 --
Commitments and contingencies
Members' interest
Members' capital.................................... 202,219 --
Accumulated deficit................................. (582) --
-------- ----
Total members' interest........................... 201,637 --
-------- ----
Total liabilities and members' interest........... $563,316 $--
======== ====
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-110
<PAGE>
AVALON CABLE OF MICHIGAN LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(In thousands)
<TABLE>
<CAPTION>
For the
Quarter Ended
March 31, 1999
--------------
(unaudited)
<S> <C>
Revenue
Basic services................................................. $ 988
Premium services............................................... 100
Other.......................................................... 124
------
Total revenue................................................ 1,212
Operating expenses
Selling, general and administrative............................ 206
Programming.................................................... 343
Technical and operations....................................... 126
Depreciation and amortization.................................. 555
------
Loss from operations............................................. (18)
Interest income.................................................. 36
Interest expense................................................. (600)
------
Net loss..................................................... $ (582)
======
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-111
<PAGE>
AVALON CABLE OF MICHIGAN LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN MEMBERS' INTEREST
(In thousands)
<TABLE>
<CAPTION>
For the Quarter Ended March
31, 1999
-----------------------------
Total
Members' Accumulated Members'
Capital Deficit Interest
-------- ----------- --------
<S> <C> <C> <C>
Balance, December 31, 1998...................... $ -- $ -- $ --
Contribution of assets and liabilities of Avalon
Cable LLC...................................... 202,219 -- 202,219
Net loss for quarter ended March 31, 1999....... -- (582) (582)
-------- ----- --------
Balance, March 31, 1999......................... $202,219 $(582) $201,637
======== ===== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-112
<PAGE>
AVALON CABLE OF MICHIGAN 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...................................................... $ (582)
Depreciation and amortization................................. 555
Net change in certain assets and liabilities, net of business
acquisitions
Increase in accounts receivable............................. (355)
Increase in prepayment and other current assets............. (37)
Increase in accounts payable and accrued expenses........... 1,045
-------
Net cash provided by operating activities................. 626
-------
Cash flows from investing activities
Payment for acquisition....................................... (450)
-------
Net cash used in investing activities..................... (450)
-------
Cash flows from financing activities
Cash contribution from Avalon Cable LLC....................... 11,747
-------
Net cash provided by financing activities................. 11,747
-------
Net increase in cash............................................ 11,923
Cash at beginning of the period................................. --
-------
Cash at end of the period................................. $11,923
=======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
F-113
<PAGE>
AVALON CABLE OF MICHIGAN LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands)
1. Description of Business
Avalon Cable of Michigan LLC (the "Company") was formed in October 1998,
pursuant to the laws of Delaware, as a wholly-owned subsidiary of Avalon Cable
LLC, for the purpose of acquiring, operating and developing cable television
systems in mid-sized suburban and exurban markets. The Company was formed to
facilitate the organization of Avalon Cable LLC and to operate the Michigan
cluster after the contemplated reorganization.
On March 26, 1999, Avalon Cable of Michigan, Inc. ("Avalon Cable Michigan")
contributed all of its assets and liabilities, except for deferred tax
liabilities, net to Avalon Cable LLC, which then contributed those assets and
liabilities to the Company. Since Avalon Cable LLC and Avalon Cable Michigan
are under common control, these assets and liabilities were recorded at their
historical cost. The contribution resulted from a series of transactions to
facilitate certain aspects of the financing related to the acquisition of the
remaining 38% ownership interest in Mercom, Inc. ("Mercom") by Avalon Cable
Michigan. The total consideration paid for the acquisition of Mercom was
$21,874, excluding fees and expenses. Also, as a result of the series of
transactions:
. The Company became the operator of the Michigan cluster replacing Avalon
Cable Michigan.
. The Company is an obligor on the Senior Subordinated Notes replacing
Avalon Cable Michigan.
. Avalon Cable Michigan is a guarantor of the obligations of the Company
under the Senior Subordinated Notes.
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.
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 include the results of operations of
the Company from the date of contribution (March 26, 1999) of the net assets by
Avalon Cable Michigan through Avalon Cable LLC and the results of R/Com L.C.
since its acquisition on March 26, 1999.
These condensed financial statements should be read in conjunction with the
audited financial statements of the Company at December 31, 1998 and the 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-114
<PAGE>
AVALON CABLE OF MICHIGAN LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(In thousands)
3. 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-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.
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 March 31, 1999. 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.
Cash and Cash Equivalents
The Company classifies as cash and cash equivalents all interest-bearing
deposits or investments with original maturities of three months or less.
Property, plant and equipment
Property, plant and equipment is stated at its historical cost for items
contributed by Avalon Cable Michigan, fair value for items acquired from R/Com,
L.C. 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....................................................... 5 years
Other equipment................................................ 5-10 years
</TABLE>
F-115
<PAGE>
AVALON CABLE OF MICHIGAN LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(In thousands)
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,
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.
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 March 31, 1999 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 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 its ultimate owners.
4. Merger and Acquisition
On March 26, 1999, Avalon Cable Michigan acquired the remaining 38%
ownership in Mercom for a total purchase price of $21,874. The acquisition has
been accounted for as a purchase and the results of Mercom since the
acquisition have been included in the financial statements of Avalon Cable
Michigan up to March 26, 1999. The results since March 26, 1999 have been
included in the accompanying financial statements. Accordingly, the
consideration was allocated to the net assets based on their respective fair
market values on date of acquisition. The excess of the consideration paid over
the estimated fair market value of the net assets acquired was $6,945 and is
being amortized using the straight-line method over 15 years.
F-116
<PAGE>
AVALON CABLE OF MICHIGAN LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(In thousands)
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.
On March 26, 1999, the Company acquired the assets of R/Com, L.C., an Iowa
limited liability company, for a total purchase price of $450. The acquisition
has been accounted for as a purchase and the results of R/Com, L.C. have been
included in the accompanying financial statements since the date of the
acquisition. Accordingly, the consideration was allocated to the net assets
based on their respective fair market values on date of acquisition. No
goodwill was recorded with this transaction because the estimated fair market
value of the assets acquired was equivalent to the consideration paid.
5. Property, Plant and Equipment
Property, plant and equipment consists of the following:
<TABLE>
<CAPTION>
March 31, 1999
--------------
(unaudited)
<S> <C>
Cable plant................................................ $105,957
Vehicles................................................... 2,515
Buildings and improvements................................. 2,360
Office furniture and fixtures.............................. 812
Construction in process.................................... 995
--------
Total property, plant and equipment.................... 112,639
Less--accumulated depreciation............................. (4,022)
--------
Property, plant and equipment, net..................... $108,617
========
</TABLE>
Depreciation expense was $145 for the quarter ended March 31, 1999.
6. Intangible Assets
Intangible assets consist of the following:
<TABLE>
<S> <C>
Cable television franchises..................................... $359,961
Goodwill........................................................ 82,487
Deferred financing costs........................................ 6,470
--------
Total....................................................... 448,918
Less--accumulated amortization.................................. (12,763)
--------
Intangible assets, net...................................... $436,155
========
</TABLE>
Amortization expense charged to operations in the quarter ending March 31,
1999 was $410.
F-117
<PAGE>
AVALON CABLE OF MICHIGAN LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(In thousands)
7. Debt
At March 31, 1999, long-term debt consists of the following:
<TABLE>
<S> <C>
Senior credit facility........................................... $174,476
Senior subordinated notes........................................ 150,000
--------
324,476
Current portion.............................................. --
--------
$324,476
========
</TABLE>
Concurrent with the March 26, 1999 restructuring, the Company assumed
certain obligations relating to Avalon Cable LLC which were transferred from
Avalon Cable Michigan. The debts assumed by the Company consist of a revolving
credit facility and subordinated debt as described below.
Credit facility
On November 6, 1998, Avalon Cable Michigan became a co-borrower along with
Avalon Cable of New England, LLC ("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
facilities terminated 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 Cable Michigan borrowed $265,888 under the
Credit Facility in order to consummate the Merger of Cable Michigan, Inc. In
December 1998, in connection with the Senior Subordinated Notes (as defined
below) and a Senior Discount Notes offerings, Avalon Cable Michigan repaid
$125,013 of the Credit Facility, and the availability under the Credit Facility
was reduced to $195,000. The Company had borrowings of $162,976 outstanding
under the tranche A and B term note facilities, and $11,500 outstanding under
the revolving credit facility. Avalon New England and Avalon Finance had
borrowings of $2,900 and $0, respectively, outstanding under the Credit
Facility at March 31, 1999.
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 March 31, 1999, 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 B term loans outstanding at March 31, 1999
was 8.67%. Interest is payable on a monthly basis. Accrued interest on the
borrowings under the credit facility was $163 at March 31, 1999.
F-118
<PAGE>
AVALON CABLE OF MICHIGAN LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(In thousands)
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 Cable Michigan became a co-issuer of a $150,000
principal balance, Senior Subordinated Notes ("Subordinated Notes") offering.
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 $570 at March 31, 1999.
The Subordinated Notes will not be redeemable at the Co-Borrowers' option
prior to December 1, 2003. Thereafter, the 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 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
Subordinated 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
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.
In connection with the restructuring, Avalon Cable Michigan became a
guarantor of the obligations of the Company under the Subordinated Notes.
F-119
<PAGE>
AVALON CABLE OF MICHIGAN LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(In thousands)
8. 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.
9. Related Party Transactions and Balances
As of March 31, 1999, the Company had a Note Payable to Avalon Finance of
$15,338 including accrued interest of $268 which was assumed under the Company
restructuring from Avalon Cable LLC, who assumed this loan from Avalon Cable
Michigan. In November 1998, Avalon Cable Michigan received $33,200 from Avalon
Finance to finance the acquisition of Cable Michigan Inc. In consideration for
this amount, the Company executed a note payable to Avalon Finance. The note
matures on December 31, 2001. Interest accrues at a rate of 4.47% per year, and
is payable on December 31, 2001. On December 10, 1998, Avalon Cable Michigan
made a partial payment of $18,130 against this note payable-affiliate.
The Company receives support services such as finance, accounting and human
resources from its parent, Avalon Cable LLC. 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 March 31,
1999, the Company was allocated charges related to such services of $21. The
Company had a payable of $21 related to these services at March 31, 1999.
At March 31, 1999, the Company had an accounts receivable-affiliate balance
of $568 with Avalon New England.
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 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 (the "Notes") were
issued. The Indenture provides that upon the occurrence of a change of control
of the Company (a "Change of Control") each holder of the Notes has the right
to require the Company to purchase all or any part (equal to $1,000 or an
integral multiple thereof) of such holder's Notes at an offer price in cash
equal to 101% of the aggregate principal amount thereon plus accrued and unpaid
interest and Liquidated Damages (as defined in the 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-120
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
$150,000,000
Avalon Cable of Michigan LLC
Avalon Cable of
New England LLC
Avalon Cable
Finance, Inc.
Offer to Exchange Series B
9 3/8% Senior Subordinated
Notes due 2008
For All Outstanding
9 3/8% 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 of Michigan LLC and Avalon Cable of New England LLC. The sole
member of each of Avalon Cable of Michigan LLC and Avalon Cable of New England
LLC is Avalon Cable LLC. Each of the Limited Liability Company Agreement of
Avalon Cable of Michigan LLC and the Amended and Restated Limited Liability
Agreement of Avalon Cable of New England LLC does not contain indemnification
provisions. However, Avalon Cable LLC's Limited Liability Company Agreement
does contain indemnification provisions.
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 Finance, Inc. Avalon Cable 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.
II-1
<PAGE>
Avalon Cable 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 Finance, Inc. shall not be liable to Avalon Cable Finance, 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 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 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 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 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 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 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
Finance, Inc., or who are or were serving at the request of Avalon Cable
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 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 Finance, Inc.
or was serving at the request of Avalon Cable 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
Finance, Inc. would have the power to indemnify such person against such
liability under Article V.
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,
II-2
<PAGE>
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, 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.
Article V also provides that Avalon Cable of Michigan, Inc. may, by action
of its board of directors, provide indemnification to employees and agents of
the corporation with the same scope and effect asa the foregoing
indemnification of directors and officers.
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 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 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.
II-3
<PAGE>
Item 21. Exhibits and Financial Statement Schedules.
(a) Exhibits.
<TABLE>
<CAPTION>
Exhibit
Number Exhibit
------- --------------------------------------------------------------------------
<S> <C>
2.1 Taconic Technology Corp. acquisition agreement.
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.
3.1 Certificate of Formation of Avalon Cable of Michigan LLC.
3.2 Certificate of Formation of Avalon Cable of New England LLC.
3.3 Certificate of Incorporation of Avalon Cable Finance, Inc.
3.4 Articles of Incorporation of Avalon Cable of Michigan, Inc.
3.5 Limited Liability Company Agreement of Avalon Cable of Michigan LLC.
3.6 Amended and Restated Limited Liability Company Agreement of Avalon Cable
of New England LLC.
3.7 By-Laws of Avalon Cable Finance, Inc.
3.8 By-Laws of Avalon Cable of Michigan, Inc.
4.1 Indenture, 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., 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 of New England LLC, Avalon Cable Finance, Inc. and Avalon Cable of
Michigan LLC as Issuers, Avalon Cable of Michigan, Inc., as guarantor, and
The Bank of New York, as Trustee for the Notes.
4.3 Form of 9 5/8% Senior Subordinated Notes due 2008 (included in Exhibit 4.1
above as Exhibit A).
4.4 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.
4.5 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.
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 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).
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Exhibit
------- --------------------------------------------------------------------------
<S> <C>
10.3 Indenture relating to the Senior Discount Notes, dated as of December 10,
1998, by and among, Avalon Cable LLC, Avalon Cable of Michigan Holdings,
Inc., Avalon Cable Holdings 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.
10.5 Employment Agreement, dated November 6, 1998, by and among Joel C. Cohen,
Avalon Cable LLC.
10.6 Employment Agreement, dated November 6, 1998, by and between Peter
Polimino and Avalon Cable LLC and Avalon Cable of New England LLC.
10.7 Employment Agreement, dated November 6, 1998, by and between Peter
Luscombe and Avalon Cable LLC.
10.8 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
Michigan, Inc., Avalon Cable of New England Holdings, Inc. and Avalon
Investors, L.L.C.
10.9 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.
12.1 Statement regarding computation of ratio of earnings to fixed charges for
Avalon Cable of Michigan LLC.
12.2 Statement regarding computation of ratio of earnings to fixed charges for
Avalon Cable of New England LLC.
12.3 Statement regarding computation of ratio of earnings to fixed charges for
Avalon Cable of Michigan, Inc.
12.4 Statement regarding computation of ratio of earnings to fixed charges for
AMRAC Clear View.
12.5 Statement regarding computation of ratio of earnings to fixed charges for
Pegasus Cable Television, Inc. and Pegasus Cable Television of
Connecticut, Inc.
12.6 Statement regarding computation of ratio of earnings to fixed charges for
Taconic Technology.
*21.1 Subsidiaries of Avalon Cable of Michigan, Inc.
23.1 Consent 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>
- --------
*Previously filed.
** To be filed by Amendment.
(1) Filed as an Exhibit to the Registration Statement on Form S-4 (File No.
333-75415) filed by Avalon Cable LLC on May 27, 1999.
II-5
<PAGE>
(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.
(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-6
<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 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-7
<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 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-8
<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 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-9
<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 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-10
<PAGE>
EXHIBIT 2.1
ASSET PURCHASE AGREEMENT
Dated September 15, 1998
Between
AVALON CABLE OF NEW ENGLAND LLC,
as Buyer
and
TACONIC TECHNOLOGY CORP.,
as Seller
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TABLE OF CONTENTS
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ARTICLE I.................................................. 1
ARTICLE II................................................. 8
2.01 Purchase and Sale of Assets.................. 8
2.02 Consideration................................ 8
2.03 Adjustment of Purchase Price................. 8
2.04 The Closing.................................. 11
2.05 No Assumed Liabilities....................... 11
2.06 Further Assurances........................... 12
ARTICLE III................................................ 13
3.01 Access....................................... 13
3.02 Financial Statements of Businesses Acquired.. 13
3.03 Fiber Construction........................... 14
3.04 Bulk Sales................................... 14
ARTICLE IV................................................. 15
4.01 Corporate Organization....................... 15
4.02 Authorization................................ 15
4.03 No Violation................................. 15
4.04 Financial Statements......................... 15
4.05 Interim Operations........................... 16
4.06 Title to Properties, Encumbrances............ 16
4.07 Contracts.................................... 16
4.08 Material Sale Assets......................... 17
4.09 Characteristics of the CATV System........... 17
4.10 Taxes........................................ 18
4.11 Affiliate Transactions....................... 18
4.12 Overbuild.................................... 18
4.13 Litigation................................... 19
4.14 Consents and Approvals....................... 19
4.15 Compliance with Law.......................... 19
4.16 FCC and Copyright Compliance................. 19
4.16.1 Compliance................................... 20
4.16.2 Copyright Office............................. 20
4.16.3 FAA Approvals................................ 20
4.16.4 Franchises................................... 20
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4.17 Employee Agreements and Plans................ 21
4.18 Environmental................................ 21
4.19 Brokers and Finders.......................... 22
4.20 Programming, Rates and Charges............... 22
4.21 Bonds, Insurance and Letters of Credit....... 22
4.22 Full Disclosure.............................. 22
ARTICLE V.................................................. 23
5.01 Corporate Organization....................... 23
5.02 Authorization................................ 23
5.03 No Violation................................. 23
5.04 Brokers and Finders.......................... 23
5.05 Qualification................................ 23
5.06 Financing.................................... 24
ARTICLE VI................................................. 24
6.01 Transfer Consents and Franchise Renewals..... 24
6.02 Supplements to Schedules..................... 24
6.03 Antitrust Laws............................... 25
6.04 No-Shop Covenant............................. 25
6.05 Removal of Equipment......................... 25
6.06 Covenant to Satisfy Conditions............... 25
ARTICLE VII................................................ 26
7.01 Antitrust Laws............................... 26
7.02 Cooperation.................................. 26
7.03 Covenant to Satisfy Conditions............... 26
ARTICLE VIII............................................... 26
8.01 Performance.................................. 26
8.02 Representations and Warranties True.......... 26
8.03 No Governmental Proceeding or Litigation..... 27
8.04 No Injunction................................ 27
8.05 HSR Act Waiting Periods...................... 27
8.06 Consents and Renewals Obtained............... 27
8.07 Purchase Price............................... 27
8.08 Assumption Agreement......................... 28
8.09 Officer's Certificate........................ 28
8.10 Opinion of Buyer's Counsel................... 28
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ARTICLE IX................................................. 28
9.01 Performance.................................. 28
9.02 Representations and Warranties True.......... 28
9.03 No Governmental Proceeding or Litigation..... 28
9.04 No Injunction................................ 29
9.05 HSR Act Waiting Periods...................... 29
9.06 Consents and Renewals Obtained............... 29
9.07 Bill of Sale................................. 29
9.08 Secretary's Certificate...................... 29
9.09 Closing Date Subscribers..................... 29
9.10 Opinion of Seller's Counsel.................. 30
9.11 Headend Lease................................ 30
ARTICLE X.................................................. 31
10.01 Ordinary Course of Business.................. 31
10.02 Organization................................. 31
10.03 Certain Changes.............................. 31
10.04 Contracts.................................... 31
ARTICLE XI................................................. 32
11.01 Survival of Undertakings..................... 32
11.02 Agreement to Indemnify by Seller............. 32
11.03 Procedure.................................... 33
11.04 Agreement to Indemnify by Buyer.............. 34
ARTICLE XII................................................ 34
12.01 Methods of Termination....................... 34
12.02 Procedure upon Termination................... 35
12.03 Limitation of Liability Upon Termination..... 35
12.04 Specific Performance......................... 35
ARTICLE XIII............................................... 36
13.01 Amendment and Modification................... 36
13.02 Waiver of Compliance......................... 36
13.03 Expenses, Transfer Taxes, Etc................ 36
13.04 Notices...................................... 36
13.05 Assignment................................... 37
13.06 Third Parties................................ 37
13.07 Confidentiality.............................. 37
13.08 Publicity.................................... 38
13.09 Interpretation............................... 38
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13.10 Entire Agreement............................. 38
13.11 Counterparts................................. 38
13.12 Governing Law................................ 39
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INDEX TO SCHEDULES
Schedule/Section Reference Subject
- -------------------------- -------
Schedule 1.01 CATV System/Region and Franchises
Schedule 4.03 Violations/Defaults
Schedule 4.04 Financial Statements
Schedule 4.04A Expenses Allocable to CATV Operations not reflected
on Financial Statements
Schedule 4.06 Title Matters
Schedule 4.07 Contracts
Schedule 4.08 Material Sale Assets
Schedule 4.09 Characteristic of the CATV System
Schedule 4.10 Tax Audits, Agreements, Waivers
Schedule 4.11 Affiliate Transactions
Schedule 4.13 Litigation
Schedule 4.14 Consents and Approvals
Schedule 4.15 Compliance with Law
Schedule 4.16 FCC and Copyright Compliance
Schedule 4.16.4 Franchises
Schedule 4.17(i) Employee Agreements and Plans
Schedule 4.17(ii) Employee Information
Schedule 4.17(iii) Collective Bargaining/Union Information
Schedule 4.18 Environmental
Schedule 4.20 Programming, Rates and Charges
Schedule 4.21 Bonds, Insurance and Letters of Credit
Schedule 10.03 Certain Changes
INDEX TO EXHIBITS
Exhibit Description
- ------- -----------
Exhibit A Assumption Agreement
Exhibit B Bill of Sale
Exhibit C Escrow Agreement
Exhibit D Intentionally Deleted
Exhibit E Headend Lease
Exhibit F Intentionally Deleted
Exhibit G Opinion of Counsel for Buyer
Exhibit H-1 Opinion of Counsel for Seller
Exhibit H-2 Opinion of FCC Counsel for Seller
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ASSET PURCHASE AGREEMENT
This AGREEMENT dated as of September 15, 1998, by and between TACONIC
TECHNOLOGY CORP., a New York corporation ("Seller") and AVALON CABLE OF NEW
ENGLAND LLC, a Delaware limited liability company ("Buyer"), sets forth the
terms and conditions upon which Seller shall sell and convey to Buyer, and Buyer
shall purchase and acquire from Seller, substantially all of the property,
assets, goodwill and business as a going concern related to the Seller's cable
television systems serving a portion of Columbia County, New York.
WHEREAS, Seller wishes to sell, transfer, convey and assign to Buyer, and
Buyer wishes to purchase, acquire, receive and accept from Seller, all of the
Sale Assets, in accordance with the terms and conditions of this Agreement;
NOW, THEREFORE, in consideration of the mutual covenants and agreements
contained herein, and intending to be legally bound hereby, Buyer and Seller
hereby covenant and agree as follows:
ARTICLE I.
DEFINITIONS
For all purposes of this Agreement, except as otherwise expressly provided
or unless the context otherwise requires:
"Accounts Receivable" means all amounts due from or on behalf of any
person with respect to any goods or services (including, without
limitation, any CATV programming services, advertising services, antenna
tower space rentals, etc.) provided by the CATV System to such person prior
to the Closing.
"Affiliate" has the meaning prescribed by Rule 12b-2 of the
regulations promulgated pursuant to the Securities Exchange Act of 1934, as
amended.
"Assumption Agreement" means the instrument of assumption delivered by
Buyer to Seller pursuant to Section 2.02(c) hereof, in substantially the
form of Exhibit A hereto.
"Bill of Sale" means the bill of sale delivered by Seller pursuant to
Section 9.07 hereof, in substantially the form of Exhibit B hereto.
"Bulk Subscriber" means any commercial establishment (e.g., any hotel
or motel) or multiple dwelling unit establishment (e.g., any apartment
building, college dormitory, hospital, etc.) connected for services by the
CATV System that pays a bulk rate for the CATV System's Standard Basic
Service or that has been served by the CATV System within the past 12
months and that has provided Seller with written notice of resubscription;
provided, that such establishment has rendered payment in full for 30 days
of such service
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and is not more than 60 days past due in any payment or any part thereof
for any such service, and further provided that such establishment's status
as a Bulk Subscriber is not the result of a credit to its account, other
than a credit which is the subject or result of a bona fide dispute with
such establishment and which would normally have been granted by Seller in
the ordinary course of its business consistent with past practice.
"Business Day" means any day on which the New York Stock Exchange (or
any successor securities exchange) and Citibank (or any successor bank) are
officially open for business in New York City.
"Buyer Damages" has the meaning set forth in Section 11.02(a) hereof.
"Cable Act" means, collectively, Title VI of the Communications Act of
1934, as amended, 47 U.S.C. (S) 151 et. seq., and all other provisions of
the Cable Communications Policy Act of 1984, the Cable Television Consumer
Protection and Competition Act of 1992 and the Telecommunications Act of
1996, as such statutes may be amended from time to time, and the rules and
regulations promulgated thereunder.
"CATV" means cable television.
"CATV Franchises" or "Franchises" means, at any date, any CATV
franchise instruments described on Schedule 4.16.4 reasonably necessary for
the construction, operation and maintenance of the CATV System identified
on Schedule 1.01 hereto as constructed, operated and maintained at such
date.
"CATV Operations" means all of the business and operations relating to
the CATV System, as presently conducted, involving the use and operation of
the Sale Assets.
"CATV System" means the CATV system as operated and maintained by
Seller (including, without limitation, one or more headends, distribution
cables, Subscriber drops and associated electronic equipment) which serves
the Region.
"Closing" means the closing of the transactions contemplated by this
Agreement.
"Closing Date" means the date on which the Closing occurs.
"Closing Date Subscribers" means the number of Qualified Subscribers
as of the Closing Date.
"Code" means the Internal Revenue Code of 1986, as amended.
"Contracts" has the meaning ascribed to it in Section 4.07(a).
"Contract Transfer Consent" means, with respect to any Contract listed
in
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Schedule 4.07, any consent (or waiver) that Seller or Buyer is required by
the terms of such Contract to obtain from any applicable party thereto for
Seller's assignment or transfer of such Contract to Buyer.
"Copyright Office" means the United States Copyright Office.
"Dispute Resolution Person" means an accountant who is independent of
Buyer and Seller and is experienced in matters involving the cable
television industry, selected by Buyer and Seller in accordance with the
rules of the American Arbitration Association ("AAA") from a panel
submitted by the AAA.
"Environmental Law" means any applicable federal, state or local law,
ordinance, rule, order, decree or regulation in effect as of the date
hereof which relates to pollution or the protection of human health, worker
safety, ambient or indoor air, ground or surface water, land, the
environment or any other natural resource including, but not limited to,
the use, storage, recycling, treatment, generation, processing, handling,
production, release, discharge, emission or disposal of any Hazardous
Substance.
"Equivalent Basic Subscribers" means the number of individual
subscribers represented by the Bulk Subscribers, which number shall be
calculated by dividing (x) the monthly billings, before nonrecurring
charges or credits but after deducting taxes, attributable to Bulk
Subscribers for Standard Basic Service for the calendar month preceding the
date on which such calculation is made, by (y) the cost of Seller's
Standard Basic Service as of the Closing Date.
"Escrow Agent" means First Union National Bank, 230 South Tryon
Street, 9th Fl, Charlotte, North Carolina 28288, or any successor thereto,
in its capacity as the escrow agent under the Escrow Agreement.
"Escrow Agreement" means the escrow agreement entered into by and
among Buyer, Seller and the Escrow Agent in substantially the form of
Exhibit C hereto, with such changes as Escrow Agent may reasonably request.
"Excluded Assets" means (i) Seller's cash-equivalents as of the
Closing Date; (ii) any and all insurance policies, bonds, letters of
credit, or other similar items, and any cash surrender value in regard
thereto; (iii) all books and records of Seller (including, without
limitation, correspondence, memoranda, books of account, tax reports and
returns and the like) other than those solely related to the CATV
Operations and other than those described in subpart (viii) of the
definition of Sale Assets; provided, that Buyer shall be entitled to the
rights set forth in Section 3.02 hereof with respect to the foregoing
excluded books and records; (iv) any and all claims, rights and interests
in and to any refunds for federal, state or local franchise, income or
other taxes or fees of any nature whatsoever for any period prior to the
Closing Date (including, without limitation, fees paid to the U.S.
Copyright Office); (v) all rights, by contract or otherwise, to receive
management or other services from any
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Affiliate of Seller except the office lease in Ghent, New York which is
included in the Sale Assets and the Headend Lease; (vi) the name "Taconic
Technology" and any related trade names, trademarks, service marks or logos
used by Seller in conjunction with the CATV System; (vii) any rights with
respect to any and all employee benefit plans covering any of the employees
of Seller; (vii) all rights accruing to Seller under this Agreement; and
(ix) those assets listed in Exhibit D hereto, if any.
"Extended Walkaway Date" has the meaning set forth within the
definition of "Walkaway Date" in this Article I.
"FAA" means the United States Federal Aviation Administration.
"FCC" means the United States Federal Communications Commission.
"Franchise Transfer Consent" means, with respect to any CATV
Franchise, including those listed in Schedule 4.16.4, any consent (or
waiver) that Seller or Buyer is legally required (whether by general
statute, specific ordinance, or the terms of the respective Franchise) to
obtain from any applicable municipal authority for Seller's assignment or
transfer of such Franchise to Buyer.
"FTC" means the United States Federal Trade Commission.
"Fund" means the Indemnification Fund.
"Hazardous Substance" means any substance, waste, pollutant,
contaminant or material, the use, transport, disposal, storage, treatment,
recycling, handling, discharge, release or emission of which is, as of the
date hereof, regulated or governed by any Environmental Law.
"Headend Lease" shall mean the lease substantially in the form of
Exhibit E, subject to modification only to comply with the decision of the
NYPSC with respect to the pricing thereof.
"HSR Act" means the Hart-Scott-Rodino Antitrust Improvements Act of
1976, as amended.
"Indemnification Fund" means, at any date, the sum of the
Indemnification Escrow Deposit and all interest accrued thereon and any and
all other proceeds from the investment thereof as of such date, less any
and all disbursements made therefrom pursuant to the Indemnification Escrow
Agreement as of such date.
"Indemnification Escrow Deposit" means the aggregate amount of
$250,000, deposited by Buyer on the date hereof pursuant to the terms and
provisions of the Escrow Agreement.
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"Licenses" means any FCC licenses and all other licenses issued by any
federal, state or local governmental authority (other than the CATV
Franchises) relating to and required to conduct the CATV Operations.
"Material Adverse Effect" means any material adverse effect upon (i)
Seller's financial condition, the CATV Operations, the Sale Assets taken as
a whole or the CATV Franchises and the Contracts taken as a whole, except
insofar as any such effect is attributable to any events or developments
affecting the CATV industry generally, including, but not limited to, state
and federal regulatory requirements (ii) the ability of Seller to fulfill
its obligations under this Agreement or (iii) the validity, performance or
enforceability of Seller's obligations under this Agreement.
"MDU" means a multiple-dwelling unit building.
"NYPSC" means the New York Public Service Commission.
"Person" or "person" means any corporation, general partnership,
limited partnership, limited liability company, limited liability
partnership, joint venture, association, individual or other entity.
"Personal Property" has the meaning set forth within the definition of
"Sale Assets."
"Post-Closing Certificate" has the meaning set forth in Section
2.03(b)(ii) hereof, and refers to the certificate to be delivered by Seller
to Buyer after the Closing Date, setting forth Seller's final determination
of the prorations and adjustments to be made to the Purchase Price as of
the Closing Date pursuant to Section 2.03(a) hereof.
"Pre-Closing Certificate" has the meaning set forth in Section
2.03(b)(i) hereof, and refers to the certificate to be delivered by Seller
to Buyer prior to the Closing Date, setting forth Seller's estimate of the
prorations and adjustments to be made to the Purchase Price on the Closing
Date pursuant to Section 2.03(a) hereof.
"Purchase Price" means the monetary sum specified in Section 2.02(b)
hereof, without reference to any adjustment thereto effected (or to be
effected) pursuant to Section 2.03(a) hereof or any reduction thereto
effected (or to be effected) pursuant to Section 2.03(b) hereof.
"Qualified Subscribers" means, at any date, the aggregate number of
Standard Basic Subscribers and Equivalent Basic Subscribers calculated as
of that date.
"Region" means the portions of Columbia County, New York served by the
CATV System, including those areas covered by the CATV Franchises referred
to on Schedule 4.16.4 hereto.
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"Sale Assets" means all properties, privileges, rights, interests and
claims, real and personal, tangible and intangible, of every type and
description, including goodwill, owned and used by Seller, as the case may
be, within the Region in the operation of the CATV System, including (i)
all of the CATV Franchises, Contracts and Licenses and intangibles relating
directly to the CATV Operations, including, but not limited to, all claims
and goodwill, if any, with respect to the CATV Operations; (ii) all
tangible personalty, electronic devices, trunk and distribution cable,
amplifiers, power supplies, conduit, vaults and pedestals, grounding and
pole hardware, Subscriber devices (including, without limitation,
converters, traps, decoders, switches, and fittings), "headend"
(origination, signal processing and transmission) equipment, facilities,
vehicles, office equipment, furniture, supplies, inventory and goods and
other personal property used exclusively by Seller in the CATV Operations
("Personal Property") as more particularly set forth on Schedule 4.08
hereto; (iii) all Seller's Accounts Receivable, Subscriber credit
information and Subscriber lists; (iv) all realty, towers, fixtures, fee,
leasehold and other interests in real property owned and used by Seller, as
the case may be, and all Seller's improvements and fixtures relating
thereto; (v) the tower and all equipment located at the headend sites which
are the subjects of the Headend Lease, regardless whether such equipment is
Personal Property or fixtures; (vi) all Seller's rights to all streets,
roads and public or private places, open or proposed, and all easements,
licenses, access and rights of way, whether public or private; (vii) all
engineering specifications, maps, plans, diagrams and blue prints; and
(viii) all books, records and computer files relating to the foregoing, all
personnel records of any employees hired by Buyer, all files and records
for any federal, state or local governmental authority relating to any of
the Sale Assets or the CATV Operations including without limitation
correspondence, filings and payment of fees if applicable, to the FCC or
the Copyright Office, provided, that the Sale Assets shall not include, and
Buyer shall not acquire any interest in, any of the Excluded Assets.V
"Schedules" means the Schedules hereto as the same may be amended or
supplemented from time to time by Seller pursuant to Section 6.03 hereof.
"Seller Damages" has the meaning set forth in Section 11.04(a) hereof.
"Standard Basic Service" means basic CATV service provided by the CATV
System and referred to on Schedule 4.20.
"Standard Basic Subscriber" means any person who has been connected
for Standard Basic Service at the CATV System's Standard Basic Rate
referred to on Schedule 4.20 for a single household subscriber (subject to
any applicable senior citizen or other standard, non-bulk discounts),
provided that such person has rendered payment in full for 30 days of such
service and is not more than 60 days past due in any payment for such
service, or any part thereof and further provided that such person's status
as a Standard Basic Subscriber is not the result of a credit to such
person's account, other than a credit that is the subject or result of a
bona fide dispute with such person and which would normally have
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been granted by Seller in the ordinary course of its business consistent
with its past business practices.
"Subscriber" means each Standard Basic Subscriber and Equivalent Basic
Subscriber.
"Subscription Agreement" means any agreement, whether oral or in
writing, for the provision of CATV Service to a Standard Basic Subscriber
or a Bulk Subscriber.
"Third Party Claim" has the meaning set forth in Section 11.03(b).
"Transfer Consents" means the Franchise Transfer Consents, Contract
Transfer Consents and any consent of the NYPSC that Seller or Buyer is
legally required (whether by general statute, specific ordinance, FCC rule
or regulation, or the terms of the respective Franchise or Contract) to
obtain (a) for Seller's sale or transfer of the Sale Assets to Buyer or (b)
to permit Buyer to operate the CATV System after the Closing. For purposes
of this definition of Transfer Consents, the consent of the NYPSC will not
be deemed to have been obtained until the NYPSC has issued a written order
and at least 30 days have elapsed from the date of that order with no third
party having filed with the NYPSC any written objections to such order
(provided, however, that nothing herein shall be deemed or used to extend
the time period in which a closing shall occur under Section 2.04 hereof).
"Walkaway Date" means July 31, 1999; provided, that if the Closing has
not occurred by such date solely because one or more of the Transfer
Consents have not been obtained as provided herein, and provided, further,
that if each of Seller's or Buyer's respective obligations (other than with
respect to the Transfer Consents) set forth in Article VIII or IX are (or
could be) satisfied as of such date, then upon not less than 10 days prior
written notice given by either Buyer or Seller to the other, as the case
may be, the Walkaway Date shall mean October 31, 1999 (and shall be
referred to herein as the "Extended Walkaway Date").
The plural of any term defined in the singular, and the singular of any
term defined in the plural, shall have the meaning correlative to such defined
term.
ARTICLE II.
PURCHASE AND SALE OF ASSETS
AND ASSUMPTION OF LIABILITIES
2.01 Purchase and Sale of Assets. Subject to the terms and conditions of
this Agreement, at the Closing, Seller shall sell, transfer, convey, assign and
deliver to Buyer, and Buyer shall purchase, acquire and accept from Seller, all
of Seller's right, title and interest in and to the Sale Assets, free and clear
of all liens, security interests, mortgages, encumbrances and other
restrictions, other than those permitted under Section 4.06 hereof.
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2.02 Consideration. Subject to the terms and conditions of this Agreement:
(a) At the Closing, Buyer shall deliver to Seller (or to such
person(s) as Seller shall designate), by wire transfer of immediately available
funds, the sum of $8,525,000 (the "Purchase Price") in cash for the Sale Assets,
which sum shall be (i) reduced on the Closing Date by the amount of the
Indemnification Fund delivered to the Escrow Agent by Buyer on the date hereof,
pursuant to Section 11.02(e) hereof, and (ii) subject to adjustment on and after
the Closing Date pursuant to Section 2.03(a) hereof.
(b) Buyer and Seller agree that the allocation of the Purchase Price
among the Sale Assets shall be agreed to at Closing. Buyer shall provide Seller
with its suggested allocation prior to Closing which Seller will then review;
Buyer and Seller shall proceed in good faith to resolve any objections. Such
allocation shall be used by both Buyer and Seller for purposes of the reporting
requirements of Section 1060 of the Code and any applicable regulations
thereunder. Any adjustments to the Purchase Price required pursuant to Section
2.03(a) hereof shall also be allocated and reported in accordance with said
Section 1060. Seller shall promptly notify Buyer, and Buyer shall promptly
notify Seller, of any adjustment that comes to its attention which is proposed
to be made by any federal, state or local taxing authority with respect to the
allocation of the Purchase Price.
2.03 Adjustment of Purchase Price.
(a) The Purchase Price shall be subject to adjustment, as of 12:01
a.m. (New York City time) on the Closing Date, to reflect, in accordance with
generally accepted accounting principles, the principle that all revenues and
refunds, and all costs, expenses and liabilities, attributable to the CATV
Operations for any period prior to such time on the Closing Date are for the
account of Seller and all revenues and refunds, and all costs, expenses and
liabilities (other than liabilities and obligations under contracts or other
obligations of Seller that Buyer does not assume) attributable to the CATV
Operations on or after the Closing Date are for the account of Buyer. The
adjustments to be made to the Purchase Price pursuant to this Section 2.03(a)
shall consist of the following:
(i) an increase in the Purchase Price by an amount equal to the
sum of:
(A) all prepaid items relating to the ownership or operation
of any of the Sale Assets and for which Buyer will receive
benefits after the Closing, which prepaid items shall be prorated
between Seller and Buyer as of the Closing Date on the basis of
the period covered by the respective prepayment, and shall be
deemed to include, without limitation, all such prepaid items
attributable to the following: real and personal property taxes
and assessments levied against the Sale Assets; real and personal
property rentals; pole rentals; any expenses relating to pole
rearrangement and make-ready work relating to the CATV System
that is performed prior to Closing,
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to the extent that such work relates solely to Subscribers to be
added to the System on or after the Closing Date; power and
utility charges; access charges; and similar items; and
(B) an amount equal to 50% of the cost of relocating certain
of the equipment included in the Sale Assets in accordance with
Section 6.05 hereof, if such amount has not been previously paid
or reimbursed by Buyer, up to a maximum aggregate increase of
$5,000.
(ii) a decrease in the Purchase Price by an amount equal to the
sum of:
(A) all Subscriber prepayments, credit balances and deposits
held by Seller as of the Closing Date and retained by Seller;
(B) all accrued and unpaid real and personal property taxes
in respect of any of the Sale Assets (which taxes shall be
prorated between Seller and Buyer as of the Closing Date on the
basis of the respective period covered by any such taxes);
(C) all accrued and unpaid expenses relating to the
ownership or operation of any of the Sale Assets, including
accrued and unpaid franchise fees (which accrued and unpaid
expenses shall be prorated between Seller and Buyer as of the
Closing Date on the basis of the period to which the respective
expense relates, and shall be deemed to include, without
limitation, accrued and unpaid expenses of the kind itemized in
Section 2.03(a)(i) above);
(D) all expenses relating to pole rearrangement and make-
ready work relating to the CATV System of which Seller has
received a notice of violation from the relevant pole company
prior to the Closing Date and which has not been cured as of such
date, or which Seller would normally perform, in the ordinary
course of business, prior to the Closing Date and which has not
been performed;
(E) in the event the number of Closing Date Subscribers is
less than the requisite number pursuant to Section 9.09, the
product of (x) $1,740 and (y) the difference between such
requisite number and the number of Closing Date Subscribers, up
to a maximum aggregate decrease of $350,000;
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(F) the adjustment contemplated by Section 9.06, if any;
(G) the unearned portion of any programming incentive
payments paid to Seller prior to Closing with respect to which
the Buyer is assuming the obligation to carry such programming on
or after the Closing; and
(H) the amount by which the PSC increases the rent to be
paid by Buyer under the Headend Lease, adjusted to reflect a
present value discount rate of 15%.
(b) For purposes of determining the prorations and adjustments to the
Purchase Price to be made as of the Closing Date pursuant to Section 2.03(a)
above, Seller and Buyer shall proceed as follows:
(i) Seller shall, not less than five days prior to the Closing
Date, deliver to Buyer a certificate (the "Pre-Closing Certificate") which
shall set forth Seller's good faith preliminary estimate of the prorations
and adjustments to the Purchase Price to be made as of the Closing Date
pursuant to Section 2.03(a) above, together with such documentation as may
reasonably support Seller's preliminary estimate set forth therein, and the
Purchase Price shall be adjusted on the Closing Date in accordance with
such estimate. Seller hereby agrees that the total copyright payments owing
with respect to the CATV System for the period in which the Closing occurs
shall be calculated in accordance with applicable law and Seller shall pay
its pro rata portion of such aggregate fees as provided in this Section
2.03(b).
(ii) Within 60 days after the Closing Date, Seller shall deliver
to Buyer a certificate (the "Post-Closing Certificate"), which shall set
forth Seller's final determination of the prorations and adjustments to the
Purchase Price to be made as of the Closing Date pursuant to Section
2.03(a) above, together with such documentation as may support Seller's
determination thereof and such other documentation relating to such Post-
Closing Certificate as Buyer may reasonably request.
(iii) If Buyer shall in good faith conclude that the Post-Closing
Certificate does not accurately reflect the final prorations and
adjustments to the Purchase Price to be made as of the Closing Date
pursuant Section 2.03(a) above, then Buyer shall, within 15 days after its
receipt of the Post-Closing Certificate, provide to Seller its written
statement of any discrepancies believed in good faith to exist, together
with such documentation as may support Buyer's determination thereof and
such other documentation relating to such statement as Seller may
reasonably request. In connection with Buyer's review of the Post-Closing
Certificate, Seller shall provide Buyer and Buyer's advisors with access to
all documents and records in its possession or under its control which
relate to the prorations and adjustments to the Purchase Price set forth in
the Post-Closing Certificate.
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(iv) If Buyer and Seller cannot resolve any dispute to their
mutual satisfaction within 30 days after Seller's receipt of Buyer's above-
specified discrepancy statement, Buyer and Seller shall, within the 10 day
period following the expiration of such 30-day period, designate a Dispute
Resolution Person to review the Post-Closing Certificate, Buyer's
discrepancy statement and any other relevant documents and to rule upon the
differences between Buyer and Seller with respect thereto. The cost of
retaining the Dispute Resolution Person shall be borne one-half by Buyer
and one-half by Seller. The Dispute Resolution Person shall report its
conclusions and ruling in writing to Buyer and Seller and such conclusions
and ruling as to any adjustments to be made pursuant to this Section 2.03
shall be conclusive and binding on all parties to this Agreement and not
subject to further dispute or review.
(v) If as a result of any resolution reached by Buyer and
Seller, or any ruling made by the Dispute Resolution Person, pursuant to
clause (iv) above, Buyer is finally determined to owe any amount to Seller,
or Seller is finally determined to owe any amount to Buyer, the obligor
shall pay such amount to the other party hereto within three Business Days
after such final determination.
2.04 The Closing. The Closing shall take place at the offices of Buyer's
counsel, Baer Marks & Upham LLP, at 805 Third Avenue, New York, New York 10022,
at 10:00 a.m. local time or at the offices of Buyer's lender or its counsel on
the first day of the month that falls at least 30 days after the first date upon
which all of the Transfer Consents shall have been obtained, unless otherwise
extended by Buyer; provided, that the Closing shall not occur later than the
Walkaway Date (or the Extended Walkaway Date, if applicable). If the Closing
shall not have occurred on or prior to the Walkaway Date (or the Extended
Walkaway Date, if applicable), and such failure to Close is attributable solely
to the breach by one party of any of its covenants, obligations, representations
or warranties hereunder, then the non-breaching party shall be entitled to
obtain specific performance of the sale transaction contemplated by this
Agreement on the terms set forth herein; provided, that such non-breaching party
shall not thereafter, in connection therewith or otherwise, be entitled to make
any claim for any breach which is known by the non-breaching party on the
Closing Date against the breaching party pursuant to Article XI hereof or
otherwise, and that any such claim or right to bring such claim for any such
known breach shall be deemed waived. Nothing contained herein shall be deemed to
limit, restrict or waive a non-breaching party's right to bring a claim for any
breach unknown to the non-breaching party as of the Closing Date; provided, such
claim is permitted under Article XI hereof.
2.05 No Assumed Liabilities. (a) At Closing, Buyer shall assume only the
following liabilities of Seller: (i) liabilities arising out of the conduct of
the CATV Operations and the ownership of the Sale Assets from and after the
Closing Date; (ii) liabilities arising pursuant to any of the CATV Franchises or
the Contracts with respect to the period from and after the Closing Date; and
(iii) liabilities for Subscriber prepayments, credit balances and deposits for
which Buyer received a credit against the Purchase Price pursuant to Section
2.03(a)(ii)(A) hereof.
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(b) Buyer is not assuming any liability, obligation or debt of Seller
or the CATV Operations except as set forth in 2.05(a) above. Without limiting
the generality of the foregoing, Buyer is not assuming any obligations or
liability (i) to any of Seller's employees for sick or vacation pay or other
benefits, (ii) under any employee benefit plan, (iii) with respect to any
pending or threatened litigations or claims or (iv) for rate refunds, rollbacks
or credits with respect to the CATV Operations prior to the Closing.
(c) Seller acknowledges that Buyer has no obligation to hire any of
Seller's employees at or after the Closing but that Buyer may, in its
discretion, determine to offer employment to any of Seller's employees or any
employees of any Affiliate of Seller who primarily perform services relating to
the CATV Operations. Should Buyer hire any such employees, Seller or its
Affiliate shall be responsible for all compensation and benefits (including
without limitation salary, bonus, accrued vacation time or sick pay) prior to
the Closing Date. Seller and Buyer (to the extent Buyer is so required) shall
comply with notification requirements, if any, under the Federal Worker
Adjustment and Retraining Notification Act.
2.06 Further Assurances. From and after the Closing Date:
(a) Seller shall from time to time, at the request of Buyer and
without further cost or expense to Buyer, execute and deliver or cause to be
executed and delivered such other instruments of conveyance and transfer as
Buyer may reasonably request, in order to more effectively convey, transfer and
assign to Buyer the Sale Assets.
(b) Buyer shall from time to time, at the request of Seller and
without further cost or expense to Seller, execute and deliver or cause to be
executed and delivered such other instruments of assumption and performance as
Seller may reasonably request, in order to more effectively evidence and carry
out Buyer's assumption of the liabilities and obligations of Seller pursuant to
the Assumption Agreement.
(c) Buyer and Seller shall cooperate in the removal promptly, but in
no event more than 30 days, after the Closing of Seller's name and logo to the
extent incorporated in or on any of the Sale Assets.
(d) Seller hereby appoints Buyer and its employees and
representatives as its attorney in fact, with full power of substitution, to
endorse Seller's name on any checks payable to Seller or its order with respect
to any of the Accounts Receivable or any other Sale Assets. Said appointment,
being coupled with an interest, is irrevocable.
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ARTICLE III.
RELATED MATTERS
---------------
3.01 Access.
(a) Subject to the provisions of Section 13.07 hereof, Seller agrees
that on and after the date hereof, during normal business hours and on
reasonable notice to Seller, it shall permit Buyer and its auditors, attorneys,
financing sources and other advisors through their authorized representatives,
to have access to any properties of Seller reasonably related to the CATV
Operations, to examine all books and records of Seller reasonably related to the
CATV Operations and to have access to any employees, advisors, consultants and
other personnel of Seller related to the CATV Operations.
(b) Buyer agrees that on and after the Closing Date, during normal
business hours, it shall permit Seller and Seller's auditors and attorneys,
through their authorized representatives, to have access to and to examine all
books and records provided by Seller to Buyer in connection with the
transactions contemplated by this Agreement and reasonably related to events
occurring prior to the Closing.
(c) Each party shall direct its representatives to render any
assistance which the other party may reasonably request in examining or
utilizing records referred to in this Section 3.01. Each party agrees to
preserve all files and records which are subject to this Section 3.01 for a
period of six (6) years after the Closing Date; provided, that each party may
destroy or otherwise dispose of any such records during such six-year period
after first giving 30 days' notice thereof to the other party, and within 30
days of receipt of such notice, such other party may cause to be delivered to it
the records intended to be destroyed, at such other party's expense.
(d) Seller further agrees that on and after the date hereof, during
normal business hours, it will permit Buyer and its authorized representatives
access to all real property owned or used by Seller in connection with the CATV
Operations (including without limitation headend sites) for the purposes of
conducting environmental assessments including without limitation a Phase I
environmental audit and to conduct any additional testing or procedures that are
reasonably appropriate based on the results of any preliminary report or such
Phase I.
3.02 Financial Statements of Businesses Acquired. Seller acknowledges that
Buyer's parent, Avalon Cable Holdings LLC, is currently planning an offering
under Rule 144A promulgated under the Securities Act of 1933, as amended (the
"Rule 144A Offering") and subsequent public debt offering under applicable
federal and state securities laws and that, in connection therewith, Avalon
Cable Holdings LLC will need current and historical financial information about
the CATV Operations to comply with Rule S-X and other applicable securities
laws. Accordingly, Seller will deliver to Buyer on or prior to the date hereof:
(a) an audited balance sheet of Seller with respect to the CATV
Operations for
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the fiscal years ending December 31, 1996 and 1997, respectively, and related
statements of income, retained earnings and cash flows for such periods setting
forth in each case in comparative form the figures for the previous fiscal year,
all reported on by independent public accountants. Such financial statements
shall each be prepared pursuant to Regulation S-X promulgated by the Securities
and Exchange Commission and accompanied by manually signed reports thereon by
independent public accountants pursuant to Rule 2-02 of Regulation S-X;
(b) an unaudited balance sheet of Seller with respect to the CATV
Operations for the fiscal year ended December 31, 1995 prepared pursuant to
Regulation S-X; and
(c) an unaudited consolidated balance sheet of Seller with respect to
the CATV Operations as of June 30, 1998 and related statements of income and
cash flows from the beginning of the current fiscal year to June 30, 1998
together with comparative data for the comparable period in Seller's fiscal year
ended December 31, 1997, all to the extent and in the form required by the rules
and regulations of the Securities and Exchange Commission and prepared pursuant
to Regulation S-X.
Unless otherwise provided herein, the cost of having KPMG Peat Marwick LLP
prepare the financial statements required by Buyer pursuant to this Section 3.02
shall be borne by Buyer, regardless of whether the transactions contemplated by
this Agreement are consummated.
3.03 Fiber Construction. Buyer acknowledges that Seller currently uses two
strands of the existing fiber of its parent, Taconic Telephone Corp. to conduct
its CATV Operations. Taconic Telephone Corp. shall permit Buyer to continue to
use such fiber on substantially the same basis as Seller currently uses such
fiber but without fees or charges of any kind for a period of six months
commencing the Closing Date (the "Use Period"). During such Use Period, Buyer
shall use reasonable efforts to construct its own fiber system at its own cost
and expense (including all make ready and ride charges). Seller acknowledges
that in connection with Buyer's construction of its own fiber system, Buyer may
require pole attachment agreements with Taconic Telephone Corp.; Seller and
Taconic Telephone Corp. agree to cause such pole attachment agreements to be in
Taconic Telephone Corp.'s standard form, at customary rates and on other
customary terms and conditions.
3.04 Bulk Sales. The parties waive compliance with the bulk sales
provisions of the New York Uniform Commercial Code or similar laws that may be
applicable to the transactions contemplated hereby.
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ARTICLE IV.
REPRESENTATIONS AND WARRANTIES OF SELLER
----------------------------------------
Seller hereby represents and warrants to Buyer that each of the statements
contained in this Article IV is true and correct as of the date of this
Agreement:
4.01 Corporate Organization. (a) Seller is a corporation duly incorporated
and validly existing under the laws of the State of New York and has all
requisite power and authority to carry on the CATV Operations as they are now
being conducted and to own the Sale Assets. Seller is duly qualified to conduct
business in the State of New York and each other state where the failure to be
so qualified would have a Material Adverse Effect.
4.02 Authorization. Seller has all requisite corporate power and authority
to enter into this Agreement and to carry out the transactions contemplated
hereby. The execution and delivery of this Agreement and consummation of the
transactions contemplated hereby has been duly authorized in accordance with its
Articles of Incorporation, as amended, and By-Laws. This Agreement is a valid
and binding agreement of Seller enforceable in accordance with its terms,
subject to all of the limitations imposed by applicable bankruptcy, insolvency,
reorganization, moratorium and similar laws of general application relating to
or affecting creditors rights generally and to general principles of equity.
4.03 No Violation. Neither the execution and delivery of this Agreement nor
the consummation of the transactions contemplated hereby will violate any
provision of the Articles of Incorporation or By-Laws of Seller, or, except as
specified in Schedule 4.03 or on Schedule 4.14, violate, constitute a material
default under, result in the termination of, accelerate the performance required
by, any agreement or commitment to which Seller is a party or by which Seller is
bound the violation of which, the termination of which or the acceleration of
which would have a Material Adverse Effect, or materially violate any statute or
law or any judgment, decree, order, regulation or rule of any court or
governmental authority to which Seller is a party or by which Seller is bound.
4.04 Financial Statements. Schedule 4.04 contains audited financial
statements of Seller with respect to the CATV Operations for each of the years
ended December 31, 1996 and 1997, an unaudited balance sheet for the year ended
December 31, 1995 and unaudited financial statements for the six month periods
ended June 30, 1998 and June 30, 1997 (collectively, the "Financial
Statements"). The Financial Statements fairly present the results of operation
of the CATV Operations for the periods set forth therein and were prepared in
accordance with generally accepted accounting principles consistently applied,
subject, in the case of interim Financial Statements, to customary year-end
adjustments and accruals and the absence of footnotes. Except as indicated on
Schedule 4.04A, the Financial Statements include all expenses (other than
depreciation, amortization, taxes and management fees) allocable to the CATV
Operations as if operated on a stand-alone basis. Schedule 4.04 also contains
the amount of all capital expenditures in respect of the CATV Operations for the
same periods covered by the Financial Statements.
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4.05 Interim Operations. Since June 30, 1998, (i) the CATV Operations have
been conducted in the ordinary and usual course consistent with past practice in
all material respects, (ii) except as otherwise provided in this Agreement,
Seller has not entered into or otherwise become a party to any agreement to take
any action which would, if taken prior to the Closing, materially breach any
obligation contained in Article X hereof; and (iii) there has been no Material
Adverse Effect in respect of the Sale Assets or the CATV Operations.
4.06 Title to Properties, Encumbrances. (a) Seller has and shall transfer
to Buyer, good title to the Sale Assets free and clear of all defects or
objections, liens, claims, charges, security interests or other encumbrances of
any nature, except (i) such matters, if any, as are specified in Schedule
4.06(a) (all of which shall be removed on or prior to the Closing Date); (ii)
imperfections of title, easements, encumbrances or restrictions, if any, which
do not and will not materially impair the present use of the respective Sale
Assets subject thereto or the CATV Operations and have not had and would not
reasonably be expected to have a Material Adverse Effect; (iii) materialmen's,
mechanics', carriers', workmen's, warehousemen's, repairmen's or other like
liens arising in the ordinary course of business, or deposits to obtain the
release of such liens (all of which shall be removed on or prior to the Closing
Date); and (iv) liens for current taxes not yet due.
(b) Except as noted on Schedule 4.06(a), the Sale Assets constitute
all assets that are used exclusively in the CATV Operations and that are deemed
reasonably necessary by Seller to operate the CATV System and conduct the CATV
Operations as currently conducted. Schedule 4.06(b) sets forth (i) all material
assets that are being used in the CATV Operations on a non-exclusive basis and
that are deemed reasonably necessary by Seller to operate the CATV System and
conduct the CATV Operations as currently conducted; and (ii) all other material
assets used in the operation of the CATV System and to conduct the CATV
Operations as currently conducted, but are not included in the Sale Assets.
4.07 Contracts.
(a) Schedule 4.07 sets forth a complete and accurate list, as of the
date of this Agreement, of all of the following (whether written or unwritten),
other than the retransmission consents and must-carry elections referred to in
Section 4.16 and the CATV Franchises:
(i) contracts relating to the CATV Operations or Sale Assets
involving post-Closing Date monetary obligations of more than $5,000
individually (i.e., in the case of any single contract), contingent or
otherwise, or which may extend for a term of more than one year after the
Closing Date; for purposes hereof, as of the date of this Agreement, the
parties have agreed to use July 1, 1999 as the Closing Date;
(ii) contracts relating to the CATV Operations or Sale Assets
under which the amount payable is dependent on the revenue, income or
similar measure of any person or entity;
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(iii) licenses, leases, contracts and other arrangements with
respect to any of the material Sale Assets, including, without limitation,
material sales, distribution and supply contracts, headend and office
leases, vehicle leases, equipment leases, and the lease of the CATV
Systems's signal fiber to Berkshire Cable;
(iv) contracts which place any material limitation on the method
of conducting or scope of the CATV Operations or the Sale Assets including,
without limitation, non-compete agreements;
(v) all programming agreements and pole attachment agreements;
(vi) all easements, rights-of-way and rights-of-entry which are
material to the CATV Operations and, to Seller's knowledge, all other
easements, rights-of-way and rights-of-entry that exist in connection with
the CATV Operations; and
(vii) other contracts, instruments, commitments, plans and
arrangements which materially involve or relate to the CATV Operations or
the Sale Assets, excluding employee related contracts described on Schedule
4.17.
All of the foregoing listed or required to be listed in Schedule 4.07 are
referred to herein as the "Contracts." Schedule 4.07 identifies each Contract
that is material to the CATV Operations.
(b) Except as otherwise indicated on Schedule 4.07, Seller is in
compliance, in all material respects, with the terms and conditions of all
Contracts and to Seller's knowledge, there is no default or event of default or
event which, with the passage of time or giving of notice or both, would
constitute a default or event of default under any such Contracts. Schedule 4.07
indicates with an asterisk which of the Contracts requires the consent of a
third party for the assignment of such Contract to Buyer. True, complete and
correct copies of each of the written Contracts have been delivered to Buyer.
4.08 Material Sale Assets. Schedule 4.08 contains a list of the tangible
Sale Assets having an individual cost or replacement value equal to or greater
than $5,000. Except as indicated in Schedule 4.08, the Sale Assets listed on
Schedule 4.08 are in good operating condition.
4.09 Characteristics of the CATV System. (a) Schedule 4.09 sets forth a
materially true and accurate description of the following information, with
respect to the CATV System:
(i) the approximate number of miles of energized cable plant and
homes passed as of the date hereof;
(ii) the approximate number of the CATV System's converters in
service, the approximate number of additional outlets, the approximate
number of pay units and the approximate number of the CATV System's
Qualified Subscribers, as of June 30,
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1998; and
(iii) the MHz capacity of the CATV System and the CATV System's
channel capacity.
(b) To Seller's knowledge, as of the date of this Agreement, and
subject to MDU's which terminate services and resubscribe in the ordinary course
of business based on seasonality, the CATV System has not lost access to any MDU
within the past 24 months, and continues to provide cable services to all of the
MDU's to which it provided services as of December 31, 1996.
(c) No franchising authority currently regulates or has regulated the
CATV System's basic rates pursuant to the 1992 Cable Act. The CATV System does
not offer a cable programming services tier except as set forth on Schedule
4.20.
(d) Annexed hereto as part of Schedule 4.09 are the most recent proof
of performance tests for the CATV System. Seller warrants and agrees that as of
the Closing Date, except as set forth on Schedule 4.15, the CATV System shall
meet or exceed the performance standards required by applicable law.
4.10 Taxes. All income, unemployment, social security, sales, franchise,
property and other material taxes levied, assessed or imposed upon Seller or the
CATV System by the United States or any state, or any governmental subdivision
of either, to the extent due and payable as of the date hereof, have been timely
and properly paid, and no liability exists for deficiencies, except where
nonpayment of any such taxes has not had, and would not reasonably be expected
to have, a Material Adverse Effect and except for taxes being contested by
appropriate proceedings and for which adequate reserves have been established on
Seller's Financial Statements. Except as set forth in Schedule 4.10, there are
no tax audits pending or any outstanding agreements or waivers extending the
statutory period of limitations applicable to any federal, state or local income
tax return of Seller. To Seller's knowledge, no tax deficiency has been
determined, nor proposed tax assessment charged, against Seller. Seller has made
or caused to be made all withholdings of taxes required to be made, and such
withholdings have either been paid to the appropriate governmental agency or set
aside, in appropriate accounts for such purpose.
4.11 Affiliate Transactions. Other than as set forth in Schedule 4.11,
there are no Contracts or other agreements or arrangements relating to the CATV
Operations between Seller, on the one hand, and any Affiliate thereof, on the
other hand.
4.12 Overbuild. As of the date hereof, to Seller's knowledge, there is (i)
no franchise issued or other application therefor pending with franchising
authorities which relate to the operation of a CATV system within the Region by
a party other than Seller, (ii) no party providing CATV service within the
Region under a franchise granted by any local franchising authority and (iii) no
party providing CATV service within the Region who has not obtained a franchise
which permits the construction, operation and maintenance of a CATV system
within the Region or any
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part thereof. To Seller's knowledge, within the past five years no operator of a
CATV system has built, updated or otherwise constructed or operated any part of
any CATV system within the area of the Region served by the CATV System operated
by Seller.
