<PAGE>
As filed with the Securities and Exchange Commission on March , 1999.
Registration No. 333-
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------
FORM S-4
REGISTRATION STATEMENT
Under
the Securities Act of 1933
----------------
AVALON CABLE LLC
(Exact name of registrant as specified in its charter)
Delaware 4813 13-4029965
(State or other (Primary Standard (I.R.S. Employer
jurisdiction of Industrial Classification Identification No.)
incorporation or Code Number)
organization)
----------------
AVALON CABLE HOLDINGS FINANCE, INC.
Delaware 4813 13-4029969
(State or other (Primary Standard (I.R.S. Employer
jurisdiction of Industrial Classification Identification No.)
incorporation or Code Number)
organization)
----------------
AVALON CABLE OF MICHIGAN HOLDINGS, INC.
Delaware 4813 04-3423309
(State or other (Primary Standard (I.R.S. Employer
jurisdiction of Industrial Classification Identification No.)
incorporation or Code Number)
organization)
----------------
AVALON CABLE OF MICHIGAN, INC.
Pennsylvania 4813 23-2566891
(State or other (Primary Standard (I.R.S. Employer
jurisdiction of Industrial Classification Identification No.)
incorporation or Code Number)
organization)
----------------
800 Third Avenue, Suite 3100
New York, New York 10022
Telephone: (212) 421-0600
(Address, including zip code, and telephone number, including area code, of
registrants' principal executive offices)
----------------
Copy to:
Joel C. Cohen Jill Sugar Factor
800 Third Avenue, Suite 3100 Kirkland & Ellis
New York, New York 10022 200 East Randolph Drive
Telephone: (212) 421-0600 Chicago, Illinois 60601
Telephone: (312) 861-2000
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
----------------
Approximate date of commencement of proposed sale of the securities to the
public: As soon as practicable after this Registration Statement becomes
effective.
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance
with General Instruction G, check the following box. [_]
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [_]
CALCULATION OF REGISTRATION FEE
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Proposed
Proposed Maximum
Amount Maximum Aggregate Amount of
Title of each Class of Securities to be Offering Price Offering Registration
to be Registered Registered Per Unit(1) Price(1) Fee
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Series B 11 7/8% Senior Discount
Notes due 2008.................. $196,000,000 36.979% $110,410,720 $30,694
- -----------------------------------------------------------------------------------------------
Guarantees of Series B 11 7/8%
Senior Discount Notes due
2008(2)......................... -- -- -- (3)
- -----------------------------------------------------------------------------------------------
</TABLE>
- -------------------------------------------------------------------------------
(1) Estimated solely for purposes of calculating the registration fee pursuant
to Rule 457(f).
(2) The guarantors are affiliates of the registrants and have guaranteed the
Series B notes being registered.
(3) Pursuant to Rule 457(n), no separate fee is payable with respect to the
guarantees of the Series B notes being registered.
----------------
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 March 31, 1999
Preliminary Prospectus
- --------------------------------------------------------------------------------
Avalon Cable LLC
Avalon Cable Holdings Finance, Inc.
Offer to Exchange Series B 11 7/8% Senior Discount Notes due 2008
For All Outstanding 11 7/8% Senior Discount Notes due 2008
- --------------------------------------------------------------------------------
Terms of the Exchange Offer
. This exchange offer expires at 5:00 p.m., New York City time, on , 1999,
unless extended.
. All outstanding notes that are validly tendered and not validly withdrawn
prior to the expiration of the exchange offer will be exchanged.
. Tenders of the outstanding notes may be withdrawn any time before the
expiration of the exchange offer.
. This exchange offer is subject to customary conditions, which the issuers of
the notes may waive.
. We will not receive any proceeds from this exchange offer.
. 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.
. There is no existing market for the notes offered in this exchange offer and
we do not intend to apply for their listing on any securities exchange.
- --------------------------------------------------------------------------------
Before you tender your notes, you should consider carefully the "Risk
Factors" beginning on page of this prospectus.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these notes or passed upon the
adequacy or accuracy of this prospectus. Any representation to the contrary is
a criminal offense.
<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. Our
strategy is to assemble two or more regional clusters, each consisting of
200,000 to 300,000 basic subscribers. We believe that our cluster strategy will
allow us to achieve economies of scale while maintaining geographic diversity
for our company as a whole. As of December 31, 1998, on a pro forma basis
giving effect to all our completed and pending acquisitions:
. we were one of the leading cable system operators in the State of
Michigan;
. we were one of the 30 largest multiple system cable operators in the
United States;
. our systems would have passed approximately 403,600 homes; and
. our systems would have served approximately 247,300 basic subscribers, of
which approximately 221,200 are located in Michigan and approximately
26,100 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 for approximately
$425.9 million. We acquired Cable Michigan because of its strong growth
prospects. We believe that there are good growth prospects for the communities
Cable Michigan serves and good opportunities to increase penetration rates,
which refers to the percentage of homes in a given area that purchase cable
services.
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 for
total consideration of approximately $21.9 million. In addition, we have
acquired, for a combined purchase price of approximately $13.3 million, the
following:
. cable television systems from Nova Cablevision, Inc., Nova Cablevision
VI, L.P. and Nova Cablevision VII, L.P. which had approximately 6,400
basic subscribers as of March 1999;
. cable television systems from Cross Country Cable TV, Inc. which had
approximately 1,900 basic subscribers as of January 1999,
. assets of Novagate Communications Corp., an Internet service provider
which had approximately 5,000 Internet subscribers as of March 1999, and
. cable system assets of R/COM, L.C. which had approximately 800 basic
subscribers as of March 1999.
We have also entered into agreements to acquire assets of Traverse Internet,
Inc., an Internet service provider which had approximately 5,000 Internet
subscribers as of March 1999, and certain cable system assets of Galaxy
American Communications which had approximately 600 basic subscribers as of
March 1999. The combined purchase price for these pending transactions is
approximately $2.9 million.
As of December 31, 1998, on a pro forma basis, we had a total of 221,200
basic subscribers and 10,000 Internet subscribers in our Michigan Cluster,
after giving effect to all completed and pending transactions.
1
<PAGE>
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
for approximately $8.1 million, and from Pegasus Cable Television, Inc. and
Pegasus Cable Television of Connecticut, Inc. for approximately $30.5 million.
This cluster provides services in western New England and upstate New York. We
believe that the consolidation of these operations will continue to allow us 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 this area 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 Corporation which had approximately 5,100 basic subscribers as of
December 31, 1998 and Hometown TV, Inc. which had approximately 400 basic
subscribers as of December 31, 1998. The combined purchase price for these
pending transactions is approximately $9.0 million.
As of December 31, 1998, we had a total of approximately 26,000 basic
subscribers in our New England Cluster, after giving effect to all completed
and pending transactions.
On a pro forma combined basis, the Issuers would have had revenues of $26.1
million and Adjusted EBITDA of $12.2 million for the quarter ended December 31,
1998 and revenues of $104.9 million and Adjusted EBITDA of $48.7 million for
the year ended December 31, 1998.
Management and Investors
David Unger, Joel Cohen and ABRY Broadcast Partners III, L.P. formed Avalon.
Each of Messrs. Unger and Cohen has spent approximately 20 years in the cable
television business. Mr. Unger, our Chairman, has held senior financial and
operating positions with Teleprompter Corp. and TKR Cable Co. He has also been
an investment banker for cable businesses for more than a decade and has
successfully purchased, operated and sold cable television systems for his own
account. Mr. Cohen, our President and Chief Executive Officer, has held senior
operating positions with Teleprompter Corp., Group W Cable Inc., United Artists
Entertainment Company and Harron Communications Corp. ABRY Broadcast Partners
III, L.P. is managed by ABRY Partners, Inc., which manages $825 million of
private equity funds, including ABRY Broadcast Partners III, L.P., and is one
of the largest private equity investment firms in North America dedicated
solely to investing in media businesses. Some investments by ABRY Partners,
Inc. have included Sullivan Broadcasting, Inc., Pinnacle Holdings, Inc. and
Citadel Communications Corporation.
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 Avalon 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;
2
<PAGE>
. 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.
The Reorganization
In March 1999, after the acquisition of Mercom, Inc., we completed a series
of transactions to facilitate certain aspects of our financing. As a result of
these transactions:
. Avalon Cable of Michigan LLC now operates our Michigan Cluster instead of
Avalon Cable of Michigan, Inc.,
. Avalon Cable of Michigan Holdings, Inc. is no longer an obligor on the
existing notes, rather, it is a guarantor of the obligations thereunder
of Avalon Cable LLC, and
. Avalon Cable of Michigan, Inc. is also a guarantor of the obligations of
Avalon Cable LLC under the existing notes.
Neither Avalon Cable of Michigan Holdings, Inc. nor Avalon Cable of
Michigan, Inc. has significant assets, other than its investment in Avalon
Cable of Michigan, Inc. and Avalon Cable LLC, respectively.
Our organizational structure after the Reorganization is displayed in a
chart in the "The Company--Structure After the Reorganization" section of this
prospectus.
The principal executive offices of each of the Issuers are located at 800
Third Avenue, Suite 3100, New York, NY, 10022, and the telephone number of each
of the Issuers is (212) 421-0600.
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 in this private
offering 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. For information on the sources and
uses of funds in connection with the original offering, you should see the "Use
of Proceeds" section of this prospectus.
The Exchange Offer
The Exchange Offer........ The Issuers are offering to exchange $196,000,000
aggregate principal amount at maturity of 11 7/8%
senior discount notes which have been registered
under the Securities Act of 1933 for $196,000,000
aggregate principal amount at maturity of their
outstanding 11 7/8% senior discount notes due 2008
which were issued in December 1998.
The Issuers will accept the old notes in exchange
for new notes to increase the liquidity of their
outstanding notes. 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. You may tender your old notes by following
the procedures described in this prospectus under
the heading "The Exchange Offer."
3
<PAGE>
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 The exchange offer is subject to customary
Exchange Offer............ 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.
By tendering your notes in this manner, you will be
representing, among other things, that:
. the new notes you acquire in the exchange offer
are being acquired in the ordinary course of your
business;
. you are not participating, do not intend to
participate, and have no arrangement or
understanding with any person to participate in
the distribution of the new notes issued to you
in the exchange offer; and
. you are not an "affiliate" of the Issuers.
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 tendered or that are
tendered, but not accepted, will be subject to the
existing transfer restrictions on the notes after
the exchange offer. The Issuers will have no
further obligation to register the old notes. If
you do not participate in the exchange offer, the
liquidity of your notes could be adversely
affected.
Procedures for Beneficial If you are the beneficial owner of old notes
Owners.................... registered in the name of a broker, dealer or other
nominee and you wish to tender your notes, you
should contact the person in whose name your notes
are registered and promptly instruct the person to
tender on your behalf.
4
<PAGE>
Guaranty Delivery If you wish to tender your old notes and time will
Procedures................ not permit your required documents to reach the
exchange agent by the expiration date, or the
procedure for book-entry transfer cannot be
completed on time, you may tender your notes
according to the guaranteed delivery procedures.
See "The Exchange Offer--Guaranteed Delivery
Procedures."
Acceptance of Old Notes;
Delivery of New Notes.....
Subject to certain conditions, the Issuers will
accept old notes which are properly tendered in the
exchange offer and not withdrawn, before 5:00 p.m.,
New York City time, on the expiration date of the
exchange offer. The new notes will be delivered as
promptly as practicable following the expiration
date.
Use of Proceeds........... The Issuers will receive no proceeds from the
exchange offer.
Exchange Agent............ [ ] is the exchange agent for the
exchange offer.
Summary of the New Notes
Issuers................... Avalon Cable LLC and Avalon Cable Holdings Finance,
Inc.
Yield and Interest........ Before December 1, 2003, there will be no current
payments of cash interest on the new notes. The new
notes will accrete in value at a rate of 11 7/8%
per annum, compounded semi-annually, to an
aggregate principal amount of $196,000,000 on
December 1, 2003, assuming all old notes are
exchanged for new notes. After December 1, 2003,
cash interest on the new notes:
. will accrue at the rate of 11 7/8% per annum on
the principal amount at maturity of the new
notes, and
. will be payable semi-annually in arrears on June
1 and December 1 of each year, commencing June 1,
2004.
Original Issue Discount... The new notes:
. will be treated for U.S. federal income tax
purposes as having been issued at a substantial
discount to their principal amount at maturity,
and
. will bear original issue discount for U.S.
federal income tax purposes.
Original issue discount will accrue from the issue
date of the new notes and will be included as
interest income periodically, including for periods
ending prior to December 1, 2003, in a holder's
gross income for U.S. federal income tax purposes
in advance of receipt of the cash payments to which
the income is attributable. See "Certain United
States Federal Income Tax Considerations."
Mandatory Payment of
Accrued Interest..........
On December 1, 2003, the Issuers will be required
to redeem an amount equal to $369.79 per $1,000
principal amount at maturity of
5
<PAGE>
each new note and each old note not exchanged for a
new note then outstanding, which we refer to as the
Accreted Interest Redemption Amount, on a pro rata
basis at a redemption price of 100% of the
principal amount at maturity of the notes so
redeemed. Assuming all of the new notes and all of
the old notes not exchanged for new notes remain
outstanding on such date, this amount would be
$72,479,000 in aggregate principal amount at
maturity of the notes. This amount represents:
. the excess of the aggregate accreted principal
amount of all notes outstanding on December 1,
2003 over the aggregate issue price thereof,
. less an amount equal to one year's simple
uncompounded interest on the aggregate issue
price of such notes at a rate per annum equal to
the stated interest rate on the notes.
Maturity Date............. December 1, 2008.
Optional Redemption....... On or after December 1, 2003, the Issuers may
redeem the new notes, in whole or in part. Before
December 1, 2001, the Issuers may redeem up to 35%
of the aggregate principal amount at maturity of
the notes originally issued:
. only with the proceeds of one or more equity
offerings and/or strategic equity investments;
and
. only if at least 65% of the aggregate principal
amount at maturity of the notes originally issued
remains outstanding after each redemption.
The prices for the above optional redemptions are
set forth in the "Description of the Notes--
Optional Redemption" section of this prospectus.
Change of Control......... If we sell certain assets or if we experience
specific kinds of changes of control, holders of
the new notes will have the opportunity to sell
their new notes to the Issuers at 101% of (a) the
accreted value of the new notes in the case of
repurchases of new notes prior to December 1, 2003
or (b) the aggregate principal amount thereof in
the case of repurchases of new notes on or after
December 1, 2003, plus accrued and unpaid interest
and liquidated damages, if any, to the date of
purchase.
Ranking................... The new notes:
. will be general unsecured obligations of the
Issuers,
. will be subordinate in right of payment to all
existing and future senior indebtedness of the
Issuers,
. will be effectively subordinated to all
indebtedness and other liabilities and
commitments of the Issuers' subsidiaries,
including their credit facility and the Senior
Subordinated Notes,
. will rank on the same level, or "pari passu,"
with any existing and future senior indebtedness
of the Issuers, and
. will rank senior to all subordinated obligations
of the Issuers.
6
<PAGE>
The indenture governing the new notes permits the
Issuers and the Operating Companies to incur
additional indebtedness subject to certain
limitations. As of December 31, 1998, on a pro
forma basis:
. the Issuers would have had no outstanding
indebtedness other than the existing notes and
the debt of their subsidiaries, and
. the outstanding senior indebtedness of the
Operating Companies on a combined basis would
have been $180.2 million.
Certain Covenants........ The indenture governing the new notes limits the
activities of the Issuers and their restricted
subsidiaries. The provisions of the new note
indenture limit 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, and
. with respect to restricted subsidiaries, issue
capital stock.
Guarantors............... Avalon Cable of Michigan Holdings, Inc. and Avalon
Cable of Michigan, Inc. will guarantee the
obligations of Avalon Cable LLC under the new
notes. However, neither Avalon Cable of Michigan
Holdings, Inc. nor Avalon Cable of Michigan, Inc.
has any significant assets other than its equity
interest in Avalon Cable of Michigan Inc. and
Avalon Cable LLC, respectively. Thus, holders
should not expect the guarantors to participate in
making principal and interest payments on the new
notes. For a description of the relationship of the
Guarantors to the Issuers, see "The Company--
Structure After the Reorganization."
For more information about the new notes, see the "Description of the Notes"
section of this prospectus.
Risk Factors
You should carefully consider all of the information in the "Risk Factors"
section of this prospectus as well as other information and data included in
this prospectus before tendering your old notes in exchange for new notes.
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, 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 the Avalon Cable of Michigan Holdings, Inc.,
Cable Michigan, Inc. Avalon Cable LLC, Avalon Cable of New England LLC, AMRAC
Clear View, Pegasus Cable Television, Inc. and Pegasus Cable Television of
Connecticut, Inc., Taconic
7
<PAGE>
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 Inc.
include 100% of Mercom, Inc. for all periods presented. The summary unaudited
pro forma combined financial and operating data gives effect to our completed
acquisitions and our pending acquisitions, the issuance of the old notes, the
issuance of the Senior Subordinated Notes by the Operating Companies, the
incurrence of debt under our secured credit facility and the reorganization
transactions described herein, as if they had occurred on January 1, 1998. In
the following table and the related notes, we refer to:
. Avalon Cable of Michigan Holdings, Inc. as Michigan Holdings,
. Avalon Cable LLC as Avalon Cable,
. 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 Holdings Finance, Inc. as Holdings 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, 1998, nor do
they necessarily indicate the Issuers' future results of operations or
financial position.
Management believes that the summary unaudited pro forma combined financial
and operating data is a meaningful presentation because the Issuers had no
operations as of December 31, 1997 and only had significant operations for a
short period of time as of December 31, 1998, and their ability to satisfy debt
and other obligations is dependent upon cash flow from the completed and
pending acquisitions. The following information is qualified by reference to
and should be read in conjunction with the "Capitalization," "Selected
Historical Financial and Other Data," and "Management's Discussion and Analysis
of Financial Condition and Results of Operations" sections of this prospectus
and the financial statements and notes thereto included elsewhere in this
prospectus.
The summary unaudited pro forma combined financial and operating data should
be read in conjunction with the financial statements of Michigan Holdings,
Cable Michigan, Avalon Cable, AMRAC, Pegasus, Taconic and Holdings Finance and
the accompanying notes thereto included elsewhere in this prospectus.
Prior to July 21, 1998, Pegasus was operated as part of Pegasus
Communications Corporation. This table below sets forth selected historical
combined data for Pegasus for periods during which they did not operate as a
separate independent company and, accordingly, certain allocations were made in
preparing such financial data. Therefore, such data may not reflect the results
of operations or the financial condition which would have resulted if Pegasus
had operated as a separate independent company during such periods, and are not
necessarily indicative of the future results of operations or financial
position of Pegasus.
8
<PAGE>
As of December 31, 1998, 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 Year Ended December 31, 1998
<TABLE>
<CAPTION>
Probable Unaudited
Michigan Cable Avalon Avalon New Transaction Pro Forma Pro Forma
Holdings(1) Michigan(2) Cable(3) England(4) Amrac(5) Pegasus(6) Taconic(7) Adjustments(8) Combined
----------- ----------- -------- ---------- -------- ---------- ----------- -------------- ---------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Statement of
operations data
Revenue........... $ 13,657 $ 74,521 $ 1,299 $3,231 $779 $3,277 $2,086 $ 6,061 $104,911
Operating
expenses......... 7,469 38,621 761 1,838 443 1,693 1,378 4,036 56,239
Corporate
overhead......... 249 6,087 56 350 42 97 22 97 7,000
Depreciation and
amortization..... 6,614 28,098 440 1,129 47 835 426 7,239 44,828
Non-recurring
expenses......... -- 5,764 -- -- -- -- -- -- 5,764
-------- -------- ------- ------ ---- ------ ------ -------- --------
Operating income
(loss)........... (675) (4,049) 42 (86) 247 652 260 (5,311) (8,920)
Interest expense,
net.............. (6,784) (7,382) (785) (503) -- (938) (17) (29,120) (45,529)
Other income
(expense), net... (796) 897 (1,311) -- -- (22) (97) (2,280) (3,582)
-------- -------- ------- ------ ---- ------ ------ -------- --------
Net-income (loss). $(8,228) $(10,534) $(2,054) $ (589) $247 $ (308) $ 146 $(36,711) $(58,031)
======== ======== ======= ====== ==== ====== ====== ======== ========
Other financial
data
EBITDA(9)......... $ 5,939 $ 29,813 $ 482 $1,043 $294 $1,487 $ 686 $ 1,928 $ 41,672
Adjusted
EBITDA(10)....... 48,719
Adjusted EBITDA
margin(11)....... 46.4%
Ratio of debt to
adjusted
EBITDA(12) 9.1x
Capital
expenditures..... $ 4,673 $18,697 $ 157 $ 21 $ 61 $ 114 $ 81 $ 165 $ 23,969
Other operating
data (end of
period)
Homes passed(13).. 349,162 28,350 7,200 18,864 403,576
Basic
subscribers(14).. 211,537 20,604 5,100 10,084 247,325
Basic
penetration(15).. 60.6% 72.7% 70.8% 53.5% 61.3%
Premium units(16). 55,550 4,912 1,225 2,513 64,200
Premium
penetration(17).. 26.3% 23.8% 24.0% 24.9% 26.0%
Average monthly
revenue per basic
subscriber(18)... $ 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 Year Ended December 31, 1998
(1) On November 6, 1998, a subsidiary of Michigan Holdings acquired Cable
Michigan. Prior to this acquisition, Michigan Holdings did not have any
operations. Michigan Holdings' results of operations include the results of
operations for the period from acquisition through December 31, 1998.
(2) 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.
(3) Avalon Cable LLC results of operations include its results of operations
from its inception (October 21, 1998) through December 31, 1998, and the
results of Avalon New England from the commencement of its operations (May
29, 1998) through December 31, 1998.
(4) 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.
(5) Amrac's results of operations includes the actual historical results of
operations for the period from January 1, 1998 through May 28, 1998.
(6) Pegasus' combined results of operations includes the actual historical
results of operations for the period from January 1, 1998 through June 30,
1998.
(7) Taconic's results of operations includes the actual historical results of
operations of Taconic for the year ended December 31, 1998.
(8) Pro forma adjustments represent those adjustments necessary to present
operating results as if all pending and completed acquisitions and the
related financing transactions and the reorganization occurred on January
1, 1998. These adjustments include in each case, the following:
(a) Adjustments to reflect the full year impact of the acquisitions of
Nova, Cross Country, Traverse, Galaxy, Westcom, Hometown and Novagate.
(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.
(9) 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 $5,764,000
of non-recurring seller transaction costs incurred by Cable Michigan in
connection with the merger with and into Avalon Michigan Inc. Management
believes that EBITDA is a meaningful measure of performance and it is
commonly used in the cable television industry to analyze and compare cable
television companies on the basis of operating performance, leverage and
liquidity. However, EBITDA is not intended to be a performance measure that
should be regarded as an alternative to, or more meaningful than, either
operating income or net income as an indicator of operating performance or
cash flows as a measure of liquidity, as determined in accordance with
generally accepted accounting principles
10
<PAGE>
Notes to Summary Unaudited Pro Forma Combined Financial and Operating Data--
(Continued)
For the Year Ended December 31, 1998
("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.
(10) Represents EBITDA, adjusted for the elimination of certain expenses and
the inclusion of Avalon corporate overhead expenses as described further
below.
The indenture governing the old notes and new notes refers to Adjusted
EBITDA as "Consolidated Cash Flow" and specifically excludes expenses like
those discussed above 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.
The following table reflects the calculation of Adjusted EBITDA (dollars
in thousands):
<TABLE>
<CAPTION>
Three Months
Year Ended Ended
December 31, December 31,
1998 1998
------------ ------------
<S> <C> <C>
EBITDA $41,672 $10,211
------- -------
Adjustments:
Cable Michigan management fee...................... 3,156 526
Cable Michigan corporate overhead expenses......... 1,171 138
Amrac and Pegasus management fees and corporate
overhead expenses................................. 140 --
Completed acquisitions corporate overhead expenses. 508 162
Taconic corporate overhead expenses................ 641 153
Pending acquisitions corporate overhead expenses... 170 59
Public company expenses of Cable Michigan and
Mercom............................................ 394 26
Non-recurring expenses(a).......................... 1,908 887
Avalon corporate overhead expenses................. (1,041) --
------- -------
Total adjustments................................ 7,047 1,951
------- -------
Adjusted EBITDA ................................... $48,719 $12,162
======= =======
</TABLE>
- --------
(a) Reflects 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,
(11) Represents Adjusted EBITDA as a percentage of revenues.
(12) Represents total pro forma debt outstanding as of December 31, 1998
divided by an amount equal to Adjusted EBITDA for the three months ended
December 31, 1998 (see note 10) multiplied by four, as specified in the
indenture for the old notes and new notes in determining compliance with
the debt incurrence covenant.
(13) The number of dwelling units in a particular community that management
estimates can be connected to the Company's cable system.
11
<PAGE>
Notes to Summary Unaudited Pro Forma Combined Financial and Operating Data--
(Continued)
For the Year Ended December 31, 1998
(14) 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.
(15) Calculated as basic subscribers as a percentage of homes passed.
(16) 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.
(17) Calculated as premium units as a percentage of basic subscribers.
(18) 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. The risks and uncertainties described below are not the only ones facing
our company or relevant to an investment in the new notes. Additional risks and
uncertainties not presently known to us or that we currently believe to be
immaterial may also adversely affect our business.
If any of the following risks and uncertainties develop into actual events,
our business, financial condition or results of operations could be materially
adversely affected. In that case, we may not be able to make principal and
interest payments on the notes, and you may lose all or part of your
investment.
Holders of old notes that fail to exchange their notes may be unable to resell
their notes.
We did not register the old notes under the federal or any state securities
laws, nor do we 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. If the holders of old notes do not exchange their notes in
the exchange offer, they lose their right to have the old notes registered
under the federal securities laws, subject to certain limitations. As a result,
a holder of old notes after the exchange offer may be unable to sell their
notes.
Your notes will not be accepted for exchange if you fail to follow the exchange
offer procedures.
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
. 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.
None of the exchange agent nor any of the Issuers or any of their affiliates
are under any duty to give you notification of defects or irregularities with
respect to tenders of old notes for exchange. old notes that are not tendered
or are tendered but not accepted will, following the exchange offer, continue
to be subject to their existing transfer restrictions. In addition, if you
tender your old notes in the exchange offer to participate in a distribution of
the new notes, you will be required to comply with the registration and
prospectus delivery requirements of the federal securities laws in connection
with any resale transaction. For additional information, please refer to "The
Exchange Offer" and "Plan of Distribution" sections of this prospectus.
The Issuers are substantially leveraged and may not have sufficient earnings to
cover fixed charges.
The Issuers are highly leveraged as a result of the substantial debt they
incurred to finance their acquisitions and to expand operations. As of December
31, 1998, on a pro forma basis, the Issuers would have had on a combined basis
outstanding long-term indebtedness of approximately $441.7 million and
shareholders' equity of approximately $144.6 million. In addition, on a pro
forma basis, combined interest expense for the Issuers would have been $45.5
million for the year ended December 31, 1998. Subject to the restrictions in
the indenture governing the Senior Subordinated Notes issued by the Operating
Companies, the indenture governing the old notes and the new notes and the
Operating Companies' senior secured credit facility, the Issuers and the
Operating Companies may incur additional indebtedness, including senior
indebtedness, from time to time, to finance future acquisitions, for capital
expenditures or for general business purposes. The degree to which the Issuers
are leveraged 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 and the Operating Companies 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;
. all borrowings by the Operating Companies under their senior credit
facility and certain other borrowings are subject to variable rates of
interest, which expose the Issuers to the risk of increased interest
rates; and
. the Issuers may be more vulnerable to economic downturns and be limited
in their ability to withstand competitive pressures.
For additional information, please refer to the "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resources" section of this prospectus.
On a pro forma basis, the combined earnings of the Issuers would have been
insufficient to cover their fixed charges by approximately $60.4 million for
the year ended December 31, 1998. In this period, however, earnings are reduced
by substantial non-cash charges, principally consisting of depreciation and
amortization of $44.8 million and accreted interest of $15.0 million for the
year ended December 31, 1998. For additional information, please refer to the
"Unaudited Pro Forma Combined Financial and Operating Data" section of this
prospectus.
The Issuers' ability to make scheduled debt payments or to refinance their
debt will depend on the future operating performances and cash flows of the
Operating Companies, which are subject to prevailing economic conditions,
prevailing interest rate levels, and financial, competitive, business and other
factors, many of which are beyond their control. In addition, our business
strategy includes making substantial capital expenditures to maintain, expand
and upgrade our cable plant so that we can expand and improve services to our
customers and make acquisitions from time to time. The Issuers believe that,
based upon current levels of operations, they and their subsidiaries will be
able to meet their debt service obligations, including payments on the new
notes when due, and implement our business strategy. However, if the Operating
Companies cannot generate sufficient cash flow from operations for these
purposes, then the Issuers and their subsidiaries may have to refinance their
debt and adopt alternative strategies. Possible alternative strategies for the
Issuers include reducing or delaying capital expenditures and acquisitions,
selling assets, restructuring or refinancing their debt or seeking additional
equity capital. We cannot assure you that the Issuers would be permitted or
able to refinance their debt under the terms of the indenture governing the
Senior Discount Notes, the indenture governing the old notes and the new notes
or the Issuers' senior secured credit facility or that they could do so on
satisfactory terms. 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.
The terms of our indebtedness impose operational and financial restrictions on
our company.