4.13 Litigation. Except as set forth in Schedule 4.13 or with respect to
matters affecting the CATV industry in general, there is no action, suit or
proceeding by or before any court or governmental or other regulatory or
administrative agency or commission pending, or to Seller's knowledge,
threatened, with respect to the CATV Operations, except any action, suit, or
proceeding that has not had and would not reasonably be expected to have a
Material Adverse Effect. Seller is not subject to any judgment or order entered
in any lawsuit or proceeding to which Seller is a party with respect to the CATV
Operations.
4.14 Consents and Approvals. Except as set forth in Schedules 4.07, 4.14,
4.16 and 4.16.4, and subject to the requirements of the HSR Act, if applicable,
and the approval of the NYPSC, no consent or approval of any governmental
authority is required by Seller in connection with the execution, delivery and
performance of this Agreement or the consummation of the transactions
contemplated hereby. Except as set forth in the preceding sentence or in
Schedule 4.14, no consent, approval or authorization of any other person is
necessary for the consummation of the transactions contemplated hereby.
4.15 Compliance with Law. Except as set forth in Schedules 4.15, 4.16, and
4.18, the CATV Operations have been conducted and the Sale Assets have been
maintained and operated in compliance with all applicable laws, regulations and
other requirements of all national governmental authorities, federal, state,
local and municipal that have jurisdiction over Seller with respect to the CATV
Operations, except where the failure to comply with such laws, regulations and
requirements have not had and would not reasonably be expected to have a
Material Adverse Effect.
4.16 FCC and Copyright Compliance. Except as provided in Schedule 4.16, the
operation of the CATV System has been and is in compliance with the Cable Act
and the rules and regulations of the FCC, except for such noncompliance as has
not had and would not reasonably be expected to have a Material Adverse Effect.
Seller has made all material filings required to be made with the FCC (including
cable television registration statements, annual reports and aeronautical
frequency usage orders) has paid all required fees to be paid to the FCC for the
CATV System, and has provided all material notices to customers required under
the Cable Act and the FCC's rules and regulations. For the past three years,
Seller has been certified for purposes of compliance with the FCC's equal
employment opportunity rules, and Seller is in material compliance with all
signal leakage criteria prescribed by the FCC. Seller makes available to
customers of the CATV System and third parties all equipment and facilities
required under any applicable federal, state and local laws, rules and
regulations and ordinances, and as of the date of this Agreement Seller is not a
party to any leased access agreement with respect to the CATV System. Except as
described in Schedule 4.16.4, none of the CATV Franchises shall expire by its
terms within thirty-six (36) months of the date of this Agreement. Seller does
not hold any FCC License related to the CATV Operations and none is required to
operate the CATV Operations as they are operated as of the date of this
Agreement.
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4.16.1 Compliance. Except as set forth in Schedule 4.16, Seller has
complied in all material respects with the must-carry and retransmission consent
provisions of the Cable Act and the FCC rules and regulations promulgated
thereunder as such provisions relate to the CATV Operations. Schedule 4.16 lists
all retransmission consent agreements and must-carry elections of stations
carried by the CATV System. Except as set forth in Schedule 4.16, since January
1, 1996, no written notices or demands have been received from the FCC, any
television station or any other Person, station, governmental authority or unit
challenging the right of the CATV System to carry any signal or deliver the
same.
4.16.2 Copyright Office. Seller has deposited with the Copyright Office all
statements of account and other documents and instruments, and paid to the
Copyright Office all royalties, supplemental royalties, fees and other sums, as
are required under the Copyright Act of 1976, as amended (the "Copyright Act")
to obtain, hold and maintain the compulsory license for cable television systems
prescribed in Section 111 of the Copyright Act. Seller and the CATV Operations
are in compliance with the Copyright Act and the rules and regulations of the
Copyright Office, except for such noncompliance which has not had and would not
reasonably be expected to have a Material Adverse Effect. To Seller's knowledge,
there is no inquiry, claim, action or demand pending before the Copyright Office
or from any other party which questions the copyright filings or payments made
by Seller with respect to the CATV System. Seller has provided Buyer with copies
of all statements of account filed with the Copyright Office from January 1,
1996 to the present.
4.16.3 FAA Approvals. All necessary FAA approvals have been obtained with
respect to the height and location of any tower used in connection with the CATV
Operations and are listed in Schedule 4.16. Any such tower is being operated in
compliance in all material respects with applicable FCC and FAA rules.
4.16.4 Franchises. Schedule 4.16.4 includes a true and complete list of all
Franchises that are held for use in connection with the CATV Operations. To
Seller's knowledge, no other franchises, franchise applications, licenses,
registrations, authorizations or permits are necessary in connection with the
operation of the CATV System in the ordinary course of business. True and
complete copies of the Franchises (together with any and all amendments thereto)
have been delivered to Buyer. Each of the Franchises is in full force and effect
in accordance with its terms. No proceeding is pending or, to Seller's
knowledge, threatened, to revoke, terminate or cancel any Franchise. Seller and
the CATV Operations are in compliance with the terms and conditions of the CATV
Franchises and are not in default thereunder, except as listed in Schedule 4.15,
and except any noncompliance or default as has not had and would not reasonably
be expected to have a Material Adverse Effect. Seller has enjoyed and continues
to enjoy good relations with each franchising authority with which it does
business.
4.17 Employee Agreements and Plans. (a) Schedule 4.17(i) contains a
complete list of all written and unwritten plans, policies and agreements,
including employment agreements, non-competition agreements, severance
agreements and indemnification agreements and arrangements,
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to which Seller is a party at the date of this Agreement and under which Seller
or any Affiliate provides benefits to current employees of Seller, engaged in
the CATV Operations (the "Plans"). Copies of all of the Plans have been
delivered or made available to Buyer. Except as disclosed in Schedule 4.17(i),
there are no commitments to amend any of those Plans. Schedule 4.17(i) also
contains a summary of the plans and policies regarding vacation and holidays
which Seller maintains for employees of the CATV System. Schedule 4.17(ii) lists
all employees of Seller employed by the CATV System, together with each such
employee's respective date of initial employment, present title and work
assignment, present annual salary, the date and percentage of his or her most
recent salary increase and, for employees whose employment relates solely to the
CATV Operations, the amount of any bonus such employees are presently eligible
to receive.
(b) As of the date of this Agreement, except as listed on Schedule
4.17(iii), (i) Seller is not a party to any collective bargaining agreement with
respect to any of the CATV Operations, (ii) none of the employees engaged in the
CATV Operations is presently a member of any collective bargaining unit related
to his or her employment in the CATV Operations, and (iii) to Seller's
knowledge, no collective bargaining unit has filed a petition for representation
of any of the employees engaged in the CATV Operations with respect to any such
employee's employment therein.
4.18 Environmental. Except as set forth in Schedule 4.18: (a) to Seller's
knowledge, Seller is in compliance in all material respects with all
Environmental Laws; (b) to Seller's knowledge, Seller has not generated,
released, stored, used, treated, handled, discharged or disposed of any
Hazardous Substance at, on, under, in or about any property leased or owned by
Seller that is to be leased to Buyer under the Headend Lease (the "Leased
Property"), discharged any Hazardous Substance to or from any Leased Property or
discharged any Hazardous Substance from any Leased Property into any ground or
surface of water, directly or indirectly; (c) to Seller's knowledge, no release
of Hazardous Substances outside any Leased Property threatens to migrate into,
onto or under such property; (d) to Seller's knowledge, no underground storage
tank is located on any Leased Property or has been removed from such property,
and the Leased Property has not and is not being used as a gasoline service
station or any other facility for storing, pumping, dispensing or producing
gasoline or any other petroleum products or wastes; (e) all wastes generated on
any Leased Property are and have been discharged by Seller, in all material
respects, in accordance with all Environmental Laws; (f) Seller has provided or
has caused to be provided to Buyer copies of any and all (i) assessments,
studies, reports or surveys relating to the environmental conditions, including
but not limited to, the presence or alleged presence of Hazardous Substances at
or on any Leased Property, which are in the possession or under the control of
Seller, (ii) notices or other written materials that were received by Seller or
any Affiliate from any governmental authority having power to administer or
enforce any Environmental Law relating to any violations of Environmental Laws
in respect of any Leased Property, and (iii) notices that were received by
Seller or any Affiliate of any claim by any person based on or alleging a
violation of any Environmental Law with respect to any Leased Property; (g)
there are no current or, to Seller's knowledge, pending, claims, administrative
proceedings, judgments, declarations or orders relating to violation of
Environmental Laws involving any Leased Property or to the presence of Hazardous
Substances at, on, in or under any Leased Property; (h) to Seller's knowledge,
no friable asbestos is present at any
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<PAGE>
real Leased Property.
4.19 Brokers and Finders. Except for Communications Equity Associates, and
the brokerage fee due said firm in connection with the transactions contemplated
by this Agreement (which brokerage fee will be paid by Seller), Seller has not
employed any broker or finder or incurred any liability for any brokerage fees,
commissions or finders' fees in connection with the transactions contemplated by
this Agreement.
4.20 Programming, Rates and Charges. Schedule 4.20 lists all programming,
stations, signals and channels offered in the CATV Operations, the channel
position of each such signal, and the channel capacity of the CATV Systems and
all of the CATV System's standard, non-discounted, non-bulk CATV rates and
charges for the Region as of the date of this Agreement including, without
limitation, a description of basic and optional or tier services available.
Schedule 4.20 also lists all discounts of every kind (whether or not standard or
offered in the ordinary course of business) from the standard rates and charges
for the Region as of the date of this Agreement and lists each courtesy and
discount account existing as of the date of this Agreement. Schedule 4.20 also
reflects all principal marketing, advertising and promotional programs currently
in effect and any such programs that were in effect since January 1, 1997.
Seller has not credited the account of any customer unless such credit was
granted in the ordinary course of business consistent with the Seller's past
business practice. Schedule 4.20 also lists all rate changes since January 1,
1996 and the dollar amounts thereof and all channels added since January 1,
1996.
4.21 Bonds, Insurance and Letters of Credit. Each insurance policy,
performance bond and letter of credit required to be maintained or which is
maintained covering the property comprising the Sale Assets is set forth in
Schedule 4.21, and a copy of each such policy, letter of credit or bond will be
delivered to Buyer by Seller within 30 days of the execution of this Agreement.
Each such policy, letter of credit and bond is current and in full force and
effect. Seller will continue to maintain in effect through the Closing Date
those bonds, letters of credit and insurance policies in connection with the
CATV System as may be required. During such period, Seller will not take any
action or refrain from taking any action with respect to such bonds, letters of
credit or insurance policies which would adversely affect the insurability of
the Sale Assets or the CATV System.
4.22 Full Disclosure. Seller has disclosed in this Agreement and the
related Schedules all information material to operation and ownership of the
Sale Assets and the CATV Operations and has not omitted any information which
would cause any of the information which has been disclosed to be misleading or
incorrect in any material respect.
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ARTICLE V.
REPRESENTATIONS AND WARRANTIES OF BUYER
---------------------------------------
Buyer hereby represents to Seller that each of the statements contained in
this Article V is true and correct as of the date of this Agreement:
5.01 Corporate Organization. Buyer is a limited liability company duly
formed and validly existing under the laws of the State of Delaware and has all
requisite power and authority to carry on its business as it is now being
conducted and to own the properties and assets it now owns, and is duly
qualified or licensed to do business as a limited liability company where the
failure to be so qualified would have a Material Adverse Effect.
5.02 Authorization. Buyer has all requisite power and authority to enter
into this Agreement and to carry out the transactions contemplated hereby. The
execution and delivery of this Agreement and consummation of the transactions
contemplated hereby has been duly authorized in accordance with Buyer's
operating agreement. This Agreement is a valid and binding agreement of Buyer
enforceable in accordance with its terms, subject to all of the limitations
imposed by applicable bankruptcy, insolvency, reorganization, moratorium and
similar laws of general application relating to or affecting creditors rights
generally and to general principles of equity.
5.03 No Violation. Neither the execution and delivery of this Agreement nor
the consummation of the transactions contemplated hereby will violate any
provisions of Buyer's Certificate of Formation or Operating Agreement, or
violate, be in conflict with, constitute a default under, result in the
termination of, accelerate the performance required by or cause the acceleration
of the maturity of any debt or obligation pursuant to any agreement or
commitment to which Buyer is a party or by which Buyer is bound, or violate any
statute or law or any judgment, decree, order, regulation or rule of any court
or governmental authority to which Buyer is bound.
5.04 Brokers and Finders. Buyer has not employed any broker or finder or
incurred any liability for any brokerage fees, commissions or finders' fees in
connection with the transactions contemplated by this Agreement, except as will
be paid by Buyer.
5.05 Qualification. There are no facts which would, under present federal
or state law, or under the present rules, regulations and policies of the FCC,
or under any CATV Instrument, disqualify Buyer from acquiring any of the Sale
Assets. In the event that Buyer becomes aware of any such facts, it shall
promptly notify Seller in writing thereof and use reasonable efforts to prevent
any such disqualification.
5.06 Financing. Buyer has sufficient funds available to satisfy its
obligations to pay the Purchase Price at Closing and will not require any
further additional outside financing to close the transactions contemplated by
this Agreement.
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<PAGE>
ARTICLE VI.
COVENANTS OF SELLER
-------------------
Seller hereby covenants and agrees with Buyer as follows with respect to
the period from the date hereof through the Closing Date:
6.01 Transfer Consents and Franchise Renewals. (a) Seller shall use its
reasonable efforts to obtain at the earliest practicable date (and in any event
prior to the Closing), and at its sole cost and expense, the Transfer Consents
which consents shall be in form and substance reasonably satisfactory to Buyer
and shall not impose any obligation or liability on Buyer greater than that
which exists under the related contract or franchise, as applicable, as in
effect on the date hereof.
(b) Seller shall use its reasonable efforts and shall fully cooperate
with Buyer in obtaining the renewals of the CATV Franchises for the towns of
Ancram, Austerlitz, Canaan, Copake and Hillsdale on terms reasonably
satisfactory to Buyer.
(c) Seller and Buyer agree to use reasonable efforts to submit all
CATV Franchise transfer and renewal requests to the appropriate authorities
within 30 days from the date hereof and to submit a petition to the NYPSC for
approval of the transactions contemplated by this Agreement within 30 days from
the date hereof.
(d) With respect to any CATV Franchise which does not expire within
thirty-six (36) months from the date of this Agreement but will expire within
thirty-six (36) months from any date after the date hereof and prior to the
Closing Date, Seller will timely and properly file a Form 394 in accordance with
applicable law and a notice pursuant to Section 626 of the Cable Act and shall
promptly (and in any event prior to the Closing) provide Buyer with a true and
complete copy thereof together with evidence of the filing thereof.
6.02 Supplements to Schedules. From time to time prior to the Closing,
Seller may (i) supplement or amend any Schedule with respect to any matter
hereafter arising which, if existing or occurring at or prior to the date of
this Agreement, would have been required to be set forth or described in that
Schedule, or (ii) correct any Schedule with respect to any matter which is
required to be set forth or described therein; provided, however, that no such
supplement, amendment or correction of any Schedule made pursuant to this
Section 6.02 shall be deemed to be accepted by Buyer or to cure any breach of
any representation, warranty or covenant made in this Agreement unless Buyer
specifically agrees thereto in writing.
6.03 Antitrust Laws. As soon as practicable, and in any event within 15
days after the date hereof, Seller shall make any and all filings Seller is
required to make under the HSR Act, if any. Seller shall furnish to Buyer such
necessary information and reasonable assistance as Buyer may request in
connection with its preparation of necessary filings or submissions to any
governmental agency, including, without limitation, any filings necessary under
the provisions of the HSR Act. Seller shall supply Buyer with copies of all
correspondence, filings or
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<PAGE>
communications (or memoranda setting forth the substance thereof) between Seller
or its representatives, on the one hand, and the FTC, the Antitrust Division of
the U.S. Department of Justice or any other governmental agency or authority or
members of their respective staffs, on the other hand, with respect to this
Agreement or the transactions contemplated hereby.
6.04 No-Shop Covenant. From the date of this Agreement until the earlier of
the Closing or the termination of this Agreement in accordance with its terms,
(a) Seller and its Affiliates shall not, directly or indirectly, (i) solicit any
offer from any other person for any form of business combination or acquisition
or disposition of all or any of the Sale Assets or the CATV System or initiate
or enter into any negotiations or provide confidential information with respect
to any such business combination or acquisition, (ii) solicit any offer from any
other person for any transaction involving Seller that would preclude or in any
way interfere with the consummation of the transactions contemplated by this
Agreement, or initiate or enter into any negotiations or provide confidential
information with respect to any such transaction, or (iii) authorize any
representative, agent, officer, director or principal stockholder to take any of
the actions prohibited in this paragraph, and (b) Seller and its Affiliates
shall use all reasonable efforts to prevent any such person or entity from
taking any of the actions prohibited in this paragraph. Nothing contained in
this Section 6.04 shall prohibit Seller from responding to any unsolicited
proposal or inquiry by advising the person or entity making such proposal or
inquiry of the terms of this Section 6.04. Seller agrees to advise Buyer
promptly after receipt of any such proposal or inquiry.
6.05 Removal of Equipment. Prior to the Closing, Seller shall have moved
into secure office space used exclusively by the CATV Operations, which space
will be the subject of the Headend Lease: (i) a certain rack of equipment at the
end of the fiber located in the Copake facility in the offices utilized by
Taconic Telephone Corp.; (ii) fiber nodes located at various offices utilized by
Taconic Telephone Corp.; and (iii) any other similar Sale Assets located in a
space which is not used exclusively in the CATV Operations. Buyer and Seller
shall share equally the cost of moving the above-mentioned items, provided that
in no event shall Buyer be required to pay more than $5,000.
6.06 Covenant to Satisfy Conditions. Seller shall use all reasonable
efforts to ensure that each of the conditions set forth in Article IX hereof to
be satisfied by Seller is satisfied, insofar as such matters are within the
control of Seller.
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<PAGE>
ARTICLE VII.
COVENANTS OF BUYER
------------------
Buyer hereby covenants and agrees with Seller as follows with respect to
the period from the date of hereof through the Closing Date:
7.01 Antitrust Laws. As soon as practicable, and in any event within 15
days after the date hereof, Buyer shall make any and all filings it is required
to make under the HSR Act, if any. Buyer shall furnish to Seller such necessary
information and reasonable assistance as Seller may request in connection with
Seller's preparation of necessary filings or submissions to any governmental
agency, including, without limitation, any filings necessary under the
provisions of the HSR Act. Buyer shall supply Seller copies of all
correspondence, filings or communications (or memoranda setting forth the
substance thereof) between Buyer or its representatives, on the one hand, and
the FTC, the Antitrust Division of the U.S. Department of Justice or any other
governmental agency or authority or members of their respective staffs, on the
other hand, with respect to this Agreement or the transactions contemplated
hereby.
7.02 Cooperation. Whenever requested by Seller, with reasonable prior
notice, Buyer shall assist and cooperate fully with Seller in Seller's efforts
to obtain the Transfer Consents, which assistance and cooperation shall include
Buyer's attending meetings with Seller and local franchising authorities within
the Region at Seller's request.
7.03 Covenant to Satisfy Conditions. Buyer shall use all reasonable
efforts to ensure that the conditions set forth in Article VIII hereof to be
satisfied by Buyer are satisfied, insofar as such matters are within the control
of Buyer.
ARTICLE VIII.
CONDITIONS TO OBLIGATIONS OF SELLER
Each and every obligation of Seller under this Agreement to be performed at
the Closing shall be subject to the satisfaction, at or before the Closing, of
each of the following conditions, unless waived in writing by Seller:
8.01 Performance. Buyer shall have performed and complied in all material
respects with all agreements, obligations and conditions required by this
Agreement to be performed or complied with by Buyer at or prior to the Closing.
8.02 Representations and Warranties True. The representations and
warranties of Buyer contained herein shall be true and accurate in all material
respects on and as of the date of this Agreement and on and as of the Closing
Date as though such representations and warranties were made on and as of the
Closing Date, and Buyer shall have delivered to Seller a certificate, dated the
Closing Date, to such effect.
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<PAGE>
8.03 No Governmental Proceeding or Litigation. No suit or action by any
governmental body or other person or legal or administrative proceeding which
questions the validity or legality of the transactions contemplated hereby shall
have been instituted and shall continue undismissed; provided, that in the case
of any such proceeding(s) brought by any person or entity other than a
governmental body, the condition set forth in this Section 8.03 shall be deemed
to have been satisfied if Seller shall have been provided with a written opinion
of counsel to the effect that it is unlikely that the relief sought in such
proceeding shall be granted.
8.04 No Injunction. On the Closing Date there shall be no effective
injunction, writ, preliminary restraining order or any other order of any nature
issued by a court of competent jurisdiction directing that all or any of the
transactions provided for herein not be consummated as provided in this
Agreement, or imposing any conditions on the consummation of any of the
transactions contemplated hereby which Seller, in its sole discretion, shall
deem unacceptable.
8.05 HSR Act Waiting Periods. All waiting periods, if any, applicable to
this Agreement and the transactions contemplated hereby under the HSR Act shall
have expired or terminated without objection by the FTC or the U.S. Department
of Justice.
8.06 Consents and Renewals Obtained. All of the Transfer Consents shall
have been obtained, and the CATV Franchises described in Section 6.01(b) shall
have been extended or renewed on terms reasonably satisfactory to Buyer, and no
Transfer Consent shall contain a material term or condition unduly burdensome to
Seller, Taconic Telephone Corp. or their Affiliates as determined in the
Seller's reasonable judgment. The NYPSC shall not have imposed in connection
with the Transfer Consent any term or condition (other than terms or conditions
not unduly burdensome) on Seller, Taconic Telephone Corp. or their Affiliates
via any NYPSC consent or order issued contemporaneously with the NYPSC Transfer
Consent; provided, however, that if Seller terminates this Agreement based on
the NYPSC's imposition of any such term or condition, Seller shall promptly
remit to Buyer all costs incurred by Buyer in connection with this Agreement and
the transactions contemplated hereby (including all legal and all accounting
fees incurred or payable by Buyer) upon receipt of a request from Buyer for such
payment, together with evidence of such expenses, up to an aggregate of $65,000.
8.07 Purchase Price. Buyer shall have delivered to Seller (or to such
other person or persons as Seller shall designate in writing), by wire transfer
of funds immediately available in New York, New York, the Purchase Price (i) as
adjusted pursuant to the Pre-Closing Certificate, and (ii) as reduced by the
amount of the Indemnification Escrow Deposit delivered to the Escrow Agent by
Buyer on the date of this Agreement pursuant to Section 11.02(e) hereof.
8.08 Assumption Agreement. Buyer shall have delivered to Seller the
Assumption Agreement, duly executed by Buyer.
8.09 Officer's Certificate. Buyer shall have delivered to Seller a
certificate of an officer or other duly authorized representative, certifying
that Buyer's company minutes annexed thereto
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<PAGE>
(which minutes shall evidence Buyer's authorization and approval of Buyer's
execution, delivery and performance of this Agreement) are in full force and
effect on the Closing Date and have not been amended or otherwise modified in
any relevant respect on or subsequent to the date thereof, and further
certifying that annexed thereto is a true, complete and correct copy of Buyer's
Certificate of Formation and Operating Agreement as then in effect and providing
a complete list of Buyer's officers and members and a sample signature of any
officer signing any documents relating to the transactions contemplated hereby.
8.10 Opinion of Buyer's Counsel. Buyer shall have delivered to Seller an
opinion of Baer Marks & Upham LLP, counsel to Buyer, dated the Closing Date, in
substantially the form of Exhibit G hereto.
8.11 Headend Lease. The Headend Lease shall have been executed and
delivered by Buyer concurrently with the Closing.
ARTICLE IX.
CONDITIONS TO OBLIGATIONS OF BUYER
----------------------------------
Each and every obligation of Buyer under this Agreement to be performed at
the Closing shall be subject to the satisfaction, at or before the Closing, of
each of the following conditions, unless waived in writing by Buyer:
9.01 Performance. Seller shall have performed and complied in all material
respects with all agreements, obligations and conditions required by this
Agreement to be performed or complied with by Seller at or prior to the Closing.
9.02 Representations and Warranties True. The representations and
warranties of Seller contained herein shall be true and accurate in all material
respects on and as of the date of this Agreement and on and as of the Closing
Date as though such representations and warranties were made on and as of the
Closing Date, and Seller shall have delivered to Buyer a certificate, dated the
Closing Date, to such effect.
9.03 No Governmental Proceeding or Litigation. No suit or action by any
governmental body or other person or legal or administrative proceeding which
questions the validity or legality of the transactions contemplated hereby shall
have been instituted and continue undismissed; provided, in the case of any such
proceeding(s) brought by any person or entity other than a governmental body,
the condition set forth in this Section 9.03 shall be deemed to have been
satisfied if Buyer shall have been provided with a written opinion of counsel
addressed to and reasonably acceptable to Buyer to the effect that it is highly
unlikely that the relief sought in such proceeding shall be granted.
9.04 No Injunction. On the Closing Date there shall be no effective
injunction, writ, preliminary restraining order or any order of any nature
issued by a court of competent jurisdiction
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<PAGE>
directing that the transactions provided for herein or any of them not be
consummated as so provided, or imposing any conditions on the consummation of
the transactions contemplated hereby which Buyer shall, in its sole discretion,
deem unacceptable.
9.05 HSR Act Waiting Periods. All waiting periods, if any, applicable to
this Agreement and the transactions contemplated hereby under the HSR Act shall
have expired or terminated without objection by the FTC or the U.S. Department
of Justice.
9.06 Consents and Renewals Obtained. All of the Transfer Consents shall
have been obtained, and the CATV Franchises described in Section 6.01 shall have
been extended or renewed on terms reasonably satisfactory to Buyer and no
Transfer Consent shall contain a material term or condition unduly burdensome to
Buyer or its Affiliates as determined in Buyer's reasonable judgment (including,
but not limited to, restrictions on Buyer's use of Taconic Telephone Corp.'s
existing fiber). This condition shall be satisfied as to any Contract if the
Buyer enters into a new written contract with the same party on terms which are
the same or better than the applicable Seller's Contract. If a Transfer Consent
or a new contract satisfying the foregoing description is not provided at or
before Closing, for any Contract that reasonably is material to the CATV
Operations (including those designated as material on Schedule 4.07), in
addition to any other remedies available to Buyer, Seller and Buyer shall
negotiate in good faith for an appropriate adjustment to the Purchase Price.
9.07 Bill of Sale. Seller shall have delivered to Buyer the Bill of Sale,
duly executed by Seller.
9.08 Secretary's Certificate. Seller shall have delivered to Buyer a
certificate of the Secretary or any other duly authorized officer, certifying
that Seller's Articles of Incorporation, By-Laws and corporate minutes annexed
thereto (which corporate minutes shall evidence the authorization and approval
of the execution, delivery and performance of this Agreement) are in full force
and effect on the Closing Date and (except as may otherwise be specified in such
certificate) have not been amended or otherwise modified in any relevant respect
on or subsequent to the date of this Agreement thereof, and further providing a
complete list of their respective directors, officers and shareholders together
with a sample signature of those officers signing any documents relating to the
transactions contemplated hereby.
9.09 Closing Date Subscribers. The number of Closing Date Subscribers
shall be no fewer than the applicable requisite number set forth in the chart
below.
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<PAGE>
<TABLE>
<CAPTION>
Month In Which Required Number of
Closing Date Occurs Closing Date Subscribers
------------------- ------------------------
<S> <C>
November, 1998 4,900
December, 1998 4,900
January, 1999 4,850
February, 1999 4,800
March, 1999 4,850
April, 1999 4,900
May, 1999 4,900
June, 1999 4,900
July, 1999 4,900
August, 1999 4,900
September, 1999 4,900
October, 1999 4,900
</TABLE>
If the number of Closing Date Subscribers is less than the applicable requisite
number by 200 Subscribers or more, Buyer at its option, may elect to terminate
this Agreement or proceed with the closing, provided that the Purchase Price
shall be adjusted as set forth in Section 2.03(a)(ii)(E).
9.10 Opinion of Seller's Counsel. Seller shall have delivered to Buyer and
its financing sources (or shall have permitted Buyer's financing sources to rely
upon) an opinion of Harter, Secrest & Emery LLP, counsel to Seller, dated the
Closing Date, in substantially the form of Exhibit H-1 hereto, and an opinion of
FCC counsel to Seller, dated the Closing Date, in substantially the form of
Exhibit H-2 hereto.
9.11 Headend Lease. The Headend Lease shall have been executed and
delivered by Taconic Telephone Corp. concurrently with the Closing.
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<PAGE>
ARTICLE X.
CONDUCT OF CATV OPERATIONS PENDING THE CLOSING
----------------------------------------------
Pending the Closing, and except as otherwise expressly consented to or
approved by Buyer in writing:
10.01 Ordinary Course of Business. Seller shall conduct the CATV
Operations in the ordinary course of business, consistent with past practices.
With respect to the CATV Operations, Seller shall conduct only those promotions
that are in the ordinary course of business, consistent with past practices and
which are identified on Schedule 4.20. Seller shall not provide a credit to any
person if the effect of such credit would be to change the status of such person
from non-Qualified Subscriber to a Qualified Subscriber, other than any such
credit that is the subject of a bona fide dispute with such person and which
would normally have been granted by Seller in the ordinary course of its
business consistent with its past business practices.
10.02 Organization. Seller shall (a) use reasonable efforts to preserve
its corporate existence and business organization intact; (b) preserve for Buyer
the existing relationships of the CATV System with franchisors, licensors,
suppliers, distributors, customers and others having business relations with it;
and (c) not otherwise materially change its method of management or operations
with respect to the CATV Operations.
10.03 Certain Changes. Except as set forth in Schedule 10.03 or as
otherwise contemplated by this Agreement, Seller shall not, with respect to the
CATV Operations, (a) permit or allow any of the Sale Assets to be subjected to
any mortgage, pledge, lien or encumbrance, except for those of a kind permitted
under Section 4.06 hereof and except in the ordinary course of business, all of
which under Section 4.06(a) subparagraphs (i) and (iii) are to be removed prior
to Closing, (b) transfer, convey, sell or otherwise dispose of any of the Sale
Assets, except in the ordinary course of business, (c) acquire any material
assets or properties, other than in the ordinary course of business, all of
which under Section 4.06(a) subparagraphs (i) and (iii) are to be removed prior
to Closing, (d) grant any general increase in the compensation of officers or
employees (including any such increase pursuant to any bonus, pension, profit
sharing or other plan or commitment) or any increase in the compensation payable
or to become payable to any officer or employee, except in the ordinary course
of business and consistent with past practice or as otherwise provided in
Schedule 10.03, (e) except in the ordinary course of business, modify, amend,
cancel or terminate any existing agreement material to its business or the Sale
Assets, including the making of any prepayment on any existing obligation in
respect of the Sale Assets, (f) take any other action which would materially
adversely affect or detract from the value of the Sale Assets or the CATV
System, or (g) except in the ordinary course of business, take any action or
operate in a manner which would cause the representations and warranties of
Seller set forth in this Agreement not to be true and correct as of the Closing
Date.
10.04 Contracts. Without the prior written consent of Buyer, which consent
shall not be unreasonably withheld, except for Subscription Agreements, Seller
shall not enter into any contract, agreement or other commitment which is not in
the ordinary course of business or which (i) would
31
<PAGE>
bind Buyer with respect to the CATV System after the Closing and (ii) would
involve post-Closing Date payments or obligations of Seller, Buyer or the CATV
Operations of more than $10,000 individually (i.e., per any such contract,
agreement or other commitment) or $100,000 in the aggregate.
ARTICLE XI.
SURVIVAL OF REPRESENTATIONS AND WARRANTIES; INDEMNIFICATION
-----------------------------------------------------------
11.01 Survival of Undertakings. The respective representations and
warranties of Buyer and Seller contained herein shall survive for a period of
one year after the Closing Date. The respective covenants of Buyer and Seller
contained herein and to be performed to any extent on or before the Closing Date
shall, to such extent, not survive the Closing Date. The respective covenants of
Buyer and Seller contained herein and to be performed to any extent after the
Closing Date shall, to such extent, survive the Closing Date until the earlier
of the expiration of the one year period or the express period (if any)
referenced in any such covenant.
11.02 Agreement to Indemnify by Seller.
(a) Subject to the conditions and provisions herein set forth,
Seller hereby agrees to indemnify, defend and hold harmless Buyer from and
against all demands, claims, causes of action, assessments, losses, damages,
liabilities, reasonable costs and expenses, including, without limitation,
interest and penalties asserted against or imposed upon or incurred by Buyer
resulting from (i) any breach by Seller of any then-surviving representation or
warranty of Seller contained in this Agreement, (ii) any breach by Seller of any
covenant or agreement contained in this Agreement, (iii) any liability or
obligation of Seller not assumed by Buyer pursuant to this Agreement, (iv)
litigation instituted after the Closing Date that relates to conduct of the CATV
Operations prior to the Closing Date, (v) any taxes payable (or that shall
become payable) by Seller under this Agreement, (vi) or giving rise to a
purchase price adjustment in Seller's favor pursuant to Section 2.03(a)(i)
hereof; (vii) taxes relating to the CATV Operations by Seller that relate to the
period prior to the Closing Date; and (viii) any copyright payments determined
to be due and payable for any period (or portion thereof) prior to the Closing
Date (collectively, "Buyer Damages").
(b) Notwithstanding anything set forth in Section 11.02(a), Buyer
shall not be entitled to recover for and agrees not to assert any claim for
Buyer Damages on account of any breach of any then-surviving representation,
warranty, covenant or agreement of Seller contained in this Agreement, unless
Buyer gives Seller, in writing, within the applicable respective period of
survivability set forth in Section 11.01 hereof, if any, written notice in
accordance with Section 11.03 specifying such claim of breach.
(c) To establish the Indemnification Fund for Seller's
satisfaction, in accordance with the terms of this Section 11.02, of any
potential indemnification obligations hereunder, Buyer shall withhold the
Indemnification Escrow Deposit (i.e., the aggregate sum of $250,000) from the
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Purchase Price and shall deliver that sum on the Closing Date by wire transfer
in immediately available funds to the Escrow Agent to be held and disposed of in
accordance with the terms of the Escrow Agreement attached hereto as Exhibit C.
(d) Notwithstanding anything to the contrary set forth in this
Agreement, Buyer's Damages with respect only to the breach of any representation
or warranty set forth in this Agreement shall be limited to $1,400,000 in the
aggregate.
(e) Seller shall be liable for damages under Section 11.02(a)(i)
and (ii) hereof only to the extent that the aggregate amount of such Buyer
Damages exceeds $25,000, provided however, that when such aggregate amount is
reached, Seller shall be liable under such sections commencing at the first
dollar of such Buyer Damages that exceed $25,000. Notwithstanding the generality
of the foregoing, the parties desire to specifically acknowledge that Seller's
obligation to indemnify Buyer under Section 11.02(a)(viii) shall not be subject
to the previous sentence.
11.03 Procedure.
(a) In the event of any claim by Buyer under this Article XI,
Buyer shall give Seller written notice of said claim promptly (and in any event
within the statute of limitations applicable to such claims) in accordance with
Section 13.04 hereof, and in such notice Buyer shall set forth the basis of its
claim for Buyer Damages and its good faith estimate of the amount thereof.
(b) In the event that any portion of Buyer's claim for Buyer
Damages shall result from the assertion of liability by any third party (a
"Third Party Claim"), then, provided such Third Party Claim involves only
monetary damages and does not seek any injunctive or other equitable relief,
Seller shall have the right to elect to undertake the defense, compromise or
settlement of such Third Party Claim for Seller's account. If Seller elects to
undertake the defense, compromise or settlement of any such Third Party Claim,
(i) Seller shall, within ten (10) days after its receipt of Buyer's notice of
any such Claim, notify Buyer as to whether Seller is exercising such right of
election and confirming that Seller shall cover any liability with respect to
such Third Party Claim; (ii) Buyer shall not be responsible for any cost, fees
and expenses incurred in connection with the defense, compromise or settlement
of such Third Party Claim, (iii) Seller shall be entitled to defend such Third
Party Claim in accordance with Seller's sole discretion and to settle such Third
Party Claim for such cash amount (and without agreeing to any other limitation
on behalf of Buyer) as Seller, in its sole discretion, deems appropriate,
provided that Seller is proceeding in good faith, diligently and with counsel
reasonably acceptable to Buyer and (iv) Seller shall have no obligation to
obtain Buyer's consent to any aspect of Seller's defense, compromise or
settlement of such Third Party Claim provided that Seller is proceeding in good
faith, diligently and with counsel reasonably acceptable to Buyer. Buyer shall
cooperate with Seller, at Seller's reasonable request, in defending any such
action.
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11.04 Agreement to Indemnify by Buyer.
(a) Subject to the conditions and provisions herein set forth,
Buyer agrees to indemnify, defend and hold harmless Seller from and against all
demands, claims, causes of action, assessments, losses, damages, liabilities,
reasonable costs and expenses, including, without limitation, interest and
penalties, asserted against or imposed upon or incurred by Seller resulting from
(i) any material breach by Buyer of any then-surviving representation, warranty
or any then-surviving covenant or agreement of Buyer contained in this
Agreement; (ii) operation of the CATV Operations on and after the Closing Date;
and (iii) any liability or obligation of Seller expressly assumed by Buyer under
Section 2.05 hereof (collectively, "Seller Damages").
(b) Notwithstanding the above, Seller shall not be entitled to
recover for and agrees not to assert any claim for Seller Damages on account of
any breach of any then-surviving covenant or agreement of Buyer contained in
this Agreement unless Seller shall have delivered to Buyer, within the
applicable period of survivability set forth in Section 11.01 hereof, written
notice specifying the basis for such claim and Seller's good faith estimate of
the amount thereof. The procedures set forth in Section 11.03 shall apply to
this Section 11.04, except that Buyer shall have the rights and obligations of
Seller, and Seller shall have the rights and obligations of Buyer set forth in
such Section, and any claims by Seller under Section 5.02 shall be made within
the statute of limitations applicable to such claims.
(c) Notwithstanding any other provision of this Agreement, no
Affiliate of Buyer and no director, officer or employee of Buyer or of any
Affiliate of Buyer shall have any liability to Seller as a result of Buyer's
breach of any representation, warranty, covenant or agreement contained herein.
ARTICLE XII.
TERMINATION AND BREACH
----------------------
12.01 Methods of Termination. This Agreement and the transactions
contemplated herein may be terminated and abandoned at any time prior to, but
not after, the occurrence of the Closing, as follows:
(a) By express, written agreement executed by Buyer and Seller;
(b) By Buyer on or after the Walkaway Date (or the Extended
Walkaway Date, if applicable), upon written notice to Seller and the Escrow
Agent, if any of the conditions provided for in Article IX of this Agreement
shall not have been satisfied in all material respects (or waived in writing by
Buyer) on or prior to the Walkaway Date (or the Extended Walkaway Date, if
applicable), or (subject to the limitation set forth herein) if the number of
Closing Date Subscribers shall not comply with the provisions of Section 9.09
hereof; provided, that Buyer has timely performed and fulfilled in all material
respects its Closing and pre-Closing obligations, conditions
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and covenants hereunder, and has not breached in any material respect any of its
representations and warranties contained in Article V hereof, except to the
extent that such failure to perform or fulfill such obligation, condition or
covenant or such breach of a representation or warranty is caused solely by
Seller's failure to timely perform or fulfill any of its obligations or
covenants hereunder or Seller's material breach of any of its representations or
warranties contained in Article IV hereof;
(c) By Seller on or after the Walkaway Date (or the Extended
Walkaway Date, if applicable), upon written notice to Buyer and the Escrow
Agent, if any of the conditions provided for in Article VIII of this Agreement
shall not have been satisfied in all material respects (or waived in writing by
Seller) on or prior to the Walkaway Date (or the Extended Walkaway Date, if
applicable); provided, that Seller has timely performed and fulfilled in all
material respects its Closing and pre-Closing obligations, conditions and
covenants hereunder, and has not breached in any material respect any of its
representations and warranties contained in Article IV hereof, except to the
extent that such failure to perform or fulfill such obligation, condition or
covenant or such breach of a representation or warranty is caused solely by
Buyer's failure to timely perform or fulfill any of its obligations or covenants
hereunder or Buyer's material breach of any of its representations or warranties
contained in Article V hereof.
12.02 Procedure upon Termination. In the event of termination and
abandonment by Buyer or by Seller, or both, pursuant to Section 12.01 hereof,
written notice thereof shall forthwith be given to the other party and the
transactions contemplated by this Agreement shall be terminated and abandoned,
without further action by Buyer or Seller. If the transactions contemplated by
this Agreement are terminated and abandoned as provided herein:
(a) Each party shall redeliver or destroy all documents, work
papers and other material of the other party relating to the transactions
contemplated hereby, whether so obtained before or after the execution hereof,
to the party furnishing the same; and
(b) All confidential information received by either party hereto
with respect to the business of the other party or any of its Affiliates shall
be treated in accordance with Section 13.07 hereof.
12.03 Limitation of Liability Upon Termination. In the event of
termination and abandonment of this Agreement, in accordance with this Article
XII, Buyer's liability hereunder and Seller's liability hereunder shall each be
limited to the recovery from the other party hereto of costs and expenses
relating to the transactions contemplated hereby if termination or abandonment
is the result of the breach of any representation, warranty or covenant by the
other party hereto, or the other party's fraud, gross negligence, willful
misconduct or failure to proceed in good faith to fulfill the terms and
conditions hereof.
12.04 Specific Performance. The parties acknowledge that if either Buyer
or Seller breaches its obligations hereunder to complete the Closing, the other
would be irreparably damaged by such breach and that, in addition to any other
remedies that may be available under this Agreement or at law, the other party
shall be entitled to specific performance and injunctive relief.
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ARTICLE XIII.
MISCELLANEOUS PROVISIONS
------------------------
13.01 Amendment and Modification. This Agreement may be amended or
modified only by an express written agreement executed by Seller and Buyer.
13.02 Waiver of Compliance. Any breach by Seller or Buyer of any of its
obligations, covenants, agreements or conditions herein may be waived only in
writing and then only if such writing is signed by the President of the party
executing such waiver, but such waiver of, or any failure to insist upon strict
compliance with, any obligation, covenant, agreement or condition shall not
operate as a waiver of, or estoppel with respect to, any subsequent or other
breach.
13.03 Expenses, Transfer Taxes, Etc. Whether or not the transactions
contemplated by this Agreement shall be consummated, and except as expressly set
forth herein, Seller and Buyer each agrees that all fees and expenses incurred
by it in connection with this Agreement shall be borne by it, including, without
limitation as to Seller or Buyer, all fees of financial advisors, counsel and
accountants; provided, that Seller and Buyer shall share equally all (i) HSR Act
filing fees, and (ii) sales (including, but not limited to, New York retail
sales taxes), recording, transfer and other similar taxes which may be payable
in connection with the transactions contemplated by this Agreement.
13.04 Notices. All notices, requests, demands and other communications
required or permitted hereunder shall be in writing, shall be deemed to have
been given on the date received and shall be delivered by hand, by registered or
certified mail, return receipt requested (with postage prepaid) or by reputable
overnight courier service (e.g., Federal Express) as follows:
(a) if to Buyer, to:
_Suncom, Inc.
201 East 69th Street
New York, New York 10021
Attention: Joel Cohen, President
Facsimile: (212) 327-3395
with a complete copy under separate cover:
Anne E. Pitter, Esq.
Baer Marks & Upham LLP
805 Third Avenue
New York, NY 10022
Facsimile: (212) 702-5835 or 5941
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or to such other person or address as Buyer shall furnish to Seller in writing
by means of a notice that shall comply with the terms of this Section 13.04; and
(b) If to Seller, to:
Taconic Technology Corp.
One Taconic Place
Chatham, New York 12037
Attention: Robert Gniadek, President
Facsimile: (518) 392-1290
with a complete copy under separate cover to:
John T. Pattison, Esq.
Jeffrey H. Bowen, Esq.
Harter, Secrest & Emery LLP
700 Midtown Tower
Rochester, New York 14604
Facsimile: (716) 232-2152
or to such other person or address as Seller shall furnish to Buyer in writing
by means of a notice that shall comply with the terms of this Section 13.04. For
purposes of this Section 13.04, delivery by reputable overnight courier service
shall be deemed to be delivery by hand.
13.05 Assignment. This Agreement and all of the provisions hereof shall be
binding upon and inure to the benefit of the parties hereto and their respective
successors and permitted assigns.
13.06 Third Parties. Except as specifically set forth or referred to
herein, nothing herein expressed or implied is intended or shall be construed to
confer upon or give to any person or other entity, other than the parties hereto
and their permitted successors or assigns, any rights or remedies existing under
or by reason of this Agreement.
13.07 Confidentiality. Buyer and Seller each agrees to keep confidential
and to cause its respective employees, counsel, accountants and other
representatives to keep confidential, the terms and provisions of this Agreement
as well as all documents and other information and data delivered pursuant
hereto, whether written or oral, relating to Seller, Buyer or any of the CATV
Operations. If the sale transaction contemplated hereby is not consummated for
any reason whatsoever, then Buyer and Seller shall each return to the other all
documents and other information and data obtained from Seller or Buyer, as the
case may be, and/or any of their respective employees, counsel, accountants or
representatives, and Buyer and Seller shall each destroy all summaries,
notations, analyses and other reports prepared by or for the other party which
incorporate or are based upon any of such documents, information or data.
Nothing herein contained shall prevent Buyer or Seller from delivering any
documents, information or data relating to Seller, Buyer or any
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of the CATV Operations (i) in connection with any legal proceeding to which it
is a party (or otherwise pursuant to a subpoena), or (ii) to Buyer's or Seller's
consultants, advisors, counsel, accountants, lenders and investors provided that
Buyer or Seller shall take appropriate precautions to assure that any such
documents, information and data shall be and remain subject to the provisions of
this Section 13.07.
13.08 Publicity. Seller and Buyer shall each consult with and cooperate
with the other with respect to the content and timing of all press releases and
other public announcements, and any oral or written statements to Seller's
employees concerning this Agreement and the transactions contemplated hereby.
Except as required by applicable law neither Seller nor Buyer shall make any
such release, announcement or statement without the prior written consent and
approval of the other, which consent and approval shall not be unreasonably
withheld.
13.09 Interpretation. The headings of the Articles and Sections of this
Agreement are inserted for convenience of reference only and shall not
constitute a part hereof or affect in any way the meaning or interpretation of
this Agreement. Seller and Buyer each acknowledges that it has actively
participated in the preparation, drafting and review of this Agreement, and each
hereby waives any claim that this Agreement or any provision hereof (or any
Exhibit or Schedule hereto) is to be construed against the other party hereto as
the draftsperson thereof.
13.10 Entire Agreement. This Agreement, including the Schedules and
Exhibits hereto, and the other documents and certificates delivered on or after
the date hereof by or on behalf of either party hereto to the other party hereto
pursuant to the terms hereof, sets forth the entire agreement and understanding
of the parties hereto in respect of the subject matter hereof, and supersedes
all prior documents, agreements (including, without limitation, that certain
Letter of Intent between Seller and Buyer dated July 9, 1998), promises,
covenants, arrangements, communications, representations and warranties, whether
oral or written, by or on behalf of either party hereto or any officer,
employee, representative or agent of either party hereto.
13.11 Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
13.12 Governing Law. This Agreement and the relations among the parties
hereto shall be governed by and construed in accordance with the laws of the
State of New York, without-giving effect to any conflict of laws. Any provision
of this Agreement prohibited by the laws of the State of New York shall be
ineffective to the extent of such prohibition without invalidating the remaining
provisions of this Agreement. Each party agrees to submit to personal
jurisdiction and to waive any objection as to venue in the County of New York,
State of New York, and further agrees that service of process on it in any
action arising out of or relating to this Agreement shall be effective if mailed
to it at its respective address listed in Section 13.04 hereof.
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<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed as of the day and year as of the date first above written.
TACONIC TECHNOLOGY CORP.
By:___________________________
Name/Title:________________
AVALON CABLE OF NEW ENGLAND, LLC
By:___________________________
Name/Title:________________
TACONIC TELEPHONE CORP., solely
for purposes of Section 3.03 hereof
By:_____________________________
Name/Title:__________________
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EXHIBIT 2.2
EXECUTION COPY
SECURITIES PURCHASE AGREEMENT
By and Between
AVALON CABLE HOLDINGS LLC
and
AVALON INVESTORS, L.L.C.
and
AVALON CABLE OF MICHIGAN HOLDINGS, INC.
and
AVALON CABLE LLC
and
CHARTER COMMUNICATIONS HOLDINGS LLC
and
CHARTER COMMUNICATIONS, INC.
May 13, 1999
<PAGE>
SECURITIES PURCHASE AGREEMENT
-----------------------------
This SECURITIES PURCHASE AGREEMENT (this "Agreement"), dated as of May 13,
1999, by and among Avalon Cable Holdings, LLC, a Delaware limited liability
company (the "Parent"), Avalon Investors, L.L.C., a Delaware limited liability
company ("Avalon Investors" and together with Parent, the "Sellers"), Avalon
Cable of Michigan Holdings, Inc., a Delaware corporation ("Michigan Holdings"),
Avalon Cable LLC, a Delaware limited liability company (the "Company" and
together with the Sellers and Michigan Holdings, the "Avalon Parties"), Charter
Communications Holdings LLC, a Delaware limited liability company (the
"Purchaser"), and Charter Communications, Inc., a Delaware corporation (the
"Guarantor"). The Sellers, Michigan Holdings, the Company, the Purchaser and the
Guarantor are sometimes referred to collectively herein as the "Parties" and
each individually as a "Party".
WHEREAS, Parent owns all of the issued and outstanding shares of common
stock of Michigan Holdings, par value $.01 per share (the "Stock"), and an
option (the "Option") to purchase all of the issued and outstanding Class B-1
Units of the Company (the"Class B-1 Units") from Avalon Cable of New England
Holdings, Inc., a Delaware corporation ("New England Holdings"), at a price (the
"Option Price") equal to $6,615,000;
WHEREAS, Michigan Holdings, through its ownership of all of the issued and
outstanding stock of Avalon Cable of Michigan, Inc. ("Cable Michigan"),
indirectly owns all of the issued and outstanding Class B-2 Units of the Company
(the "Class B-2 Units" and together with the Class B-1 Units, the "Class B
Units");
WHEREAS, Avalon Investors owns all of the issued and outstanding Class A
Units of the Company (the "Class A Units" and together with the Class B Units,
the "Units");
WHEREAS, the Units which are owned directly or indirectly by the Sellers,
represent all of the issued and outstanding equity interests of the Company;
WHEREAS, the Purchaser wishes to purchase from the Sellers, and the Sellers
wish to sell to the Purchaser, all of the outstanding equity interests of the
Company;
WHEREAS, in order to give effect to the purchase and sale described in the
immediately preceding recital, the Sellers wish to sell to the Purchaser, and
the Purchaser wishes to purchase from the Sellers (such purchase and sale being
the "Purchase and Sale"), the Stock, the Option and the Class A Units (together
the "Purchased Securities"), all subject to the terms and conditions set forth
herein; and
WHEREAS, contemporaneously with the execution and delivery of this
Agreement, Parent and Purchaser have executed and delivered an escrow agreement,
in the form of the attached Exhibit A, among them and the escrow agent named
therein (as in effect from time to time, including any successor agreement, the
"Pre-Closing Escrow Agreement"), and Purchaser has agreed to deliver by May 18,
1999 to such escrow agent, as agent (together with any successor thereto under
the Pre-Closing Escrow Agreement, the "Pre-Closing Escrow Agent"), cash in the
amount of $50,000,000, which cash amount Purchaser may replace with a letter of
credit in the face amount of $50,000,000 (the "Letter of Credit") as provided in
the
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Pre-Closing Escrow Agreement, as security for the performance of Purchaser's
obligations under this Agreement.
NOW THEREFORE, in consideration of the mutual covenants and promises
contained herein and for other good and valuable consideration the receipt and
adequacy of which are hereby acknowledged, the Parties hereby agree as follows:
ARTICLE I
DEFINITIONS, INTERPRETATION
---------------------------
Section 1.1 Certain Defined Terms. Capitalized terms used herein and not
otherwise defined, shall have the following meanings:
"Affiliate" means, with respect to any Person, any other Person who
directly or indirectly, through one or more intermediaries. controls, is
controlled by, or is under common control with such Person. The term "control"
means the possession, directly or indirectly, of the power to direct or cause
the direction of the management and policies of a Person, whether through the
ownership of voting securities, by contract or otherwise, and the terms
"controlled" and "controlling" have meanings correlative thereto.
"Affiliated Group" means an affiliated group as defined in Section 1504
of the Code (or any analogous combined, consolidated or unitary group defined
under state, local or foreign income Tax law) of which any Avalon Company or any
Avalon Subsidiary is or has been a member.
"Agreement" has the meaning so forth in the first paragraph hereof.
"Applicable Percentage" has the meaning set forth in Section 7.1(vi).
"Avalon Companies" means, collectively, Michigan Holdings and the Company.
"Avalon Investors" has the meaning set forth in the first paragraph hereof.
"Avalon Parties" has the meaning set forth in the first paragraph hereof.
"Avalon Percentage" means 98.462%.
"Avalon Subsidiaries" means the Subsidiaries of the Company and Cable
Michigan.
"Balance Sheet" means the consolidated balance sheet as of the Balance
Sheet Date of the Company and the consolidated Avalon Subsidiaries set forth in
the Form S-4.
"Balance Sheet Date" means December 31, 1998.
"Bank Facility" means the Senior Credit Agreement dated as of November 5,
1998 by and among certain of the Avalon Subsidiaries, Lehman Brothers Inc.,
Fleet Bank, N.A.,
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<PAGE>
Union Bank of California, N.A. and Lehman Commercial Paper Inc., as in effect
from time to time.
"Base Purchase Price" means $832,000,000.
"Basic Service" has the meaning set forth in Section 4.17(a).
"Basic Subscriber" has the meaning set forth in Section 4.17(a).
"Benefit Arrangement" means any employment, severance or similar contract
or arrangement (whether or not written and whether applicable to one or more
individuals) or any plan, policy, fund, program or contract or arrangement
(whether or not written and whether applicable to one or more individuals)
providing for compensation, bonus, profit-sharing, stock option, or other stock
related rights or other forms of incentive or deferred compensation, vacation
benefits, fringe benefits, insurance coverage (including any self-insured
arrangements), health or medical benefits, disability benefits, workers'
compensation, supplemental unemployment benefits, severance benefits and post-
employment or retirement benefits (including compensation, pension, health,
medical or life insurance or other benefits) that (i) is not an Employee Plan,
(ii) is entered into, maintained, administered or contributed to by the Avalon
Companies or the Avalon Subsidiaries, and (iii) covers any employee or former
employee of the Avalon Companies or any ERISA Affiliate.
"Business Day" means a day, other than a Saturday or Sunday, on which
commercial banks in New York City are open for the general transaction of
business.
"Capital Plan" means the capital expenditure plan that is attached to
Schedule 4.8.
"Cable Act" means the Cable Television Consumer Protection and Competition
Act of 1992, as amended and the FCC rules and regulations promulgated
thereunder.
"Cable Michigan" means Avalon Cable of Michigan, Inc., a Pennsylvania
corporation.
"CERCLA" means the federal Comprehensive Environmental Response,
Compensation. and Liability Act.
"Class A Units" has the meaning set forth in the recitals.
"Class B Unit" has the meaning set forth in the recitals.
"Class B-1 Units" has the meaning set forth in the recitals.
"Class B-2 Units" has the meaning set forth in the recitals.
"Closing" has the meaning set forth in Section 2.2.
"Closing Date" has the meaning set forth in Section 2.2.
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<PAGE>
"Code" means the Internal Revenue Code of 1986, as amended.
"Communications Act" means the Communications Act of 1934, as amended.
"Company" has the meaning set forth in the first paragraph hereof.
"Company's LLC Agreement" means the Amended and Restated Limited Liability
Company Agreement of the Company dated as of March 26, 1999 (as in effect from
time to time).
"Confidential Information" means any information concerning the businesses
and affairs of the Avalon Companies and the Avalon Subsidiaries that is not
already generally available to the public.
"Confidentiality Agreement" means that certain confidentiality agreement
dated as of April 26, 1999, by and between Parent and Purchaser, as in effect
from time to time.
"Copyright Act" means the 1976 Copyright Act, as amended.
"Copyright Office" means the United States Copyright Office.
"Disclosure Schedule" means the disclosure schedules delivered by the
Sellers to the Purchaser on the date hereof and attached hereto. Any exceptions
to the representations and warranties described in the Disclosure Schedule shall
apply to each section of the representations and warranties identified and any
other sections to which it is reasonably apparent, based on the nature and
language of the relevant description, that such exceptions relate.
"Employee Plan" means any "employee benefit plan", as defined in Section
3(3) of ERISA that (i) is subject to any provision of ERISA, (ii) is maintained,
administered or contributed to by the Avalon Companies or the Avalon
Subsidiaries, and (iii) covers any employee or former employee of the Avalon
Companies or the Avalon Subsidiaries.
"Enforceability Exception" means applicable bankruptcy, insolvency,
moratorium or similar laws of general application relating to or affecting
creditors' rights, and general principles of equity.
"Environmental Laws" means any federal, state, and local laws, judicial
decisions. regulations, rules, judgments, orders, decrees, permits, licenses,
agreements and governmental restrictions (including, without limitation, CERCLA
and RCRA) relating to human health, the environment or to emissions, discharges
or releases of pollutants, contaminants or other hazardous substances or wastes
into the environment, including without limitation ambient air, surface water,
ground water or land, or otherwise relating to the manufacture, processing,
distribution, use, treatment, storage, disposal, transport or handling of
pollutants, contaminants or other hazardous substances or wastes or the clean-up
or other remediation thereof.
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"Environmental Liabilities" means any and all liabilities of the named
entity, which arise under or relate to matters covered by Environmental Laws and
relate to actions occurring or conditions existing on or prior to the Closing
Date, and includes fines, penalties, and costs of correcting any compliance
deficiencies, and obligations for site cleanup or investigation or cleanup
resulting from the disposal, release or threatened release of hazardous
substances, pollutants, contaminants, or wastes.
"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, participation or security described in clause (i) above.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended.
"ERISA Affiliate" means any entity which, together with any Avalon Company
or Avalon Subsidiary, would be treated as a single employer under Section 414(b)
or (c) of the Code.
"Escrow Adjustment Amount" has the meaning set forth in Section 2.8(b).
"Exchange Act" means the Securities Exchange Act of 1934, as amended, and
the rules and regulations thereunder.
"Exercise Notice" has the meaning set forth in Section 2.4.
"FCC" means the Federal Communications Commission.
"FCC Licenses" has the meaning set forth in Section 4.17(l).
"FCC Rules and Regulations" means the rules and regulations of the FCC
under the Communications Act.
"Financial Statements" has the meaning set forth in Section 4.7.
"Form S-4" has the meaning set forth in Section 4.6.
"Franchise" means a written "franchise" within the meaning of Section
602(9)of the Cable Communications Policy Act of 1984 (47 U.S.C. Section 522(9)).
"Franchising Authorities" has the meaning that term is given by Section
602(10) of the Cable Communications Policy Act of 1984 (47 U.S.C. Section
522(10)).
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"Funded Debt" means, without duplication, all obligations under
indebtedness for borrowed money, all obligations under capital leases, notes
payable, guaranties and drafts accepted representing extensions of credit.
"GAAP" means generally accepted accounting principles as in effect in the
United States on the date of this Agreement applied on a basis consistent with
the Financial Statements.
"Hazardous substance" means waste, material, substance, pollutant,
contaminant, or other matter regulated by or pursuant to any Environmental Law,
including without limitation any substance that is a "hazardous substance" under
CERCLA, any substance that is a "hazardous waste" under RCRA or any pesticide,
toxic chemical, petroleum product or byproduct, asbestos or polychlorinated
biphenyl.
"HSR Act" means the Hart-Scott-Rodino Antitrust Improvement Act of 1976, as
amended, and the rules and regulations thereunder.
"ICE Agreement" means the Asset Purchase Agreement dated as of the date
hereof among the Purchaser, the Guarantor and Interlake Cablevision Enterprises
Holdings, LLC, as amended from time to time.
"IRS" means the United States Internal Revenue Service.
"Knowledge" means (i) with respect to the Avalon Parties, the actual
knowledge of the Persons listed on Schedule 1.1(a) after reasonable inquiry and
not any constructive or imputed knowledge of any such Person or any of such
Person's affiliates, stockholders, members, officers or any other employee of
any of such Persons, and (ii) with respect to the Purchaser, means actual
knowledge of the Persons listed on Schedule 1.1(b) and not any constructive or
imputed knowledge of any such Person or any of such Person's affiliates,
officers or other employees.
"Lien" means, with respect to any asset, any lien, claim, charge,
restriction, pledge, mortgage, conditional sale, option, security interest,
encumbrance or other condition adversely affecting title or other ownership
interest in respect of such asset.
"Material Adverse Effect" means a material adverse effect on the business,
assets, operations or financial condition of the Avalon Companies and Avalon
Subsidiaries, taken as a whole (other than those arising from general economic
or industry-wide events or occurrences), or on the ability of the Avalon Parties
or the Purchaser to perform their material obligations under this Agreement.
"Material Breach" means a breach of any provision of this Agreement that
prevents the satisfaction of any Closing condition that has not been waived (or
causes such a condition not to be satisfied).
"Members Agreement" has the meaning set forth in Section 10.12.
"Michigan Holdings" has the meaning set forth in the first paragraph
hereof.
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"MVPD" means a distributor of cable television services, multichannel
multi-point distribution service, direct broadcast satellite service or
television receive-only satellite programming, who makes available for purchase,
by subscribers or customers, multiple channels of video programming, other than
persons distributing such services only to multiple dwelling unit or other
commercial customers (including hotels, motels, resorts, hospitals, dormitories,
prisons, restaurants, bars and similar establishments).
"Multiemployer Plan" means any "multiemployer plan," as defined in Section
4001(a)(3) of ERISA, (A) which the Avalon Companies or any Avalon Subsidiary
maintains or contributes to, or with respect to which the Avalon Companies or
any Avalon Subsidiary has any liability or potential liability and (B) which
covers any current or former employee of any Avalon Company or Avalon
Subsidiary.
"New England Holdings" has the meaning set forth in the recitals.
"Option" has the meaning set forth in the recitals.
"Option Price" has the meaning set forth in the recitals.
"Ordinary Course" means the ordinary course of business consistent with
past custom and practice (including with respect to quantity, frequency and
amount).
"Parent" has the meaning set forth in the first paragraph of this
Agreement.
"Parent Account" has the meaning set forth in Section 2.3.
"Party" or "Parties" has the meaning set forth in the first paragraph
hereof.
"Permitted Liens" means (i) materialmen's, mechanics', carriers',
workmen's, warehousemen's, repairmen's, and other like Liens arising in the
Ordinary Course for payments which are not material in amount, and deposits to
obtain the release of such Liens; (ii) Liens for current Taxes not yet due and
payable or which are being contested in good faith by appropriate proceedings
and for which appropriate reserves have been established; (iii) Liens securing
the payment of Funded Debt and related obligations, and (iv) other Liens or
minor imperfections of title that do not materially impair the conduct of the
Avalon Companies or Avalon Subsidiaries' business or the use or value of any
material assets.
"Person" means an individual, a partnership, a corporation, a limited
liability company, an association, a joint stock company, a trust, a joint
venture, an unincorporated organization, or a governmental entity (or any
department, agency, or political subdivision thereof).
"Plans" shall mean all Benefit Arrangements, Multiemployer Plans, Employee
Pension Benefit Plans and Employee Welfare Benefit Plans.
"Post-Closing Escrow Agent" means the escrow agent named in the Post-
Closing Escrow Agreement, including any successor thereto.
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"Post-Closing Escrow Agreement" means the Post-Closing Escrow Agreement to
be entered into as of the Closing Date, substantially in the form attached
hereto as Exhibit B.
"Post-Closing Escrow Fund" means the Escrow Adjustment Amount held under
the Post-Closing Escrow Agreement.
"Pre-Closing Escrow Agent" has the meaning set forth in the recitals.
"Pre-Closing Escrow Agreement" has the meaning set forth in the recitals.
"Pre-Closing Escrow Fund" means $50,000,000 held pursuant to the Pre-
Closing Escrow Agreement, whether in cash or as a Letter of Credit.
"Pre-Closing Period" means any taxable period ending on or before the
Closing Date.
"Proprietary Rights" means all (i) patents, patent applications, patent
disclosure and inventions (whether patentable or unpatentable and whether or not
reduced to practice), (ii) trademarks, service marks, trade dress, trade names,
logos, slogans, corporate names and Internet domain names, and registrations and
applications for registration thereof, together with all of the goodwill
associated therewith, (iii) copyrights and copyrightable works, and
registrations and applications for registration thereof, (iv) computer software,
data bases and documentation, and (v) trade secrets and other information
(including ideas, formulae and compositions), know-how, processes, techniques,
research and development information, drawings, specifications, designs, plans,
proposals, data, financial, business and marketing plans and customer and
supplier lists and information.
"Purchase and Sale" has the meaning set forth in the recitals.
"Purchase Price" has the meaning set forth in Section 2.3.
"Purchased Securities" has the meaning set forth in the recitals.
"Purchaser" has the meaning set forth in the first paragraph hereof.
"RCRA" means the federal Resource Conservation and Recovery Act.
"Scheduled Agreements" has the meaning set forth in Section 4.17(b).
"SEC" means the Securities and Exchange Commission.
"Securities Act" means the Securities Act of 1933, as amended.
"Sellers" has the meaning set forth in the first paragraph hereof.
"Stock" has the meaning set forth in the recitals.
"Subsidiary" as to any Person, means any corporation or other entity of
which securities or other ownership interests having ordinary voting power to
elect a majority of the
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board of directors or other persons performing similar functions are directly or
indirectly owned by such Person.
"Subsidiary Securities" has the meaning set forth in Section 4.5(b).
"Systems" means the cable television systems owned by the Avalon
Subsidiaries.
"Tax" means any (i) federal, state, local or foreign income, gross
receipts, franchise, estimated, alternative minimum, add-on minimum, sales, use,
transfer, registration, value added, excise, natural resources, severance,
stamp, occupation, premium, windfall profit, environmental, customs, duties,
real property, personal property, capital stock, social security, medicare,
unemployment, disability, payroll, license, employee or other withholding, or
other tax, of any kind whatsoever, including any interest, penalties or
additions to tax or additional amounts in respect of the foregoing; (ii)
liability for the payment of any amounts of the type described in clause (i)
arising as a result of being (or ceasing to be) a member of any Affiliated Group
(or being included (or required to be included) in any Tax Return relating
thereto); and (iii) liability for the payment of any amounts of the type
described in clause (i) as a result of any express or implied obligation to
indemnify or otherwise assume or succeed to the liability of any other Person.
"Tax Returns" means returns, declarations, reports, claims for refund,
information returns or other documents (including any related or supporting
schedules, statements or information) filed or required to be filed in
connection with the determination, assessment or collection of Taxes of any
party or the administration of any laws, regulations or administrative
requirements relating to any Taxes.
"Termination Date" has the meaning set forth in Section 8.1(ii).
"Title IV Plan" means an Employee Plan subject to Title IV of ERISA other
than any Multiemployer Plan.
"Transactions" has the meaning set forth in Section 2.5.
"Units" has the meaning set forth in the recitals.
"Year 2000 Plan" has the meaning set forth in Section 4.20.
"Year 2000 Problem" has the meaning set forth in Section 4.20.
Section 1.2 Interpretation. Unless otherwise indicated to the contrary
herein by the context or use thereof: (i) the words "herein," "hereto," "hereof'
and words of similar import refer to this Agreement as a whole and not to any
particular Section or paragraph hereof; (ii) the word "including" means
"including, but not limited to"; (iii) masculine gender shall also include the
feminine and neutral genders, and vice versa, and (iv) words importing the
singular shall also include the plural, and vice versa.
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ARTICLE II
PURCHASE AND SALE OF SECURITIES: CLOSING
-----------------------------------------
Section 2.1 Transfer of Purchased Securities. Upon the terms and subject
to the conditions contained herein, Sellers shall sell, convey, transfer, assign
and deliver to Purchaser, and Purchaser shall acquire at the Closing, the
Purchased Securities.
Section 2.2 Closing Date; Delayed Closing. The closing of the purchase and
sale of Purchased Securities pursuant to this Agreement (the "Closing") will
occur at the offices of Kirkland & Ellis, 153 East 53rd Street, New York, New
York, at 10:00 a.m. on the later of (x) the fifth (5th) Business Day after all
of the conditions to closing set forth in Article VII (other than those that
will be satisfied by deliveries at the Closing) are either satisfied or duly
waived and (y) November 8, 1999. Notwithstanding the foregoing, if, on the date
for the Closing, any condition specified in Article VII has not been satisfied
(and will not be satisfied by the delivery of documents or tender of payment by
the Parties at the Closing) or waived by Purchaser or Sellers, as the case may
be, then the date for the Closing will be extended to any date specified by
Purchaser to Sellers, or by Sellers to Purchaser, with not less than five (5)
Business Days' prior notice (subject to Purchaser's and Sellers' respective
conditions to Closing being satisfied or waived on such specified date). The
date upon which the Closing actually occurs is referred to herein as the
"Closing Date".
Section 2.3 Consideration for Purchased Securities. Upon the terms and
subject to the conditions contained herein, as consideration for the purchase of
the Purchased Securities, Purchaser shall pay to Parent, as agent for the
Sellers and subject to Section 10.12, an amount (the "Purchase Price") equal to
the Base Purchase Price less an amount equal to the Option Price less the amount
of any adjustments required to be made pursuant to Section 2.7. At the Closing,
the Purchaser will pay the Purchase Price in the following manner:
(i) an amount (the "Closing Cash Payment") equal to the Base Purchase
Price less the sum of (x) the Option Price and (y) the Escrow Adjustment
Amount, will be paid by wire transfer of immediately available funds to an
account (the "Parent Account") designated by Parent not less than two (2)
Business Days prior to Closing; and
(ii) the amount of the Escrow Adjustment Amount will be paid by wire
transfer of immediately available funds to such bank account as the Post-
Closing Escrow Agent shall designate. After the Closing, the Post-Closing
Escrow Agent will hold and release such funds in accordance with the terms
and conditions of the Post-Closing Escrow Agreement and Section 2.8. For
the avoidance of doubt, the Post-Closing Escrow Fund shall be used only for
the purposes set forth in Section 2.8(d).
Section 2.4 Related Transactions. At the Closing, immediately following
the transfer described in Section 2.1, the Purchaser shall exercise the Option
by delivering to New England Holdings an exercise notice (the "Exercise Notice")
substantially in the form attached hereto as Exhibit B and paying the Option
Price to the Parent (for the account of New England Holdings) by wire transfer
of immediately available funds to the Parent Account. Effective as of the
Closing, Purchaser shall cause all amounts then due under the Bank Facility
(including
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all prepayment premiums, penalties or other like charges) to be paid in full
with the effect that the Bank Facility and related documentation shall be
terminated effective as of the Closing, or in the alternative, shall cause all
defaults and events of default under the Bank Facility and related documentation
arising from the consummation of the Transactions to be waived and the Parent
and New England Holdings to be released from all liabilities and obligations
thereunder. If the Bank Facility is not so terminated, the Liens created by the
Bank Facility and related documentation shall not result in a breach of any
representation or warranty set forth herein.
Section 2.5 Closing Deliveries by Sellers. To effect the transactions
referred to in Sections 2.1 and 2.4 (the "Transactions"), Sellers shall, on the
Closing Date, deliver to Purchaser the following:
(i) certificates evidencing the Stock, free and clear of any and all
Liens, duly endorsed in blank for transfer or accompanied by stock powers
duly executed in blank;
(ii) assignments evidencing the transfer of the Option from Parent to
Purchaser, the transfer of the Class B-1 Units by New England Holdings to
Purchaser and the transfer of the Class A Units from Avalon Investors to
Purchaser, in each case free and clear of any and all Liens;
(iii) copies of all consents, approvals, releases, and waivers from
governmental authorities and other third parties which have been obtained;
and
(iv) all other documents required to be delivered by the Seller
pursuant to Article VII hereof not specifically mentioned above in this
Section 2.5.
All instruments and documents executed and delivered to Purchaser pursuant
hereto shall be in form and substance, and shall be executed in a manner
reasonably satisfactory to Purchaser and its counsel.
Section 2.6 Closing Deliveries by Purchaser. To effect the Transactions,
Purchaser shall, on the Closing Date, deliver the following:
(i) the Closing Cash Payment and the Escrow Adjustment Amount, each
in accordance with Section 2.3; and
(ii) the Option Price and Exercise Notice, each in accordance with
Section 2.4; and
(iii) all other documents required to be delivered by the Purchaser
pursuant to Article VII hereof not specifically mentioned above in this
Section 2.6.
All instruments and documents executed and delivered to Sellers pursuant hereto
shall be in form and substance, and shall be executed in a manner, reasonably
satisfactory to Parent and its counsel.
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Section 2.7 Purchase Price Adjustments.
(a) Closing Subscribers. If the number of Closing Subscribers is less
than 258,000, the Purchase Price shall be decreased by an amount equal to
the Avalon Percentage of the product of (x) 258,000 minus the number of
Closing Subscribers multiplied by (y) $3,275.1938. For purposes of this
Agreement, "Closing Subscribers" means (i) the total number of Basic
Subscribers for all of the Systems as of the last day of the month
immediately preceding the Closing plus (ii) the total number of "Basic
Subscribers" as defined under Section 4.17 of the ICE Agreement as of the
last day of the month immediately preceding the Closing.
(b) Closing Net Liabilities. The Purchase Price shall be decreased by
the amount of the Closing Net Liabilities. For purposes of this Agreement,
"Closing Net Liabilities" means:
(i) without duplication, the principal amount and any accrued
but unpaid interest (i.e., the accreted value in the case of any notes
issued at a discount) as of the Closing Date in respect of the Funded Debt
(including the Bank Facility), if any, of the Avalon Companies or Avalon
Subsidiaries as of the Closing Date (exclusive of any prepayment or
repayment premium, penalty or other charge); minus
(ii) Working Capital if such number is greater than zero; plus
(iii) the absolute value of Working Capital if such number is
less than zero.
(c) Certain Definitions and Procedures. For the purposes of, and
subject to the other provisions of, this Section 2.7(b):
(i) "Working Capital" means Current Assets as of 12:01 a.m.
(local time) on the Closing Date minus Current Liabilities as of 12:01 a.m.
(local time) on the Closing Date.
(ii) "Current Assets" means the total current assets of the
Avalon Companies and Avalon Subsidiaries determined on a combined,
consolidated basis and without duplication in accordance with GAAP, except
as otherwise provided in this Section 2.7(c); provided, for the purposes of
determining accounts receivable under this definition, accounts receivable
that consist of subscriber receivables that as of the Closing Date are: (i)
less than sixty (60) days old shall be valued at ninety-nine percent (99%)
of the face value thereof; (ii) at least sixty (60) days but less than
ninety (90) days old shall be valued at seventy-five percent (75%) of the
face value thereof; and (iii) ninety (90) days old or older shall be valued
at zero; and provided further, that for purposes of determining accounts
receivable for advertising ("Advertising Receivables") under this
definition of Current Assets, Advertising Receivables as of the Closing
Date shall be valued at 100% of the face value thereof as reported by the
service company handling advertising for the Company and the Avalon
Subsidiaries. For purposes of the foregoing, accounts receivable for
subscriber receivables and Advertising Receivables shall be determined
without regard to any allowance for doubtful accounts or bad debt reserves.
In addition, for the purpose of determining accounts receivable
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aging for subscriber receivables under this definition, the parties agree
to use the aging stated on the billing report generated in the ordinary
course on the date closest to the Closing Date (whether such report is
generated before or after the Closing Date) to determine the aging of any
account receivable for a subscriber and to use the actual billing date as
the beginning point for the determination of the aging of any other account
receivable. For the avoidance of doubt, Current Assets shall not include
inventory or work-in-progress.
(iii) "Current Liabilities" means the total current liabilities of the
Avalon Companies and Avalon Subsidiaries, including, without limitation,
vacation pay, determined on a combined, consolidated basis and without
duplication (including without duplication of any amount described in
Section 2.7(b)(i)) in accordance with GAAP, except as otherwise provided in
this Section 2.7(c).
(iv) For purposes of the definitions of "Current Assets" and "Current
Liabilities," (A) deferred taxes shall not be included, (B) income taxes
for any tax period that begins before the Closing Date and ends on or after
the Closing Date shall be included as a liability equal to the amount of
the liability that would be shown on a Tax Return as if each Avalon
Company's and Avalon Subsidiary's tax year ended on the Closing Date, and
(C) income taxes payable shall exclude all taxes arising from any actions
taken at the request of the Purchaser pursuant to Section 6.11.
Section 2.8 Purchase Price Adjustment Procedures.
(a) Estimate. No later than six (6) Business Days prior to the date
scheduled for the Closing, Parent shall prepare and deliver to Purchaser a
written report (the "Preliminary Closing Statement") setting forth Parent's
estimates of Closing Net Liabilities and Closing Subscribers, determined in
accordance with Section 2.7, and the Purchase Price, as adjusted pursuant
to Section 2.7. The Preliminary Closing Statement shall be prepared by
Parent in good faith and shall be certified by Parent to be its good faith
estimate of the Closing Net Liabilities, Closing Subscribers and Purchase
Price, as adjusted, as of the date thereof together with a work sheet
showing the calculation thereof. Parent shall make available to Purchaser
such information as Purchaser shall reasonably request relating to the
matters set forth in the Preliminary Closing Statement. If Purchaser does
not agree with the Closing Net Liabilities, Closing Subscribers or Purchase
Price set forth in the Preliminary Closing Statement, then on or prior to
the third (3/rd/) Business Day prior to the date scheduled for the Closing,
Purchaser may deliver to Parent a written report (the "Preliminary Dispute
Notice") setting forth in reasonable detail Purchaser's good faith
estimates of any amount set forth in the Preliminary Closing Statement with
which Purchaser disagrees. In the case of any such estimated amount set
forth in the Preliminary Dispute Notice, Parent and Purchaser shall
endeavor in good faith to agree prior to the Closing on the appropriate
amount of such estimates to be used in calculating the Closing Cash
Payment.
(b) Escrow Adjustment Amount. If Parent and Purchaser agree on the
estimates described in Section 2.8(a) or if Purchaser does not deliver a
Preliminary Dispute Notice, the "Escrow Adjustment Amount" shall equal
$10,000,000. If Parent and Purchaser
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do not agree on the amounts set forth in the Preliminary Dispute Notice, if
any, by the Business Day immediately prior to the date scheduled for the
Closing, then the "Escrow Adjustment Amount" shall equal $10,000,000 plus
the amount, if any, by which (x) the Purchase Price as adjusted in
accordance with Section 2.7 giving effect to the estimates set forth in the
Preliminary Closing Statement (with any changes thereto mutually agreed to
by Purchaser and Parent) exceeds (y) the Purchase Price as adjusted in
accordance with Section 2.7 giving effect to the estimates set forth in the
Preliminary Dispute Notice (with any changes agreed to by Purchaser and
Parent).
(c) Final Closing Statement. Within ninety (90) days after the
Closing Date, Purchaser shall prepare and deliver to Parent a written
report (the "Final Closing Statement") setting forth Purchaser's final
determination of Closing Net Liabilities, Closing Subscribers and Purchase
Price to the extent not previously agreed upon pursuant to Section 2.8(a),
determined in accordance with Section 2.7 and in accordance with the
methodologies and the accounting policies and practices described in
Section 2.7. The Final Closing Statement shall be prepared by Purchaser in
good faith and shall be certified by Purchaser to be, as of the date
prepared, its good faith determination of the Closing Net Liabilities,
Closing Subscribers and Purchase Price, as so adjusted as applicable.
Purchaser shall allow Parent and its agents access at all reasonable times
after the Closing Date to copies of the books, records and accounts of the
Avalon Companies and Avalon Subsidiaries and make available to Parent such
information as Parent reasonably requests to allow Parent to examine the
accuracy of the Final Closing Statement. Within thirty (30) days after the
date that the Final Closing Statement is delivered by Purchaser to Parent,
Parent shall complete its examination thereof and may deliver to Purchaser
a written report setting forth any proposed adjustments to any amounts set
forth in the Final Closing Statement; provided, however, that if Purchaser
does not comply with its obligations pursuant to the preceding sentence,
such thirty (30) day period shall run from the day after the date on which
Purchaser complies with such obligations. After submission of the Final
Closing Statement, Purchaser shall have no right to raise further
adjustments in its favor and after submission of Parent's report of any
proposed adjustments, Parent shall have no right to raise further
adjustments in its favor. If Parent notifies Purchaser of its acceptance of
the amounts set forth in the Final Closing Statement, or if Parent fails to
deliver its report of any proposed adjustments within the period specified
in the second preceding sentence, the amounts set forth in the Final
Closing Statement shall be conclusive, final and binding on the parties as
of the last day of such period. Purchaser and Parent shall use good faith
efforts to resolve any dispute involving the amounts set forth in the Final
Closing Statement. If Parent and Purchaser fail to agree on any amount set
forth in the Final Closing Statement within fifteen (15) days after
Purchaser receives Parent's report pursuant to this Section 2.8(c), then
Parent and Purchaser shall retain the firm of Ernst & Young LLP (or its
successor)(the "Referee") to make the final determination, under the terms
of this Agreement, of any amounts under dispute. The Referee shall endeavor
to resolve the dispute as promptly as practicable and the Referee's
resolution of the dispute shall be final and binding on the parties, and a
judgment may be entered thereon in any court of competent jurisdiction. The
costs and expenses of the Referee and its services rendered pursuant to
this Section 2.8(c) shall be borne one-half by Purchaser and one-half by
Parent.
(d) Payment of Purchase Price Adjustments
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(i) Within three (3) Business Days after the amount of the Purchase
Price is finally determined pursuant to this Section 2.8 (such amount being
the "Final Purchase Price"), Purchaser and Parent shall direct the Post-
Closing Escrow Agent to pay from the Post-Closing Escrow Fund (x) if and to
the extent, if any, the Final Purchase Price exceeds the Closing Cash
Payment, the amount of such excess to Parent (as agent for the Sellers and
subject to Section 10.12) and (y) the balance thereof, if any, to
Purchaser. To the extent the Final Purchase Price exceeds the Closing Cash
Payment by more than the amount of the Post-Closing Escrow Fund, Purchaser
shall promptly (and in no event later than 3 Business Days after the
Purchase Price is finally determined) pay to Parent (as agent for the
Sellers and subject to Section 10.12) the remainder thereof, but not in
excess of $10,000,000. The Parties agree that the Post-Closing Escrow Fund
shall be Purchaser's sole and exclusive source for any adjustments to the
Purchase Price after the Closing and that neither Seller nor any other
Person shall have any liability to Purchaser to the extent the Closing Cash
Payment exceeds the Final Purchase Price.
(ii) Any interest that has accrued on the Post-Closing Escrow Fund
shall be paid to the Purchaser and the Parent pro rata based on the payment
of the Post-Closing Escrow Fund to each of them pursuant to the subsection
(i) above. Such interest payment shall be made with the payments otherwise
required under this Section 2.8(d) or an soon thereafter as practicable.
(iii) All payments to the Parent under this Section 2.8(d) shall be
made by wire transfer of immediately available funds to the Parent Account
and all payments to the Purchaser under this Section 2.8(d) shall be made
by wire transfer of immediately available funds to an account designated by
the Purchaser.
Section 2.9 Escrow Deposit. On or prior to May 18, 1999, Purchaser shall
deliver $50,000,000 in cash to the Pre-Closing Escrow Agent to be held as the
Pre-Closing Escrow Fund under the Pre-Closing Escrow Agreement.
Section 2.10 Guarantee. The Guarantor shall cause the Purchaser (and any
other Person to whom this Agreement may be assigned as permitted hereunder) to
perform all of their obligations hereunder on a timely basis.
ARTICLE III
REPRESENTATIONS AND WARRANTIES
------------------------------
REGARDING SELLERS
-----------------
Parent and, as to itself and its Purchased Securities, Avalon Investors
represent and warrant to Purchaser that the statements contained in this Article
III are correct and complete as of the date of this Agreement and will be
correct and complete as of the Closing Date, except as set forth in the
Disclosure Schedule.
Section 3.1 Organization. Each Seller is a limited liability company duly
organized, validly existing, and in good standing under the laws of the State of
Delaware.
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Section 3.2 Authority. Each Seller has all the requisite power and
authority to execute and deliver this Agreement and to perform its obligations
hereunder. The execution and delivery by each Seller of, the performance of each
Seller under, and the consummation by each Seller of the Transactions have been
duly and validly authorized by all action by or on behalf of each Seller. This
Agreement constitutes the valid and legally binding obligation of the Sellers,
enforceable against the Sellers in accordance with its terms, except as the same
may be limited by Enforceability Exceptions.
Section 3.3 Breach. The execution and delivery of this Agreement by the
Sellers does not, and the consummation of the Transactions by the Sellers will
not, (i) violate or conflict with the Certificate of Formation or limited
liability company agreement (as in effect from time to time) of each Seller,
(ii) constitute a material breach or default of, or give rise to any third-party
right of termination, cancellation, modification or acceleration under, any
agreement, understanding or undertaking to which either Seller is a party or by
which either Seller is bound, or give rise to any Lien on any of the Purchased
Securities or the Class B Units (other than in favor of Purchaser), or (iii)
subject to obtaining the approvals and making the filings described in Section
3.4 hereof, constitute a material violation of any statute, law, ordinance,
rule, regulation, judgment, decree, order or writ of any judicial, arbitral,
public, or governmental authority having jurisdiction over the Sellers or any of
the Purchased Securities.
Section 3.4 Consents and Approvals. Neither the execution and delivery of
this Agreement by the Sellers nor the consummation of the Transactions by the
Sellers will require any consent, approval, authorization or permit of, or
filing with or notification to, any governmental or regulatory authority, except
(i) for filings required under the Exchange Act, (ii) for notification pursuant
to the HSR Act and expiration or termination of the waiting period thereunder,
(iii) for notices to, or consents and waivers from, the relevant Franchising
Authorities in connection with a change of control of the holders of the
Franchises of the Avalon Companies and Avalon Subsidiaries, and the FCC in
connection with a change of control of the holders of the FCC Licenses, and (iv)
where the failure to obtain such consents, approvals, authorizations or permits,
or to make such filings or notifications, would not be, and would not reasonably
be expected to be, material.
Section 3.5 Purchased Securities.
(a) The Stock. Parent holds of record and owns beneficially all of
the Stock, free and clear of any restrictions on transfer, Taxes, Liens,
options, warrants, purchase rights, contracts, commitments, equities, claims,
and demands (other than restrictions under the Securities Act and state
securities laws or that will be terminated effective as of the Closing or are
described in Section 3.4). Parent is not a party to any option, warrant,
purchase right, or other contract or commitment that could require it to sell,
transfer, or otherwise dispose of the Stock (other than this Agreement). Parent
is not a party to any voting trust, proxy, or other agreement or understanding
with respect to the Stock that will not be terminated effective as of the
Closing.
(b) Class A Units. Avalon Investors holds all right, title and
interest in and to the Class A Units, free and clear of any restrictions on
transfer, Taxes, Liens, options, warrants, purchase rights, contracts,
commitments, equities, claims, and demands (other than
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restrictions under the Securities Act and state securities laws or that will be
terminated effective as of the Closing or are described in Section 3.4). Avalon
Investors is not a party to any option, warrant, purchase right, or other
contract or commitment that could require it to sell, transfer, or otherwise
dispose of the Class A Units (other than this Agreement). Avalon Investors is
not a party to any voting trust, proxy, or other agreement or understanding
(other than the Company's LLC Agreement or the Members Agreement) with respect
to the Class A Units that will not be terminated effective as of the Closing.
(c) The Option. Parent holds all right title and interest in and to
the Option, free and clear of any restrictions on transfer, Taxes, Liens,
options, warrants, purchase rights, contracts, commitments, equities, claims,
and demands (other than restrictions under the Securities Act and state
securities laws or that will be terminated effective as of the Closing or are
described in Section 3.4). Parent is not a party to any option, warrant,
purchase right, or other contract or commitment that could require it to sell,
transfer, or otherwise dispose of the Option (other than this Agreement) that
will not be terminated effective as of the Closing. There are no Liens or
restrictions which would prohibit Parent from transferring (or impose any
liability on any Person in connection with the transfer of ) the Option to
Purchaser at the Closing.
(d) Class B-1 Units. New England Holdings holds all right, title and
interest in and to the Class B-1 Units, free and clear of any restrictions on
transfer Taxes, Liens, options, warrants, purchase rights, contracts,
commitments, equities, claims, and demands (other than the restrictions under
the Securities Act and state securities laws or that will be terminated
effective as of the Closing or are described in Section 3.4). New England
Holdings is not a party to any option, warrant, purchase right, or other
contract or commitment that could require it to sell, transfer, or otherwise
dispose of the Class B-1 Units (other than the Option). Avalon Investors is not
a party to any voting trust, proxy, or other agreement or understanding (other
than Company's LLC Agreement) with respect to the Class B-1 Units that will not
be terminated effective as of the Closing.
(e) All Equity Interests in the Company. After the consummation of
the Transactions, Purchaser will hold (directly or indirectly) all right, title
and interest in and to all equity interests in the Company, free and clear of
any restrictions on transfer, Liens, options, warrants, purchase rights,
contracts, commitments, equities, claims, and demands (other than (i)
restrictions arising under the Securities Act and/or state securities laws, or
under any Franchise or FCC License, and (ii) Liens not existing prior to the
Closing resulting from the ownership of the Purchased Securities by Purchaser).
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ARTICLE IV
REPRESENTATIONS AND WARRANTIES
------------------------------
REGARDING THE AVALON COMPANIES
------------------------------
Parent represents and warrants to Purchaser that the statements contained
in this Article IV are correct and complete as of the date of this Agreement and
will be correct and complete as of the Closing Date, except as set forth in the
Disclosure Schedule.
Section 4.1 Organization, Requisite Power, Authority and Qualification.
Each of the Avalon Companies is a corporation or limited liability company duly
organized, validly existing and in good standing under the laws of the State of
Delaware, and has all the requisite power to carry on its business as now
conducted. Each of the Avalon Companies is duly qualified to do business as a
foreign corporation or company and is in good standing in each jurisdiction
where the character of the property owned or leased by it or the nature of its
activities makes such qualification necessary, with such exception as would not
have a material and adverse effect on the Avalon Companies and Avalon
Subsidiaries taken as a whole. The Avalon Companies have heretofore delivered to
Purchaser true and complete copies of the Certificate of Incorporation and
Bylaws or Certificate of Formation and limited liability company agreement of
each of the Avalon Companies. Each of the Avalon Parties has all the requisite
power and authority to execute and deliver this Agreement and to perform its
obligations hereunder. This Agreement constitutes the valid and legally binding
obligation of each of the Avalon Parties, enforceable against each of the Avalon
Parties in accordance with its terms, except as the same may be limited by
Enforceability Exceptions. The execution and delivery by each of the Avalon
Parties of, the performance of each of the Avalon Parties under, and the
consummation by each of the Avalon Parties of the Transactions have been duly
and validly authorized by all action by or on behalf of each of the Avalon
Parties.
Section 4.2 No Breach. Except as set forth on Schedule 4.2, neither the
execution and delivery of this Agreement by the Avalon Companies nor the
consummation of the Transactions by the Avalon Companies will (i) violate or
conflict with the Certificate of Incorporation or Bylaws or the Certificate of
Formation or limited liability company agreement of any Avalon Company or Avalon
Subsidiary, or (ii) constitute a material breach or default of or give rise to
any third-party right of termination, suspension, cancellation, modification or
acceleration under, any material agreement, understanding or undertaking to
which any Avalon Company or Avalon Subsidiary is a party or by which it is
bound, or give rise to any Lien on any of their properties, or (iii) subject to
obtaining the approvals and making the filings described in Section 4.3 hereof,
constitute a material violation of any statute, law, ordinance, rule,
regulation, judgment, decree, order or writ of any judicial, arbitral, public,
or governmental authority having jurisdiction over the Avalon Companies or
Avalon Subsidiaries or any of their properties or assets.
Section 4.3 Consents and Approvals. Except as set forth on Schedule 4.3,
neither the execution and delivery of this Agreement by the Avalon Companies nor
the consummation of the Transactions by the Avalon Companies require any
consent, approval, authorization or permit of, or filing with or notification
to, any governmental or regulatory authority or any other Person, except (i) for
filings required under the Exchange Act, (ii) for notification pursuant to, and
expiration or termination of the waiting period under, the HSR Act,
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(iii) for notices to, or consents or waivers from, the relevant Franchising
Authorities in connection with a change of control of the holders of the
Franchises of the Avalon Companies and Avalon Subsidiaries, and the FCC in
connection with a change of control of the holders of the FCC Licenses and (iv)
where the failure to obtain such consents, approvals, authorizations or permits
or to make such filings or notifications, would not be, or would not reasonably
be expected to be, material.
Section 4.4 Capitalization of the Avalon Companies. The authorized, issued
and outstanding Equity Securities of the Avalon Companies are set forth in
Schedule 4.4. All of the issued and outstanding Equity Securities of the Avalon
Companies are duly authorized, validly issued, fully paid and non-assessable,
and are free and clear of any preemptive rights, restrictions on transfer or
Liens (other than (i) restrictions arising under the Securities Act and/or state
securities laws or any Franchise or FCC License, (ii) those that will be
terminated effective as of the Closing Date, (iii) Liens not existing prior to
the Closing resulting from the ownership of the Purchased Securities by
Purchaser or (iv) those described in Section 4.3). There are no outstanding
options, warrants or other rights of any kind to acquire any additional Equity
Securities of the Avalon Companies (other than the Option), nor is any Avalon
Company committed to issuing any such option, warrant, right or security.
Section 4.5 Avalon Subsidiaries.
(a) Each of the Avalon Subsidiaries is a corporation or limited
liability company duly organized, validly existing and in good standing
under the laws of Delaware (other than Cable Michigan which is duly
organized, validly existing and in good standing under the laws of
Pennsylvania). Each of the Avalon Subsidiaries has all requisite power to
carry on its business as now being conducted. Each Avalon Subsidiary is
duly qualified to do business as a foreign organization and is in good
standing in each jurisdiction where the character of the property owned or
leased by it or the nature of its activities makes such qualification
necessary. All Avalon Subsidiaries and their respective jurisdictions of
organization are as set forth in Schedule 4.5(a). Other than marketable
securities and the Subsidiary Securities, the Avalon Companies and Avalon
Subsidiaries do not have any investments in any other Person.
(b) All of the outstanding Equity Securities of each Avalon
Subsidiary (collectively, the "Subsidiary Securities") are duly authorized,
validly issued and (in the case of any corporate Avalon Subsidiary) fully
paid and non-assessable, are owned by the Company, directly or indirectly,
and are free and clear of any preemptive rights, restrictions on transfer,
Liens, options, warrants, voting agreements, trusts, purchase rights,
contracts, commitments, equities, claims, demands, or other arrangements or
understandings, except for (i) restrictions arising under the Securities
Act and/or state securities laws or any Franchise or FCC License, (ii)
Liens not existing prior to the Closing resulting from the ownership of the
Purchased Securities by the Purchaser, or (iii) restrictions that will be
terminated at the Closing. There are no outstanding obligations of any
Avalon Company or any Avalon Subsidiary to repurchase, redeem or otherwise
acquire any outstanding Subsidiary Securities.
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Section 4.6 SEC Filings.
(a) The Sellers have delivered to Purchaser (i) the Form S-4 (the
"Form S-4") which the Company filed with the SEC dated March 31, 1999, and
(ii) all of the other reports, statements, schedules and registration
statements of any of the Avalon Companies or the Avalon Subsidiaries filed
with the SEC thereafter.
(b) As of its filing date each such report or statement filed
pursuant to the Exchange Act complied in all material respects with the
applicable requirements of the Exchange Act and did not contain any untrue
statement of a material fact or omit to state any material fact necessary
in order to make the statements made therein, in the light of the
circumstances under which they were made, not misleading.
(c) Each such registration statement, as amended or supplemented, if
applicable, filed pursuant to the Securities Act as of the date such
statement or amendment became effective complied in all material respects
with the applicable requirements of the Securities Act and did not contain
any untrue statement of a material fact or omit to state any material fact
required to be stated therein or necessary to make the statements therein
not misleading.
Section 4.7 Financial Statements. The audited financial statements of the
Avalon Companies included in the Form S-4 (the "Financial Statements") are in
all material respects in accordance with the books and records of the Avalon
Companies and Avalon Subsidiaries and were prepared in conformity with generally
accepted accounting principles applied on a consistent basis (except as may be
indicated in the notes thereto), and fairly present in all material respects the
consolidated financial position of the Avalon Companies and Avalon Subsidiaries
as of the date thereof and their consolidated results of operations and cash
flows for the period then ended (subject to normal year-end adjustments in the
case of any unaudited interim financial statements). Except as set forth in the
Financial Statements or on Schedule 4.7, none of the Avalon Companies or Avalon
Subsidiaries have any Funded Debt other than that which, pursuant to its terms,
can be repaid at Closing without the incurrence of any premium, penalty or other
charge.
Section 4.8 Absence of Certain Changes. Except as set forth on Schedule
4.8, as reflected in the pro forma financial statements included in the Form S-4
or as otherwise permitted by this Agreement, since the Balance Sheet Date, the
Avalon Companies and the Avalon Subsidiaries have conducted their business in
the Ordinary Course in all material respects and there has not been (except as
contemplated by this Agreement) without the consent of Purchaser:
(i) any event or occurrence which has had a Material Adverse Effect;
(ii) any declaration, setting aside or payment of any dividend or
other distribution with respect to any shares of Equity Securities of any
Avalon Company, or any repurchase, redemption or other acquisition by any
Avalon Company of any outstanding Equity Securities of the Avalon
Companies:
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(iii) any termination or failure to renew, or any written threat (that
was not subsequently withdrawn) to terminate or fail to renew any Franchise
or Scheduled Agreement;
(iv) any merger with or consolidation with any other Person;
(v) any amendment of any material term of any outstanding security
of the Avalon Companies;
(vi) any creation or assumption by the Avalon Companies or Avalon
Subsidiaries of any Lien (other than Permitted Liens) on any material
asset;
(vii) any making of any loan, advance or capital contributions to or
investment in any Person other than advances to employees in the Ordinary
Course and loans, advances or capital contributions to or investments in
the Avalon Subsidiaries made in the Ordinary Course;
(viii) any damage, destruction or other casualty loss (to the extent
not covered by insurance) affecting the business or assets of the Avalon
Companies or Avalon Subsidiaries in excess of $1,000,000 in the aggregate;
(ix) any transaction or commitment made, or any contract or agreement
entered into, by the Avalon Companies or Avalon Subsidiaries relating to
its assets or business (including the acquisition or disposition of any
assets) or any relinquishment by the Avalon Companies or Avalon
Subsidiaries of any contact or other right, in any case, involving more
than $1,000,000 in the aggregate, other than those contemplated by this
Agreement and additions of subscribers to existing programming agreements;
(x) any material change in any method of accounting or accounting
practice by the Avalon Companies or Avalon Subsidiaries, except for any
such change required by reason of a change in GAAP, or
(xi) any (A) grant of any severance or termination pay to any
director, officer or employee of the Avalon Companies or Avalon
Subsidiaries in excess of $250,000 in the aggregate, (B) entering into of
any employment, deferred compensation or other similar agreement (or any
amendment to any such existing agreement) with any director, officer or
employee of the Avalon Companies or Avalon Subsidiaries, (C) increase in
benefits payable under any existing severance or termination pay policies
or (D) other than the procurement of D&O Insurance for the directors and
officers of the Avalon Companies and the Avalon Subsidiaries. increase in
compensation, bonus or other benefits payable to directors or officers (who
are not employees) of the Avalon Companies or Avalon Subsidiaries, or,
other than in the Ordinary Course, to employees (including officers who are
employees) of the Avalon Companies or Avalon Subsidiaries.
Section 4.9 No Undisclosed Material Liabilities. Neither the Avalon
Companies nor the Avalon Subsidiaries have any indebtedness, liability or
obligation of any
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type required by GAAP to be reflected on a balance sheet, except (i) liabilities
reflected or reserved against in the Balance Sheet, or otherwise disclosed in
the Form S-4, (ii) for Funded Debt, (iii) for liabilities incurred in the
Ordinary Course since the Balance Sheet Date, (iv) for other liabilities which
are not material, (v) as set forth on the Disclosure Schedule or any contract or
agreement set forth thereon or not required to be set forth thereon (other than
for breach thereof) and (vi) liabilities which would be taken into account in
the calculation of Closing Net Liabilities for purposes of Section 2.7 or are
otherwise specifically referred to in Section 2.7.
Section 4.10 Litigation. There is no charge, complaint, suit, action,
proceeding, arbitration, claim or investigation pending against or, to the
Knowledge of the Avalon Companies, threatened against the Avalon Companies or
Avalon Subsidiaries that would, nor is there any judgment, decree, inquiry, rule
or order outstanding against the Avalon Companies or Avalon Subsidiaries which
would, (i) reasonably be expected to be material or (ii) result in a revocation,
termination, suspension or material modification or other limitation of any
Franchises or FCC Licenses.
Section 4.11 Taxes.
(a) The Avalon Companies and Avalon Subsidiaries have (i) timely
filed or obtained extensions for all material Tax Returns required to be filed
by them, all such filed returns have been completed in all material respects in
accordance with applicable law and all such filed returns are true and accurate
in all material respects, (ii) paid all Taxes that are shown on such Tax Returns
as due and payable, (iii) paid all material Taxes otherwise required to be paid
other than Taxes that are being contested in good faith by appropriate
proceedings and for which adequate reserves have been established, and (iv) used
commercially reasonable efforts to maintain in all material respects all
required records with respect to any liability for Taxes for taxable years with
respect to which the statute of limitations has not yet expired, regardless of
whether such liability has been previously assessed in whole or in part or is
assessed in whole or in part after the date of this Agreement.
(b) There are no Liens for Taxes (other than for Taxes not yet due
and payable or for Taxes that are being contested in good faith by appropriate
proceedings and for which adequate reserves have been established) on the assets
of the Avalon Companies and Avalon Subsidiaries.
(c) Neither of the Avalon Companies nor any Avalon Subsidiary has
requested or been granted an extension of the time for filing any Tax Return
which has not yet been filed with respect to an amount of Taxes which is
material.
(d) Neither of the Avalon Companies nor any Avalon Subsidiary has
consented to extend to a date later than the date hereof the time in which any
Tax which is material may be assessed or collected by any taxing authority.
(e) No deficiency or proposed adjustment which has not been settled
or otherwise resolved for any amount of Tax which is material has been proposed,
asserted or assessed by any taxing authority against the Avalon Companies or
Avalon Subsidiaries. Neither
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of the Avalon Companies nor any Avalon Subsidiary has any Knowledge of an intent
by any taxing authority to assert a deficiency or proposed adjustment against
the Avalon Companies or Avalon Subsidiaries for any amount of Tax which is
material.
(f) There is no action, suit, taxing authority proceeding or audit
now in progress, pending or, to the Knowledge of the Sellers, threatened against
or with respect to the Avalon Companies or Avalon Subsidiaries with respect to
an amount of Taxes which is material.
(g) No claim has ever been made by a taxing authority in a
jurisdiction where the Avalon Companies or Avalon Subsidiaries does not file Tax
Returns that the Avalon Companies or Avalon Subsidiaries is or may be subject to
Taxes assessed by such jurisdiction which are material in amount.
(h) All Tax allocation agreements, Tax sharing agreements, or similar
arrangements to which either of the Avalon Companies or any of the Avalon
Subsidiaries is a party to or bound by are listed in Section 4.11(h) of the
Disclosure Schedule. Neither of the Avalon Companies nor any Avalon Subsidiary
is a party to or bound by any Tax allocation agreement, Tax sharing agreement,
or similar arrangement with respect to an amount of Taxes which is material or
has a current or potential contractual obligation to indemnify any other Person
with respect to Taxes which are material in amount, except as listed in Section
4.11(h) of the Disclosure Schedule.
(i) Neither of the Avalon Companies nor any Avalon Subsidiary has
made any payments, or will become obligated (under any contract entered into on
or before the Closing Date) to make any payments which are material in amount,
that will be non-deductible under Section 280G of the Code or that would result
in an excise Tax to the recipient of such payment pursuant to Section 4999 of
the Code (or any corresponding provision of state, local or foreign income Tax
law).
(j) Schedule 4.11 contains a list of states, territories and
jurisdictions (whether foreign or domestic) in which any Avalon Company or
Avalon Subsidiary is required to file Tax Returns relating to income Taxes of
any Avalon Company or Avalon Subsidiary which are material in amount.
(k) Neither of the Avalon Companies nor any Avalon Subsidiary has any
(i) income reportable for a period ending after the Closing Date but
attributable to a transaction (e.g., an installment sale) occurring in a period
ending on or prior to the Closing Date which resulted in a deferred reporting of
income from such transaction (other than a deferred intercompany transaction),
or (ii) deferred gain or loss arising out of any deferred intercompany
transaction.
(l) Each of the Avalon Companies and Avalon Subsidiaries has had
since its inception and will continue to have through the Closing Date the
federal tax status (i.e., partnership, C corporation, S corporation, or
disregarded entity) as set forth in Schedule 4.11, except as results from any
actions taken pursuant to this Agreement.
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(m) Neither of the Avalon Companies nor any of the Avalon
Subsidiaries has been at any time a member of any partnership, joint venture or
other arrangement or contract which is treated as a partnership for federal,
state, local or foreign tax purposes (a "Tax Partnership") or the holder of a
beneficial interest in any trust for any period for which the statute of
limitations for any Tax has not expired, except for a Tax Partnership which is
the Company or an Avalon Subsidiary.
(n) All material elections with respect to Taxes affecting any of the
Avalon Companies or Avalon Subsidiaries as of the date hereof are set forth in
Schedule 4.11. No consent to the application of Section 341(f)(2) of the Code
has been filed with respect to any property or assets held, acquired, or to be
acquired by any of the Avalon Companies or Avalon Subsidiaries which are treated
as corporations for federal income tax purposes.
(o) Neither of the Avalon Companies nor any Avalon Subsidiary has
agreed to or is required to make any material adjustment under Section 481(a) of
the Code.
(p) Neither of the Avalon Companies nor any Avalon Subsidiary is or
has been a member of any Affiliated Group.
Section 4.12 Employee Benefit Matters.
(a) Schedule 4.12 identifies each Employee Plan and Benefit
Arrangement. The Sellers have furnished or made available to Purchaser (i)
copies of such Employee Plans and Benefit Arrangements (and, if applicable,
related trust agreements) and all amendments thereto, (ii) the currently-
effective summary plan description pertaining to each Employee Plan, (iii) the
most recent annual report for each Employee Plan (including all related
schedules), (iv) the most recent IRS determination letter for each Employee Plan
which is intended to constitute a qualified plan under Section 401 of the Code,
and (v) for each unfunded Employee Plan or Benefit Arrangement, financial
statements which fairly present the financial condition and results of
operations of such Plan. No Employee Plan or Benefit Arrangement is, and neither
of the Avalon Companies nor any Avalon Subsidiary maintains or is obligated to
contribute to, any employee benefit plan (as defined in Section 3(3) of ERISA)
that is (i) a Multiemployer Plan, (ii) a Title IV Plan, (iii) maintained in
connection with any trust described in Section 501(c)(9) of the Code, or (iv)
subject to the minimum funding requirements of Part 3 of Title I of ERISA. None
of the Avalon Companies nor any Avalon Subsidiary has any liabilities with
respect to an employee benefit plan described in (i) or (ii) above with respect
to any ERISA Affiliate.
(b) No "prohibited transaction" (within the meaning of Section
4975(c) of the Code) has occurred with respect to any employee benefit plan or
arrangement which is covered by Title I of ERISA, which transaction has caused
or will cause the Avalon Companies or Avalon Subsidiaries to incur any material
liability under ERISA, the Code or otherwise, excluding transactions effected
pursuant to and in compliance with a statutory or administrative exemption.
(c) Each Employee Plan identified on the Schedule 4.12 that is
intended to be qualified under Section 401(a) of the Code has received a
favorable determination letter from
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the IRS that it is so qualified and that its trust is exempt from Tax under
Section 501(a) of the Code, (ii) each Employee Plan has been maintained and
operated in substantial compliance with its terms and with the requirements
prescribed by any and all applicable statutes, orders, rules and regulations
including ERISA and the Code, and (iii) no Employee Plan or Benefit Arrangement
provides for post-employment or post-retirement health or medical or life
insurance benefits for retired, former or current employees of the Avalon
Companies and Avalon Subsidiaries, except as required to avoid excise tax under
Section 4980B of the Code or as required by state law.
(d) Each Benefit Arrangement has been maintained and operated in
substantial compliance with its terms and with the requirements prescribed by
any and all applicable statutes, orders, rules and regulations and has been
maintained in good standing with applicable regulatory authorities.
(e) There is not and there has not been at any time since November 6,
1998 any pending or, to the Knowledge of the Avalon Companies, threatened
investigations, audits, or material litigation or arbitration concerning or
involving any Employee Plan or Benefit Arrangement and (ii) no material claims
are pending or threatened with respect to any bond or any fiduciary liability or
other similar insurance with regard to the actions of any Person in connection
with any Employee Plan, nor is there expected to be any notice to any insurer
under any such bond or policy with regard to any Employee Plan.
(f) The Avalon Companies and Avalon Subsidiaries have complied in all
material respects with all requirements of Section 4980B of the Code.
Section 4.13 Labor Matters. Except as set forth in Schedule 4.13,
(a) Neither of the Avalon Companies nor any Avalon Subsidiary is
party to any labor union or collective bargaining agreement.
(b) No employees of any Avalon Company or Avalon Subsidiary are
represented by any labor organization.
(c) As of the date hereof, no labor organization or group of
employees of the Avalon Companies or Avalon Subsidiaries has made a pending
demand for recognition or certification, and there are no representation or
certification proceedings or petitions seeking a representation proceeding
presently pending or threatened to be brought or filed, with the National Labor
Relations Board or any other labor relations tribunal or authority.
(d) To the Knowledge of the Avalon Companies, as of the date hereof,
there are no formal organizing activities involving a material number of
employees of the Avalon Companies or Avalon Subsidiaries pending with. or
threatened by, any labor organization.
(e) There are no strikes, or material work stoppages, slowdowns,
lockouts, arbitrations or grievances or other labor disputes pending or, to the
Knowledge of the Avalon Companies, threatened against the Avalon Companies or
Avalon Subsidiaries.
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(f) The Avalon Companies and Avalon Subsidiaries have no employment
agreements, either written or oral, with any employee of the Systems, except as
set forth in Schedule 4.13. The employment under each such agreement may be
terminated at any time.
Section 4.14 Compliance with Laws. The Avalon Companies and Avalon
Subsidiaries hold all licenses, franchises, certificates, consents, permits,
qualifications and authorizations from all governmental authorities necessary
for the lawful conduct of their businesses, except where the failure to hold any
of the foregoing would not be material. Neither of the Avalon Companies nor any
Avalon Subsidiaries (or any prior operator of the Systems) has materially
violated, or is in material violation of any such licenses, franchises,
certificates, consents, permits, qualifications or authorizations or any
applicable statutes, laws, ordinances, rules and regulations (including any of
the foregoing related to occupational safety, storage, disposal, discharge into
the environment of hazardous wastes, environmental protection, conservation,
unfair competition, labor practices or corrupt practices) of any governmental
authorities. The Avalon Companies and Avalon Subsidiaries (and any prior
operator of the Systems) have made all material submissions (including
registration statements) required under, and the operation of the Systems has
been in compliance in all material respects with, the Communications Act and the
applicable FCC Rules and Regulations, the Cable Act, the Copyright Act and all
Franchises.
Section 4.15 Title to Properties, Encumbrances. Each of the Avalon
Companies and Avalon Subsidiaries has good and marketable title to (or in the
case of leased or licensed assets, valid and existing leasehold or licensee
interests in) the material assets set forth on the Balance Sheet (other than
those disposed of in the Ordinary Course since the Balance Sheet Date), free and
clear of all Liens other than Permitted Liens. Each of the Avalon Companies and
Avalon Subsidiaries owns or has the lawful right to use all assets, properties,
operating rights, easements, contracts, leases and other instruments necessary
to operate its business as presently conducted in all material respects.
Schedule 4.15 sets forth a list of all material real property which is owned or
leased by Avalon Companies or any Avalon Subsidiary. Other than such exceptions
as would not be material to the operation of the Systems, all buildings,
improvements, central receiving apparatus, distribution equipment, cables,
converters, origination equipment and other operating assets of the Avalon
Companies and Avalon Subsidiaries are in good working order and condition,
normal wear and tear excepted, in each case sufficient for use in the Ordinary
Course.
Section 4.16 Environmental Matters. There are no material Environmental
Liabilities of the Avalon Companies or any Avalon Subsidiaries. The Avalon
Companies and Avalon Subsidiaries (and any prior operator of the Systems) are in
compliance and have been in compliance, in all material respects, with all
Environmental Laws. There are no pending or, to the Knowledge of the Avalon
Companies and Avalon Subsidiaries, threatened, claims relating to the current or
prior business of the Avalon Companies or Avalon Subsidiaries arising under any
Environmental Law. No material amount of any Hazardous substance is present at
any property or facility now or previously owned, leased or used (including any
off-site disposal facility) by the Avalon Companies or any Avalon Subsidiary in
a way which violates or could reasonably be expected to violate in any material
respect any Environmental Law. There has been no environmental assessment,
investigation, study, audit, test, review or other analysis conducted of which
the Avalon Companies have Knowledge in relation to the current or prior
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business of the Avalon Companies or Avalon Subsidiaries or any property or
facility now or previously owned leased or used (including any off-site disposal
facility) by the Avalon Companies or Avalon Subsidiaries which has not been made
available or delivered to Purchaser.
Section 4.17 Systems, Franchises and Material Agreements.
(a) As of the Balance Sheet Date, the Systems (i) had approximately
232,141 Basic Subscribers (as defined below), (ii) passed approximately 377,512
residential dwelling units, and (iii) included approximately 9,405 plant miles
(including underground and aerial plant miles). For purposes hereof, "Basic
Subscriber" means a customer of the Avalon Companies or any Avalon Subsidiary
who as of the relevant date satisfies all of the following requirements:
(i) such customer is connected to and receiving Basic Service (as
defined below) from an Avalon Company or an Avalon Subsidiary;
(ii) such customer is being charged for the services received at a
rate that is not less than the rate that the Avalon Companies or any Avalon
Subsidiary generally charges to its customers in that location;
(iii) such customer has paid to the applicable provider the applicable
rate for all services received for one month (or more) of service prior to the
relevant date; and
(iv) such customer does not have any amount payable to the Avalon
Subsidiaries that is unpaid more than sixty (60) days after the later of the due
date of the related invoice and the last day of the period to which such amount
relates, in each case in excess of $10.00;
provided that a hotel, motel or other multiple dwelling unit customer shall be
considered to be that number of Basic Subscribers which is equal to revenues
from Basic Service generated by such hotel. motel or other customer for the
month ending on the relevant date (or if such date is not the end of a month,
the month ending immediately prior to such date) (without regard to non-
recurring revenues from ancillary services such as installation fees) divided by
the comparable rate charged to detached single family homes for such service in
the relevant area by the applicable provider. For purposes hereof, "Basic
Service" means, for any given Franchise area, the cable television service tier
or tiers provided by an Avalon Company or Avalon Subsidiary in such Franchise
area which include the retransmission of domestic off air-television broadcast
signals.
(b) Except for (i) contracts, commitments and agreements entered into
in accordance with the terms of this Agreement, (ii) those contracts listed on
Schedule 4.17(b) (the "Scheduled Agreements"), and (iii) the Franchises of the
Avalon Companies and the Avalon Subsidiaries, neither of the Avalon Companies
nor any Avalon Subsidiary is a party to or is bound by a contract, commitment or
agreement which is material to the Avalon Companies and Avalon Subsidiaries
taken as a whole or which involves payments of more than $500,000 in the
aggregate or which restricts the Avalon Companies or any Avalon Subsidiary from
engaging in any business or from operating in any jurisdiction or which involves
the purchase of
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programming by an Avalon Company or any Avalon Subsidiary or which involves the
lease of real property or capital lease of personal property. Schedule 4.17(b)
sets forth a list, complete in all material respects, of the Franchises of the
Avalon Companies and the Avalon Subsidiaries. Each such Franchise is the validly
existing, legally enforceable obligation of an Avalon Company or one of the
Avalon Subsidiaries, as the case may be, and of the other parties thereto,
subject to the Enforceability Exceptions. Each such Scheduled Agreement is, in
all material respects, the validly existing, legally enforceable obligation of
an Avalon Company or one of the Avalon Subsidiaries, as the case may be, and, to
the Knowledge of the Avalon Companies, of the other parties thereto, subject to
the Enforceability Exceptions. The Avalon Companies and the Avalon Subsidiaries
are validly and lawfully operating in all material respects under their
respective Franchises and the Scheduled Agreements to which they are a party.
The Avalon Companies and the Avalon Subsidiaries have duly complied in all
material respects with all of the terms and conditions of each of their
respective Franchises to which they are a party, and, to the Parent's Knowledge,
each other party to any such Franchise has complied in all material respects
with each such Franchise. The Avalon Companies and the Avalon Subsidiaries have
duly complied in all material respects with all of the terms and conditions of
each of their respective Scheduled Agreements or other material agreements to
which they are a party, and to the Knowledge of Parent, each other party to any
such agreement has complied in all material respects with each such agreement to
which they are a party. Each System operates pursuant to a Franchise. Parent has
delivered or made available to Purchaser true and complete copies of all of the
Franchises and Scheduled Agreements of the Avalon Companies and the Avalon
Subsidiaries. None of the Avalon Companies or Avalon Subsidiaries has an
agreement with At Home, Road Runner or the ISP Channel.
(c) No Person (including any governmental authority) has any right to
acquire any interest in any System or any assets of an Avalon Company or any
Avalon Subsidiary (including any right of first or similar right) upon an
assignment or transfer of control of a Franchise or an Avalon Company or an
Avalon Subsidiary, other than rights of condemnation or eminent domain afforded
by law.
(d) Neither of the Avalon Companies nor any Avalon Subsidiary has
made or is bound by any material written commitments to any state, municipal,
local or other governmental commission, agency or body with respect to the
operation and construction of the Systems which are not fully reflected in its
Franchises and the Scheduled Agreements.
(e) No Franchising Authority has advised an Avalon Company or an
Avalon Subsidiary in writing, or otherwise formally notified an Avalon Company
or an Avalon Subsidiary in accordance with the terms of the applicable
Franchise, of its intention to deny renewal of an existing Franchise held by an
Avalon Company or an Avalon Subsidiary. Neither of the Avalon Companies nor any
Avalon Subsidiary has received, nor has notice that it will receive, from any
Franchising Authority a preliminary assessment that a Franchise held by an
Avalon Company or an Avalon Subsidiary should not be renewed as provided in
Section 626(c)(1) of the Communications Act, nor has an Avalon Company, an
Avalon Subsidiary, or a Franchising Authority commenced or requested the
commencement of an administrative proceeding concerning the renewal of a
Franchise held by an Avalon Company or Avalon Subsidiary as provided in Section
626(c)(l) of the Communications Act. With such exceptions as would not be
material, the Avalon Companies and Avalon Subsidiaries have timely filed
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pursuant to the formal renewal procedures established by Section 626(a) of the
Communications Act notices of renewal in accordance with the Communications Act
with all Franchising Authorities with respect to each Franchise held by an
Avalon Company or Avalon Subsidiary expiring within 36 months after the date of
this Agreement. As of the date hereof, no Franchising Authority has commenced,
nor is there pending, nor to Parent's Knowledge is there threatened, any
proceeding to suspend, modify, terminate or revoke a Franchise held by an Avalon
Company or Avalon Subsidiary.
(f) The Avalon Companies and Avalon Subsidiaries are operating the
Systems in compliance in all material respects with the provisions of the
applicable Franchises, FCC Licenses, the Copyright Act, the Cable Act, the
Communications Act and the FCC Rules and Regulations, including those relating
to carriage of signals, syndicated exclusivity, network non-duplication, and
retransmission consent. Without limiting the foregoing, and with such exceptions
as would be material, (i) each of the communities served by the Systems has been
registered with the FCC, (ii) all of the semi-annual and annual performance
tests on the Systems required to have been performed by the Avalon Companies and
Avalon Subsidiaries under Section 76.601 of the FCC Rules and Regulations since
June 1, 1997 have been performed, (iii) the Systems currently meet the technical
standards set forth in the FCC Rules and Regulations, including the leakage
limits contained in Section 76.605(a)(11) thereof, (iv) the Avalon Companies
have delivered or made available to Purchaser a copy of the most recent FCC
Forms 320 filed with the FCC (Basic Signal Leakage Performance Report) for the
Avalon Companies and Avalon Subsidiaries, (v) copies of the most recent signal
leakage tests conducted under Section 76.611 of the FCC Rules and Regulations
and copies of the most recent "proof of performance" tests on the Systems have
been delivered or made available to Purchaser by the Avalon Companies, and (vi)
the most recent signal leakage tests and the proof of performance tests for the
Systems were conducted in accordance with the testing procedures set forth in
Sections 76.601 and 76.609 of the FCC Rules and Regulations and such tests
evidence that the Systems meet or exceed the technical standards set forth in
Section 76.605 of the FCC Rules and Regulations.
(g) (i) All commercial broadcast television stations (except
superstations) carried by the Systems are carried either pursuant to
retransmission consent agreements or must-carry elections (or must-carry
defaults), (ii) the Avalon Companies have delivered or made available to
Purchaser full and complete copies of all retransmission consent agreements with
respect to such television stations, and (iii) Schedule 4.17(g) sets forth each
commercial television station that has elected must-carry status with respect to
any System but that is not being carried and the reason for non-carriage. There
are no requests by any television station which asserts that it is entitled to
must-carry status seeking carriage on any System which an Avalon Company or
Avalon Subsidiary has denied or refused to honor or which is the subject of a
complaint filed with the FCC.
(h) The Avalon Companies have delivered or made available to
Purchaser true, correct, and complete specimen copies of (i) all FCC Forms 328,
329, 393, 1200, 1205, 1210, 1215, 1220, 1225, 1230, 1235 and 1240 that have been
filed with governmental authorities with respect to the Systems, and all
material correspondence with governmental authorities related thereto, (ii) all
material correspondence with any governmental body that
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relates to rate regulation generally or to specific rates charged to subscribers
of the Systems and that is with respect to rate complaints that are pending at
the FCC or basic rates that are currently under review by a local governmental
entity (including any Franchising Authority) or the FCC, including any
complaints relating to any system filed with the FCC with respect to any rates
charged to subscribers of the Systems and that involve rate complaints that have
not been finally resolved, and any material documentation relating to an
exemption from the rate regulation provisions of the Communications Act claimed
by an Avalon Company or Avalon Subsidiary with respect to the Systems. Schedule
4.17(h) sets forth (x) a list of all rate complaints filed with the FCC relating
to the Systems of which an Avalon Company or Avalon Subsidiary has any Knowledge
and which have not been finally resolved by the FCC, and further sets forth
those Franchising Authorities that have been certified or filed for
certification under the Communications Act with respect to rate regulation
relating to any system and that have not been finally denied certification or
decertified, and (y) a list of all letters of inquiry from the FCC received by
an Avalon Company or Avalon Subsidiary since 1992 with regard to rate
restructuring that have not been finally resolved. For purposes of this
subsection the term "finally" means that there is no pending FCC or court
consideration or request for FCC or court review, reconsideration or appeal, and
the time for seeking any such review, reconsideration or appeal has expired.
(i) The Avalon Companies and Avalon Subsidiaries have filed with the
Franchising Authorities, the FCC and the Copyright Office all material forms,
reports, statements of accounts and other material information required to be
filed under the Franchises, the Communications Act, Section 111 of the Copyright
Act, the FCC Rules and Regulations and the rules and regulations of the
Copyright Office relating to Section 111, and all such forms, reports,
statements of account, and other information were correct in all material
respects at the time of filing. Parent has delivered or made available to
Purchaser true and correct copies of: (i) all reports, filings and
correspondence made or filed by the Avalon Companies, the Avalon Subsidiaries or
the predecessor operators of the Systems with the FCC or pursuant to FCC rules
and regulations for the past year, and (ii) all reports, filings and
correspondence made or filed by the Avalon Companies, the Avalon Subsidiaries or
the predecessor operators of the Systems with the Copyright Office or pursuant
to the Copyright Office rules and regulations for the past three years.
(j) (i) The Avalon Companies and Avalon Subsidiaries (and, to the
Knowledge of Sellers, the prior operators of the Systems) have paid in all
material respects all compulsory copyright and any other fees required under the
Copyright Act for the Systems, and (ii) neither of the Avalon Companies nor any
Avalon Subsidiary has any Knowledge of any material deficiency in the amount of
any compulsory copyright fee or other fee payments made and has not received
from the Copyright Office or any other Person any statement or claim respecting
an underpayment or nonpayment of any compulsory copyright fee or other fee
payment for the Systems.
(k) (i) The Avalon Companies and Avalon Subsidiaries (and, to the
Knowledge of Sellers, the prior operators of the Systems) have paid all
franchise and any other fees owed to all relevant Franchising Authorities
required for the Systems, and (ii) there is no deficiency in the amount of any
franchise payment made or to be made by the Avalon Companies and no Avalon
Company has received from any Franchising Authority any
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statement or claim respecting an underpayment or nonpayment of any franchise fee
for the Systems.