The indenture governing the Senior Subordinated Notes, the indenture
governing the old notes and the new notes and the Issuers' senior secured
credit facility contain numerous restrictive covenants. These covenants place
significant restrictions on, among other things, the ability of the Issuers and
the Operating Companies:
. to incur additional indebtedness,
. to create liens and other encumbrances,
. to pay dividends and make certain other payments, investments, loans and
guarantees,
. to enter into transactions with affiliates and
. to 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 Operating Companies to meet specified financial ratios and tests.
For additional information, please refer to the "Description of Certain Debt--
The Credit Facility", "--The Senior Subordinated Notes" and "Description of the
Notes--Certain
14
<PAGE>
Covenants" sections of this prospectus. Events beyond the control of the
Operating Companies may affect their ability to meet these ratios and tests. We
cannot assure you that the Operating Companies will meet these ratios or these
tests.
Our failure to comply with the obligations in the indenture governing the
Senior Subordinated Notes, the indenture governing the old notes and the new
notes and the Issuers' senior secured credit facility could result in an event
of default under such agreements. An event of default could permit acceleration
of the related debt and could also permit the acceleration of debt under other
instruments that may contain cross-acceleration or cross-default provisions. In
this event, lenders under these instruments could declare all amounts
outstanding to be immediately due and payable. In addition, in the case of the
credit facility and any other secured debt, the lenders thereunder could
foreclose upon the secured assets. We cannot assure you that the assets of the
Issuers and the Operating Companies would be sufficient to repay the debt of
the Issuers and the Operating Companies, including the new notes and the Senior
Subordinated Notes, if the lenders under the credit facility accelerated their
debt. In addition, the Issuers and their subsidiaries may incur other debt in
the future that may contain more restrictive covenants than those currently
applicable.
The Issuers are holding companies and rely on dividends from their subsidiaries
to pay amounts due under the new notes.
The Issuers are holding companies with no significant assets other than
their direct and indirect investments in their operating subsidiaries,
including the Operating Companies. The Issuers will be the sole obligors on the
new notes. The new notes will not be guaranteed by any subsidiary of the
Issuers, including the Operating Companies, or secured by any of the Issuers'
assets. Therefore, the new notes will be effectively subordinated to all debt
and other liabilities of the Issuers' subsidiaries, including the Operating
Companies. Claims of creditors of the Issuers' subsidiaries, including general
trade creditors, will generally have priority as to the assets of the Issuers'
subsidiaries over the claims of the Issuers and the holders of the new notes.
As of December 31, 1998, on a pro forma basis, the Issuer's subsidiaries,
including the Operating Companies, would have had $441.7 million of debt
outstanding, including debt under the Senior Subordinated Notes and the credit
facility, and $17.4 million of trade payables and other liabilities
outstanding.
The Issuers will rely on dividends and other advances and transfers of funds
from their subsidiaries, including the Operating Companies, as the sole source
of funds to meet their debt service obligations under the new notes. The
ability of the Issuers' subsidiaries to pay such dividends and make such
advances and transfers will be subject to applicable state laws restricting the
payment of dividends and to restrictions in the credit facility, the indenture
under which the Senior Subordinated Notes were issued, and other agreements
governing indebtedness of the Issuers' subsidiaries. Subject to certain
conditions, the credit facility and the indenture governing the Senior
Subordinated Note permit the Issuers' subsidiaries to make distributions to the
Issuers in amounts sufficient for the Issuers to pay interest, including the
Accreted Interest Redemption Amount, when due on the new notes. We cannot
assure you that such conditions will be satisfied at the time the Accreted
Interest Redemption Amount or other interest payments under the new notes are
payable. See "Description of Certain Debt."
We have a limited operating history and our business plan may be unsuccessful.
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. You also have limited information upon which you can
evaluate the Issuers' performance and your investment in the new notes. We
cannot assure you that we will succeed at effectively managing our various
cable systems or the systems that we plan to acquire. Our failure to achieve
expected benefits from the combination of our various cable systems or to
successfully integrate acquired entities could materially affect the Issuers'
results of operations. We cannot assure you that the past operating history of
any or all of the entities that we have acquired will be indicative of our
future results.
15
<PAGE>
We depend on our key personnel and we 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.
We may be unable to complete acquisitions.
As part of our long-term strategy, we are seeking to build two or more
regional clusters, each consisting of 200,000 to 300,000 basic subscribers. 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. We cannot assure you that we will find
attractive acquisition candidates at suitable prices, successfully acquire
those candidates, or effectively manage the integration of acquired businesses
into our existing business. Our results of operations could be materially
affected if we do not achieve our expected benefits or successfully integrate
new businesses into our existing business. We cannot assure you that we will
consummate any future acquisitions, including our pending acquisitions, or that
we will be able to obtain additional financing for any future acquisitions on
satisfactory terms. An additional financing would likely result in an increase
in the Issuers' combined indebtedness and interest expense.
Acquisitions of businesses, including our pending acquisitions, are
frequently subject to federal and state regulations and review by state and
local governmental bodies and agencies, including the Federal Communications
Commission (the "FCC") and local franchising authorities. Many franchise
agreements and/or local cable ordinances require consent before transferring
ownership or control of a franchise. If a franchise authority fails to grant
consent, the transfer of ownership or control of the franchise could result in
revocation of the franchise. The loss of a franchise in one community in a
cable system could also potentially disrupt the ability to provide service in
communities located elsewhere on the same system. See the "Business--Business
Strategy" section of this prospectus. We may, in our sole discretion, complete
acquisitions in the absence of all required approvals from local franchises
authorities. While we do not believe that the failure to obtain any single
franchise consent is likely to have a material adverse effect on us, failure to
obtain a sufficient number of these consents could have a material adverse
effect on us.
We may be unable to compete successfully in our highly competitive industry.
As a cable television systems operator, 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;
. from other sources of news, information and entertainment, such as
newspapers, movie theaters, live sporting events, interactive online
computer services and home video products, including videotape cassette
recorders;
. potentially from other operators of cable television systems, including
systems operated by local governmental authorities; and
. from other distribution systems capable of delivering programing to homes
and businesses including direct broadcast satellite systems, private
satellite master antenna television systems and wireless terrestrial
program distribution services such as multipoint, multichannel
distribution service.
16
<PAGE>
In recent years, the number of subscribers to direct broadcast satellite
services has grown significantly on a national basis. Additionally, Congress
and the FCC have recently proposed regulations that could make it easier for
direct broadcast satellite providers to legally deliver certain distant and
local broadcast signals. Recent changes in federal law and recent
administrative and judicial decisions have also removed certain restrictions
that have limited entry into the cable television business by potential
competitors such as telephone companies, registered utility holding companies
and their subsidiaries. Such developments will enable local telephone companies
to provide a wide variety of video services in the telephone company's service
area which will be directly competitive with services provided by cable
television systems.
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. The Telecommunications Act of 1996
also directed the FCC to review its broadcast/cable ownership restrictions to
determine if they are necessary in the public interest. Pursuant to the mandate
of the Telecommunications Act of 1996, the FCC eliminated its regulatory
restriction on cross-ownership of cable systems and national broadcasting
networks. The FCC also recently released a Notice of Inquiry seeking comment on
all of the broadcast ownership rules not already under review in other
proceedings. This review includes the FCC's television/cable television cross
ownership rule. In a recently released Notice of Proposed Rule Making, the FCC
is requesting comment on whether to change the definition of ownership that
constitutes a cognizable interest in a cable system. The result of this
proceeding could affect all ownership prohibitions and could result in
additional competition for us.
We compete on the basis of providing a variety of locally desired
programming and services, superior technical performance and customer service
at reasonable prices. Many of our present and potential competitors have
substantially greater resources than we do. 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 may be adversely affected by non-renewal or termination of our franchises.
We operate under franchises granted by state and local authorities. Our
franchises are subject to renewal and renegotiation from time to time. Our
business is dependent upon the retention and renewal of our local franchises. 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.
These conditions include requirements relating to payment of fees, system
bandwidth capacity, customer service requirements, and franchise renewal and
termination. We cannot assure you that we will be able to retain or renew
franchises or that the terms of any these renewals will be on terms as
favorable to us as the existing terms. 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. Our future acquisitions
will be dependent on our ability to obtain franchise transfer approvals or
change of control approvals in a timely manner. Subject to limitations imposed
by federal law, each city has some flexibility in determining the terms of a
franchise, including franchise fees, and to some extent can impose conditions
on the franchise, such as build-out and upgrade requirements. For additional
information, please refer to "Business--Franchises" section of this prospectus.
Regulation of the cable television industry and pending legislation could
adversely affect our business.
Federal, state and local governmental agencies extensively regulate the
cable television industry. The Cable Television Consumer Protection and
Competition Act of 1992 and the Cable Communications Policy Act of 1984, both
of which amended the Communications Act of 1934, established a national policy
to guide the development and regulation of cable television systems. The
Communications Act of 1934 was substantially
17
<PAGE>
amended by the Telecommunications Act of 1996. Principal responsibility for
implementing the policies of these amendments has been allocated between the
FCC and state and local franchising authorities.
Federal Law and Regulation. The Cable Television Consumer Protection and
Competition Act of 1992 and the FCC's implementing rules generally have
increased the administrative and operational expenses of cable television
systems and have resulted in additional regulatory oversight by the FCC and
local and/or state franchise authorities. The Cable Television Consumer
Protection and Competition Act of 1992, the Cable Communications Policy Act of
1984 and the FCC regulations promulgated under these acts have established:
. regulation of rates for certain services,
. mandatory carriage and retransmission consent requirements that require a
cable system under certain circumstances to carry a local broadcast
station or to obtain consent to carry a local or distant broadcast
station,
. rules for certain franchise renewals and all transfers, and
. other requirements covering a variety of operational areas, such as equal
employment opportunity, technical standards and customer service
requirements.
The Telecommunications Act of 1996 deregulates rates for cable programming
services tiers in 1999 for all cable television companies, including our
company. For certain small cable operators, the Telecommunications Act of 1996
also immediately eliminated rate regulation of cable programming services tiers
and, in certain circumstances, basic services and equipment. In July 1998, the
FCC issued a Notice of Proposed Rulemaking to determine the obligation of cable
operators to carry the digital signals of broadcasters. We cannot predict the
ultimate effect of the Cable Television Consumer Protection and Competition Act
of 1992 or the Telecommunications Act of 1996, and the ultimate outcome of the
various FCC rulemaking proceedings.
State and Local Regulation. As described above, cable television systems
generally operate under non-exclusive franchises, permits or licenses granted
by municipalities or other state or local governmental entities. Subject to
federal limitations, the terms and conditions of franchises vary materially
from jurisdiction to jurisdiction. A number of states subject cable systems to
the jurisdiction of centralized state governmental agencies. To date, New York,
Connecticut and Massachusetts all have centralized authorities. For additional
information, please refer to "Regulation" section of this prospectus.
Additional Legislation. Our results of operations may be adversely impacted
by changes in federal, state and local regulations. Currently, the Chairman of
the House Telecommunications Subcommittee, Rep. Billy Tauzin, has introduced
legislation that would, among other things, impact the manner in which cable
services are packaged and rate regulated. The legislation could require certain
cable operators to offer a low-cost, limited version of basic service that
would include only off-air signals and public, government and education access.
It would also allow regulation of certain cable rates if a community, after due
process, determined that a cable operator offered insufficient customer choice
in the packaging of its services. This legislation remains at the introductory
phase of the legislative process. 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 may be adversely affected by rapid 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. For additional information, please refer to the
"Business--Technology" section of this prospectus.
18
<PAGE>
Our inability to procure third party programming and related services could
adversely affect our business.
Our cable programming services are dependent upon our ability to obtain
attractive programming at reasonable rates. We currently obtain cable
programming through the National Cable Television Cooperative, a cable
programming buying group of which we are a member. We also obtain programming
by negotiating programming contracts on our own behalf. We do not anticipate
entering into long-term programming contracts for 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. We cannot assure you that we will be able to maintain our
current programming services or that we will secure these programming rights on
commercially acceptable terms. We believe that our relations with our
programming suppliers are generally good. However, our business could suffer a
material adverse effect if we lost key programming contracts. 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.
The controlling equityholder of our company may have interests in conflict with
the interests of our noteholders.
ABRY Broadcast Partners III, L.P., which we refer to as ABRY III, controls
our total voting power. ABRY III can therefore direct our policies. In
addition, ABRY III can select a majority of the managers of Avalon and,
indirectly, the managers and the directors of the Issuers. Certain changes in
ABRY III's beneficial ownership interest in the Issuers would constitute a
change of control under the indenture governing the Senior Subordinated Notes,
the indenture governing the old notes and the new notes and the Issuers' senior
secured credit facility and our other agreements and obligations, and could
result in an event of default or otherwise give rise to an obligation to make
an immediate payment under these agreements and obligations.
ABRY 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. ABRY III and its affiliates,
other than Avalon, 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. ABRY III and its
affiliates, other than us and members of our management, may from time to time
identify, pursue and consummate acquisitions of television, cable and other
broadcasting and related businesses that would be complementary to our
business. If this were to occur, these acquisition opportunities would not be
available to us.
ABRY 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.
Our ability to purchase new notes upon a change of control may be limited.
In the event there is a change of control of the Issuers, the Issuers must
make an offer to buy back the new notes at a price equal to 101% of (a) the
accreted value of the new notes in the case of repurchases of new notes prior
to December 1, 2003 or (b) the aggregate principal amount thereof in the case
of repurchases of new notes on or after December 1, 2003 together with accrued
and unpaid interest and liquidated damages, if 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. 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. In addition, certain events involving a change of control may result
in:
. an event of default under the credit facility or other debt agreements of
the Issuers or their affiliates,
. an obligation of the Issuers or the Operating Companies to make an
immediate payment under the credit facility or other debt agreements of
the Issuers or their affiliates, or
19
<PAGE>
. obligations to purchase, or offer to purchase, the indebtedness
thereunder, including the Senior Subordinated Notes.
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.
Certain liabilities related to separation of Cable Michigan from Commonwealth
Telephone Enterprises, Inc. may adversely affect our business.
On September 30, 1997, Commonwealth Telephone Enterprises, Inc. distributed
all of the outstanding common stock of Cable Michigan and RCN Corporation to
its shareholders. In connection with this distribution, Commonwealth Telephone
Enterprises, Inc., RCN Corporation and Cable Michigan executed a Distribution
Agreement and a Tax Sharing Agreement, each dated as of September 5, 1997. The
terms of the Distribution Agreement require Cable Michigan to indemnify
Commonwealth Telephone Enterprises, Inc. and RCN Corporation against certain
liabilities arising before or in connection with the distribution of the Cable
Michigan common stock. This includes indemnification by Cable Michigan for
liabilities related to Cable Michigan's business and a portion of the
liabilities relating to the combined operations of Cable Michigan, Commonwealth
Telephone Enterprises, Inc. and RCN Corporation, including the conduct of the
corporate overhead function by Commonwealth Telephone Enterprises, Inc.,
employee matters and employee benefit matters. Similarly, under the
Distribution Agreement, Commonwealth Telephone Enterprises, Inc. and RCN
Corporation must indemnify Cable Michigan against liabilities related to their
respective businesses and certain liabilities related to the prior joint
operation of Cable Michigan, Commonwealth Telephone Enterprises, Inc. and RCN
Corporation. The Tax Sharing Agreement provides for allocating certain taxes
among Cable Michigan, Commonwealth Telephone Enterprises, Inc. and RCN
Corporation, with each retaining taxes allocable to their respective
businesses.
Although we do not believe that any of the liabilities arising under the
Distribution Agreement or the Tax Sharing Agreement or the combined operations
of Cable Michigan, Commonwealth Telephone Enterprises, Inc. and RCN Corporation
will have a material adverse effect on our business, our financial condition or
the results of our operations, we cannot assure you as to the extent of any of
these liabilities. In addition, if Commonwealth Telephone Enterprises, Inc. and
RCN Corporation were required to indemnify Cable Michigan, the assets of which
are now owned by Avalon Cable of Michigan LLC, for any of these liabilities, we
could not assure you whether Commonwealth Telephone Enterprises, Inc. and RCN
Corporation would fulfill any of their obligations to Cable Michigan under
either the Distribution Agreement or the Tax Sharing Agreement.
We may be adversely affected if our year 2000 efforts are not successful.
The year 2000 issue is the result of computer programs being written using
two digits rather than four to define the applicable year. Any of our computer
programs with date-sensitive software may recognize a date using "00" as the
year to be 1900 rather than the year 2000. 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
to analyze the extent to which we face a year 2000 problem. We also are in the
process of reviewing systems provided to us by third parties, including billing
systems. Although we have not yet made a final determination, we believe that
any year 2000 problem, if it arises in the future, should not be material to
our liquidity, financial position or results of operations. However, we cannot
assure you as to the extent of any of these liabilities.
20
<PAGE>
The notes could be voided or subordinated to our other debt if the issuance of
the notes constituted a fraudulent conveyance.
Under federal or state fraudulent transfer laws, if a court found that at
the time the Issuers issued the old notes or the new notes, any of the original
Issuers:
(1) incurred the debt with the intent of hindering, delaying or
defrauding current or future creditors; or
(2) received less than fair consideration or reasonably equivalent value
for incurring the debt and
. was insolvent or was rendered insolvent by reason of the incurrence
of the debt,
. was engaged, or about to engage, in a business or transaction for
which its remaining assets were unreasonably small or
. intended to incur, believed or should have believed, it would incur
debts beyond its ability to pay as the debts mature,
then, in each case, a court of competent jurisdiction could void all or a
portion of the Issuer's obligations to the holders of the old notes or new
notes, or subordinate the Issuer's obligations to the holders to other existing
and future indebtedness of the Issuer, as the case may be. This result would
entitle other creditors to be paid in full before any payment could be made on
the old notes or the new notes, and possibly allow other creditors to
invalidate the old notes or the new notes. In that event, we could not assure
you that the holders would ever recover any repayment on their notes.
The definition of insolvency for purposes of the foregoing will vary
depending upon the law applied. Generally, however, an Issuer would be
considered insolvent if:
. the sum of its debts, including contingent liabilities, were greater than
the fair saleable value of all of its assets; or
. the present fair saleable value of its assets was less than the amount
that would be required to pay its probable liability on its existing
debts, including contingent liabilities, as they become absolute and
mature; or
. it could not pay its debts as they mature.
We believe that, for the above purposes, the old notes were issued and are
being exchanged without the intent to hinder, delay or defraud creditors, and
for proper purposes and in good faith. We also believe that after the issuance
and exchange of the notes and the application of their proceeds, the Issuers
will be solvent, will have sufficient capital for carrying on their business
and will be able to pay their debts as they mature. We can give no assurance,
however, what standard a court would apply in reviewing the transactions or
that a court would agree with our conclusions in this regard. 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.
Significant damages or loss to our uninsured properties may adversely affect
our business.
We maintain insurance covering risks incurred in the ordinary course of
business, including general liability, property coverage and business
interruption insurance. However, as is typical in the cable television
industry, we do not maintain insurance covering our underground cable plant.
While our management believes our insurance coverage will be adequate, 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.
21
<PAGE>
The original issue discount on the new notes will have federal income tax
consequences for holders of those notes.
The new notes will bear original issue discount for federal income tax
purposes. Consequently, holders of the new notes generally will be required to
include amounts in gross income for federal income tax purposes in advance of
receipt of the cash payments to which the income is attributable. Please see
the "Certain United States Federal Income Tax Considerations" section of this
prospectus for a more detailed discussion of the federal income tax
consequences of the purchase, ownership and disposition of the New Discount
Notes.
Issuers may not be able to deduct some of the interest on the new notes.
Although unlikely, it is possible that the new notes will constitute
"applicable high yield discount obligations" ("AHYDOs") for federal income tax
purposes. The new notes would be AHYDOs if:
. the yield to maturity on the new notes is equal to or greater than the
sum of the relevant applicable federal rate plus five percentage points
and
. the new notes bear significant original issue discount.
A debt instrument bears significant original issue discount for this purpose
if, as of the close of any accrual period ending more than five years after
issuance, the total amount of income includible by a holder with respect to the
debt instrument exceeds the sum of:
. interest paid to the holder (in cash or, generally, in property other
than debt instruments or stock of the issuer or a related person) and
. an amount equal to the issue price of the debt instrument multiplied by
its yield to maturity.
For purposes of this discussion, the date of issuance refers to the date of
issuance of the old notes.
Should the new notes be AHYDOs, the Issuers would not be entitled to claim a
deduction for original issue discount that accrued with respect to such new
notes until amounts attributable to such original issue discount were actually
paid. In addition, to the extent that the yield to maturity of the new notes
exceeded the sum of the relevant applicable federal rate plus six percentage
points (the "non-deductible portion"), any deduction that was attributable to
the non-deductible portion would be permanently disallowed.
Although the law is unclear in certain respects and the issue is therefore
not free from doubt, the new notes should not constitute AHYDOs because they
should not bear significant original issue discount because, by the close of
the first accrual period ending more than five years after issuance, the
Issuers are required by the terms of the new notes to pay, in cash, an amount
at least equal to the excess of all original issue discount accrued to that
date since the date of issuance of the old notes over an amount equal to one
year's simple uncompounded interest on the aggregate issue price of the old
notes at a rate per annum equal to the stated interest rate on the old notes;
thereafter, cash interest is required to be paid semiannually.
Bankruptcy claims by holders of the new notes against the Issuers may be
limited in amount.
If a bankruptcy case is commenced by or against any of the Issuers under
federal bankruptcy law after the issuance of the new notes, the claim of a
holder of the new notes with respect to the principal amount of those notes may
be limited to the sum of:
. the initial public offering price of the new notes, and
. that portion of the original issue discount which is not deemed to
constitute "unmatured interest" for purposes of federal bankruptcy law.
Any original issue discount that was not amortized as of any such bankruptcy
filing would constitute "unmatured interest."
22
<PAGE>
There is currently no public market for the new notes and one may not develop.
While the old notes are presently eligible for trading in the Private
Offerings, Resales and Trading Through Automated Linkages (known as "PORTAL")
market of the National Association of Securities Dealers by qualified
institutional buyers, there is no existing market for the new notes. The
initial purchasers of the old notes have informed us that they currently intend
to make a market in the new notes following the exchange offer, but they are
not obligated to do so, and any market making may be stopped at any time
without notice. We do not intend to apply for a listing of the new notes on any
securities exchange. We do not know if an active public market for the new
notes will develop or, if developed, will continue. If an active public market
does not develop or is not maintained, the market price and liquidity of the
new notes may be adversely affected. We cannot assure you regarding the
liquidity of the market for the new notes, the ability of holders to sell their
new notes or the price at which holders may sell their new notes. For
additional information, please refer to the "Plan of Distribution" section of
this prospectus.
23
<PAGE>
THE COMPANY
Overview
Each of the Issuers is an indirect subsidiary of, and is controlled by,
Avalon. Avalon is controlled by ABRY Broadcast Partners III, L.P., which we
refer to as "ABRY III". The Operating Companies are wholly owned subsidiaries
of the Issuers.
Initial Structure
The following chart sets forth our corporate structure as of the time of the
old note offering. Originally, the issuers under the Old Notes were Avalon
Cable LLC, Avalon Cable of Michigan Holdings, Inc. and Avalon Cable Holdings
Finance, Inc. At that time, Avalon Cable of Michigan, Inc. operated the cable
systems located in our Michigan Cluster. Avalon Cable of New England LLC
operates the cable systems located in our New England Cluster. Avalon Cable of
Michigan, Inc. is a wholly owned subsidiary of Avalon Cable of Michigan
Holdings, Inc., Avalon Cable of New England LLC is a wholly owned subsidiary of
Avalon Cable LLC and Avalon Cable Finance, Inc. is a wholly owned subsidiary of
Avalon Cable Holdings Finance, Inc. Each of Avalon Cable Holdings Finance, Inc.
and Avalon Cable Finance, Inc. was organized for purposes of facilitating the
initial financing and other financings and conducts no activities other than in
connection with those financings.
[CORPORATE STRUCTURE CHART HERE]
- --------
(a) Old Note Issuer.
(b) Senior Subordinated Note Issuer and borrower under the credit facility.
(c) In the Cable Michigan acquisition, Avalon Cable of Michigan, Inc. acquired
the approximately 62% of Mercom's outstanding common stock owned by Cable
Michigan. Subsequently, Avalon Cable of Michigan, Inc. acquired the
remaining shares.
24
<PAGE>
Structure After the Reorganization
In order to facilitate certain aspects of our financing, in March 1999,
after the acquisition of the approximately 38% 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 Holdings, Inc. ceased to be an obligor on the
old notes and together with Avalon Cable of Michigan, Inc. became a
guarantor of the obligations of Avalon Cable LLC under the old notes;
. Avalon Cable of Michigan LLC became an additional obligor on the Senior
Subordinated Notes; and
. Avalon Cable of Michigan, Inc. ceased to be an obligor on the Senior
Subordinated Notes and the credit facility and became a guarantor of the
obligations of Avalon Cable of Michigan LLC under the Senior Subordinated
Notes and the credit facility.
In addition, as part of the Reorganization, certain intercompany debt was
cancelled.
Neither Avalon Cable of Michigan Holdings, Inc. nor Avalon Cable of
Michigan, Inc. has any significant assets other than its equity interests in
Avalon Cable of Michigan, Inc. and Avalon Cable LLC, respectively. As a result,
you should not expect Avalon Cable of Michigan Holdings, Inc. and Avalon Cable
of Michigan, Inc., as guarantors, to participate in making interest and
principal payments on the new notes.
25
<PAGE>
The following chart sets forth our corporate structure immediately after
giving effect to the Reorganization.
[CORPORATE STRUCTURE CHART HERE]
- --------
(a) Old Note Issuer.
(b) Senior Subordinated Note Issuer and borrower under the credit facility.
(c) Guarantor of Avalon Cable LLC's obligations under the old notes and new
notes.
(d) Guarantor of Avalon Cable of Michigan LLC's obligations under the Senior
Subordinated Notes and the credit facility.
26
<PAGE>
USE OF PROCEEDS
We will not receive any cash proceeds from the issuance of the new notes. We
used the proceeds of approximately $110.4 million from the offering of the old
notes and approximately $150.0 million from the offering of the Senior
Subordinated Notes principally to:
. repay approximately $125.0 million under the Operating Companies' 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 ABRY
Subordinated Bridge 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 ABRY Subordinated Bridge. The credit facility, the Bridge
Credit Facility and the ABRY Subordinated Bridge 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 ABRY
Subordinated Bridge, 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 Avalon indebtedness incurred in connection with prior
acquisitions and to pay financing costs and fees and expenses.
Borrowings under the Bridge Credit Agreement, dated as of November 5, 1998,
among the Issuers, the lenders named therein, Lehman Brothers Inc. and Lehman
Commercial Paper Inc., bore interest, at the time of repayment, at
approximately 11.3% per annum. The Bridge Credit Facility would have become due
and ayable 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 ABRY Subordinated Bridge bore interest, at the time of repayment, at
approximately 12.3% per annum. Interest under the ABRY Subordinated Bridge was
not currently payable in cash; rather, interest due and payable could be added
to the principal amount outstanding thereunder. For a description of the ABRY
Subordinated Bridge, see the definition of "ABRY Subordinated Debt" under
"Description of the Notes."
27
<PAGE>
CAPITALIZATION
The following table sets forth:
. the actual capitalization as of December 31, 1998 of each of Michigan
Holdings, Avalon Cable LLC and Avalon Finance Holdings, which were the
issuers under the old notes as of such date as of December 31, 1998, and
. the pro forma combined capitalization of the Issuers as of December 31,
1998, giving effect to the pending acquisitions and the reorganization
transactions 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>
Actual December 31, 1998
----------------------------------
Avalon Avalon Unaudited
Michigan Finance Pro Forma Combined
Holdings Avalon Cable LLC Holdings December 31, 1998
-------- ---------------- -------- ------------------
<S> <C> <C> <C> <C>
Credit facility........ $140,875 $ -- $ -- $179,636(1)
Senior Subordinated
Notes................. 150,000 -- -- 150,000
New Notes.............. -- -- -- 111,494(2)
Old Notes.............. 111,494 -- -- -- (2)
Notes Payable--
affiliates............ 15,171 3,341 15,171 -- (3)
Other.................. -- 600 -- 600
-------- ------- ------- --------
Total debt........... 417,540 3,941 15,171 441,730
Issuers' equity........ 26,772 47,291 -- 144,626(4)
-------- ------- ------- --------
Total capitalization. $444,312 $51,232 $15,171 $586,356
======== ======= ======= ========
</TABLE>
(1) To reflect additional borrowings under the credit facility for the
completed and pending acquisitions of Mercom, Nova, Cross Country,
Traverse Internet, Novagate, R/COM, Hometown and Galaxy of $38,761,000.
(2) To reflect the exchange of Old Notes for New Notes.
(3) To reflect the elimination of intercompany debt as part of the
Reorganization.
(4) To reflect the contribution to the capital of Avalon Cable LLC by
Avalon Cable of Michigan, Inc. as part of the Reorganization.
28
<PAGE>
UNAUDITED PRO FORMA COMBINED FINANCIAL DATA
The following Unaudited Pro Forma Combined Financial Data is based on the
historical financial statements of the Avalon Cable of Michigan Holdings, Inc.