(l) (i) The Avalon Companies and Avalon Subsidiaries currently hold
all licenses, authorizations, consents or permits of the FCC (the "FCC
Licenses") necessary for the operation in all material respects of the Systems
as currently operated, (ii) all such FCC Licenses are in full force and effect,
(iii) there are not pending before the FCC any requests or applications to
modify, extend or renew any of the FCC Licenses and (iv) there are not pending
nor threatened, any proceedings that might result in the revocation, termination
or cancellation of any of the FCC Licenses. Sellers have delivered or made
available to Purchaser true and complete copies of all of the FCC Licenses of
the Avalon Companies and the Avalon Subsidiaries.
Section 4.18 Transactions with Affiliates. Schedule 4.18 sets forth all
arrangements between the Avalon Companies and Avalon Subsidiaries, on the one
hand, and any Seller, any affiliate of Seller, or any affiliate of the Avalon
Companies (other than the Avalon Subsidiaries), on the other hand, that will not
be terminated effective as of the Closing Date.
Section 4.19 Proprietary Rights. The Avalon Companies and the Avalon
Subsidiaries have been operated in such a manner so as not to violate or
infringe in any material respect upon any Proprietary Rights of others.
Section 4.20 Year 2000. The Avalon Companies and Avalon Subsidiaries have
initiated a review and assessment of all areas within its business that would
reasonably be expected to be adversely affected in a material way by the Year
2000 Problem (that is, the risk that computer applications used by them may be
unable to recognize and perform properly date-sensitive functions involving
certain dates prior to and any date after December 31, 1999), (ii) developed a
plan (the "Year 2000 Plan") for addressing the Year 2000 Problem on a timely
basis, and (iii) to date, implemented that plan in all material respects.
Section 4.21 Systems Information.
(a) Schedule 4.21(a) sets forth a materially true and accurate description,
on a System-by-System basis, of the following information relating to the
Systems as of the dates indicated and, in the case of clauses (i), (ii) and
(iii) below, as of the Closing Date:
(i) the approximate number of aerial and underground miles of plant
included in the assets of the Avalon Companies and Avalon Subsidiaries and
served by each headend;
(ii) the approximate number of single family homes and residential
multiple dwelling units passed by the Systems;
(iii) the MHZ capacity and channel capacity of each headend; and
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(iv) the number of subscribers served by the Systems and a description
of the calculation methodology used by the Avalon Companies and Avalon
Subsidiaries to calculate such subscribers.
(b) Schedule 4.21(e) sets forth a materially true and accurate
description of the following information relating to the Systems as of the date
of this Agreement:
(i) a description of the Basic Services and other services, e.g.,
expanded basic services, pay TV and a la carte services available from the
Systems, and the rates charged by the Avalon Companies and Avalon
Subsidiaries therefor, including all rates, tariffs and other charges for
cable television or other services provided by each System;
(ii) the stations and signals carried by the Systems and the channel
position of each such signal and station; and
(iii) the cities, towns, villages, boroughs and counties served by the
Systems.
(c) Each System is capable in all material respects of providing all
channels, stations and signals reflected as being carried on such System on
Schedule 4.21(e).
(d) Except as described on Schedule 4.21, and other than direct
broadcast satellite and satellite master antenna television, with respect to
each area in which the Systems currently provide cable television service: (i)
no Person is operating a cable television system or other non-satellite MVPD
other than a System in such area; (ii) no local franchising authority has
awarded a cable television franchise in such area to any Person other than the
Avalon Companies and Avalon Subsidiaries; and (iii) to the Knowledge of the
Avalon Companies or Avalon Subsidiaries, no MVPD has applied for a cable
television franchise to serve such area.
Section 4.22 Finders and Brokers. The Avalon Parties, the Avalon Companies,
the Avalon Subsidiaries and any affiliates thereof have not entered into any
contract with any Person which will result in the obligation of Purchaser, the
Avalon Companies or the Avalon Subsidiaries to pay any finder's fees, brokerage
or agent's commissions or other like payments in connection with the
negotiations leading to this Agreement or the consummation of the transactions
contemplated hereby.
Section 4.23 Additional Real Property Matters. Neither the Avalon Companies
nor any Avalon Subsidiaries has received any notice from any governmental body
(i) requiring it to make any material repairs or changes to its material real
property or the improvements located on such real property or (ii) giving notice
of any material governmental actions pending. There is no action, proceeding or
litigation pending (or, to the Knowledge of the Avalon Companies, contemplated
or threatened): (x) to take all or any portion of its material real property, or
any interest therein, by eminent domain; or (y) to modify the zoning of, or
other governmental rules or restrictions applicable to, such real property or
the use or development thereof.
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Section 4.24 Insurance, Surety Bonds, Damages. Set forth on Schedule 4.24
hereto is a correct list of all insurance policies and surety bonds of the
Avalon Companies and Avalon Subsidiaries now in effect, including the names of
the insureds and their addresses. The premiums on such insurance policies and
bonds have been currently paid, and such policies and bonds are valid,
outstanding and enforceable, in full force and effect and insure against risks
and liabilities and provide for coverage to the extent and in a manner required
of or deemed reasonably appropriate and sufficient by the Avalon Companies.
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF PURCHASER
-------------------------------------------
Each of the Purchaser and Guarantor hereby jointly and severally represents
and warrants to the Sellers that the statements contained in this Article V are
correct and complete as of the date of this Agreement and will be correct and
complete as of the Closing Date.
Section 5.1 Organization. Purchaser is a limited liability company, and
Guarantor is a corporation, each duly organized, validly existing and in good
standing under the laws of the State of Delaware.
Section 5.2 Authority. Each of Purchaser and Guarantor has all the
requisite power and authority to execute and deliver this Agreement and to
perform its obligations hereunder. The execution and delivery by Purchaser and
Guarantor of, the performance of Purchaser and Guarantor under, and the
consummation by Purchaser and Guarantor of the Transactions have been duly and
validly authorized by all action by or on behalf of each of Purchaser and
Guarantor. This Agreement constitutes the valid and legally binding obligation
of each of Purchaser and Guarantor, enforceable against each of them in
accordance with its terms, except as the same may be limited by Enforceability
Exceptions.
Section 5.3 Breach. The execution and delivery of this Agreement by
Purchaser and Guarantor does not, and the consummation of the Transactions by
Purchaser and Guarantor will not, (i) violate or conflict with the governing
documents of Purchaser or Guarantor, (ii) constitute a material breach or
default of, or give rise to any third-party right of termination, cancellation,
modification or acceleration under, any material agreement, understanding or
undertaking to which Purchaser or Guarantor is a party or by which it is bound,
or (iii) constitute a material violation of any material statute, law,
ordinance, rule, regulation, judgment, decree, order or writ of any judicial,
arbitral, public, or governmental authority having jurisdiction over Purchaser.
Section 5.4 Consents and Approvals. Neither the execution and delivery of
this Agreement by Purchaser or Guarantor nor the consummation of the
transactions contemplated hereby by Purchaser or Guarantor will require any
consent, approval, authorization or permit of, or filing with or notification
to, any governmental or regulatory authority, except (i) for filings required
under the Exchange Act, (ii) for notification pursuant to the HSR Act and
expiration or termination of the waiting period thereunder, and (iii) for
notices to, or consents and waivers from, the relevant Franchising Authorities
in connection with a change of control of the holders of the Franchises of the
Avalon Companies and Avalon
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Subsidiaries, and the FCC in connection with a change of control of the holders
of the FCC licenses of the Avalon Companies and Avalon Subsidiaries.
Section 5.5 Financing. Purchaser has, and will have on the Closing Date,
sufficient funds available to pay the amounts contemplated under Sections 2.3
and 2.4 and to pay all related fees and expenses payable by Purchaser arising in
connection with this Agreement and the Transactions. The payment of all such
amounts by Purchaser is not contingent upon the consummation of an initial
public offering of any class of equity securities or an offering of any debt
securities, in each case of the Purchaser or any of its Affiliates.
Section 5.6 No Violation to FCC Cross-Ownership Rules. Assuming Purchaser
or Guarantor were now in control of the Avalon Companies and Avalon
Subsidiaries, neither Purchaser nor Guarantor would be in violation of the
Communications Act, any FCC or other restrictions regarding the ownership of
media and related businesses that would materially adversely affect the ability
of Purchaser or Guarantor to own the Avalon Companies and Avalon Subsidiaries or
any material part of their business (in each case, assuming that Purchaser,
Guarantor and their affiliates have consummated all acquisitions of media and
related businesses which any of them has executed an agreement or letter of
intent to purchase that has not been terminated or expired), including without
limitation, such restrictions governing cross-ownership or national size
standards.
Section 5.7 Finders and Brokers. Neither Purchaser nor Guarantor, nor any
of their affiliates have entered into any contract with any Person which will
result in the obligation of Sellers to pay any finder's fees, brokerage or
agent's commissions or other like payments in connection with the negotiations
leading to this Agreement or the consummation of the transactions contemplated
hereby.
Section 5.8 Purchase for Own Account. The Purchaser is acquiring the
Purchased Securities for its own account, for the purposes of investment only,
and not with a view to the resale or distribution thereof within the meaning of
the Securities Act.
ARTICLE VI
PRE-CLOSING COVENANTS
---------------------
The Parties agree as follows with respect to the period between the
execution of this Agreement and the Closing.
Section 6.1 General. Each of the Parties will use its reasonable best
efforts to take all action and to do all things necessary, proper, or advisable
in order to consummate and make effective the Transactions. The Sellers and the
Avalon Companies will use reasonable efforts to satisfy, or to cause to be
satisfied, the conditions to the obligations of Purchaser to consummate the
Transactions, as set forth in Article VII. Purchaser will use its reasonable
efforts to satisfy, or to cause to be satisfied, the conditions to the
obligations of Sellers to consummate the Transactions, as set forth in Article
VII. Each Party will use its commercially reasonable efforts to challenge and
contest any litigation or claim brought against or otherwise involving such
Party (or its affiliates) that reasonably could result in the imposition of
orders or requirements that could cause the conditions to the Closing not to be
satisfied.
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Section 6.2 Notice and Consents. As soon as practicable, but in no event
later than the thirtieth (30th) day after the date of this Agreement, (i) Parent
will cause each of the Avalon Companies and Avalon Subsidiaries to give any
notices to, make any filings with, and use its reasonable best efforts to obtain
any authorizations, consents, and approvals of governments and governmental
agencies in connection with the matters referred to in Sections 3.4, 4.2 and 4.3
above and (ii) Purchaser will give any notices to, make any filings with, and
use its reasonable best efforts to obtain any authorizations, consents, and
approvals of governments and governmental agencies in connection with the
matters referred to in Section 5.4 above; provided, that each Party will afford
the other Party the opportunity to review, approve and revise the form of letter
or application proposed to request consent or form of written notice prior to
delivery to the third party whose consent is sought or to whom such notification
is required. The Parties shall cooperate to obtain all required consents and no
Party shall intentionally take any action or steps that would prejudice or
jeopardize the obtaining of any required consent. Parent shall not (and shall
cause the Avalon Companies and Avalon Subsidiaries not to) accept or agree or
accede to any modifications or amendments to, or the imposition of any condition
to the transfer of, any of their Franchises that are not acceptable to the
Purchaser; provided, that Purchaser's consent shall not be required to any such
modification, amendment or condition that is consistent with the capital
expenditures included in the Capital Plan or which would require, in the
aggregate, payments after the Closing not in excess of $1,000,000. Without
limiting the generality of the foregoing, each of the Parties will file (and
Parent will cause each of the Avalon Companies and Avalon Subsidiaries to file)
any Notification and Report Forms and related material that it may be required
to file with the Federal Trade Commission and the Antitrust Division of the
United States Department of Justice under the HSR Act, will use its reasonable
best efforts to obtain (and Parent will cause each of the Avalon Companies and
Avalon Subsidiaries to use its reasonable best efforts to obtain) a waiver from
the applicable waiting period, and will make (and Parent will cause each of the
Avalon Companies and Avalon Subsidiaries to make) any further filings pursuant
thereto that may be necessary, proper, or advisable in connection therewith.
Section 6.3 Operation of Business. Except as set forth on Schedule 6.3 or
as otherwise contemplated herein, from the date hereof until the Closing, each
of the Avalon Companies and the Subsidiaries shall conduct their business in the
Ordinary Course in all material respects (including making routine capital
expenditures and operating substantially in accordance with the Capital Plan,
pursuing ongoing and planned line extensions, placing conduit or cable in new
developments, fulfilling installation requests, completing disconnection work
orders and disconnecting and discontinuing service to customers whose accounts
are delinquent) and shall use their commercially reasonable efforts to preserve
intact their business organizations and relationships with third parties and
Franchises, and to keep available the services of their present officers and
employees in all material respects, continue marketing, advertising and
promotional expenditures with respect to their business in the Ordinary Course
in all material respects, and operate their business in material compliance with
all applicable legal requirements. Without limiting the generality of the
foregoing, Parent shall cause the Avalon Companies and Avalon Subsidiaries to:
(i) maintain their assets in good operating repair, order and condition,
ordinary wear and tear excepted; (ii) maintain equipment and inventory for their
Systems at normal historical levels consistent with its past practices (as
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adjusted to account for abnormally high inventory levels related to periodic
rebuild activity); (iii) maintain in full force and effect policies of insurance
with respect to their business in such amounts and with respect to such risks as
are currently in effect for their Systems; and (iv) maintain their books,
records and accounts with respect to the operation of their Systems in the
usual, regular and ordinary manner on a basis consistent with its past
practices. In addition, Parent shall deliver to Purchaser (x) true and complete
copies of all monthly statements of income and other financial information with
respect to the Avalon Companies and the Avalon Subsidiaries as is provided to
the lenders under the Bank Facility; and (y) as soon as reasonably possible but
in any event within five Business Days after the date of submission to the
appropriate governmental authority, copies of all FCC forms required to be filed
with any governmental authority with respect to rates and prepared with respect
to any of the Systems.
Section 6.4 Negative Covenants. Without limiting the covenants set forth in
Section 6.3, and except as reflected in the pro forma financial statements
included in the Form S-4 or as otherwise permitted by this Agreement, from the
date hereof until the Closing without the consent of Purchaser none of the
Avalon Companies or the Avalon Subsidiaries:
(i) will adopt or propose any material change in its Articles of
Incorporation or Bylaws or similar governing documents (including limited
liability company agreements);
(ii) will merge or consolidate with any other Person or acquire assets
from any other Person in excess of $5,000,000 in the aggregate;
(iii) will incur any Funded Debt other than (a) borrowings in the
Ordinary Course, (b) borrowings to enable the Avalon Companies and the
Avalon Subsidiaries to consummate transactions described in the Form S-4,
(c) other borrowings under the Bank Facility and (d) borrowings which can
be repaid at any time without incurring any penalties, premiums or other
like charges which would be payable by the Avalon Companies or the Avalon
Subsidiaries after the Closing;
(iv) will sell, license or otherwise dispose of any material assets or
property except (A) pursuant to existing contracts or commitments disclosed
herein or (B) in excess of $1,000,000 in the aggregate;
(v) will enter into, terminate, renew or amend in any material and
adverse respect any agreement or Franchise that would be required to be
disclosed on Schedule 4.17(b) or Schedule 4.18;
(vi) with such exceptions as do not, in the aggregate, have a Material
Adverse Effect, will take or agree or commit to take any action that would
knowingly make any representation and warranty set forth in Article III or
IV inaccurate at, or as of any time prior to, the Closing;
(vii) will make any Cost of Service Election;
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(viii) will enter into any agreement with or commitment to any
competitive access provider and/or local exchange company or any internet
access or on-line services provider with respect to the use or lease of any
of its assets;
(ix) will decrease the rate charged for any level of basic services,
expanded basic services or any pay TV or add, delete, retier or repackage
any analog programming services, in each case except to the extent required
under the 1992 Cable Act or law; provided, however, that if rates are
decreased in order to so comply, Parent will provide Purchaser with copies
of any FCC forms (even if not filed with any governmental authority) that
Parent used to determine that the new rates were required; or
(x) will agree or commit to do any of the foregoing.
Section 6.5 Full Access.
(a) Parent will permit, and will cause each of the Avalon Companies
and Avalon Subsidiaries to permit, representatives of Purchaser to have full
access at all reasonable times, and in a manner so as not to interfere with the
normal business operations of the Avalon Companies and Avalon Subsidiaries, to
all premises, properties (including for purposes of obtaining Phase I
environmental assessments), personnel, books, records (including tax records),
contracts, and documents of or pertaining to each of the Avalon Companies and
Avalon Subsidiaries; provided that any such access to personnel will be (i)
solely with the prior consent of the Parent (which consent the Parent will not
unreasonably withhold) and (ii) in the presence of a representative of the
Parent, if the Parent so requires.
(b) Purchaser will treat and hold as such any Confidential Information
it receives from any of the Sellers, the Avalon Companies and Avalon
Subsidiaries or any of their representatives in the course of the reviews
contemplated by this Section 6.4, will not use any of the Confidential
Information except in connection with this Agreement, and, if this Agreement is
terminated for any reason whatsoever, will return to the Parent all tangible
embodiments (and all copies) of the Confidential Information which are in its
possession.
Section 6.6 Notice of Developments. Each Seller shall promptly notify
Purchaser of any development causing a breach (or which could reasonably be
expected to cause a breach) of any of its representations and warranties in
Article III or IV above.
Section 6.7 Additional Filings. Parent will use commercially reasonably
efforts to cause the Avalon Companies and Avalon Subsidiaries to make any
submissions or filings reasonably requested by the Purchaser to insure
compliance of all their Systems with requirements of the FCC or Copyright Office
regulations, including submission of any past due or corrective filings,
requests for reinstatement or relicensing of lapsed licenses, and any notices,
requests for authorization or similar filings.
Section 6.8 Year 2000 Remediation Program. Parent shall cause the Avalon
Companies and the Avalon Subsidiaries to: (i) until the Closing Date, use
commercially reasonably efforts to continue to implement the Year 2000 Plan,
(ii) assist and cooperate with
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Purchaser in the refinement and implementation of the Year 2000 Plan, (iii)
assist and cooperate with Purchaser in developing and implementing plans for
Purchaser to continue the Year 2000 Plan after the Closing Date, and (iv)
implement on a reasonable basis all solutions identified as reasonably necessary
by vendors, distributors and manufacturers of the computers systems used by them
to address the Year 2000 Problem.
Section 6.9 Offers. The Sellers (and their directors, officers, employees,
representatives and agents) shall not directly or indirectly, (i) offer the
Units, the Option, the Stock or substantially all of the assets of the Avalon
Companies or the Avalon Subsidiaries for sale; (ii) solicit, encourage or
entertain offers for the Units, the Option, the Stock or the assets of the
Avalon Companies or the Avalon Subsidiaries; (iii) initiate negotiations or
discussions for the sale of the Units, the Option, the Stock or substantially
all of the assets of the Avalon Companies or the Avalon Subsidiaries; or (iv)
make information about the Units, the Option, the Stock or the assets of the
Avalon Companies or the Avalon Subsidiaries available to any third party in
connection with the possible sale of the Units, the Option, the Stock or the
assets of the Avalon Companies or the Avalon Subsidiaries prior to the Closing
Date.
Section 6.10 Tax Covenants.
(a) Section 754 Elections; Allocation of Purchase Price.
(i) To the extent not already in effect, each Avalon Company and
Avalon Subsidiary that is treated as a partnership for federal income tax
purposes shall timely file an election under Section 754 of the Code so
that such entities shall be able to adjust the tax basis of their assets
(collectively, the "Partnership Assets") under Section 743(b) of the Code
as a result of the transactions contemplated herein.
(ii) The total Purchase Price plus the Option Price shall be
allocated among the Stock and the Units and the amount thereof allocated to
the Units plus the liabilities of the Company allocable to the Units(the
"Unit Purchase Price") shall be allocated among the proportionate amount of
the Partnership Assets attributable to the Units, all in an allocation
agreement (the "Allocation Agreement") to be prepared in accordance with
the rules under Sections 743(b), 751, 755 and 1060 of the Code. Purchaser
shall deliver a draft of the Allocation Agreement to Sellers at least
thirty (30) days prior to the Closing Date for approval and consent, and
Purchaser and Sellers shall mutually agree upon the Allocation Agreement
prior to the Closing Date. In this regard, Purchaser and Sellers agree that
for purposes of such Allocation Agreement, the Unit Purchase Price shall be
allocated between the tangible assets and Franchises by allocating an
amount to the tangible assets of the Company and its Subsidiaries equal to
the portion of the book value of such tangible assets attributable to the
Units, and the remainder to the Franchises of the Company and its
Subsidiaries. Neither Purchaser nor Sellers shall unreasonably withhold
their approval and consent with respect to the Allocation Agreement.
Purchaser and Sellers agree that the Allocation Agreement shall be amended
to reflect any post-Closing adjustments determined under Section 2.7 of
this Agreement. Unless otherwise required by applicable law, Purchaser,
Sellers and each Avalon Company and Avalon Subsidiary agree to act, and
cause their respective affiliates to act, in accordance with the
computations and allocations contained in the
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Allocation Agreement in any relevant Tax Returns or similar filings
(including any forms or reports required to be filed pursuant to Section
1060 of the Code ("1060 Forms")), to cooperate in the preparation of any
1060 Forms, to file such 1060 Forms in the manner required by applicable
law and to not take any position inconsistent with such Allocation
Agreement upon examination of any tax refund or refund claim, in any
litigation or otherwise.
(b) Certain Taxes. All transfer, documentary, sales, use, stamp,
registration and other similar Taxes and fees (including any penalties and
interest but excluding any income tax) incurred in connection with the
transactions consummated pursuant to this Agreement shall be borne equally by
Purchaser and Sellers (i.e., 50% by Purchaser on the one hand, and the Seller on
the other hand). Purchaser and Sellers will cooperate in all reasonable respects
to prepare and file all necessary Tax Returns and other documentation with
respect to all such transfer, documentary, sales, use, stamp, registration and
other Taxes and fees.
(c) Tax Elections. Except as set forth on Schedule 6.10(c), from and
after the date of this Agreement, no Avalon Company or Avalon Subsidiary shall,
without the prior written consent of the Purchaser (which consent shall not be
unreasonably withheld), make, or cause or permit to be made, any Tax election
that would bind either Avalon Company, any Avalon Subsidiary, or Purchaser in
any material respect.
(d) Tax Return Positions. The Parent shall prepare or cause to be
prepared and file or cause to be filed all Tax Returns for the Avalon Companies
and the Avalon Subsidiaries that are due on or before the Closing Date. Such Tax
Returns shall be prepared in accordance with each of the Avalon Company's or
Avalon Subsidiary's past custom and practice, and the Parent shall permit
Purchaser to review and comment on each such Tax Return prior to filing. Neither
of the Avalon Companies nor any Avalon Subsidiary shall take a position on any
Tax Return with respect to such entity's federal tax status (i.e., partnership,
S corporation, C corporation, or disregarded entity) different than that set
forth on Schedule 4.11.
(e) Purchaser shall cause the Company to prepare its Income Tax
returns for periods ending before the Closing Date, on the Closing Date, or
including the Closing Date (with respect to the portion of the taxable period
ending on the Closing Date) which are due after the Closing Date in accordance
with the allocation provision in the Company's LLC Agreement at the time of the
Closing. For purposes of Section 6.4, any changes to such allocation provisions
shall be deemed material. The Purchaser will permit the Sellers to review and
comment on each such Tax Return prior to filing. As required, Code Regulation
Section 1.706-1(C)(2) shall govern the partnership allocations of the Company
based on an interim closing of its books .
(f) The Purchaser, Parent and Avalon Investors agree to be governed by
Section 9.5 of the Company's LLC Agreement regarding Tax Controversies for any
taxable period or year for which either New England Holdings or Avalon Investors
were members of the Company (including, for this purpose, any taxable period or
year for which either such party was a member for any portion thereof). In
addition, Purchaser agrees to extend the provisions
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regarding the Class A Units contained in Section 9.5 of the Company's LLC
Agreement to the holders of the Class B-1 Units held by New England Holdings.
Section 6.11 Restructuring. Parent agrees to cooperate, and to cause each
of the Avalon Companies and Avalon Subsidiaries to cooperate, with Purchaser
prior to the Closing in restructuring the legal form or ownership of any of the
Avalon Companies or Avalon Subsidiaries, changing the form of equity ownership
in either of the Avalon Companies, permitting the Purchaser to purchase
interests in the Avalon Subsidiaries from either an Avalon Company or an Avalon
Subsidiary, or effecting other restructurings of the transactions contemplated
herein; provided, however, that such cooperation may be withheld if and to the
extent either Seller determines, in its sole discretion, that such cooperation:
(i) would, or could reasonably be expected to, have any adverse effect on any
Seller or any direct or indirect equity holder of any Seller (including the
partners of any direct or indirect equity holder which is a partnership for
federal Tax purposes), including, without limitation, with respect to (A) Taxes
or (B) liabilities to be assumed or retained, directly or indirectly, by the
Sellers or any such holders, but excluding in the case of (A) and (B) any effect
for which Purchaser agrees to provide compensation (including indemnification)
which each Seller determines in its sole discretion to be satisfactory; (ii)
would, or could reasonably be expected to, delay the Closing; or (iii) would
result in a breach of the Company's LLC Agreement or Members Agreement.
ARTICLE VII
CONDITIONS TO THE CLOSING
-------------------------
Section 7.1 Conditions to the Obligations of the Purchaser. The obligations
of Purchaser to consummate the Transactions are subject to the satisfaction of
the following further conditions:
(i) the applicable waiting period under the HSR Act relating to the
Purchase and Sale shall have expired or been terminated;
(ii) the governmental and third party notices, authorizations,
consents, orders or approvals set forth on Schedule 7.1 shall have been
obtained and be in effect;
(iii) (A) no federal, state or foreign court, arbitrator or
governmental body, agency or official shall have issued any order, and
there shall not have been adopted or promulgated any statute, rule or
regulation, prohibiting the consummation of the Purchase and Sale, or,
except for orders, statutes, rules and regulations of general effect,
limiting or restricting Purchaser's conduct or operation of the business of
the Company after the Purchase and Sale in a manner that would not have a
Material Adverse Effect, and (B) no proceeding seeking to prohibit, alter
or prevent the Purchase and Sale shall have been instituted by any
governmental agency or authority before any court, arbitrator or
governmental body, agency or official and be pending;
(iv) (A) each of the Avalon Parties shall have performed in all
material respects all of its obligations hereunder required to be performed
by it at or prior to the Closing and the representations and warranties set
forth in Articles III and
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IV of this Agreement shall be true (disregarding all exceptions therein for
materiality and Material Adverse Effect) at and as of the Closing Date as
if remade at and as of such date (disregarding all exceptions therein for
materiality and Material Adverse Effect) at and as of such date with such
exceptions as would not, individually or in the aggregate, have a Material
Adverse Effect and (B) Purchaser shall have received a certificate signed
by the Parent on behalf of the Avalon Parties to the foregoing effect;
(v) Purchaser shall have received (A) the documents to be delivered by
Parent pursuant to Section 2.5 of the Agreement and (B) all customary
documents that the Purchaser may reasonably request relating to the
existence of the Avalon Companies and the Avalon Subsidiaries and the
authority of each of the Avalon Parties to enter into this Agreement, all
in form and reasonably satisfactory to the Purchaser;
(vi) all notices to and authorizations, consents, orders and approvals
from applicable Franchise Authorities necessary to transfer control of
Franchises in which in the aggregate the Applicable Percentage of the Basic
Subscribers of the Company and its Subsidiaries are located shall have been
obtained and be in effect. For purposes of this Section 7.1(vi), the term
"Applicable Percentage" means (x) in the event that the Closing occurs on
or prior to November 30, 1999, ninety-percent (90%), or (y) in the event
the Closing occurs on or after December 1, 1999, eighty-five percent (85%);
and
(vii) Purchaser shall have received a certification by each of the
Sellers pursuant to Treasury Regulation Section 1.1445-2(b)(2) that it is
not a foreign person.
Section 7.2 Conditions to the Obligations of the Avalon Parties. The
obligations of the Avalon Parties to consummate the Transactions are subject to
the satisfaction of the following further conditions:
(i) the applicable waiting period under the HSR Act relating to the
Purchase and Sale shall have expired or been terminated;
(ii) the governmental and third party notices, authorizations,
consents, orders or approvals set forth on Schedule 7.1 shall have been
obtained and be in effect;
(iii) (A) Purchaser shall have performed in all material respects all
of its obligations hereunder required to be performed by it at or prior to
the Closing and the representations and warranties of the Purchaser
contained in this Agreement shall be true (disregarding all exceptions
therein for materiality and Material Adverse Effect) at and as of the
Closing as if made at and as of such time (except for representations and
warranties made as of a specific date, which shall be true (disregarding all
exceptions therein for materiality and Material Adverse Effect) at and as of
such date) with such exceptions as would not, individually or in the
aggregate, have a Materially Adverse Effect, and (B) the Parent shall have
received a certificate signed by Purchaser to the foregoing effect;
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(iv) Parent shall have received (A) the documents to be delivered by
Purchaser pursuant to Section 2.6 of this Agreement, and (B) all customary
documents that Parent may reasonably request relating, to the existence of
Purchaser and Guarantor and the authority of Purchaser and Guarantor to
enter into this Agreement, all in form and substance reasonably satisfactory
to Parent; and
(v) (A) no federal, state or foreign court, arbitrator or governmental
body, agency or official shall have issued any order, and there shall not
have been adopted or promulgated any statute, rule or regulation,
prohibiting the consummation of the Purchase and Sale, and (B) no proceeding
seeking to prohibit, alter or prevent the Purchase and Sale shall have been
instituted by any governmental agency or authority before any court,
arbitrator or governmental body, agency or official and be pending.
ARTICLE VIII
TERMINATION
-----------
Section 8.1 Termination. This Agreement may be terminated at any time prior
to the Closing:
(a) at any time, by written agreement of Parent and Purchaser;
(b) on or after the Termination Date, if the Closing has not occurred,
(i) by Purchaser, by written notice to the Parent:
(A) at any time when a Seller, but not Purchaser, is in Material
Breach;
(B) at any time when neither Purchaser nor any Seller is in
Material Breach; or
(C) at any time when both Purchaser and a Seller are in Material
Breach; or
(ii) by Parent, by written notice to Purchaser:
(A) at any time when Purchaser, but neither Seller, is in
Material Breach;
(B) at any time when neither Purchaser nor any Seller is in
Material Breach; or
(C) at any time when both Purchaser and a Seller are in Material
Breach; and
(c) at any time on or after May 19, 1999, by Parent, if Purchaser has
failed to deliver $50,000,000 to the Pre-Closing Escrow Agent to be held as the
Pre-Closing Escrow Funds.
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The "Termination Date" will be the earlier of March 31, 2000, or any date after
the day on which the Closing was to have occurred under Section 2.2 on which all
of the conditions to the Closing are satisfied or waived or will be satisfied by
the delivery of documents or tender of payment at the Closing.
Section 8.2 Effect of Termination. If this Agreement is terminated pursuant
to Section 8.1, this Agreement shall become void and of no effect with no
liability on the part of any Party hereto (including for any breach hereof),
except that (i) the agreements contained in this Section 8.2, Section 6.5(b) and
Section 10.8 shall survive the termination hereof, and (ii) the Pre-Closing
Escrow Agreement and the Confidentiality Agreement shall survive the termination
hereof. Without limiting the foregoing, the Parties agree that the payment of
the Pre-Closing Escrow Fund to the Company as contemplated in the Pre-Closing
Escrow Agreement shall serve as liquidated damages for a Material Breach by
Purchaser in the event of a termination under Section 8.1(b)(ii)(A). Any
disbursements from the Pre-Closing Escrow Fund for the benefit of Sellers or
Parent shall be made to the Company.
ARTICLE IX
POST-CLOSING COVENANTS
----------------------
Section 9.1 Further Assurances. On and after the Closing Date, the Avalon
Parties and Purchaser will take all appropriate action and execute (or cause to
be executed) all documents, instruments or conveyances of any kind which may be
reasonably necessary or advisable to carry out any of the provisions hereof,
including amending and restating the Company's LLC Agreement to reflect the
Transactions and the transfers of the Units contemplated hereunder.
Section 9.2 Survival of Representations and Warranties. Except for the
representations and warranties set forth in Sections 3.2, 3.5, 4.4, 4.5(b),
4.22, 5.2, 5.7 and 5.8 which shall survive indefinitely, the representations and
warranties provided for in this Agreement shall not survive beyond the Closing
Date. The provisions of this Section 9.2 shall not limit any covenant or
agreement of the parties hereto which, by its terms, contemplates performance
after the Closing Date.
Section 9.3 Cooperation. None of the Avalon Parties or the Avalon
Subsidiaries will take any action that is designed or intended to have the
effect of discouraging any lessor, licensor, customer, supplier, or other
business associate of any of the Avalon Companies or Avalon Parties from
maintaining the same business relationships with such Persons after the Closing
as it maintained with such Persons prior to the Closing. The Avalon Parties will
refer all customer inquiries relating to the businesses of the Company to the
Company from and after the Closing.
Section 9.4 Confidentiality. From and after the Closing, the Sellers will
treat and hold as such all of the Confidential Information, refrain from using
any of the Confidential Information except in connection with this Agreement,
and deliver promptly to the Purchaser or destroy, at the request and option of
Purchaser, all tangible embodiments (and all copies) of the Confidential
Information which are in its possession. In the event that any Avalon Party is
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requested or required (by oral question or request for information or documents
in any legal proceeding, interrogatory, subpoena, civil investigative demand, or
similar process) to disclose any Confidential Information, such Avalon Party
will notify Purchaser promptly of the request or requirement so that Purchaser
may seek an appropriate protective order or waive compliance with the provisions
of this Section 9.4. If, in the absence of a protective order or the receipt of
a waiver hereunder, any Avalon Party is, on the advice of counsel, compelled to
disclose any Confidential Information to any tribunal or else stand liable for
contempt, such Avalon Party may disclose the Confidential Information to the
tribunal; provided, that such Avalon Party shall use its best efforts to obtain,
at the reasonable request of Purchaser, an order or other assurance that
confidential treatment will be accorded to such portion of the Confidential
Information required to be disclosed as Purchaser shall designate.
Section 9.5 Name Change. Promptly after the Closing, Purchaser shall
change, or cause the Avalon Companies to change, the names of each of the Avalon
Companies and the Avalon Subsidiaries to names which shall not include the word
"Avalon" or any derivative thereof or name similar thereto. Purchaser
acknowledges and agrees after the Closing, as among Parent, Purchaser, the
Avalon Companies and the Avalon Subsidiaries, Parent shall retain all interests
in and rights to, and neither Purchaser nor any Avalon Company or Avalon
Subsidiary will use, the name "Avalon" or any derivative thereof or name similar
thereto; provided, however, Purchaser shall be entitled to use the phrase
"previously operated by Avalon" or similar phrases in connection with its
correspondence with customers, regulators and other parties in connection with
the Systems; provided, further, Purchaser shall not be required to remove an
name or mark incorporating the name "Avalon" or similar names to the extent that
such names or marks are affixed to equipment in customer homes or properties or
to the extent that such removal would be impracticable.
Section 9.6 Public Announcements. The timing and content of all
announcements regarding any aspect of this Agreement or the transactions
contemplated hereto to the financial community, government agencies, employees
or the general public shall be mutually agreed upon in advance by each of the
Parties hereto: provided, that each Party hereto may make any such announcement
which it in good faith believes, based on advice of counsel, is necessary or
advisable in connection with any requirement of law or regulation, it being
understood and agreed that each Party shall promptly provide the other Parties
hereto with copies of any such announcement and, if practicable, such copies
shall be provided prior to the making of any such announcement.
Section 9.7 Cooperation on Tax Matters.
(i) Purchaser and Sellers shall cooperate fully, as and to the extent
reasonably requested by the other party, in connection with the filing of
Tax Returns pursuant to this Section 9.7 and any audit, litigation, or
other proceeding with respect to Taxes. Such cooperation shall include the
retention and (upon the other party's request) the provision of records and
information which are reasonably relevant to any such audit, litigation, or
other proceeding and making employees available on a mutually convenient
basis to provide additional information and explanation of any material
provided hereunder. Purchaser and Sellers agree (A) to retain all books and
records with respect to Tax matters pertinent to any Avalon Company or
Avalon
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Subsidiary relating to any taxable period beginning before the Closing Date
until the expiration of the statute of limitations (and, to the extent
notified by Purchaser or Sellers any extensions thereof) of the respective
taxable periods, and to abide by all record retention agreements entered
into with any taxing authority, and (B) to give the other party reasonable
written notice prior to transferring, destroying or discarding any such
books and records and, if the other party so requests, Purchaser or Sellers
as the case may be, shall allow the other party to take possession of such
books and records to the extent they would otherwise be destroyed or
discarded.
(ii) Purchaser and the Sellers further agree, upon request, to use
commercially reasonable efforts to obtain any certificate or other document
from any Governmental Authority or any other Person as may be necessary to
mitigate, reduce or eliminate any Tax that could be imposed (including
Taxes with respect to the transactions contemplated hereby).
(iii) Purchaser, on one hand, and Sellers, on the other hand, agree
that if any of them receives any notice of an audit or examination from any
Governmental Authority with respect to Taxes of either of the Avalon
Companies or any of the Avalon Subsidiaries for any taxable period or
portion thereof ending on or prior to the Closing Date, then the recipient
of such notice shall, within three (3) business days of the receipt
thereof, notify and provide copies of such notice to the other party, as
the case may be, in accordance with the notice provisions of Section 10.2.
ARTICLE X
MISCELLANEOUS
-------------
Section 10.1 Assignment. Neither this Agreement nor any of the rights or
obligations hereunder may be assigned by the Party hereto without the prior
written consent of each other Party, except that Purchaser may assign its rights
and obligations under this Agreement to an Affiliate of Purchaser or an entity
in which Paul G. Allen has a direct or indirect equity interest of at least
$100,000,000; provided, however, that no such assignment shall be permitted if
it could reasonably be expected to delay the Closing; provided, further, that no
such assignment shall relieve Purchaser or Guarantor of their obligations
hereunder. Subject to the foregoing, this Agreement shall be binding upon and
inure to the benefit of the Parties hereto and their respective heirs, legal
representatives, successors and permitted assigns. This Agreement shall be for
the sole benefit of the Parties hereto and their respective heirs, successors,
permitted assigns and legal representatives and is not intended, nor shall be
construed, to give any Person, other than the Parties hereto and their
respective heirs, successors, assigns and legal representatives, any legal or
equitable right, remedy or claim hereunder.
Section 10.2 Notices. Any notice, request, demand, waiver, consent,
approval or other communication which is required or permitted hereunder shall
be in writing. All such notices shall be delivered personally, by certified
mail, return receipt requested by reputable overnight courier (costs prepaid,
recipient's signature required), and shall be deemed given or
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made upon receipt thereof. All such notices are to be given or made to the
parties at the following addresses (or to such other address as any party may
designate by a notice given in accordance with the provisions of this Section):
If to Purchaser or Guarantor to:
-------------------------------
Charter Communications, Inc.
12444 Powerscourt Drive, Suite 100
St. Louis, Missouri 63131
Attention: Jerald L. Kent, President
Telecopy: (314) 965-8793
With copies (which shall not constitute notice to Purchaser
-----------------------------------------------------------
or Guarantor) to:
----------------
Curtis S. Shaw, Esq.
Senior Vice President & General Counsel
Charter Communications, Inc.
12444 Powerscourt Drive
St. Louis, Missouri 63131
Telecopy: (314) 965-8793
and to:
------
Irell & Manella LLP
1800 Avenue of the Stars, Suite 900
Los Angeles, California 90067
Attention: Alvin G. Segel, Esq.
Telecopy: (310) 203-7199
If to any Avalon Party, to:
--------------------------
Avalon Cable, L.L.C.
800 Third Avenue
Suite 3100
New York, NY
Attention: Joel C. Cohen
and to:
------
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Avalon Cable, L.L.C.
c/o ABRY Partners, Inc.
18 Newbury Street
Boston, MA 02116
Attention: Peggy Koenig
47
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With copies (which shall not constitute notice to such
------------------------------------------------------
Persons) to:
-----------
Kirkland & Ellis
153 East 53/rd/ Street, 39/th/ Floor
New York, NY 10022
Attention: John L. Kuehn, Esq.
and to:
------
Cleary, Gottlieb, Steen & Hamilton
One Liberty Plaza
New York, NY 10006
Attention: Michael L. Ryan, Esq.
Section 10.3 Choice of Law. This Agreement shall be governed by, and
construed in accordance with, the internal laws of the State of New York,
without reference to the choice of law or conflicts of law principles thereof.
Section 10.4 Entire Agreement; Amendments and Waivers. This Agreement,
together with all Exhibits and Schedules hereto, constitutes the entire
agreement among the Parties pertaining to the subject matter hereof and
supersedes all prior agreements, understandings, negotiations and discussions,
whether oral or written, of the Parties; provided, that the Confidentiality
Agreement shall survive the execution and delivery of this Agreement. No
supplement, modification or waiver of this Agreement shall be binding unless
executed in writing by the Party to be bound thereby. No waiver of any of the
provisions of this Agreement shall be deemed or shall constitute a waiver of any
other provision hereof (whether or not similar), nor shall such waiver
constitute a continuing waiver unless otherwise expressly provided.
Section 10.5 Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
Section 10.6 Invalidity. In the event that any one or more of the
provisions contained in this Agreement or in any other instrument referred to
herein, shall, for any reason, be held to be invalid, illegal or unenforceable
in any respect, such invalidity, illegality or unenforceability shall not affect
any other provision of this Agreement or any other such instrument.
Section 10.7 Headings. The headings of the Articles and Sections herein are
inserted for convenience of reference only and are not intended to be a part of
or to affect the meaning or interpretation of this Agreement.
Section 10.8 Expenses. The Sellers will be liable for the costs and
expenses of the Sellers, the Avalon Companies, and the Avalon Subsidiaries
incurred in connection with the negotiation, preparation, execution and
performance of this Agreement and the consummation of the transactions
contemplated hereby; provided, however, that the expenses incurred by the Avalon
Parties in connection with the preparation and filing of any application under
the HSR
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Act or with the FCC, any Franchising Authorities or any other governmental
authority shall be paid by the Purchaser. Purchaser will be liable for the costs
and expenses of Purchaser incurred in connection with the negotiation,
preparation, execution and performance of this Agreement and the consummation of
the transactions contemplated hereby.
Section 10.9 Specific Performance. Each of the Parties acknowledges and
agrees that the other party would be damaged irreparably in the event any of the
provisions of this Agreement are not performed in accordance with their specific
terms or otherwise are breached. Accordingly, each party agrees that the other
party shall be entitled to an injunction or injunctions to prevent breaches of
the provisions of this Agreement and to enforce specifically this Agreement and
the terms and provisions hereof in any action instituted in any court of the
United States or any state thereof having jurisdiction over the parties and the
matter (subject to Section 10.3) without the requirement of posting a bond or
other security therefor, in addition to any other remedy to which they may be
entitled, at law or in equity.
Section 10.10 Waiver of Jury Trial. Each of the parties hereto waives to
the fullest extent permitted by law any right it may have to trial by jury in
respect of any claim, demand, action or cause of action based on, or arising out
of, under or in connection with this Agreement, or any course of conduct, course
of dealing. verbal or written statement or action of any party hereto, in each
case whether now existing or hereafter arising, and whether in contract, tort,
equity or otherwise. The parties to this Agreement each hereby agrees that any
such claim, demand, action or cause of action shall be decided by court trial
without a jury and that the parties to this Agreement may file an original
counterpart of a copy of this Agreement with any court as evidence of the
consent of the parties hereto to the waiver of their right to trial by jury.
Section 10.11 No Strict Construction. The Parties 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, 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.
Section 10.12 Certain Concerns of the Sellers. Each of the Sellers
acknowledges and agrees that, as between the Sellers, any allocation of (i)
payments of the Purchase Price, (ii) expenses of the Sellers in connection with
the Transactions, and (iii) liabilities for breaches of representations or
warranties under this Agreement shall be governed exclusively by the terms and
conditions of the Members Agreement dated as of November 6, 1998 (as in effect
from time to time, the "Members Agreement") by and among the Avalon Parties and
certain other Persons party thereto.
* * * * *
49
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement
as of the date and year first above written.
AVALON CABLE HOLDINGS LLC
By: -----------------------------------------
Name: Joel C. Cohen
Title: President and Chief Executive Officer
AVALON INVESTORS, L.L.C.
By: ------------------------------------------
Name: David Brown
Title: President
AVALON CABLE OF MICHIGAN HOLDINGS, INC.
By: ------------------------------------------
Name: Joel C. Cohen
Title: President and Chief Executive Officer
AVALON CABLE LLC
By: ------------------------------------------
Name: Joel C. Cohen
Title: President and Chief Executive Officer
50
<PAGE>
CHARTER COMMUNICATIONS, INC.
By: ------------------------------------------
Name: Curtis S. Shaw
Title: Senior Vice President
CHARTER COMMUNICATIONS HOLDINGS, LLC
By: ------------------------------------------
Name: Curtis S. Shaw
Title: Senior Vice President
51
<PAGE>
Exhibit 3.1
CERTIFICATE OF FORMATION
OF
AVALON CABLE OF MICHIGAN 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
of Michigan 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 FORMATION
OF
AVALON CABLE OF NEW ENGLAND LLC
The undersigned, an authorized natural person, for the purpose of forming a
limited liability company, under the provisions and subject to the requirements
of the State of Delaware (particularly Chapter 18, Title 6 of the Delaware Code
and the acts amendatory thereof and supplemental thereto, and known, identified,
and referred to as the "Delaware Limited Liability Company Act"), hereby
certifies that:
FIRST: The name of the limited liability company (hereinafter called the
"limited liability company") is Avalon Cable of New England LLC.
SECOND: The address of the registered office and the name and the address
of the registered agent of the limited liability company required to be
maintained by Section 18-104 of the Delaware Limited Liability Company Act are
Corporation Service Company, 1013 Centre Road, Wilmington, Delaware 19805.
Executed on September 3, 1997.
/s/ Ann Schram
--------------------------------------------
Ann Schram, Authorized Person
<PAGE>
EXHIBIT 3.3
CERTIFICATE OF INCORPORATION
OF
AVALON CABLE FINANCE, INC.
ARTICLE ONE
-----------
The name of the corporation is Avalon Cable 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, Barbara A. Beach, 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 3.4
RESTATED ARTICLES OF INCORPORATION OF SURVIVING
CORPORATION
ARTICLES OF INCORPORATION-FOR PROFIT
OF
AVALON CABLE OF MICHIGAN, INC.
Name of Corporation
A TYPE OF CORPORATION INDICATED BELOW
Indicate type of domestic corporation:
X Business-stock (15 Pa.C.S. (S) 1306)
- -----
_____ Business-nonstock (15 Pa.C.S. (S) 2102)
_____ Business-statutory close (15 Pa.C.S. (S) 2303)
_____ Management (15 Pa.C.S. (S) 2702)
_____ Professional (15 Pa.C.S. (S) 2903)
_____ Insurance (15 Pa.C.S. (S) 3101)
_____ Cooperative (15 Pa.C.S. (S) 7102)
In compliance with the requirements of the applicable provisions of 15
Pa.C.S. (relating to corporations and unincorporated associations) the
undersigned, desiring to incorporate a corporation for profit hereby, state(s)
that:
1. The name of the corporation is: Avalon Cable of Michigan, Inc.
2. The (a) address of this corporation's initial registered office in this
Commonwealth or (b) name of its commercial registered office provider and the
country of venue is:
(a) Number and street City State Zip County
(b) c/o CT Corporation System Philadelphia
Name of Commercial Registered Office Provider County
For a corporation represented by a commercial registered office provider, (a)
the county in (b) shall be deemed the county in which the corporation is located
for venue and official publication purposes.
3. The corporation is incorporated under the provisions of the Business
Corporation Law of 1988.
4. The aggregate number of shares authorized is: 1,000 (other provisions, if
any, attach 8 1/2 x 11 sheet)
<PAGE>
5. The name and address, including number and street, if any, of each
incorporator is:
Name Address
Thaddine G. Gomez 200 E. Randolph Dr., Chicago, IL 60601
6. The specified effective date, if any, is:
month day year hour, if any
7. Additional provisions of the articles, if any, attach and 8 1/2 x 11 sheet.
See Annex A.
8. Statutory close corporation only: Neither the corporation nor any
shareholder shall make an offering of any of its shares of any class that would
constitute a "public offering" within the meaning of the Securities Act of 1933
(15 U.S.C. (S) 77a et seq.).
9. Cooperative corporations only (Complete and strike out inapplicable term)
The common bond of membership among its members/shareholders is:
IN TESTIMONY WHEREOF, the incorporator(s) has (have) signed these Articles
of Incorporation this 9th day of July, 1998.
/s/ Thaddine G. Gomez
------------------------------------
Thaddine G. Gomez
(Signature)
<PAGE>
ANNEX A
TO
ARTICLES OF INCORPORATION - FOR PROFIT
OF
AVALON CABLE OF MICHIGAN, INC.
7. Notwithstanding any bylaw of the Corporation to the contrary, Section 2538
(Adoption of Transactions with Interested Shareholders) and the provisions
contained in Subchapters E (Control Transactions), G (Control-Share
Acquisitions), H (Disgorgement by Certain Controlling Shareholders Following
Attempts to Acquire Control), I (Severance Compensation for Employees Terminated
Following Certain Control-Share Acquisitions) and J (Business Combination
Transactions - Labor Contracts) of Chapter 25 of the Pennsylvania Business
Corporation Law of 1988, as it may be amended from time to time, shall not be
applicable to the Corporation.
<PAGE>
EXHIBIT 3.5
LIMITED LIABILITY COMPANY AGREEMENT
OF
AVALON CABLE OF MICHIGAN LLC
This Limited Liability Company Agreement (this "Agreement") of Avalon
---------
Cable of Michigan LLC is entered into as of November 6, 1998 by Avalon Cable
LLC, a Delaware limited liability company, as sole member (the "Member").
------
The Member hereby forms a limited liability company pursuant to and in
accordance with the Delaware Limited Liability Company Act (6 Del.C. (S) 18-101,
------
et seq.), as amended from time to time (the "Act"), and hereby agrees as
- -- ---
follows:
1. Name. The name of the limited liability company formed hereby
----
(the "Company") is Avalon Cable of Michigan LLC.
-------
2. Purpose. The Company is formed for the object and purpose of,
-------
and the nature of the business to be conducted and promoted by the Company is,
engaging in any lawful act or activity for which limited liability companies may
be formed under the Act and engaging in any and all activities necessary or
incidental to the foregoing.
3. Members. The name and mailing address of the sole Member is as
-------
follows:
Name Address
---- -------
Avalon Cable LLC 201 East 69th Street
Penthouse G
New York, NY 10021
4. Powers. The Member, as the sole Member of the Company, shall
------
manage the Company in accordance with this Agreement. The actions of the Member
taken in such capacity and in accordance with this Agreement shall bind the
Company.
i. The Member shall have full, exclusive and complete discretion to
manage and control the business and affairs of the Company, to make all
decisions affecting the business, operations and affairs of the Company and
to take all such actions as it deems necessary or appropriate to accomplish
the purpose of the Company as set forth herein. Subject to the provisions
of this Agreement and the "Investment Documents" (as defined in the limited
liability company agreement for the sole Member), the Member (and the
officers appointed under clause (iv) below) shall have general and active
management of the day to day business and operations of the Company. In
addition, the Member shall have such other powers and duties as may be
prescribed by this Agreement. Such duties may be delegated
<PAGE>
by the Member to officers, agents or employees of the Company as the Member
may deem appropriate from time to time.
ii. The Member may, from time to time, designate one or more persons
to be officers of the Company. No officer need be a Member or a manager of
the Company. Any officers so designated will have such authority and
perform such duties as the Member may, from time to time, delegate to them.
The Member 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 will hold office until his or her successor will
be duly designated and will qualify or until his or her death or until he
or she will resign or will 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 will be fixed from time to time by
the Member. Any officer may be removed as such, either with or without
cause, by the Member whenever in his, her or its 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 Member. The names of the
initial officers of the Company, and their respective titles, are set forth
on the attached Schedule 1.
6. Tax Elections. The fiscal and taxable year of the Company shall
-------------
be the calendar year.
7. Dissolution. The Company shall dissolve, and its affairs shall
-----------
be wound up upon the first to occur of the following (a) the written consent of
the Member, (b) the death, retirement, resignation, expulsion, insolvency,
bankruptcy or dissolution of the Member or (c) the occurrence of any other event
which terminates the continued membership of the Member in the Company.
8. Allocation of Profits and Losses. The Company's profits and
--------------------------------
losses shall be allocated to the Member.
9. Liability of Member. The Member shall not have any liability for
-------------------
the obligations or liabilities of the Company except to the extent provided in
the Act.
10. Governing Law. This Agreement shall be governed by, and
-------------
construed under, the laws of the State of Delaware, all rights and remedies
being governed by said laws.
-2-
<PAGE>
IN WITNESS WHEREOF, the undersigned, intending to be legally bound
hereby, has duly executed this Limited Liability Company Agreement as of the
date first written above.
AVALON CABLE LLC
By:________________________________
Its:_______________________________
<PAGE>
SCHEDULE 1
INITIAL OFFICERS
----------------
David Unger Chairman and Assistant Secretary
Joel Cohen President, Chief Executive Officer and Secretary
Peggy Koenig Vice President and Assistant Secretary
Jay Grossman Vice President and Assistant Secretary
<PAGE>
EXHIBIT 3.6
AMENDED AND RESTATED
LIMITED LIABILITY COMPANY AGREEMENT
OF
AVALON CABLE OF NEW ENGLAND LLC
This Amended and Restated Limited Liability Company Agreement (this
"Agreement") of Avalon Cable of New England LLC, a Delaware limited liability
- ----------
company (the "LLC") is entered into as of November 6, 1998, by Avalon Cable of
---
New England Holdings, Inc., f/k/a Avalon Cable NE, Inc., a Delaware corporation
("Avalon NE"), and Avalon Cable LLC, a Delaware limited liability company
---------
("Avalon Cable").
- --------------
On May 29, 1998, Joel C. Cohen ("Cohen"), David Unger ("Unger") and
----- -----
Avalon NE entered into an Amended and Restated Limited Liability Company
Agreement (the "Prior Agreement"), the execution and delivery of which withdrew
---------------
Cohen and Unger (the initial organizers and members of the LLC) as members of
the LLC and named Avalon NE as the sole member of the LLC.
Avalon NE entered into a Securities Purchase Agreement (as in effect
from time to time, the "Securities Purchase Agreement") dated as of November 6,
-----------------------------
1998, by and among the Avalon Cable, Avalon Cable Holdings, LLC, a Delaware
limited liability company, Avalon Cable of Michigan Holdings, Inc., a Delaware
corporation, Avalon NE, Avalon Cable of Michigan, Inc., a Pennsylvania
corporation, and Avalon Investors, L.L.C., pursuant to which, among other
things, Avalon NE shall contribute its membership interest in the LLC to Avalon
Cable in exchange for certain securities of Avalon Cable.
In accordance with the Prior Agreement and the Act (as defined below)
and to effectuate the transactions contemplated by the Securities Purchase
Agreement, Avalon NE and Avalon Cable have agreed that upon the execution and
delivery of this agreement: (a) Avalon Cable will become a member of the LLC,
(b) Avalon NE will withdraw as a member of the LLC, (c) upon and after such
withdrawal, Avalon Cable will be the sole member of the LLC (in such capacity,
the "Member"), and (d) the Prior Agreement will be superseded and amended and
------
restated in its entirety as provided herein.
NOW, THEREFORE, for good valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties to this Agreement
agree that: (a) Avalon Cable hereby becomes a member of the LLC, (b) Avalon NE
hereby withdraws as a member of the LLC, and (c) the Prior Agreement is hereby
superseded and amended and restated in its entirety as follows:
1. NAME. The name of the limited liability company governed hereby
----
(the "Company") is Avalon Cable of New England LLC.
-------
<PAGE>
2. PURPOSE. The Company does and will exist for the object and
-------
purpose of, and the nature of the business to be conducted and promoted by
the Company is and will be, engaging in any lawful act or activity for
which limited liability companies may be formed under the Delaware Limited
Liability Company Act (6 Del.C. (S) 18-101, et seq.), as in effect from
------ -- ---
time to time (the "Act"), and engaging in any and all activities necessary
---
or incidental to the foregoing.
3. MEMBERS. The name and mailing address of the sole Member is as
-------
follows:
Name Address
---- -------
Avalon Cable LLC 201 E. 69th Street
Penthouse G
New York, NY 10021
4. POWERS. The Member, as the sole member of the Company, shall
------
manage the Company in accordance with this Agreement. The actions of the
Member taken in such capacity and in accordance with this Agreement shall
bind the Company. The Company shall not have any "manager," as that term
is defined in the Act.
i. The Member shall have full, exclusive and complete discretion
to manage and control the business and affairs of the Company, to make
all decisions affecting the business, operations and affairs of the
Company and to take all such actions as it deems necessary or
appropriate to accomplish the purpose of the Company as set forth
herein. Subject to the provisions of this Agreement, the Member (and
the officers appointed under clause (ii) below) shall have general and
active management of the day to day business and operations of the
Company. In addition, the Member shall have such other powers and
duties as may be prescribed by this Agreement. Such duties may be
delegated by the Member to officers, agents or employees of the
Company as the Member may deem appropriate from time to time.
ii. The Member may, from time to time, designate one or more
persons to be officers of the Company. No officer need be a member of
the Company. Any officers so designated will have such authority and
perform such duties as the Member may, from time to time, delegate to
them. The Member may assign titles to particular officers, including,
without limitation, chairman, chief executive officer, president, vice
president, chief operating officer, secretary, assistant secretary,
treasurer and assistant treasurer. Each officer will hold office
until his or her successor will be duly designated and will qualify or
until his or her death or until he or she will resign or will 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 will be fixed from time to time by the Member or by any
officer acting within his or her authority. Any officer may be
removed as such, either with or without cause, by the Member whenever
in his, her or its judgment the best
-2-
<PAGE>
interests of the Company will be served thereby. Any vacancy occurring
in any office of the Company may be filled by the Member. The names of
the initial officers of the Company, and their respective titles, are
set forth on the attached Schedule 1.
6. TAX ELECTIONS. The fiscal and taxable year of the Company shall
-------------
be the calendar year.
7. DISSOLUTION. The Company shall dissolve, and its affairs shall be
-----------
wound up upon the first to occur of the following (a) the written consent
of the Member, (b) the death, retirement, resignation, expulsion,
insolvency, bankruptcy or dissolution of the Member, or (c) the occurrence
of any other event which terminates the continued membership of the Member
in the Company.
8. ALLOCATION OF PROFITS AND LOSSES. The Company's profits and
--------------------------------
losses shall be allocated to the Member.
9. LIABILITY OF MEMBER. The Member shall not have any liability for
-------------------
the obligations or liabilities of the Company except to the extent provided
in the Act.
10. GOVERNING LAW. This Agreement shall be governed by, and
-------------
construed under, the internal laws of the State of Delaware, all rights and
remedies being governed by said laws.
* * * *
-3-
<PAGE>
IN WITNESS WHEREOF, the undersigned, intending to be legally bound
hereby, has duly executed this Amended and Restated Limited Liability Company
Agreement as of the date first written above.
AVALON CABLE OF NEW ENGLAND HOLDINGS, INC.
By:___________________________
Its:__________________________
AVALON CABLE LLC
By:___________________________
Its:__________________________
<PAGE>
SCHEDULE 1
INITIAL OFFICERS
----------------
David Unger Chairman and Assistant Secretary
Joel Cohen President, Chief Executive Officer and Secretary
Peggy Koenig Vice President and Assistant Secretary
Jay Grossman Vice President and Assistant Secretary
-5-
<PAGE>
EXHIBIT 3.7
BY-LAWS
OF
AVALON CABLE 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
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<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.
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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 there at
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
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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.
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<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
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<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 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 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.
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<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
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<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-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 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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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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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.
-15-
<PAGE>
Exhibit 3.8
BY-LAWS
OF
AVALON CABLE OF MICHIGAN, INC.
A Pennsylvania corporation
ARTICLE I
---------
OFFICES
-------
Section 1. Registered Office. The Corporation shall have and maintain a
registered office in the State of Pennsylvania and a registered agent having a
business office identical with such registered office. 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 Pennsylvania, as the board of
directors may from time to time determine or the business of the corporation may
require.
ARTICLE II
----------
MEETINGS OF SHAREHOLDERS
------------------------
Section 1. Place and Time of Meetings. An annual meeting of the
shareholders 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 election 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 shareholders may be
called for any purpose and may be held at such time and place, within or without
the State of Pennsylvania, 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.
Section 3. Place of Meeting. The board of directors may designate any
place, either within or without the State of Pennsylvania, as the place of
meeting for any annual meeting or for
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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 shareholders 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 shareholder 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 shareholder 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. Shareholders List. The officer having charge of the stock
ledger of the corporation shall make, at least ten (10) days before every
meeting of the shareholders, a complete list of the shareholders entitled to
vote at such meeting arranged in alphabetical order, showing the address of each
shareholder and the number of shares registered in the name of each shareholder.
Such list shall be open to the examination of any shareholder, 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 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 shareholder 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 shareholders, 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 shareholder of record entitled to vote at the meeting.
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<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
shareholders, 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 Business
Corporation Law of the State of Pennsylvania or by the certificate of
incorporation of the corporation or any amendments thereto and subject to
Section 3 of Article VI hereof, every shareholder shall at every meeting of the
shareholders be entitled to one (1) vote in person or by proxy for each share of
common stock held by such shareholder.
Section 10. Proxies. Each shareholder entitled to vote at a meeting of
shareholders 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 shareholders 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
shareholders, 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 shareholders of the corporation, or any action which may be
taken at any annual or special meeting of such shareholders, 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 shareholders 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 Pennsylvania, 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 shareholders 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
3
<PAGE>
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 (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 shareholders who have not consented in writing. Any
action taken pursuant to such written consent or consents of the shareholders
shall have the same force and effect as if taken by the shareholders 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 board shall be five (5). Thereafter, the number of
directors shall be established from time to time by resolution of the board of
directors. 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 shareholders, 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 services are entitled to elect one or more
directors by the provisions of the corporation's Articles 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, through 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 shareholders.
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 Sectiontion 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 shareholders 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
shareholders 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
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<PAGE>
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 shareholders
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 shareholders 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 other powers as the board of directors, the president, or
secretary may, from time to time, prescribe.
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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 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 Business Corporation Law of the
State of Pennsylvania, as the same
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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 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 Sectiontion 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 Business Corporation
Law of the State of Pennsylvania 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 shareholders) 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 Business Corporation Law of the State of
Pennsylvania nor an actual determination by the corporation (including its board
of directors, independent legal counsel, or its shareholders) 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. 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
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under any statute, provision of the certificate of incorporation, by-law,
agreement, vote of shareholders 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 Business Corporation Law of the State of Pennsylvania
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 to the resulting or surviving corporation as he or she would have
with respect to such constituent corporation if its separate existence had
continued.
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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-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 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 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 Shareholder Meetings. In order that
the corporation may determine the shareholders entitled to notice of or to vote
at any meeting of shareholders or any
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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 shareholders entitled to notice of or to vote at a meeting of
shareholders 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
shareholders of record entitled to notice of or to vote at a meeting of
shareholders 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 shareholders 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 shareholders 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 Pennsylvania, its principal
place of business, or an officer or agent of the corporation having custody of
the book in which proceedings of meetings of shareholders 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 shareholders 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 shareholders entitled to receive payment of any
dividend or other distribution or allotment or any rights or the shareholders
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 shareholders 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.