("Michigan Holdings"), Cable Michigan, Avalon Cable LLC ("Avalon Cable"), AMRAC
Clear View ("Amrac"), Pegasus Cable Television, Inc. and Pegasus Cable
Television of Connecticut, Inc. (collectively, "Pegasus"), Taconic Technology
Corporation ("Taconic") and Avalon Cable Holdings Finance, Inc. ("Holdings
Finance") and the assumptions and adjustments described in the accompanying
notes. The results of Mercom are included in the results of Avalon 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, the incurrence of debt under our
senior credit facility and the reorganization transactions described herein, as
if each had occurred on January 1, 1998. The Unaudited Pro Forma Combined
Statements of Operations do not purport to represent what the Issuers' results
of operations actually would have been if all completed and pending
acquisitions had occurred as of the date indicated or what the results will be
for future periods. Among other things, this data do not give effect to certain
non-recurring charges or cost savings expected to result from our acquisitions.
The following Unaudited Pro Forma Combined Balance Sheet as of December 31,
1998 was prepared as if all of the completed and pending acquisitions 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.
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 Unaudited Pro Forma Combined Financial Data should be read in
conjunction with the financial statements of Michigan Holdings, Cable Michigan,
Avalon Cable, Avalon New England, Amrac, Pegasus, Taconic and Holdings Finance
and the accompanying notes thereto included elsewhere in this prospectus.
Prior to July 21, 1998, Pegasus was operated as part of Pegasus
Communications Corporation. The table below sets forth selected historical
combined data for Pegasus. The historical combined financial data presented
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. 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.
29
<PAGE>
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
December 31, 1998
(dollars in thousands)
<TABLE>
<CAPTION>
Avalon Avalon Unaudited
Michigan Avalon Holdings Probable Pro Forma Pro Forma
Holdings Cable Finance Transaction Adjustments Combined
-------- ------- -------- Taconic ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
Current assets:
Cash................... $ 9,071 $ 217 $ -- $ -- $ (8,525)(a) $ --
(38,524)(b)
(1,000)(c)
38,761 (d)
Accounts receivable,
net................... 5,015 847 -- 55 -- 5,917
Prepaids and other
current assets........ 2,015 121 -- 596 -- 2,732
-------- ------- ------- ------ --------- --------
Total current assets. 16,101 1,185 -- 651 (9,288) 8,649
Property, plant and
equipment, net......... 104,965 6,456 -- 1,692 1,612 (a) 120,152
5,427 (b)
Deferred financing
costs.................. 10,658 -- -- -- 1,000 (c) 11,658
Intangible assets, net.. 420,655 30,804 -- -- 4,835 (a) 475,536
19,242 (b)
Notes receivable--
affiliate.............. -- 15,171 15,171 -- (30,342)(e) --
Other assets............ 1,270 32 -- 29 -- 1,331
-------- ------- ------- ------ --------- --------
Total assets......... $553,649 $53,648 $15,171 $2,372 $ (7,514) $617,326
======== ======= ======= ====== ========= ========
Current liabilities:
Current portion of
long-term debt........ $ -- $ 20 $ -- $ -- $ -- $ 20
Accounts payable and
accrued expenses...... 10,194 1,452 -- 294 -- 11,940
Accounts payable--
affiliates............ 2,023 247 -- -- -- 2,270
Advance billings and
customer deposits..... 2,454 717 -- -- -- 3,171
-------- ------- ------- ------ --------- --------
Total current
liabilities......... 14,671 2,436 -- 294 -- 17,401
Credit facility......... 140,875 -- -- -- 38,761 (d) 179,636
Senior Subordinated
Notes.................. 150,000 -- -- -- -- 150,000
Senior Discount Notes... 111,494 -- -- -- (111,494)(g) --
New Notes............... -- -- -- -- 111,494 (g) 111,494
Long-term debt.......... -- 580 -- -- -- 580
Notes payable--
affiliates............. 15,171 3,341 15,171 -- (30,342)(e) --
(3,341)(f)
Deferred credits and
other.................. 80,811 -- -- 371 (371)(a) 13,589
(67,222)(h)
-------- ------- ------- ------ --------- --------
Total liabilities.... 513,022 6,357 15,171 665 (62,515) 472,700
Minority interest....... 13,855 -- -- -- (13,855)(b) --
Equity, net............. 26,772 47,291 -- 1,707 (1,707)(a) 144,626
-- -- -- -- 3,341 (f)
67,222 (h)
-------- ------- ------- ------ --------- --------
Total liabilities and
equity, net......... $553,649 $53,648 $15,171 $2,372 $ (7,514) $617,326
======== ======= ======= ====== ========= ========
</TABLE>
(See Notes to Unaudited Pro Forma Combined Balance Sheet)
30
<PAGE>
NOTES TO UNAUDITED PRO FORMA COMBINED BALANCE SHEET
December 31, 1998
(a) To reflect the pending acquisition of Taconic (dollars in thousands):
<TABLE>
<S> <C>
Cash paid......................................................... $8,525
======
To record purchase price adjustments:
Historical net book value, excluding debt....................... $1,707
Eliminate net (assets)/liabilities not acquired................. 371
------
Historical cost basis of net assets acquired.................. 2,078
Identified value of property and equipment in excess of
historical cost.............................................. 1,612
Goodwill and other intangibles................................ 4,835
------
Fair value of Taconic....................................... $8,525
======
</TABLE>
(b) To reflect the Mercom acquisition and the acquisitions of Nova, Cross
Country, Traverse Internet, Novagate, R/COM, Hometown and Galaxy (the
"Additional Acquisitions") as if these acquisitions occurred on January 1,
1998 (dollars in thousands except the price per share):
<TABLE>
<S> <C>
Mercom shares outstanding...................................... 1,822,810
Purchase price per share....................................... $ 12.00
---------
Mercom purchase price...................................... $ 21,874
Additional Acquisitions purchase price (1)................. 16,650
---------
Fair value of the Mercom Acquisition and the Additional
Acquisitions.............................................. $ 38,524
=========
To record purchase price adjustments:
Historical cost basis of net assets acquired................... $ 13,855
Identified value of property, plant and equipment in excess of
historical cost............................................... 5,427
Goodwill and other intangibles................................. 19,242
---------
Fair value of the Mercom Acquisition and the Additional
Acquisitions.............................................. $ 38,524
=========
</TABLE>
--------
(1) We have acquired certain assets and liabilities of Nova, Cross
Country, Novagate and R/COM and, as of March 1999, have signed
definitive agreements to acquire assets of Hometown, Galaxy and
Traverse Internet. 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 $38,761,000
incurred in connection with the Mercom Acquisition, the Additional
Acquisitions and the exchange offering.
(e) To eliminate transactions between the Issuers consisting of (i) a note
receivable, including interest receivable, of $15,171,000 from Avalon
Michigan Inc. payable to Avalon Finance and (ii) a note receivable,
including interest receivable, of $15,171,000 from Avalon Finance payable
to Avalon New England.
(f) To reflect the contribution of capital of $3,341,000 from Avalon Cable
Holdings LLC to Michigan Holdings in connection with the Reorganization.
(g) To reflect the exchange of Old Notes for New Notes.
(h) To reflect the contribution of capital from Avalon Michigan Inc. to Avalon
Cable LLC and then to Avalon Michigan LLC in connection with the
Reorganization, whereby the net deferred tax liabilities of $67,222,000
remained at Avalon Michigan Inc. Avalon Michigan LLC is treated as a
division of Avalon Cable LLC which is a partnership for tax purposes. As
such, the partnership is not subject to income tax. Under the limited
liability company agreements of Avalon Cable LLC and Avalon Michigan LLC,
both companies are required to make cash distribution to their members for
any tax liability resulting from the members' ownership interests in the
limited liability company.
31
<PAGE>
UNAUDITED PRO FORMA COMBINED STATEMENTS OF OPERATIONS
For Year Ended December 31, 1998
<TABLE>
<CAPTION>
Probable Unaudited
Michigan Cable Avalon Avalon New Transactions Pro Forma Pro Forma
Holdings(1) Michigan(2) Cable(3) England(4) Amrac(5) Pegasus(6) Taconic(7) Adjustments(8) Combined
----------- ----------- -------- ---------- -------- ---------- ------------ -------------- ---------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues......... $13,657 $ 74,521 $ 1,299 $3,231 $779 $3,277 $2,086 $ 6,061 (a) $104,911
Operating
expenses........ 7,469 38,621 761 1,838 443 1,693 1,378 4,036 (a) 56,239
Corporate
overhead........ 249 6,087 56 350 42 97 22 97 (a) 7,000
Depreciation and
amortization.... 6,614 28,098 440 1,129 47 835 426 7,239 (b) 44,828
Non-recurring
expenses........ -- 5,764 -- -- -- -- -- -- 5,764
------- -------- ------- ------ ---- ------ ------ -------- --------
Operating (loss)
income.......... (675) (4,049) 42 (86) 247 652 260 (5,311) (8,920)
Interest expense,
net............. (6,784) (7,382) (785) (503) -- (938) (17) (29,120)(c) (45,529)
Other income
(expense), net.. (769) 897 (1,311) -- -- (22) (97) (2,280)(d)(e) (3,582)
------- -------- ------- ------ ---- ------ ------ -------- --------
Net (loss)
income.......... $(8,228) $(10,534) $(2,054) $ (589) $247 $ (308) $ 146 $(36,711) $(58,031)
======= ======== ======= ====== ==== ====== ====== ======== ========
</TABLE>
(See Notes to Unaudited Pro Forma Combined Statements of Operations)
32
<PAGE>
NOTES TO UNAUDITED PRO FORMA COMBINED STATEMENTS OF OPERATIONS
For the Year Ended December 31, 1998
(1) 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.
(2) Cable Michigan's results of operations includes the actual historical
results of operations of Cable Michigan for the year ended December 31,
1997 and for the period from January 1, 1998 through September 30, 1998.
(3) Avalon Cable LLC results of operations include its results of operations
from its inception (October 21, 1998) through December 31, 1998, and the
results of operations of Avalon New England from the commencement of its
operations (November 6, 1998) through December 31, 1998.
(4) On May 29, 1998, Avalon New England acquired Amrac. On July 21, 1998,
Avalon New England acquired Pegasus. Prior to these acquisitions, Avalon
New England did not have any operations. Avalon New England's results of
operations include the results of operations for the period from the
acquisitions (May 29, 1998 for Amrac and July 21, 1998 for Pegasus) through
December 31, 1998.
(5) Amrac's results of operations includes the historical results of operations
for the year ended December 31, 1997 and for the period from January 1,
1998 through May 28, 1998.
(6) Pegasus' combined results of operations includes the actual historical
results of operations for the year ended December 31, 1997 and for the
period from January 1, 1998 through June 30, 1998.
(7) Taconic's results of operations includes the actual historical results of
operations of Taconic for the year ended December 31, 1998.
(8) Pro forma adjustments represent those adjustments necessary to present
operating results as if all pending and completed acquisitions and the
financings and the reorganization occurred on January 1, 1998. These
adjustments included the following:
(a) To adjust revenues, operating expenses and corporate overhead of
$6,061,000, $4,036,000 and $97,000, respectively for the year ended
December 31, 1998, to account for the acquisitions of Nova, Cross
Country, Traverse Internet, Galaxy, R/COM, Novagate and Hometown as if
these acquisitions occurred on January 1, 1998.
(b) Amount represents increased depreciation and amortization due to excess
of fair value over historical cost generated from the acquisitions of
Cable Michigan (including Mercom), Amrac, Pegasus, Taconic and our
other completed and pending acquisitions calculated as follows (dollars
in thousands):
<TABLE>
<CAPTION>
Year Ended
December 31,
1998
------------
<S> <C>
Pro forma depreciation and amortization...................... $44,828
Historical depreciation and amortization..................... 37,589
-------
Pro forma adjustment......................................... $ 7,239
=======
</TABLE>
33
<PAGE>
NOTES TO UNAUDITED PRO FORMA COMBINED
STATEMENTS OF OPERATIONS--(Continued)
For the Year Ended December 31, 1998
(c) Amount represents increased interest expense due to the financings and
the offerings (dollars in thousands):
<TABLE>
<CAPTION>
Year Ended
December 31,
1998
--------------
<S> <C> <C>
Historical interest expense, net.......................... $16,409
-------
Senior Subordinated Notes................................. 14,063
Senior discount notes..................................... 13,500
Credit facility (1)....................................... 16,386
Other debt................................................ 122
Amortization of deferred financing fees................... 1,458
------
Pro forma interest expense................................ 45,529
-------
Pro forma adjustment...................................... $29,120
=======
</TABLE>
--------
(1) If the assumed interest rate on the credit facility increased by
0.125%, total pro forma interest expense would increase by
$225,000 for the year ended December 31, 1998.
(d) To remove tax benefits, net, since after the Reorganization two of the
three Issuers will be treated as partnerships for federal income tax
purposes (dollars in thousands):
<TABLE>
<CAPTION>
Year Ended
December 31,
1998
------------
<S> <C>
Pegasus...................................................... $ 5
Taconic...................................................... 97
Cable Michigan............................................... (2,382)
-------
Total tax (benefit), net................................. $(2,280)
=======
</TABLE>
(e) To eliminate minority interest in loss of Mercom due to the completion
of the Mercom acquisition of $473,000 for the year ended December 31,
1998.
34
<PAGE>
SELECTED HISTORICAL FINANCIAL AND OTHER DATA
Cable Michigan and Avalon Cable of Michigan Holdings, Inc.
Prior to September 30, 1997, Cable Michigan was operated as part of
Commonwealth Telephone Enterprises, Inc. ("CTE"). The table below sets forth
selected historical consolidated data for Cable Michigan. The historical
consolidated financial data presented below reflect periods during which Cable
Michigan did not operate as an independent company and, accordingly, certain
allocations were made in preparing the financial data. Therefore, this data may
not reflect the results of operations or the financial condition which would
have resulted if Cable Michigan had operated as a separate independent company
during these periods, and are not necessarily indicative of Cable Michigan's
future results of operations or financial position.
The selected historical consolidated statement of operations and balance
sheet data of Cable Michigan shown below for the five years ended December 31,
1997 have been derived from the consolidated financial statements of Cable
Michigan which have been audited by PricewaterhouseCoopers LLP, independent
accountants. The selected historical consolidated statement of operations and
balance sheet data for the period from January 1 to November 5, 1998 have been
derived from the consolidated financial statements of Cable Michigan, which
have been audited by PricewaterhouseCoopers LLP, independent accountants. The
selected historical consolidated statements of operations and balance sheet
data of Avalon Cable of Michigan Holdings, Inc. as of December 31, 1998 and for
the period from June 2, 1998 (inception) through December 31, 1998 have been
derived from the consolidated financial statements of Avalon Cable of Michigan
Holdings, Inc., which have been audited by PricewaterhouseCoopers LLP,
independent accountants. The 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 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.
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
January 1, June 2, 1998
Year Ended December 31, 1998 to through
------------------------------------------------ November 5, December 31,
1993 1994 1995 1996 1997 1998 1998 (10)
-------- -------- -------- -------- -------- ----------- ------------
(dollars in thousands)
<S> <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
Operating expenses...... 25,283 26,981 28,465 37,016 40,978 38,621 7,469
Corporate overhead...... 3,372 1,562 6,284 7,075 7,204 6,087 249
Depreciation and
amortization........... 32,697 28,685 25,154 31,427 32,082 28,098 6,554
Non-recurring expenses.. -- -- -- -- -- 5,764 --
-------- -------- -------- -------- -------- -------- --------
Operating (loss) income. (12,687) (8,087) 772 669 1,035 (4,049) (675)
Interest (expense), net. (15,960) (15,767) (15,918) (15,052) (11,393) (7,382) (6,784)
Gain on sale of Florida
cable system........... -- -- -- -- 2,571 -- --
Other (expense) income,
net.................... (496) (2,372) 4,645 6,127 3,429 897 (769)
-------- -------- -------- -------- -------- -------- --------
Net loss................ $(29,143) $(26,226) $(10,501) $ (8,256) $ (4,358) $(10,534) $(8,228)
======== ======== ======== ======== ======== ======== ========
Other financial data
EBITDA (1).............. $ 20,010 $ 20,598 $ 25,926 $ 32,096 $ 33,117 $ 29,813 $ 5,939
EBITDA margin (2)....... 41.1% 41.9% 42.7% 42.1% 40.7% 40.0% 43.5%
Capital expenditures.... N/A $ 8,678 $ 11,207 $ 9,605 $ 14,041 $ 18,697 4,673
Ratio of earnings to
fixed charges (3)...... N/A N/A -- -- -- -- --
Balance sheet data (end
of period)
Total assets............ $147,286 $116,972 $172,759 $149,200 $142,597 $131,220 $553,649
Long-term debt
(excluding current
portion)............... -- -- 181,807 163,247 143,000 120,000 417,540
Net (deficit) equity.... (60,419) (76,931) (73,757) (79,741) (53,874) (63,865) 26,772
Other operating data
(end of period)
Homes passed (4)........ 296,918 308,343 316,196 327,439 336,895 345,010 349,162
Basic subscribers (5)... 170,134 179,109 191,774 198,322 203,912 214,819 211,537
Basic penetration (6)... 57.3% 58.1% 60.7% 60.6% 60.5% 62.3% 60.6%
Premium units (7)....... N/A N/A 80,925 64,118 65,361 64,866 55,550
Premium penetration (8). N/A N/A 42.2% 32.3% 32.1% 30.2% 26.3%
Average monthly revenue
per basic
subscriber (9)......... $ 29.65 $ 27.53 $ 31.36 $ 32.30 $ 33.03 $ 33.18 $ 34.96
</TABLE>
(See Notes to Selected Historical Financial and Other Data)
35
<PAGE>
Amrac
The selected historical statement of operations and balance sheet data of
Amrac shown below for the four years ended December 31, 1997 have been derived
from the financial statements of Amrac which have been audited by Greenfield,
Altman, Brown, Berger & Katz, P.C., independent accountants. The selected
historical financial and other data of Amrac shown below for the year ended
December 31, 1993 has been derived from the unaudited financial statements of
Amrac. The selected historical financial and other data for the period ended
May 28, 1997 have been derived from the unaudited financial statements of
Amrac, 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
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
======= ======= ======= ======= ======= ====== =======
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
Balance sheet data (end
of period)
Total assets............ $ 1,440 $ 1,200 $ 1,001 $ 1,043 $ 1,374 $ 903 $ 1,073
Long-term debt
(excluding current
portion)............... 1,512 1,044 778 488 163 416 --
Partners' (deficit)
equity................. (394) (286) (180) 54 684 287 931
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
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.
The selected historical combined statement of operations and balance sheet
data of Pegasus shown below for the three years ended December 31, 1997 have
been derived from the combined financial statements of Pegasus which have been
audited by PricewaterhouseCoopers LLP, independent accountants. The selected
historical combined financial and other data for the six months ended June 30,
1997 and 1998 have been derived from the unaudited combined financial
statements of Pegasus, 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 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)
======= ======= ======= ======= =======
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).............................. -- -- -- -- --
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)
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
Currently, Taconic is being operated as part of Taconic Technology
Corporation. 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 Taconic 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 Taconic had operated as
a separate independent company during these periods, and are not necessarily
indicative of Taconic's future results of operations or financial position.
The selected historical statements of operations and balance sheet data of
Taconic shown below for the three years ended December 31, 1998 have been
derived from the financial statements of Taconic, which have been audited by
KPMG LLP, independent accountants. The selected financial and other data of
Taconic shown below for the year ended December 31, 1995 has been derived from
the unaudited financial statements of Taconic. The audited financial statements
of Taconic as of December 31, 1997 and 1998 and for the two years then ended
December 31, 1998 are included elsewhere herein. 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>
Year Ended December 31,
------------------------------
1995 1996 1997 1998
------ ------ ------ ------
(dollars in thousands)
<S> <C> <C> <C> <C>
Statement of operations data
Revenues....................................... $1,771 $1,916 $2,005 $2,086
Operating expenses............................. 1,108 1,213 1,278 1,378
Corporate overhead............................. 56 62 34 22
Depreciation and amortization.................. 359 432 426 426
------ ------ ------ ------
Operating income............................... 248 209 267 260
Interest expense, net.......................... (129) (102) (79) (17)
Other (expense), net........................... (15) (43) (75) (97)
------ ------ ------ ------
Net income..................................... $ 104 $ 64 $ 113 $ 146
====== ====== ====== ======
Other financial data
EBITDA (1)..................................... $ 607 $ 641 $ 693 $ 686
EBITDA margin (2).............................. 34.3% 33.5% 34.6% 32.9%
Capital expenditures........................... $ 445 $ 238 $ 214 $ 81
Ratio of earnings to fixed charges (3)......... 1.7x 1.8x 2.5x 3.4x
Balance sheet data (end of period)
Total assets................................... $2,797 $2,638 $2,337 $2,372
Long-term debt (excluding current portion)..... 1,110 946 793 --
Shareholders' equity........................... 614 678 792 1,707
Other operating data (end of period)
Homes passed (4)............................... 7,037 7,128 7,210 7,200
Basic subscribers (5).......................... 4,738 4,733 4,819 5,100
Basic penetration (6).......................... 67.3% 66.4% 66.8% 70.8%
Premium units (7).............................. 1,492 1,337 1,271 1,225
Premium penetration (8)........................ 31.5% 28.2% 26.4% 24.0%
Average monthly revenue per basic subscriber
(9)........................................... $31.87 $33.72 $34.98 $34.67
</TABLE>
(See Notes to Selected Historical Financial and Other Data)
38
<PAGE>
Avalon Cable LLC
The selected historical consolidated statement of operations and balance
sheet data of Avalon Cable LLC shown below as of December 31, 1998 and for the
period from October 21, 1998 (inception) through December 31, 1998 have been
derived from the consolidated financial statements of Avalon Cable LLC which
have been audited by PricewaterhouseCoopers LLP, independent accountants. The
selected historical consolidated statement of operations and balance sheet data
for the period from as of December 31, 1998 and for the period from October 21,
1998 (inception) through December 31, 1998 have been derived from the
consolidated financial statements of Avalon Cable LLC, which have been audited
by PricewaterhouseCoopers LLP, independent accountants. The audited
consolidated financial statements of Avalon Cable LLC as of December 31, 1998
and for the period from October 21, 1998 (inception) through December 31, 1998
are included elsewhere herein. 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
October 21, 1998
to December 31,
1998
----------------
<S> <C>
Statement of operations data
Revenues....................................................... $ 1,299
Operating expenses............................................. 761
Corporate overhead............................................. 56
Depreciation and amortization.................................. 440
-------
Operating (loss) income........................................ 42
Interest (expense), net........................................ (2,096)
Other (expense) income, net.................................... --
-------
Net loss....................................................... $(2,054)
=======
Other financial data
EBITDA (1)..................................................... $ 481
EBITDA margin (2).............................................. 37.0%
Capital expenditures........................................... 157
Ratio of earnings to fixed charges (3)......................... --
Balance sheet data (end of period)
Total assets................................................... 53,648
Long-term debt (excluding current portion)..................... 3,921
Members' interest.............................................. 47,291
Other operating data (end of period)
Homes passed (4)............................................... 28,350
Basic subscribers (5).......................................... 20,604
Basic penetration (6).......................................... 72.7%
Premium units (7).............................................. 4,912
Premium penetration (8)........................................ 23.8%
Average monthly revenue per basic subscriber (9)............... $ 34.22
</TABLE>
(See Notes to Selected Historical Financial and Other Data)
39
<PAGE>
Holdings Finance
The selected historical consolidated statement of operations and balance
sheet data of Holdings Finance shown below for as of December 31, 1998 and for
the period from October 21, 1998 (inception) through December 31, 1998 have
been derived from the consolidated financial statements of Holdings Finance
which have been audited by PricewaterhouseCoopers LLP, independent accountants.
The selected historical consolidated statement of operations and balance sheet
data for the period from 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 Holdings Finance, which have been
audited by PricewaterhouseCoopers LLP, independent accountants. The audited
consolidated financial statements of Holdings Finance as of December 31, 1998
and for the period from October 21, 1998 (inception) through December 31, 1998
are included elsewhere herein.
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
October 21, to
December 31,
1998
--------------
<S> <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......................................................... $ --
=======
Other financial data
EBITDA (1)....................................................... $ --
EBITDA margin (2)................................................ --
Capital expenditures............................................. --
Ratio of earnings to fixed charges (3)........................... --
Balance sheet data (end of period)
Total assets..................................................... $15,171
Long-term debt (excluding current portion)....................... 15,171
Members' interest................................................ --
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>
Michigan Holdings
The selected historical consolidated statement of operations and balance
sheet data of Michigan Holdings shown below for as of December 31, 1998 and for
the period from October 21, 1998 (inception) through December 31, 1998 have
been derived from the consolidated financial statements of Michigan Holdings
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 Michigan Holdings, which have been
audited by PricewaterhouseCoopers LLP, independent accountants. The audited
consolidated financial statements of Michigan Holdings as of December 31, 1998
and for the period from October 21, 1998 (inception) through December 31, 1998
are included elsewhere herein.
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
October 21, to
December 31,
1998
--------------
<S> <C>
Statement of operations data
Revenues......................................................... $ 13,657
Operating expenses............................................... 7,469
Corporate overhead............................................... 249
Depreciation and amortization.................................... 6,614
--------
Operating (loss) income.......................................... (675)
Interest (expense), net.......................................... (6,784)
Other (expense) income, net...................................... (769)
--------
Net loss......................................................... $ (8,228)
========
Other financial data
EBITDA (1)....................................................... $ 5,939
EBITDA margin (2)................................................ 43.5%
Capital expenditures............................................. 4,673
Ratio of earnings to fixed charges (3)........................... --
Balance sheet data (end of period)
Total assets..................................................... $553,649
Long-term debt (excluding current portion)....................... 417,540
Stockholders' equity............................................. 26,772
Other operating data (end of period)
Homes passed (4)................................................. 349,213
Basic subscribers (5)............................................ 211,537
Basic penetration (6)............................................ 60.6%
Premium units (7)................................................ 55,550
Premium penetration (8).......................................... 26.3%
Average monthly revenue per basic
subscriber (9).................................................. $ 34.96
</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 Jauary 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. Cable
Michigan's earnings were inadequate to cover fixed charges by $15,119,000,
$8,525,000 and $12,368,000 for the years ended December 31, 1996, 1997 and
for the period from January 1, 1998 through November 5, 1998,
respectively. Avalon Michigan Inc.'s earnings were inadequate to cover
fixed charges by $5,128,000 for the period from June 2, 1998 (inception)
through December 31, 1998. Pegasus earnings were inadequate to cover fixed
charges by $1,239,000, $1,156,000, $625,000, $414,000 and $303,000 for the
years ended December 31, 1995, 1996, 1997 and for the nine months ended
September 30, 1997 and 1998, respectively.
(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 Michigan Inc. commenced on November 6, 1998 with
the acquisition of Cable Michigan.
42
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Overview
General. Members of our management and investors formed Avalon in 1997 to
acquire, operate and develop cable television systems in mid-sized suburban and
exurban markets. Our operations in the New England Cluster are the result of
our acquisitions of Amrac in May 1998 and of Pegasus in July 1998. In addition,
we have entered into agreements to acquire cable system assets and related
liabilities of Taconic which had approximately 5,100 basic subscribers as of
December 31, 1998 and Hometown TV, Inc. which had approximately 400 basic
subscribers as of December 31, 1998. The combined purchase price for these
pending transactions is approximately $9.0 million. As of December 31, 1998, we
had a total of 26,100 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 which had approximately 6,400 basic subscribers as
of March 1999, cable television systems from Cross Country which had
approximately 1,900 basic subscribers as of January 1999, cable system assets
of R/COM, L.C. which had approximately 800 basic subscribers as of March 1999,
and assets of Novagate Communications Corp, an Internet service provider which
had approximately 5,000 Internet subscribers as of March 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 5,000 Internet subscribers as of March
1999 and certain cable system assets of Galaxy American Communications which
had approximately 600 basic subscribers as of March 1999. We expect that these
pending acquisitions will close within the first half of 1999. The combined
purchase price for these pending transactions is approximately 2.9 million. As
of December 31, 1998, we had a total of 221,200 basic subscribers and 10,000
Internet subscribers in our Michigan Cluster, after giving effect to all
completed and pending transactions.
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, Pegasus, and
Taconic may not be indicative of our results of operations in the future. For
additional information, please refer to "--Pro Forma Operating Results" section
of this prospectus.
Revenues. Our revenues are primarily attributable to monthly subscription
fees charged to subscribers for our basic and premium cable television
programming services. Our basic revenues consist of monthly subscription fees
for all services other than premium programming, as well as monthly charges for
customer equipment rental. Premium revenues consist of monthly subscription
fees for programming provided on a per channel basis. In addition, we derive
other revenues from installation and reconnection fees that we charge to
subscribers to commence or reinstate service, pay-per-view charges, late
payment fees, advertising revenues and commissions related to the sale of
merchandise by home shopping services.
Operating Expenses. Our expenses primarily consist of programming fees,
plant and operating costs, general and administrative expenses, and marketing
costs directly attributable to our cable systems. We expect that our
programming costs will increase in the ordinary course of our business as a
result of increases in the number of subscribers, increases in the number of
channels that we provide to customers and contractual rate increases from our
programming suppliers. We benefit and expect to continue to benefit from our
membership in industry cooperatives which provide members with volume discounts
from programming networks and cable
43
<PAGE>
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 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. To replace
the allocated costs of $1.1 million for the year ended December 31, 1998, we
estimate that we would have incurred corporate overhead expenses of
approximately $1.5 million for the year ended December 31, 1998. The additional
corporate overhead primarily represents personnel used in managing a larger
organization and will enable us to acquire additional cable systems without
incurring additional overhead. For example, we have eliminated management fees
and certain corporate overhead expenses at Amrac and Pegasus of approximately
$292,000 for the year ended December 31, 1998. Management expects to eliminate
certain corporate overhead expenses at Nova, Cross Country, Novagate, R/COM,
Traverse Internet, Galaxy and Hometown of $1.3 million for the year ended
December 31, 1998.