Section 6. Registered Shareholders. 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
12
<PAGE>
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.
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
13
<PAGE>
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,
Pennsylvania". 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 shareholder 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
shareholders, 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 shareholder. 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 shareholder.
The demand under oath shall be directed to the corporation at its registered
office in the State of Pennsylvania 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 Business Corporation Law of the State of Pennsylvania 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.
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ARTICLE VIII
------------
AMENDMENTS
----------
Except for Article III hereof, 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
shareholders of the same powers.
15
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EXHIBIT 4.1
EXECUTION COPY
________________________________________________________________________________
AVALON CABLE OF MICHIGAN, INC.,
AVALON CABLE OF NEW ENGLAND LLC
AND
AVALON CABLE FINANCE, INC.,
AS ISSUERS
9 3/8% SENIOR SUBORDINATED NOTE DUE 2008
INDENTURE
Dated as of December 10, 1998
THE BANK OF NEW YORK,
as Trustee
________________________________________________________________________________
<PAGE>
CROSS-REFERENCE TABLE*
<TABLE>
<CAPTION>
Trust Indenture Act Section Indenture Section
<S> <C>
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) ............................................................ 12.3
(iv)(c) ........................................................... 12.3
313(a) .............................................................. 7.6
(b)(1) ............................................................ 10.3
(b)(2) ............................................................ 7.7
(v)(c) ............................................................ 7.6
12.2
(v)(d) ............................................................ 7.6
314(a) .............................................................. 4.3;
12.2
(A)(b) ............................................................ 10.2
(c)(1) ............................................................ 12.4
(c)(2) ............................................................ 12.4
(c)(3) ............................................................ N.A.
(vi)(e) ........................................................... 12.5
(f) ............................................................... N.A.
315(a) .............................................................. 7.1
(b) ............................................................... 7.5
12.2
(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
</TABLE>
<PAGE>
<TABLE>
<S> <C>
318(a) ............................................................. 12.1
(b) .............................................................. N.A.
(c) .............................................................. 12.1
</TABLE>
N.A. means not applicable.
*This Cross-Reference Table is not part of the Indenture.
2
<PAGE>
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION> Page
----
ARTICLE 1.
DEFINITIONS AND INCORPORATION BY REFERENCE
<S> <C>
SECTION 1.1 DEFINITIONS ................................................ 1
SECTION 1.2 OTHER DEFINITIONS .......................................... 23
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 SUBORDINATED NOTES
SECTION 2.1 FORM AND DATING ............................................ 25
SECTION 2.2 EXECUTION AND AUTHENTICATION ............................... 26
SECTION 2.3 REGISTRAR AND PAYING AGENT ................................. 27
SECTION 2.4 PAYING AGENT TO HOLD MONEY IN TRUST ........................ 27
SECTION 2.5 HOLDER LISTS ............................................... 28
SECTION 2.6 TRANSFER AND EXCHANGE ...................................... 28
SECTION 2.7 REPLACEMENT SENIOR SUBORDINATED NOTES ...................... 41
SECTION 2.8 OUTSTANDING SENIOR SUBORDINATED NOTES ...................... 42
SECTION 2.9 TREASURY SENIOR SUBORDINATED NOTES ......................... 42
SECTION 2.10 TEMPORARY SENIOR SUBORDINATED NOTES ........................ 42
SECTION 2.11 CANCELLATION ............................................... 43
SECTION 2.12 DEFAULTED INTEREST ......................................... 43
</TABLE>
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<TABLE>
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<S> <C>
SECTION 2.13 CUSIP NUMBERS .............................................. 43
ARTICLE 3.
REDEMPTION AND PREPAYMENT
SECTION 3.1 NOTICES TO TRUSTEE ......................................... 44
SECTION 3.2 SELECTION OF SENIOR SUBORDINATED 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 SUBORDINATED NOTES REDEEMED IN PART ................. 46
SECTION 3.7 OPTIONAL REDEMPTION ........................................ 46
SECTION 3.8 MANDATORY REDEMPTION ....................................... 47
SECTION 3.9 OFFER TO PURCHASE BY APPLICATION OF EXCESS PROCEEDS ........ 47
ARTICLE 4.
COVENANTS
SECTION 4.1 PAYMENT OF SENIOR SUBORDINATED NOTES ....................... 49
SECTION 4.2 MAINTENANCE OF OFFICE OR AGENCY ............................ 50
SECTION 4.3 REPORTS .................................................... 50
SECTION 4.4 COMPLIANCE CERTIFICATE ..................................... 51
SECTION 4.5 TAXES ...................................................... 52
SECTION 4.6 STAY, EXTENSION AND USURY LAWS ............................. 52
SECTION 4.7 RESTRICTED PAYMENTS ........................................ 52
SECTION 4.8 DIVIDEND AND OTHER PAYMENT RESTRICTIONS AFFECTING
SUBSIDIARIES RESTRICTED ................................... 55
</TABLE>
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<TABLE>
<CAPTION> Page
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<S> <C>
SECTION 4.9 INCURRENCE OF INDEBTEDNESS AND ISSUANCE OF PREFERRED
STOCK ...................................................... 56
SECTION 4.10 ASSET SALES ................................................ 58
SECTION 4.11 TRANSACTIONS WITH AFFILIATES ............................... 60
SECTION 4.12 LIENS ...................................................... 61
SECTION 4.13 BUSINESS ACTIVITIES ........................................ 61
SECTION 4.14 CORPORATE EXISTENCE ........................................ 61
SECTION 4.15 OFFER TO REPURCHASE UPON CHANGE OF CONTROL ................. 61
SECTION 4.16 NO SENIOR SUBORDINATED DEBT ................................ 62
SECTION 4.17 GUARANTEES BY RESTRICTED SUBSIDIARIES ...................... 63
SECTION 4.18 PAYMENTS FOR CONSENT ....................................... 63
SECTION 4.19 SALE AND LEASEBACK TRANSACTIONS ............................ 63
SECTION 4.20 SALE OR ISSUANCE OF CAPITAL STOCK OF RESTRICTED
SUBSIDIARIES ............................................... 63
SECTION 4.21 FUTURE ADDITIONAL OBLIGORS ................................. 64
SECTION 4.22 STATEMENT BY OFFICERS AS TO DEFAULT ........................ 64
ARTICLE 5.
SUCCESSORS
SECTION 5.1 MERGER, CONSOLIDATION, OR SALE OF ASSETS ................... 64
SECTION 5.2 SUCCESSOR CORPORATION OR GUARANTORS SUBSTITUTED ............ 65
ARTICLE 6.
EVENTS OF DEFAULT
SECTION 6.1 EVENTS OF DEFAULT .......................................... 66
</TABLE>
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<TABLE>
<CAPTION> Page
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<S> <C>
SECTION 6.2 ACCELERATION ............................................... 68
SECTION 6.3 OTHER REMEDIES ............................................. 68
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 SUBORDINATED 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
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 ......................................... 74
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
</TABLE>
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<TABLE>
<CAPTION> Page
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<S> <C>
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
SECTION 8.1 OPTION TO EFFECT LEGAL DEFEASANCE OR COVENANT
DEFEASANCE .................................................. 78
SECTION 8.2 LEGAL DEFEASANCE AND DISCHARGE .............................. 78
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
SECTION 9.1 WITHOUT CONSENT OF HOLDERS OF SENIOR
SUBORDINATED NOTES ..................................... 82
SECTION 9.2 WITH CONSENT OF HOLDERS OF SENIOR SUBORDINATED NOTES ........ 83
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 SUBORDINATED NOTES ........ 85
</TABLE>
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<TABLE>
<CAPTION> Page
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<S> <C>
SECTION 9.6 TRUSTEE TO SIGN AMENDMENTS, ETC ............................. 86
ARTICLE 10.
SUBORDINATION
SECTION 10.1 AGREEMENT TO SUBORDINATE .................................... 86
SECTION 10.2 [INTENTIONALLY OMITTED] ..................................... 86
SECTION 10.3 LIQUIDATION; DISSOLUTION; BANKRUPTCY ........................ 86
SECTION 10.4 DEFAULT ON DESIGNATED SENIOR INDEBTEDNESS ................... 86
SECTION 10.5 ACCELERATION OF SENIOR SUBORDINATED NOTES ................... 87
SECTION 10.6 WHEN DISTRIBUTION MUST BE PAID OVER ......................... 87
SECTION 10.7 NOTICE BY ISSUERS ........................................... 88
SECTION 10.8 SUBROGATION ................................................. 88
SECTION 10.9 RELATIVE RIGHTS ............................................. 88
SECTION 10.10 SUBORDINATION MAY NOT BE IMPAIRED BY ISSUERS OR
GUARANTORS .................................................. 89
SECTION 10.11 DISTRIBUTION OR NOTICE TO REPRESENTATIVE .................... 89
SECTION 10.12 ARTICLE 10 NOT TO PREVENT EVENTS OF DEFAULT OR LIMIT
RIGHT TO ACCELERATE ......................................... 89
SECTION 10.13 RIGHTS OF TRUSTEE AND PAYING AGENT .......................... 90
SECTION 10.14 AUTHORIZATION TO EFFECT SUBORDINATION ....................... 90
SECTION 10.15 AMENDMENTS .................................................. 90
SECTION 10.16 TRUSTEE'S COMPENSATION NOT PREJUDICED ....................... 90
SECTION 10.17 SUBORDINATION OF GUARANTEE .................................. 90
</TABLE>
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<TABLE>
<CAPTION> Page
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<S> <C>
SECTION 10.18 TRUSTEE NOT FIDUCIARY FOR HOLDERS OF SENIOR
INDEBTEDNESS ......................................... 91
ARTICLE 11.
GUARANTEE
SECTION 11.1 UNCONDITIONAL GUARANTEE .................................... 91
SECTION 11.2 SEVERABILITY ............................................... 92
SECTION 11.3 LIMITATION OF GUARANTOR'S LIABILITY ........................ 92
SECTION 11.4 CONTRIBUTION ............................................... 92
SECTION 11.5 SUBORDINATION OF SUBROGATION AND OTHER RIGHTS .............. 93
ARTICLE 12.
MISCELLANEOUS
SECTION 12.1 TRUST INDENTURE ACT CONTROLS ............................... 93
SECTION 12.2 NOTICES .................................................... 93
SECTION 12.3 COMMUNICATION BY HOLDERS OF SENIOR SUBORDINATED
NOTES WITH OTHER HOLDERS OF SENIOR SUBORDINATED
NOTES ...................................................... 94
SECTION 12.4 CERTIFICATE AND OPINION AS TO CONDITIONS PRECEDENT ......... 94
SECTION 12.5 STATEMENTS REQUIRED IN CERTIFICATE OR OPINION .............. 95
SECTION 12.6 RULES BY TRUSTEE AND AGENTS ................................ 95
SECTION 12.7 NO PERSONAL LIABILITY OF DIRECTORS, OFFICERS,
EMPLOYEES AND SHAREHOLDERS ................................. 95
SECTION 12.8 GOVERNING LAW .............................................. 96
SECTION 12.9 NO ADVERSE INTERPRETATION OF OTHER AGREEMENTS .............. 96
SECTION 12.10 SUCCESSORS ................................................. 96
</TABLE>
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<TABLE>
<CAPTION> Page
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<S> <C>
SECTION 12.11 SEVERABILITY .............................................. 96
SECTION 12.12 COUNTERPART ORIGINALS ..................................... 96
SECTION 12.13 TABLE OF CONTENTS, HEADINGS, ETC .......................... 96
</TABLE>
EXHIBITS:
A Form of Senior Subordinated Notes
B Form of Certificate of Transfer
C Form of Certificate of Exchange
D Form of Supplemental Indenture
viii
<PAGE>
INDENTURE dated as of December 10, 1998 among Avalon Cable of
Michigan, Inc., a Pennsylvania corporation ("Avalon Michigan"), Avalon Cable of
New England LLC, a Delaware limited liability company and Avalon Cable Finance,
Inc., a Delaware corporation ("Avalon Finance") 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 9 3/8% Senior Subordinated Notes due 2008 (the
"Initial Senior Subordinated Notes") and the 9 3/8% Senior Subordinated Notes
due 2008 if and when issued in the Exchange Offer (the "New Senior Subordinated
Notes" and, together with the Initial Senior Subordinated Notes and the
Additional Senior Subordinated Notes, if any, the "Senior Subordinated 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 Holding Companies
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 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
<PAGE>
2
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 Holding Companies within 18
months of the date of issuance thereof, unless refinanced.
"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
Cable of New England LLC of all of the cable system assets of Taconic Technology
Corp.
"Additional Obligor" means additional Persons that the Issuers may
designate as Obligors under the Senior Subordinated Notes pursuant to this
Indenture.
"Additional Senior Subordinated Notes" means an additional $50.0
million in aggregate principal amount of Senior Subordinated Notes issued under
this Indenture after the Issue Date in accordance with Sections 2.2 and 4.9
hereof.
"Administrative Agent" means Lehman Commercial Paper Inc.
"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.
"Agent" means any Registrar, Paying Agent, co-registrar,
authenticating agent or securities custodian.
"Amrac" means Amrac Clear View, a Limited Partnership.
<PAGE>
3
"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 LLC" means Avalon Cable of Michigan LLC, a Delaware
limited liability company.
"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.
"Bridge Credit Agreement" means the Bridge Credit Agreement, dated as
of November 5, 1998, among the Holding Companies, the lenders named therein,
Lehman Brothers Inc. and Lehman Commercial Paper Inc., including any related
notes, guarantees, collateral documents, instruments and agreements executed in
connection therewith, and in each case, as
<PAGE>
4
amended, restated, supplemented, modified, renewed, refunded, replaced or
refinanced from time to time.
"Bridge Lenders" means the several banks and other financial
institutions or entities from time to time parties to the Bridge Credit
Agreement.
"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.
"Completed Acquisitions" means the acquisitions of Cable Michigan,
Amrac and Pegasus by Avalon or an Affiliate of Avalon.
<PAGE>
6
"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
<PAGE>
7
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 12.2 hereof or such other address as to which the
Trustee may give notice to the Issuers.
"Custodian" means the Trustee, as custodian with respect to the Senior
Subordinated 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 Subordinated 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 Subordinated
Notes, and any and all successors thereto appointed as depositary hereunder and
having become such pursuant to the applicable provision of this Indenture.
"Designated Senior Debt" means (i) any Indebtedness outstanding under
the Senior Credit Facility and (ii) any other Senior Indebtedness permitted
hereunder the principal amount of which is $25.0 million or more and that has
been designated by the Issuers as "Designated Senior Debt."
"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
<PAGE>
8
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 Subordinated 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 Notes" means those certain notes of the Holding Companies,
placed in escrow on November 6, 1998, that may be issued if the terms of the
Bridge Credit Agreement so require.
"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.
"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
<PAGE>
9
the Senior Credit Facility and the Senior Subordinated 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.
"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 upon the effective completion
of the Reorganization and its execution of a Guarantee of the Senior
Subordinated Notes in accordance with the provisions of this Indenture and (ii)
any Subsidiary that executes a Guarantee of the Senior Subordinated Notes in
accordance with the provisions of this Indenture, and their respective
successors and assigns.
"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.
<PAGE>
10
"Holder" means a Person in whose name a Senior Subordinated Note is
registered.
"Holding Companies" means initially Avalon Cable of Michigan Holdings,
Inc., Avalon Cable LLC and Avalon Cable Holdings Finance, Inc. or any successor
thereto; provided that subsequent to the Reorganization, the Holding Companies
shall be Avalon Cable LLC, as successor to Avalon Cable of Michigan, Inc., and
Avalon Cable Holdings Finance, Inc. or any successor thereto.
"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 Subordinated Notes and which is
otherwise subordinated to the prior payment in full of the Senior Subordinated
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., Prudential Securities
Incorporated, BancBoston Robertson Stephens Inc., Fleet Securities, Inc. and SG
Cowen Securities Corporation.
"Initial Senior Subordinated Notes" means $150.0 million in aggregate
principal amount of Senior Subordinated 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 $150.0 million aggregate
principal amount of the Senior Subordinated Notes are originally issued.
"Issuers" means, initially, Avalon Michigan, Avalon New England and
Avalon Finance or any successor thereto; provided that subsequent to the
Reorganization, the Issuers shall be Avalon New England, Avalon Finance and
Avalon Michigan LLC, as successor to Avalon Michigan, 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 Subordinated 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
<PAGE>
12
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
<PAGE>
13
(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).
"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
<PAGE>
14
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).
"New Senior Subordinated 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 Subordinated 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 Subordinated 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 12.5 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 Subordinated Notes sold in reliance on Rule 144A.
"Opinion of Counsel" means a written opinion from legal counsel that
meets the requirements of Section 12.5 hereof. The counsel may be an employee of
or counsel to the Issuers, any Subsidiary of the Issuers or the Trustee.
"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
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
<PAGE>
16
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 Junior Securities" means Equity Interests in or debt
securities of any Issuer that are issued pursuant to a plan of reorganization of
such Issuer and are subordinated to all Senior Indebtedness (and any debt
securities issued in exchange for Senior Indebtedness) to substantially the same
extent as, or to a greater extent than, the Senior Subordinated Notes are
subordinated to Senior Indebtedness pursuant to the Indenture so long as (i) the
effect of the issuance of such Equity Interests or debt securities is not to
cause the Senior Subordinated Notes to be treated as part of the same class of
claims or any class of claims pari passu with, or senior to, such Senior
Indebtedness pursuant to such plan of reorganization and (ii) the rights of the
holders of such Senior Indebtedness are not altered or impaired without their
consent.
"Permitted Liens" means (i) Liens securing Indebtedness under the
Senior 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
<PAGE>
17
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 (v) 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).
<PAGE>
18
"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 Senior Subordinated 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
Subordinated Notes on terms at least as favorable to the Holders of Senior
Subordinated 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 Subordinated 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.
<PAGE>
19
"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.
"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 Subordinated 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) Avalon Michigan ceases to be an Issuer and 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.
<PAGE>
20
"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.
"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 Credit Facility" means that certain Senior Credit Agreement,
dated as of November 5, 1998, by and among the 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.
"Senior Discount Notes" means the Senior Discount Notes issued by the
Holding Companies, as co-obligors, under an indenture dated as of December 10,
1998 among the Holding Companies and the Bank of New York, as trustee.
"Senior Indebtedness" means (i) all Indebtedness outstanding under the
Senior Credit Facility permitted under clause (i) of the second paragraph of
Section 4.9, (ii) any other Indebtedness permitted to be incurred by the Issuers
under the terms of the Indenture, unless the instrument under which such
Indebtedness is incurred expressly provides that it is on a parity with or
subordinated in right of payment to the Senior Subordinated Notes and (iii) all
Obligations with respect to the foregoing. Notwithstanding anything to the
contrary in the foregoing, Senior Indebtedness will not include (w) any
liability for federal, state, local or other taxes owed or owing by the Issuers,
(x) any Indebtedness of the Issuers to any of their Subsidiaries or other
Affiliates, (y) any trade payables or (z) any Indebtedness that is incurred in
violation of the Indenture.
"Shelf Registration Statement" means the Shelf Registration Statement
as defined in the Registration Rights Agreement.
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21
"Senior Subordinated 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 Subordinated Notes.
"Senior Subordinated Notes" has the meaning assigned to it in the
preamble to this Indenture.
"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 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.
<PAGE>
22
"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 Subordinated 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 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.
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23
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 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.
Defined in
Term Section
"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
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24
"Funding Guarantor"..................................... 11.4
"incur"................................................. 4.9
"Legal Defeasance"...................................... 8.2
"Offer Amount".......................................... 3.9
"Offer Period".......................................... 3.9
"Paying Agent".......................................... 2.3
"Payment Blockage Notice"............................... 10.4
"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
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:
"indenture securities" means the Senior Subordinated Notes and the
Senior Subordinated 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;
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25
(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 Subordinated Notes, the New Senior Subordinated
Notes and the Additional Senior Subordinated Notes, if any, shall vote and
consent together on all matters as one class and none of the Initial Senior
Subordinated Notes, the New Senior Subordinated Notes or the Additional Senior
Subordinated Notes shall have the right to vote or consent as a separate class
on any matter.
ARTICLE 2.
THE SENIOR SUBORDINATED NOTES
SECTION 2.1 FORM AND DATING.
(a) General.
The Senior Subordinated Notes and the Trustee's certificate of
authentication shall be substantially in the forms as in Exhibit A hereto. The
Senior Subordinated Notes may have notations, legends or endorsements required
by law, stock exchange rule or usage. Each Senior Subordinated Note shall be
dated the date of its authentication. The Senior Subordinated Notes shall be in
denominations of $1,000 and integral multiples thereof.
The terms and provisions contained in the Senior Subordinated 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 Subordinated Note
conflicts with the express provisions of this Indenture, the provisions of this
Indenture shall govern and be controlling.
(b) Global Notes.
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26
Senior Subordinated 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 Subordinated 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 Subordinated Notes as shall be specified therein and each
shall provide that it shall represent the aggregate principal amount of
outstanding Senior Subordinated Notes from time to time endorsed thereon and
that the aggregate principal amount of outstanding Senior Subordinated 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 of outstanding Senior Subordinated 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
Senior Subordinated 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 Subordinated
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 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 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.
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27
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 Subordinated Notes for each of the
Issuers by manual or facsimile signature. The Issuers' seals, if any, may be
reproduced on the Senior Subordinated Notes and may be in facsimile form.
If an Officer whose signature is on a Senior Subordinated Note no
longer holds that office at the time a Senior Subordinated Note is
authenticated, the Senior Subordinated Note shall nevertheless be valid.
A Senior Subordinated Note shall not be valid until authenticated by
the manual signature of the Trustee. The signature shall be conclusive evidence
that the Senior Subordinated 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 Subordinated Notes for original issue up to the aggregate principal
amount of $150,000,000 and (ii) authenticate Additional Senior Subordinated
Notes for issue up to the aggregate principal amount of $50,000,000. The
aggregate principal amount of Senior Subordinated Notes outstanding at any time
may not exceed $200,000,000 except as provided in Section 2.7 hereof. The
Trustee shall also authenticate the Senior Subordinated 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
Subordinated Notes. An authenticating agent may authenticate Senior
Subordinated 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
Subordinated Notes may be presented for registration of transfer or for exchange
("Registrar") and an office or agency where Senior Subordinated Notes may be
presented for payment ("Paying Agent"). The Registrar shall keep a register of
the Senior Subordinated 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
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28
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.
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 Subordinated 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 Subordinated 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 Subordinated 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
<PAGE>
29
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 Subordinated
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 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 Subordinated 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 Subordinated 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).
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30
(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 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 Subordinated 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
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(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 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 Subordinated 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
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32
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 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.
(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
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33
(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 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 Subordinated Notes are so registered.
Any 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 Subordinated 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;
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(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 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 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
Subordinated 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.
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35
(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 Subordinated 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 Subordinated 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;
(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,
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36
the Trustee shall cancel the Restricted Definitive Note, increase or cause
to be increased the aggregate principal amount 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 Subordinated 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 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 Subordinated 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 Subordinated 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 Subordinated 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
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37
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
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 or cause to be increased the aggregate principal amount 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 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;
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38
(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:
(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 Subordinated 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 Subordinated 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 Subordinated 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
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39
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
Subordinated 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 Notes in an aggregate principal
amount 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 Subordinated 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 equal to the principal amount of the Restricted
Definitive Notes accepted for exchange in the Exchange Offer. Concurrently with
the issuance of such Senior Subordinated Notes, the Trustee shall cause the
aggregate principal amount 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 Subordinated 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
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40
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 (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 Subordinated 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
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41
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."
(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 Subordinated
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).
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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 Subordinated Notes during a period beginning at the opening of
business 15 days before the day of any selection of Senior Subordinated
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 Subordinated Note so selected for redemption in whole
or in part, except the unredeemed portion of any Senior Subordinated Note
being redeemed in part or (C) to register the transfer of or to exchange a
Senior Subordinated 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 Subordinated Note, the Trustee, any Agent and the Issuers may
deem and treat the Person in whose name any Senior Subordinated Note is
registered as the absolute owner of such Note for the purpose of receiving
payment of principal of and interest on such Senior Subordinated 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 SUBORDINATED NOTES.
If any mutilated Senior Subordinated 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 Subordinated Note, the Issuers
shall issue and the Trustee, upon receipt of an Authentication Order, shall
authenticate a replacement Senior Subordinated 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
Subordinated 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 Subordinated Note.
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Every replacement Senior Subordinated 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 Subordinated Notes duly issued
hereunder.
SECTION 2.8 OUTSTANDING SENIOR SUBORDINATED NOTES.
The Senior Subordinated Notes outstanding at any time are all the
Senior Subordinated 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 Subordinated Note does not cease to be
outstanding because the Issuers or an Affiliate of the Issuers holds the Senior
Subordinated Note.
If a Senior Subordinated 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 Subordinated Note is held by a bona
fide purchaser.
If the principal amount of any Senior Subordinated 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 Subordinated Notes payable on that date, then on and
after that date such Senior Subordinated Notes shall be deemed to be no longer
outstanding and shall cease to accrue interest.
SECTION 2.9 TREASURY SENIOR SUBORDINATED NOTES.
In determining whether the Holders of the required principal amount of
Senior Subordinated Notes have concurred in any direction, waiver or consent,
Senior Subordinated 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 Subordinated Notes that a Responsible Officer of the Trustee
actually knows are so owned shall be so disregarded.
SECTION 2.10 TEMPORARY SENIOR SUBORDINATED NOTES.
Until certificates representing Senior Subordinated Notes are ready
for delivery, the Issuers may prepare and the Trustee, upon receipt of an
Authentication Order, shall authenticate temporary Senior Subordinated Notes.
Temporary Senior Subordinated Notes shall be substantially in the form of
certificated Senior Subordinated Notes but may have variations that the Issuers
consider appropriate for temporary Senior Subordinated Notes.
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44
Without unreasonable delay, the Issuers shall prepare and the Trustee
shall authenticate Definitive Notes in exchange for temporary Senior
Subordinated Notes.
Holders of temporary Senior Subordinated Notes shall be entitled to
all of the benefits of this Indenture.
SECTION 2.11 CANCELLATION.
The Issuers at any time may deliver Senior Subordinated Notes to the
Trustee for cancellation. The Registrar and Paying Agent shall forward to the
Trustee any Senior Subordinated Notes surrendered to them for registration of
transfer, exchange or payment. The Trustee and no one else shall cancel all
Senior Subordinated Notes surrendered for registration of transfer, exchange,
payment, replacement or cancellation and shall return such canceled Senior
Subordinated Notes (subject to the record retention requirement of the Exchange
Act). Certification of the destruction of all canceled Senior Subordinated Notes
shall be delivered (at the expense of the Issuers) to the Issuers. The Issuers
may not issue new Senior Subordinated Notes to replace Senior Subordinated 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
Subordinated 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 Subordinated 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 Subordinated 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 Subordinated 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 Subordinated 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 Subordinated
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.
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45
In the event that the Issuers shall issue and the Trustee shall
authenticate any Additional Senior Subordinated Notes pursuant to this
Indenture, the Issuers shall use their best efforts to obtain the same CUSIP
number for such Additional Senior Subordinated Notes as is printed on the Senior
Subordinated Notes outstanding at such time; provided, however, that if any
Additional Senior Subordinated Notes is determined, pursuant to an Opinion of
Counsel, to be a different class of security than the Senior Subordinated Notes
outstanding at such time for federal income tax purposes, the Issuers may obtain
a CUSIP number for such Additional Senior Subordinated Notes that is different
from the CUSIP number printed on the Senior Subordinated 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
Subordinated 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 Subordinated 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 Subordinated 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 Subordinated 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 Subordinated Notes to be redeemed and (iv) the
redemption price.
SECTION 3.2 SELECTION OF SENIOR SUBORDINATED NOTES TO BE REDEEMED.
If less than all of the Senior Subordinated Notes are to be redeemed
or purchased in an offer to purchase at any time, the Trustee shall select the
Senior Subordinated Notes to be redeemed or purchased among the Holders of the
Senior Subordinated Notes in compliance with
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46
the requirements of the principal national securities exchange, if any, on which
the Senior Subordinated Notes are listed or, if the Senior Subordinated 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 Subordinated 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 Subordinated Notes not
previously called for redemption.
The Trustee shall promptly notify the Issuers of the Senior
Subordinated Notes selected for redemption and, in the case of any Senior
Subordinated Note selected for partial redemption, the principal amount thereof
to be redeemed. Senior Subordinated Notes and portions of Senior Subordinated
Notes selected shall be in amounts of $1,000 or whole multiples of $1,000;
except that if all of the Senior Subordinated Notes of a Holder are to be
redeemed, the entire outstanding amount of Senior Subordinated 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 Subordinated Notes called for redemption also apply to portions of Senior
Subordinated 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 Subordinated Notes are to be redeemed at its registered address.
The notice shall identify the Senior Subordinated Notes to be redeemed
and shall state:
(a) the redemption date;
(b) the redemption price;
(c) if any Senior Subordinated Note is being redeemed in part, the
portion of the principal amount of such Senior Subordinated Note to be redeemed
and that, after the redemption date upon surrender of such Senior Subordinated
Note, a new Senior Subordinated Note or Senior Subordinated Notes in principal
amount equal to the unredeemed portion shall be issued upon cancellation of the
original Senior Subordinated Note;
(d) the name and address of the Paying Agent;
(e) that Senior Subordinated 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 Subordinated Notes called for redemption ceases to
accrue on and after the redemption date;
(g) the paragraph of the Senior Subordinated Notes and/or Section of
this Indenture pursuant to which the Senior Subordinated 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
Subordinated 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 Subordinated 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 Subordinated 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 Subordinated 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
Subordinated Notes or the portions of Senior Subordinated Notes called for
redemption. If a Senior Subordinated 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 Subordinated Note was registered at the close of business on such record
date. If any Senior Subordinated 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 Subordinated Notes and in Section 4.1 hereof.
<PAGE>
48
SECTION 3.6 SENIOR SUBORDINATED NOTES REDEEMED IN PART.
Upon surrender of a Senior Subordinated 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 Subordinated Note equal in principal amount to the unredeemed portion of
the Senior Subordinated Note surrendered.
SECTION 3.7 OPTIONAL REDEMPTION.
(a) Except as described in clause (b) of this Section 3.7, the Senior
Subordinated Notes will not be redeemable at the Issuers' option prior to
December 1, 2003. Thereafter, the Senior Subordinated 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....................... 104.688%
2004....................... 103.125%
2005....................... 101.563%
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 of Senior
Subordinated 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, 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 at maturity of Senior Subordinated 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 4.10 or 4.15, the Issuers shall not be
required to make mandatory redemption or sinking fund payments with respect to
the Senior Subordinated 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 Subordinated
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
Subordinated Notes tendered in response to the Asset Sale Offer. Payment for
any Senior Subordinated 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 Subordinated Note is registered at
the close of business on such record date, and no additional interest shall be
payable to Holders who tender Senior Subordinated 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 Subordinated 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 Subordinated 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 Subordinated 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 Subordinated Note purchased
pursuant to an Asset Sale Offer may only elect to have all of such Senior
Subordinated Note purchased and may not elect to have only a portion of
such Senior Subordinated Note purchased;
(f) that Holders electing to have a Senior Subordinated Note purchased
pursuant to any Asset Sale Offer shall be required to surrender the Senior
Subordinated Note, with the form entitled "Option of Holder to Elect
Purchase" on the reverse of the Senior Subordinated 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 Subordinated Note the Holder delivered for
purchase and a statement that such Holder is withdrawing his election to
have such Senior Subordinated Note purchased;
(h) that, if the aggregate principal amount of Senior Subordinated
Notes surrendered by Holders exceeds the Offer Amount, the Issuers shall
select the Senior Subordinated 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 Subordinated Notes in
denominations of $1,000, or integral multiples thereof, shall be
purchased); and
(i) that Holders whose Senior Subordinated Notes were purchased only
in part shall be issued new Senior Subordinated Notes equal in principal
amount to the unpurchased portion of the Senior Subordinated 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 Subordinated Notes or portions thereof tendered
pursuant to the Asset Sale Offer, or if less than the Offer Amount has been
tendered, all Senior Subordinated Notes tendered, and shall deliver to the
Trustee an Officers' Certificate stating that such Senior Subordinated 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 Subordinated Notes tendered by such Holder and
accepted by the Issuers for purchase, and the Issuers shall promptly issue a new
Senior Subordinated Note, and the Trustee, upon receipt of an Authentication
Order from the Issuers shall authenticate and mail or deliver such new Senior
Subordinated Note to such Holder, in a principal amount equal to any unpurchased
portion of the Senior Subordinated Note surrendered.
<PAGE>
51
Any Senior Subordinated 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.
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.
ARTICLE 4.
COVENANTS
SECTION 4.1 PAYMENT OF SENIOR SUBORDINATED 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 Subordinated
Notes on the dates and in the manner provided in the Senior Subordinated 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
Subordinated 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 Subordinated
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 Subordinated
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.
The Issuers may also from time to time designate one or more other
offices or agencies where the Senior Subordinated 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
<PAGE>
52
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 Subordinated Notes are
outstanding, the Issuers, on a combined consolidated basis, will furnish to each
of the Holders of Senior Subordinated 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 Subordinated 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).
<PAGE>
53
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 Subordinated 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 Subordinated
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 Subordinated Notes.
SECTION 4.6 STAY, EXTENSION AND USURY LAWS.
<PAGE>
54
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 Subordinated 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; 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 (excluding Restricted Payments permitted by
clauses (ii), (iii), (iv), (vii), (viii), (ix), (x), (xi),
<PAGE>
55
(xii), (xiii), (xiv) or (xv) 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 other than
a contribution to the equity capital of the Issuers from a capital contribution
contemplated by clause (xiv) of the next succeeding paragraph or the proceeds of
the ABRY Subordinated Debt incurred by the Holding Companies (unless and until
converted to equity) 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 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 Subordinated 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 Subordinated 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
<PAGE>
56
repurchased, redeemed, acquired or retired Equity Interests shall not exceed $2
million in any 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 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; (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 the
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 or distributions to
dissenting stockholders pursuant to transactions permitted under the terms of
the Indenture; (xi) payments to the Holding Companies from the Net Cash Proceeds
of the Offering, in an amount not to exceed $20.1 million, to permit repayment
of a portion of the borrowings under the Bridge Credit Agreement; (xii) payments
to the Holding Companies to permit repayment of funds on the ABRY Subordinated
Debt (including all interest accrued thereon) in accordance with the terms
thereof; (xiii) payments to the Holding Companies to permit cash payments to
holders of Senior Discount Notes in an amount sufficient to enable the Holding
Companies to make payments of interest required to be made in respect of the
Senior Discount Notes when due to be paid in accordance with the terms thereof;
provided such interest payments are made with the proceeds of such payment;
(xiv) any Issuer may pay any dividend or make any distribution so long as
simultaneously therewith a capital contribution in an equal amount is made to
another Issuer and (xv) 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), (xi),
(xii), (xiii) and (xv) 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
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Section 4.7 were computed, together with a copy of any opinion or appraisal
required by the Indenture.
SECTION 4.8 DIVIDEND AND OTHER PAYMENT RESTRICTIONS AFFECTING SUBSIDIARIES
RESTRICTED.
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 Senior 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 Senior 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 Subordinated Notes, (e) 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, (f) by reason of customary non-
assignment provisions in leases entered into in the ordinary course of business,
(g) 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, (h)
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, (i) 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 (j) applicable law or any applicable rule, regulation or order.
SECTION 4.9 INCURRENCE OF INDEBTEDNESS AND ISSUANCE OF PREFERRED STOCK.
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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) 6.5
to 1, if such incurrence or issuance is on or prior to December 31, 2000, and
(b) 6.0 to 1, if such incurrence or issuance is after December 31, 2000.
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 Senior 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 Senior Credit
Facility; provided that the aggregate principal amount of all Indebtedness
of the Issuers and their Restricted Subsidiaries outstanding under the
Senior 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; provided, further,
that the aggregate principal amount of Indebtedness (excluding guarantees
by Restricted Subsidiaries under the Senior Credit Facility and under any
Permitted Refinancing Indebtedness) incurred by Restricted Subsidiaries of
the Issuers pursuant to this clause (i) does not exceed $25 million at any
one time outstanding;
(ii) the incurrence by the Issuers and their Restricted Subsidiaries
of Existing Indebtedness;
(iii) the incurrence by the Issuers of the Existing Michigan
Indebtedness and the Mercom Intercompany Loan;
(iv) the incurrence by the Issuers of Indebtedness represented by
the Senior Subordinated Notes in an aggregate principal amount of $150
million outstanding on the date of the Indenture;
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(v) 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 (v), not to exceed
$10.0 million at any time outstanding;
(vi) the incurrence by the Issuers or any of their Restricted
Subsidiaries of Permitted Refinancing Indebtedness;
(vii) 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 Subordinated 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 (vii);
(viii) 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;
(ix) 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;
(x) 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;
(xi) 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
(xii) the incurrence by the Issuers or any of their Restricted
Subsidiaries of additional Indebtedness in an aggregate principal amount
(or accreted value, as
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applicable) at any time outstanding, including all Permitted Refinancing
Indebtedness incurred to refund, refinance or replace any other
Indebtedness incurred pursuant to this clause (xii), 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 (xii) 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 4.1 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 Subordinated 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 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
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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 under the
Senior Credit Facility (and to correspondingly permanently reduce the
commitments with respect thereto) 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 make an offer to all Holders of Senior Subordinated 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 Subordinated 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, 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 of the Senior Subordinated Notes and such other Indebtedness
tendered into such Asset Sale Offer exceeds the amount of Excess Proceeds, the
Trustee shall select the Senior Subordinated 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 Subordinated 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 and regulations are applicable in connection with the
repurchase of Senior Subordinated 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
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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, the Holding Companies 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, the Holding Companies 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, the Holding
Companies 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 Subordinated 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 Senior Subordinated Notes, any Lien securing
such Indebtedness shall be subordinate to the Liens securing the Senior
Subordinated Notes and all payments due under the Indenture and the Senior
Subordinated Notes.
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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 Avalon Finance 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 Subordinated 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 Subordinated 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 Subordinated 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 (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 Subordinated 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
Subordinated 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 Subordinated Notes or portions
thereof properly tendered pursuant to the Change of Control Offer, (2) deposit
with the Paying Agent an amount
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equal to the Change of Control Payment in respect of all Senior Subordinated
Notes or portions thereof so tendered and (3) deliver or cause to be delivered
to the Trustee the Senior Subordinated Notes so accepted together with an
Officers' Certificate stating the aggregate principal amount of Senior
Subordinated Notes or portions thereof being purchased by the Issuers. The
Paying Agent will promptly mail to each Holder of Senior Subordinated Notes so
tendered the Change of Control Payment for such Senior Subordinated Notes, and
the Trustee will promptly authenticate and mail (or cause to be transferred by
book entry) to each Holder a new Senior Subordinated Note equal in principal
amount to any unpurchased portion of the Senior Subordinated Notes surrendered,
if any; provided that each such new Senior Subordinated 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
Subordinated 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 Subordinated 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 NO SENIOR SUBORDINATED DEBT.
Notwithstanding any other provisions of this Indenture, the Issuers
will not incur, create, issue, assume, guarantee or otherwise become liable,
directly or indirectly, for any Indebtedness (including Acquired Debt) that is
subordinate or junior in right of payment to any Senior Indebtedness and senior
in any respect in right of payment to the Senior Subordinated Notes.
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
Subordinated Note Guarantee of payment of the Senior Subordinated 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 or any other rights against the
Issuers or any other Restricted Subsidiary as a result of any
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payment by such Restricted Subsidiary under its Senior Subordinated Note
Guarantee until the Senior Subordinated 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 Subordinated 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 Subordinated Notes unless such
consideration is offered to be paid or is paid to all Holders of the Senior
Subordinated 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 and (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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SECTION 4.21 FUTURE ADDITIONAL OBLIGORS.
The Issuers may designate additional Persons as Additional Obligors
under the Senior Subordinated Notes. The Issuers will cause each Additional
Obligor to execute and deliver to the Trustee an amendment and supplement to the
Indenture pursuant to which such Additional Obligor will agree to be bound by
all the terms and conditions of this Indenture, including all payment
obligations in respect of the Senior Subordinated Notes, and thereafter the term
Issuers shall include in all respects such Additional Obligor.
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 Subordinated 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 Subordinated 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
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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.
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
Subordinated 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 Subordinated
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
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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
Subordinated Note Guarantee.
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 Subordinated Notes
and such default continues for a period of 30 days, whether or not such
payment is prohibited by the provisions of Article 10 hereof;
(b) the Issuers default in the payment when due of principal of or
premium, if any, on the Senior Subordinated Notes, whether or not such
payment is prohibited by the provisions of Article 10 hereof;
(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 of the then outstanding Senior Subordinated 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 Subordinated Notes for 60 days after written notice
to the Issuers by the Trustee or the Holders of at least 25% in aggregate
principal amount of the Senior Subordinated 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,
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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;
(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
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(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.
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 of the then outstanding Senior
Subordinated Notes may declare all the Senior Subordinated 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 Subordinated 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
Subordinated Notes will become due and payable without further action or notice.
Holders of the Senior Subordinated Notes may not enforce the Indenture or the
Senior Subordinated Notes except as provided in the Indenture. Subject to
certain limitations within this Indenture or the TIA, Holders of a majority in
principal amount of the then outstanding Senior Subordinated Notes may direct
the Trustee in its exercise of any trust or power. The Trustee may withhold from
Holders of the Senior Subordinated 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 Subordinated Notes
or to enforce the performance of any provision of the Senior Subordinated Notes
or this Indenture.
The Trustee may maintain a proceeding even if it does not possess any
of the Senior Subordinated Notes or does not produce any of them in the
proceeding. A delay or omission by the Trustee or any Holder of a Senior
Subordinated 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.
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The Holders of a majority in aggregate principal amount of the Senior
Subordinated Notes then outstanding by notice to the Trustee may on behalf of
the Holders of all of the Senior Subordinated 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
principal of, the Senior Subordinated Notes.
SECTION 6.5 CONTROL BY MAJORITY.
Holders of a majority in principal amount of the then outstanding
Senior Subordinated 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 Subordinated 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 Subordinated Note may pursue a remedy with
respect to this Indenture or the Senior Subordinated Notes only if:
(a) the Holder of a Senior Subordinated Note gives to the Trustee
written notice of a continuing Event of Default;
(b) the Holders of at least 25% in principal amount of the then
outstanding Senior Subordinated Notes make a written request to the Trustee to
pursue the remedy;
(c) such Holder of a Senior Subordinated Note or Holders of Senior
Subordinated 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 of the then outstanding Senior Subordinated Notes do not give the Trustee
a direction inconsistent with the request.
A Holder of a Senior Subordinated Note may not use this Indenture to
prejudice the rights of another Holder of a Senior Subordinated Notes or to
obtain a preference or priority over another Holder of a Senior Subordinated
Notes.
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SECTION 6.7 RIGHTS OF HOLDERS OF SENIOR SUBORDINATED NOTES TO RECEIVE
PAYMENT.
Notwithstanding any other provision of this Indenture, the right of
any Holder of a Senior Subordinated Note to receive payment of principal,
premium and Liquidated Damages, if any, and interest on the Senior Subordinated
Note, on or after the respective due dates expressed in the Senior Subordinated
Notes (including in connection with an offer to purchase), or to bring suit for
the 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 Subordinated 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 Subordinated Notes allowed in any judicial proceedings
relative to the Issuers (or any other obligor upon the Senior Subordinated
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,
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arrangement, adjustment or composition affecting the Senior Subordinated 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 6.10 PRIORITIES.
If the Trustee collects any money pursuant to this Article, it shall
pay out the money in the following order:
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 Subordinated Notes for amounts due and
unpaid on the Senior Subordinated 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 Subordinated 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 Subordinated 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 Subordinated Notes pursuant to Section 6.7 hereof, or a
suit by Holders of more than 10% in principal amount of the then outstanding
Senior Subordinated 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
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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 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.
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(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 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.
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(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.
(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 Subordinated 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 Subordinated 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 Subordinated Notes,
the Registration Rights Agreement or the Offering Memorandum; it shall not be
accountable for the Issuers' use of the proceeds from the Senior Subordinated
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 Subordinated Notes or any other document in connection
with the sale of the Senior Subordinated 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 Subordinated 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 Subordinated 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 Subordinated Notes.
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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 Subordinated
Notes remain outstanding, the Trustee shall (at the expense of the Issuers) mail
to the Holders of the Senior Subordinated Notes a brief report dated as of such
reporting date that complies with TIA (S) 313(a) (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 Subordinated Notes shall be mailed to the Issuers and filed with the SEC
and each stock exchange on which the Senior Subordinated Notes are listed in
accordance with TIA (S) 313(d). The Issuers shall promptly notify the Trustee
when the Senior Subordinated 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 Subordinated Note Guarantees, the
Senior Subordinated 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
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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.
To secure the Issuers' payment obligations in this Section, the
Trustee shall have a Lien prior to the Senior Subordinated 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 Subordinated 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
Subordinated Notes of a majority in principal amount of the then outstanding
Senior Subordinated 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 of the then
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outstanding Senior Subordinated 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 Subordinated Notes of at least 10% in principal amount of
the then outstanding Senior Subordinated 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 Subordinated Notes who has been a bona fide Holder of a Senior
Subordinated Notes for at least six months, fails to comply with Section 7.10,
such Holder of a Senior Subordinated 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 Subordinated 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).
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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.
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 Subordinated
Notes and the Senior Subordinated 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
Subordinated Notes and to have each Guarantor's obligations discharged with
respect to
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its Senior Subordinated 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 Subordinated
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 Subordinated Notes and this Indenture (and the Trustee, on demand of
and at the expense of the Issuers, shall execute 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 Subordinated 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 Subordinated Notes when such payments
are due, (b) the Issuers' obligations with respect to such Senior Subordinated
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, 4.16, 4.17, 4.18, 4.19, 4.20, and 5.1 hereof
with respect to the outstanding Senior Subordinated Notes on and after the date
the conditions set forth in Section 8.4 are satisfied (hereinafter, "Covenant
Defeasance"), and the Senior Subordinated 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 Subordinated Notes shall not be
deemed outstanding for accounting purposes). For this purpose, Covenant
Defeasance means that, with respect to the outstanding Senior Subordinated
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
Subordinated 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.
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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 Subordinated Notes:
In order to exercise either Legal Defeasance or Covenant Defeasance:
(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 Subordinated Notes on the
stated maturity or on the applicable redemption date, as the case may be, and
the Issuers must specify whether the Senior Subordinated 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 Subordinated 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 Subordinated 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;
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(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 Subordinated 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
Subordinated Notes shall be held in trust and applied by the Trustee, in
accordance with the provisions of such Senior Subordinated 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
Subordinated 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 Subordinated 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.
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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 Subordinated Notes and
remaining unclaimed for two years after such principal, and premium, if any,
Liquidated Damages, if any, or interest has become due and 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 Subordinated 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 non callable 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
Subordinated 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
Subordinated Notes following the reinstatement of their obligations, the Issuers
shall be subrogated to the rights of the Holders of such Senior Subordinated
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
SUBORDINATED NOTES.
Notwithstanding Section 9.2 of this Indenture, the Issuers, any
Guarantors and the Trustee may amend or supplement this Indenture, any Senior
Subordinated Note Guarantees or the Senior Subordinated Notes without the
consent of any Holder of a Note:
(a) to cure any ambiguity, omission, defect or inconsistency;
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(b) to provide for uncertificated Senior Subordinated Notes in
addition to or in place of certificated Senior Subordinated 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;
(c) to provide for the assumption of the Issuers' obligations to the
Holders of the Senior Subordinated Notes by a successor to the Issuers pursuant
to Article 5 hereof or in the Reorganization;
(d) to provide for Additional Obligors;
(e) to additional guarantees with respect to the Senior Subordinated
Notes, including any Senior Subordinated Note Guarantees;
(f) to make any change that would provide any additional rights or
benefits to the Holders of the Senior Subordinated Notes or that does not
adversely affect the legal rights hereunder of any Holder of the Senior
Subordinated Notes; or
(g) 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 SUBORDINATED 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 Subordinated Notes and any Senior Subordinated Note
Guarantees may be amended or supplemented with the consent of the Holders of at
least a majority in principal amount of the Senior Subordinated 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
Subordinated 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 Subordinated Notes, except a payment default resulting
from an acceleration that has been rescinded) or compliance with any provision
of this Indenture, the Senior Subordinated Notes or any Senior Subordinated Note
Guarantees may be waived with the consent of the Holders of a majority in
principal amount of the then
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outstanding Senior Subordinated Notes voting as a single class (including
consents obtained in connection with a tender offer or exchange offer for, or
purchase of, the Senior Subordinated Notes). Section 2.8 hereof shall determine
which Senior Subordinated Notes are considered to be "outstanding" for purposes
of this Section 9.2.
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 Subordinated 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
Subordinated 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 Subordinated 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 of the Senior
Subordinated 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 Subordinated 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 Subordinated Notes held by a non-consenting Holder):
(a) reduce the principal amount of Senior Subordinated Notes whose
Holders must consent to an amendment, supplement or waiver;
(b) reduce the principal of or change the fixed maturity of any
Senior Subordinated Note or alter the provisions with respect to the redemption
of the Senior Subordinated 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 Subordinated 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
Subordinated Notes (except a rescission of acceleration of the Senior
Subordinated Notes by the Holders of at least a
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majority in aggregate principal amount at maturity of the then outstanding
Senior Subordinated Notes and a waiver of the payment default that resulted from
such acceleration);
(e) make any Senior Subordinated Notes payable in money other than
that stated in the Senior Subordinated Notes;
(f) make any change in the provisions of this Indenture relating to
waivers of past Defaults or the rights of Holders of Senior Subordinated Notes
to receive payments of principal of or premium, if any, or interest or
Liquidated Damages, if any, on the Senior Subordinated Notes;
(g) waive a redemption payment with respect to any Senior
Subordinated 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
Subordinated 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 Subordinated Notes is a continuing consent by the
Holder of a Senior Subordinated Notes and every subsequent Holder of a Senior
Subordinated Notes or portion of a Senior Subordinated Notes that evidences the
same debt as the consenting Holder's Senior Subordinated Notes, even if notation
of the consent is not made on any Senior Subordinated Notes. However, any such
Holder of a Senior Subordinated Notes or subsequent Holder of a Senior
Subordinated Notes may revoke the consent as to its Senior Subordinated 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 SUBORDINATED NOTES.
The Trustee may place an appropriate notation about an amendment,
supplement or waiver on any Senior Subordinated Notes thereafter authenticated.
The Issuers in exchange for all Senior Subordinated Notes may issue and the
Trustee shall, upon receipt of an Authentication Order, authenticate new Senior
Subordinated Notes that reflect the amendment, supplement or waiver.
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Failure to make the appropriate notation or issue a new Senior
Subordinated 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 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 12.4 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.
SUBORDINATION
SECTION 10.1 AGREEMENT TO SUBORDINATE.
The Issuers agree, and each Holder by accepting a Senior Subordinated
Notes agrees, that the Indebtedness evidenced by the Senior Subordinated Notes
is subordinated in right of payment, to the extent and in the manner provided in
this Article 10, to the prior payment in full, in cash or Cash Equivalents, of
all Senior Indebtedness (whether outstanding on the date hereof or hereafter
created, incurred, assumed or guaranteed), and that the subordination is for the
benefit of the holders of Senior Indebtedness.
SECTION 10.2 [INTENTIONALLY OMITTED].
SECTION 10.3 LIQUIDATION; DISSOLUTION; BANKRUPTCY.
Upon any distribution to creditors of any of the Issuers in a
liquidation or dissolution of any such Issuer or in a bankruptcy,
reorganization, insolvency, receivership or similar proceeding relating to such
Issuer or its property, in an assignment for the benefit of creditors or any
marshaling of such Issuer's assets and liabilities holders of Senior
Indebtedness of such Issuer will be entitled to receive payment in full of all
Obligations due in respect of such Senior Indebtedness (including interest after
the commencement of any such proceeding at the rate specified in the applicable
Senior Indebtedness) before the Holders of the Senior Subordinated Notes will be
entitled to receive any payment with respect to the Senior Subordinated Notes
(except that Holders may receive and retain (i) Permitted Junior Securities and
(ii) payments made from the trust described under Section 8.1 hereof).
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SECTION 10.4 DEFAULT ON DESIGNATED SENIOR INDEBTEDNESS.
The Issuers may not make any payment upon or in respect of the Senior
Subordinated Notes (except in (i) Permitted Junior Securities and (ii) payments
made from any defeasance trust created pursuant to Section 8.1 hereof) if:
(i) a default in the payment of any principal of, premium, if any,
or interest on Designated Senior Debt occurs and is continuing beyond any
applicable period of grace; or
(ii) any other default occurs and is continuing with respect to
Designated Senior Debt that permits holders of the Designated Senior Debt
as to which such default relates to accelerate its maturity and the Trustee
receives a notice of such default (a "Payment Blockage Notice") from any of
the Issuers or the holders of any Designated Senior Debt. No new period of
payment blockage may be commenced unless and until (i) 360 days have
elapsed since the effectiveness of the immediately prior Payment Blockage
Notice and (ii) all scheduled payments of principal, premium, if any, and
interest on the Senior Subordinated Notes that have come due have been paid
in full in cash. No nonpayment default that existed or was continuing on
the date of delivery of any Payment Blockage Notice to the Trustee shall
be, or be made, the basis for a subsequent payment Blockage Notice unless
such default shall have been waived for a period of not less than 180 days.
The Issuers may and shall resume payments on and distributions in
respect of the Senior Subordinated Notes and may acquire them upon the earlier
of:
(1) in the case of a default referred to in Section 10.4(i) hereof,
the date upon which such default is cured or waived, or
(2) in the case of a default referred to in Section 10.4(ii) hereof,
the earlier of the date on which such default is cured or waived or 179 days
after the date on which the applicable Payment Blockage Notice is received,
unless the maturity of any Designated Senior Debt has been accelerated,
if this Article 10 otherwise permits the payment, distribution or acquisition at
the time of such payment or acquisition.
SECTION 10.5 ACCELERATION OF SENIOR SUBORDINATED NOTES.
If payment of the Senior Subordinated Notes is accelerated because of
an Event of Default, the Issuers shall promptly notify holders of Senior
Indebtedness of the acceleration.
SECTION 10.6 WHEN DISTRIBUTION MUST BE PAID OVER.
<PAGE>
90
In the event that the Trustee or any Holder receives any payment of
any Obligations with respect to the Senior Subordinated Notes at a time when the
Trustee or such Holder, as applicable, has actual knowledge that such payment is
prohibited by Section 10.4 hereof, such payment shall be held by the Trustee or
such Holder, in trust for the benefit of, and shall be paid forthwith over and
delivered, upon written request, to, the holders of Senior Indebtedness as their
interests may appear or their Representative, for application to the payment of
all Obligations with respect to Senior Indebtedness remaining unpaid to the
extent necessary to pay such Obligations in full in accordance with their terms,
after giving effect to any concurrent payment or distribution to or for the
holders of Senior Indebtedness.
With respect to the holders of Senior Indebtedness, the Trustee
undertakes to perform only such obligations on the part of the Trustee as are
specifically set forth in this Article 10, and no implied covenants or
obligations with respect to the holders of Senior Indebtedness shall be read
into this Indenture against the Trustee. The Trustee shall not be deemed to owe
any fiduciary duty to the holders of Senior Indebtedness, and shall not be
liable to any such holders if the Trustee shall pay over or distribute to or on
behalf of Holders or the Issuers or any other Person money or assets to which
any holders of Senior Indebtedness shall be entitled by virtue of this Article
10, except if such payment is made as a result of the willful misconduct or
negligence of the Trustee.
SECTION 10.7 NOTICE BY ISSUERS.
The Issuers shall promptly notify in writing the Trustee and the
Paying Agent of any facts known to the Issuers that would cause a payment of any
Obligations with respect to the Senior Subordinated Notes to violate this
Article 10, but failure to give such notice shall not affect the subordination
of the Senior Subordinated Notes to the Senior Indebtedness as provided in this
Article 10.
SECTION 10.8 SUBROGATION.
After all Senior Indebtedness is paid in full and until the Senior
Subordinated Notes are paid in full, Holders of Senior Subordinated Notes shall
be subrogated (equally and ratably with all other Indebtedness pari passu with
the Senior Subordinated Notes) to the rights of holders of Senior Indebtedness
to receive distributions applicable to Senior Indebtedness to the extent that
distributions otherwise payable to the Holders of Senior Subordinated Notes have
been applied to the payment of Senior Indebtedness. A distribution made under
this Article 10 to holders of Senior Indebtedness that otherwise would have been
made to Holders of Senior Subordinated Notes is not, as between the Issuers and
Holders, a payment by the Issuers on the Senior Subordinated Notes.
SECTION 10.9 RELATIVE RIGHTS.
This Article 10 defines the relative rights of Holders of Senior
Subordinated Notes and holders of Senior Indebtedness. Nothing in this
Indenture shall:
<PAGE>
91
(1) impair, as between the Issuers and Holders of Senior Subordinated
Notes, the obligation of the Issuers, which is absolute and unconditional, to
pay principal of and interest on the Senior Subordinated Notes in accordance
with their terms;
(2) affect the relative rights of Holders of Senior Subordinated
Notes and creditors of the Issuers other than their rights in relation to
holders of Senior Indebtedness; or
(3) prevent the Trustee or any Holder of Senior Subordinated Notes
from exercising its available remedies upon a Default or Event of Default,
subject to the rights of holders and owners of Senior Indebtedness to receive
distributions and payments otherwise payable to Holders of Senior Subordinated
Notes.
SECTION 10.10 SUBORDINATION MAY NOT BE IMPAIRED BY ISSUERS OR
GUARANTORS.
No right of any holder of Senior Indebtedness to enforce the
subordination of the Indebtedness evidenced by the Senior Subordinated Notes or
the related Senior Subordinated Note Guarantee shall be impaired by any act or
failure to act by the Issuers, any Guarantor or any Holder or by the failure of
the Issuers, any Guarantor or any Holder to comply with this Indenture.
SECTION 10.11 DISTRIBUTION OR NOTICE TO REPRESENTATIVE.
Whenever a distribution is to be made or a notice given to holders of
Senior Indebtedness, the distribution may be made and the notice given to their
Representative.
Upon any payment or distribution of assets of the Issuers referred to
in this Article 10, the Trustee and the Holders of Senior Subordinated Notes
shall be entitled to rely upon any order or decree made by any court of
competent jurisdiction or upon any certificate of such Representative or of the
liquidating trustee or agent or other Person making any distribution to the
Trustee or to the Holders of Senior Subordinated Notes for the purpose of
ascertaining the Persons entitled to participate in such distribution, the
holders of the Senior Indebtedness and other Indebtedness of the Issuers, the
amount thereof or payable thereon, the amount or amounts paid or distributed
thereon and all other facts pertinent thereto or to this Article 10.
<PAGE>
92
SECTION 10.12 ARTICLE 10 NOT TO PREVENT EVENTS OF DEFAULT OR LIMIT
RIGHT TO ACCELERATE.
The failure to make a payment in respect of the Senior Subordinated
Notes, whether directly or pursuant to any Senior Subordinated Note Guarantee,
by reason of any provision in this Article 10 shall not be construed as
preventing the occurrence of a Default or Event of Default. Nothing in this
Article 10 shall have any effect on the right of the Holders or the Trustee to
accelerate the maturity of the Senior Subordinated Notes or to make a claim for
payment under any Senior Subordinated Note Guarantee.
SECTION 10.13 RIGHTS OF TRUSTEE AND PAYING AGENT.
Notwithstanding the provisions of this Article 10 or any other
provision of this Indenture, the Trustee shall not be charged with knowledge of
the existence of any facts that would prohibit the making of any payment or
distribution by the Trustee, and the Trustee and the Paying Agent may continue
to make payments on the Senior Subordinated Notes, unless the Trustee shall have
received at its Corporate Trust Office at least five Business Days prior to the
date of such payment written notice of facts that would cause the payment of any
Obligations with respect to the Senior Subordinated Notes to violate this
Article 10. Only the Issuers or a Representative may give the notice. Nothing
in this Article 10 shall impair the claims of, or payments to, the Trustee under
or pursuant to Section 7.7 hereof.
The Trustee in its individual or any other capacity may hold Senior
Indebtedness with the same rights it would have if it were not Trustee. Any
Agent may do the same with like rights.
SECTION 10.14 AUTHORIZATION TO EFFECT SUBORDINATION.
Each Holder of Senior Subordinated Notes, by the Holder's acceptance
thereof, authorizes and directs the Trustee on such Holder's behalf to take such
action as may be necessary or appropriate to effectuate the subordination as
provided in this Article 10, and appoints the Trustee to act as such Holder's
attorney-in-fact for any and all such purposes. If the Trustee does not file a
proper proof of claim or proof of debt in the form required in any proceeding
referred to in Section 6.9 hereof at least 30 days before the expiration of the
time to file such claim, the Representatives are hereby authorized to file an
appropriate claim for and on behalf of the Holders of the Senior Subordinated
Notes.
SECTION 10.15 AMENDMENTS.
The provisions of this Article 10 shall not be amended or modified
without the written consent of the Holders of at least 75% in aggregate
principal amount of the Senior Subordinated Notes then outstanding if such
amendment would adversely affect the rights of Holders of Senior Subordinated
Notes.
<PAGE>
93
SECTION 10.16 TRUSTEE'S COMPENSATION NOT PREJUDICED.
Nothing in this Article 10 shall apply to amounts due to the Trustee
pursuant to other sections in this Indenture.
SECTION 10.17 SUBORDINATION OF GUARANTEE.
Each Guarantor will agree, and the Trustee and each Holder of the
Senior Subordinated Notes, whether upon original issue or upon transfer,
assignment or exchange thereof, accepts and agrees that all payments of the
principal of and interest on the Senior Subordinated Notes pursuant to each
Senior Subordinated Note Guarantee made by or on behalf of each Guarantor shall
be subordinated and junior in right of payment to the prior payment in full in
cash or Cash Equivalents of all amounts payable under any senior Indebtedness of
such Guarantor, including any senior Indebtedness incurred as a result of such
Guarantor's guarantee of any Senior Indebtedness.
SECTION 10.18 TRUSTEE NOT FIDUCIARY FOR HOLDERS OF SENIOR
INDEBTEDNESS.
The Trustee shall not be deemed to owe any fiduciary duty to the
holders of Senior Indebtedness and shall not be liable to any such holders if
the Trustee shall in good faith mistakenly pay over or distribute to Holders of
Securities or to the Issuers or to any other person cash, property or securities
to which any holders of Senior Indebtedness shall be entitled by virtue of this
Article or otherwise. With respect to the holders of Senior Indebtedness, the
Trustee undertakes to perform or to observe only such of its covenants or
obligations as are specifically set forth in this Article and no implied
covenants or obligations with respect to holders of Senior Indebtedness shall be
read into this Indenture against the Trustee.
ARTICLE 11.