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 costs associated with operating as
a public company such as public reporting, shareholder printing and mailing
expenses, certain public company fees, outside directors' fees and directors'
liability insurance costs. The one-time operating costs include certain special
promotions, certain one-time promotion accruals, certain expenses related to
the relocation of the customer service call center, certain litigation
expenses, certain costs related to our merger with Cable Michigan and certain
expenses associated with a May 1998 storm in Grand Rapids.
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 CTE, 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 Adjusted EBITDA of $12.2 million and $48.7 million for the three
months and year ended December 31, 1998, respectively.
We cannot assure you that we will fully realize our anticipated cost savings
associated with our planned operating changes or our elimination of certain
management fees, redundant corporate, general and administrative costs. We also
cannot assure you that unanticipated costs in combining or operating the
businesses we plan to acquire will not reduce or eliminate our anticipated cost
savings.
Seasonality. We expect that our revenues and EBITDA will be slightly
seasonal. On a combined basis after giving effect to the Acquisitions, the
Issuers generated approximately 51.2% of the their revenues and 51.3% of their
EBITDA, for the fiscal year ended December 31, 1998 during the second and third
quarters.
44
<PAGE>
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 Cable Michigan, Amrac,
Pegasus and Taconic refer to their results of operations occurring before their
respective acquisition by us, other than a portion of the results of Amrac and
Pegasus for the year ended December 31, 1998 during which Amrac and Pegasus
were owned by us. Our management intends to implement a number of operational
and organizational changes to the businesses described below. As a result, our
management believes that the historical results of operations described below
are not necessarily indicative of our future results of operations. For
additional information, please refer to the "--Overview--Pro Forma Operating
Results" section of this prospectus.
Cable Michigan
General
Prior to September 30, 1997, Cable Michigan was operated as a part of CTE.
On September 30, 1997, CTE 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 Michigan
Inc. and Avalon 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 Michigan Inc.
Nine Months Ended September 30, 1998 Compared with Nine Months Ended September
30, 1997
Revenues for the nine months ended September 30, 1998 were $65.8 million, an
increase of $4.9 million, or 8.0%, as compared to revenues of $60.9 million for
the nine months ended September 30, 1997. This increase was primarily due to
the effects of rate increases implemented in May 1998 and February 1997 and an
increase in the average number of basic subscribers of approximately 3.6%. The
average number of basic subscribers is calculated as the sum of the number of
basic subscribers at the beginning of the period and at the end of the period
divided by two.
Operating expenses excluding depreciation and amortization, corporate
overhead and non-recurring expenses were $33.9 million for the nine months
ended September 30, 1998, an increase of $3.4 million, or 11.1%, as compared to
$30.5 million for the nine months ended September 30, 1997. This increase was
primarily due to higher programming costs resulting from contractual rate
increases from programming suppliers, increases in the number of channels
provided to customers and increases in the number of basic subscribers.
45
<PAGE>
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.
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.
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.
Pegasus
General
Prior to July 21, 1998, Pegasus was operated as part of Pegasus
Communications Corporation. The historical combined financial data presented
below reflect periods during which Pegasus did not operate as an
46
<PAGE>
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.
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.
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.
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.
47
<PAGE>
Amrac
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.
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.
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.
Taconic
General
Currently, Taconic is operated as part of Taconic Technology Corporation.
The historical financial data presented below reflect periods during which
Taconic did not operate as an independent company and,
48
<PAGE>
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 Taconic had operated as a separate
independent company during these periods, and are not necessarily indicative of
Taconic's future results of operations or financial position.
Year Ended December 31, 1998 Compared with Year Ended December 31, 1997
Revenues for the year ended December 31, 1998 were approximately $2.1
million, an increase of $81,000 or 3.9%, as compared to revenues of
approximately $2.0 million for the year ended December 31, 1997. This increase
was primarily due to the effects of rate increases implemented in the first
quarter of 1997 and 1998 and an increase in the average number of basic
subscribers of approximately 6%.
Operating expenses excluding depreciation and amortization and corporate
overhead were approximately $1.4 million for the year ended December 31, 1998,
an increase of $100,000, or 7.8%, as compared to $1.3 million for the year
ended December 31, 1997. This increase was primarily due to higher programming
costs resulting from contractual rate increases from programming suppliers and
increases in the number of basic subscribers.
Operating income before depreciation and amortization and corporate overhead
was $686,000 for the year ended December 31, 1998, a decrease of $7,000, or
1.0%, as compared to $693,000 for the year ended December 31, 1997.
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.
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.
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
49
<PAGE>
strategy that includes selective acquisitions. We have funded our acquisitions,
capital expenditures and working capital requirements to date through a
combination of secured and unsecured borrowings and equity contributions. We
intend to use amounts available under the credit facility, future debt and
equity financings and internally generated funds to finance our working capital
requirements, capital expenditures and future acquisitions.
Over the next five years, we intend to spend approximately $76 million to
upgrade our existing systems and the systems subject to pending acquisitions.
These capital expenditures are expected to consist of:
. approximately $45 million to upgrade the bandwidth capacity of these
systems and to employ additional fiber in the related cable plant,
. approximately $16 million for ongoing maintenance and replacement and
. approximately $15 million for installations and extensions to the related
cable plant required as a result of growth in our subscriber base.
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 ABRY
Subordinated Bridge 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 indebtedness and to pay fees and expenses. The net proceeds of
the old note offering and the Senior Subordinated Note offering were used
principally to repay approximately:
. $125.0 million of borrowings under the credit facility,
. $105.0 million of borrowings by the Issuers under the Bridge Credit
Facility and
. $18.0 million of borrowings by the Issuers under the ABRY Subordinated
Bridge, 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 ABRY
Subordinated Bridge.
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 no outstanding indebtedness other than the old notes and debt of the
Issuers' subsidiaries and the Operating Companies would have had $330.2 million
of indebtedness outstanding and $17.0 million of trade payables and other
liabilities outstanding. Such indebtedness includes $179.6 million under the
credit facility and $150.0 million under the old notes, but excludes $30.0
million of availability under the revolving credit facility.
Under the credit facility, the Operating Companies currently have:
. a $30.0 million revolving credit facility, 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.
In addition, the credit facility provides for up to $75.0 million in an
uncommitted acquisition facility. Subject to compliance with the terms of the
credit facility, borrowings under the revolving credit facility will be
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. No additional
borrowings may be made under the senior term loan facilities after March 31,
1999. Borrowings
50
<PAGE>
under the credit facility are guaranteed by each of the Issuers, Avalon and
Avalon Cable of New England Holdings, Inc. ("Avalon New England Holdings"). The
credit facility is secured by substantially all of the assets of the Operating
Companies in which a security interest may be granted. For additional
information concerning the credit facility, including the timing of scheduled
payments, see "Description of Certain Debt--The Credit Facility."
The Senior Subordinated Notes were issued in an aggregate principal amount
of $150.0 million and will mature on December 1, 2008. The Senior Subordinated
Notes are general unsecured obligations of the Operating Companies and are
subordinated in right of payment to all current and future senior indebtedness
of the Operating Companies, including indebtedness under the credit facility.
Interest on the Senior Subordinated Notes accrues at the rate of 9 3/8% per
annum and is payable semi-annually in arrears on June 1 and December 1 of each
year, to holders of record on the immediately preceding May 15 and November 15.
For additional information concerning the Senior Subordinated Notes, see
"Description of Certain Debt--The Senior Subordinated Notes."
The Operating Companies are wholly owned subsidiaries of the Issuers. The
Issuers are holding companies with no significant assets other than their
investment in the Operating Companies. The primary source of funds to the
Issuers will be dividends and other advances and transfers from the Operating
Companies. The ability of the Operating Companies to make dividends and other
advances and transfers of funds, including funds required to pay interest on
the new notes when due, is subject to certain restrictions under the credit
facility, the indenture governing the Senior Subordinated Notes and other
agreements to which the Operating Companies become a party. A payment default
under the indenture governing the Senior Subordinated Notes would constitute an
event of default under the credit facility, and could result in the
acceleration of the indebtedness thereunder.
The credit facility, the indenture governing the Old Notes and the New
Notes, and the Senior Subordinated Note indenture contain financial and other
covenants that restrict, among other things, the ability of the Issuers and the
Operating Companies 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. For additional information, please refer
to "Risk Factors" section of this prospectus.
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 Senior
Discount Notes, the indenture governing the Old Notes and the New Notes or the
Issuers' senior secured credit facility, 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
51
<PAGE>
employed by third party service providers (including for billing services) in
order to analyze the extent, if any, to which we face a "Year 2000" problem (a
problem that is expected to arise with respect to computer programs that use
only two digits to identify a year in the date field and which were designed
and developed without considering the impact of the upcoming change in the
century).
In particular, we are in the process of completing a review and survey of
all information technology and non-information technology equipment and
software in order to discover items that may not be Year 2000 compliant. We are
contacting each material third party vendor of products and services used by
our company in writing in order to determine the Year 2000 status of the
products and services provided by such vendors. To date, our third party
vendors have indicated that all material products and services are Year 2000
compliant. We anticipate that we will complete our survey of equipment and
software prior to July 1, 1999 and that we will complete all required
remediation and testing prior to December 31, 1999.
Our most reasonably likely worst case Year 2000 scenario involves the
complete failure of our third party billing and customer support system. Such a
scenario is, however, highly unlikely given that our billing and 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.
52
<PAGE>
BUSINESS
General
Members of our management and investors formed Avalon 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 December 31, 1998, on a pro forma basis including all
of the completed and pending acquisitions:
. our systems would have passed approximately 403,600 homes,
. our systems would have served approximately 247,300 basic subscribers,
with approximately 221,200 located in Michigan and approximately 26,100
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
("MSOs") in the United States.
On November 6, 1998, we completed our acquisition of Cable Michigan. As of
December 31, 1998, Cable Michigan served approximately 211,500 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 ("Market Statistics
1997"), 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 December 31, 1998, Cable Michigan's systems
had a basic penetration rate of 60%, compared to the national average of 69%
(according to Paul Kagan Inc.), and a premium penetration rate of 26%, compared
to the national
average of 72% (according to Paul Kagan Inc.). The total consideration that we
paid in connection with the Cable Michigan acquisition, excluding the amounts
to be paid in the Mercom transaction and related fees and expenses, was
approximately $425.9 million, net of option exercise proceeds. At this time,
Cable Michigan owned approximately 62% of the outstanding shares of Mercom,
Inc. ("Mercom").
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 and Cross Country, which served, on a combined basis, approximately 8,300
basic subscribers in Michigan as of December 31, 1998. We completed the
acquisition of Nova in March 1999 and the acquisition of Cross Country in
January 1999. In addition, we consummated the acquisitions of the assets of
Novagate Communications Corp. ("Novagate"), an Internet service provider, and
the cable system assets of R/COM, L.C. ("R/COM"), 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. ("Traverse Internet"), an Internet service provider
which had approximately 5,000 Internet subscribers as of March 1999 and certain
cable system assets of Galaxy American Communications ("Galaxy") which had
approximately 600 basic subscribers as of March 1999. The combined purchase
price for these pending acquisitions is approximately $2.9 million.
53
<PAGE>
We also provide cable television services to approximately 26,100 basic
subscribers in western New England after giving effect to all completed and
pending acquisitions. These operations commenced with our acquisitions of cable
system assets from Amrac in May 1998 for approximately $8.1 million and from
Pegasus 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 Corporation which had approximately 5,100 subscribers as of December
31, 1998 and Hometown TV, Inc. ("Hometown") which had approximately 400
subscribers as of December 31, 1998. 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 $26.1
million and Adjusted EBITDA of $12.2 million for the quarter ended December 31,
1998 and revenues of $104.9 million and Adjusted EBITDA of $48.7 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, Cross Country and R/COM acquisitions and the
pending cable system acquisitions entered into by Cable Michigan, and exchanges
of systems with other cable operators to create a more contiguous footprint. In
the
54
<PAGE>
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 its 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.
55
<PAGE>
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 December 31, 1998, giving
effect to all completed and pending acquisitions.
<TABLE>
<CAPTION>
Michigan New England
Cluster Cluster Total
-------- ----------- --------
<S> <C> <C> <C>
Homes passed............................. 367,416 36,160 403,576
Basic subscribers........................ 221,187 26,138 247,325
Basic penetration........................ 60.2% 72.3% 61.3%
Premium units............................ 57,925 6,275 64,200
Premium penetration...................... 26.2% 24.0% 26.0%
Average monthly revenue per basic
subscriber.............................. $ 34.43 $ 35.81 $ 34.57
</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 December 31, 1998, these cable systems
passed approximately 349,200 homes and served approximately 211,500 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. In March 1999, Cable Michigan completed its acquisition of cable
system assets from Nova for approximately $7.8 million. As of December 31,
1998, Nova'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. In January 1999, Cable Michigan completed its acquisition of
the stock of Cross Country for approximately $2.1 million. Cross Country
currently operates a cable system located in Whitehall and Montague, Michigan.
As of December 31, 1998, Cross Country's cable system passed approximately
5,000 homes and served approximately 1,900 basic subscribers.
R/COM. In March 1999, we completed our acquisition of certain assets of
R/COM for approximately $0.5 million. As of December 31, 1998, R/COM's cable
system passed approximately 2,900 homes and served approximately 800 basic
subscribers.
Galaxy. In February 1999, we signed an agreement to acquire certain assets
of Galaxy for approximately $0.8 million. As of December 31, 1998, Galaxy's
cable system passed approximately 3,200 homes and served approximately 600
basic subscribers. We expect that the consummation of the Galaxy acquisition
will occur in April of 1999.
Traverse City ISP. On November 16, 1998, we signed a non-binding letter of
intent to acquire certain of the assets of Traverse Internet for approximately
$2.1 million. We expect to sign a definitive agreement by early December 1998.
As of December 31, 1998, Traverse Internet served approximately 5,000
residential customers in the Traverse City area and had been growing at a rate
of approximately 150 subscribers per week. Traverse Internet currently provides
Internet access through a standard dial-up phone modem connection. We
56
<PAGE>
plan to upgrade these customers to cable-modem based Internet access, which
will provide the same service at much higher speeds. We expect that the
consummation of the Traverse Internet acquisition will occur in April of 1999.
Novagate ISP. In March 1999, we completed our acquisition of the assets of
Novagate for approximately $2.9 million. As of December 31, 1998, Novagate
served approximately 5,000 residential Internet customers in the Grand Rapids
area and had been growing at a rate of approximately 50 subscribers per week.
Novagate currently provides Internet access through a standard dial-up phone
modem connection. We plan to upgrade these customers to cable modem based
Interest access, which will provide the same service at much higher speeds.
The Michigan Cluster--Operations
The cable systems located in the Michigan Cluster serve communities situated
in the western, middle and southern portions of Michigan. The following chart
sets forth certain information relating to the cable systems located in the
Michigan Cluster as of December 31, 1998, on a pro forma basis.
<TABLE>
<CAPTION>
Western Michigan Mid Michigan Southern Michigan
-------------------------- ------------ -----------------
Grand Rapids Traverse City Lapeer Monroe
------------ ------------- ------------ -----------------
<S> <C> <C> <C> <C>
Homes passed............ 148,684 133,267 27,795 57,670
Basic subscribers....... 91,122 80,781 16,840 32,444
Basic penetration....... 61.3% 60.6% 60.6% 56.3%
Premium units........... 22,383 17,801 5,273 12,468
Premium penetration..... 24.6% 22.0% 31.3% 38.4%
Average monthly revenue
per basic subscriber... $ 32.51 $ 33.25 $ 35.35 $ 33.61
</TABLE>
Approximately 80% of the Michigan Cluster's subscriber base is located in
and around Grand Rapids and Traverse City. Grand Rapids, 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 December 31, 1998, approximately 42% of the
Michigan Cluster's plant capacity was 330 MHz (40 analog channels) or less.
Over the next five years, we expect to invest approximately $43 million to
complete its capital plan for the Michigan Cluster. Cable Michigan initiated a
plan in 1996 under which approximately $29.1 million had been invested as of
December 31, 1998. Our plan continues Cable Michigan's plan and
57
<PAGE>
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 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 December 31, 1998, Cable Michigan's penetration rates
for Expanded Basic Service and the Family Value Package were 89.2% and 82.4% of
basic subscribers, respectively. In May 1998, Cable Michigan implemented an
average annual rate increase for basic cable service of $2.29 per month, an
increase of approximately 8.3%. 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 December 31, 1998, the Michigan Cluster maintained
a 63% basic penetration rate and a 35% 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
and Pegasus. We plan to add to the New England Cluster through the acquisitions
of Taconic and Hometown.
Amrac and Pegasus. On May 30, 1998, we acquired the assets of Amrac for
approximately $8.1 million. The Amrac 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 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 December 31, 1998, these cable
systems, which currently constitute the New England Cluster, passed
approximately 34,000 homes and served approximately 20,600 basic subscribers.
Taconic. On September 10, 1998, we entered into an agreement to purchase the
cable related assets of Taconic for approximately $8.5 million. As of December
31, 1998, Taconic's cable system passed approximately 7,200 homes and served
approximately 5,000 basic subscribers. Taconic'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 Acquisition will occur in the second quarter of
1999.
Hometown. In December 1998, we signed an agreement to acquire certain assets
of Hometown for approximately $0.5 million. As of December 31, 1998, Hometown's
cable systems passed approximately 700 homes and served approximately 400 basic
subscribers. We expect that the consummation of the Hometown acquisition will
occur in the second quarter of 1999.
58
<PAGE>
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 December 31, 1998, representing the cable systems acquired or to
be acquired by us in the Amrac, Pegasus, Taconic and Hometown acquisitions.
<TABLE>
<CAPTION>
Western
New England
Charlton/ Winsted, CT/
Central Belchertown/ Berkshire, MA/
Massachusetts Hadley Chatham, NY
------------- ------------ --------------
<S> <C> <C>
Homes passed............ 13,238 22,922
Basic subscribers....... 10,995 15,143
Basic penetration....... 83.1% 66.1%
Premium units........... 2,885 3,390
Premium penetration..... 26.2% 22.4%
Average monthly revenue
per basic subscriber... $35.81(1) $35.81(1)
</TABLE>
- --------
(1) Data is only available on a consolidated basis.
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 and Hometown acquisitions, as of December 31,
1998, 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
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 $32.20 per month. In the
remaining systems, we offer tiers of basic cable television programming at an
average price of $10.95 per month for off-air broadcast channels and $16.05 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
59
<PAGE>
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.
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 December 31, 1998. 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 "Risk Factors," "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and "Regulation--
Copyright" sections 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,
60
<PAGE>
. 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 our customer service personnel's contacts with customers to upgrade
services, and
. centralize marketing and programming under a Vice President of Marketing.
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 $800,000 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 conveniently 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,
61
<PAGE>
. 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.
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 acquisition,
as of December 31, 1998. 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%
<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>
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.
62
<PAGE>
Upon the completion of our planned upgrades, virtually all of the cable
plant included in these systems will have a bandwidth capacity of 450 MHz or
greater and approximately 85% will have a bandwidth capacity of 550 MHz or
greater.
We expect that our planned use of fiber optic technology as an alternative
to coaxial cable will play a major role in allowing us to consolidate headend
facilities and to reduce amplifier cascades, thereby improving picture quality,
system reliability and headend and maintenance expenditures. Fiber optic
strands are capable of carrying hundreds of video, data and voice channels over
extended distances without the extensive signal 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 acquisition, as of December 31, 1998, on a pro forma
basis, to approximately 75 headends, excluding the number of headends to be
acquired in the Galaxy acquisition, and from eight headends in the New England
Cluster as of December 31, 1998, on a pro forma basis, to approximately six
headends.
We have been closely monitoring development in the area of digital
compression, a technology that enables cable operators to increase the channel
capacity of cable television systems by permitting a significantly increased
number of video signals to fit in a cable television system's existing
bandwidth. We believe that the utilization of digital compression technology in
the future could enable us to increase channel capacity in certain systems in a
cost efficient manner. Such utilization of digital compression would generally
be implemented as part of system upgrades, where some portion of the additional
analog channels would be allocated to additional tiers of cable services. The
use of digital compression also could expand the number and types of services
offered and enhance the development of current and future revenue sources.
For the cable industry, providing high-speed cable modems to residential and
business customers has recently become a viable source of additional revenue.
Cable modems provide Internet access at higher speeds and lower costs than the
technologies offered by other communication providers. For example, a 10
megabit cable modem provides Internet access at download speeds 350 times
faster than typical 28.8 kilobit dial-up phone modem connections. Cable
Michigan introduced cable-modem based Internet access in the Traverse City area
in 1998. Based on its success to date, we purchased assets of Novagate and
agreed to purchase Traverse Internet, a local ISP in the same market. We
believe that acquiring expertise from an incumbent ISP will allow us to offer
services in a more effective and timely manner. Based on our experience with
these acquisitions, we may seek to acquire additional ISPs.
Franchises
Cable television systems are constructed and operated under fixed-term non-
exclusive franchises or other types of operating authorities, (which we
collectively refer to as "franchises") that are granted by either local
governmental or centralized state authorities. These franchises typically
contain many conditions, such as:
. time limitations on commencement and completion of construction;
. conditions of service, including the number of channels, the provision of
free service to schools and certain other public institutions;
. the maintenance of insurance and indemnity bonds; and
. the payment of fees to communities.
Certain provisions of these local franchises are subject to limits imposed
by federal law.
On a pro forma basis, as of December 31, 1998, we held 473 franchises in the
aggregate, consisting of approximately 452 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
63
<PAGE>
Policy Act of 1984 (the "1984 Cable Act") 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.
As indicated by the following chart, our franchises expire at various
points in time through the year 2019.
<TABLE>
<CAPTION>
Percentage of Number of Percentage of
Year of Franchise Number of Total Basic Total Basic
Expiration Franchises(a) Franchises(a) Subscribers(a) Subscribers(a)
----------------- ------------- ------------- -------------- --------------
<S> <C> <C> <C> <C>
1999-2001............... 55 12% 19,354 8%
2002 and after.......... 418 88 227,971 92
--- --- ------- ---
Total................... 473 100% 247,325 100%
=== === ======= ===
</TABLE>
- --------
(a) Calculated on a pro forma basis as of December 31, 1998 after giving
effect to all completed and pending acquisitions.
The Cable Television Consumer Protection and Competition Act of 1992 (the
"1992 Cable Act") and the Cable Communications Policy Act of 1984 (the "1984
Cable Act" and collectively with the 1992 Cable Act, the "Cable Acts")
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, the
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 "Risk Factors" and "Regulation" sections 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 1992 Cable 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.
64
<PAGE>
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. Satellite service known as direct broadcast satellite
("DBS") 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. DBS is
currently being heavily marketed on a nationwide basis by three DBS providers,
and a fourth company is also proposing to provide DBS services over multiple
satellites. Announced acquisitions may consolidate all DBS spectrum and assets
into the two dominant DBS providers. DBS providers provide significant
competition to us and other cable service providers. Legislation pending before
Congress may substantially remove the legal obstacles to DBS delivery of local
and distant broadcast signals.
The digital satellite service offered by DBS 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 DBS
systems. Furthermore, DBS 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. DBS providers currently face
technical and legal obstacles to providing broadcast signals, although certain
DBS 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 DBS 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 1992 Cable 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
December 31, 1998, 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 (which we refer to
as "LECs"). The Telecommunications Act of 1996 makes it easier for LECs and
others to provide a wide variety of video services and to provide multichannel
video programming services to subscribers. Various LECs 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 LECs 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
65
<PAGE>
competitive disadvantage if the delivery of video services by LECs becomes
widespread. Issues of cross-subsidization by LECs of video and telephony
services also pose strategic disadvantages for cable operators seeking to
compete with LECs which provide video services. Ameritech Corporation
("Ameritech") has obtained cable television franchises in southeastern Michigan
and has overbuilt some cable operators thereby creating a competitive
environment. To date, Ameritech has not applied for cable franchises in the
areas served by us, including after giving effect to the Additional Michigan
Acquisitions. We cannot predict the likelihood of success of video service
ventures by LECs or their impact on us.
We face additional competition from private satellite master antenna
television ("SMATV") systems. SMATV systems offer both improved reception of
local television stations and many of the same satellite-delivered programming
services offered by franchised cable television systems. SMATV 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 1984 Cable 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 SMATV systems not
subject to regulation as a franchised cable television service. A July 1998 FCC
decision allowed SMATVs to interconnect facilities using common carrier
facilities located in public rights of way without obtaining cable television
franchises. This decision could spur growth of SMATV 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 ("MMDS") which use low-power
microwave frequencies to transmit video programming over-the-air to
subscribers. There are MMDS operators who are authorized to provide or are
providing broadcast and satellite programming to subscribers in areas 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 MMDS. 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. LECs and
other common carriers also provide facilities for the transmission and
distribution to homes and businesses of interactive computer-based services,
including the Internet, as well as data and other non-video services. The FCC
has conducted spectrum auctions for licenses to provide personal 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
66
<PAGE>
greater resources than we have. For additional information, please refer to the
"Risk Factors" and "--Rapid Technological Change" sections of this prospectus.
Employees
As of December 31, 1998, we had a total of approximately 293 employees.
Approximately 20 of our employees located in Michigan are represented by labor
unions or trade councils. We have hired approximately 68 employees and expect
to hire approximately 10 additional full-time equivalent employee positions in
Michigan to staff our new customer service operation for the Michigan Cluster.
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 Acquisition
Transactions.
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" and "Risk Factors"
sections 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
Acquisition Transactions. 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 Acquisition
Transactions, 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.
67
<PAGE>
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 1984 Cable Act, the 1992 Cable Act and the
Telecommunications Act of 1996 (the "1996 Telecom Act"). These statutes amended
the federal Communications Act of 1934 (the "Communications Act") 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 1992 Cable Act. The 1992 Cable 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 1992 Cable Act directs the FCC to promulgate regulations to govern the rate
regulation process at both the federal and local level. The 1992 Cable 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 1996 Telecom Act. The 1996 Telecom Act makes several
significant changes to cable rate regulation. The 1996 Telecom Act:
. 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 1996 Telecom Act
provide cable systems some relief from the administrative burdens and costs of
rate regulation.
FCC regulations. Following the 1992 Cable 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:
68
<PAGE>
. 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 1992 Cable 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.
69
<PAGE>
Broadcast Signal Carriage--Must-Carry and Retransmission Consent
Must-carry. The 1992 Cable 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 1992 Cable 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
PEG Access. Federal law permits franchising authorities to obtain channel
capacity on our cable systems for public, educational and governmental ("PEG")
access programming. When required by a local franchise authority, we must
provide PEG access channel capacity at no charge. Local franchise authorities
may also require us to purchase PEG access equipment and pay other PEG access
related expenses. We have no direct editorial control over programming
cablecast on PEG 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 acquired
in the Acquisition Transactions typically provide for periodic payment of
fees to franchising
70
<PAGE>
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 1996 Telecom Act imposed additional controls on the local cable
franchise process. The 1996 Telecom Act 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: (1) as cable services; (2) as telecommunications
services; or (3) 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 1992 Cable 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
71
<PAGE>
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 1992 Cable 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 1992 Cable 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 1996 Telecom Act
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 SMATV and MMDS cross-ownership restrictions. In January 1995, the
FCC relaxed its restrictions on ownership of SMATV systems. The revised rules
permit a cable operator to acquire SMATV systems in the operator's existing
franchise area so long as the programming services provided through the SMATV
system are offered according to the terms of the cable operator's local
franchise agreement. The 1996 Telecom Act provides that the cable/SMATV and
cable/MMDS cross-ownership rules do not apply in any franchise area where the
operator faces effective competition.
Competition with Local Exchange Carriers
The 1996 Telecom Act makes significant changes to the regulation of local
exchange carriers (which we refer to as "LECs") that provide cable services.
The 1996 Telecom Act:
. Eliminates the requirement that LECs 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 LECs to offer video services in their telephone
service areas.
. Permits LECs to provide service as franchised cable operators or as "open
video system" operators. As an open video system operator, a LEC 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 LEC from acquiring an existing cable system in its telephone
service area except in limited circumstances.
The changes to regulation of LEC ownership of cable systems increases the
risk to our cable systems that LECs will seek to compete in our franchise
areas.
While the 1996 Telecom Act facilitates LEC entry into cable markets, it also
opens the local exchange markets to competition. The 1996 Telecom Act removes
barriers to entry into the local telephone exchange market by preempting state
and local laws that restrict competition and by requiring all LECs to provide
72
<PAGE>
nondiscriminatory access and interconnection to potential competitors,
including cable operators, wireless telecommunications providers and long
distance companies.
Regulations promulgated by the FCC under the 1996 Telecom Act require LECs
to open their telephone networks to competition by providing competitors
interconnection, access to unbundled network elements and retail services at
wholesale rates. As a result of these changes, companies can interconnect with
incumbent LECs 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 1996 Telecom Act 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 1996 Telecom Act required operators to block fully
both the video and audio portion of sexually explicit or indecent programming
on channels that are primarily dedicated to sexually oriented programming or
alternatively to carry such programming only at "safe harbor" time, periods
defined by the FCC as the hours between 10 p.m. and 6 a.m. The U.S. Supreme
Court recently ruled that these restrictions are unconstitutional.
73
<PAGE>
The 1996 Telecom Act 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 1996 Telecom Act, the television industry recently adopted a
voluntary ratings system for violent and indecent video programming. The 1996
Telecom Act 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 1996 Telecom Act modifies
several other cable-related statutory provisions including those governing
technical standards, equipment compatibility, subscriber notice requirements
and program access. The 1996 Telecom Act also repeals the three-year anti-
trafficking prohibition adopted in the 1992 Cable Act. FCC regulations
implementing the 1996 Telecom Act preempt certain local restrictions on
satellite and over-the-air antenna reception of video programming services,
including zoning, land-use or building regulations, or any private covenant,
homeowners' association rule, 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.
74
<PAGE>
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, ASCAP, BMI and
SESAC. In October 1989, the special rate court of the U.S. District Court for
the Southern District of New York imposed interim rates on the cable industry's
use of ASCAP-controlled music. ASCAP and cable industry representatives have
met to discuss the development of a standard licensing agreement covering
ASCAP-controlled music in local origination and access channels and pay-per-
view programming. We cannot predict the ultimate outcome of these industry
negotiations or the amount of any license fees required for past and future use
of ASCAP-controlled music. 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 BMI. BMI and cable industry representatives recently
concluded negotiations for a standard licensing agreement covering the
performance of BMI music contained in advertising and other information
inserted by operators into cable programming and on certain local access and
origination channels carried on cable systems. SESAC 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.
75
<PAGE>
MANAGEMENT
Executive Officers, Managers and Directors
Each of the Issuers is an indirect subsidiary of, and is controlled by,
Avalon. Avalon is a limited liability company whose affairs are governed by a
Board of Managers (the "Board"). The following table sets forth certain
information, as of March 15, 1999, with respect to the executive officers and
managers ("Managers") of Avalon. Each of Avalon's Managers is also a manager of
Avalon Cable LLC ("Avalon Holdings") and a director of Avalon Cable Holdings
Finance, Inc. ("Finance Holdings"). The executive officers of each of the
Issuers are substantially similar to the executive officers of Avalon. The
election of the Managers is subject to the terms of the Avalon Holdings 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.......... 42 Chairman of the Board
Joel C. Cohen........... 53 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.
David W. Unger is the Chairman of the Board of Avalon and co-founded Avalon
in 1997. 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 is the President, Chief Executive Officer, Secretary and a
Manager of Avalon. Mr. Cohen co-founded the Company in 1997. From 1996 to 1997,
Mr. Cohen served as the Chief Financial Officer of Patient Education Media,
Inc. ("PEMI") 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 PEMI
from June 1996 through December 1997. Prior to June 1996, PEMI did not employ a
Chief Financial Officer. PEMI was formed in 1994 to create and market patient
educational videos and other products under the trademark TIME-LIFE MEDICAL.
PEMI ceased producing education video tapes in September 1996 and ceased all
operations on December 20, 1996. Thereafter, PEMI proceeded to liquidate the
majority of its assets. On March 14, 1997, PEMI 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 PEMI.
Peter Polimino is the Vice President of Finance of Avalon. Mr. Polimino is a
financial professional with over 18 years of experience in cable, broadcast and
network television and radio. Prior to joining Avalon in
76
<PAGE>
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 is the Vice President of Engineering of Avalon. Prior to
joining Avalon 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 is the General Manager of Avalon's New England operations. Prior
to joining Avalon 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 is the General Manager of the Company's Michigan operations. Mr.
Dineen joined Avalon upon the consummation of the Merger and will oversee the
Company's operations in Michigan. Mr. Dineen has been 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 and a partner in ABRY Partners, Inc. ("ABRY"). Prior to joining ABRY 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 and a partner in ABRY. Ms. Koenig joined ABRY 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 and President and Managing Partner of
ABRY. Prior to joining ABRY, 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.
Compensation of Managers
Each of the Managers receives reimbursement of reasonable out-of-pocket
expenses incurred in connection with meetings of the Board. The Managers who
are employees of Avalon do not receive any fee in addition to their regular
salary for serving on the Board. The Managers who are not employees of Avalon
do not receive any compensation for serving on the Board.
77
<PAGE>
Executive Compensation
Avalon was formed in 1997. The Issuers were formed during 1997 and 1998 in
connection with the acquisitions of Cable Michigan and Amrac and related
financing transactions. The executive officers of Avalon are similar in all
material respects to the executive officers of the Issuers. None of the
officers of Avalon, other than its chief executive officer, received
compensation in excess of $100,000 in his capacity as an officer of Avalon in
1998. The following table sets forth information concerning the compensation of
Avalon's Chief Executive Officer for services in all capacities rendered to
Avalon 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 Messrs. Unger, Cohen, Polimino, Luscombe, Dee and Dineen
(collectively, the "Executives") is a party to an employment agreement that
provides for an annual base salary and eligibility for a bonus if certain
performance goals are met. The employment agreements for Messrs. Unger, Cohen,
Polimino and Luscombe are described below. Messrs. Dee and Dineen have
employment agreements with similar provisions. In addition, certain of the
equity interests in Avalon owned by the Executives will vest under the terms of
the Management Securities Purchase Agreements (as defined). For additional
information, please refer to "Certain Relationships and Related Transactions--
Management Securities Purchase Agreements" of this prospectus.
David W. Unger. Pursuant to an Employment Agreement dated November 6, 1998
(the "Unger Employment Agreement") between Mr. Unger and Avalon, Avalon has
agreed to employ, and Mr. Unger has agreed to serve, as Chairman of the Board
of Avalon and its subsidiaries for a period of five years or until his earlier
resignation, death, disability or termination of employment (the "Unger
Employment Period"). The Unger Employment Agreement provides that Mr. Unger is:
. required to devote approximately two-thirds of his business time to
Avalon,
. 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 Avalon during the term of the Unger
Employment Period and for a period of six months thereafter, and
. prohibited from disclosing any confidential information gained during the
Unger Employment Period.
If Avalon terminates 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 the Unger Employment Agreement.
Joel C. Cohen. Pursuant to an Employment Agreement dated November 6, 1998
(the "Cohen Employment Agreement") between Mr. Cohen and Avalon, Avalon has
agreed to employ, and Mr. Cohen has agreed to serve, as President and Chief
Executive Officer of Avalon and its subsidiaries for a period of five years or
until his earlier resignation, death, disability or termination of employment
(the "Cohen Employment Period"). The Cohen Employment Agreement further
provides that Mr. Cohen is:
. required to devote substantially all of his business time to Avalon,
78
<PAGE>
. 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 Avalon during the Cohen Employment Period
and for a period of six months thereafter, and
. prohibited from disclosing any confidential information gained by him
during the Cohen Employment Period.
If Avalon terminates 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
the Cohen Employment Agreement.
Peter Polimino. Pursuant to an Employment Agreement dated November 6, 1998
(the "Polimino Employment Agreement") between Mr. Polimino and Avalon, Avalon
has agreed to employ, and Mr. Polimino has agreed to serve, as Vice President
of Finance of Avalon and its subsidiaries for a period of five years or until
his earlier resignation, death, disability or termination of employment (the
"Polimino Employment Period"). The Polimino Employment Agreement further
provides that Mr. Polimino is:
. required to devote 100% of his business time to Avalon,
. 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 Avalon during the Polimino Employment
Period and for a period of six months thereafter, and
. prohibited from disclosing any confidential information gained by him
during the Polimino Employment Period.
Peter Luscombe. Pursuant to an Employment Agreement dated November 6, 1998
(the "Luscombe Employment Agreement") between Mr. Luscombe and Avalon, Avalon
has agreed to employ, and Mr. Luscombe has agreed to serve, as Vice President
of Engineering of Avalon and its subsidiaries for a period of five years or
until his earlier resignation, death, disability or termination of employment
(the "Luscombe Employment Period"). The Luscombe Employment Agreement further
provides that Mr. Luscombe is:
. required to devote 100% of his business time to Avalon,
. 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 Avalon during the Luscombe Employment
Period and for a period of six months thereafter, and
. prohibited from disclosing any confidential information gained by him
during the Luscombe Employment Period.
79
<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Investor Securities Purchase Agreement
David W. Unger, Joel C. Cohen, ABRY III, Avalon and others are parties to an
Investor Securities Purchase Agreement dated as of May 29, 1998 (the "Investors
Securities Purchase Agreement"), pursuant to which Avalon sold to certain
investors, and such investors purchased from Avalon, certain Class A Units of
Avalon for $1,000 per Unit, in cash. The investors are entitled to
indemnification in certain circumstances to the extent that Avalon is
determined to have breached certain representations, warranties or agreements
contained in the Investors Securities Purchase Agreement.
Management Securities Purchase Agreements
Each of the Executives entered into a Management Securities Purchase
Agreement with Avalon (each, a "Management Securities Purchase Agreement"),
pursuant to which Avalon sold to each Executive and such Executive purchased
from Avalon certain 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 certain 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 the Company or any of its subsidiaries. Each
Management Securities Purchase Agreement further provides that Avalon or ABRY
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.
Members Agreement
Avalon, ABRY III and the Executives are parties to a Members Agreement dated
as of May 29, 1998 (the "Members Agreement"). Pursuant to the Members
Agreement, ABRY III and each of the Executives have agreed to vote their equity
interests in Avalon to elect three representatives of ABRY III and each of
Messrs. Unger and Cohen to the Board. The Members Agreement also contains:
. certain "co-sale" rights exercisable by the Executives and others in the
event of certain sales by ABRY III,
. certain "drag along" sale rights exercisable by ABRY III, as majority
interest holder in Avalon, in the event of an Approved Company Sale (as
defined in the Members Agreement) and
. certain restrictions on transfers by interest holders in Avalon other
than ABRY 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 resulting in at least $25 million in net proceeds or in which at
least 25% of the equity interests of Avalon are sold or (b) a Sale of the
Company (as defined in the Members Agreement).
Registration Agreement
Avalon, ABRY III, the Executives and certain other holders are parties to a
Registration Agreement dated as of May 29, 1998 (the "Registration Agreement").
Pursuant to the Registration Agreement, the holders of a majority of the ABRY
Registrable Securities (as defined in the Registration Agreement) may request
registration (a "Demand 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.
80
<PAGE>
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
(other than registrations on form S-4 or Form S-8).
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 and
the holders of registrable securities and all independent certified public
accountants and underwriters, will be borne by us.
Avalon Holdings Securities Purchase Agreement
Avalon, Avalon Holdings, Avalon Cable of Michigan Holdings, Inc. ("Michigan
Holdings") and Avalon Cable of New England Holdings, Inc. ("Avalon New England
Holdings"), Avalon Michigan Inc. and Avalon Investors are parties to an Amended
and Restated Securities Purchase Agreement dated as of March 26, 1999 (the
"Avalon Holdings Securities Purchase Agreement"). Pursuant to the Avalon
Holdings Securities Purchase Agreement, Avalon Holdings sold to Avalon
Investors, and Avalon Investors purchased from Avalon Holdings, all of the
outstanding Class A Units issued by Avalon Holdings for $45.0 million in cash.
In addition, pursuant to the Avalon Holdings Securities Purchase Agreement, on
March 26, 1999, Avalon Michigan Inc. transferred to Avalon Holdings, and Avalon
Holdings assumed from Avalon Michigan Inc., all right, title and interest of
Avalon Michigan Inc. in substantially all of its assets and liabilities in
exchange for 510,994 Class B-2 Units issued by Avalon Holdings. Avalon Holdings
then transferred these assets and liabilities to Avalon Michigan LLC. These
transfers of assets and liabilities were part of the Reorganization.
Avalon Holdings Members Agreement
Avalon Holdings, ABRY III, Avalon, Avalon New England Holdings, Avalon
Michigan Inc., Michigan Holdings and Avalon Investors are parties to an Amended
and Restated Members Agreement dated as of
March 26, 1999 (the "Avalon Holdings Members Agreement"). The Avalon Holdings
Members Agreement contains:
. certain "co-sale" rights exercisable by Avalon Investors in the event of
certain sales by ABRY III, Avalon and their affiliates,
. certain "drag along" sale rights exercisable by Avalon and its affiliates
in the event of an Approved Company Sale (as defined in the Avalon
Holdings Members Agreement),
. certain restrictions on transfers by interest holders in Avalon Holdings
. certain "pre-emptive rights" provisions and
. obligations to enter into a Registration Rights Agreement immediately
before an initial public offering.
Avalon Michigan Inc. and Michigan Holdings became parties to the Avalon
Holdings Members Agreement as part of the Reorganization. The Avalon Holdings
Members Agreement terminates upon the first sale of securities of Avalon
Holdings or a successor entity to the public with proceeds of more than $50
million.
ABRY Management and Consulting Services Agreement
Pursuant to a Management Agreement between ABRY and Avalon dated as of May
29, 1998 (the "Management Agreement"), ABRY is entitled to a management fee
when, and if, it provides certain advisory and management consulting services
to us. We anticipate that any such management fee, if incurred, would be
$200,000 per annum plus reimbursable expenses.
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.
81
<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The Issuers are each indirectly controlled by Avalon. Finance Holdings is a
wholly owned subsidiary of Avalon Holdings. Avalon owns a controlling interest
in Avalon Holdings. Avalon Cable of Michigan LLC and Avalon Cable of New
England LLC are wholly owned subsidiaries of Avalon Holdings. Avalon Cable
Finance, Inc. is a wholly owned subsidiary of Finance Holdings. See "The
Company" section of this prospectus for a further description of our corporate
structure.
The following table sets forth certain information regarding the beneficial
ownership of the Class A Units of Avalon (which are the only outstanding
membership interests in Avalon with voting rights) as of November 15, 1998 by:
. holders having beneficial ownership of more than 5% of the voting equity
interests of Avalon,
. each Manager and director of Avalon and the Issuers,
. the executive officers of Avalon and the Issuers and
. all such Managers, directors and executive officers as a group. For
descriptions of certain voting and other arrangements among such holders,
see "Certain Relationships and Related Transactions."
<TABLE>
<CAPTION>
Beneficial Ownership(a)
------------------------
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(b)............................ 41,094.927 95.12%
All Managers, Directors and executive
officers as a group (9 persons)............ 42,600.243 98.61%
</TABLE>
- --------
(a) "Beneficial ownership" 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.
(b) 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.
Avalon Equity Structure
The Issuers are each indirectly controlled by Avalon. Avalon has three
classes of equity units authorized and available for issuance:
. class A units ("Class A Units"),
. class B units ("Class B Units"), and
. class C units ("Class C Units" and together with the Class A Units, Class
B Units, the "Units").
82
<PAGE>
Each class of Units represents a fractional part of the membership interests
of Avalon and has the rights and obligations specified in Avalon's Amended and
Restated Limited Liability Company Agreement. To date, certain of Avalon's
Class A Units, Class B Units and Class C Units have been issued and are
outstanding.
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 (the
"Voting Units"). A preferred return (the "Avalon Preferred Return") accrues
semi-annually on the original issue price (the "Capital Value") of each Voting
Unit at a rate of 15%, or 20% under certain circumstances, per annum. Avalon
cannot pay distributions in respect of other classes of securities (including
distributions made in connection with a liquidation) until the Capital Value
and accrued Avalon Preferred Return in respect of each Voting Unit is paid to
each holder thereof (such distributions being the "Priority Distributions"). In
addition to the Priority Distributions, each holder of Voting Units is also
entitled to participate in distributions payable to the residual common equity
interests of Avalon (the "Last Priority Distributions").
Incentive Units
The Class B Units and Class C Units (collectively, the "Incentive Units")
are junior, non-voting equity interests in Avalon which were issued to each of
Avalon's 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 Last Priority Distributions, if any, provided that
Priority Distributions on all Voting Units shall have been paid in full.
Avalon Cable LLC Equity Structure
Avalon Holdings directly or indirectly controls each of the Operating
Companies. Avalon Holdings has authorized two classes of equity units: class A
units ("Class A Units") and class B units ("Class B Units," and together with
the Class A Units, the "Avalon Holdings Units"). The Avalon Holdings Units
represent a fractional part of the membership interests of Avalon Holdings and
have the rights and obligations specified in Avalon Holdings' 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 participating preferred equity interests, each of
which was issued on November 6, 1998 to Avalon Investors.
A preferred return (the "Avalon Holdings Preferred Return") accrues annually
on the initial purchase price (the "Avalon Holdings Capital Value") of each
Class A Unit at a rate of 15%, or 17% under certain circumstances, per annum.
Avalon Holdings cannot pay distributions in respect of other classes of
securities (including distributions made in connection with a liquidation)
until the Avalon Holdings Capital Value and accrued Avalon Holdings Preferred
Return in respect of each Class A Unit is paid to the holders thereof (such
distributions being the "Avalon Holdings Priority Distributions"). So long as
any portion of the Avalon Holdings Priority Distributions remains unpaid, the
holders of a majority of the Class A Units are entitled to block certain
actions by Avalon Holdings including the payment of certain distributions, the
issuance of senior or certain types of pari passu equity securities or the
entering into or amending of certain related-party agreements. In addition to
the Avalon Holdings Priority Distributions, each Class A Unit is also entitled
to participate in Common Distributions (as defined below), pro rata according
to the percentage such unit represents of the aggregate number of Avalon
Holdings Units then outstanding.
83
<PAGE>
Class B Units
The Class B Units are junior equity securities which are divided into two
identical subclasses, Class B-1 Units and Class B-2 Units. There are currently
64,696 Class B-1 Units outstanding, all which were issued to Avalon New England
Holdings on November 6, 1998, in exchange for its contribution to the capital
of Avalon Holdings of its 100% membership interest in Avalon New England. There
are currently 510,994 Class B-2 Units outstanding, all of which were issued to
Avalon Michigan Inc. in exchange for the contribution of substantially all of
its assets to the capital of Avalon Holdings as part of the Reorganization.
After the payment in full of the Avalon Holdings Priority Distributions, each
Class B Unit is entitled to participate in distributions ("Common
Distributions") pro rata according to the percentage such unit represents of
the aggregate number of Avalon Holdings Units then outstanding.
84
<PAGE>
DESCRIPTION OF CERTAIN DEBT
The following description of certain provisions of certain indebtedness of
the Issuers and their affiliates does not purport to be complete, 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 New
England, Avalon Michigan LLC and Avalon Finance (the "Borrowers"). Avalon
Michigan LLC became a Borrower instead of Avalon Michigan Inc. as part of the
Reorganization. The credit facility was provided to the Borrowers by a
syndicate of banks and other financial institutions (the "Senior Lenders") for
which Lehman Commercial Paper Inc. ("LCPI") acts as administrative agent (the
"Administrative Agent"). The credit facility provides for:
. term loan borrowings of up to $120,888,000 (the "Tranche A Term Loan")
under the Tranche A term loan facility (the "Tranche A Term Loan
Facility"),
. term loan borrowings of $170,000,000 (the "Tranche B Term Loan") under
the Tranche B term loan facility (the "Tranche B Term Loan Facility" and
together with the Tranche A Term Loan Facility, the "Senior Term Loan
Facilities"), and
. revolving credit borrowings of up to $30,000,000 (the "Revolving Credit
Loans") 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 (as defined in the credit facility), the Borrowers may request that
incremental term loan facilities of up to $75,000,000 be established in
accordance with the terms of the credit facility. As of March 31, 1999, there
were borrowings of $36.3 million outstanding under the Tranche A Term Loan
Facility, $129.6 million outstanding under the Tranche B Term Loan Facility and
$13.7 million outstanding under the revolving credit facility, and $16.3
million of availability under the revolving credit facility. The remaining
commitments under the Tranche A Term Loan Facility will terminate on March 31,
1999, and the revolving credit facility will terminate on October 31, 2005.
Additional borrowings could be made under the Tranche A Term Loan Facility only
to complete certain acquisitions (including repayment of related indebtedness
and payment of fees and expenses). 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.
85
<PAGE>
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), subject to
reimbursement of certain of the Senior Lenders' costs under certain conditions.
The credit facility provides that the Borrowers must meet or exceed a
consolidated interest coverage ratio, fixed charge coverage ratio and debt
service coverage ratio and must not exceed certain consolidated leverage
ratios, each as set forth in the credit facility. The credit facility also
contains customary affirmative covenants, including, required interest rate
protection arrangements and the pledge of additional collateral in certain
circumstances, and certain negative covenants, including covenants that limit
certain indebtedness, liens, fundamental changes, disposition of property,
restricted payments (including distributions to the Issuers of amounts to pay
the Accreted Interest Redemption Amount and other interest payments on the
Senior Discount Notes), capital expenditures, investments, optional payments
and modifications of debt instruments (including the indenture governing the
Old Notes and New Notes and the Senior Subordinated Notes), transactions with
affiliates and sales and leasebacks. In particular, under the credit facility,
the Operating Companies may pay cash dividends to the Issuers to allow payments
of interest (including the Accreted Interest Redemption Amount) on the Senior
Discount Notes so long as no Default (as defined in the credit facility) or
Event of Default (as defined in the credit facility) shall have occurred and be
continuing or would occur as a result thereof and a consolidated leverage ratio
test is satisfied. The credit facility also includes customary events of
default.
The obligations of the Borrowers under the credit facility are secured by
substantially all the assets of the Borrowers. In addition, the obligations of
the Borrowers under the credit facility are guaranteed by each of the Issuers,
Avalon, Avalon New England Holdings and Avalon Michigan Inc. None of the
guarantors have significant assets other than their investments in affiliates.
The Senior Subordinated Notes
On December 3, 1998, Avalon Cable of Michigan, Inc. ("Avalon Michigan
Inc."), Avalon Cable of New England LLC ("Avalon New England") and Avalon Cable
Finance, Inc. ("Avalon Finance") issued $150.0 million aggregate principal
amount of their 9 3/8% Senior Subordinated Notes due 2008. The Senior
Subordinated Notes were issued under an indenture dated as of December 10, 1998
(the "Senior Subordinated Note Indenture") by and among Avalon New England,
Avalon Finance and Avalon Cable of Michigan LLC ("Avalon Michigan LLC"), as
issuers, and The Bank of New York, as trustee.
In the Reorganization, Avalon Michigan Inc. ceased to be obligated as an
issuer under the Senior Subordinated Notes and became a guarantor of Avalon
Michigan LLC's obligations under the Senior Subordinated Notes. Thus, the
obligors under the Senior Subordinated Notes are currently Avalon New England,
Avalon Finance and Avalon Michigan LLC, which we refer to collectively as the
Senior Subordinated Note Issuers. Avalon Michigan LLC does not have significant
assets or liabilities, other than its equity interest in Avalon Holdings.
The Senior Subordinated Notes are general unsecured obligations of the
Senior Subordinated Note Issuers and are subordinated in right of payment to
all current and future senior indebtedness of the Senior Subordinated Note
Issuers, including indebtedness under the credit facility. Interest on the
Senior Subordinated Notes accrues at the rate of 9.375% per annum and is
payable semi-annually in arrears on June 1 and December 1 of each year, to
holders of record on the immediately preceding May 15 and November 15. The
Senior Subordinated Notes are limited in aggregate principal amount to $200.0
million, of which $150.0 million was issued in the initial Senior Subordinated
Note offering. The remaining $50.0 million may be issued from time to time,
subject to compliance with the debt incurrence covenants in the Senior
Subordinated Note Indenture, the indenture governing the old notes and the new
notes and the financial covenants in the credit facility.
86
<PAGE>
On or after December 1, 2003, the Senior Subordinated Notes will be subject
to redemption at any time at the option of the Senior Subordinated Note
Issuers, in whole or in part, at the redemption prices (expressed as percentage
of principal amount) set forth below plus accrued and unpaid interest, if any,
and liquidated damages, if any, thereon to the applicable redemption date, if
redeemed during the twelve-month period beginning on December 1 of the years
indicated below:
<TABLE>
<CAPTION>
Year Percentage
---- ----------
<S> <C>
2003.......................... 104.688%
2004.......................... 103.125%
2005.......................... 101.563%
2006 and thereafter........... 100.000%
</TABLE>
Notwithstanding the foregoing, at any time prior to December 1, 2001, the
Senior Subordinated Note Issuers may on any one or more occasions redeem up to
35% of the aggregate principal amount of Senior Subordinated Notes originally
issued under the Senior Subordinated Note Indenture at a redemption price equal
to 109.375% of the principal amount thereof, plus accrued and unpaid interest,
if any, and liquidated damages, if any, thereon, to the redemption date, with
the net cash proceeds of any equity offering and/or the net cash proceeds of a
strategic equity investment; provided that at least 65% of the aggregate
principal amount of Senior Subordinated Notes originally issued remain
outstanding immediately after each occurrence of such redemption. As used in
this paragraph, "equity offering" and "strategic equity investment" have
substantially the same meanings as in the indenture governing the old notes and
new notes.
Upon the occurrence of a "change of control," each holder of Senior
Subordinated Notes will have the right to require the Senior Subordinated Note
Issuers to repurchase all or any part of such holder's Senior Subordinated
Notes pursuant to a change of control offer at any offer price in cash equal to
101% of the aggregate principal amount thereof plus accrued and unpaid interest
and liquidated damages thereon, if any, to the date of purchase. For such
purpose, "change of control" has substantially the same meaning as in the
Senior Subordinated Note Indenture.
The Senior Subordinated Note Indenture contains covenants that, among other
things, limits the ability of the Senior Subordinated Note Issuers and their
restricted subsidiaries, to:
. incur additional indebtedness,
. pay dividends or make certain other restricted payments, including
distributions to the Issuers of amounts to pay the Accreted Interest
Redemption Amount and interest payments on the old notes and the new
notes,
. enter into transactions with affiliates,
. sell assets or subsidiary stock,
. create liens,
. restrict dividends or other payments from restricted subsidiaries,
. merge, consolidate or sell all or substantially all of their combined
assets,
. incur indebtedness that is senior to the Senior Subordinated Notes but
junior to senior indebtedness and,
. with respect to the restricted subsidiaries, issue capital stock.
In particular, the Senior Subordinated Note Indenture provides that payments
of cash dividends by the Operating Companies to the Issuers in order to make
payments of interest, including the Accreted Interest Redemption Amount, in
accordance with the terms of the old note and new notes will be permitted so
long as no default or event of default, as such terms are defined in the Senior
Subordinated Note Indenture, shall have occurred and be continuing or would
occur as a consequence thereof. The Senior Subordinated Note Indenture
87
<PAGE>
also permits the Operating Companies to pay dividends and make other restricted
payments, including to the Issuers, if certain other conditions are satisfied.
Under certain circumstances, the Senior Subordinated Note Issuers are required
to make an offer to purchase Senior Subordinated Notes at a price equal to 100%
of the aggregate principal amount thereof plus accrued and unpaid interest and
liquidated damages thereon, if any, to the date of purchase with the proceeds
of certain asset sales. The Senior Subordinated Note Indenture contains certain
customary events of default which will include the failure to pay principal,
interest and liquidated damages, the failure to comply with certain covenants
under the Senior Subordinated Notes or the Senior Subordinated Note Indenture,
certain cross-defaults on indebtedness, the failure to pay certain aggregated
amounts on certain final judgement and certain events of bankruptcy or
insolvency. See the "Risk Factors" section of this prospectus.
88
<PAGE>
THE EXCHANGE OFFER
Purpose and Effect of the Exchange Offer
The Old Notes were originally issued on December 3, 1998 to Lehman Brothers
Inc. and Barclays Capital Inc. (the "Initial Purchasers") pursuant to a
Purchase Agreement dated December 3, 1998. The 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 (the "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 (the "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.
89
<PAGE>
As indicated above, each broker-dealer (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
90
<PAGE>
the Shelf Registration Statement and to provide comments on the Shelf
Registration Statement within the time periods set forth in the Registration
Rights Agreement to have their Old Notes included in the Shelf Registration
Statement and benefit from the provisions regarding liquidated damages set
forth below. Such required representations and information are described in the
Registration Rights Agreement.
The Registration Rights Agreement provides that:
. the Issuers will file the Registration Statement with the SEC on or prior
to March 31, 1999;
. the Issuers will use their best efforts to have the Registration
Statement declared effective by the SEC on or prior to 90 days after the
date of the original filing of the Registration Statement;
. unless the exchange offer would not be permitted by applicable law or SEC
policy, the Issuers will offer and use their best efforts to issue on or
prior to 30 business days after the Registration Statement is declared
effective, New Notes in exchange for all Old Notes tendered prior thereto
in the exchange offer; and
. if obligated to file the Shelf Registration Statement, the Issues will
file the Shelf Registration Statement with the SEC on or prior to 45 days
after such filing obligation arises and to cause the Shelf Registration
Statement to be declared effective by the SEC on or prior to 90 days
thereafter.
If:
(a) the Issuers fail to file any of the registration statements required
by the Registration Rights Agreement on or before the date specified for
such filing;
(b) any of such registration statements is not declared effective by
the SEC on or prior to the date specified for such effectiveness;
(c) the Issuers fail to consummate the exchange offer within 30
business days after the Registration Statement has been declared effective;
or
(d) the Shelf Registration Statement or the Registration Statement is
filed and declared effective but thereafter ceases to be effective or
usable in connection with resales of Transfer Restricted Securities during
the period specified in the Registration Rights Agreement (each such event
referred to in clauses (a) through (d) above a "registration default"),
the Issuers will pay liquidated damages to holders of the Old Notes as follows:
$.05 per week per $1,000 principal amount of Old Notes for the first 90-day
period following a registration default and an additional $.05 per week per
$1,000 principal amount at maturity of Old Notes for each subsequent 90-day
period until all registration defaults have been cured, up to a maximum amount
of liquidated damages for all registration defaults of $.50 per week per $1,000
principal amount at maturity of Old Notes.