GUARANTEE
SECTION 11.1 UNCONDITIONAL GUARANTEE.
Any Guarantor will unconditionally, jointly and severally, guarantee
to each Holder of a Senior Subordinated 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 Subordinated 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 Subordinated Notes and all
other obligations of the Issuers to the Holders or the Trustee hereunder or
under the Senior Subordinated 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 11.3. Any Guarantor will agree that its
obligations hereunder shall be unconditional, irrespective of the validity,
<PAGE>
94
regularity or enforceability of the Senior Subordinated Notes or this Indenture,
the absence of any action to enforce the same, any waiver or consent by any
Holder of the Senior Subordinated 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 Subordinated Note Guarantee, as the case may be,
will not be discharged except by complete performance of the obligations
contained in the Senior Subordinated 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 Subordinated 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 Subordinated 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 Subordinated Note Guarantee.
SECTION 11.2 SEVERABILITY.
In case any provision of this Article 11 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 11.3 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 Subordinated 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 Subordinated 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 11.4, result in the obligations of such Guarantor not constituting such
a fraudulent transfer or conveyance.
<PAGE>
95
SECTION 11.4 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
Subordinated 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 11.3, for all
payments, damages and expenses incurred by such Funding Guarantor in discharging
the Issuers' obligations with respect to the Senior Subordinated Notes or any
other Guarantor's obligations under a Senior Subordinated Note Guarantee, as the
case may be.
SECTION 11.5 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 Subordinated 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
Subordinated Notes in accordance with the provisions provided therefor in this
Indenture.
ARTICLE 12.
MISCELLANEOUS
SECTION 12.1 TRUST INDENTURE ACT CONTROLS.
If any provision of this Indenture limits, qualifies or conflicts with
the duties imposed by TIA (S) 31 8(c), the imposed duties shall control.
SECTION 12.2 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, Inc.
Avalon Cable of New England, LLC
Avalon Cable Finance, Inc.
800 Third Avenue, Suite 3100
New York, New York 10022
<PAGE>
96
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 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 12.3 COMMUNICATION BY HOLDERS OF SENIOR SUBORDINATED
NOTES WITH OTHER HOLDERS OF SENIOR SUBORDINATED NOTES.
Holders may communicate pursuant to TIA (S) 312(b) with other Holders
with respect to their rights under this Indenture or the Senior Subordinated
Notes. The Issuers, the Trustee, the Registrar and anyone else shall have the
protection of TIA (S) 312(c).
<PAGE>
97
SECTION 12.4 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 12.5 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 12.5 hereof) stating that, in the opinion of such counsel, all
such conditions precedent and covenants have been satisfied.
SECTION 12.5 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 12.6 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 12.7 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 Guarantor, as such, shall
have any liability for any
<PAGE>
98
obligations under the Senior Subordinated Notes, the Senior Subordinated 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
Subordinated Notes by accepting a Senior Subordinated Notes waives and releases
all such liability. The waiver and release are part of the consideration for
issuance of the Senior Subordinated 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 12.8 GOVERNING LAW.
THE LAW OF THE STATE OF NEW YORK SHALL GOVERN THIS INDENTURE, THE
SENIOR SUBORDINATED NOTES AND ANY SENIOR SUBORDINATED NOTE GUARANTEES.
SECTION 12.9 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 12.10 SUCCESSORS.
All agreements of the Issuers in this Indenture and the Senior
Subordinated Notes shall bind its successors. All agreements of the Trustee in
this Indenture shall bind its successors.
SECTION 12.11 SEVERABILITY.
In case any provision in this Indenture or in the Senior Subordinated
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 12.12 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 12.13 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.
<PAGE>
99
[Signatures on following page]
<PAGE>
100
SIGNATURES
Dated as of December 10, 1998
AVALON CABLE OF MICHIGAN, INC.
By: /s/ Joel C. Cohen
-------------------------------
Name: Joel C. Cohen
Title: President, CEO and Secretary
AVALON CABLE OF NEW ENGLAND,
LLC
By: /s/ Joel C. Cohen
--------------------------------
Name: Joel C. Cohen
Title: President, CEO and Secretary
AVALON CABLE FINANCE, INC.
By: /s/ Joel C. Cohen
--------------------------------
Name: Joel C. Cohen
Title: President, CEO 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]
9 3/8% Senior Subordinated Notes due 2008
CUSIP/CINS_________
No.______ $_________
AVALON CABLE OF MICHIGAN, INC.
AVALON CABLE OF NEW ENGLAND LLC
AVALON CABLE 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, INC.
By:____________________________
Name:
Title:
By:_____________________________
Name:
Title:
AVALON CABLE OF NEW ENGLAND LLC
By:____________________________
Name:
Title:
A-1
<PAGE>
By:_________________________
Name:
Title:
AVALON CABLE 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)
9 3/8% Senior Subordinated 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, Inc. a Pennsylvania corporation, Avalon
Cable of New England LLC, a Delaware limited liability company, and Avalon Cable
Finance, Inc., a Delaware corporation (collectively the "Issuers") promise to
pay interest on the principal amount of this Senior Subordinated Note at 9 3/8%
per annum from December 3, 1998 until maturity and shall pay the Liquidated
Damages, if any, payable pursuant to Section 5 of the Registration Rights
Agreement referred to below. 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 Subordinated Notes will accrue
from the most recent date to which interest has been paid or, if no interest has
been paid, from the date of issuance; provided that if there is no existing
Default in the payment of interest, and if this Senior Subordinated 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, 1999. 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. The Issuers will pay interest on the Senior Subordinated
Notes (except defaulted interest) and Liquidated Damages, if any, to the Persons
who are registered Holders of Senior Subordinated Notes at the close of business
on the May 15 or November 15 next preceding the Interest Payment Date, even if
such Senior Subordinated 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
Subordinated Notes will be payable as to principal, premium and Liquidated
Damages, if any, and 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
Subordinated 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. 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.
A-3
<PAGE>
4. Indenture.
The Issuers issued the Senior Subordinated 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
Subordinated 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 Subordinated 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 Subordinated
Note conflicts with the express provisions of the Indenture, the provisions of
the Indenture shall govern and be controlling. The Senior Subordinated Notes are
obligations of the Issuers limited to $200.0 million in aggregate principal
amount.
Upon completion of the Reorganization, it is anticipated that (i) the
Issuers will be (a) Avalon New England, (b) Avalon Finance and (c) Avalon Cable
of Michigan LLC ("Avalon Michigan LLC"), as successor to Avalon Michigan, and
(ii) Avalon Michigan will cease to obligated as an Issuer, but will become a
guarantor of Avalon Michigan LLC's obligations under the Senior Subordinated
Notes.
The payment of principal of, and premium, if any, and interest on, and
other Obligations evidenced by, the Senior Subordinated Notes will be
subordinated in right of payment, as set forth in the Indenture, to the prior
payment in full of all Senior Indebtedness whether outstanding on the date of
the Indenture or thereafter incurred. Each Holder of this Senior Subordinated
Note, by accepting the same, (i) agrees to such provisions, (ii) authorizes and
directs the Trustee on such Holder's behalf to take such action as may be
necessary or appropriate to effectuate the subordination as provided in the
Indenture and (iii) appoints the Trustee to act as attorney-in-fact for any and
all such purposes.
5. Optional Redemption.
(a) Except as described in subparagraph (b) of this Paragraph 5, the
Senior Subordinated Notes will not be redeemable at the Issuers' option prior to
December 1, 2003. Thereafter, the Senior Subordinated 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................................. 104.688%
2004................................. 103.125%
2005................................. 101.563%
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 of Senior
Subordinated Notes originally issued under the Indenture at a
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<PAGE>
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 at maturity of Senior Subordinated 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.
6. Mandatory Redemption.
Except as set forth in paragraph 7 below, the Issuers are not required
to make mandatory redemption or sinking fund payments with respect to the Senior
Subordinated Notes.
7. Repurchase at the Option of holders.
(a) Upon the occurrence of a Change of Control, each Holder of Senior
Subordinated 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 Subordinated 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 (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
Subordinated 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
Subordinated 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, the Issuers
shall commence an offer to all Holders of Senior Subordinated 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 Subordinated 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, 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 of
Senior Subordinated Notes tendered into such Asset Sale surrendered by
A-5
<PAGE>
Holders thereof exceeds the amount of Excess Proceeds, the Trustee shall select
the Senior Subordinated Notes to be purchased on a pro rata basis, by lot or
other customary method; provided that no Senior Subordinated 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 Subordinated 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 Subordinated Notes purchased by completing the form entitled
"Option of Holder to Elect Purchase" on the reverse of the Senior Subordinated
Notes.
8. 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 Subordinated Notes to
be redeemed at its registered address. Notices of redemption may not be
conditional. If any Senior Subordinated Note is to be redeemed in part only, the
notice of redemption that relates to such Senior Subordinated 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 Subordinated Notes or
portions of them called for redemption.
9. Denominations, Transfer, Exchange. The Senior Subordinated Notes are in
registered form without coupons in denominations of $1,000 and integral
multiples thereof. A Holder may transfer or exchange Senior Subordinated 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 Subordinated Notes selected for redemption.
Also, the Issuers are not required to transfer or exchange any Senior
Subordinated Notes for a period of 15 business days before a selection of Senior
Subordinated Notes to be redeemed or during the period between a record date and
the next succeeding Interest Payment Date.
10. Persons Deemed Owners. The registered Holder of a Senior Subordinated Note
may be treated as its owner for all purposes.
11. Amendment, Supplement and Waiver. Subject to certain exceptions, the
Indenture, or the Senior Subordinated Notes may be amended or supplemented with
the consent of the Holders of at least a majority in principal amount of the
then outstanding Senior Subordinated Notes voting as a single class, and any
existing default or compliance with any provision of the Indenture or the Senior
Subordinated Notes may be waived with the consent of the Holders of a majority
in principal amount of the then outstanding Senior Subordinated Notes voting as
a single class. Without the consent of any Holder of a Senior Subordinated Note,
the Indenture or the Senior Subordinated Notes may be amended or supplemented to
cure any ambiguity, omission, defect or inconsistency, to provide for
uncertificated Senior Subordinated Notes in addition to or in place of
certificated Senior Subordinated Notes, to provide for the assumption of the
Issuers' obligations to Holders of the Senior Subordinated Notes in case of a
merger, consolidation or sale of assets (including the Reorganization), to add
additional guarantees with respect to the Senior Subordinated Notes, to provide
for Additional Obligors, to make any change that would provide any additional
rights or benefits to the Holders of the Senior Subordinated 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.
12. Defaults and Remedies.
A-6
<PAGE>
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 Subordinated Notes (whether or
not prohibited by the subordination provisions of the Indenture); (ii) default
in payment when due of the principal of or premium, if any, on the Senior
Subordinated 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 Subordinated 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 of the then outstanding Senior
Subordinated Notes may declare all the Senior Subordinated 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 Subordinated 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 Subordinated Notes will become due and payable without
further action or notice. Holders of the Senior Subordinated Notes may not
enforce the Indenture or the Senior Subordinated Notes except as provided in the
Indenture. Subject to certain limitations, Holders of a majority in principal
amount of the then outstanding Senior Subordinated Notes may direct the Trustee
in its exercise of any trust or power. The Trustee may withhold from Holders of
the Senior Subordinated 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 of the Senior
Subordinated Notes then outstanding by notice to the Trustee may on behalf of
the Holders of all of the Senior Subordinated 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 principal of, the
Senior Subordinated 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
A-7
<PAGE>
of Default that is continuing, to deliver to the Trustee a statement specifying
such Default or Event of Default.
13. 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.
14. 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 Subordinated Notes, as such, shall
have any liability for any obligations of the Issuers under the Senior
Subordinated 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 Subordinated Notes by accepting a Senior Subordinated Note
waives and releases all such liability. The waiver and release are part of the
consideration for issuance of the Senior Subordinated 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.
15. Authentication. This Senior Subordinated Note shall not be valid until
authenticated by the manual signature of the Trustee or an authenticating agent.
16. 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).
17. Additional Rights of Holders of Restricted Global Notes and Restricted
Definitive Notes. In addition to the rights provided to Holders of Senior
Subordinated 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 Subordinated 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 Subordinated Notes (collectively, the "Registration Rights
Agreement").
18. 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 Subordinated 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 Subordinated
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 Subordinated Notes pursuant to the Indenture,
the Issuers shall use their best efforts to obtain the same CUSIP number for
such Additional Senior Subordinated Notes as is printed on the Senior
Subordinated Notes outstanding at such time; provided, however, that if any
series of Additional Senior
A-8
<PAGE>
Subordinated Notes is determined, pursuant to an Opinion of Counsel, to be a
different class of security than the Senior Subordinated Notes outstanding at
such time for federal income tax purposes, the Issuers may obtain a CUSIP number
for such series of Additional Senior Subordinated Notes that is different from
the CUSIP number printed on the Senior Subordinated Notes then outstanding.
19. Guarantees. This Senior Subordinated 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, Inc.
Avalon Cable of New England LLC
Avalon Cable Finance, Inc.
800 Third Avenue, Suite 3100
New York, New York 10022
Attention: Vice President--Finance
A-9
<PAGE>
Assignment Form
To assign this Senior Subordinated Note, fill in the form below: (I) or (we)
assign and transfer this Senior Subordinated 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 Subordinated 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 Subordinated 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.
A-10
<PAGE>
Option of Holder to Elect Purchase
If you want to elect to have this Senior Subordinated 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 Subordinated 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 Subordinated 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.
A-11
<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 Subordinated Note is issued
in global form.
A-12
<PAGE>
EXHIBIT B
FORM OF CERTIFICATE OF TRANSFER
Avalon Cable of Michigan, Inc.
Avalon Cable of New England LLC
Avalon Cable 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: 9 3/8% Senior Subordinated Senior Subordinated Notes due 2008
-------------------------------------------------------------
Reference is hereby made to the Indenture, dated as of December 10,
1998 (the "Indenture"), among Avalon Cable of Michigan, Inc. ("Avalon
Michigan"), Avalon Cable of New England LLC ("Avalon New England"), Avalon Cable
Finance, Inc. ("Avalon Finance") and The Bank of New York, as trustee.
Initially, Avalon Michigan, Avalon New England and Avalon Finance or any
successor thereto will be the Issuers of the Senior Subordinated Notes (the
"Issuers"); provided that subsequent to the Reorganization, the Issuers shall be
Avalon New England, Avalon Finance and Avalon Michigan LLC, as successor to
Avalon Michigan, 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 Subordinated Note[s] or interest in such Senior Subordinated Note[s]
specified in Annex A hereto, in the principal amount of $____ in such Senior
Subordinated 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 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.
B-1-1
<PAGE>
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;
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 Subordinated Notes at the time of
transfer of less than $250,000, an Opinion of Counsel provided
B-1-2
<PAGE>
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 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-1-3
<PAGE>
Dated: ___________________
B-1-4
<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-1-4
<PAGE>
EXHIBIT C
FORM OF CERTIFICATE OF EXCHANGE
Avalon Cable of Michigan, Inc.
Avalon Cable of New England LLC
Avalon Cable 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: 9 3/8% Senior Subordinated Senior Subordinated Notes due 2008
-------------------------------------------------------------
(CUSIP ____________________)
Reference is hereby made to the Indenture, dated as of December __,
1998 (the "Indenture"), among Avalon Cable of Michigan, Inc. ("Avalon
Michigan"), Avalon Cable of New England LLC ("Avalon New England"), Avalon
Cable Finance, Inc. ("Avalon Finance") and The Bank of New York, as trustee.
Initially, Avalon Michigan, Avalon New England and Avalon Finance or any
successor thereto will be the Issuers of the Senior Subordinated Notes (the
"Issuers"); provided that subsequent to the Reorganization, the Issuers shall be
Avalon New England, Avalon Finance and Avalon Michigan LLC, as successor to
Avalon Michigan, 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 Subordinated Note[s] or interest in such Senior Subordinated Note[s]
specified herein, in the principal amount of $______, for the Senior
Subordinated 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 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.
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(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
(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
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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:______________________
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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 of up to $200.0 million of
9 3/8% Senior Subordinated Notes due 2008 (the "Senior Subordinated 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 Subordinated Notes and the Indenture on
the terms and conditions set forth herein (the "Senior Subordinated 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 Subordinated 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 Subordinated 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 Subordinated Notes or
the obligations of the Issuers hereunder or thereunder, that:
(i) the principal of and interest on the Senior Subordinated
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 Subordinated 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
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(ii) in case of any extension of time of payment or renewal of
any Senior Subordinated 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
Subordinated Notes or the Indenture, the absence of any action to
enforce the same, any waiver or consent by any Holder of the
Senior Subordinated 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 Subordinated Note Guarantee shall not be discharged
except by complete performance of the obligations contained in
the Senior Subordinated 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
Subordinated Note Guarantee, to the extent theretofore
discharged, shall be reinstated in full force and effect.
(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
Subordinated 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 Subordinated 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 Subordinated Note Guarantee not
constitute a fraudulent transfer or conveyance for purposes of
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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 Subordinated 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 Subordinated 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 Subordinated Notes or any other
Guarantor's obligations under a Senior Subordinated Note
Guarantee, as the case may be.
(j) Each Guarantor agrees, and the Trustee and each Holder of the
Senior Subordinated Notes, whether upon original issue or upon
transfer, assignment or exchange thereof, accepts and agrees that
all payments of the principal of and interest on the Senior
Subordinated Notes pursuant to each Senior Subordinated Note
Guarantee made by or on behalf of each Guarantor shall be
subordinated and junior in right of payment to the prior payment
in full in cash or Cash Equivalents of all amounts payable under
any senior Indebtedness of such Guarantor, including any senior
Indebtedness incurred as a result of such Guarantor's guarantee
of any Senior Indebtedness.
(k) This Senior Subordinated 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
Subordinated Note Guarantees shall remain in full force and effect
notwithstanding any failure to endorse on each Senior Subordinated Note a
notation of such Senior Subordinated 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
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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 Subordinated
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 Subordinated 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 Subordinated 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 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 Subordinated Note Guarantee.
(b) Any Guarantor not released from its obligations under its Senior
Subordinated Note Guarantee shall remain liable for the full
amount of principal of and interest on the Senior Subordinated
Notes and for the other obligations of any Guarantor under the
Indenture as provided in Article 10 of the Indenture.
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 Subordinated Notes, as
such, shall have any liability for any obligations of the Issuers under the
Senior Subordinated 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 Subordinated Notes by accepting a Senior
Subordinated Note waives and releases all such liability. The waiver and release
are part of the consideration for issuance of the Senior Subordinated 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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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 Subordinated
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.
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:
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SUPPLEMENTAL INDENTURE
----------------------
SUPPLEMENTAL INDENTURE (this "Supplemental Indenture"), dated as of
March 26, 1999, by and among Avalon Cable of Michigan LLC, a Delaware limited
liability company ("Avalon Michigan LLC"), Avalon Cable of New England LLC, a
Delaware limited liability company ("Avalon New England"), Avalon Cable 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 Michigan Inc., Avalon New England 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 of up to $200.0 million of 9 3/8% Senior Subordinated
Notes due 2008 (the "Senior Subordinated Notes");
WHEREAS, the Reorganization (as defined in the Indenture) has
occurred;
WHEREAS, pursuant to the Reorganization, Avalon Cable LLC, a Delaware
limited liability company ("Avalon Holdings"), assumed the liabilities and
obligations of Avalon Michigan Inc. under the Indenture and the Senior
Subordinated Notes;
WHEREAS, immediately thereafter and pursuant to the Reorganization,
Avalon Michigan LLC assumed the liabilities and obligations of Avalon Holdings
under the Indenture and the Senior Subordinated Notes;
WHEREAS, in connection with the foregoing and as contemplated by the
Indenture, Avalon Michigan Inc. shall guarantee the obligations of Avalon
Michigan LLC under the Indenture and Senior Subordinated 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 Michigan
LLC, Avalon New England 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 Subordinated Notes as follows:
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1. CAPITALIZED TERMS. Capitalized terms used herein without definition
shall have the meanings assigned to them in the Indenture.
2. AGREEMENT TO GUARANTEE. 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 Michigan LLC therefor, to each
Holder of a Senior Subordinated 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 Subordinated Notes or the obligations of the Issuers
hereunder or thereunder, that:
(i) the principal of and interest on the Senior Subordinated
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 Subordinated
Notes, if any, if lawful, and all other obligations of Avalon
Michigan 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 Subordinated 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 Avalon Michigan
Inc., to the extent of the obligation of Avalon Michigan 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 Subordinated Notes
or the Indenture, the absence of any action to enforce the same, any waiver
or consent by any Holder of the Senior Subordinated 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.
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(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 Subordinated Note Guarantee shall not be discharged
except by complete performance of the obligations contained in the
Senior Subordinated 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 Subordinated Note
Guarantee, to the extent theretofore discharged, shall be
reinstated in full force and effect.
(f) 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
Subordinated 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 Subordinated Note
Guarantee.
(h) 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 Subordinated 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 Avalon
Michigan Inc. hereby irrevocably agree that the obligations of
each Guarantor under each Senior Subordinated 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
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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 Subordinated 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 Subordinated Notes or any other
Guarantor's obligations under a Senior Subordinated Note
Guarantee, as the case may be.
(j) Each Guarantor agrees, and the Trustee and each Holder of the
Senior Subordinated 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 Subordinated Notes
pursuant to each Senior Subordinated 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 Subordinated Notes in accordance with the provisions
provided therefor in the Indenture.
(k) This Supplemental Indenture shall constitute a Senior Subordinated
Note Guarantee of 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. Avalon Michigan Inc. agrees that this
Senior Subordinated Note Guarantee shall remain in full force and effect
notwithstanding any failure to endorse on each Senior Subordinated Note a
notation of such Senior Subordinated Note Guarantee.
4. RELEASE. In the event of a sale or other disposition of all of the
assets of Avalon Michigan Inc., by way of merger, consolidation or otherwise, or
a sale or other disposition of all to the capital stock of Avalon Michigan Inc.,
then Avalon Michigan Inc. (in the event of a sale or other disposition, by way
of merger, consolidation or otherwise, of all of the capital stock of Avalon
Michigan Inc.) or the corporation acquiring the property (in the event of a sale
or other disposition of all or substantially all of the assets of Avalon
Michigan Inc.) will, upon notice to the
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Trustee of its intention to be so released, be released and relieved of any
obligations under its Senior Subordinated Note Guarantee.
5. THE ISSUERS. As of the date hereof and after giving effect to the
Reorganization, as contemplated by the Indenture, the Issuers are Avalon
Michigan LLC, Avalon New England 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 Subordinated Notes, as
such, shall have any liability for any obligations under the Senior Subordinated
Notes, the Senior Subordinated 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 Subordinated Notes by
accepting a Senior Subordinated Note waives and releases all such liability. The
waiver and release are part of the consideration for issuance of the Senior
Subordinated 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 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
Subordinated 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 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 OF MICHIGAN LLC
By: /s/ Joel C. Cohen
--------------------------
Name: Joel C. Cohen
Title: President
AVALON CABLE OF NEW ENGLAND LLC
By: /s/ Joel C. Cohen
---------------------------
Name: Joel C. Cohen
Title: President
AVALON CABLE FINANCE, INC.
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 4.4
EXECUTION COPY
$150,000,000
AVALON CABLE OF MICHIGAN, INC.
AVALON CABLE OF NEW ENGLAND LLC
AVALON CABLE FINANCE, INC.
9 3/8% Senior Subordinated Notes due 2008
PURCHASE AGREEMENT
------------------
December 3, 1998
LEHMAN BROTHERS INC.
PRUDENTIAL SECURITIES INCORPORATED
BANCBOSTON ROBERTSON STEPHENS INC.
FLEET SECURITIES, INC.
SG COWEN SECURITIES CORPORATION
c/o Lehman Brothers Inc.
Three World Financial Center
New York, New York 10285
Dear Sirs:
Avalon Cable of Michigan, Inc., a Pennsylvania corporation ("Avalon
Michigan"), Avalon Cable of New England LLC, a Delaware limited liability
company ("Avalon New England" and, together with Avalon Michigan, the
"Companies"), and Avalon Cable Finance, Inc., a Delaware corporation ("Avalon
Finance" and, together with the Companies, the "Issuers") propose to issue and
sell to you (the "Initial Purchasers") $150.0 million in aggregate principal
amount at maturity of their 9 3/8% Senior Subordinated 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 17, 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
<PAGE>
2
the Initial Notes to: (i) refinance certain existing indebtedness; (ii)
distribute a certain amount to Avalon Cable of Michigan Holdings, Inc.
("Michigan Holdings"), Avalon Cable LLC ("Avalon Holdings") and Avalon Cable
Holdings Finance, Inc. ("Finance Holdings" and, together with Michigan Holdings
and Avalon Holdings, the "Holding Companies") to repay certain indebtedness; and
(iii) 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 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."
<PAGE>
3
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 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 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' 9 3/8% Senior Subordinated 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
<PAGE>
4
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 its state of organization 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 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).
<PAGE>
5
(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 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
<PAGE>
6
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).
(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
<PAGE>
7
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 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.
<PAGE>
8
(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 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
<PAGE>
9
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 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.
<PAGE>
10
(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.
(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 Discount 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
<PAGE>
11
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 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
<PAGE>
12
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:
(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.
<PAGE>
13
(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 $150.0 million in
aggregate principal amount of Initial Notes to the Initial Purchasers and the
Initial Purchasers, severally and not jointly, will purchase the aggregate
principal amount of Initial Notes set forth next to such Initial Purchaser's
name on Schedule I hereto at an aggregate purchase price equal to 97.25% of the
principal amount thereof (the "Purchase Price"). Each of the Initial Purchasers
agrees not to decline, and agrees not to permit its affiliates to decline, any
payments or prepayments to be made under the Credit Facility with the proceeds
of the Offering.
If any Initial Purchaser or Initial Purchasers default in their
obligations to purchase Initial Notes hereunder and the aggregate principal
amount at maturity of Initial Notes that such defaulting Initial Purchaser or
Initial Purchasers agreed but failed to purchase does not exceed 10% of the
total principal amount at maturity of Initial Notes that the Initial Purchasers
are obligated to purchase on such Closing Date, Lehman Brothers Inc. may make
arrangements satisfactory to the Issuers for the purchase of such Initial Notes
by other persons, including any of the Initial Purchasers, but if no such
arrangements are made by the Closing Date, the non-defaulting Initial Purchasers
shall be obligated severally, in proportion to their respective commitments
hereunder, to purchase the Initial Notes that such defaulting Initial Purchasers
agreed but failed to purchase. If any Initial Purchaser or Initial Purchasers so
default and the aggregate principal amount at maturity of Initial Notes with
respect to which such default or defaults occur exceeds 10% of the total
principal amount at maturity of Initial Notes and arrangements satisfactory to
Lehman Brothers Inc. and the Issuers for the purchase of such Initial Notes by
other persons are not made within 36 hours after such default, this Agreement
will terminate without liability on the part of any non-defaulting Initial
Purchaser or the Issuers, except as provided in Section 13. As used in this
Agreement, the term "Initial Purchaser" includes any person substituted for a
Initial Purchaser under this Section. Nothing herein will relieve a defaulting
Initial Purchaser from liability for its default.
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.
<PAGE>
14
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>
15
(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.
<PAGE>
16
(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 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 New Notes in connection with the
Exchange Offer or (ii) 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
<PAGE>
17
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 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 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.
(b) 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.
(c) 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.
(d) 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. Each of the
Companies is qualified to do business and is in good standing in Connecticut,
Massachusetts, Michigan and New York as indicated in a schedule attached to such
opinion.
(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
<PAGE>
18
requisite limited liability company or corporate, as the case may be, power and
authority to execute, deliver and perform their respective 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
<PAGE>
19
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).
(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 Michigan's or Avalon
New England's Certificate of Formation or Limited Liability Company Agreement or
Avalon Finance'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
<PAGE>
20
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.
(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.
(e) 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.
<PAGE>
21
(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, 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.
(f) 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.
<PAGE>
22
(g) The Issuers and the Trustee shall have entered into the Indenture
and the Initial Purchasers shall have received counterparts, conformed as
executed, thereof.
(h) 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.
(i) With respect to the letter of PricewaterhouseCoopers LLP, KPMG
Peat Marwick LLP and Greenfield, Altman, Brown, Berger & Katz, P.C. delivered to
the Initial 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.
(j) 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(k) 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.
(k) 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
<PAGE>
23
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.
(l) Simpson Thacher & Bartlett shall have been furnished with such
other documents and opinions, in addition to those set forth above, as they may
reasonably 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.
(m) 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.
(n) 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.
(o) 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.
<PAGE>
24
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 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
<PAGE>
25
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 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
<PAGE>
26
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
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
<PAGE>
27
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.
(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(k), 7(m) or 7(n) 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
<PAGE>
28
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 of Michigan, Inc., 201 East 69/th/
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 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>
29
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 OF MICHIGAN, INC.
By: /s/ Jay M. Grossman
-----------------------------
Name: Jay M. Grossman
Title: Vice President and
Assistant Secretary
AVALON CABLE OF NEW ENGLAND LLC
By: /s/ Jay M. Grossman
-----------------------------
Name: Jay M. Grossman
Title: Vice President and
Assistant Secretary
AVALON CABLE FINANCE, INC.
By: /s/ Jay M. Grossman
-----------------------------
Name: Jay M. Grossman
Title: Vice President and
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 of Notes
- ----------------- -------------------------
Lehman Brothers Inc. $114,375,000
Prudential Securities Incorporated 13,125,000
BancBoston Robertson Stephens Inc. 7,500,000
Fleet Securities Inc. 7,500,000
SG Cowen Securities Corporation 7,500,000
------------
Total $150,000,000
============
<PAGE>
EXHIBIT 4.5
EXECUTION COPY
________________________________________________________________________________
________________________________________________________________________________
REGISTRATION RIGHTS AGREEMENT
Dated as of December 10, 1998
Among
AVALON CABLE OF MICHIGAN, INC.
AVALON CABLE OF NEW ENGLAND LLC
AVALON CABLE FINANCE, INC.
as Issuers
and
LEHMAN BROTHERS INC.
PRUDENTIAL SECURITIES INCORPORATED
BANCBOSTON ROBERTSON STEPHENS INC.
FLEET SECURITIES, INC.
SG COWEN SECURITIES CORPORATION
as Initial Purchasers
________________________________________________________________________________
________________________________________________________________________________
<PAGE>
TABLE OF CONTENTS
-----------------
Page
----
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
i
<PAGE>
This Registration Rights Agreement (this "Agreement") is made and
entered into as of December 10, 1998 by and among Avalon Cable of Michigan,
Inc., a Pennsylvania corporation ("Avalon Michigan"), Avalon Cable of New
England LLC, a Delaware limited liability company ("Avalon New England"), Avalon
Cable Finance, Inc. a Delaware corporation ("Avalon Finance"), and Lehman
Brothers Inc. ("Lehman"), Prudential Securities Incorporated ("Prudential"),
BancBoston Robertson Stephens Inc. ("BancBoston"), Fleet Securities, Inc.
("Fleet"), and SG Cowen Securities Corporation ("SG Cowen" and, together with
Lehman, Prudential, BancBoston, and Fleet, 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 $150,000,000 aggregate principal amount of
the Issuers' 9 3/8% Senior Subordinated Notes due 2008 (the "Senior Subordinated
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
Subordinated 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 Subordinated 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>
2
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 Subordinated 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 Subordinated 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, Avalon Michigan, Avalon New England and
-------
Avalon Finance; provided that, subsequent to the Reorganization (as defined
in the Indenture), the Issuers shall be Avalon New England, Avalon Finance
and Avalon Cable of Michigan LLC, a Delaware limited liability company, as
successor to Avalon Michigan.
Liquidated Damages: As defined in Section 5(a) hereof.
------------------
NASD: National Association of Securities Dealers, Inc.
----
New Notes: The New Senior Subordinated 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.
--------------------
<PAGE>
3
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 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.
(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,
<PAGE>
4
(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 Subordinated 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-
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
<PAGE>
5
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
Subordinated 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
(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 Subordinated Notes by the
Holders of Transfer Restricted Securities entitled to the benefit of this
Section 4(a)
<PAGE>
6
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
Subordinated 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 of Senior Subordinated Notes held by
such Holder. The amount of Liquidated Damages will increase by an additional
$.05 per week per $1,000 principal amount of Senior Subordinated 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 of Senior Subordinated
Notes. All accrued Liquidated Damages shall be paid to Holders by the Issuers
in the same manner as interest is paid 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.
<PAGE>
7
(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 Subordinated Notes, on or before the
applicable Interest Payment Date (whether or not any payment other than
Liquidated Damages is payable on such Senior Subordinated 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 Subordinated 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 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
-----
<PAGE>
8
& 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 Subordinated 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 of
Senior Subordinated 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 of Senior Subordinated Notes and/or New Notes, as the case
may be, be included in such underwritten offering.
(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 Subordinated 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
<PAGE>
9
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 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;
<PAGE>
10
(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 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;
<PAGE>
11
(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 Subordinated 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 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
<PAGE>
12
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.
(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.
<PAGE>
13
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 Subordinated Notes covered by the Shelf
Registration Statement, New Notes in the same amount as the Senior
Subordinated 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
Subordinated Notes, as the case may be; in return, the Senior Subordinated
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 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;
<PAGE>
14
(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 Subordinated 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
(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
<PAGE>
15
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 Subordinated Notes on a national
securities exchange or automated quotation system, and the obtaining of a
rating of the Senior Subordinated 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 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,
<PAGE>
16
but not limited to, any loss, claim, damage, liability, expense or action
relating to purchases and sales of Senior Subordinated 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 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 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.
<PAGE>
17
(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 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
<PAGE>
18
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
Subordinated 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.
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
<PAGE>
19
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 Subordinated Notes. The
---------------------------------------------------
Issuers will not take any action, or permit any change to occur, with
respect to Senior Subordinated 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
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 of Michigan, Inc.
Avalon Cable of New England, LLC
Avalon Cable Finance, Inc.
<PAGE>
20
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 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.
<PAGE>
21
(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 OF MICHIGAN, 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 FINANCE, INC.
By: /s/ Joel C. Cohen
---------------------
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. Cubero
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 of Michigan LLC,
Avalon Cable of New England LLC,
Avalon Cable Finance, Inc.,
Avalon Cable of Michigan, Inc.
800 Third Street
Suite 3100
New York, NY 10022
Re: Avalon Cable of Michigan LLC,
Avalon Cable of New England LLC,
Avalon Cable Finance, Inc., and
Avalon Cable of Michigan, Inc.
Registration Statement on Form S-4
Registration No. 333-75453
----------------------------------
Ladies and Gentlemen:
We are issuing this opinion letter in our capacity as special legal counsel
to Avalon Cable of Michigan LLC, a Delaware limited liability company ("Avalon
Michigan LLC"), Avalon Cable of New England LLC, a Delaware limited liability
company ("Avalon New England"), and Avalon Cable Finance, Inc., a Delaware
corporation ("Avalon Finance" and, collectively with Avalon Michigan LLC and
Avalon New England, the "Issuers") and Avalon Cable of Michigan, Inc., a
Pennsylvania corporation ("Avalon Michigan" or the "Guarantor" and, together
with the Issuers, the "Registrants"), in connection with the proposed
registration by the Issuers of up to $150,000,000 in aggregate principal amount
of the Issuers' 9 3/8% Series B Senior Subordinated Notes due 2008 (the
"Exchange Notes"), pursuant to a Registration Statement on Form S-4
(Registration No. 333-75453) 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 Michigan LLC under the Exchange Notes will be guaranteed
by the Guarantor (the "Guarantee"). The Exchange Notes are to be issued pursuant
to the Indenture (as supplemented,
<PAGE>
KIRKLAND & ELLIS
May 26, 1999
Page 2
the "Indenture"), dated as of December 10, 1998, among Avalon Michigan, Avalon
New England and Avalon 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 Michigan LLC, Avalon New
England and Avalon Finance, as issuers, Avalon Michigan, as guarantor, and The
Bank of New York, as trustee. The Guarantee is to be issued pursuant to the
Supplemental Indenture. The Exchange Notes and the Guarantee are to be issued in
exchange for and in replacement of the Issuers' outstanding 9 3/8% Senior
Discount Notes due 2008 (the "Old Notes"), of which $150,000,000 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 Michigan, Avalon New England,
Avalon Finance, Lehman Brothers Inc., Prudential Securities Incorporated,
BancBoston Robertson Stephens Inc., Fleet Securities, Inc. and SG Cowen
Securities Corporation.
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, fraudulent transfer, fraudulent
conveyance, moratorium or other similar law affecting
<PAGE>
KIRKLAND & ELLIS
May 26, 1999
Page 3
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.
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 10.4
EXECUTIVE EMPLOYMENT AGREEMENT
THIS EXECUTIVE EMPLOYMENT AGREEMENT (this "Agreement") is made as of
---------
November 6, 1998, between Avalon Cable LLC, a Delaware limited liability company
(the "Company"), Avalon Cable of New England, LLC, a Delaware limited liability
-------
company ("Avalon Cable New England"), and David Unger ("Executive").
------------------------ ---------
The Executive and Avalon Cable New England entered into an Executive
Employment Agreement (the "Old Agreement") as of May 29, 1998, in connection
-------------
with the consummation of the transactions contemplated by the Investor
Securities Purchase Agreement dated as of May 29, 1998 (the "Investor Securities
-------------------
Purchase Agreement") by and among Avalon Cable Holdings, LLC ("Avalon Holdings")
- ------------------ ---------------
and its members.
This Agreement is being entered into in connection with the
consummation of the transactions contemplated by the Securities Purchase
Agreement dated as of the date hereof (as in effect from time to time, the
"Securities Purchase Agreement") among Avalon Holdings, Avalon Cable of
- ------------------------------
Michigan, Inc., Avalon Cable of New England, Inc., the Company and the other
parties thereto. Each capitalized term which is used and not otherwise defined
in this Agreement has the meaning which the Investor Securities Purchase
Agreement assigns to that term.
In consideration of the mutual covenants contained herein and other
good and valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto agree as follows:
1. Termination of Old Agreement. Avalon Cable of New England and
----------------------------
the Executive hereby terminate the Old Agreement.
2. Employment. The Company will employ Executive, and Executive
----------
accepts employment with the Company, upon the terms and conditions set forth in
this Agreement, for the period beginning on the date of this Agreement and
ending as provided in Section 6 (the "Employment Period").
-----------------
3. Position and Duties. During the Employment Period, Executive
-------------------
will exclusively serve as the Chairman of Avalon Holdings and its Subsidiaries
and render such managerial, analytical, administrative, marketing and other
executive services to the Avalon Holdings and its Subsidiaries, if any, as are
from time to time necessary in connection with the management and affairs of
Avalon Holdings and its Subsidiaries (together with all reasonably related
activities, the "Business"), subject to the authority of the Managers of the
--------
Company (the "Board") and to the proviso set forth in the following sentence.
-----
Executive will devote his best efforts and approximately sixty-seven percent
(67%) of substantially all of his business time and attention (except for
permitted vacation periods and reasonable periods of illness or other
incapacity) to the business and affairs of Avalon Holdings and its Subsidiaries,
if any; provided that Executive may
--------
<PAGE>
continue to serve as chairman of Suncom Communications, LLC and as an Executive
Vice President of Audio Communications Network, LLC or its successor; and
provided further that, without limiting Section 9, during the Employment Period,
- -------- -------
Executive will not directly or indirectly own, manage, control, participate in,
consult with, render services for, or in any other manner engage in the cable
television business other than (i) on behalf of the Company or any affiliate
thereof or (ii) as a passive owner of less than 5% of the outstanding stock of a
corporation of any class which is publicly traded, so long as Executive has no
direct or indirect participation in the business of such corporation. Executive
will report to the Board. Executive will perform his duties and responsibilities
to the best of his abilities in a diligent, trustworthy, businesslike and
efficient manner.
4. Base Salary, Bonus and Benefits.
-------------------------------
(a) Base Salary. During the Employment Period, Executive will be paid
-----------
$125,000 per annum as base compensation for services (as in effect from time to
time, the "Base Salary"); provided, that, effective on each anniversary of the
----------- --------
date hereof, the Base Salary will increase by 5% of the amount thereof prior to
such increase. The Board may review, and in its sole discretion otherwise may
increase, the Base Salary as and when the Board deems appropriate if and when
the size and scope of the Company and its Subsidiaries increases beyond its
currently expected increased size and scope. The Base Salary will be payable in
regular installments in accordance with the general payroll practices of the
Company and its Subsidiaries. In addition, during the Employment Period,
Executive will be entitled to participate in all of the employee benefit
programs for which senior executive employees of the Company and its
Subsidiaries are generally eligible.
(b) Reimbursement of Expenses. The Company will reimburse Executive
-------------------------
for all reasonable expenses incurred by him in the course of performing his
duties under this Agreement and which are consistent with the Company's policies
in effect from time to time with respect to travel, entertainment and other
business expenses, subject to the Company's requirements with respect to
reporting and documentation of such expenses.
(c) Bonus. In addition to the Base Salary, the Board may in its sole
-----
discretion award a bonus (the "Bonus") to Executive following the end of each
-----
fiscal year during the Employment Period as the Board deems appropriate, in an
amount up to 20% of the weighted-average Base Salary in effect during such
fiscal year. The Bonus, if awarded, for a fiscal year will be paid only after
delivery of the audited financial statements for such fiscal year pursuant to
the Investor Securities Purchase Agreement.
5. Vacation Days. Executive shall earn and be entitled to one and
-------------
two-thirds (1-2/3) days of paid vacation ("Vacation Time") for each full month
-------------
of the Employment Period, in addition to legal holidays; provided, however, that
-------- -------
no such Vacation Time shall accrue or be earned to the extent that such accrual
or earning would cause Executive's accrued or earned, but unused, Vacation Time
to exceed four (4) weeks at any time. Vacation Time which accrues in accordance
with this Section 5 shall be available to the Executive on each successive one
month anniversary of the date hereof. In addition, the Company agrees that
Executive has earned eight and one-third (8 1/3) days of unused Vacation Time
prior to the execution of this Agreement. Executive shall make
-2-
<PAGE>
best efforts to schedule vacations so as not to conflict with the conduct of the
Company's business, and Executive shall give to the Board adequate advance
notice of his planned absences.
6. Termination.
-----------
(a) The Employment Period will continue until the earlier of: (i) the
fifth anniversary of the date hereof; or (ii Executive's resignation, death or
Disability or other incapacity (as determined by the Company in good faith) or
until the Employment Period is terminated by the Company for any reason or for
no reason (provided that the Company shall not terminate the Employment Period
in bad faith). For the purposes of this Agreement, "Cause" shall mean (i) the
-----
commission of a felony or a crime involving moral turpitude or the commission
of any other act or omission involving dishonesty, disloyalty or fraud with
respect to the Company or any of its affiliates, (ii) conduct tending to bring
the Company or any of its affiliates into substantial public disgrace or
disrepute, (iii) substantial and repeated failure to perform duties as
reasonably directed by the Board, (iv) gross negligence or willful misconduct
with respect to the Company or any of its affiliates, (v) substantial
underperformance in carrying out Executive's duties under this Agreement, or
(vi) any material breach of or misrepresentation by Executive or the Company
under this Agreement or any Related Agreement (as defined below). For the
purposes of this Agreement, "Related Agreements" means the Members Agreement,
------------------
the Registration Agreement, the Investor Securities Purchase Agreement, the LLC
Agreement and the Management Securities Purchase Agreement to which Executive is
a party, each dated as of the date hereof among the Company (except for the LLC
Agreement) and its members, and each as in effect from time to time. For
purposes of this Agreement, "Disability" means the inability of Executive to
----------
perform his duties hereunder for 120 days during any 12-month period.
(b) In the event of Executive's resignation, death, disability or
other incapacity or the termination of the Employment Period by the Company for
Cause or effective upon a Sale of the Company (as that term is defined in the
Members Agreement), Executive will not be entitled to receive his Base Salary or
any fringe benefits or Bonus for periods after the termination of the Employment
Period. In the event of termination of the Employment Period by the Company for
any other reason or for no reason, Executive will be entitled to receive his
Base Salary (at the rate then in effect) and fringe benefits described in
paragraph 4(a) for a period of six months thereafter (so long as Executive is
not in breach of Section 8, or 9 hereof).
7. Resignation as Officer or Director. Upon the termination of the
----------------------------------
Employment Period, Executive will resign each position (if any) that he then
holds as an officer, director or manager of the Company or any of its
Subsidiaries (including, without limitation, his membership on the Board).
8. Confidential Information. The Executive acknowledges that the
------------------------
information, observations and data that have been or may be obtained by him
during his employment or other relationship or interaction with the Company or
any affiliate or predecessor thereof or of any such Subsidiary (each of the
Company, any of its affiliates or any such predecessor being an "Avalon-Related
--------------
Company" and collectively they are the "Avalon-Related Companies") prior to and
- ------- ------------------------
after the date of this Agreement concerning the business or affairs of the
Avalon-Related Companies (collectively, "Confidential Information") are and will
------------------------
be the property of the Avalon-Related
-3-
<PAGE>
Companies. Therefore, Executive agrees that he will not disclose to any
unauthorized Person or use for his own account any Confidential Information
without the prior written consent of the Company (by the action of the Board),
unless and to the extent that (i) the aforementioned matters become generally
known to and available for use by the public other than as a result of
Executive's acts or omissions to act or (ii) disclosure of the aforementioned
matters is required under federal or state law or a duly issued subpoena. In the
event any disclosure pursuant to clause (ii) above is made, Executive will give
the Company reasonable prior notice thereof and will permit the Avalon-Related
Companies to resist or limit the scope of the disclosure to be made. Executive
will deliver to the Company at the termination of the Employment Period, or at
any other time any Avalon-Related Company may request, all memoranda, notes,
plans, records, reports, computer tapes and software and other documents and
data (and copies thereof) containing or relating to Confidential Information or
the business of any Avalon-Related Company which he may then possess or have
under his control.
9. Non-Compete, Non-Solicitation.
-----------------------------
(a) Non-Compete. Executive acknowledges that during his employment
-----------
or other relationship or interaction with the Avalon-Related Companies he has
and will become familiar with trade secrets and other confidential information
concerning such Persons, and with investment opportunities relating to the
Business, and that his services have been and will be of special, unique and
extraordinary value to the foregoing entities. Therefore, Executive agrees that,
during the Employment Period and for six (6) months thereafter (the Employment
Period and such six month period being the "Noncompete Period"), he will not
-----------------
directly or indirectly own, manage, control, participate in, consult with,
render services for, or in any other manner engage in any business, or as an
investor in or lender to any business (in each case including, without
limitation, on his own behalf or on behalf of another entity) which is in the
cable television business in any market in which the Avalon-Related Companies
are operating or are considering operating (including pursuant to any potential
acquisitions), at any given point in time during the Employment Period or as of
the end of the Employment Period if the Employment Period has ended; provided
--------
that for purposes of this Section 9(a), but not for purposes of Section 9(b),
the Noncompete Period will terminate at the end of the Employment Period if the
Employment Period is terminated by the Company other than for Cause or
Executive's disability. Nothing in this Section 9 will prohibit Executive from
being a passive owner of less than 5% of the outstanding stock of a corporation
engaged in a competing business described above of any class which is publicly
traded, so long as Executive has no direct or indirect participation in the
business of such corporation. By initialing in the space provided below,
Executive acknowledges that he has read carefully and had the opportunity to
consult with legal counsel regarding the provisions of this Section
9(a).________ [INITIAL]
(b) Non-Solicitation. During the Noncompete Period, Executive will
----------------
not directly or indirectly (i) induce or attempt to induce any employee or full-
time independent contractor of the Company or any Subsidiary to leave the employ
or contracting relationship with such entity, or in any way interfere with the
relationship between any such entity and any employee or full-time independent
contractor thereof, (ii) solicit for employment or as an independent contractor
any person who was an employee or full-time independent contractor of the
Company or any Subsidiary at any time during the Employment Period, or (iii)
induce or attempt to induce any customer, supplier or other business relation of
the Company or any Subsidiary to cease doing business with
-4-
<PAGE>
such entity or in any way interfere with the relationship between any such
customer, supplier or other business relation and such entity. By initialing in
the space provided below, Executive acknowledges that he has read carefully and
had the opportunity to consult with legal counsel regarding the provisions of
this Section 9(b)._________[INITIAL]
10. Enforcement. The Company and Executive agree that if, at the
-----------
time of enforcement of Section 8 or 9, a court holds that any restriction stated
in any such Section is unreasonable under circumstances then existing, then the
maximum period, scope or geographical area reasonable under such circumstances
will be substituted for the stated period, scope or area. Because Executive's
services are unique and because Executive has access to information of the type
described in Sections 8 and 9, the Company and Executive agree that money
damages would be an inadequate remedy for any breach of Section 8 or 9.
Therefore, in the event of a breach or threatened breach of Section 8 or 9, the
Company or its successors or assigns (or any other affected Person) may, in
addition to other rights and remedies existing in their favor, apply to any
court of competent jurisdiction for specific performance and/or injunctive or
other relief in order to enforce, or prevent any violations of, the provisions
of Section 8 or 9, without posting a bond or other security. The provisions of
Sections 8, 9 and 10 are intended to be for the benefit of the Company, its
Subsidiaries, and their respective successors and assigns, each of which may
enforce such provisions and each of which (other than the Company) is an express
third-party beneficiary of such provisions and this Agreement generally.
Sections 8, 9 and 10 will survive and continue in full force in accordance with
their terms notwithstanding any termination of the Employment Period. By
initialing in the space provided below, Executive acknowledges that he has read
carefully and had the opportunity to consult with legal counsel regarding the
provisions of this Section 10.________[INITIAL]
11. Representations. Executive represents and warrants to the
---------------
Company and its Subsidiaries that Executive is not a party to or bound by any
employment agreement, noncompete agreement or confidentiality agreement with any
other Person, other than with ACN Operating, LLC and/or any of its Subsidiaries
or Affiliates.
12. Key-Man Life Insurance. If the Board determines that the Company
----------------------
and/or one or more of its Subsidiaries should purchase a "key-man" insurance
policy on the life of Executive, then Executive agrees to submit to any
requested physical examination in connection with the Company's or any
Subsidiary's purchase of such a key-man insurance policy, and the Executive
agrees to cooperate fully in connection with the underwriting, purchase and/or
retention of any such key-man insurance policy by the Company or any of its
Subsidiaries.
13. Miscellaneous.
-------------
(a) Notices. All notices, demands or other communications to be given
-------
or delivered under or by reason of the provisions of this Agreement shall be in
writing and shall be deemed to have been given when delivered personally to the
recipient, sent to the recipient by reputable overnight courier service (charges
prepaid), or mailed to the recipient by certified or registered mail, return
receipt requested and postage prepaid. Such notices, demands and other
communications shall be sent to the address indicated below:
-5-
<PAGE>
Notices to Executive:
--------------------
David Unger
The Excelsior
303 East 57th Street, Apt. 30G
New York, NY 10022
with a copy (which shall not constitute notice to Executive) to:
---------------------------------------------------------------
Baer Marks & Upham LLP
805 Third Avenue
New York, NY 10022
Attention: Anne E. Pitter
Notices to the Company:
----------------------
Avalon Cable LLC
201 East 69th Street, Penthouse G
New York, NY 10021
Attention: Joel Cohen, President
with copies (which shall not constitute notice to the Company) to:
-----------------------------------------------------------------
ABRY Partners, Inc.
18 Newbury Street
Boston, Massachusetts 02116
Attention: Jay Grossman
Kirkland & Ellis
Citicorp Center
153 East 53rd Street
New York, New York 10022
Attention: John L. Kuehn, Esq.
or to such other address or to the attention of such other person as the
recipient party has specified by prior written notice to the sending party.
(b) Amendment and Waiver. No modification, amendment or waiver of
--------------------
any provision of this Agreement will be effective unless such modification,
amendment or waiver is approved in writing by the Company, Executive and ABRY,
if ABRY then holds (either directly or indirectly) any Equity Securities of the
Company. The failure of any party to enforce any of the provisions of this
Agreement will in no way be construed as a waiver of such provisions and will
not affect the right of such party thereafter to enforce each and every
provision of this Agreement in accordance with its terms.
-6-
<PAGE>
(c) Severability. Without limiting Section 9, whenever possible, each
------------
provision of this Agreement will be interpreted in such a manner as to be
effective and valid under applicable law, but if any provision of this Agreement
is held to be invalid, illegal or unenforceable in any respect under any
applicable law or rule in any jurisdiction, such invalidity, illegality or
unenforceability will not affect the validity, legality or enforceability of any
other provision of this Agreement in such jurisdiction or affect the validity,
legality or enforceability of any provision in any other jurisdiction, but this
Agreement will be reformed, construed and enforced in that jurisdiction as if
such invalid, illegal or unenforceable provision had never been contained in
this Agreement.
(d) Entire Agreement. Except as otherwise expressly set forth
----------------
herein, this agreement and the other agreements referred to herein embodies the
complete agreement and understanding among the parties hereto with respect to
the subject matter hereof 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 hereof in any way.
(e) Successors and Assigns. This Agreement will bind and inure to
----------------------
the benefit of and be enforceable by the Company and Executive and their
respective assigns; provided that Executive may not assign his rights under this
--------
Agreement without the prior written consent of each of the Company and ABRY, if
ABRY then holds (either directly or indirectly) any Equity Securities of the
Company.
(f) Counterparts. This Agreement may be executed simultaneously in
------------
two or more counterparts, any one of which need not contain the signatures of
more than one party, but all such counterparts taken together will constitute
one and the same Agreement.
(g) Descriptive Headings; Interpretation. The descriptive headings
------------------------------------
of this Agreement are inserted for convenience only and do not constitute a
substantive part of this Agreement.
(h) GOVERNING LAW. ALL ISSUES AND QUESTIONS CONCERNING THE
-------------
CONSTRUCTION, VALIDITY, INTERPRETATION AND ENFORCEMENT OF THIS AGREEMENT WILL
BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE DOMESTIC LAWS OF THE STATE
OF NEW YORK, WITHOUT GIVING EFFECT TO ANY CHOICE OF LAW OR CONFLICT PROVISION OR
RULE (WHETHER OF THE STATE OF NEW YORK OR ANY OTHER JURISDICTION) THAT WOULD
CAUSE THE LAWS OF ANY JURISDICTION OTHER THAN THE STATE OF NEW YORK TO BE
APPLIED. IN FURTHERANCE OF THE FOREGOING, THE INTERNAL LAW OF THE STATE OF NEW
YORK WILL CONTROL THE INTERPRETATION AND CONSTRUCTION OF THIS AGREEMENT, EVEN IF
UNDER THAT JURISDICTION'S CHOICE OF LAW OR CONFLICT OF LAW ANALYSIS, THE
SUBSTANTIVE LAW OF SOME OTHER JURISDICTION WOULD ORDINARILY APPLY.
(i) 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
-7-
<PAGE>
WITH, OR ARISING OUT OF THIS AGREEMENT OR ANY ANCILLARY AGREEMENT OR THE
VALIDITY, PROTECTION, INTERPRETATION, COLLECTION OR ENFORCEMENT THEREOF.
(j) No Strict Construction. The parties hereto 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 hereto, 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.
* * * * *
-8-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Executive
Employment Agreement as of the date first written above.
AVALON CABLE OF NEW ENGLAND LLC
By:________________________________
Name:
Title:
AVALON CABLE LLC
By:________________________________
Name:
Title:
___________________________________
David Unger
The undersigned, each being an affiliate of the "Company" referred to
in this Agreement, hereby unconditionally guarantees the payment and performance
of the Company's obligations under this Agreement.
AVALON CABLE OF MICHIGAN, INC.
By:________________________________
Name:
Title:
AVALON CABLE HOLDINGS, LLC
By:________________________________
Name:
Title:
<PAGE>
EXHIBIT 10.5
EXECUTIVE EMPLOYMENT AGREEMENT
THIS EXECUTIVE EMPLOYMENT AGREEMENT (this "Agreement") is made as of
---------
November 6, 1998, between Avalon Cable LLC, a Delaware limited liability company
(the "Company"), Avalon Cable of New England, LLC, a Delaware limited liability
-------
company ("Avalon Cable New England"), and Joel C. Cohen ("Executive").
------------------------ ---------
The Executive and Avalon Cable New England entered into an Executive
Employment Agreement (the "Old Agreement") as of May 29, 1998, in connection
-------------
with the consummation of the transactions contemplated by the Investor
Securities Purchase Agreement dated as of May 29, 1998 (the "Investor Security
-----------------
Purchase Agreement") by and among Avalon Cable Holdings, LLC ("Avalon Holdings")
- ------------------ ---------------
and its members.
This Agreement is being entered into in connection with the
consummation of the transactions contemplated by the Securities Purchase
Agreement dated as of the date hereof (as in effect from time to time, the
"Securities Purchase Agreement") among Avalon Holdings, Avalon Cable of
- ------------------------------
Michigan, Inc., Avalon Cable of New England, Inc., the Company and the other
parties thereto. Each capitalized term which is used and not otherwise defined
in this Agreement has the meaning which the Investor Securities Purchase
Agreement assigns to that term.
In consideration of the mutual covenants contained herein and other
good and valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto agree as follows:
1. Termination of Old Agreement. Avalon Cable of New England and
----------------------------
the Executive hereby terminate the Old Agreement.
2. Employment. The Company will employ Executive, and Executive
----------
accepts employment with the Company, upon the terms and conditions set forth in
this Agreement, for the period beginning on the date of this Agreement and
ending as provided in Section 6 (the "Employment Period").
-----------------
3. Position and Duties. During the Employment Period, Executive
-------------------
will exclusively serve as the President and Chief Executive Officer of Avalon
Holdings and its Subsidiaries and render such managerial, analytical,
administrative, marketing and other executive services to Avalon Holdings and
its Subsidiaries, if any, as are from time to time necessary in connection with
the management and affairs of Avalon Holdings and its Subsidiaries (together
with all reasonably related activities, the "Business"), subject to the
--------
authority of the Managers of the Company (the "Board") and to the proviso set
-----
forth in the following sentence. Executive will devote his best efforts and
substantially all of his business time and attention (except for permitted
vacation periods and reasonable periods of illness or other incapacity, and
except for continuing to perform through the end of calendar year 1998 under
Executive's present consulting arrangement with ARP
<PAGE>
Partnership) to the business and affairs of the Company and its Subsidiaries, if
any; provided that, without limiting Section 9, during the Employment Period,
--------
Executive will not directly or indirectly own, manage, control, participate in,
consult with, render services for, or in any other manner engage in the cable
television business other than (i) on behalf of the Company or any Subsidiary
thereof or (ii) as a passive owner of less than 5% of the outstanding stock of a
corporation of any class which is publicly traded, so long as Executive has no
direct or indirect participation in the business of such corporation. Executive
will report to the Board. Executive will perform his duties and responsibilities
to the best of his abilities in a diligent, trustworthy, businesslike and
efficient manner.
4. Base Salary, Bonus and Benefits.
-------------------------------
(a) Base Salary. During the Employment Period, Executive will be paid
-----------
$250,000 per annum as base compensation for services (as in effect from time to
time, the "Base Salary"); provided, that, effective on each anniversary of the
----------- --------
date hereof, the Base Salary will increase by 5% of the amount thereof prior to
such increase. The Board may review, and in its sole discretion otherwise may
increase, the Base Salary as and when the Board deems appropriate if and when
the size and scope of the Company and its Subsidiaries increases beyond its
currently expected increased size and scope. The Base Salary will be payable in
regular installments in accordance with the general payroll practices of the
Company and its Subsidiaries. In addition, during the Employment Period,
Executive will be entitled to participate in all of the employee benefit
programs for which senior executive employees of the Company and its
Subsidiaries are generally eligible.
(b) Reimbursement of Expenses. The Company will reimburse Executive
-------------------------
for all reasonable expenses incurred by him in the course of performing his
duties under this Agreement and which are consistent with the Company's policies
in effect from time to time with respect to travel, entertainment and other
business expenses, subject to the Company's requirements with respect to
reporting and documentation of such expenses.
(c) Bonus. In addition to the Base Salary, the Board may in its sole
-----
discretion award a bonus (the "Bonus") to Executive following the end of each
-----
fiscal year during the Employment Period as the Board deems appropriate, in an
amount up to 20% of the weighted-average Base Salary in effect during such
fiscal year. The Bonus, if awarded, for a fiscal year will be paid only after
delivery of the audited financial statements for such fiscal year pursuant to
the Investor Securities Purchase Agreement.
5. Vacation Days. Executive shall earn and be entitled to one and
-------------
two-thirds (1-2/3) days of paid vacation ("Vacation Time") for each full month
-------------
of the Employment Period, in addition to legal holidays; provided, however, that
-------- -------
no such Vacation Time shall accrue or be earned to the extent that such accrual
or earning would cause Executive's accrued or earned, but unused, Vacation Time
to exceed four (4) weeks at any time. Vacation Time which accrues in accordance
with this Section 5 shall be available to the Executive on each successive one
month anniversary of the date hereof. In addition, the Company agrees that
Executive has earned eight and one-third (8 1/3) days of unused Vacation Time
prior to the execution of this Agreement. Executive shall make best efforts to
schedule vacations so as not to conflict with the conduct of the Company's
business, and Executive shall give to the Board adequate advance notice of his
planned absences.
-2-
<PAGE>
6. Termination.
-----------
(a) The Employment Period will continue until the earlier of: (i) the
fifth anniversary of the date hereof; or (ii Executive's resignation, death or
Disability or other incapacity (as determined by the Company in good faith) or
until the Employment Period is terminated by the Company for any reason or for
no reason (provided that the Company shall not terminate the Employment Period
in bad faith). For the purposes of this Agreement, "Cause" shall mean (i) the
-----
commission of a felony or a crime involving moral turpitude or the commission
of any other act or omission involving dishonesty, disloyalty or fraud with
respect to the Company or any of its affiliates, (ii) conduct tending to bring
the Company or any of its affiliates into substantial public disgrace or
disrepute, (iii) substantial and repeated failure to perform duties as
reasonably directed by the Board, (iv) gross negligence or willful misconduct
with respect to the Company or any of its affiliates, (v) substantial
underperformance in carrying out Executive's duties under this Agreement, or
(vi) any material breach of or misrepresentation by Executive or the Company
under this Agreement or any Related Agreement (as defined below). For the
purposes of this Agreement, "Related Agreements" means the Members Agreement,
------------------
the Registration Agreement, the Investor Securities Purchase Agreement, the LLC
Agreement and the Management Securities Purchase Agreement to which Executive is
a party, each dated as of May 29, 1998 among the Company (except for the LLC
Agreement) and its members, and each as in effect from time to time. For
purposes of this Agreement, "Disability" means the inability of Executive to
----------
perform his duties hereunder for 120 days during any 12-month period.
(b) In the event of Executive's resignation, death, disability or
other incapacity or the termination of the Employment Period by the Company for
Cause, Executive will not be entitled to receive his Base Salary or any fringe
benefits or Bonus for periods after the termination of the Employment Period.
In the event of termination of the Employment Period by the Company for any
other reason or for no reason, Executive will be entitled to receive his Base
Salary (at the rate then in effect) and fringe benefits described in paragraph
4(a) for a period of six months thereafter (so long as Executive is not in
breach of Section 8 or 9 hereof).