All accrued liquidated damages will be payable to holders of the Old Notes
in cash on semi-annual payment dates that correspond to the accretion dates
(or, on or after December 1, 2003, the semi-annual interest payment date),
commencing with the first such date occurring after any such additional
interest commences to accrue, until such registration default is cured.
The summary herein of certain provisions of the Registration Rights
Agreement is subject to, and is qualified in its entirety by, all the
provisions of the Registration Rights Agreement, a copy of which is filed as an
exhibit to the Registration Statement of which this prospectus is a part.
Following the consummation of the exchange offer, holders of the Old Notes
who were eligible to participate in the exchange offer but who did not tender
their Old Notes will not have any further registration rights and such Old
Notes will continue to be subject to certain restrictions on transfer.
Accordingly, the liquidity of the market for such Old Notes could be adversely
affected.
91
<PAGE>
Terms of the Exchange Offer
Upon the terms and subject to the conditions set forth in this prospectus
and in the Letter of Transmittal, we will accept any and all Old Notes validly
tendered and not withdrawn prior to 5:00 p.m., New York City time, on ,
1999, or such later date and time as to which the exchange offer has been
extended. We will issue $1,000 principal amount of New Notes in exchange for
each $1,000 principal amount at maturity of outstanding Old Notes accepted in
the exchange offer. Holders may tender some or all of their Old Notes pursuant
to the exchange offer. However, Old Notes may be tendered only in integral
multiples of $1,000.
The form and terms of the New Notes are substantially the same as the form
and terms of the Old Notes except that:
. the New Notes bear a New Note designation and a different CUSIP number
from the Old Notes;
. the New Notes have been registered under the federal securities laws and
hence will not bear legends restricting the transfer thereof as the Old
Notes do; and
. the holders of the New Notes will generally not be entitled to rights
under the Registration Rights Agreement, which rights generally will be
satisfied when the exchange offer is consummated.
The New Notes will evidence the same debt as the tendered Old Notes and will
be entitled to the benefits of the indenture under which the Old Notes were
issued. As of the date of this prospectus, $196,000,000 aggregate principal
amount at maturity of Old Notes were outstanding.
Holders of Old Notes do not have any appraisal or dissenters' rights under
the General Corporation Law of Delaware, the Delaware Limited Liability Company
Act or the indentures relating to such notes in connection with the exchange
offer. We intend to conduct the exchange offer in accordance with the
applicable requirements of the Securities Exchange Act of 1934, and the rules
and regulations of the SEC thereunder.
We shall be deemed to have accepted validly tendered Old Notes when, as and
if we have given oral or written notice thereof, such notice if given orally,
to be confirmed in writing, to the exchange agent. The exchange agent will act
as agent for the tendering holders for the purpose of receiving the New Notes
from our company.
If any tendered Old Notes are not accepted for exchange because of an
invalid tender, the occurrence of certain other events set forth herein or
otherwise, the certificates for any such unaccepted Old Notes will be returned,
without expense, to the tendering holder thereof as promptly as practicable
after the expiration date.
Holders who tender Old Notes in the exchange offer will not be required to
pay brokerage commissions or fees or, subject to the instructions in the Letter
of Transmittal, transfer taxes with respect to the exchange of Old Notes
pursuant to the exchange offer. We will pay all charges and expenses, other
than transfer taxes in certain circumstances, in connection with the exchange
offer. For additional information, please refer to the "--Fees and Expenses"
section of this prospectus.
Expiration Date; Extensions; Amendments
The expiration date is 5:00 p.m., New York City time, on , 1999,
unless we extend the exchange offer, in which case the expiration date will be
the latest date and time to which the exchange offer is extended.
In order to extend the exchange offer, we will notify the exchange agent of
any extension by oral or written notice, such notice if given orally, to be
confirmed in writing, and will issue a press release or other public
announcement thereof, each prior to 9:00 a.m., New York City time, on the next
business day after the previously scheduled expiration date.
92
<PAGE>
We reserve the right:
. to delay accepting any Old Notes, to extend the exchange offer or to
terminate the exchange offer if any of the conditions set forth below
under "conditions" shall not have been satisfied, by giving oral or
written notice, such notice if given orally, to be confirmed in writing,
of such delay, extension or termination to the exchange agent, or
. to amend the terms of the exchange offer in any manner.
Any such delay in acceptance, extension, termination or amendment will be
followed as promptly as practicable by oral or written notice thereof to the
registered holders.
Yield and Interest on the New Notes
Before December 1, 2003, there will be no current payments of cash interest
on the New Notes. The New Notes and the Old Notes not exchanged for New Notes
will accrete in value at a rate of 11 7/8% per annum, compounded semi-annually,
to an aggregate principal amount of $196,000,000 on December 1, 2003. Holders
of Old Notes that are accepted for exchange will receive New Notes with a
principal amount equal to the accreted value of the Old Notes on the date of
issuance of the New Notes. Old Notes accepted for exchange will cease to
accrete in value upon issuance of the New Notes.
On December 1, 2003, the Issuers will be required to redeem an amount equal
to $369.70 per $1,000 principal amount at maturity of each New Note and each
Old Note not exchanged for a New Note then outstanding, on a pro rata basis at
a redemption price of 100% of the principal amount at maturity of the notes so
redeemed. Thereafter, cash interest will be payable semi-annually in arrears on
June 1 and December 1 of each year, commencing June 1, 2004.
Procedures for Tendering
Only a registered holder of Old Notes may tender such notes in the exchange
offer. To tender in the exchange offer, a holder must complete, sign and date
the Letter of Transmittal, or a facsimile thereof, have the signatures thereon
guaranteed if required by the Letter of Transmittal and mail or otherwise
deliver such Letter of Transmittal or such facsimile, together with the Old
Notes and any other required documents, or cause The Depository Trust Company
to transmit an agent's message as described below in connection with a book-
entry transfer, to the exchange agent prior to the expiration date. To be
tendered effectively, the Old Notes, the Letter of Transmittal or agent's
message and other required documents must be completed and received by the
exchange agent at the address set forth below under "--Exchange Agent" prior to
the expiration date. Delivery of the Old Notes may be made by book entry
transfer in accordance with the procedures described below. Confirmation of
such book-entry transfer must be received by the exchange agent prior to the
expiration date.
The term "agent's message" means a message, transmitted by a book-entry
transfer facility to, and received by, the exchange agent forming a part of a
confirmation of a book-entry, which states that such book-entry transfer
facility has received an express acknowledgment from the participant in such
book-entry transfer facility tendering the Old Notes that such participant has
received and agrees:
. to participate in the Automated Tender Option Program ("ATOP");
. 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.
93
<PAGE>
The method of delivery of Old Notes and the Letter of Transmittal or agent's
message and all other required documents to the exchange agent is at the
election and sole risk of the holder. As an alternative to delivery by mail,
holders may wish to consider overnight or hand delivery service. In all cases,
sufficient time should be allowed to assure delivery to the exchange agent
before the expiration date. No Letter of Transmittal or Old Notes should be
sent to any of the Issuers or any of their affiliates. Holders may request
their respective brokers, dealers, commercial banks, trust companies or
nominees to effect the above transactions for such holders.
Any beneficial owner whose Old Notes are registered in the name of a broker,
dealer, commercial bank, trust company or other nominee and who wishes to
tender should contact the registered holder promptly and instruct such
registered holder to tender on such beneficial owner's behalf. For additional
information, please refer to the "Instructions to Registered Holder and/or
Book-Entry Transfer Facility Participant from Beneficial Owner" included with
the Letter of Transmittal.
Signatures on a Letter of Transmittal or a notice of withdrawal, as the case
may be, must be guaranteed by an eligible institution (as defined below) unless
the Old Notes tendered pursuant thereto are tendered by a registered holder who
has not completed the box entitled "Special Registration Instructions" or
"Special Delivery Instructions" on the Letter of Transmittal, or for the
account of an eligible institution. In the event that signatures on a Letter of
Transmittal or a notice of withdrawal, as the case may be, are required to be
guaranteed, such guarantee must be by a member firm of the Medallion System (an
"eligible institution").
If the Letter of Transmittal is signed by a person other than the registered
holder of any Old Notes listed therein, such notes must be endorsed or
accompanied by a properly completed bond power, signed by such registered
holder as such registered holder's name appears on such notes with the
signature thereon guaranteed by an eligible institution.
If the Letter of Transmittal or any Old Notes or bond powers are signed by
trustees, executors, administrators, guardians, attorneys-in-fact, officers of
corporations or others acting in a fiduciary or representative capacity, such
persons should so indicate when signing, and evidence to our satisfaction of
their authority to so act must be submitted with the Letter of Transmittal.
We understand that the exchange agent will make a request promptly after the
date of this prospectus to establish accounts with respect to the Old Notes at
the book-entry transfer facility, The Depository Trust Company (the "book-entry
transfer facility"), for the purpose of facilitating the exchange offer, and
subject to the establishment thereof, any financial institution that is a
participant in the book-entry transfer facility's system may make book-entry
delivery of Old Notes by causing such book-entry transfer facility to transfer
such Old Notes into the exchange agent's account with respect to the Old Notes
in accordance with the book-entry transfer facility's procedures for such
transfer. Although delivery of the Old Notes may be effected through book-entry
transfer into the exchange agent's account at the book-entry transfer facility,
unless an agent's message is transmitted to and received by the exchange agent
in compliance with ATOP 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
94
<PAGE>
final and binding on all parties. Unless waived, any defects or irregularities
in connection with tenders of Old Notes must be cured within such time as the
Issuers shall determine. Although the Issuers intend to notify holders of
defects or irregularities with respect to tenders of Old Notes, neither the
Issuers, the exchange agent nor any other person shall incur any liability for
failure to give such notification. Tender of Old Notes will not be deemed to
have been made until such defects or irregularities have been cured or waived.
Any Old Notes received by the exchange agent that are not properly tendered and
as to which the defects or irregularities have not been cured or waived will be
returned by the exchange agent to the tendering holders, unless otherwise
provided in the Letter of Transmittal, as soon as practicable following the
expiration date.
Guaranteed Delivery Procedures
Holders who wish to tender their Old Notes and whose Old Notes are not
immediately available, who cannot deliver their Old Notes, the Letter of
Transmittal or any other required documents to the exchange agent, or who
cannot complete the procedures for book-entry transfer, prior to the expiration
date, may effect a tender if:
(a) the tender is made through an eligible institution;
(b) prior to the expiration date, the exchange agent receives by
facsimile transmission, mail or hand delivery from such eligible
institution a properly completed and duly executed Notice of Guaranteed
Delivery, setting forth the name and address of the holder, the certificate
number(s) of such Old Notes and the principal amount of Old Notes tendered,
stating that the tender is being made thereby and guaranteeing that, within
three New York Stock Exchange trading days after the expiration date, the
Letter of Transmittal, or facsimile thereof, or, in the case of a book-
entry transfer, an agent's message, together with the certificate(s)
representing the Old Notes, or a confirmation of book-entry transfer of
such notes into the exchange agent's account at the Book-Entry Transfer
Facility, and any other documents required by the Letter of Transmittal
will be deposited by the eligible institution with the exchange agent; and
(c) the certificate(s) representing all tendered Old Notes in proper
form for transfer, or a confirmation of a book-entry transfer of such Old
Notes into the exchange agent's account at the book entry transfer
facility, together with a Letter of Transmittal, of facsimile thereof,
properly completed and duly executed, with any required signature
guarantees, or, in the case of a book-entry transfer, an agent's message,
are received by the exchange agent within three New York Stock Exchange
trading days after the expiration date of the exchange offer.
Withdrawal of Tenders
Except as otherwise provided herein, tenders of Old Notes may be withdrawn
at any time prior to 5:00 p.m., New York City time, on the expiration date of
the exchange offer.
To withdraw a tender of Old Notes in the exchange offer, a telegram, telex,
letter or facsimile transmission notice of withdrawal must be received by the
exchange agent at its address set forth herein prior to 5:00 p.m., New York
City time, on the expiration date of the exchange offer. Any such notice of
withdrawal must:
. specify the name of the person having deposited notes to be withdrawn
(the "Depositor");
. 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 Depositor.
95
<PAGE>
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.
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
[ ] 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 By Hand:
or Overnight Courier: [ ]
[ ]
By Facsimile:
(For Eligible Institutions Only)
( ) -
Confirm by Telephone:
( ) -
[ ]
Delivery to an address other than set forth above will not constitute a
valid delivery.
96
<PAGE>
Fees and Expenses
The expenses of soliciting tenders will be borne by the Issuers. The
principal solicitation is being made by mail however, additional solicitation
may be made by telegraph, telecopy, telephone or in person by officers and
regular employees of the Issuers and their affiliates.
The Issuers have not retained any dealer-manager in connection with the
exchange offer and will not make any payments to brokers, dealers, or others
soliciting acceptances of the exchange offer. The Issuers, however, will pay
the exchange agent reasonable and customary fees for its services and will
reimburse it for its reasonable out-of-pocket expenses in connection therewith.
The Issuers will pay the cash expenses to be incurred in connection with the
exchange offer. Such expenses include fees and expenses of the exchange agent
and trustee, accounting and legal fees and printing costs, among others.
Accounting Treatment
The New Notes will be recorded at the same carrying value as the Old Notes,
which is face value, as reflected in the Issuers' accounting records on the
date of exchange. Accordingly, the Issuers will recognize no gain or loss for
accounting purposes. The expenses of the exchange offer will be expensed over
the term of the New Notes.
Consequences of Failure to Exchange
The Old Notes that are not exchanged for New Notes pursuant to the exchange
offer will remain restricted securities. Accordingly, such Old Notes may be
resold only:
. to the Issuers, upon redemption thereof or otherwise;
. so long as the Old Notes are eligible for resale pursuant to Rule 144A
under the Securities Act, to a person inside the United States whom the
seller reasonably believes is a qualified institutional buyer within the
meaning of Rule 144A in a transaction meeting the requirements of Rule
144A;
. in accordance with Rule 144 under the Securities Act;
. outside the United States to a foreign person in a transaction meeting
the requirements of Rule 904 under the Securities Act;
. pursuant to another exemption from the registration requirements of the
Securities Act, and based upon an opinion of counsel reasonably
acceptable to the Issuers; or
. pursuant to an effective registration statement under the Securities Act,
in each case in accordance with any applicable securities laws of any
state of the United States.
Resale of the New Notes
With respect to resales of New Notes, based on interpretations by the staff
of the SEC set forth in no-action letters issued to third parties, we believe
that a holder or other person who receives New Notes, whether or not such
person is the holder, other than a person that is an "affiliate" of the Issuers
within the meaning of Rule 405 under the Securities Act, in exchange for Old
Notes in the ordinary course of business and who is not participating, does not
intend to participate, and has no arrangement or understanding with any person
to participate, in the distribution of the New Notes, will be allowed to resell
the New Notes to the public without further registration under the Securities
Act and without delivering to the purchasers of the New Notes a prospectus that
satisfies the requirements of Section 10 of the Securities Act. However, if any
holder acquires New Notes in the exchange offer for the purpose of distributing
or participating in a distribution of the New Notes, such holder cannot rely on
the position of the staff of the SEC enunciated in such no-action letters or
any similar interpretive letters, and must comply with the registration and
prospectus delivery requirements of
97
<PAGE>
the Securities Act in connection with any resale transaction, unless an
exemption from registration is otherwise available. Further, each Participating
Broker-Dealer that receives New Notes for its own account in exchange for Old
Notes, where such Old Notes were acquired by such Participating Broker-Dealer
as a result of market-making activities or other trading activities, must
acknowledge that it will deliver a prospectus in connection with any resale of
such New Notes.
As contemplated by these no-action letters and the Registration Rights
Agreement, each holder accepting the exchange offer is required to represent to
the Issuers in the Letter of Transmittal that:
. the New Notes are to be acquired by the holder or the person receiving
such New Notes, whether or not such person is the holder, in the ordinary
course of business;
. the holder or any such other person, other than a broker-dealer referred
to in the next sentence, is not engaging and does not intend to engage,
in the distribution of the New Notes;
. the holder or any such other person has no arrangement or understanding
with any person to participate in the distribution of the New Notes;
. neither the holder nor any such other person is an "affiliate" of the
company within the meaning of Rule 405 under the Securities Act; and
. the holder or any such other person acknowledges that if such holder or
other person participates in the exchange offer for the purpose of
distributing the New Notes it must comply with the registration and
prospectus delivery requirements of the Securities Act in connection with
any resale of the New Notes and cannot rely on those no-action letters.
As indicated above, each Participating Broker-Dealer that receives New Notes
for its own account in exchange for Old Notes must acknowledge that it will
deliver a prospectus in connection with any resale of such New Notes. For a
description of the procedures for such resales by Participating Broker-Dealers,
see "Plan of Distribution."
98
<PAGE>
DESCRIPTION OF THE NOTES
General
The Old Notes were originally issued pursuant to an Indenture (the
"Indenture") by and among Avalon Cable of Michigan Holdings, Inc. ("Michigan
Holdings"), Avalon Cable LLC ("Avalon Holdings") and Avalon Cable Holdings
Finance, Inc. ("Finance Holdings"), as joint and several obligors, and The Bank
of New York, as trustee (the "Trustee"), in a private transaction that is not
subject to the registration requirements of the Securities Act. See "Notice to
Investors." In the Reorganization, Michigan Holdings ceased to be an obligor
under the Old Notes, and became a guarantor, together with Avalon Cable of
Michigan, Inc. ("Avalon Michigan") of Avalon Holdings' obligations under the
New Notes and the Indenture. Michigan Holdings and Avalon Michigan do not have
significant assets or liabilities, other than their equity interests in Avalon
Michigan and Avalon Holdings, respectively. See "The Company--Corporate
Structure." Thus, currently, the "Issuers" under the Indenture are Avalon
Holdings and Finance Holdings. The form and terms of the New Notes are the same
as the form and terms of the Old Notes, which they replace, except that the
holders of the New Notes will not be entitled to certain rights under the
Registration Rights Agreement, including the provisions providing for
liquidated damages on the Old Notes in certain circumstances relating to the
timing of the exchange offer, which rights will terminate when the exchange
offer is consummated.
The terms of the New Notes and the Old Notes (collectively, 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 "Trust Indenture Act"). The
New Notes are subject to all such terms, and Holders of New Notes are referred
to the Indenture and the Trust Indenture Act for a statement thereof. The
following summary of the material provisions of the Indenture does not purport
to be complete and is qualified in its entirety by reference to the Indenture,
including the definitions therein of certain terms used below. Copies of the
Indenture and Registration Rights Agreement are available as set forth below
under "Available Information." The definitions of certain terms used in the
following summary are set forth below under "Certain Definitions." For purposes
of this summary, references to the "Issuers" do not include their respective
Subsidiaries.
The New Notes, like the Old Notes, will be general unsecured obligations of
the Issuers and will rank pari passu in right of payment with all current and
future senior Indebtedness of the Issuers. However, the operations of the
Issuers are conducted through their Subsidiaries and, therefore, the Issuers
are dependent upon the cash flow of their Subsidiaries to meet their
obligations, including their obligations under the New Notes. The Issuers'
Subsidiaries will not be guarantors of the New Notes. As a result, the New
Notes will be effectively subordinated to all Indebtedness and other
liabilities and commitments (including trade payables and lease obligations) of
the Issuers' Subsidiaries. Any right of the Issuers to receive assets of any of
their Subsidiaries upon the latter's liquidation or reorganization (and the
consequent right of the Holders of the New Notes to participate in those
assets) will be effectively subordinated to the claims of that Subsidiary's
creditors, except to the extent that the Issuers are themselves recognized as
creditors of such Subsidiary, in which case the claims of the Issuers would
still be subordinate to any security in the assets of such Subsidiary and any
Indebtedness of such Subsidiary senior to that held by the Issuers. As of
December 31, 1998, on a pro forma basis after giving effect to all completed
and pending acquisitions and the Reorganization: (a) the Issuers would have on
a combined basis no Indebtedness other than Indebtedness represented by the Old
Notes and Indebtedness of their subsidiaries (some of which is guaranteed by
the Issuers) and (b) the Issuers' Subsidiaries would have had on a combined
basis approximately $330.2 million of Indebtedness, including borrowings under
the credit facility, and $17.0 million of trade payables and other liabilities
outstanding and approximately $30.0 million of undrawn availability under the
credit facility. The Indenture permits the Issuers and their Restricted
Subsidiaries to incur additional Indebtedness, including secured Indebtedness,
subject to certain limitations.
All of the Issuers' Subsidiaries are currently Restricted Subsidiaries.
Under certain circumstances, the Issuers will be able to designate current or
future Subsidiaries as Unrestricted Subsidiaries. Unrestricted Subsidiaries
will not be subject to any of the restrictive covenants set forth in the
Indenture.
99
<PAGE>
Principal, Maturity and Interest
The Notes are limited in aggregate principal amount at issuance to $160.4
million, of which $110.4 million were issued in the initial offering, and will
mature on December 1, 2008. The Old Notes were issued at a substantial discount
from their principal amount at maturity of $196.0 million, to generate gross
proceeds of approximately $110.4 million. Until December 1, 2003, interest will
not be paid currently on the Notes, but the Accreted Value will increase
(representing amortization of original issue discount) between the date of
original issuance and December 1, 2003, on a semi-annual basis using a 360-day
year comprised of twelve 30-day months, such that the Accreted Value shall be
equal to the full principal amount at maturity of the Notes on December 1, 2003
(the "Full Accretion Date"). Beginning on the Full Accretion Date, interest on
the Notes will accrue at the rate of 11.875% per annum and will be payable
semi-annually in arrears on June 1 and December 1 of each year, to Holders of
record on the immediately preceding May 15 and November 15. Additional Notes
may be issued from time to time, subject to the provisions of the Indenture
described below under the caption "--Certain Covenants--Incurrence of
Indebtedness and Issuance of Preferred Stock." The Old Notes, the Notes offered
hereby and any additional Notes subsequently issued under the Indenture would
be treated as a single class for all purposes under the Indenture, including,
without limitation, waivers, amendments, redemptions and offers to purchase.
Interest on the Notes will accrue from the most recent date to which interest
has been paid or, if no interest has been paid, from the Full Accretion Date.
Interest will be computed on the basis of a 360-day year comprised of twelve
30-day months. Principal, premium, if any, and interest and Liquidated Damages
thereon, if any, on the Notes will be payable at the office or agency of the
Issuers maintained for such purpose within the City and State of New York or,
at the option of the Issuers, payment of interest may be made by check mailed
to the Holders of the Notes at their respective addresses set forth in the
register of Holders of Notes; provided that all payments of principal, premium,
if any, interest and Liquidated Damages, if any, with respect to Notes for
which Holders have given wire transfer instructions to the Issuers at least 10
business days prior to the applicable interest payment date will be required to
be made by wire transfer of immediately available funds to the accounts
specified by the Holders thereof. Until otherwise designated by the Issuers,
the Issuers' office or agency in New York will be the office of the Trustee
maintained for such purpose. The Notes will be issued in denominations of
$1,000 and integral multiples thereof.
Parent Guarantees
The payment obligations of Avalon Holdings under the Notes is jointly and
severally guaranteed (the "Parent Guarantees") by the Parent Guarantors. The
Parent Guarantees were issued in connection with the Reorganization to avoid
certain adverse tax consequences in respect of the Reorganization. Neither
Parent Guarantor has any significant business operations or assets, other than,
with respect to Avalon Michigan, its equity interest in Avalon Holdings, and,
with respect to Michigan Holdings, its equity interest in Avalon Michigan, and
neither Parent Guarantor has any revenues. As a result, prospective purchasers
of the Notes should not expect the Parent Guarantors to participate in
servicing the interest, principal obligations and Liquidated Damages, if any,
on the Notes. The obligations of each Parent Guarantor under its Parent
Guarantee will be limited so as not to constitute a fraudulent conveyance under
applicable law. See the "Risk Factors" section of this prospectus.
Maximum Amount of Obligations
The obligations of each Issuer and each Parent Guarantor (under the Parent
Guarantee) are limited to the maximum amount as will, after giving effect to
all other contingent and fixed liabilities of such Issuer or such Parent
Guarantor, as the case may be (including, without limitation, any obligations
under any senior
Indebtedness) and after giving effect to any collections from or payments made
by or on behalf of any other Issuer or Parent Guarantor, as the case may be, in
respect of the obligations of such other Issuer or other Parent
100
<PAGE>
Guarantor, as the case may be, under its obligations under the Indenture,
result in the obligations of such Issuer or such Parent Guarantor, as the case
may be, under its obligations under the Indenture not constituting a fraudulent
conveyance or fraudulent transfer under federal or state law. See the "Risk
Factors" section of this prospectus.
Mandatory Payment of Accrued Interest
Prior to December 1, 2003, interest on the Notes will accrete at an annual
rate of 11 7/8% per annum, compounded semi-annually, but will not be paid until
December 1, 2003. On December 1, 2003, the Issuers will be required to redeem
an amount equal to $369.79 per $1,000 principal amount at maturity of each Note
then outstanding (the "Accreted Interest Redemption Amount") ($72,479,000 in
aggregate principal amount at maturity of the Notes, assuming all of the Old
Notes are exchanged in this exchange offer and all New Notes remain outstanding
on such date) on a pro rata basis at a redemption price of 100% of the
principal amount at maturity of the Notes so redeemed. The Accreted Interest
Redemption Amount represents (i) the excess of the aggregate accreted principal
amount of all Notes outstanding on December 1, 2003 over the aggregate issue
price thereof less (ii) an amount equal to one year's simple uncompounded
interest on the aggregate issue price of such Notes at a rate per annum equal
to the stated interest rate on the Notes.
Optional Redemption
Except as described below, the Notes are not redeemable at the Issuers'
option prior to December 1, 2003. Thereafter, the Notes are subject to
redemption at any time at the option of the Issuers, in whole or in part, upon
not less than 30 nor more than 60 days notice, at the redemption prices
(expressed as percentages of principal amount) set forth below plus accrued and
unpaid interest, if any, and Liquidated Damages, if any, thereon to the
applicable redemption date, if redeemed during the twelve-month period
beginning on December 1 of the years indicated below:
<TABLE>
<CAPTION>
Year Percentage
---- ----------
<S> <C>
2003.......................... 105.938%
2004.......................... 103.958%
2005.......................... 101.979%
2006 and thereafter........... 100.000%
</TABLE>
Notwithstanding the foregoing, at any time prior to December 1, 2001, the
Issuers may on any one or more occasions redeem up to 35% of the aggregate
principal amount at maturity of Notes originally issued under the Indenture at
a redemption price equal to 111.875% of the Accreted Value at the date of
redemption, plus Liquidated Damages, if any, to the redemption date, with the
Net Cash Proceeds of any Equity Offering and/or the Net Cash Proceeds of a
Strategic Equity Investment; provided that at least 65% of the aggregate
principal amount at maturity of Notes originally issued remain outstanding
immediately after each occurrence of such redemption; and provided, further,
that each such redemption shall occur within 45 days of the date of the closing
of such Equity Offering and/or Strategic Equity Investment.
As used in the preceding paragraph, "Equity Offering" means any public or
private sale of Capital Stock of any of the Issuers or Avalon or any Subsidiary
of Avalon pursuant to which the Issuers together receive net proceeds of at
least $25.0 million, other than issuances of Capital Stock pursuant to employee
benefit plans or as compensation to employees; provided that to the extent such
Capital Stock is issued by Avalon or any Subsidiary of Avalon, the Net Cash
Proceeds thereof shall have been contributed to one or more of the Issuers in
the form of an equity contribution.
Selection and Notice
If less than all of the Notes are to be redeemed at any time, selection of
Notes for redemption will be made by the Trustee in compliance with the
requirements of the principal national securities exchange, if any,
101
<PAGE>
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 (or, in the case of
repurchases of Notes prior to the Full Accretion Date, at a purchase price
equal to 101% of the Accreted Value thereof as of the date of purchase)
(collectively, the "Change of Control Payment"). Within 20 days following any
Change of Control, the Issuers will mail a notice to each Holder describing the
transaction or transactions that constitute the Change of Control and offer (a
"Change of Control Offer") to repurchase Notes on the date specified in such
notice, which date shall be no earlier than 30 days and no later than 60 days
from the date such notice is mailed (the "Change of Control Payment Date"),
pursuant to the procedures required by the Indenture and described in such
notice. The Issuers will comply with the requirements of Rule 14e-1 under the
Exchange Act and any other securities laws and regulations thereunder to the
extent such laws and regulations are applicable in connection with the
repurchase of the Notes as a result of a Change of Control.
On the Change of Control Payment Date, the Issuers will, to the extent
lawful, (1) accept for payment all Notes or portions thereof properly tendered
pursuant to the Change of Control Offer, (2) deposit with the Paying Agent an
amount equal to the Change of Control Payment in respect of all Notes or
portions thereof so tendered and (3) deliver or cause to be delivered to the
Trustee the Notes so accepted together with an Officers' Certificate stating
the aggregate principal amount at maturity of Notes or portions thereof being
purchased by the Issuers. The Paying Agent will promptly mail to each Holder of
Notes so tendered the Change of Control Payment for such Notes, and the Trustee
will promptly authenticate and mail (or cause to be transferred by book entry)
to each Holder a new Note equal in principal amount to any unpurchased portion
of the Notes surrendered, if any; provided that each such new Note will be in a
principal amount of $1,000 or an integral multiple thereof. The Indenture will
provide that, prior to complying with the provisions of this covenant, but in
any event within 90 days following a Change of Control, the Issuers will either
repay all outstanding senior Indebtedness or obtain the requisite consents, if
any, under all agreements governing outstanding senior Indebtedness to permit
the repurchase of Notes required by this covenant. The Issuers will publicly
announce the results of the Change of Control Offer on or as soon as
practicable after the Change of Control Payment Date.
The Credit Facility and the indenture governing the Senior Subordinated
Notes limit the ability of the Issuers to purchase any Notes and provides that
certain change of control events with respect to the Issuers, the Company
Issuers or Avalon would constitute a default thereunder. Any future credit
agreements or other
102
<PAGE>
agreements relating to Indebtedness to which the Issuers or the Company Issuers
become a party may contain similar restrictions and provisions. In the event a
Change of Control occurs at a time when the Issuers are prohibited from
purchasing Notes, the Issuers could seek the consent of its lenders or lenders
of the Company Issuers to the purchase of Notes or could attempt to refinance
the borrowings that contain such prohibition. If the Issuers or the Company
Issuers do not obtain such a consent or repay such borrowings, the Issuers will
remain prohibited from purchasing the Notes and the Senior Subordinated Notes.
In such case, the Issuers' failure to purchase tendered Notes would constitute
an Event of Default under the Indenture which would, in turn, constitute a
default under the Credit Facility.
The meaning of the phrase "all or substantially all" as used in the
Indenture in the definition of "Change of Control" with respect to a sale of
assets varies according to the facts and circumstances of the subject
transaction, has no clearly established meaning under relevant law and is
subject to judicial interpretation. Accordingly, in certain circumstances,
there may be a degree of uncertainty in ascertaining whether a particular
transaction would involve a disposition of "all or substantially all" of the
assets of the Issuers, and therefore it may be unclear whether a Change of
Control has occurred and whether the Notes are subject to a Change of Control
Offer.
Restrictions in the Indenture on the ability of the Issuers and their
Restricted Subsidiaries to incur additional Indebtedness, to grant Liens on
their property, to make Restricted Payments and to make Asset Sales may also
make more difficult or discourage a takeover of the Issuers, whether favored or
opposed by the management of the Issuers. Consummation of any such transaction
in certain circumstances may require redemption or repurchase of the Notes, and
there can be no assurance that the Issuers or the acquiring party will have
sufficient financial resources to effect such redemption or repurchase. Such
restrictions and the restrictions on transactions with Affiliates may, in
certain circumstances, make more difficult or discourage any leveraged buyout
of the Issuers or any of their Subsidiaries by the management of the Issuers or
other persons. While such restrictions cover a wide variety of arrangements
which have traditionally been used to effect highly leveraged transactions, the
Indenture may not afford the holders of the Notes protection in all
circumstances from the adverse aspects of a highly leveraged transaction,
reorganization, restructuring, merger or similar transaction.
The Issuers will not be required to make a Change of Control Offer upon a
Change of Control if a third party makes the Change of Control Offer in the
manner, at the times and otherwise in compliance with the requirements set
forth in the Indenture applicable to a Change of Control Offer made by the
Issuers and purchases all Notes validly tendered and not withdrawn under such
Change of Control Offer.
The Change of Control provisions described above will be applicable whether
or not any other provisions of the Indenture are applicable. Except as
described above with respect to a Change of Control, the Indenture does not
contain provisions that permit the Holders of the Notes to require that the
Issuers repurchase or redeem the Notes in the event of a takeover,
recapitalization or similar transaction.
Asset Sales
The Issuers will not, and will not permit any of their Restricted
Subsidiaries to, consummate an Asset Sale unless (i) such Issuer or such
Restricted Subsidiary receives consideration at the time of such Asset Sale at
least equal to the fair market value (evidenced by a resolution of its Board of
Directors, whose determination shall be conclusive, set forth in an Officers'
Certificate delivered to the Trustee) of the assets or Equity Interests issued
or sold or otherwise disposed of and (ii) at least 75% of the consideration
therefor received by such Issuer or such Restricted Subsidiary is in the form
of cash or Cash Equivalents; provided that the amount of (x) any liabilities
(as shown on such Issuer's or such Restricted Subsidiary's most recent balance
sheet), of such Issuer or any of its Restricted Subsidiaries (other than
contingent liabilities and liabilities that are by their terms
subordinated to the Notes) that are assumed by the transferee of any such
assets and (y) any securities, notes or
103
<PAGE>
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 connection with any Asset Sale permitted to be
consummated under this paragraph shall constitute Net Cash Proceeds subject to
the provisions of the next paragraph.
Within 360 days after the receipt of any Net Cash Proceeds from an Asset
Sale, the Issuer or such Restricted Subsidiary, as the case may be, may apply
such Net Cash Proceeds, at its option, (a) to repay Indebtedness of the Company
Issuers (and to correspondingly permanently reduce the commitments with respect
thereto under the Credit Facility) or (b) to the acquisition of a controlling
interest in a Permitted Business, the making of a capital expenditure or the
acquisition of assets used or useful in a Permitted Business. Pending the final
application of any such Net Cash Proceeds, the Issuers or such Restricted
Subsidiary, as the case may be, may temporarily reduce revolving credit
borrowings or otherwise invest such Net Cash Proceeds in any manner that is not
prohibited by the Indenture. Any Net Cash Proceeds from Asset Sales that are
not applied or invested as provided in the first sentence of this paragraph
within the applicable period shall be deemed to constitute "Excess Proceeds."
When the aggregate amount of Excess Proceeds exceeds $10.0 million, the Issuers
shall be required, to the extent permitted by the Senior Subordinated Note
Indenture, to make an offer to all Holders of Notes and all holders of other
pari passu Indebtedness of the Issuers containing provisions similar to those
set forth in the Indenture with respect to offers to purchase or redeem with
the proceeds of sales of assets (an "Asset Sale Offer") to purchase the maximum
principal amount of Notes and such other pari passu Indebtedness of the Issuers
that may be purchased out of the Excess Proceeds, at an offer price in cash in
an amount equal to 100% of the principal amount thereof plus accrued and unpaid
interest and Liquidated Damages thereon, if any, to the date of repurchase (or,
in the case of repurchases of Notes prior to the Full Accretion Date, at a
purchase price equal to 100% of the Accreted Value thereof as of the date of
repurchase), in accordance with the procedures set forth in the Indenture and
such other Indebtedness. To the extent that any Excess Proceeds remain after
consummation of an Asset Sale Offer, the Issuers may use such Excess Proceeds
for any purpose not otherwise prohibited by the Indenture (including as
provided in the next paragraph). If the aggregate principal amount at maturity
or Accreted Value (as applicable) of Notes and such other Indebtedness tendered
into such Asset Sale Offer exceeds the amount of Excess Proceeds, the Trustee
shall select the Notes and such other Indebtedness to be purchased on a pro
rata basis, by lot or by any other customary method; provided that no Notes of
$1,000 or less shall be redeemed in part. Upon completion of such offer to
purchase, the amount of Excess Proceeds shall be reset at zero.
If any of the Issuers is, or may be, required to make an Asset Sale Offer,
the Company Issuers may be required to make a similar offer to purchase the
Senior Subordinated Notes (and pari passu Indebtedness) from the holders
thereof. In such event, the Issuers and the Company Issuers may make
simultaneous similar offers to purchase the Notes (and any pari passu
Indebtedness containing similar provisions) and the Senior Subordinated Notes
(and pari passu Indebtedness), respectively. If such simultaneous offers are
made, the Excess Proceeds shall first be utilized to redeem any Senior
Subordinated Notes (and pari passu Indebtedness) tendered pursuant to such
offer by the Company Issuers. To the extent that any Excess Proceeds are
remaining after such offer by the Company Issuers, such remaining Excess
Proceeds shall be utilized to redeem a pro rata portion of the Notes and any
pari passu Indebtedness containing similar provisions.
104
<PAGE>
The Issuers will comply with the requirements of Rule 14e-1 under the
Exchange Act and any other securities laws and regulations thereunder to the
extent such laws and regulations are applicable in connection with the
repurchase of Notes pursuant to an Asset Sale Offer.
Certain Covenants
Restricted Payments
The Issuers will not, and will not permit any of their Restricted
Subsidiaries to, directly or indirectly: (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 Notes, except a payment
of interest or principal at Stated Maturity, or a payment of interest made
through the issuance of additional Indebtedness of the same kind as the
Indebtedness on which such interest shall have accrued or payment on
Indebtedness owed to another Issuer and except any payment in respect of the
ABRY Subordinated Debt; or (iv) make any Restricted Investment (all such
payments and other actions set forth in clauses (i) through (iv) above being
collectively referred to as "Restricted Payments"), unless, at the time of and
after giving effect to such Restricted Payment:
(a) no Default or Event of Default shall have occurred and be continuing
or would occur as a consequence thereof; and
(b) the Issuers would, at the time of such Restricted Payment and after
giving pro forma effect thereto as if such Restricted Payment had been made
at the beginning of the applicable quarter, have been permitted to incur at
least $1.00 of additional Indebtedness pursuant to the test set forth in
the 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 (ii), (iii), (iv), (vii), (viii), (ix), (x), (xi), (xii) and
(xiii) of the next succeeding paragraph), is less than the sum of (i)(A)
100% of the aggregate Consolidated Cash Flow of the Issuers (or, in the
event such Consolidated Cash Flow shall be a deficit, minus 100% of such
deficit) accrued for the period beginning on the first day of the Issuers'
first fiscal quarter commencing after the Issue Date and ending on the last
day of the Issuers' most recent calendar month for which financial
information is available to the Issuers ending prior to the date of such
proposed Restricted Payment, taken as one accounting period, less (B) 1.4
times Consolidated Interest Expense for the same period, plus (ii) 100% of
the aggregate Net Cash Proceeds received by the Issuers as a contribution
to the equity capital of the Issuers or from the issue or sale since the
Issue Date of Equity Interests of the Issuers (other than Disqualified
Stock), or of Disqualified Stock or debt securities (including the ABRY
Subordinated Debt) of the Issuers that have been converted into such Equity
Interests (other than Equity Interests (or Disqualified Stock or
convertible debt securities) sold to a Restricted Subsidiary of the Issuers
and other than Disqualified Stock or convertible debt securities that have
been converted into Disqualified Stock), plus (iii) to the extent that any
Restricted Investment that was made after the Issue Date is sold for cash
or otherwise liquidated or repaid for cash, the amount of such Net Cash
Proceeds plus (iv) to the extent that any Unrestricted Subsidiary is
redesignated as a Restricted Subsidiary after the Issue Date, the fair
market
105
<PAGE>
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 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 Notes with the
Net Cash Proceeds from an incurrence of Permitted Refinancing Indebtedness;
(iv) the payment of any dividend or distribution by a Restricted Subsidiary of
any of the Issuers to the holders of its common Equity Interests so long as the
applicable Issuer or such Restricted Subsidiary receives at least its pro rata
share of such dividend or distribution in accordance with its Equity Interests;
(v) the repurchase, redemption or other acquisition or retirement for value of
any Equity Interests of any of the Issuers or the payment of a dividend to any
Affiliates of the Issuers to effect the repurchase, redemption, acquisition or
retirement of an Affiliate's equity interest, that are held by any member of
any of the Issuers' (or any of their respective Restricted Subsidiaries)
management pursuant to any management equity subscription or purchase agreement
or stock option agreement or similar agreement; provided that the aggregate
price paid for all such repurchased, redeemed, acquired or retired Equity
Interests shall not exceed $2 million in any 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 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; (vii) any payments or
distributions or other transactions to be made in connection with the Merger,
the Mercom Acquisition or the Reorganization (including fees and expenses
incurred in connection therewith); (viii) payments to Affiliates of the Issuers
and holders of Equity Interests in the Issuers in amounts equal to the amounts
required to pay any Federal, state or local income taxes to the extent that (A)
such income taxes are attributable to the income of the Issuers and their
Restricted Subsidiaries (but limited, in the case of taxes based upon taxable
income, to the extent that cumulative taxable net income subsequent to the
Issue Date is positive) and (B) such taxes are related to Indebtedness between
or among any of the Issuers and any of their Restricted Subsidiaries or Avalon
or any of its Restricted Subsidiaries; (ix) Restricted Investments received in
connection with an Asset Sale that complies with the covenant described under
"--Asset Sales"); (x) payments on the ABRY Subordinated Debt (including all
accrued interest thereon) in accordance with the terms thereof; (xi) payments
or distributions to dissenting stockholders pursuant to transactions permitted
under the terms of the Indenture; (xii) the distribution by Avalon Holdings to
the holders of its Capital Stock of all the Equity Interests held by Avalon
Holdings in any of its Subsidiaries; provided that, substantially
simultaneously with such distribution, such Equity Interests, and/or option to
purchase all such Equity Interests, are sold to a third party for consideration
in an amount at least equal to the fair market value of such Equity Interests
and Avalon Holdings receives an amount equal to the Net Cash Proceeds of such
sale and any other consideration received in connection therewith; and (xiii)
other Restricted Payments in an aggregate amount not to exceed $5.0 million;
provided, however, that at the time of, and after giving effect to, any
Restricted Payment permitted under clauses (v), (vi), (x) and (xiii) above, no
Default or Event of Default shall have occurred and be continuing or would
occur as a consequence thereof.
The amount of all Restricted Payments (other than cash) shall be the fair
market value on the date of the Restricted Payment of the asset(s) or
securities proposed to be transferred or issued by the applicable Issuer or the
Restricted Subsidiary of such Issuer, pursuant to the Restricted Payment. The
fair market value of any
106
<PAGE>
non-cash Restricted Payment shall be determined by the Board of Directors of
such Issuer or Restricted Subsidiary, as the case may be, whose resolution with
respect thereto shall be delivered to the Trustee, such determination shall be
conclusive and shall be based upon an opinion or appraisal issued by an
appraisal, accounting or investment banking firm of national standing if such
fair market value exceeds $10.0 million. Not later than the date of making any
Restricted Payment, such Issuer or Restricted Subsidiary, as the case may be,
shall deliver to the Trustee an Officers' Certificate stating that such
Restricted Payment is permitted and setting forth the basis upon which the
calculations required by the covenant "--Restricted Payments" were computed,
together with a copy of any opinion or appraisal required by the Indenture.
Incurrence of Indebtedness and Issuance of Preferred Stock
The Issuers will not, and will not permit any of their Restricted
Subsidiaries to, directly or indirectly, create, incur, issue, assume,
guarantee or otherwise become directly or indirectly liable, contingently or
otherwise, with respect to (collectively, "incur") any Indebtedness (including
Acquired Debt) other than Permitted Debt and the Issuers will not issue any
Disqualified Stock and will not permit any of their Restricted Subsidiaries to
issue any shares of preferred stock (other than to an Issuer or another
Restricted Subsidiary); provided, however, that the Issuers may incur
Indebtedness (including Acquired Debt) or issue shares of Disqualified Stock
and any of the Issuers' Restricted Subsidiaries may incur Indebtedness or issue
shares of preferred stock if the Issuers' Leverage Ratio at the time of
incurrence of such Indebtedness or the issuance of such Disqualified Stock or
such preferred stock, as the case may be, after giving pro forma effect to such
incurrence or issuance and to the use of the proceeds therefrom would have been
no greater than (a) 7.0 to 1,
if such incurrence or issuance is on or prior to December 31, 2000, and (b) 6.5
to 1, if such incurrence or issuance is after December 31, 2000.
The Indenture will also provide that the Issuers will not incur any
Indebtedness that is contractually subordinated in right of payment to any
other Indebtedness of the Issuers unless such Indebtedness is also
contractually subordinated in right of payment to the Notes on substantially
identical terms; provided, however, that no Indebtedness of the Issuers shall
be deemed to be contractually subordinated in right of payment to any other
Indebtedness of the Issuers solely by virtue of being unsecured.
The provisions of the first paragraph of this covenant shall not apply to
the incurrence of any of the following items of Indebtedness (collectively,
"Permitted Debt"):
(i) the incurrence by the Issuers or their Restricted Subsidiaries of
Indebtedness under the Credit Facility letters of credit (with letters of
credit being deemed to have a principal amount equal to the maximum
potential liability of the Issuers and their Restricted Subsidiaries
thereunder) and related Guarantees under the Credit Facility; provided that
the aggregate principal amount of all Indebtedness of the Issuers and their
Restricted Subsidiaries outstanding under the Credit Facility after giving
effect to such incurrence, including all Permitted Refinancing Indebtedness
incurred to refund, refinance or replace any other Indebtedness incurred
pursuant to this clause (i) does not exceed an amount equal to $345,888,000
less the aggregate amount applied by the Issuers and their Restricted
Subsidiaries to permanently reduce the availability of Indebtedness under
the Credit Facility pursuant to the provisions described under the caption
"--Certain Covenants--Asset Sales";
(ii) the incurrence by the Issuers of the ABRY Subordinated Debt;
(iii) the incurrence by the Issuers and their Restricted Subsidiaries of
Existing Indebtedness;
(iv) the incurrence by the Issuers of the Existing Michigan Indebtedness
and the Mercom Intercompany Loan;
(v) the incurrence by the Issuers of Indebtedness represented by the
Notes and the incurrence by the Company Issuers of Indebtedness represented
by the Senior Subordinated Notes in an aggregate principal amount of $150
million outstanding on the date of the Indenture;
107
<PAGE>
(vi) the incurrence by the Issuers or any of their Restricted
Subsidiaries of Indebtedness represented by Capital Lease Obligations,
mortgage financings or purchase money obligations, in each case incurred
for the purpose of financing all or any part of the purchase price or cost
of construction or improvement of property, plant or equipment used in the
business of the Issuers or such Restricted Subsidiary, in an aggregate
principal amount, including all Indebtedness incurred to refund, refinance
or replace Indebtedness incurred pursuant to this clause (vi), not to
exceed $10.0 million at any time outstanding;
(vii) the incurrence by the Issuers or any of their Restricted
Subsidiaries of Permitted Refinancing Indebtedness;
(viii) the incurrence by the Issuers or any of their Restricted
Subsidiaries of intercompany Indebtedness between or among any of the
Issuers and any of their Restricted Subsidiaries; provided, however, that
(i) if one of the Issuers is the obligor on such Indebtedness, such
Indebtedness is expressly subordinated to the prior payment in full in cash
of all Obligations with respect to the Notes and the Indenture, and (ii)(A)
any subsequent event or issuance or transfer of Equity Interests that
results in any such Indebtedness being held by a Person other than one of
the Issuers or a Restricted Subsidiary thereof and (B) any sale or other
transfer of any such Indebtedness to a Person that is not any one of the
Issuers or a Restricted Subsidiary thereof shall be deemed, in each case,
to constitute an incurrence of such Indebtedness by such Issuer or such
Restricted Subsidiary, as the case may be, that was not permitted by this
clause (viii);
(ix) the incurrence by the Issuers or any of their Restricted
Subsidiaries of Hedging Obligations that are incurred in the ordinary
course of business for the purpose of fixing or hedging currency, commodity
or interest rate risk (including with respect to any floating rate
Indebtedness that is permitted by the terms of the Indenture to be
outstanding) in connection with the conduct of their respective businesses
and not for speculative purposes;
(x) the guarantee by the Issuers of Indebtedness of any of their
Restricted Subsidiaries so long as the incurrence of such Indebtedness by
such Restricted Subsidiary is permitted to be incurred by another provision
of this covenant "--Incurrence of Indebtedness and Issuance of Preferred
Stock";
(xi) the guarantee by any Restricted Subsidiary of Indebtedness of any
of the Issuers so long as such guarantee by such Restricted Subsidiary
complies with the provisions under the covenant "--Guarantees by Restricted
Subsidiaries";
(xii) Indebtedness consisting of customary indemnification, adjustments
of purchase price or similar obligations, in each case, incurred or assumed
in connection with the acquisition of any business or assets; and
(xiii) the incurrence by the Issuers or any of their Restricted
Subsidiaries of additional Indebtedness in an aggregate principal amount
(or accreted value, as applicable) at any time outstanding, including all
Permitted Refinancing Indebtedness incurred to refund, refinance or replace
any other Indebtedness incurred pursuant to this clause (xiii), not to
exceed $15.0 million.
For purposes of determining compliance with this covenant, in the event that
an item of proposed Indebtedness meets the criteria of more than one of the
categories of Permitted Debt described in clauses (i) through (xiii) above as
of the date of incurrence thereof or is entitled to be incurred pursuant to the
first paragraph of this covenant as of the date of incurrence thereof, the
Issuers shall, in their sole discretion, classify or reclassify such item of
Indebtedness in any manner that complies with this covenant. Accrual of
interest, the accretion of accreted value and the payment of interest in the
form of additional Indebtedness will not be deemed to be an incurrence of
Indebtedness for purposes of this covenant and the payment of dividends on
Disqualified Stock in the form of additional shares of the same class of
Disqualified Stock will not be deemed an issuance of Disqualified Stock.
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
108
<PAGE>
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 (i)(x) pay dividends or make any other distributions
to the Issuers or any of their Restricted Subsidiaries (1) on its Capital Stock
or (2) with respect to any other interest or participation in, or measured by,
its profits, or (y) pay any Indebtedness owed to the Issuers or any of their
Restricted Subsidiaries, (ii) make loans or advances to the Issuers or any of
their Restricted Subsidiaries or (iii) transfer any of its properties or assets
to the Issuers or any of their Restricted Subsidiaries, except for such
encumbrances or restrictions existing under or by reason of (a) Existing
Indebtedness as in effect on the Issue Date, (b) the Credit Facility as in
effect on the date of the Indenture and any amendments, modifications,
restatements, renewals, increases, supplements, refundings, replacements or
refinancings thereof; provided that such amendments, modifications,
restatements, renewals, increases, supplements, refundings, replacements or
refinancings are no more restrictive with respect to such dividends and other
payments restrictions than those contained in the Credit Facility as in effect
on the date of the Indenture; (c) the terms of any Indebtedness permitted by
the Indenture to be incurred by any Restricted Subsidiary of any of the
Issuers, (d) the Indenture and the Notes, (e) the Indenture under which the
Senior Subordinated Notes will be issued and the Senior Subordinated Notes, (f)
any instrument governing Indebtedness or Capital Stock of a Person acquired by
the Issuers or any of their Restricted Subsidiaries as in effect at the time of
such acquisition (except to the extent such Indebtedness was incurred in
connection with or in contemplation of such acquisition), which encumbrance or
restriction is not applicable to any Person, or the properties or assets of any
Person, other than the Person, or the property or assets of the Person, so
acquired, provided that, in the case of Indebtedness, such Indebtedness was
permitted by the terms of the Indenture to be incurred, (g) by reason of
customary non-assignment provisions in leases entered into in the ordinary
course of business, (h) purchase money obligations (including Capital Lease
Obligations) for property acquired in the ordinary course of business that
impose restrictions of the nature described in clause (iii) above on the
property so acquired, (i) Permitted Refinancing Indebtedness, provided that the
restrictions contained in the agreements governing such Permitted Refinancing
Indebtedness are no more restrictive, taken as a whole, than those contained in
the agreements governing the Indebtedness being refinanced, (j) contracts for
the sale of assets, including, without limitation, customary restrictions with
respect to a Subsidiary pursuant to an agreement that has been entered into for
the sale or disposition of all or substantially all of the Capital Stock or
assets of such Subsidiary or (k) applicable law or any applicable rule,
regulation or order.
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 Guarantee of payment of
the 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 payment by such Restricted Subsidiary under its Guarantee until the
Notes have been paid in full.
Merger, Consolidation, or Sale of Assets
The Issuer or Issuers holding all or substantially all of the assets of the
Issuers on a combined basis will not, directly or indirectly, consolidate or
merge with or into (whether or not such Issuer is the surviving
109
<PAGE>
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 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 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 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, (a) any or all of the Issuers may merge or
consolidate with or transfer substantially all of its assets to an Affiliate
that has no significant assets or liabilities and was formed solely for the
purpose of changing the jurisdiction of organization of such Issuer or the form
of organization of such Issuer, provided that the amount of Indebtedness of
such Issuer and its Restricted Subsidiaries is not increased thereby and
provided, further, that the successor assumes all obligations of such Issuer
under the Indenture and the Registration Rights Agreement and (b) nothing in
this section shall be deemed to prevent the consummation of the Reorganization.
Upon any consolidation or merger, or any sale, assignment, transfer, lease,
conveyance or other disposition of all or substantially all of the properties
or assets of the Issuers in accordance with this covenant, the successor
corporation formed by such consolidation or into or with which an Issuer or
Issuers are merged or to which such sale, assignment, transfer, lease,
conveyance or other disposition is made shall succeed to, and be substituted
for and may exercise every right and power of such Issuer or Issuers under the
Indenture with the same effect as if such successor Person had been named as
such Issuer or Issuers therein (so that from and after the date of such
consolidation, merger, sale, lease, conveyance or other disposition, the
provisions of the Indenture referring to the "Issuers" shall refer instead to
the successor corporation and not to such Issuer or Issuers), and may exercise
every right and power of such Issuer or Issuers under the Indenture with the
same effect as if such successor Person had been named as such Issuer or
Issuers therein; provided, however, that the predecessor Issuer shall not be
relieved from the obligation to pay the principal of and interest on the Notes
except in the case of a sale, assignment, transfer, conveyance or other
disposition of all or substantially all of the properties or assets of the
Issuers on a combined basis that meets the requirements of this covenant.
Transactions with Affiliates
The Issuers will not, and will not permit any of their Restricted
Subsidiaries to, make any payment to, or sell, lease, transfer or otherwise
dispose of any properties or assets to, or purchase any property or assets
from, or enter into or make or amend any transaction, contract, agreement,
understanding, loan, advance or Guarantee with, or for the benefit of, any
Affiliate of any such Person (each of the foregoing, an "Affiliate
Transaction"), unless (i) such Affiliate Transaction is on terms that are no
less favorable to such Issuer or the relevant Restricted Subsidiary than those
that would have been obtained in a comparable transaction by such Issuer or
110
<PAGE>
such Restricted Subsidiary with an unrelated Person and (ii) such Issuer
delivers to the Trustee (a) with respect to any Affiliate Transaction or series
of related Affiliate Transactions involving aggregate consideration in excess
of $2.5 million, a resolution of its Board of Directors set forth in an
Officers' Certificate certifying that such Affiliate Transaction complies with
clause (i) above and that such Affiliate Transaction has been approved
by a majority of the members of its Board of Directors and (b) with respect to
any Affiliate Transaction or series of related Affiliate Transactions involving
aggregate consideration in excess of $10.0 million, an opinion as to the
fairness to the Holders of such Affiliate Transaction from a financial point of
view issued by an investment banking, appraisal or accounting firm of national
standing; provided that none of the following shall be deemed to be Affiliate
Transactions: (1) any employment agreement entered into by any of the Issuers
or any of their Restricted Subsidiaries or Avalon in the ordinary course of
business, (2) transactions between or among any of the Issuers and/or their
Restricted Subsidiaries, (3) any sale or other issuance of Equity Interests
(other than Disqualified Stock) of any of the Issuers, (4) Restricted Payments
that are permitted by the covenant described above under the caption "--
Restricted Payments," (5) fees and compensation paid to members of the Boards
of Directors of the Issuers and their Restricted Subsidiaries or Avalon in
their capacity as such, to the extent such fees and compensation are reasonable
and customary, (6) advances to employees for moving, entertainment and travel
expenses, drawing accounts and similar expenditures in the ordinary course of
business, (7) fees and compensation paid to, and indemnity provided on behalf
of, officers, directors or employees of the Issuers or any of their Restricted
Subsidiaries or Avalon, as determined by the Board of Directors of such Person,
to the extent such fees and compensation are reasonable and customary, (8) all
transactions associated with the Reorganization and the Mercom Acquisition, (9)
the Mercom Intercompany Loan, the ABRY Management Agreement and the Mercom
Management Agreement and (10) Indebtedness permitted under 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 (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 the covenant described above under the caption "--Incurrence of
Indebtedness and Issuance of Preferred Stock," (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, the covenant described above under the caption "Repurchase at the Option
of Holders--Asset Sales."
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 the
covenant described above under the caption "Repurchase at the Option of
Holders--Asset Sales," 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.
111
<PAGE>
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 (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. For so long as any Notes remain outstanding, the
Issuers shall furnish to the Holders and to securities analysts and prospective
investors, upon their request, the information required to be delivered
pursuant to Rule 144A(d)(4) under the Securities Act.