7. Resignation as Officer or Director. Upon the termination of the
----------------------------------
Employment Period, Executive will resign each position (if any) that he then
holds as an officer, director or manager of the Company or any of its
Subsidiaries (including, without limitation, his membership on the Board).
8. Confidential Information. The Executive acknowledges that the
------------------------
information, observations and data that have been or may be obtained by him
during his employment or other relationship or interaction with the Company or
any affiliate or predecessor thereof or of any such Subsidiary (each of the
Company or any of its affiliates or any such predecessor being an "Avalon-
------
Related Company" and collectively they are the "Avalon-Related Companies") prior
- --------------- ------------------------
to and after the date of this Agreement concerning the business or affairs of
the Avalon-Related Companies (collectively, "Confidential Information") are and
------------------------
will be the property of the Avalon-Related Companies. Therefore, Executive
agrees that he will not disclose to any unauthorized Person or use for his own
account any Confidential Information without the prior written consent of the
Company
-3-
<PAGE>
(by the action of the Board), unless and to the extent that the aforementioned
matters become generally known to and available for use by the public other than
as a result of Executive's acts or omissions to act. Executive will deliver to
the Company at the termination of the Employment Period, or at any other time
any Avalon-Related Company may request, all memoranda, notes, plans, records,
reports, computer tapes and software and other documents and data (and copies
thereof) containing or relating to Confidential Information or the business of
any Avalon-Related Company which he may then possess or have under his control.
9. Non-Compete, Non-Solicitation.
-----------------------------
(a) Non-Compete. Executive acknowledges that during his employment or
-----------
other relationship or interaction with the Avalon-Related Companies he has and
will become familiar with trade secrets and other confidential information
concerning such Persons, and with investment opportunities relating to the
Business, and that his services have been and will be of special, unique and
extraordinary value to the foregoing entities. Therefore, Executive agrees that,
during th e Employment Period and for six (6) months thereafter (the
Employment Period and such six month period being the "Noncompete Period"), he
-----------------
will not directly or indirectly own, manage, control, participate in, consult
with, render services for, or in any other manner engage in any business, or as
an investor in or lender to any business (in each case including, without
limitation, on his own behalf or on behalf of another entity) which is in the
cable television business in any market in which the Avalon-Related Companies
are operating or are considering operating (including pursuant to any potential
acquisitions), at any given point in time during the Employment Period, or as of
the end of the Employment Period if the Employment Period has ended. Nothing in
this Section 9 will prohibit Executive from being a passive owner of less than
5% of the outstanding stock of a corporation engaged in a competing business as
described above of any class which is publicly traded, so long as Executive has
no direct or indirect participation in the business of such corporation. By
initialing in the space provided below, Executive acknowledges that he has read
carefully and had the opportunity to consult with legal counsel regarding the
provisions of this Section 9(a). _______ [INITIAL]
(b) Non-Solicitation. During the Noncompete Period, Executive will
----------------
not directly or indirectly (i) induce or attempt to induce any employee or full-
time independent contractor of the Company or any Subsidiary to leave the employ
or contracting relationship with such entity, or in any way interfere with the
relationship between any such entity and any employee or full-time independent
contractor thereof, (ii) solicit for employment or as an independent contractor
any person who was an employee or full-time independent contractor of the
Company or any Subsidiary at any time during the Employment Period, or (iii)
induce or attempt to induce any customer, supplier or other business relation of
the Company or any Subsidiary to cease doing business with such entity or in any
way interfere with the relationship between any such customer, supplier or other
business relation and such entity. By initialing in the space provided below,
Executive acknowledges that he has read carefully and had the opportunity to
consult with legal counsel regarding the provisions of this Section 9(b). ______
[INITIAL]
10. Enforcement. The Company and Executive agree that if, at the
-----------
time of enforcement of Section 8 or 9, a court holds that any restriction stated
in any such Section is unreasonable under circumstances then existing, then the
maximum period, scope or geographical
-4-
<PAGE>
area reasonable under such circumstances will be substituted for the stated
period, scope or area. Because Executive's services are unique and because
Executive has access to information of the type described in Sections 8 and 9,
the Company and Executive agree that money damages would be an inadequate remedy
for any breach of Section 8 or 9. Therefore, in the event of a breach or
threatened breach of Section 8 or 9, the Company or its successors or assigns
(or any other affected Person) may, in addition to other rights and remedies
existing in their favor, apply to any court of competent jurisdiction for
specific performance and/or injunctive or other relief in order to enforce, or
prevent any violations of, the provisions of Section 8 or 9, without posting a
bond or other security. The provisions of Sections 8, 9 and 10 are intended to
be for the benefit of the Company, its Subsidiaries, and their respective
successors and assigns, each of which may enforce such provisions and each of
which (other than the Company) is an express third-party beneficiary of such
provisions and this Agreement generally. Sections 8, 9 and 10 will survive and
continue in full force in accordance with their terms notwithstanding any
termination of the Employment Period. By initialing in the space provided below,
Executive acknowledges that he has read carefully and had the opportunity to
consult with legal counsel regarding the provisions of this Section 10. ______
[INITIAL]
11. Representations. Executive represents and warrants to the
---------------
Company and its Subsidiaries that Executive is not a party to or bound by any
employment agreement, noncompete agreement or confidentiality agreement with any
other Person.
12. Key-Man Life Insurance. If the Board determines that the Company
----------------------
and/or one or more of its Subsidiaries should purchase a "key-man" insurance
policy on the life of Executive, then Executive agrees to submit to any
requested physical examination in connection with the Company's or any
Subsidiary's purchase of such a key-man insurance policy, and the Executive
agrees to cooperate fully in connection with the underwriting, purchase and/or
retention of any such key-man insurance policy by the Company or any of its
Subsidiaries.
13. Miscellaneous.
-------------
(a) Notices. All notices, demands or other communications to be given
-------
or delivered under or by reason of the provisions of this Agreement shall be in
writing and shall be deemed to have been given when delivered personally to the
recipient, sent to the recipient by reputable overnight courier service (charges
prepaid), or mailed to the recipient by certified or registered mail, return
receipt requested and postage prepaid. Such notices, demands and other
communications shall be sent to the address indicated below:
Notices to Executive:
--------------------
Joel C. Cohen
101 West 67th St.
Penthouse 1C
New York, NY 10023
-5-
<PAGE>
with a copy (which shall not constitute notice to Executive) to:
---------------------------------------------------------------
Segal & Meltzer
60 Madison Avenue
Suite 914
New York, NY 10010
Attn: Michael I. Meltzer
Notices to the Company:
----------------------
Avalon Cable LLC
201 East 69th Street, Penthouse G
New York, NY 10021
Attention: Joel C. Cohen, President
with copies (which shall not constitute notice to the Company) to:
-----------------------------------------------------------------
ABRY Partners, Inc.
18 Newbury Street
Boston, Massachusetts 02116
Attention: Jay Grossman
Kirkland & Ellis
Citicorp Center
153 East 53rd Street
New York, New York 10022
Attention: John L. Kuehn, Esq.
or to such other address or to the attention of such other person as the
recipient party has specified by prior written notice to the sending party.
(b) Amendment and Waiver. No modification, amendment or waiver of any
--------------------
provision of this Agreement will be effective unless such modification,
amendment or waiver is approved in writing by the Company, Executive and ABRY,
if ABRY then holds (either directly or indirectly) any Equity Securities of the
Company. The failure of any party to enforce any of the provisions of this
Agreement will in no way be construed as a waiver of such provisions and will
not affect the right of such party thereafter to enforce each and every
provision of this Agreement in accordance with its terms.
(c) Severability. Without limiting Section 9, whenever possible, each
------------
provision of this Agreement will be interpreted in such a manner as to be
effective and valid under applicable law, but if any provision of this Agreement
is held to be invalid, illegal or unenforceable in any respect under any
applicable law or rule in any jurisdiction, such invalidity, illegality or
unenforceability will not affect the validity, legality or enforceability of any
other provision of this Agreement in such jurisdiction or affect the validity,
legality or enforceability of any provision in any other jurisdiction, but this
Agreement will be reformed, construed and enforced in that
-6-
<PAGE>
jurisdiction as if such invalid, illegal or unenforceable provision had never
been contained in this Agreement.
(d) Entire Agreement. Except as otherwise expressly set forth herein,
----------------
this agreement and the other agreements referred to herein embodies the complete
agreement and understanding among the parties hereto with respect to the subject
matter hereof 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 hereof in any way.
(e) Successors and Assigns. This Agreement will bind and inure to the
----------------------
benefit of and be enforceable by the Company and Executive and their respective
assigns; provided that Executive may not assign his rights under this Agreement
--------
without the prior written consent of each of the Company and ABRY, if ABRY then
holds (either directly or indirectly) any Equity Securities of the Company.
(f) Counterparts. This Agreement may be executed simultaneously in
------------
two or more counterparts, any one of which need not contain the signatures of
more than one party, but all such counterparts taken together will constitute
one and the same Agreement.
(g) Descriptive Headings; Interpretation. The descriptive headings of
------------------------------------
this Agreement are inserted for convenience only and do not constitute a
substantive part of this Agreement.
(h) GOVERNING LAW. ALL ISSUES AND QUESTIONS CONCERNING THE
-------------
CONSTRUCTION, VALIDITY, INTERPRETATION AND ENFORCEMENT OF THIS AGREEMENT WILL
BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE DOMESTIC LAWS OF THE STATE
OF NEW YORK, WITHOUT GIVING EFFECT TO ANY CHOICE OF LAW OR CONFLICT PROVISION OR
RULE (WHETHER OF THE STATE OF NEW YORK OR ANY OTHER JURISDICTION) THAT WOULD
CAUSE THE LAWS OF ANY JURISDICTION OTHER THAN THE STATE OF NEW YORK TO BE
APPLIED. IN FURTHERANCE OF THE FOREGOING, THE INTERNAL LAW OF THE STATE OF NEW
YORK WILL CONTROL THE INTERPRETATION AND CONSTRUCTION OF THIS AGREEMENT, EVEN IF
UNDER THAT JURISDICTION'S CHOICE OF LAW OR CONFLICT OF LAW ANALYSIS, THE
SUBSTANTIVE LAW OF SOME OTHER JURISDICTION WOULD ORDINARILY APPLY.
(i) 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 ANY ANCILLARY AGREEMENT OR THE VALIDITY, PROTECTION, INTERPRETATION,
COLLECTION OR ENFORCEMENT THEREOF.
-7-
<PAGE>
(j) No Strict Construction. The parties hereto 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 hereto, 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.
* * * * *
-8-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Executive
Employment Agreement as of the date first written above.
AVALON CABLE OF NEW ENGLAND LLC
By:__________________________________
Name:
Title:
AVALON CABLE LLC
By:__________________________________
Name:
Title:
_____________________________________
Joel C. Cohen
The undersigned, each being an affiliate of the "Company" referred to in
this Agreement, hereby unconditionally guarantees the payment and performance of
the Company's obligations under this Agreement.
AVALON CABLE OF MICHIGAN, INC.
By:________________________________
Name:
Title:
AVALON CABLE HOLDINGS, LLC
By:________________________________
Name:
Title:
<PAGE>
EXHIBIT 10.6
EXECUTIVE EMPLOYMENT AGREEMENT
THIS AGREEMENT (this "Agreement") is made as of November 6, 1998
---------
between Avalon Cable LLC, a Delaware limited liability company (the "Company"),
-------
and Peter Polimino ("Executive").
---------
In consideration of the mutual covenants contained herein and other
good and valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto agree as follows:
1. Employment. The Company will employ Executive, and Executive
----------
accepts employment with the Company, upon the terms and conditions set forth in
this Agreement, for the period beginning on the date of this Agreement and
ending as provided in Section 5 (the "Employment Period").
-----------------
2. Position and Duties. During the Employment Period, Executive
-------------------
will serve as the Vice President of Finance of the Company and render such
managerial, analytical, administrative, marketing and other executive services
to the Company and its subsidiaries, if any, as are from time to time necessary
in connection with the management and affairs of the Company and its
subsidiaries (together with all reasonably related activities, the "Business"),
--------
subject to the authority of the President of the Company (the "President") and
---------
to the provisos set forth in the following sentence. Executive will devote his
best efforts and all of his business time and attention (provided that Executive
shall also be allowed permitted vacation periods (as set forth below) and
reasonable periods of illness or other incapacity) to the business and affairs
of the Company and its subsidiaries, if any. During the Employment Period,
Executive will not directly or indirectly own, manage, control, participate in,
consult with, render services for, or in any other manner engage in the cable
television business other than: (i) on behalf of the Company or any subsidiary
thereof; or (ii) as a passive owner of less than 5% of the outstanding stock of
a corporation of any class which is publicly traded, so long as Executive has no
direct or indirect participation in the business of such corporation. Executive
will report to the President. Executive will perform his duties and
responsibilities to the best of his abilities in a diligent, trustworthy,
businesslike and efficient manner.
3. Periodic Review. On or promptly after the six (6) month
---------------
anniversary of the date first above written, the Board of Directors of the
Company (the "Board") shall consider (the "Initial Review") promoting the
----- --------------
Executive to the position of Chief Financial Officer of the Company ("C.F.O").
-----
In conducting such review, the Board will evaluate Executive's performance with
respect to the criteria (the "Promotion Criteria") set forth on the attached
------------------
Schedule A and if the Board, in its sole and absolute discretion, determines
- ----------
that Executive has substantially satisfied one or more such Promotion Criteria,
Executive shall be promoted to the position of C.F.O. In the event, however,
that the Board, in its sole and absolute discretion, decides that Executive has
not substantially satisfied one or more Promotion Criteria, Executive shall not
be promoted to the position of C.F.O.; provided, however, in such case the Board
-------- -------
shall reconsider promoting Executive
<PAGE>
to the position of C.F.O. on each three (3) month anniversary of the Initial
Review until the earlier of: (i) the promotion of Executive to the position
C.F.O.; or (ii) the termination of the Employment Period as set forth in Section
6 below. Notwithstanding anything to the contrary contained herein, if at any
time prior to the promotion of Executive to the position of C.F.O., the Board
authorizes the Company or the President to fill such position with a person
other than the Executive, the obligations of the Company and the Board under
this Section 3 shall immediately terminate.
4. Base Salary, Bonus and Benefits.
-------------------------------
(a) Base Salary. During the Employment Period, Executive will be paid
-----------
$110,000 per annum as base compensation for services (as in effect from time to
time, the "Base Salary"). The President may review, and in its sole discretion
-----------
may increase, the Base Salary as and when the President deems appropriate. The
Base Salary will be payable in regular installments in accordance with the
general payroll practices of the Company and its subsidiaries. In addition,
during the Employment Period, Executive will be entitled to participate in all
of the employee benefit programs for which executive employees of the Company
and its subsidiaries are generally eligible.
(b) Reimbursement of Expenses. The Company will reimburse Executive
-------------------------
for all reasonable expenses incurred by him in the course of performing his
duties under this Agreement and which are consistent with the Company's policies
in effect from time to time with respect to travel, entertainment and other
business expenses, subject to the Company's requirements with respect to
reporting and documentation of such expenses.
(c) Bonus. In addition to the Base Salary, the President may in his
-----
sole discretion award a bonus (the "Bonus") to Executive following the end of
-----
each fiscal year during the Employment Period as the President deems
appropriate, in an amount up to 20% of the weighted-average Base Salary in
effect during such fiscal year.
5. Vacation. Executive shall earn and be entitled to one and one-
--------
quarter (1-1/4) days of paid vacation ("Vacation Time") for each full month of
-------------
the Employment Period, in addition to legal holidays; provided, however, that no
-------- -------
such Vacation Time shall accrue or be earned to the extent that such accrual or
earning would cause Executive's accrued or earned, but unused, Vacation Time to
exceed three (3) weeks at any time. Vacation Time which accrues in accordance
with this Section 5 shall be available to the Executive on each successive one-
month anniversary of the date hereof. Executive shall make best efforts to
schedule vacations so as not to conflict with the conduct of the Company's
business, and Executive shall give to the President adequate advance notice of
his planned absences.
6. Termination.
-----------
(a) The Employment Period will continue until the earlier of: (i) the
fifth anniversary of the date hereof; or (ii Executive's resignation, death or
Disability or other incapacity (as determined by the Company in good faith) or
until the Employment Period is terminated by the Company for any reason or for
no reason (provided that the Company shall not terminate the Employment Period
in bad faith). For the purposes of this Agreement, "Cause" shall mean: (A) the
-----
-2-
<PAGE>
commission of a felony or a crime involving moral turpitude or the commission
of any other act or omission involving dishonesty, disloyalty or fraud with
respect to the Company or any of its affiliates; (B) conduct tending to bring
the Company or any of its affiliates into substantial public disgrace or
disrepute; (C) substantial and repeated failure to perform duties as reasonably
directed by the President; (D) gross negligence or willful misconduct with
respect to the Company or any of its affiliates; (E) substantial
underperformance in carrying out Executive's duties under this Agreement; or (F)
any material breach of or misrepresentation by Executive or the Company under
this Agreement. For purposes of this Agreement, "Disability" means the
----------
inability of Executive to perform his duties hereunder for 120 days during any
12-month period.
(b) In the event of termination of the Employment Period for any
reason or no reason, Executive will not be entitled to receive his Base Salary
or any fringe benefits or Bonus for periods after the termination of the
Employment Period.
7. Resignation as Officer or Director. Upon the termination of the
----------------------------------
Employment Period, Executive will resign each position (if any) that he then
holds as an officer, director or manager of the Company or any of its
subsidiaries (including, without limitation, his membership on the Board).
8. Confidential Information. The Executive acknowledges that the
------------------------
information, observations and data that have been or may be obtained by him
during his employment or other relationship or interaction with the Company or
any Affiliate or predecessor thereof (each of the Company, any of its Affiliates
or any such predecessor being an "Avalon-Related Company" and collectively they
----------------------
are the "Avalon-Related Companies") prior to and after the date of this
------------------------
Agreement concerning the business or affairs of the Avalon-Related Companies
(collectively, "Confidential Information") are and will be the property of the
------------------------
Avalon-Related Companies. Therefore, Executive agrees that he will not disclose
to any unauthorized Person or use for his own account any Confidential
Information without the prior written consent of the Company (by the action of
the Board), unless and to the extent that the aforementioned matters become
generally known to and available for use by the public other than as a result of
Executive's acts or omissions to act. Executive will deliver to the Company at
the termination of the Employment Period, or at any other time any Avalon-
Related Company may request, all memoranda, notes, plans, records, reports,
computer tapes and software and other documents and data (and copies thereof)
containing or relating to Confidential Information or the business of any
Avalon-Related Company which he may then possess or have under his control. For
purposes hereof, the term "Affiliate" shall mean with respect to any individual,
---------
corporation, partnership, limited liability company, trust, joint venture,
governmental entity or other unincorporated entity, association or group (each a
"Person"), any other Person who directly or indirectly, through one or more
------
intermediaries, Controls, is Controlled by, or is under common Control with such
Person; and with respect to any individual also includes any relative of such
individual. The term "Control" means the possession, directly or indirectly of
-------
the power to direct or cause the direction of the management and policies of a
Person, whether through the ownership of voting securities, by contract or
otherwise, and the term "Controlled" and "Controlling" have meanings correlative
---------- -----------
thereto.
-3-
<PAGE>
9. Non-Compete, Non-Solicitation.
-----------------------------
(a) Non-Compete. Executive acknowledges that during his employment or
-----------
other relationship or interaction with the Avalon-Related Companies he has and
will become familiar with trade secrets and other confidential information
concerning such Persons, and with investment opportunities relating to the
Business, and that his services have been and will be of special, unique and
extraordinary value to the foregoing entities. Therefore, Executive agrees
that, during the Employment Period and for six (6) months thereafter (the
Employment Period and such six-month period being the "Noncompete Period"), he
-----------------
will not directly or indirectly own, manage, control, participate in, consult
with, render services for, or in any other manner engage in any business, or as
an investor in or lender to any business (in each case including, without
limitation, on his own behalf or on behalf of another entity) which is in the
cable television business in any market in which the Avalon-Related Companies
are operating or are considering operating (including pursuant to any potential
acquisitions), at any given point in time during the Employment Period or as of
the end of the Employment Period if the Employment Period has ended; provided
--------
that for purposes of this Section 9(a), but not for purposes of Section 9(b),
the Noncompete Period will terminate at the end of the Employment Period if the
Employment Period is terminated by the Company other than for Cause or
Executive's disability. Nothing in this Section 9 will prohibit Executive from
being a passive owner of less than 5% of the outstanding stock of a corporation
engaged in a competing business described above of any class which is publicly
traded, so long as Executive has no direct or indirect participation in the
business of such corporation. By initialing in the space provided below,
Executive acknowledges that he has read carefully and had the opportunity to
consult with legal counsel regarding the provisions of this Section 9(a).
_______ [INITIAL]
(b) Non-Solicitation. During the Noncompete Period, Executive will
----------------
not directly or indirectly: (i) induce or attempt to induce any employee or
full-time independent contractor of the Company or any subsidiary to leave the
employ or contracting relationship with such entity, or in any way interfere
with the relationship between any such entity and any employee or full-time
independent contractor thereof; (ii) solicit for employment or as an independent
contractor any person who was an employee or full-time independent contractor of
the Company or any subsidiary at any time during the Employment Period; or (iii)
induce or attempt to induce any customer, supplier or other business relation of
the Company or any subsidiary to cease doing business with such entity or in any
way interfere with the relationship between any such customer, supplier or other
business relation and such entity. By initialing in the space provided below,
Executive acknowledges that he has read carefully and had the opportunity to
consult with legal counsel regarding the provisions of this Section 9(b)._______
[INITIAL]
10. Enforcement. The Company and Executive agree that if, at the
-----------
time of enforcement of Section 8 or 9, a court holds that any restriction stated
in any such Section is unreasonable under circumstances then existing, then the
maximum period, scope or geographical area reasonable under such circumstances
will be substituted for the stated period, scope or area. Because Executive's
services are unique and because Executive has access to information of the type
described in Sections 8 and 9, the Company and Executive agree that money
damages would be an inadequate remedy for any breach of Section 8 or 9.
Therefore, in the event of a breach or threatened breach of Section 8 or 9, the
Company or its successors or assigns (or any other affected Person) may, in
addition to other rights and remedies existing in their favor, apply to any
court of competent
-4-
<PAGE>
jurisdiction for specific performance and/or injunctive or other relief in order
to enforce, or prevent any violations of, the provisions of Section 8 or 9,
without posting a bond or other security. The provisions of Sections 8, 9 and 10
are intended to be for the benefit of the Company, its subsidiaries, and their
respective successors and assigns, each of which may enforce such provisions and
each of which (other than the Company) is an express third-party beneficiary of
such provisions and this Agreement generally. Sections 8, 9 and 10 will survive
and continue in full force in accordance with their terms notwithstanding any
termination of the Employment Period. By initialing in the space provided below,
Executive acknowledges that he has read carefully and had the opportunity to
consult with legal counsel regarding the provisions of this Section 10. _______
[INITIAL]
11. Representations. Executive represents and warrants to the
---------------
Company and its subsidiaries that Executive is not a party to or bound by any
employment agreement, noncompete agreement or confidentiality agreement with any
other Person.
12. Key-Man Life Insurance. If the Board determines that Avalon
----------------------
Holdings and/or one or more of its subsidiaries should purchase a "key-man"
insurance policy on the life of Executive, then Executive agrees to submit to
any requested physical examination in connection with the Company or any
subsidiary's purchase of such a key-man insurance policy, and the Executive
agrees to cooperate fully in connection with the underwriting, purchase and/or
retention of any such key-man insurance policy by the Company or any of its
subsidiaries.
13. Miscellaneous.
-------------
(a) Notices. All notices, demands or other communications to be given
-------
or delivered under or by reason of the provisions of this Agreement shall be in
writing and shall be deemed to have been given when delivered personally to the
recipient, sent to the recipient by reputable overnight courier service (charges
prepaid), or mailed to the recipient by certified or registered mail, return
receipt requested and postage prepaid. Such notices, demands and other
communications shall be sent to the address indicated below:
Notices to Executive:
--------------------
Peter Polimino
20 Prince Road
Mahopack, NY 10541
Notices to the Company:
----------------------
Avalon Cable LLC
201 East 69th Street, Penthouse G
New York, NY 10021
Attention: Joel C. Cohen, President
-5-
<PAGE>
with copies (which shall not constitute notice to the Company) to:
-----------------------------------------------------------------
ABRY Partners, Inc.
18 Newbury Street
Boston, Massachusetts 02116
Attention: Jay Grossman
and
Kirkland & Ellis
Citicorp Center
153 East 53rd Street
New York, New York 10022
Attention: John L. Kuehn, Esq.
or to such other address or to the attention of such other person as the
recipient party has specified by prior written notice to the sending party.
(b) Amendment and Waiver. No modification, amendment or waiver of any
--------------------
provision of this Agreement will be effective unless such modification,
amendment or waiver is approved in writing by the Company, Executive and ABRY,
if ABRY then holds (directly and indirectly) any Equity Securities of the
Company. The failure of any party to enforce any of the provisions of this
Agreement will in no way be construed as a waiver of such provisions and will
not affect the right of such party thereafter to enforce each and every
provision of this Agreement in accordance with its terms.
(c) Severability. Without limiting Section 10, whenever possible, each
------------
provision of this Agreement will be interpreted in such a manner as to be
effective and valid under applicable law, but if any provision of this Agreement
is held to be invalid, illegal or unenforceable in any respect under any
applicable law or rule in any jurisdiction, such invalidity, illegality or
unenforceability will not affect the validity, legality or enforceability of any
other provision of this Agreement in such jurisdiction or affect the validity,
legality or enforceability of any provision in any other jurisdiction, but this
Agreement will be reformed, construed and enforced in that jurisdiction as if
such invalid, illegal or unenforceable provision had never been contained in
this Agreement.
(d) Entire Agreement. Except as otherwise expressly set forth herein,
----------------
this agreement and the other agreements referred to herein embodies the complete
agreement and understanding among the parties hereto with respect to the subject
matter hereof 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 hereof in any way.
(e) Successors and Assigns. This Agreement will bind and inure to the
----------------------
benefit of and be enforceable by the Company and Executive and their respective
assigns; provided that Executive may not assign his rights under this Agreement
--------
without the prior written consent of each
-6-
<PAGE>
of the Company and ABRY, if ABRY then holds (directly or indirectly) any Equity
Securities of the Company.
(f) Counterparts. This Agreement may be executed simultaneously in
------------
two or more counterparts, any one of which need not contain the signatures of
more than one party, but all such counterparts taken together will constitute
one and the same Agreement.
(g) Descriptive Headings; Interpretation. The descriptive headings of
------------------------------------
this Agreement are inserted for convenience only and do not constitute a
substantive part of this Agreement.
(h) GOVERNING LAW. ALL ISSUES AND QUESTIONS CONCERNING THE
-------------
CONSTRUCTION, VALIDITY, INTERPRETATION AND ENFORCEMENT OF THIS AGREEMENT WILL
BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE DOMESTIC LAWS OF THE STATE
OF NEW YORK, WITHOUT GIVING EFFECT TO ANY CHOICE OF LAW OR CONFLICT PROVISION OR
RULE (WHETHER OF THE STATE OF NEW YORK OR ANY OTHER JURISDICTION) THAT WOULD
CAUSE THE LAWS OF ANY JURISDICTION OTHER THAN THE STATE OF NEW YORK TO BE
APPLIED. IN FURTHERANCE OF THE FOREGOING, THE INTERNAL LAW OF THE STATE OF NEW
YORK WILL CONTROL THE INTERPRETATION AND CONSTRUCTION OF THIS AGREEMENT, EVEN IF
UNDER THAT JURISDICTION'S CHOICE OF LAW OR CONFLICT OF LAW ANALYSIS, THE
SUBSTANTIVE LAW OF SOME OTHER JURISDICTION WOULD ORDINARILY APPLY.
(i) 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 ANY ANCILLARY AGREEMENT OR THE VALIDITY, PROTECTION, INTERPRETATION,
COLLECTION OR ENFORCEMENT THEREOF.
(j) No Strict Construction. The parties hereto 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 hereto, 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.
* * * * *
-7-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Executive
Employment Agreement as of the date first written above.
AVALON CABLE OF NEW ENGLAND, LLC
By:____________________________________
Name:
Title:
_______________________________________
Peter Polimino
-8-
<PAGE>
SCHEDULE A
----------
PROMOTION CRITERIA
------------------
In determining whether Executive shall be promoted to the position of
C.F.O. in accordance with Section 3 hereof, the Board shall consider whether or
not Executive has:
. Located and opened the administrative and financial headquarters of the
Company
. Established the Corporate Finance Function
. Hired the required people to run the financial operations of Avalon Cable
of Michigan
. Established a cash management system
. Established an on-going relationship with bank group
. Formulated and implement a twelve-month zero-based operating budget
. Formulated and implement the capital expenditure plan
. Installed general ledger, accounts payable, fixed assets, payroll and all
related accounting subsystems necessary for the financial operation of
Avalon Cable of Michigan, including Cable Data
. Created the standard business monthly reporting for statements of profit
and loss, balance sheet and cash flow, including a forecast by calendar
month
. Established the necessary relationship with Price Waterhouse Coopers and
completed the 1998 audit
. Produced all required external reporting for Mercom, Inc., and its
subsidiaries
. Produced all rate regulatory reporting essential to Avalon Cable of
Michigan
. Completed offering of senior subordinated notes, assuming market
conditions allow
. Established credibility with respect to acumen on all tax matters
<PAGE>
EXHIBIT 10.7
EXECUTIVE EMPLOYMENT AGREEMENT
THIS AGREEMENT (this "Agreement") is made as of November 6, 1998
---------
between Avalon Cable LLC, a Delaware limited liability company (the "Company"),
-------
and Peter Luscombe ("Executive").
---------
In consideration of the mutual covenants contained herein and other
good and valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto agree as follows:
1. Employment. The Company will employ Executive, and Executive
----------
accepts employment with the Company, upon the terms and conditions set forth in
this Agreement, for the period beginning on the date of this Agreement and
ending as provided in Section 5 (the "Employment Period").
-----------------
2. Position and Duties. During the Employment Period, Executive
-------------------
will serve as the Vice President of Engineering of the Company and render such
managerial, analytical, administrative, marketing and other executive services
to the Company and its subsidiaries, if any, as are from time to time necessary
in connection with the management and affairs of the Company and its
subsidiaries (together with all reasonably related activities, the "Business"),
--------
subject to the authority of the President of the Company (the "President") and
---------
to the provisos set forth in the following sentence. Executive will devote his
best efforts and all of his business time and attention (provided that Executive
shall also be allowed permitted vacation periods (as set forth below) and
reasonable periods of illness or other incapacity) to the business and affairs
of the Company and its subsidiaries, if any. During the Employment Period,
Executive will not directly or indirectly own, manage, control, participate in,
consult with, render services for, or in any other manner engage in the cable
television business other than: (i) on behalf of the Company or any subsidiary
thereof; or (ii) as a passive owner of less than 5% of the outstanding stock of
a corporation of any class which is publicly traded, so long as Executive has no
direct or indirect participation in the business of such corporation. Executive
will report to the President. Executive will perform his duties and
responsibilities to the best of his abilities in a diligent, trustworthy,
businesslike and efficient manner.
3. Base Salary, Bonus and Benefits.
-------------------------------
(a) Base Salary. During the Employment Period, Executive will be paid
-----------
$110,000 per annum as base compensation for services (as in effect from time to
time, the "Base Salary"). The President may review, and in its sole discretion
-----------
may increase, the Base Salary as and when the President deems appropriate. The
Base Salary will be payable in regular installments in accordance with the
general payroll practices of the Company and its subsidiaries. In addition,
during the Employment Period, Executive will be entitled to participate in all
of the employee benefit programs for which executive employees of the Company
and its subsidiaries are generally eligible.
<PAGE>
(b) Reimbursement of Expenses. The Company will reimburse Executive
-------------------------
for all reasonable expenses incurred by him in the course of performing his
duties under this Agreement and which are consistent with the Company's policies
in effect from time to time with respect to travel, entertainment and other
business expenses, subject to the Company's requirements with respect to
reporting and documentation of such expenses.
(c) Bonus. In addition to the Base Salary, the President may in his
-----
sole discretion award a bonus (the "Bonus") to Executive following the end of
-----
each fiscal year during the Employment Period as the President deems
appropriate, in an amount up to 20% of the weighted-average Base Salary in
effect during such fiscal year.
4. Vacation. Executive shall earn and be entitled to one and one-
--------
quarter (1-1/4) days of paid vacation ("Vacation Time") for each full month of
-------------
the Employment Period, in addition to legal holidays; provided, however, that no
-------- -------
such Vacation Time shall accrue or be earned to the extent that such accrual or
earning would cause Executive's accrued or earned, but unused, Vacation Time to
exceed three (3) weeks at any time. Vacation Time which accrues in accordance
with this Section 4 shall be available to the Executive on each successive one-
month anniversary of the date hereof. Executive shall make best efforts to
schedule vacations so as not to conflict with the conduct of the Company's
business, and Executive shall give to the President adequate advance notice of
his planned absences.
5. Termination.
-----------
(a) The Employment Period will continue until the earlier of: (i) the
fifth anniversary of the date hereof; or (ii Executive's resignation, death or
Disability or other incapacity (as determined by the Company in good faith) or
until the Employment Period is terminated by the Company for any reason or for
no reason (provided that the Company shall not terminate the Employment Period
in bad faith). For the purposes of this Agreement, "Cause" shall mean: (A) the
-----
commission of a felony or a crime involving moral turpitude or the commission
of any other act or omission involving dishonesty, disloyalty or fraud with
respect to the Company or any of its affiliates; (B) conduct tending to bring
the Company or any of its affiliates into substantial public disgrace or
disrepute; (C) substantial and repeated failure to perform duties as reasonably
directed by the President; (D) gross negligence or willful misconduct with
respect to the Company or any of its affiliates; (E) substantial
underperformance in carrying out Executive's duties under this Agreement; or (F)
any material breach of or misrepresentation by Executive or the Company under
this Agreement. For purposes of this Agreement, "Disability" means the
----------
inability of Executive to perform his duties hereunder for 120 days during any
12-month period.
(b) In the event of termination of the Employment Period for any
reason or no reason, Executive will not be entitled to receive his Base Salary
or any fringe benefits or Bonus for periods after the termination of the
Employment Period.
6. Resignation as Officer or Director. Upon the termination of the
----------------------------------
Employment Period, Executive will resign each position (if any) that he then
holds as an officer, director or manager of the Company or any of its
subsidiaries (including, without limitation, his membership on the Board).
-2-
<PAGE>
7. Confidential Information. The Executive acknowledges that the
------------------------
information, observations and data that have been or may be obtained by him
during his employment or other relationship or interaction with the Company or
any Affiliate or predecessor thereof (each of the Company, any of its Affiliates
or any such predecessor being an "Avalon-Related Company" and collectively they
----------------------
are the "Avalon-Related Companies") prior to and after the date of this
------------------------
Agreement concerning the business or affairs of the Avalon-Related Companies
(collectively, "Confidential Information") are and will be the property of the
------------------------
Avalon-Related Companies. Therefore, Executive agrees that he will not disclose
to any unauthorized Person or use for his own account any Confidential
Information without the prior written consent of the Company (by the action of
the Board), unless and to the extent that the aforementioned matters become
generally known to and available for use by the public other than as a result of
Executive's acts or omissions to act. Executive will deliver to the Company at
the termination of the Employment Period, or at any other time any Avalon-
Related Company may request, all memoranda, notes, plans, records, reports,
computer tapes and software and other documents and data (and copies thereof)
containing or relating to Confidential Information or the business of any
Avalon-Related Company which he may then possess or have under his control. For
purposes hereof, the term "Affiliate" shall mean with respect to any individual,
---------
corporation, partnership, limited liability company, trust, joint venture,
governmental entity or other unincorporated entity, association or group (each a
"Person"), any other Person who directly or indirectly, through one or more
------
intermediaries, Controls, is Controlled by, or is under common Control with such
Person; and with respect to any individual also includes any relative of such
individual. The term "Control" means the possession, directly or indirectly of
-------
the power to direct or cause the direction of the management and policies of a
Person, whether through the ownership of voting securities, by contract or
otherwise, and the term "Controlled" and "Controlling" have meanings correlative
---------- -----------
thereto.
8. Non-Compete, Non-Solicitation.
-----------------------------
(a) Non-Compete. Executive acknowledges that during his employment or
-----------
other relationship or interaction with the Avalon-Related Companies he has and
will become familiar with trade secrets and other confidential information
concerning such entities, and with investment opportunities relating to the
Business, and that his services have been and will be of special, unique and
extraordinary value to the foregoing entities. Therefore, Executive agrees that,
during the Employment Period and for six (6) months thereafter (the Employment
Period and such six-month period being the "Noncompete Period"), he will not
-----------------
directly or indirectly own, manage, control, participate in, consult with,
render services for, or in any other manner engage in any business, or as an
investor in or lender to any business (in each case including, without
limitation, on his own behalf or on behalf of another entity) which is in the
cable television business in any market in which the Avalon-Related Companies
are operating or are considering operating (including pursuant to any potential
acquisitions), at any given point in time during the Employment Period or as of
the end of the Employment Period if the Employment Period has ended; provided
--------
that for purposes of this Section 8(a), but not for purposes of Section 8(b),
the Noncompete Period will terminate at the end of the Employment Period if the
Employment Period is terminated by the Company other than for Cause or
Executive's disability. Nothing in this Section 8 will prohibit Executive from
being a passive owner of less than 5% of the outstanding stock of a corporation
engaged in a competing business described above of any class which is publicly
traded, so long as Executive has no direct or indirect participation in the
business of such corporation. By initialing in the space provided
-3-
<PAGE>
below, Executive acknowledges that he has read carefully and had the opportunity
to consult with legal counsel regarding the provisions of this Section 8(a).
_______ [INITIAL]
(b) Non-Solicitation. During the Noncompete Period, Executive will
----------------
not directly or indirectly; (i) induce or attempt to induce any employee or
full-time independent contractor of the Company or any subsidiary to leave the
employ or contracting relationship with such entity, or in any way interfere
with the relationship between any such entity and any employee or full-time
independent contractor thereof; (ii) solicit for employment or as an independent
contractor any person who was an employee or full-time independent contractor of
the Company or any subsidiary at any time during the Employment Period; or (iii)
induce or attempt to induce any customer, supplier or other business relation of
the Company or any subsidiary to cease doing business with such entity or in any
way interfere with the relationship between any such customer, supplier or other
business relation and such entity. By initialing in the space provided below,
Executive acknowledges that he has read carefully and had the opportunity to
consult with legal counsel regarding the provisions of this Section 8(b)._______
[INITIAL]
9. Enforcement. The Company and Executive agree that if, at the
-----------
time of enforcement of Section 7 or 8, a court holds that any restriction stated
in any such Section is unreasonable under circumstances then existing, then the
maximum period, scope or geographical area reasonable under such circumstances
will be substituted for the stated period, scope or area. Because Executive's
services are unique and because Executive has access to information of the type
described in Sections 7 and 8, the Company and Executive agree that money
damages would be an inadequate remedy for any breach of Section 7 or 8.
Therefore, in the event of a breach or threatened breach of Section 7 or 8, the
Company or its successors or assigns (or any other affected Person) may, in
addition to other rights and remedies existing in their favor, apply to any
court of competent jurisdiction for specific performance and/or injunctive or
other relief in order to enforce, or prevent any violations of, the provisions
of Section 7 or 8, without posting a bond or other security. The provisions of
Sections 7, 8 and 9 are intended to be for the benefit of the Company, its
subsidiaries, and their respective successors and assigns, each of which may
enforce such provisions and each of which (other than the Company) is an express
third-party beneficiary of such provisions and this Agreement generally.
Sections 7, 8 and 9 will survive and continue in full force in accordance with
their terms notwithstanding any termination of the Employment Period. By
initialing in the space provided below, Executive acknowledges that he has read
carefully and had the opportunity to consult with legal counsel regarding the
provisions of this Section 9. _______ [INITIAL]
10. Representations. Executive represents and warrants to the
---------------
Company and its subsidiaries that Executive is not a party to or bound by any
employment agreement, noncompete agreement or confidentiality agreement with any
other Person.
11. Key-Man Life Insurance. If the Board determines that Avalon
----------------------
Holdings and/or one or more of its subsidiaries should purchase a "key-man"
insurance policy on the life of Executive, then Executive agrees to submit to
any requested physical examination in connection with the Company or any
subsidiary's purchase of such a key-man insurance policy, and the Executive
agrees to cooperate fully in connection with the underwriting, purchase and/or
retention of any such key-man insurance policy by the Company or any of its
subsidiaries.
-4-
<PAGE>
12. Miscellaneous.
-------------
(a) Notices. All notices, demands or other communications to be given
-------
or delivered under or by reason of the provisions of this Agreement shall be in
writing and shall be deemed to have been given when delivered personally to the
recipient, sent to the recipient by reputable overnight courier service (charges
prepaid), or mailed to the recipient by certified or registered mail, return
receipt requested and postage prepaid. Such notices, demands and other
communications shall be sent to the address indicated below:
Notices to Executive:
--------------------
Peter Luscombe
__________
__________
__________
Notices to the Company:
----------------------
Avalon Cable LLC
201 East 69th Street, Penthouse G
New York, NY 10021
Attention: Joel C. Cohen, President
with copies (which shall not constitute notice to the Company) to:
-----------------------------------------------------------------
ABRY Partners, Inc.
18 Newbury Street
Boston, Massachusetts 02116
Attention: Jay Grossman
and
Kirkland & Ellis
Citicorp Center
153 East 53rd Street
New York, New York 10022
Attention: John L. Kuehn, Esq.
or to such other address or to the attention of such other person as the
recipient party has specified by prior written notice to the sending party.
(b) Amendment and Waiver. No modification, amendment or waiver of any
--------------------
provision of this Agreement will be effective unless such modification,
amendment or waiver is approved in writing by the Company, Executive and ABRY,
if ABRY then holds (directly and indirectly) any Equity Securities of the
Company. The failure of any party to enforce any of the provisions of this
Agreement will in no way be construed as a waiver of such provisions and will
-5-
<PAGE>
not affect the right of such party thereafter to enforce each and every
provision of this Agreement in accordance with its terms.
(c) Severability. Without limiting Section 9, whenever possible, each
------------
provision of this Agreement will be interpreted in such a manner as to be
effective and valid under applicable law, but if any provision of this Agreement
is held to be invalid, illegal or unenforceable in any respect under any
applicable law or rule in any jurisdiction, such invalidity, illegality or
unenforceability will not affect the validity, legality or enforceability of any
other provision of this Agreement in such jurisdiction or affect the validity,
legality or enforceability of any provision in any other jurisdiction, but this
Agreement will be reformed, construed and enforced in that jurisdiction as if
such invalid, illegal or unenforceable provision had never been contained in
this Agreement.
(d) Entire Agreement. Except as otherwise expressly set forth herein,
----------------
this agreement and the other agreements referred to herein embodies the complete
agreement and understanding among the parties hereto with respect to the subject
matter hereof 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 hereof in any way.
(e) Successors and Assigns. This Agreement will bind and inure to the
----------------------
benefit of and be enforceable by the Company and Executive and their respective
assigns; provided that Executive may not assign his rights under this Agreement
--------
without the prior written consent of each of the Company and ABRY, if ABRY then
holds (directly or indirectly) any Equity Securities of the Company.
(f) Counterparts. This Agreement may be executed simultaneously in
------------
two or more counterparts, any one of which need not contain the signatures of
more than one party, but all such counterparts taken together will constitute
one and the same Agreement.
(g) Descriptive Headings; Interpretation. The descriptive headings of
------------------------------------
this Agreement are inserted for convenience only and do not constitute a
substantive part of this Agreement.
(H) GOVERNING LAW. ALL ISSUES AND QUESTIONS CONCERNING THE
-------------
CONSTRUCTION, VALIDITY, INTERPRETATION AND ENFORCEMENT OF THIS AGREEMENT WILL
BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE DOMESTIC LAWS OF THE STATE
OF NEW YORK, WITHOUT GIVING EFFECT TO ANY CHOICE OF LAW OR CONFLICT PROVISION OR
RULE (WHETHER OF THE STATE OF NEW YORK OR ANY OTHER JURISDICTION) THAT WOULD
CAUSE THE LAWS OF ANY JURISDICTION OTHER THAN THE STATE OF NEW YORK TO BE
APPLIED. IN FURTHERANCE OF THE FOREGOING, THE INTERNAL LAW OF THE STATE OF NEW
YORK WILL CONTROL THE INTERPRETATION AND CONSTRUCTION OF THIS AGREEMENT, EVEN IF
UNDER THAT JURISDICTION'S CHOICE OF LAW OR CONFLICT OF LAW ANALYSIS, THE
SUBSTANTIVE LAW OF SOME OTHER JURISDICTION WOULD ORDINARILY APPLY.
-6-
<PAGE>
(i) 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 ANY ANCILLARY AGREEMENT OR THE VALIDITY, PROTECTION, INTERPRETATION,
COLLECTION OR ENFORCEMENT THEREOF.
(j) No Strict Construction. The parties hereto 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 hereto, 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.
* * * * *
-7-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Executive
Employment Agreement as of the date first written above.
AVALON CABLE LLC
By:________________________________________
Name:
Title:
___________________________________________
Peter Luscombe
-8-
<PAGE>
EXHIBIT 10.8
EXECUTION COPY
--------------
AMENDED AND RESTATED MEMBERS AGREEMENT
THIS AMENDED AND RESTATED MEMBERS AGREEMENT (this "Agreement") is made
---------
as of March 26, 1999 by and among Avalon Cable LLC, a Delaware limited liability
company (the "Company"), ABRY Broadcast Partners III, L.P., a Delaware limited
-------
liability partnership ("ABRY"), Avalon Cable Holdings, LLC, a Delaware limited
----
liability company (the "Parent"), Avalon Cable of Michigan Holdings, Inc., a
------
Delaware corporation ("Michigan Inc."), Avalon Cable of Michigan, Inc., a
-------------
Pennsylvania corporation ("Avalon Cable Michigan"), Avalon Cable of New England
---------------------
Holdings, Inc., a Delaware corporation ("Avalon Cable N.E," and together with
----------------
ABRY, the Parent, Michigan Inc., Avalon Cable Michigan and the Company, the
"Avalon Parties"), and Avalon Investors, L.L.C., a Delaware limited liability
- ---------------
company ("Avalon Investors"). The term "Parties" when used herein shall refer to
----------------
each of ABRY, the Avalon Parties and the Avalon Investors. Capitalized terms
used but not otherwise defined herein shall have the meanings set forth in the
LLC Agreement.
The Parties (excluding Avalon Cable Michigan and Michigan Inc.)
entered into a Members Agreement dated as of the First Closing Date (the "Prior
-----
Agreement") for the purposes, among others, of: (i) assuring continuity in the
- ---------
management and ownership of the Company; and (ii) limiting the manner and terms
by which the Securities may be transferred.
To effectuate the provisions of the Securities Purchase Agreement, the
Parties desire to, and hereby, amend and restate the Prior Agreement in its
entirety as set forth in this Agreement.
NOW, THEREFORE, in consideration of the mutual covenants contained
herein and other good and valuable consideration, the receipt and sufficiency of
which are hereby acknowledged, the parties to this Agreement hereby agree as
follows:
1. Restrictions on Transfer of Securities.
--------------------------------------
(a) Transfer Restrictions Generally. The Avalon Parties and the
-------------------------------
Avalon Investors and its Affiliates shall not directly or indirectly (including
by means of a merger or consolidation) sell, transfer, assign, pledge, encumber,
dispose of, hypothecate or otherwise dispose of (a "Transfer") any interest in
--------
any Securities, and neither ABRY nor the Parent will Transfer any interest in
any Ownership Interests, except: (i) in accordance with the applicable
provisions of Section 1(b), Section 1(c), Section 4 or in Permitted Transfers
made in accordance with Section 1(d); and (ii) otherwise in accordance with this
Agreement. A Transfer of an option, any derivative or other right to acquire
any Ownership Interest will constitute a Transfer of such Ownership Interest.
(b) Participation Rights of Avalon Investors
----------------------------------------
(i) Participation Right Generally. In the event of a Transfer of
-----------------------------
Ownership Interests by an Avalon Party, prior to such Transfer such Avalon
Party (the "Proposed Transferor") will give the Avalon Investors written
-------------------
notice (the "Sale Notice") of the proposed
-----------
<PAGE>
Transfer, which notice shall specify: (a) the proposed purchase price for
the Securities; (b) the total number of Securities proposed to be
transferred; (c) the identity of the prospective purchaser of the
Securities; (d) all other material terms and conditions of the proposed
transaction; and (e) the price to be paid in such Transfer (as determined
in accordance with Section 1(b)(iii)) to the Avalon Investors if the Avalon
Investors were to elect to participate in such Transfer to the maximum
extent permitted by this Section 1(b); and will be accompanied by proposed
agreements for the transaction, if available. The Avalon Investors may
elect to participate in the proposed Transfer as an additional transferor
by delivering to the Proposed Transferor a notice to that effect on or
prior to the 10th Business Day after the Sale Notice is received. By so
electing, the Avalon Investors shall have irrevocably elected to include in
such Transfer (at the price for Class A Units and on the other terms and
conditions described in the Sale Notice): (x) if at the time of such
Transfer there is any Unpaid Yield or Unreturned Capital Value with respect
to the Class A Units, all (or, at the Avalon Investors's election, any
portion) of the Class A Units owned by the Avalon Investors; or (y) if at
the time of such Transfer there is no Unpaid Yield or Unreturned Capital
Value with respect to the Class A Units, the Pro-Rata Portion of the Class
A Units owned by the Avalon Investors. The Proposed Transferors shall use
their best efforts to obtain the agreement of the prospective Transferee(s)
to the participation of the Avalon Investors in any contemplated Transfer
as provided in this Section 1(b)(i), and the Proposed Transferors shall not
Transfer any of their Securities to any prospective Transferee in any
Transfer to which this Section 1(b)(i) applies if such prospective
Transferee declines to allow the participation of the Avalon Investors as
contemplated by this Section 1(b)(i). If Avalon Investors has not elected
to Transfer its Class A Units pursuant to this Section 1(b)(i), then the
Proposed Transferor may, not later than 180 days after such 10th Business
Day, proceed to Transfer the Securities in question for the purchase price
for the Proposed Transferor's Ownership Interests stated in the Sale Notice
and on terms and conditions not materially more favorable to the Proposed
Transferor than those set forth in the Sale Notice.
(ii) Rules of Interpretation. For any Transfer by ABRY, the "Pro-Rata
----------------------- --------
Portion" means the fair value of the Equity Securities of the Parent to be
-------
included in such Transfer by ABRY, expressed as a percentage of the
aggregate fair value of the Equity Securities of the Parent held by ABRY
and its Affiliates.
For example, if ABRY proposes to Transfer 100 Class A Units
of the Parent at a time when ABRY and its Affiliates in the
aggregate own 1,000 Class A Units of the Parent having the
same fair value per Unit, then the Pro-Rata Portion for such
Transfer will be 10% and the Avalon Investors, if it elects
to participate in such Transfer in accordance with Section
1(b)(i), shall be entitled to include in such Transfer 10%
of its Class A Units (or up to all of its Class A Units, if
at the time of such Transfer, there is Unpaid Yield or
Unreturned Capital Value with respect to the Class A Units).
For any Transfer by the Parent, the "Pro-Rata Portion" means the fair value
----------------
of the Equity Securities of the Company directly or indirectly represented
by the Ownership Interests to
-2-
<PAGE>
be included in such Transfer by the Parent, expressed as a percentage of
the aggregate fair value of the Equity Securities of the Company directly
or indirectly owned by the Parent.
For example, if the Parent proposes to Transfer 100% of the
stock of Avalon Cable N.E. at a time when: (i) such
corporation owns 200 Class B Units of the Company; (ii)
Avalon Cable Michigan owns 800 Class B Units of the Company;
and (iii) the Parent directly or indirectly owns no other
Equity Securities of the Company, then the Pro-Rata Portion
for such Transfer will be 20% and, if Avalon Investors
elects to participate in such Transfer in accordance with
Section 1(b)(i), shall be entitled to include in such
Transfer 20% of its Class A Units (or up to all of its Class
A Units, if at the time of such Transfer, there is Unpaid
Yield or Unreturned Capital Value with respect to the Class
A Units).
(iii) Purchase Price to be Paid to Avalon Investors. In any Transfer
---------------------------------------------
in which the Avalon Investors exercises the right to participate pursuant
to this Section 1(b), the reasonable out-of-pocket expenses of the Proposed
Transferor, the Avalon Investors and their respective Affiliates incurred
in connection therewith will be paid out of the consideration received and
the remainder of the consideration will be shared such that the purchase
price to be paid to the Avalon Investors will be the amount that the Avalon
Investors would receive from the Company in respect of the Class A Units
included in such Transfer by the Avalon Investors if:
(A) an amount equal to such remainder of the aggregate
consideration paid in such Transfer for: (1) the Class A Units
included in such Transfer by the Avalon Investors; and (2) the
Ownership Interests included in such Transfer by the Proposed
Transferor were distributed by the Company in accordance with Section
7.1 of the LLC Agreement (without giving effect to Section 7.1(a)
thereof or the sentences of Section 7.1 of the LLC Agreement that
follow Section 7.1(d) thereof). Notwithstanding the foregoing, for
purposes of calculating the amount under this Section that would be
distributed by the Company in accordance with Section 7.1 of the LLC
Agreement, distributions shall be made pursuant to Sections 7.1(b),
(c) and (d) thereof only to the extent of each Unitholder's Pro Forma
Positive Capital Account Balance, after taking into account any
previous distributions pursuant to such Section 7.1; and
(B) at the time of such distribution, the only Equity
Securities of the Company outstanding were: (1) the Class A Units
included in such Transfer by the Avalon Investors; and (2) (i) the
Equity Securities of the Company actually included in such Transfer by
the Parent, if the Transfer is by the Parent and the Ownership
Interests included in the Transfer by the Parent are Equity Securities
of the Company or (ii) the Pro-Rata Portion of each class or type of
Equity Securities of the Company owned directly or indirectly by the
Parent, if the Transfer is by Parent and the Ownership Interests
included in the Transfer are not Equity Securities of the
-3-
<PAGE>
Company, or if the Transfer is a Transfer by ABRY or an Affiliate of
ABRY of Ownership Interests issued by the Parent.
An illustration of the application of this Section 1(b)(iii) is attached
hereto as Exhibit 1(b) and is made part of this Agreement.
------------
(c) Right of First Offer. In the event that the Avalon Investors
--------------------
wishes to Transfer its Equity Securities, the Avalon Investors shall provide the
Company with written notice (the "Offer Notice") indicating the proposed
------------
purchase price and other material terms and conditions of the proposed Transfer
and, for ten (10) Business Days following the Company's receipt of such Offer
Notice, the Company shall have the exclusive option to deliver a reply notice
(the "Reply Notice") to Avalon Investors setting forth the irrevocable election
------------
of the Company to require Avalon Investors to sell to the Company all (but not
less than all) of such Equity Securities at the purchase price and on the other
material terms and conditions specified in the Offer Notice. In the event there
has not been a timely election by the Company to acquire such Equity Securities
under this Section 1(c), then Avalon Investors may, during the 180 days (the
"Sale Period") following the end of such ten (10) Business Day period and
-----------
without any further obligation to the Company, sell the number of Equity
Securities specified in the Offer Notice, at not less than at the purchase price
per Equity Security and on other material terms and conditions not materially
more favorable to the transferee thereof than those specified in such Offer
Notice. In the event there has been a timely election by the Company to acquire
all of the Equity Securities sought to be transferred by Avalon Investors, then
the Transfer of such Equity Securities to the Company shall close at a time and
place as reflected in the Offer Notice. At such closing, each party shall pay
its own costs and expenses in connection with such Transfer. The rights and
restrictions contained in this Section 1 continue to be applicable to the Class
A Units specified in the Transfer Notice after any such Transfer and the
Eligible Transferee agrees in writing to be bound by the provisions of this
Agreement. Any Class A Units not so Transferred within the Sale Period will be
subject to the provisions of this Section 1(c) upon subsequent Transfer. The
provisions of this Section 1(c) will not apply to a Transfer of Class A Units by
the Avalon Investors pursuant to Section 1(b) or Section 4 of this Agreement or
in accordance with the Put Agreement.
(d) Permitted Transfers. The restrictions contained in this Section 1
-------------------
shall not apply with respect to any Transfer of Securities or Ownership
Interests: (i) to an Affiliate of the Transferring Person (a "Permitted
---------
Transferee"); (ii) in connection with a Special Sale, in accordance with Section
- ----------
7.4 of the LLC Agreement; (iii) in a Public Sale; or (iv) in connection with a
pledge or collateral assignment of any Ownership Interest to secure any
Indebtedness of the Company or its Subsidiaries or any direct or indirect
guarantee thereof; provided, that the restrictions contained in this Section 1
--------
shall continue to be applicable to such Securities or Ownership Interests after
any such Transfer described in clause (i) above; and provided further, that each
-------- -------
Permitted Transferee shall have executed and delivered a counterpart to this
Agreement pursuant to Section 3(a) hereof.
(e) Certain Transfers. So long as there is any Unpaid Yield or
-----------------
Unreturned Capital Value with respect to the Class A Units, the Avalon Parties
shall not Transfer Securities or Ownership Interests to any Person (other than
pursuant to clause (i) of Section 1(d)) in exchange for
-4-
<PAGE>
consideration other than cash, cash equivalents, capital stock of a class that
is publicly traded or some combination thereof.
2. Legend. Each certificate evidencing Ownership Interests owned by
------
a Party to this Agreement and each certificate issued in exchange for or upon
the Transfer of any such Ownership Interests (to the extent any such
certificates exist) shall be stamped or otherwise imprinted with a legend in
substantially the following form:
THE SECURITIES REPRESENTED BY THIS CERTIFICATE ARE
SUBJECT TO AN AMENDED AND RESTATED MEMBERS AGREEMENT
DATED AS OF [___________, 199_] AMONG THE ISSUER OF
SUCH SECURITIES (THE "COMPANY"), CERTAIN OF THE
-------
COMPANY'S SECURITYHOLDERS AND CERTAIN OTHER PARTIES.
A COPY OF SUCH AMENDED AND RESTATED MEMBERS AGREEMENT
WILL BE FURNISHED WITHOUT CHARGE BY THE COMPANY TO THE
HOLDER HEREOF UPON WRITTEN REQUEST.
The legend set forth above shall be removed from the certificates evidencing any
such Ownership Interests which cease to be subject to the terms of this
Agreement.
3. Transfer; Admission of Additional Members. (a) Prior to
-----------------------------------------
Transferring any Ownership Interests (other than in a Public Sale, Sale of the
Company, or a Transfer described in clause (ii) or (iv) of Section 1(d) to any
Person, the Transferring Person will cause the prospective Transferee to execute
and deliver to the Company and the other Parties to this Agreement, a
counterpart to this Agreement pursuant to which the prospective Transferee
agrees to be bound by this Agreement to the same extent as the Transferring
Person with respect to the Ownership Interests so Transferred. For purposes of
this Section 3, a Transfer by an Affiliate of ABRY of Ownership Interests issued
by the Parent will be deemed to be a Transfer of Ownership Interests by ABRY,
and a Transfer by any Subsidiary of the Parent of Ownership Interests will be
deemed to be a Transfer of Ownership Interests by the Parent.
For example, a Transfer by Avalon Cable Michigan of Class B Units of
the Company will be deemed to be a Transfer of Ownership Interests by
the Parent.
Notwithstanding anything to the contrary contained herein, in the event that any
Avalon Party Transfers any Securities to any Affiliate of such Avalon Party in
accordance with the terms and conditions of this Agreement, such Affiliate
transferee shall agree that it will not cease to be an Affiliate of such Avalon
Party transferor unless, prior to ceasing to be such an Affiliate, such
Affiliate transferee shall transfer to the Avalon Party transferor or an
Affiliate thereof all of the Securities owned by it.
(b) Upon admission by the managers or the Members of any additional
Member or Unitholder in accordance with the provisions of the LLC Agreement, the
additional Member or
-5-
<PAGE>
Unitholder shall agree in writing to be bound by the terms and conditions of
this Agreement. The Parties shall amend this Agreement to the extent necessary
to permit any additional Member or Unitholder to become a party hereto.
4. Sale of the Company.
-------------------
(a) If the Parent Board approves a Sale of the Company (an "Approved
--------
Company Sale"), then each Class A Member will consent to and raise no objections
- ------------
against the Approved Company Sale. If the Approved Company Sale is structured
as a merger or consolidation involving the Company, then each Class A Member
shall waive any dissenters rights, appraisal rights or similar rights in
connection with such merger or consolidation. If the Approved Company Sale is
structured as a Transfer of Securities (with or without a Transfer of other
Ownership Interests), then subject to the following sentence and Sections 4(b)
and 4(c), each Class A Member shall agree to include in such Transfer either:
(x) if at the time of the Approved Company Sale there is any Unpaid Yield or
Unreturned Capital Value with respect to the Class A Units, all of its Class A
Units and rights to acquire Class A Units; or (y) if at the time of the Approved
Company Sale there is not any Unpaid Yield or Unreturned Capital Value with
respect to the Class A Units, a proportionate quantity of its Class A Units and
rights to acquire Class A Units, in each case on the terms and conditions
approved by the Board. Each Class A Member shall take all necessary or
desirable actions in connection with the consummation of an Approved Company
Sale as requested by the Parent Board, including, without limitation, executing
a sale contract pursuant to which each Class A Member will severally (but not
jointly) with the other Transferring Person(s) agree to indemnify the acquiring
Person(s) in respect of breaches of representations, warranties and indemnities
regarding the Company, its Subsidiaries and their respective assets, liabilities
and business (collectively, the "Company Reps"), and will make and provide
------------
indemnity in respect of breaches of such representations and warranties
concerning such Class A Member and the Class A Units to be Transferred by it or
him (as may be reasonably acceptable to such Class A Member), as may be set
forth in any agreement approved by the Parent Board; provided, that: (i) if any
--------
Transferring Person pays any amount in connection with any claim under the
Company Reps by the purchaser or purchasers in such Approved Company Sale (a
"Company Loss"), then each other Transferring Person will simultaneously
------------
contribute to such first Person an amount equal to such contributing holder's
portion of such Company Loss, determined in accordance with the following clause
(ii) of this proviso; (ii) each Class A Member's "portion of such Company Loss"
shall be the amount required to be contributed by such Member so that subsequent
to such Member's contribution, the net portion of the aggregate consideration
received by such Member is equal to the amount that such Member would have
received if the aggregate consideration received by all Members or the Company
in such Approved Company Sale (net of costs reimbursed pursuant to Section
4(c)), adjusted to account for the Company Loss, had been distributed as
described in Section 4(c)(ii); and (iii) a Class A Member shall be required to
provide indemnification in respect of Company Reps only if the sale contract
which such Class A Member is required to sign provides that such Member's
maximum liability for any breach of the Company Reps shall be the consideration
received by such Member for such Member's Class A Units.
(b) The obligations of the Class A Members with respect to the
Approved Company Sale are subject to the satisfaction of the following
conditions: (i) upon the consummation
-6-
<PAGE>
of the Approved Company Sale, each Class A Member shall receive the portion of
the aggregate consideration described in Section 4(c) (and in accordance with
the LLC Agreement, if applicable); (ii) each Transferring Person shall receive
the same form of consideration (except that, if any Avalon Party is given an
option as to the form and amount of consideration to be received, each Class A
Member shall be given the same option); and (iii) the consideration to be
received by the Class A Members must be cash, cash equivalents, shares of
capital stock of a class that is publicly traded or some combination thereof.
(c) In connection with an Approved Company Sale, the reasonable out-
of-pocket expenses of the Proposed Transferor and each Class A Member and its
Affiliates incurred in connection therewith will be paid out of the
consideration received and the remainder of the consideration will be shared
such that the portion of the aggregate consideration to be paid to a Class A
Member is as follows:
(i) if the Approved Company Sale is structured as a sale of assets of
the Company or any of its Subsidiaries, then each Class A Member shall be
entitled to the amount that such Class A Member would receive from the
Company in respect of the Class A Units owned by such Class A Member if an
amount equal to such remainder of the aggregate consideration paid in such
Approved Company Sale were distributed by the Company in accordance with
Section 7.1 of the LLC Agreement (without giving effect to Section 7.1(a)
thereof or the sentences of Section 7.1 of the LLC Agreement that follow
Section 7.1(d) thereof). Notwithstanding the foregoing, for purposes of
calculating the amount under this Section that would be distributed by the
Company in accordance with Section 7.1 of the LLC Agreement, distributions
shall be made pursuant to Sections 7.1(b), (c) and (d) thereof only to the
extent of each Unitholder's Pro Forma Positive Capital Account Balance,
after taking into account any previous distributions pursuant to such
Section 7.1;
(ii) if the Approved Company Sale is structured as a Transfer of
Equity Securities of the Company, then each Class A Member shall be
entitled to the amount that such Class A Member would receive from the
Company in respect of the Class A Units Transferred in such Approved
Company Sale by such Class A Member if: (A) an amount equal to such
remainder of the aggregate consideration paid in such Approved Company Sale
were distributed by the Company in accordance with Section 7.1 of the LLC
Agreement (without giving effect to Section 7.1(a) thereof or the sentences
of Section 7.1 of the LLC Agreement that follow Section 7.1(d) thereof).
Notwithstanding the foregoing, for purposes of calculating the amount under
this Section that would be distributed by the Company in accordance with
Section 7.1 of the LLC Agreement, distributions shall be made pursuant to
Sections 7.1(b), (c) and (d) thereof only to the extent of each
Unitholder's Pro Forma Positive Capital Account Balance, after taking into
account any previous distributions pursuant to such Section 7.1; and (B) at
the time of such distribution, the only Equity Securities of the Company
outstanding were the classes and quantities of Securities actually
Transferred in such Approved Company Sale; or
-7-
<PAGE>
(iii) if the Approved Company Sale is structured as a sale of both
Equity Securities of the Company and other Ownership Interests, then each
Class A Member shall be entitled to the amount that such Class A Member
would receive from the Company in respect of the Class A Units Transferred
in such Approved Company Sale by such Class A Member if: (A) an amount
equal to such remainder of the aggregate consideration paid in such
Approved Company Sale was distributed by the Company in accordance with
Section 7.1 of the LLC Agreement (without giving effect to Section 7.1(a)
thereof or the sentences of Section 7.1 of the LLC Agreement that follow
Section 7.1(d) thereof). Notwithstanding the foregoing, for purposes of
calculating the amount under this Section that would be distributed by the
Company in accordance with Section 7.1 of the LLC Agreement, distributions
shall be made pursuant to Sections 7.1(b), (c) and (d) thereof only to the
extent of each Unitholder's Pro Forma Positive Capital Account Balance,
after taking into account any previous distributions pursuant to such
Section 7.1; and (B) at the time of such distribution, the only Equity
Securities of the Company outstanding were: (x) the classes and quantities
of Securities actually Transferred in such Approved Company Sale by the
Members; and (y) without duplication, the Pro-Rata Portion of Equity
Securities of the Company owned indirectly by the Parent, if the Approved
Company Sale included a Transfer by the Parent or ABRY of Ownership
Interests of Michigan Inc., Avalon Cable Michigan, Avalon Cable N.E. or the
Parent. For purposes of this Section 4.1(c), the "Pro-Rata Portion" shall
be determined in accordance with Section 1(b) as if the Transfer in
question is actually the Approved Company Sale.
Notwithstanding anything to the contrary contained in this Agreement, if and to
the extent required by the Financing Agreements, the owners of Ownership
Interests subject to this Agreement hereby agree to return to the Company any
proceeds received in connection with an Approved Company Sale; provided, that:
--------
(i) such proceeds shall be used only to reduce Indebtedness under the Financing
Agreements or as otherwise required or permitted thereunder; and (ii) the
provisions of Section 7.4(b) of the LLC Agreement shall apply to the return of
proceeds pursuant to this paragraph.
(d) Illustration. An illustration of the application of this
------------
Section 4 is attached hereto as Exhibit 4.
---------
5. Market Stand-Off Agreement. If requested by the Company or the
--------------------------
Successor Corporation and an underwriter in connection with any registered
public offering which occurs prior to or relates to a Qualified Public Offering
of Equity Securities of the Company or the Successor Corporation, a Party shall
not sell or otherwise Transfer or dispose of any Equity Securities or any other
securities held by such Party (other than those included in such registration)
during the 180-day period following the effective date of the registration
statement relating to such public offering and for a period of seven (7) days
prior to such date (each such 187-day period being a "Hold-Back Period");
----------------
provided, that all executive officers and directors of the Company or the
- --------
Successor Corporation who hold Equity Securities of the type included in such
offering (or of a type that are exercisable or exchangeable for or convertible
into Equity Securities of such type) and holders of at least five percent (5%)
of such Equity Securities on a fully-diluted basis are bound by and have entered
into similar agreements.
-8-
<PAGE>
The obligations described in this Section 5 shall not apply to a
registration relating solely to employee benefit plans on Form S-1 or Form S-8
or similar forms that may be promulgated in the future, or a registration
relating solely to a Commission Rule 145 transaction on Form S-4 or similar
forms that may be promulgated in the future. The Company or the Successor
Corporation may impose stop-transfer instructions with respect to any securities
of the Company or the Successor Corporation subject to the foregoing restriction
until the end of any Hold-Back Period.
6. Rights Relating to Issuances of New Securities.
----------------------------------------------
(a) Right of First Refusal. The Company hereby grants to the Class A
----------------------
Members the right of first refusal ("Right of First Refusal") to purchase a pro
----------------------
rata share of Equity Securities, whether now authorized or not, which the
Company may, from time to time, propose to sell and issue (including, without
limitation, Equity Securities issued pursuant to the Investment Agreement or
upon the conversion of the ABRY Bridge Loan or any New Bridge Loan). Prior to
making any such sale or issuance, the Company shall deliver a written notice
(the "New Equity Notice") to each Class A Member specifying in reasonable detail
-----------------
the class and quantity of Equity Securities proposed to be sold and issued, the
proposed purchase price (which shall be payable solely in cash), the identity of
the proposed buyer(s) and the other material terms and conditions of such sale
and issuance. Each Class A Member may elect to purchase a portion of the Equity
Securities specified in the New Equity Notice equal to the percentage of
outstanding Units owned by such Class A Member, upon the same terms and
conditions as those set forth in the Transfer Notice, by delivering a written
notice of such election (the "New Equity Election Notice") to the Company within
--------------------------
ten (10) Business Days after the New Equity Notice has been received by such
Class A Member (the "Option Period"), in which event such Member will be bound
-------------
to consummate such purchase on such terms and conditions. If the Class A
Members do not so elect to purchase any portion of the Equity Securities
specified in the New Equity Notice, then the Company may sell and issue during
the 180-day period immediately following the expiration of the Option Period all
of such securities to the proposed buyer(s) at the price stated in the New
Equity Election Notice and on other terms and conditions not materially more
favorable to the purchaser(s) thereof than those specified in the New Equity
Notice. Any Equity Securities not sold or issued within such 180-day period
will be subject to the provisions of this Section 6(a) upon subsequent sale and
issuance. In the case of the conversion of the Avalon Bridge Loan or a New
Bridge Loan, the cash price to be paid pursuant to the exercise of the Right of
First Refusal will be $75.149 per Class B Unit.
(b) Right of First Offer. In the event that the Company proposes to
--------------------
issue, or proposes to grant rights or options to purchase, Permitted Pari-Passu
Equity, the Company shall promptly deliver a written notice of such proposal
(the "PPPE Notice") to the Avalon Investors specifying in reasonable detail the
-----------
class, quantity and material terms of such Permitted Pari Passu Equity and the
price at which such securities are proposed to be offered for sale to others.
The Avalon Investors may elect to purchase such Permitted Pari Passu Equity
subject to terms and at the price and on the other terms and conditions set
forth in the PPPE Notice by delivering a written notice of such election (the
"PPPE Election Notice") to the Company within ten (10) Business Days after the
- ---------------------
PPPE Notice has been received by the Avalon Investors. In the event there has
not been a timely election to acquire such Permitted Pari Passu Equity under
this Section 6(b), then the Company may, within the 180-day period following the
expiration of such 10-Business Day period,
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<PAGE>
sell the Equity Securities specified in the PPPE Notice, at not less than the
purchase price per Equity Security stated in the PPPE Notice and on terms and
conditions not materially more favorable to the purchaser(s) thereof than those
specified in such PPPE Notice; provided, however, that in such case the Equity
-------- -------
Securities specified in the PPPE Notice shall be subject to the Right of First
Refusal set forth in Section 6(a). In the event the Company is unable to sell
the Equity Securities specified in the PPPE Notice during such 180-day period,
the Company shall not thereafter issue or sell any such Equity Securities
without first again offering such securities to the Avalon Investors in
accordance with this Section 6(b).
(c) Limitations. Sections 6(a) and 6(b) shall not apply to Equity
-----------
Securities that:
(i) are not issued for cash or cash equivalents in connection
with acquisitions by the Company;
(ii) are issued to effect a merger or consolidation;
(iii) are issued to satisfy conversion or purchase rights
theretofore issued by the Company not in violation of this Section 6 (other
than pursuant to the ABRY Bridge Loan or any New Bridge Loan);
(iv) are issued, in accordance with this Agreement, to Avalon
Cable Michigan in accordance with Section 1.2 of the Securities Purchase
Agreement;
(v) are issued in connection with a Qualified Public Offering;
(vi) are issued in connection with a recapitalization or
reorganization pursuant to Section 8; or
The Right of First Refusal will not apply to Permitted Pari Passu Equity until
it has first been offered to the Avalon Investors pursuant to Section 6(b).
7. [intentionally deleted]
8. Public Offering; Registration Rights. In the event that the
------------------------------------
Parent Board approves a public offering and sale of common stock ("IPO Stock")
---------
of a corporation that is the successor to the Parent or any Subsidiary thereof
(the "Successor Corporation") pursuant to an effective registration statement
---------------------
under the Securities Act (an "Initial Public Offering"), then the Parties shall
-----------------------
take all necessary or desirable actions in connection with the consummation of
such Initial Public Offering as the Parent Board so requests, so long as, in
connection with the conversion of the Parent or such Subsidiary thereof into the
Successor Corporation (by means of a merger or otherwise), each Member shall
receive a quantity of IPO Stock having a fair value (valued at the price per
share of IPO Stock paid to the Successor Corporation in the Initial Public
Offering, without reduction for discounts or commissions) equal to the amount
that such Member would receive if an amount equal to the Pre-IPO Value were
distributed to the Members pursuant to Section 7.1 of the LLC Agreement;
provided, that: (i) such conversion shall be effected immediately prior to the
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<PAGE>
closing of the issuance and sale of IPO Stock in the Initial Public Offering
(the "IPO Closing"); and (ii) the Parties shall take such actions as may be
-----------
necessary or desirable to cause the Successor Corporation to assume all of the
obligations of the Company under this Agreement. The "Pre-IPO Value" means the
-------------
product of the number of shares of IPO Stock outstanding immediately prior to
the IPO Closing multiplied by the price per share of IPO Stock paid to the
Successor Corporation in the Initial Public Offering, without reduction for
discounts or commissions. As a condition to the conversion described above and
notwithstanding any additional registration rights previously granted or granted
in connection with the Initial Public Offering, each of the Parent, Company or
Successor Corporation covenants and agrees to enter into a registration rights
agreement with the Avalon Investors and its Affiliates or assigns, the terms of
which require that if the managing underwriter of any registered public
offering, including the Initial Public Offering, determines that IPO Stock owned
by Parties ("Member Stock") may be included in such offering, then Member Stock
------------
will be included in such offering in the following order after the inclusion of
all securities sought to be included for the Company's account: (i) first, any
Priority Stock requested to be included in such offering; and (ii) second, pro
rata based upon the number of shares of Member Stock (after giving effect to the
preceding clause (i)) requested to be included in such offering. The reasonable
out-of-pocket expenses of the Avalon Investors and its Affiliates incurred in
connection with the reorganization into the Successor Corporation by the Avalon
Investors shall be paid by the Company.
9. Definitions.
-----------
"ABRY" has the meaning set forth in the preamble.
----
"ABRY Bridge Loan" has the meaning set forth in the LLC Agreement.
----------------
"Affiliate" means with respect to any Person, any other Person
---------
controlling, controlled by, or under common control with such first Person.
"Approved Company Sale" has the meaning set forth in Section 4.
---------------------
"Avalon Cable Michigan" has the meaning set forth in the preamble.
---------------------
"Avalon Cable N.E." has the meaning set forth in the preamble.
-----------------
"Avalon Investors" has the meaning set forth in the preamble.
----------------
"Avalon Parties" has the meaning set forth in the preamble.
--------------
"Class A Member" means any Member who owns Class A Units.
--------------
"Class B Member" means any Member who owns Class B Units.
--------------
"Class A Units" and "Class B Units" have the meanings set forth in the
------------- -------------
LLC Agreement.
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<PAGE>
"Company" has the meaning set forth in the preamble.
-------
"Company Loss" has the meaning set forth in Section 4.
------------
"Company Reps" has the meaning set forth in Section 4.
------------
"Election Notice" has the meaning set forth in Section 6.
---------------
"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, participation, any contract rights, any form of derivative
or security described in clause (i) above.
"Executive" means any person who has been, is, or will be, employed by
---------
the Company or any Affiliate thereof or is an independent contractor of the
Company or any Affiliate thereof and purchases or otherwise acquires Securities.
"First Closing Date" has the meaning set forth in the Securities
------------------
Purchase Agreement.
"Hold-Back Period" has the meaning set forth in Section 4.
----------------
"Indebtedness" has the meaning set forth in the LLC Agreement.
------------
"Initial Class B Unit Purchase Price" means $75.149 per Class B Unit.
-----------------------------------
"Initial Public Offering" has the meaning set forth in Section 8.
-----------------------
"Investment Agreement" means the Investment Agreement dated as of the
--------------------
First Closing Date by and among the Avalon Parties.
"IPO Closing" has the meaning set forth in Section 8.
-----------
"IPO Stock" has the meaning set forth in Section 8.
---------
"LLC Agreement" means the Limited Liability Company Agreement of the
-------------
Company dated as of the First Closing Date, as in effect from time to time.
"Majority in Voting Interest" has the meaning which the LLC Agreement
---------------------------
assigns to that term.
"Member" means any member of the Company admitted to membership in
------
accordance with the LLC Agreement.
-12-
<PAGE>
"Member Securities" means Equity Securities of either Avalon Cable
-----------------
N.E. or Avalon Cable Michigan.
"Member Stock" has the meaning set forth in Section 8.
------------
"Michigan Inc." has the meaning set forth in the preamble.
-------------
"New Bridge Loan" has the meaning set forth in the LLC Agreement.
---------------
"New Equity has the meaning set forth in Section 6.
----------
"New Equity Election Notice" has the meaning set forth in Section
--------------------------
6(a).
"New Equity Notice" has the meaning set forth in Section 6(a).
-----------------
"Notice of New Equity" has the meaning set forth in Section 6.
--------------------
"Offer Notice" has the meaning set forth in Section 1(c).
------------
"Option Period" has the meaning set forth in Section 6(a).
-------------
"Ownership Interest" means: (i) any Equity Security of the Parent;
------------------
(ii) any Equity Security of the Company; or (iii) any Equity Security of any
Subsidiary of the Parent that directly or indirectly owns any Equity Security of
the Company.
"Parent" has the meaning set forth in the preamble.
------
"Parent Board" means the governing body of the Parent.
------------
"Parties" has the meaning set forth in the preamble.
-------
"Permitted Pari-Passu Equity" has the meaning set forth in the LLC
---------------------------
Agreement.
"Permitted Transfer" means any Transfer permitted under Section 1(d).
------------------
"Permitted Transferee" means any Person who receives Securities or
--------------------
Ownership Interests in connection with a Permitted Transfer.
"Person" means an individual, a partnership, a corporation, an
------
association, a limited liability company, a joint stock company, a trust, a
joint venture, an unincorporated organization or any other entity (including,
without limitation, any governmental entity or any department, agency or
political subdivision thereof).
"PPPE Election Notice" has the meaning set forth in Section 6(b).
--------------------
-13-
<PAGE>
"PPPE Notice" has the meaning set forth in Section 6(b).
-----------
"Pre-IPO Value" has the meaning set forth in Section 8.
-------------
"Priority Stock" means IPO Stock received by the Avalon Investors
--------------
pursuant to Section 8 in respect of any Unpaid Yield or Unreturned Capital Value
of any Class A Unit.
"Pro Forma Positive Capital Account Balance" means, with respect to
------------------------------------------
each Unitholder, such Unitholder's pro forma positive capital account balance
determined, solely for purposes of this Agreement, under the assumption that all
of the assets and properties of the Company (including both the Avalon New
England Interest and Avalon Michigan Interest as defined in the LLC Agreement)
were adjusted 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 (as
defined in the LLC Agreement and as clarified herein) and the amounts of such
adjustments were taken into account in determining Pro Forma Positive Capital
Account Balances, as gain or loss from the disposition of such assets and
properties pursuant to the principles of Article VIII (Allocations) of the LLC
Agreement. For purposes of this Agreement, the consideration received in a
Transfer or a Sale of the Company, as the case may be, shall be appropriately
taken into account in determining the Fair Market Values of the Company's assets
and properties.
"Proposed Transferor" has the meaning set forth in Section 1(b).
-------------------
"Pro Rata Portion" has the meaning set forth in Section 1(b)(ii).
----------------
"Public Sale" means any sale of Securities to the public pursuant to
-----------
an offering registered under the Securities Act or to the public through a
broker, dealer or market maker pursuant to the provisions of Rule 144 (or any
similar provision then in effect) adopted under the Securities Act.
"Put Agreement" means the Put and Capital Contribution Agreement dated
-------------
as of the First Closing Date by and among ABRY, its general partner and Avalon
Investors, as in effect from time to time.
"Qualified Public Offering" means the sale in a public offering
-------------------------
registered under the Securities Act of equity securities of the Company or the
Successor Corporation: (i) providing net proceeds to the Company or any of its
successors and the selling equity holders of at least $50,000,000; or (ii) where
at least 25% of the outstanding Equity Securities of the Company or the
Successor Corporation have been sold in such sale.
"Reply Notice" has the meaning set forth in Section 1(c).
------------
"Right of First Refusal" has the meaning set forth in Section 6(a).
----------------------
"Sale Notice" has the meaning set forth in Section 1(b).
-----------
-14-
<PAGE>
"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 Cable of Michigan
LLC and Avalon Cable of 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 of more transactions.
"Second Closing" has the meaning set forth in the Securities Purchase
--------------
Agreement.
"Securities" means collectively, (i) the Class A Units, (ii) Class B
----------
Units, (iii) any other class of Equity Securities of the Company which is not
limited to a fixed sum or percentage of par value or stated value in respect of
the rights of the holders thereof to participate in dividends and in the
distribution of assets upon the voluntary or involuntary liquidation,
dissolution or winding up of the issuer of such securities (including, by way of
example and without limitation, the common stock of the Successor Corporation),
or (iv) any class of Member Securities. As to any particular shares
constituting Securities, such shares will cease to be Securities when they have
been transferred in a Public Sale.
"Securities Act" means the Securities Act of 1933, as amended from
--------------
time to time.
"Securities Purchase Agreement" means the Securities Purchase
-----------------------------
Agreement dated as of the First Closing Date by and among Parent, Michigan Inc.,
Avalon Cable Michigan, Avalon Cable N.E., the Company and the Avalon Investors,
as in effect from time to time.
"Subsidiaries" 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
hereof, 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.
"Successor Corporation" has the meaning set forth in Section 8.
---------------------
"Transfer" has the meaning set forth in Section 1(a).
--------
"Unpaid Yield" has the meaning set forth in the LLC Agreement.
------------
-15-
<PAGE>
"Unreturned Capital Value" has the meaning set forth in the LLC
------------------------
Agreement.
"Unsold New Equity" has the meaning set forth in Section 6.
-----------------
"Voting Interest" has the meaning set forth in the LLC Agreement.
---------------
10. Miscellaneous.
-------------
(a) Transfers in Violation of Agreement. Any Transfer or attempted
-----------------------------------
Transfer of any Ownership Interests in violation of any provision of this
Agreement shall be void, and the issuer of such Ownership Interests shall not
record such Transfer on its books or treat any purported Transferee of such
Ownership Interests as the owner of such Ownership Interests for any purpose.
If, notwithstanding the immediately preceding sentence, any Transfer is held by
an arbitral panel or a court of competent jurisdiction to be effective, then the
restrictions on Transfer under this Agreement applicable to the transferor shall
apply to the transferee and to any subsequent transferee as if such transferee
were a party hereto.
(b) Termination. This Agreement shall terminate upon, have no further
-----------
force and effect after and shall not be applicable to, the first sale of
securities of the Company or successor entity to the public effected pursuant to
the closing of the Company's first firm commitment underwritten public offering
registered under the Securities Act of 1933, as amended, with proceeds of more
than $50,000,000.
(c) Remedies. Any Person having rights under any provision of this
--------
Agreement shall be entitled to enforce such rights specifically to recover
damages caused by reason of any breach of any provision of this Agreement and to
exercise all other rights granted by law.
(d) Specific Performance. Each of the Parties agrees and
--------------------
acknowledges: (i) that it may be impossible to measure in money the damage to
the Parties if any of them or any legal representative of any Party hereto fails
to comply with any of the agreements, covenants, restrictions or obligations
imposed by this Agreement; (ii) that every such agreement, covenant, restriction
and obligation is material; and (iii) that in the event of any such failure of
compliance, the Parties may not have an adequate remedy at law or in damages.
Therefore, each Party consents to the issuance of an injunction or the
enforcement of other equitable remedies against it at the suit of an aggrieved
Party without the posting of any bond or other security, to compel specific
performance of all of the terms hereof and to prevent any Transfer or otherwise
of Securities in contravention of any of the terms of this Agreement.
(e) Amendments This Agreement shall not be amended, supplemented or
----------
restated without first obtaining the written consent of the Parties; provided,
--------
that consent of the Parties shall not be required under the preceding clause 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.
-16-
<PAGE>
(f) Successors and Assigns. All covenants and agreements in this
----------------------
Agreement by or on behalf of any of the parties hereto shall bind and inure to
the benefit of the respective successors and assigns of the parties hereto
whether so expressed or not, including, without limitation, the Successor
Corporation. In addition, whether or not any express assignment has been made,
the provisions of this Agreement which are for the benefit of purchasers or
holders of Ownership Interests are also for the benefit of, and enforceable by,
any subsequent holder of such Ownership Interests.
(g) 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.
(h) Counterparts. This Agreement may be executed simultaneously in
------------
two or more counterparts, any one of which need not contain the signatures of
more than one party, but all such counterparts taken together shall constitute
one and the same Agreement.
(i) Descriptive Headings. The descriptive headings of this Agreement
--------------------
are inserted for convenience only and do not constitute a part of this
Agreement.
(j) GOVERNING LAW. ALL ISSUES AND QUESTIONS CONCERNING THE
-------------
CONSTRUCTION, VALIDITY, INTERPRETATION AND ENFORCEMENT OF THIS AGREEMENT AND THE
EXHIBITS AND SCHEDULES HERETO SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE
WITH, THE LAWS OF THE STATE OF NEW YORK, WITHOUT GIVING EFFECT TO ANY CHOICE OF
LAW OR CONFLICT OF LAW RULES OR PROVISIONS (WHETHER OF THE STATE OF NEW YORK OR
ANY OTHER JURISDICTION) THAT WOULD CAUSE THE APPLICATION OF THE LAWS OF ANY
JURISDICTION OTHER THAN THE STATE OF NEW YORK.
(k) Notices. All notices, demands or other communications to be
-------
given, delivered or received under or by reason of the provisions of this
Agreement shall be in writing and shall be deemed to have been given, delivered
or received upon receipt or refusal when delivered personally to the recipient,
sent to the recipient by reputable overnight courier service (charges prepaid),
or mailed to the recipient by certified or registered mail, return receipt
requested and postage prepaid. Such notices, demands and other communications
shall be sent to an Investor at the address indicated on the Schedule of
Parties, and to the Company at the address indicated below:
If to the Company, to:
Avalon Cable LLC
c/o ABRY Partners, Inc.
18 Newbury Street
Boston, MA 02116
Attention: Jay Grossman
-17-
<PAGE>
with a copy (which will not constitute notice to the Company) to:
Kirkland & Ellis
153 East 53rd Street
New York, NY 10022
Attention: John L. Kuehn
or to such other address or to the attention of such other person as the
recipient party has specified by prior written notice to the sending party.
(l) 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 ANY ANCILLARY AGREEMENT OR THE VALIDITY, PROTECTION, INTERPRETATION,
COLLECTION OR ENFORCEMENT THEREOF.
(m) No Strict Construction. The parties hereto 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 hereto, 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.
(n) Entire Agreement. Except as otherwise expressly set forth herein,
----------------
this agreement and the other agreements referred to herein embodies the complete
agreement and understanding among the parties hereto with respect to the subject
matter hereof 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 hereof in any way.
* * * * *
-18-
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Amended and Restated
Members Agreement as of the date first written above.
ABRY BROADCAST PARTNERS, III, L.P.
By: ABRY Capital, L.P.
Its: General Partners
By: ABRY Equity Investors, L.P.
Its: General Partner
By: ABRY Holdings, III, Inc.
Its: General Partner
By _______________________________
Name:
Title:
AVALON CABLE HOLDINGS, LLC
By: _______________________________
Name:
Title:
AVALON CABLE LLC
By: _______________________________
Name:
Title:
AVALON CABLE OF MICHIGAN
HOLDINGS, INC.
By: _______________________________
Name:
Title:
<PAGE>
AVALON CABLE OF MICHIGAN, INC.
By: _______________________________
Name:
Title:
AVALON CABLE OF NEW ENGLAND
HOLDINGS INC.
By: _______________________________
Name:
Title:
AVALON INVESTORS, L.L.C
By: _______________________________
Name:
Title:
<PAGE>
SCHEDULE OF PARTIES AND NOTICE ADDRESSES
To each of:
ABRY Broadcast Partners III, L.P.,
Avalon Cable Holdings, LLC,
Avalon Cable of Michigan Holdings, Inc.,
Avalon Cable of Michigan, Inc.,
Avalon Cable of New England, Inc., and
Avalon Cable LLC
c/o ABRY Partners, Inc.
18 Newbury Street
Boston, MA 02116
Attention: Jay Grossman
with a copy (which will not constitute notice to any of the
aforementioned Parties) to:
Kirkland & Ellis
153 East 53rd Street
New York, NY 10022
Attention: John L. Kuehn
To the Strategic Investor:
to such address as the Strategic Investor may specify by notice
given in accordance with Section 10(k)
with a copy (which shall not
----------------------------
constitute notice to the Avalon Investors) to:
---------------------------------------------
Cleary, Gottlieb, Steen & Hamilton
One Liberty Plaza
New York, NY 10006
Attention: Michael L. Ryan
<PAGE>
Exhibit 1(b)
Illustration of the Application of Section 1(b)(iii)
Assumptions:
. A Transfer pursuant to Section 1(b) occurs at a time when the
Unreturned Capital Value of the Class A Units is $45,000,000 and the
Unpaid Yield on the Class A Units is $10,000,000.
. At the time of the Transfer, the Company has outstanding 45,000 Class
A Units, all of which are held by the Avalon Investors, and 575,690
Class B Units. Of such 575,690 Class B Units, 250,000 are held by
Avalon Cable N.E. At the time of the Transfer, all of the stock of
Avalon Cable N.E. is held by the Parent.
. In the Transfer, the acquiring Person has offered to pay a total of
$120,000,000 for the 45,000 Class A Units and all of the stock of
Avalon Cable N.E. Therefore, the proposed Transfer involves all 45,000
of the Class A Units and 250,000 of the Class B Units. The Avalon
Investors elects to participate in the Transfer to the fullest extent
permitted by Section 1(b).
. In connection with the Transfer, the holders of Class A Units and
Class B Units incur reasonable out-of-pocket costs in the aggregate
amount of $200,000.
Purchase Prices Payable for Class A Units and Class B Units:
From the $120,000,000 in gross proceeds, the $200,000 in out-of-pocket
costs described above will be reimbursed.
The remaining $119,800,000 will be shared among the transferring persons in
the same manner as they would share such amount if it were distributed
pursuant to Section 7.1 of the LLC Agreement (without giving effect to
Section 7.1(a) thereof or the sentences of Section 7.1 of the LLC Agreement
that follow Section 7.1(d) thereof) -- as if the Units involved in the
Transfer were the only Units outstanding. Such "sharing" would be as
follows:
First, an amount equal to the Unpaid Yield on the Class A Units
-----
($10,000,000) will be paid to the Avalon Investors.
Second, an amount equal to the Unreturned Capital Value of the Class A
------
Units ($45,000,000) will be paid to the Avalon Investors.
<PAGE>
Third, the remaining $64,800,000 will be paid to the Avalon Investors
-----
and the Parent, pro rata according to the 45,000 Units included in the
Transfer by the Avalon Investors and the 250,000 Class B Units
included in the Transfer by the Parent -- i.e., $9,884,746 to the
Avalon Investors, and $54,915,254 to the Parent.
If the Avalon Investors had not elected to participate in the proposed Transfer,
then the Parent would be entitled to Transfer the stock of Avalon Cable N.E.
(representing 250,000 of the Class B Units) for not more than $54,915,254 (i.e.,
the price the Parent would have received in the Transfer had the Avalon
Investors elected to participate to the maximum extent permitted), and on other
terms and conditions not more favorable to the acquiring Person(s) than those
set forth in the related Sale Notice, during the 180-day period described in
Section 1(b).
<PAGE>
Exhibit 4
Illustration of the application of Section 4
Assumptions:
. An Approved Company Sale occurs at a time when the Unreturned Capital
Value of the Class A Units is $45,000,000 and the Unpaid Yield on the
Class A Units is $10,000,000 (except for Case 4).
. At the time of the Approved Company Sale, the Company has outstanding
45,000 Class A Units, all of which are held by the Avalon Investors,
and 575,690 Class B Units. Of such Class B Units, 64,696 are held by
Avalon Cable N.E. and 510,994 are held by Avalon Cable Michigan. At
the time of the Approved Company Sale, all of the stock of Avalon
Cable N.E. and Avalon Cable Michigan is held by the Parent and
Michigan Inc., respectively.
. Each owner of Units has a sufficient Pro Forma Positive Capital
Account Balance to permit such owner to receive the share of the
aggregate proceeds of the Approved Company Sale to which it is
entitled pursuant to Section 4 hereof.
. In connection with the Approved Company Sale, the holders of Class A
Units and Class B Units incur reasonable out-of-pocket costs in the
aggregate amount of $200,000.
Case 1 Assumptions:
. In the Approved Company Sale, the acquiring Person has offered to pay
a total of $120,000,000 for the consolidated assets of the Company and
its Subsidiaries.
Case 2 Assumptions:
. In the Approved Company Sale, the acquiring Person has offered to pay
a total of $120,000,000 for the 45,000 Class A Units and the 575,690
Class B Units.
Case 3 Assumptions:
. In the Approved Company Sale, the acquiring Person has offered to pay
a total of $120,000,000 for the 45,000 Class A Units and all of the
stock of both Avalon Cable Michigan and Avalon Cable N.E. Therefore,
the proposed Transfer involves all 45,000 of the Class A Units and all
575,690 of the Class B Units.
<PAGE>
Case 4 Assumptions:
. In the Approved Company Sale, the acquiring Person has offered to pay
a total of $52,000,000 for 80% equity stake in the Company and at the
time of such Approved Company Sale, there is neither Unpaid Yield nor
Unreturned Capital Value on the Class A Units.
Case 5 Assumptions:
. In the Approved Company Sale, the acquiring Person has offered to pay
a total of $107,000,000 for an 80% equity stake in the Company.
. The Avalon Investors shall include all of its 45,000 Class A Units in
the proposed Transfer. Avalon Cable Michigan and Avalon Cable N.E.
shall include an aggregate of 451,552 Class B Units in the proposed
Transfer. Of such Class B Units, Avalon Cable N.E. shall include all
of its 64,696 Class B Units and Avalon Cable Michigan shall include
386,856 of its Class B Units.
Purchase Prices Payable for Class A Units and Class B Units
Case 1:
. From the $120,000,000 in gross proceeds, the $200,000 in out-of-
pocket costs described above will be reimbursed.
. The remaining $119,800,000 will be shared among the transferring
persons in the same manner as they would share such amount if it were
distributed pursuant to Section 7.1 of the LLC Agreement (without
giving effect to Section 7.1(a) thereof or the sentences of Section
7.1 of the LLC Agreement that follow Section (d) thereof).
First, an amount equal to the Unpaid Yield on the Class A Units
-----
($10,000,000) will be paid to the Avalon Investors.
Second, an amount equal to the Unreturned Capital Value of the Class A
------
Units ($45,000,000) will be paid to the Avalon Investors.
Third, the remaining $64,800,000 will be paid to the Avalon Investors,
-----
Avalon Cable N.E. and Avalon Cable Michigan pro rata according to the
45,000 Class A Units held by the Avalon Investors, the 64,696 Class B
Units held by Avalon Cable N.E. and the 510,994 Class B Units held by
Avalon Cable Michigan (i.e. approximately $4,697,997.39 to the Avalon
Investors, $6,754,258.65 to Avalon Cable N.E. and $53,347,743.96 to
Avalon Cable Michigan).
<PAGE>
Case 2:
. From the $120,000,000 in gross proceeds, the $200,000 in out-of-
pocket costs described above will be reimbursed.
. The remaining $119,800,000 will be shared among the transferring
persons in the same manner as they would share such amount if it were
distributed pursuant to Section 7.1 of the LLC Agreement (without
giving effect to Section 7.1(a) thereof or the sentences of Section
7.1 of the LLC Agreement that follow Section (d) thereof).
First, an amount equal to the Unpaid Yield on the Class A Units
-----
($10,000,000) will be paid to the Avalon Investors.
Second, an amount equal to the Unreturned Capital Value of the Class A
------
Units ($45,000,000) will be paid to the Avalon Investors.
Third, the remaining $64,800,000 will be paid to the Avalon Investors,
-----
Avalon Cable N.E. and Avalon Cable Michigan pro rata according to the
45,000 Class A Units held by the Avalon Investors, the 64,696 Class B
Units held by Avalon Cable N.E. and the 510,994 Class B Units held by
Avalon Cable Michigan (i.e. approximately $4,697,997.39 to the Avalon
Investors, $6,754,258.65 to Avalon Cable N.E. and $53,347,743.96 to
Avalon Cable Michigan).
Case 3:
. From the $120,000,000 in gross proceeds, the $200,000 in out-of-
pocket costs described above will be reimbursed.
. The remaining $119,800,000 will be shared among the transferring
persons in the same manner as they would share such amount if it were
distributed pursuant to Section 7.1 of the LLC Agreement (without
giving effect to Section 7.1(a) thereof or the sentences of Section
7.1 of the LLC Agreement that follow Section (d) thereof) --as if the
Units involved in the Transfer were the only Units outstanding.
First, an amount equal to the Unpaid Yield on the Class A Units
-----
($10,000,000) will be paid to the Avalon Investors.
Second, an amount equal to the Unreturned Capital Value of the Class A
------
Units ($45,000,000) will be paid to the Avalon Investors.
Third, the remaining $64,800,000 will be paid to the Avalon Investors,
-----
the Parent (as sole stockholder of Avalon Cable N.E.) and Michigan
Inc. (as sole stockholder of Avalon Cable Michigan) pro rata according
to the 45,000 Class A Units held by the Avalon Investors, the 64,696
Class B Units held by Avalon Cable N.E. and the 510,994 Class B Units
held by Avalon Cable Michigan (i.e. approximately
<PAGE>
$4,697,997.39 to the Avalon Investors, $6,754,258.65 to the Parent and
$53,347,743.96 to Michigan Inc.).
Case 4:
Units to be Included in the Transfer:
. Under Section 4(a), each of the Avalon Investors, Avalon Cable N.E.
and Avalon Cable Michigan shall include in the Transfer 80% of such
Person's Units (i.e. 36,000 Class A Units, 51,756.80 Class B Units and
408,795.20 Class B Units held by the Avalon Investors, Avalon Cable
N.E. and Avalon Cable Michigan, respectively).
Purchase Prices to be Paid:
. From the $52,000,000 in gross proceeds, the $200,000 in out-of-pocket
costs described above will be reimbursed.
. The remaining $51,800,000 will be shared among the transferring
persons in the same manner as they would share such amount if it were
distributed pursuant to Section 7.1 of the LLC Agreement (without
giving effect to Section 7.1(a) thereof or the sentences of Section
7.1 of the LLC Agreement that follow Section (d) thereof) --as if the
496,552 Units involved in the Transfer were the only Units
outstanding. Because there is no Unpaid Yield or Unreturned Capital
Value on the Class A Units, the remaining $51,800,000 will be paid to
the Avalon Investors, Avalon Cable N.E. and Avalon Cable Michigan pro
rata according to the 36,000 Class A Units included in the Transfer by
the Avalon Investors, the 51,756.80 Class B Units included in the
Transfer by Avalon Cable N.E. and the 408,795.20 Class B Units
included in the Transfer by Avalon Cable Michigan (i.e. approximately
$3,755,497.91 to the Avalon Investors, $5,399,237.62 to Avalon Cable
N.E. and $42,645,264.46 to Avalon Cable Michigan).
Case 5:
Purchase Prices to be Paid:
. From the $107,000,000 in gross proceeds, the $200,000 in out-of-
pocket costs described above will be reimbursed.
. The remaining $79,800,000 will be shared among the transferring
persons in the same manner as they would share such amount if it were
distributed pursuant to Section 7.1 of the LLC Agreement (without
giving effect to Section 7.1(a) thereof or the sentences of Section
7.1 of the LLC Agreement that follow Section (d) thereof) --as if the
496,552 Units involved in the Transfer were the only Units
outstanding.
<PAGE>
First, an amount equal to the Unpaid Yield on the Class A Units
-----
($10,000,000) will be paid to the Avalon Investors.
Second, an amount equal to the Unreturned Capital Value of the Class A
------
Units ($45,000,000) will be paid to the Avalon Investors.
Third, the remaining $51,800,000 will be paid to the Avalon Investors,
-----
Avalon Cable N.E. and Avalon Cable Michigan pro rata according to the
45,000 Class A Units included in the Transfer by the Avalon Investors,
the 64,696 Class B Units included in the Transfer by Avalon Cable N.E.
and the 386,856 Class B Units held by Avalon Cable Michigan (i.e.
approximately $4,694,372.39 to the Avalon Investors, $6,749.047.03 to
Avalon Cable N.E. and $40,356,580.58 to Avalon Cable Michigan).
<PAGE>
EXHIBIT 10.9
AMENDED AND RESTATED
MANAGEMENT AND CONSULTING SERVICES AGREEMENT
THIS AMENDED AND RESTATED MANAGEMENT AND CONSULTING SERVICES AGREEMENT
(this "Agreement") is entered into as of November 6, 1998 between ABRY Partners,
---------
Inc., a Delaware corporation ("ABRY"), Avalon Cable Holdings, LLC, a Delaware
----
limited liability company (the "Parent"), Avalon Cable of Michigan Holdings,
------
Inc., a Delaware corporation ("Michigan Inc."), Avalon Cable of Michigan, Inc.,
-------------
a Delaware corporation ("Avalon Cable Michigan"), Avalon Cable of New England,
---------------------
Inc. ("Avalon Cable N.E."), Avalon Cable of New England, LLC, a Delaware limited
-----------------
liability company ("Avalon Cable N.E. LLC"), and Avalon Cable LLC, a Delaware
---------------------
limited liability company (the "Company"). ABRY and the Avalon Companies are
-------
referred to herein collectively as the "Parties" and each individually as a
-------
"Party."
-----
The Parent, Avalon Cable N.E. LLC and ABRY entered into a Management
and Consulting Services Agreement dated May 29, 1998 (the "Prior Agreement").
---------------
The Parties (excluding ABRY and Avalon Cable N.E. LLC) and one
additional Person entered into a Securities Purchase Agreement (the "Securities
----------
Purchase Agreement") dated as of the First Closing Date, pursuant to which,
- ------------------
among other things, Avalon Cable N.E. contributed its 100% equity interest in
Avalon Cable N.E. LLC to the Company in exchange for an equity interest in the
Company.
To effectuate the transactions contemplated by the Securities Purchase
Agreement, the Parties wish to, and hereby, amend and restate the Prior
Agreement in its entirety as set forth in this Agreement.
NOW, THEREFORE, in consideration of the foregoing premises and the
respective agreements hereinafter set forth and the mutual benefits to be
derived from this Agreement, the Parties hereby agree as follows:
1. DEFINITIONS.
-----------
An "Affiliate" of any Person means any other Person controlling,
---------
controlled by or under common control with such first Person.
"Person" means an individual, a partnership, a limited liability
------
company, a corporation, an association, a joint stock company, a trust, a joint
venture, an unincorporated organization or any governmental entity.
<PAGE>
With respect to the Parent, a "Subsidiary" means any corporation,
----------
partnership, limited liability company, association or other business entity of
which 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, or a majority economic interest, is at
the time owned or controlled, directly or indirectly, by the Parent or one or
more of the other Subsidiaries of the Parent or a combination thereof.
2. ENGAGEMENT. The Company (on behalf of the Parent and its
----------
Subsidiaries) hereby engages ABRY as a financial and management consultant, and
ABRY hereby agrees to provide financial and management consulting services to
the Parent and its Subsidiaries, all on the terms and subject to the conditions
set forth in this Agreement.
3. SERVICES OF ABRY. ABRY hereby agrees during the term of this
----------------
Agreement to consult with the Managers of the Parent (the "Board"), the boards
-----
of directors (or similar governing bodies) of the Parent's Subsidiaries, and
management of the Parent and its Subsidiaries, in such manner and on such
business and financial matters as the Board may reasonably request from time to
time, including but not limited to corporate strategy, budgeting of future
corporate investments, acquisition and divestiture strategies, and debt and
equity financing.
4. PERSONNEL. ABRY will provide and devote to the performance of
---------
this Agreement those officers, employees and agents of ABRY which ABRY deems
appropriate for the furnishing of the services described in this Agreement.
5. MANAGEMENT FEES. From and after the date of this Agreement, the
---------------
Company will pay to ABRY a management fee (pro-rated, for partial calendar
years) in installments, at the rate of (a) $50,000 per annum, if the original
cost of all securities of the Company held by ABRY and its Affiliates is less
than $10,000,000, (b) $100,000 per annum, if the original cost of all securities
of the Company held by ABRY and its Affiliates equals or exceeds $10,000,000 and
is less than $15,000,000, (c) $150,000 per annum, if the original cost of all
securities of the Company held by ABRY and its Affiliates equals or exceeds
$15,000,000 and is less than $25,000,000, or (d) $200,000 per annum, if the
original cost of all securities of the Company held by ABRY and its Affiliates
equals or exceeds $25,000,000; provided that for any calendar year (or partial
--------
calendar year, as the case may be) the management fee for such period shall be
calculated pro-rata, based on the number of days during such period that the
original cost of ABRY's and its Affiliates' aggregate holdings of the Company's
securities was within each of the four fee classifications specified above
(taking into account any additional purchases by ABRY or its Affiliates of
securities of the Company during such period but ignoring any sales of such
securities by ABRY or its Affiliates during such period); provided further that,
--------
each calendar year beginning with calendar year 1999, the Company shall pay to
ABRY the applicable fee as specified above multiplied by the Multiplier (as
defined below) for such calendar year. The "Multiplier" for each calendar year
----------
equals 1.05/X /where X equals (A) the number of such calendar year, minus (B)
1998 (i.e., X for calendar year 2000 equals 2000-1998 or 2, therefore the
Multiplier for calendar year 2000 equals 1.05/2/ or 1.1025). The management fee
described in this Section 5 will be payable quarterly, in arrears, on each March
31, June 30, September 30 and December 31.
2
<PAGE>
6. EXPENSES. In addition to the management fees described in
--------
Section 5, the Company will reimburse ABRY for reasonable travel expenses and
other out-of-pocket costs and expenses incurred by ABRY or any director,
officer, employee or other agent or representative of ABRY in connection with
the rendering of services under this Agreement (without duplication of any
reimbursement of expenses incurred by any representative of an Affiliate of ABRY
in such person's capacity as a manager of the Parent or otherwise), which
reimbursement shall be payable quarterly, in arrears.
7. EFFECT OF TERMINATION. Either ABRY or the Company (with the
---------------------
approval of the Board) may terminate this Agreement by prior written notice to
the other. No termination of this Agreement, whether pursuant to this Section 7
or otherwise, will affect the Company's duty to pay any management fee accrued,
or to reimburse any cost or expense incurred, prior to the effective date of
that termination.
8. LIABILITY. Neither ABRY nor any of its Affiliates, stockholders,
---------
officers, employees or agents will be liable to the Parent or its Subsidiaries
or Affiliates for any loss, liability, damage, cost or expense (including
reasonable attorneys' fees) (in the aggregate, "Losses") arising out of or in
------
connection with the performance of services contemplated by this Agreement,
unless such Losses are a result of the gross negligence or willful misconduct of
such Person. The Company agrees to indemnify and hold harmless ABRY, its
stockholders, Affiliates, officers, agents and employees against and from any
and all Losses arising from ABRY's performance under this Agreement, except as a
result of the gross negligence or willful misconduct of the Person in question.
9. INDEPENDENT CONTRACTOR STATUS. ABRY and the Company agree that
-----------------------------
ABRY will perform services under this Agreement as an independent contractor,
retaining control over and responsibility for its own operations and personnel.
Neither ABRY nor its officers, employees or agents will be considered employees
or agents of the Parent or any of its Subsidiaries as a result of this Agreement
nor will any of them have authority to contract in the name of or bind the
Company by reason of this Agreement, except as the Company may expressly agree
in writing.
10. AMENDMENT AND WAIVER. No modification, amendment or waiver of
--------------------
any provision of this Agreement will be effective unless approved in writing by
the Company and ABRY. The failure of the Company or ABRY to enforce any of the
provisions of this Agreement will in no way be construed as a waiver of such
provisions and will not affect the right of such party thereafter to enforce
each and every provision of this Agreement in accordance with its terms.
11. NOTICES. Any notice provided for in this Agreement will be in
-------
writing and will be either personally delivered, or mailed by first class mail,
return receipt requested, or sent by reputable overnight courier, in each case
with delivery charges or postage prepaid, to the recipient at the address below
indicated:
3
<PAGE>
Notices to ABRY:
---------------
ABRY Partners, Inc.
18 Newbury Street
Boston, MA 02116
Attention: Jay Grossman
Notices to the Company:
----------------------
Avalon Cable LLC
201 East 69th Street, Penthouse G
New York, NY 10021
Attention: Joel Cohen, President
with a copy (which will not constitute notice to the Company) to:
----------------------------------------------------------------
Baer Marks & Upham LLP
805 Third Avenue
New York, NY 10022
Attention: Anne E. Pitter
and
Kirkland & Ellis
153 East 53rd Street
New York, NY 10022
Attention: John L. Kuehn
or to such other address or to the attention of such other Person as the
recipient party will have specified by prior written notice to the sending
party. Any notice under this Agreement will be deemed to have been given when
so delivered or mailed.
12. SEVERABILITY. Whenever possible, each provision of this
------------
Agreement will be interpreted in such a manner as to be effective and valid
under applicable law, but if any provision of this Agreement is held to be
invalid, illegal or unenforceable in any respect under any applicable law or
rule in any jurisdiction, such invalidity, illegality or unenforceability will
not affect the validity, legality or enforceability of any other provision of
this Agreement in such jurisdiction or affect the validity, legality or
enforceability of any provision in any other jurisdiction, but this Agreement
will be reformed, construed and enforced in such jurisdiction as if such
invalid, illegal or unenforceable provision had never been contained in this
Agreement.
13. ENTIRE AGREEMENT. This Agreement embodies 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
4
<PAGE>
by or among the parties, written or oral, which may have related to the subject
matter of this Agreement in any way.
14. SUCCESSORS AND ASSIGNS. This Agreement will bind and inure to
----------------------
the benefit of and be enforceable by the Company and ABRY and their respective
assigns; provided that none of the Company or ABRY may assign its rights or
--------
delegate its duties under this Agreement, without the prior written consent of
each of the others.
15. COUNTERPARTS. This Agreement may be executed simultaneously in
------------
two or more counterparts, any one of which need not contain the signatures of
more than one party, but all such counterparts taken together will constitute
one and the same Agreement.
16. DESCRIPTIVE HEADINGS. The descriptive headings of this Agreement
--------------------
are inserted for convenience only and do not constitute a substantive part of
this Agreement.
17. GOVERNING LAW. ALL ISSUES AND QUESTIONS CONCERNING THE
-------------
CONSTRUCTION, VALIDITY, INTERPRETATION AND ENFORCEMENT OF THIS AGREEMENT WILL BE
GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE DOMESTIC LAWS OF THE
COMMONWEALTH OF MASSACHUSETTS, WITHOUT GIVING EFFECT TO ANY CHOICE OF LAW OR
CONFLICT PROVISION OR RULE (WHETHER OF THE COMMONWEALTH OF MASSACHUSETTS OR OF
ANY OTHER JURISDICTION) THAT WOULD CAUSE THE LAWS OF ANY JURISDICTION OTHER THAN
THE COMMONWEALTH OF MASSACHUSETTS TO BE APPLIED. IN FURTHERANCE OF THE
FOREGOING, THE INTERNAL LAW OF THE COMMONWEALTH OF MASSACHUSETTS WILL CONTROL
THE INTERPRETATION AND CONSTRUCTION OF THIS AGREEMENT, EVEN IF UNDER THAT
JURISDICTION'S CHOICE OF LAW OR CONFLICT OF LAW ANALYSIS, THE SUBSTANTIVE LAW OF
SOME OTHER JURISDICTION WOULD ORDINARILY APPLY.
18. 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 ANY ANCILLARY AGREEMENT OR THE VALIDITY, PROTECTION,
INTERPRETATION, COLLECTION OR ENFORCEMENT THEREOF.
19. 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 will be construed as if drafted jointly by the parties, and no
presumption or burden of proof will arise favoring or disfavoring any party by
virtue of the authorship of any of the provisions of this Agreement.
* * * *
5
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Management
and Consulting Services Agreement as of the day and year first above written.
ABRY PARTNERS, INC.
By:___________________________
Name:
Its:
AVALON CABLE HOLDINGS, LLC
By:____________________________
Name:
Its:
AVALON CABLE OF NEW ENGLAND INC.
By:____________________________
Name:
Its:
AVALON CABLE OF MICHIGAN HOLDINGS INC.
By:____________________________
Name:
Its:
AVALON CABLE OF MICHIGAN INC.
By:____________________________
Name:
Its:
AVALON CABLE LLC
By:____________________________
Name:
Its:
6
<PAGE>
AVALON CABLE OF NEW ENGLAND, LLC
By:_________________________________
Name:
Its:
The undersigned, being the parent company of the "Company" referred to
in this Agreement, hereby unconditionally guarantees the payment and performance
of the Company's obligations under this Agreement.
AVALON CABLE HOLDINGS, LLC
By:_________________________________
Name:
Title:
7
<PAGE>
Exhibit 12.1
Avalon Cable of Michigan LLC
----------------------------
Computation of Ratio of Earnings to
Fixed Charges
For the
three months
ended March 31, 1999
--------------------
Pre-Tax income (loss) from continuing operations (18)
============
Adjustments to net income (loss)
- --------------------------------
Interest Expense 564
Rent Expense 14
------------
Total Fixed Charges 578
============
Income from operations plus Fixed Charges 560
------------
Ratio of earnings to fixed charges --
Amount of the deficiency of earnings to fixed charges 18
<PAGE>
EXHIBIT 12.2
Avalon Cable of New England, LLC
--------------------------------
Computation of Ratio of Earnings to
-----------------------------------
Fixed Charges
-------------
<TABLE>
<CAPTION>
For the For the
three months three months
ended ended
December 31, March 31,
------------ ------------
1998 1999
------------ ------------
<S> <C> <C>
Pre-Tax income (loss) from continuing operations (12) 263
============ ============
Adjustments to net income (loss)
- --------------------------------
Interest Expense 860 (92)
Rent Expense 15 --
------------ ------------
Total Fixed Charges 875 (92)
============ ============
Income from operations plus Fixed Charges 863 263
------------ ------------
Ratio of earnings to fixed charges 0.99 --
Amount of the deficiency of earnings to fixed charges 12 --
</TABLE>
<PAGE>
EXHIBIT 12.3
Avalon Cable of Michigan, Inc.
------------------------------
Computation of Ratio of Earnings to
-----------------------------------
Fixed Charges
-------------
<TABLE>
<CAPTION>
For the period For the
from inception three months
(June 2, 1998) to ended
December 31, 1998 March 31,
1999
----------------- ------------
<S> <C> <C>
Pre-Tax income (loss) from continuing operations (615) (264)
================= ============
Adjustments to net income(loss)
- --------------------------------
Interest Expense 4,537 9,058
Rent Expense 43 250
----------------- ------------
Total Fixed Charges 4,580 9,308
================= ============
Income from operations plus Fixed Charges 3,965 9,044
----------------- ------------
Ratio of earnings to fixed charges -- --
Amount of the deficiency of earnings to fixed charges 615 264
</TABLE>
<PAGE>
EXHIBIT 12.4
AMRAC Clear View
----------------
Computation of Ratio of Earnings to
-----------------------------------
Fixed Charges
-------------
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
Year Ended December 31, Five Months Ended May 28,
---------------------------------------- -------------------------
1993 1994 1995 1996 1997 1997 1998
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Earnings [Income (loss) before tax] (A) (2) 139 172 234 630 229 246
---- ---- ---- ---- ---- ---- ----
Rent expense (B) 34 38 32 40 49 20 20
---- ---- ---- ---- ---- ---- ----
Fixed Charges
- -------------
Interest expense, net 147 142 130 92 47 23 (1)
Amortization of discount & deferred financing costs** 8 8 8 8 13 3 -
1/3 rent expense (=B/3) 11 13 11 13 16 7 7
---- ---- ---- ---- ---- ---- ----
Total (C) 166 163 149 113 76 33 6
==== ==== ==== ==== ==== ==== ====
Earnings to fixed charges (= (A + C) / C) 1.0 1.9 2.2 3.1 9.3 8.0 44.4
---- ---- ---- ---- ---- ---- ----
Amount of the deficiency of earnings to fixed charges
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
EXHIBIT 12.5
Pegasus Cable Television, Inc. and Pegasus Cable Television of Connecticut, Inc.
- --------------------------------------------------------------------------------
Computation of Ratio of Earnings to
-----------------------------------
Fixed Charges
-------------
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
Year Ended December 31, Six Months Ended June 30,
------------------------ -------------------------
1995 1996 1997 1997 1998
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Earnings [Income (loss) before tax] (A) (1,239) (1,156) (625) (413) (303)
------ ------ ------ ------ ------
Rent expense (B) 184 186 174 9 10
------ ------ ------ ------ ------
Fixed Charges
- -------------
Interest expense, net 1,745 1,889 1,791 863 938
Amortization of discount & deferred financing costs** 22 1 15 5 12
1/3 rent expense (= B/3) 61 62 58 3 3
------ ------ ------ ------ ------
Total (C) 1,828 1,952 1,864 871 953
====== ====== ====== ====== ======
Earnings to fixed charges (= (A + C) / C) 0.3 0.4 0.7 0.5 0.7
------ ------ ------ ------ ------
- ----------------------------------------------------------------------------------------------------------
Amount of the deficieny of earnings to fixed charges 1,239 1,156 625 414 303
</TABLE>
<PAGE>
EXHIBIT 12.6
Taconic Technology Corporation
------------------------------
Computation of Ratio of Earnings to
-----------------------------------
Fixed Charges
-------------
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
Year Ended December 31, Three Months Ended March 31,
1995 1996 1997 1998 1997 1998
------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Earnings [Income (loss) before tax] (A) 119 107 188 243 163 72
------ ------ ------ ------ ------ ------
Rent expense (B) 96 118 129 253 50 72
------ ------ ------ ------ ------ ------
Fixed Charges
- -------------
Interest expense, net 129 102 79 17 44 -
Amortization of discount & deferred financing costs**
1/3 rent expense (=B/3) 32 39 43 84 17 24
------ ------ ------ ------ ------ ------
Total (C) 161 141 122 101 61 24
====== ====== ====== ====== ====== ======
Earnings to fixed charges (= (A + C) / C) 1.74 1.76 2.54 3.40 3.69 4.00
------ ------ ------ ------ ------ ------
Amount of the deficiency of earnings to fixed charges N/A N/A
- ----------------------------------------------------------------------------------------------------------------------
</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. 333-75453) of
Avalon Cable of Michigan LLC, Avalon Cable of New England LLC, Avalon Cable
Finance, 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, 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 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, (iii) our report dated March 30, 1999
relating to the financial statements of Avalon Cable of New England LLC as of
December 31, 1997 and 1998 and for the period from September 4, 1997 (inception)
through December 31, 1997 and for the year ended December 31, 1998, (iv) our
report dated March 30, 1999 relating to the financial statements of Avalon Cable
Finance, Inc. 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 financial statements of Avalon Cable of Michigan LLC as of
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. 333-75453) of
Avalon Cable of Michigan LLC, Avalon Cable of New England LLC, Avalon Cable
Finance, 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. 333-75453) of
Avalon Cable of Michigan LLC, Avalon Cable of New England LLC, Avalon Cable
Finance, Inc. and Avalon Cable of Michigan, Inc. of our report dated March 30,
1999 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
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. 333-75453) of
Avalon Cable of Michigan LLC, Avalon Cable of New England LLC, Avalon Cable
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, Berger & 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-88 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 of Michigan LLC, Avalon Cable
of New England LLC, Avalon Cable Finance, Inc., Avalon Cable of Michigan, Inc.
/s/ KPMG LLP
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 OF MICHIGAN LLC
(Exact name of obligor as specified in its charter)
Delaware 13-4029981
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
--------------
AVALON CABLE OF NEW ENGLAND LLC
(Exact name of obligor as specified in its charter)
Delaware 22-3556161
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
--------------
AVALON CABLE FINANCE, INC.
(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.)
--------------
<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 9-3/8% Senior Subordinated Notes due 2008
(Title of the indenture securities)
================================================================================
<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.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------
Name Address
- -----------------------------------------------------------------------------------
<S> <C>
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
</TABLE>
(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 Registration 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
- ----------------------------------------------------------------------------
Consolidated 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>
ASSETS Dollar Amounts
in Thousands
Cash and balances due from depository
institutions:
<S> <C>
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, 37,238,439
allowance, and reserve.........................
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 issued 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 )
- ------------------------------------------------------------------------
<PAGE>
Exhibit 99.1
LETTER OF TRANSMITTAL
To Tender for Exchange
Series B 9 3/8% Senior Subordinated Notes due 2008
of
AVALON CABLE OF MICHIGAN LLC,
AVALON CABLE OF NEW ENGLAND LLC
AND
AVALON CABLE 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 of Michigan LLC, a Delaware limited
liability company (the "Avalon Michigan"), Avalon Cable of New England LLC, a
Delaware limited liability company ("Avalon New England"), and Avalon Cable
Finance, Inc. ("Avalon Finance" and, together with Avalon Michigan and Avalon
New England, 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 9 3/8% Senior
Subordinated 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 9 3/8% Senior
Subordinated Notes due 2008 (the "Notes"), of which $150,000,000 aggregate
principal amount is outstanding.
<PAGE>
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 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).
2
<PAGE>
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 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
BOX 1
DESCRIPTION OF NOTES TENDERED
(Attach additional signed pages, if necessary)
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C>
Name(s) and Address(es) of Registered
Note
Holder(s), exactly as name(s) appear(s) Aggregate
on Certificate Principal Amount Aggregate
Note Certificate(s) Number(s) of Represented by Principal Amount
(Please fill in, if blank) Notes* Certificates Tendered**
-----------------------------------------------------------
</TABLE>
--------------------------------------------
--------------------------------------------
--------------------------------------------
Total
- --------------------------------------------------------------------------------
* 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.
BOX 2
BENEFICIAL OWNER(S)
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
State of Principal Residence of Each
Beneficial Owner Principal Amount of Tendered Notes Held for
of Tendered Notes Account of Beneficial Owner
</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
9 3/8% Senior Subordinated Notes due 2008
of
AVALON CABLE OF MICHIGAN LLC,
AVALON CABLE OF NEW ENGLAND LLC AND
AVALON CABLE FINANCE, INC.
Pursuant to the Prospectus Dated , 1999
This form must be used by a holder of 9 3/8% Senior Subordinated Notes due
2008 (the "Notes") of Avalon Cable of Michigan LLC, a Delaware limited
liability company ("Avalon Michigan"), Avalon Cable of New England LLC, a
Delaware limited liability company ("Avalon New England") and Avalon Cable
Finance, Inc., a Delaware corporation ("Avalon Finance" and, together with
Avalon Michigan and Avalon New England, 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 OF MICHIGAN LLC,
AVALON CABLE OF NEW ENGLAND LLC AND
AVALON CABLE FINANCE, INC.
9 3/8% Senior Subordinated 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 of Michigan LLC, a Delaware
limited liability company ("Avalon Michigan"), Avalon Cable of New England LLC
("Avalon New England") and Avalon Cable Finance, Inc. ("Avalon Finance" and,
together with Avalon Michigan and Avalon New England, 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 9 3/8% Senior Subordinated 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 9 3/8% 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 of Michigan LLC, a Delaware
limited liability company ("Avalon Michigan LLC"), Avalon Cable of New England
LLC, a Delaware limited liability company ("Avalon New England"), Avalon Cable
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 Avalon-Pennsylvania,
Avalon New England, Avalon Finance, and the Trustee, providing for the issuance
of an aggregate principal amount of up to $200 million of 9-3/8% Senior
Subordinated 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
<PAGE>
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
<PAGE>
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