Events of Default and Remedies
The Indenture provides that each of the following constitutes an Event of
Default: (i) default for 30 days in the payment when due of interest on, or
Liquidated Damages with respect to, the Notes; (ii) default in payment when due
of the Accreted Value of or the principal of or premium, if any, on the Notes;
(iii) 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"; (iv) 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"; (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 Notes; (vi) default under any mortgage,
indenture or instrument under which there may be issued or by which there may
be secured or evidenced any Indebtedness for money borrowed by any of the
Issuers or any of their Restricted Subsidiaries (or the payment of which is
guaranteed by any of the Issuers or any of their Restricted Subsidiaries)
whether such Indebtedness or guarantee now exists, or is created after the
Issue Date, which default (a) is caused by a failure to pay principal of or
premium, if any, or interest on such Indebtedness prior to the expiration of
the grace period provided in such Indebtedness on the date of such default (a
"Payment Default") or (b) results in the acceleration of such Indebtedness
prior to its express maturity and, in each case, the principal amount of any
such Indebtedness, together with the principal amount of any other such
Indebtedness under which there has been a Payment Default or the maturity of
which has been so accelerated, aggregates without duplication $5.0 million or
more; (vii) failure by any of the Issuers or any of their Restricted
Subsidiaries to pay final judgments aggregating in excess of $5.0 million
(excluding amounts covered by insurance), which judgments are not paid,
discharged or stayed for a period of 60 days; and (viii) certain events of
bankruptcy or insolvency with respect to any of the Issuers or any of their
Restricted Subsidiaries that constitute a Significant Subsidiary, or any group
of Restricted Subsidiaries that, taken together, would constitute a Significant
Subsidiary.
If any Event of Default occurs and is continuing, the Trustee or the Holders
of at least 25% in principal amount at maturity of the then outstanding Notes
may declare all the Notes to be due and payable immediately; provided that so
long as any Indebtedness permitted to be incurred pursuant to the Credit
Facility shall be outstanding, such acceleration shall not be effective until
the earlier of (i) an acceleration of such Indebtedness under the Credit
Facility and (ii) 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
112
<PAGE>
Notes may not enforce the Indenture or the Notes except as provided in the
Indenture. Subject to certain limitations, Holders of a majority in principal
amount at maturity of the then outstanding Notes may direct the Trustee in its
exercise of any trust or power. The Trustee may withhold from Holders of the
Notes notice of any continuing Default or Event of Default (except a Default or
Event of Default relating to the payment of principal or interest) if it
determines that withholding notice is in their interest.
The Holders of a majority in aggregate principal amount at maturity of the
Notes then outstanding by notice to the Trustee may on behalf of the Holders of
all of the Notes waive any existing Default or Event of Default and its
consequences under the Indenture except a continuing Default or Event of
Default in the payment of interest on, or the Accreted Value or principal of,
the Notes.
The Issuers are required to deliver to the Trustee annually a statement
regarding compliance with the Indenture, and the Issuers are required upon
becoming aware of any Default or Event of Default that is continuing, to
deliver to the Trustee a statement specifying such Default or Event of Default.
No Personal Liability of Directors, Officers, Employees and Stockholders
No past, present or future director, officer, employee, incorporator,
manager, member or stockholder of any Person who is or was an Issuer or Parent
Guarantor, as such, shall have any liability for any obligations of the Issuers
under the Notes or the Indenture or any related documents or for any claim
based on, in respect of, or by reason of, such obligations or their creation.
Each Holder of Notes by accepting a Note waives and releases all such
liability. The waiver and release are part of the consideration for issuance of
the Notes. Such waiver may not be effective to waive liabilities under the
federal securities laws and it is the view of the Commission that such a waiver
is against public policy.
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 (i) 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, (ii) 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, (iii) the rights,
powers, trusts, duties and immunities of the Trustee, and the Issuers'
obligations in connection therewith and (iv) 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, (i) 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; (ii) 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
113
<PAGE>
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; (iii) 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; (iv) 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; (v) 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; (vi) 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; (vii) 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 (viii) the Issuers must deliver to the Trustee an
Officers' Certificate and an opinion of counsel, each stating that all
conditions precedent provided for relating to the Legal Defeasance or the
Covenant Defeasance have been complied with.
Transfer and Exchange
A Holder may transfer or exchange Notes in accordance with the Indenture.
The Registrar and the Trustee may require a Holder, among other things, to
furnish appropriate endorsements and transfer documents and the Issuers may
require a Holder to pay any taxes and fees required by law or permitted by the
Indenture. The Issuers are not required to transfer or exchange any Note
selected for redemption. Also, the Issuers are not required to transfer or
exchange any Note for a period of 15 business days before a selection of Notes
to be redeemed.
The registered Holder of a Note will be treated as the owner of it for all
purposes.
Amendment, Supplement and Waiver
Except as provided in the next two succeeding paragraphs, the Indenture or
the Notes may be amended or supplemented with the consent of the Holders of at
least a majority in principal amount at maturity of the Notes then outstanding
(including, without limitation, consents obtained in connection with a purchase
of, or tender offer or exchange offer for, Notes), and any existing default or
compliance with any provision of the Indenture or the Notes may be waived with
the consent of the Holders of a majority in principal amount at maturity of the
then outstanding Notes (including consents obtained in connection with a tender
offer or exchange offer for Notes).
Without the consent of each Holder affected, an amendment or waiver may not
(with respect to any Notes held by a non-consenting Holder): (i) reduce the
principal amount of Notes whose Holders must consent to an amendment,
supplement or waiver, (ii) reduce the Accreted Value or principal of or change
the fixed maturity of any Note or alter the provisions with respect to the
redemption of the Notes (other than provisions relating to the covenants
described above under the caption "--Repurchase at the Option of Holders"),
(iii) reduce the rate of or change the time for payment of interest on any
Note, (iv) 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), (v) make any Note payable in money other
than
114
<PAGE>
that stated in the Notes, (vi) 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, (vii) 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 (ix) make any change in
the foregoing amendment and waiver provisions.
Notwithstanding the foregoing, without the consent of any Holder of Notes,
the Issuers and the Trustee may amend or supplement the Indenture or the Notes
to cure any ambiguity, omission, defect or inconsistency, to provide for
uncertificated Notes in addition to or in place of certificated Notes, to
provide for the assumption of the Issuers' obligations to Holders of Notes in
the case of a merger, consolidation or asset transfer (including the
Reorganization), to add additional guarantees with respect to the Notes, to
make any change that would provide any additional rights or benefits to the
Holders of Notes or that does not adversely affect the legal rights under the
Indenture of any such Holder, or to comply with requirements of the Commission
in order to effect or maintain the qualification of the Indenture under the
Trust Indenture Act.
Concerning the Trustee
The Indenture contains certain limitations on the rights of the Trustee,
should it become a creditor of any of the Issuers, to obtain payment of claims
in certain cases, or to realize on certain property received in respect of any
such claim as security or otherwise. The Trustee will be permitted to engage in
other transactions; however, if it acquires any conflicting interest it must
eliminate such conflict within 90 days, apply to the Commission for permission
to continue or resign.
The Holders of a majority in principal amount of the then outstanding Notes
will have the right to direct the time, method and place of conducting any
proceeding for exercising any remedy available to the Trustee, subject to
certain exceptions. The Indenture provides that in case an Event of Default
shall occur (which shall not be cured), the Trustee will be required, in the
exercise of its power, to use the degree of care of a prudent man in the
conduct of his own affairs. Subject to such provisions, the Trustee will be
under no obligation to exercise any of its rights or powers under the Indenture
at the request of any Holder of Notes, unless such Holder shall have offered to
the Trustee security and indemnity satisfactory to it against any loss,
liability or expense.
Additional Information
Anyone who receives this prospectus may obtain a copy of the Indenture and
Registration Rights Agreement without charge by writing to Avalon Holdings,
Attention: Vice President--Finance.
Book-Entry, Delivery and Form
The New Notes initially will be represented by one or more global notes in
registered, global form without interest coupons (collectively, the "Global
Note"). The Global Note will be deposited upon issuance with the Trustee as
custodian for the Depositary, in New York, New York, and registered in the name
of the Depositary or its nominee, in each case for credit to an account of a
direct or indirect participant as described below.
Except as set forth below, the Global Note may be transferred, in whole and
not in part, only to another nominee of the Depositary or to a successor of the
Depositary or its nominee. Beneficial interest in the Global Note may not be
exchanged for New Notes in certificated form except in the limited
circumstances described below. Except in the limited circumstances described
below, owners of beneficial interests in the Global Note will not be entitled
to receive physical delivery of Certificated Notes (as defined below).
The New Notes may be presented for registration of transfer and exchange at
the offices of the Exchange Agent.
115
<PAGE>
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.
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
116
<PAGE>
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.
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
117
<PAGE>
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.
Certain Definitions
Set forth below are certain defined terms used in the Indenture. Reference
is made to the Indenture for a full disclosure of all such terms, as well as
any other capitalized terms used herein for which no definition is provided.
"ABRY" means ABRY Partners, Inc.
"ABRY III" means ABRY Broadcast Partners III, L.P.
"ABRY Management Agreement" means the Management and Consulting Services
Agreement entered into as of May 29, 1998 and amended and restated as of
November 6, 1998 by and among ABRY Partners, Inc., Avalon Michigan Inc. and
Avalon New England, and any successor agreement; provided that any such
successor agreement shall not modify the ABRY Management Agreement as in effect
as of November 6, 1998 in any material respect, taken as a whole, adverse to
the Issuers and their Subsidiaries or the Trustee.
"ABRY Subordinated Debt" means Indebtedness of the Issuers in principal
amount not to exceed $30.0 million in the aggregate at any time outstanding (a)
that is owed to Avalon, directly or indirectly, or to ABRY III, ABRY or any
other investment fund controlled by ABRY, (b) as to which the payment of
principal of (and premium, if any) and interest and other payment obligations
in respect of such Indebtedness shall be subordinate to the prior payment in
full of the Senior Discount Notes and the Notes to at least the following
extent: (i) no payments of principal (or premium, if any) or interest on or
otherwise due in respect of such Indebtedness may be permitted for so long as
any default in the payment of principal (or premium, if any) or interest on the
Senior Discount Notes and/or the Notes exists and (ii) in the event that any
other default that with the passing of time or the giving of notice, or both,
would constitute an event of default exists with respect to the Senior Discount
Notes and/or the Notes, upon notice by 25% or more in principal amount at
maturity of the Senior Discount Notes and/or the Notes, as appropriate, to the
trustee under the Senior Discount Notes and/or the Notes, such trustee or
trustees shall have the right to give notice to the Issuers and the holders of
such Indebtedness (or trustees or agents therefor) of a payment blockage, and
thereafter no payments of principal of (or premium, if any) or interest on or
otherwise due in respect of such Indebtedness may be made for a period of 179
days from the date of such notice and (c) that shall automatically convert into
common equity of the Issuers within 18 months of the date of issuance thereof,
unless refinanced.
"Accreted Value" means as of any date prior to December 1, 2003, an amount
per $1,000 principal amount at maturity of the Notes that is equal to the sum
of (a) the initial offering price of each Note and (b) the portion of the
excess of the principal amount at maturity of each Note over such initial
offering price which shall have been amortized through such date, such amount
to be so amortized on a daily basis and compounded semi-annually on each June
1, and December 1, at the rate of 11 7/8% per annum from the Issue Date through
the date of determination computed on the basis of a 360-day year of twelve 30-
day months.
"Acquired Debt" means, with respect to any specified Person, (i)
Indebtedness of any other Person existing at the time such other Person is
merged with or into or became a Restricted Subsidiary of such specified Person,
including, without limitation, Indebtedness incurred in connection with, or in
contemplation of, such other Person merging with or into or becoming a
Restricted Subsidiary of such specified Person, and (ii) Indebtedness secured
by a Lien encumbering any asset acquired by such specified Person.
118
<PAGE>
"Acquisition Transactions" means the acquisition (i) by the Issuers and
their subsidiaries of 1,822,810 outstanding shares of the common stock of
Mercom, (ii) by Avalon Michigan Inc. or Avalon Michigan LLC of a cable
television system from Cross Country Cable TV, Inc., (iii) by Avalon Michigan
Inc. or Avalon Michigan LLC of a cable television system from Nova
Cablevision, Inc., Nova Cablevision VI, L.P. and Nova Cablevision VII, L.P.,
(iv) by Avalon Michigan Inc. or Avalon Michigan LLC of the assets of Traverse
Internet, Inc. and (v) by Avalon New England of all of the cable system assets
of Taconic Technology Corp.
"Affiliate" means, with respect to any specified Person, any other Person
controlling or controlled by or under common control with such specified
Person. For purposes of this definition, "control" (including, with
correlative meanings, the terms "controlling," "controlled by" and "under
common control with"), as used with respect to any Person, shall mean the
possession, directly or indirectly, of the power to direct or cause the
direction of the management or policies of such Person, whether through the
ownership of voting securities, by agreement or otherwise; provided that
beneficial ownership of 10% or more of the voting securities of a Person shall
be deemed to be control.
"Amrac" means Amrac Clear View, a Limited Partnership.
"Asset Sale" means (i) the sale, lease, conveyance or other disposition of
any assets or rights (including, without limitation, by way of a sale and
leaseback) other than in the ordinary course of business (provided that the
sale, lease, conveyance or other disposition of all or substantially all of
the assets of the Issuers and their Restricted Subsidiaries taken as a whole
will be governed by the covenants described above under the captions
"Repurchase at the Option of Holders--Change of Control" and "--Merger,
Consolidation, or Sale of Assets" and not by the provisions of the covenant
described above under the caption "--Asset Sales"), and (ii) the issue or sale
by the Issuers or any of their Restricted Subsidiaries of Equity Interests in
any of their Restricted Subsidiaries, in the case of either clause (i) or
(ii), whether in a single transaction or a series of related transactions (a)
that have a fair market value in excess of $2.5 million or (b) for Net Cash
Proceeds in excess of $2.5 million. Notwithstanding the foregoing: (i) a
transfer of assets by any of the Issuers to a Restricted Subsidiary of any
Issuer or by a Restricted Subsidiary of any Issuer to such Issuer or to
another Issuer or Restricted Subsidiary of an Issuer, (ii) an issuance or sale
of Equity Interests by a Restricted Subsidiary of an Issuer to any Issuer or
to another Issuer or Restricted Subsidiary of any Issuer, (iii) a Restricted
Payment that is permitted by the covenant described above under the caption
"--Restricted Payments" and (iv) transactions that are part of the
Reorganization will not be deemed to be Asset Sales.
"Attributable Debt" in respect of a sale and leaseback transaction means,
at the time of determination, the present value (discounted at the rate of
interest implicit in such transaction, determined in accordance with GAAP) of
the obligation of the lessee for net rental payments during the remaining term
of the lease included in such sale and leaseback transaction (including any
period for which such lease has been extended or may, at the option of the
lessor, be extended).
"Avalon" means Avalon Cable Holdings LLC, a Delaware limited liability
company.
"Avalon Michigan" means Avalon Cable of Michigan, Inc., a Pennsylvania
corporation.
"Avalon Michigan LLC" means Avalon Cable of Michigan LLC, a Delaware
limited liability company.
"Avalon New England" means Avalon Cable of New England LLC, a Delaware
limited liability company.
"Board of Directors" means, as to any Person, the board of directors of
such Person (or, if such Person is a limited liability company, the board of
managers of such Person) or similar governing body or any duly authorized
committee thereof.
"Business Day" means a day other than a Saturday, Sunday or other day on
which commercial banks in New York City are authorized or required by law to
close.
119
<PAGE>
"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.
"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
120
<PAGE>
such transaction where the Voting Stock of such Issuer or Issuers or Avalon
outstanding immediately prior to such transaction is converted into or
exchanged for Voting Stock (other than Disqualified Stock) of the surviving or
transferee Person constituting a majority of the outstanding shares of such
Voting Stock of such surviving or transferee Person (immediately after giving
effect to such issuance); provided, however, that notwithstanding the
foregoing, the Reorganization shall not be deemed to be a Change of Control.
"Commission" means the Securities and Exchange Commission.
"Company Issuers" means initially Avalon Michigan, Avalon New England and
Avalon Cable Finance, Inc. or any successor thereto; provided that subsequent
to the Reorganization, the Company Issuers shall be Avalon New England, Avalon
Michigan LLC, as successor to Avalon Michigan, and Avalon Cable Finance, Inc.
or any successor thereto.
"Completed Acquisitions" means the acquisitions of Cable Michigan, Amrac and
Pegasus by Avalon or an Affiliate of Avalon.
"Consolidated Cash Flow" means, with respect to any Person for any period,
the Consolidated Net Income of such Person for such period plus (i) an amount
equal to any extraordinary loss plus any net loss realized in connection with
an Asset Sale (to the extent such losses were deducted in computing such
Consolidated Net Income), plus (ii) provision for taxes based on income or
profits of such Person and its Restricted Subsidiaries for such period, to the
extent that such provision for taxes was included in computing such
Consolidated Net Income, plus (iii) Consolidated Interest Expense of such
Person for such period, to the extent that any such expense was deducted in
computing such Consolidated Net Income, plus (iv) depreciation and amortization
(including amortization of goodwill and other intangibles but excluding
amortization of prepaid cash expenses that were paid in a prior period) of such
Person and its Restricted Subsidiaries for such period to the extent that such
depreciation and amortization were deducted in computing such Consolidated Net
Income, plus (v) other non-cash items decreasing such Consolidated Net Income,
minus (vi) non-cash items increasing such Consolidated Net Income for such
period (other than items that were accrued in the ordinary course of business),
in each case, on a consolidated basis and determined in accordance with GAAP.
"Consolidated Interest Expense" means, with respect to any Person for any
period, the sum, without duplication of (i) the consolidated interest expense
of such Person and its Restricted Subsidiaries for such period, whether paid or
accrued (including, without limitation, amortization of original issue
discount, non-cash interest payments, the interest component of any deferred
payment obligations, the interest component of all payments associated with
Capital Lease Obligations, imputed interest with respect to Attributable Debt,
commissions, discounts and other fees and charges incurred in respect of letter
of credit or bankers' acceptance financings, and net payments (if any) pursuant
to Hedging Obligations), (ii) the consolidated interest expense of such Person
and its Restricted Subsidiaries that was capitalized during such period, (iii)
any interest expense on Indebtedness of another Person that is guaranteed by
such Person or any of its Restricted Subsidiaries or secured by a Lien on
assets of such Person or any of its Restricted Subsidiaries (whether or not
such guarantee or Lien is called upon) and (iv) the product of (a) all cash
dividend payments (and non-cash dividend payments in the case of a Person that
is a Restricted Subsidiary) on any series of preferred stock of such Person or
any of its Restricted Subsidiaries, times (b) a fraction, the numerator of
which is one and the denominator of which is one minus the then current
combined federal, state and local statutory tax rate of such Person, expressed
as a decimal, in each case, on a consolidated basis and in accordance with
GAAP.
"Consolidated Net Income" means, with respect to any Person for any period,
the aggregate of the Net Income of such Person and its Restricted Subsidiaries
(for such period, on a consolidated basis, determined in accordance with GAAP);
provided that (i) the Net Income (but not loss) of any Person that is not a
Restricted Subsidiary or that is accounted for by the equity method of
accounting shall be included only to the extent of the amount of dividends or
distributions paid in cash to the referent Person or a Restricted Subsidiary,
(ii) the Net Income of any Person acquired in a pooling of interests
transaction for any period prior to the date of such acquisition shall be
excluded, (iii) the cumulative effect of a change in accounting principles
shall be excluded
121
<PAGE>
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.
"Credit Facility" means that certain Senior Credit Agreement, dated as of
November 5, 1998, by and among the Company Issuers, the lenders party thereto,
Lehman Commercial Paper Inc., as administrative agent and other parties
thereto, including any related notes, guarantees, collateral documents,
instruments and agreements executed in connection therewith, and in each case
as amended, modified, renewed, refunded, replaced or refinanced from time to
time.
"Default" means any event that is or with the passage of time or the giving
of notice (or both) would be an Event of Default.
"Disqualified Stock" means any Capital Stock that, by its terms (or by the
terms of any security into which it is convertible or for which it is
exchangeable at the option of the holder thereof), or upon the happening of any
event, matures or is mandatorily redeemable, pursuant to a sinking fund
obligation or otherwise, or redeemable at the option of the holder thereof, in
whole or in part, on or prior to the date that is 91 days after the date on
which the Notes mature, except to the extent that such Capital Stock is solely
redeemable with, or solely exchangeable for, any Capital Stock of such Person
that is not Disqualified Stock; provided, however, that any Capital Stock that
would constitute Disqualified Stock solely because the holders thereof have the
right to require the Issuers or their Affiliates to repurchase such Capital
Stock upon the occurrence of a Change of Control or an Asset Sale shall not
constitute Disqualified Stock if the terms of such Capital Stock provide that
the Issuers or their Affiliates may not repurchase or redeem any such Capital
Stock pursuant to such provisions unless such repurchase or redemption complies
with the covenant described under the caption under "--Certain Covenants--
Restricted Payments."
"Equity Interests" means Capital Stock and all warrants, options or other
rights to acquire Capital Stock (but excluding any debt security that is
convertible into, or exchangeable for, Capital Stock).
"Excess Proceeds" means any Net Cash Proceeds from Asset Sales that are not
applied or invested as provided in the first sentence of the third paragraph
under the caption "--Asset Sales" within the applicable period.
"Existing Michigan Indebtedness" means Indebtedness incurred by Avalon
Michigan Inc. or Mercom between the Issue Date and the completion of the
Reorganization that would be permitted to be incurred under the terms of the
Indenture, including any related notes, guarantees, collateral documents,
instruments and agreement executed in connection therewith, and in each case,
as amended, modified renewed, refunded, replaced or refinanced.
"Existing Indebtedness" means up to $5.0 million in aggregate principal
amount of Indebtedness of the Issuers and their Restricted Subsidiaries (other
than Indebtedness under the Credit Facility and the Notes) in existence on the
Issue Date, until such amounts are repaid.
122
<PAGE>
"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.
"Government Securities" means direct obligations of, or obligations
guaranteed by, the United States of America, and the payment for which the
United States pledges its full faith and credit.
"Guarantee" means a guarantee (other than by endorsement of negotiable
instruments for collection in the ordinary course of business), direct or
indirect, in any manner (including, without limitation, letters of credit and
reimbursement agreements in respect thereof), of all or any part of any
Indebtedness.
"Hedging Obligations" means, with respect to any Person, the net payment
Obligations of such Person under (i) interest rate swap agreements, interest
rate cap agreements and interest rate collar agreements and (ii) other
agreements or arrangements in the ordinary course of business designed to
protect such Person against fluctuations in commodity prices, interest rates or
currency exchange rates.
"Holder" means a Person in whose name a Note is registered.
"Indebtedness" means, with respect to any Person, without duplication, any
indebtedness of such Person, whether or not contingent, in respect of borrowed
money or evidenced by bonds, notes, debentures or similar instruments or
letters of credit (or reimbursement agreements in respect thereof) or banker's
acceptances or representing Capital Lease Obligations or the balance deferred
and unpaid of the purchase price of any Property acquired by such Person or
representing any Hedging Obligations, except any such balance that constitutes
an accrued expense or trade or accounts payable, if and to the extent any of
the foregoing indebtedness (other than letters of credit and Hedging
Obligations) would appear as a liability upon a balance sheet of such Person
prepared in accordance with GAAP, as well as all Indebtedness of others secured
by a Lien on any asset of such Person (whether or not such Indebtedness is
assumed by such Person) and, to the extent not otherwise included, the
Guarantee by such Person of any Indebtedness of any other Person. The amount of
any Indebtedness outstanding as of any date shall be (i) the face amount
thereof, in the case of any Indebtedness with respect to acceptances, letters
of credit and similar facilities, (ii) the accreted value thereof in the case
of any Indebtedness that does not require current payments of interest and
(iii) the principal amount thereof, together with any interest thereon that is
more than 30 days past due, in the case of any other Indebtedness; provided,
however, that, in each case, with respect to any Indebtedness of any Person
secured by a Lien on any asset of such Person and non-recourse to such Person,
the amount of such Indebtedness shall be the lesser of (A) the principal amount
thereof and (B) the fair market value of the Property subject to such Lien.
Notwithstanding the foregoing, the term "Indebtedness" shall not include
Indebtedness of the Issuers to Affiliates for which principal and interest
payments are not required to be made prior to the maturity of the Notes and
which is otherwise subordinated to the prior payment in full of the Notes.
"Investments" means, with respect to any Person, all investments by such
Person in other Persons (including Affiliates) in the forms of direct or
indirect loans (including Guarantees of Indebtedness or other Obligations),
advances of assets or capital contributions (excluding commission, travel and
entertainment, moving, and similar advances to officers and employees made in
the ordinary course of business), purchases or other acquisitions for
consideration of Indebtedness, Equity Interests or other securities, together
with all items that are or would be classified as investments on a balance
sheet prepared in accordance with GAAP. If any of the Issuers or any of their
Restricted Subsidiaries sells or otherwise disposes of any Equity Interests of
any direct or indirect Restricted Subsidiary of any Issuer such that, after
giving effect to any such sale or disposition, such Person is no longer a
direct or indirect Restricted Subsidiary of any Issuer, such Issuer or such
123
<PAGE>
Restricted Subsidiary, as the case may be, shall be deemed to have made an
Investment on the date of any such sale or disposition equal to the fair market
value of the Equity Interests of such Restricted Subsidiary not sold or
disposed of in an amount determined as provided in the final paragraph of the
covenant described above under the caption "--Restricted Payments."
"Issue Date" means the date on which the Notes are originally issued.
"Issuers" means, initially, Michigan Holdings, Avalon Holdings and Finance
Holdings or any successor thereto; provided that subsequent to the
Reorganization, the Issuers shall be Avalon Holdings, as successor to Michigan
Holdings, and Finance Holdings or any successor thereto.
"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,
124
<PAGE>
interest determined on a fluctuating basis, to the extent such interest is
covered by Hedging Obligations, shall be deemed to accrue at the rate per annum
resulting after giving effect to the operation of such agreements.
"Lien" means, with respect to any asset, any mortgage, lien, pledge, charge,
security interest or encumbrance of any kind in respect of such asset, whether
or not filed, recorded or otherwise perfected under applicable law (including
any conditional sale or other title retention agreement, any lease in the
nature thereof, any option or other agreement to sell or give a security
interest in any asset and any filing of or agreement to give any financing
statement under the Uniform Commercial Code (or equivalent statutes) of any
jurisdiction).
"Mercom" means Mercom, Inc., a Delaware corporation.
"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
125
<PAGE>
would constitute Indebtedness), (b) is directly or indirectly liable (as a
guarantor or otherwise) or (c) constitutes the lender; and (ii) no default with
respect to which (including any rights that the holders thereof may have to
take enforcement action against an Unrestricted Subsidiary) would permit (upon
notice, lapse of time or both) any holder of any Indebtedness (other than the
Notes being offered hereby) of any of the Issuers or their Restricted
Subsidiaries to declare a default on such other Indebtedness or cause the
payment thereof to be accelerated or payable prior to its stated maturity; and
(iii) as to which the lenders have been notified in writing that they will not
have any recourse to the stock or assets of any of the Issuers or their
Restricted Subsidiaries.
"Obligations" means any principal, premium, if any, interest (including
interest accruing on or after the filing of any petition in bankruptcy or for
reorganization relating to any Issuer or any of their Restricted Subsidiaries
whether or not a claim for post-filing interest is allowed in such proceeding),
penalties, fees, charges, expenses, indemnifications, reimbursement
obligations, damages (including Liquidated Damages), guarantees and other
liabilities or amounts payable under the documentation governing any
Indebtedness or in respect thereof.
"Pegasus" means, collectively, Pegasus Cable Television, Inc. and Pegasus
Cable Television of Connecticut, Inc.
"Permitted Business" means any business engaged in by the Issuers or their
Restricted Subsidiaries as of the Issue Date or any business reasonably
related, ancillary or complementary thereto.
"Permitted Investments" means (a) any Investment in any Issuer or in any
Restricted Subsidiary of the Issuers; (b) any Investment in Cash Equivalents
constituting Cash Equivalents at the time made; (c) any Investment by the
Issuers or any of their Restricted Subsidiaries in a Person engaged in a
Permitted Business, if as a result of such Investment (i) such Person becomes a
Wholly-Owned Subsidiary of any Issuer or (ii) such Person is merged,
consolidated or amalgamated with or into, or transfers or conveys substantially
all of its assets to, or is liquidated into, any of the Issuers or any of their
Restricted Subsidiaries; (d) any Restricted Investment made as a result of the
receipt of non-cash consideration from an Asset Sale that was made in
compliance with the covenant described above under the caption "Repurchase at
the Option of Holders--Asset Sales"; (e) any acquisition of assets solely in
exchange for the issuance of Equity Interests (other than Disqualified Stock)
of any of the Issuers; (f) other Investments by the Issuers or any of their
Restricted Subsidiaries in any Person having an aggregate fair market value
(measured as of the date made and without giving effect to subsequent changes
in value), when taken together with all other Investments made pursuant to this
clause (f) that are at the time outstanding, not to exceed $10.0 million; (g)
Investments arising in connection with Hedging Obligations that are incurred in
the ordinary course of business, for the purpose of fixing or hedging currency,
commodity or interest rate risk (including with respect to any floating rate
Indebtedness that is permitted by the terms of the Indenture to be outstanding)
in connection with the conduct of the business of the Issuers and their
Restricted Subsidiaries; (h) prior to the completion of the Mercom Acquisition,
the Mercom Intercompany Loan; and (i) any Investment existing on the Issue Date
and any amendment, modification, restatement, supplement, extension, renewal,
refunding, replacement, refinancing, in whole or in part, thereof.
"Permitted Investors" means the collective reference to ABRY and its Control
Investment Affiliates, including ABRY III.
"Permitted Liens" means (i) Liens securing Indebtedness under the Credit
Facility or other senior Indebtedness if such Indebtedness was permitted by the
terms of the Indenture to be incurred, (ii) Liens securing Indebtedness of any
Restricted Subsidiary of any of the Issuers if such Indebtedness was permitted
by the terms of the Indenture to be incurred; (iii) Liens securing Hedging
Obligations with respect to Indebtedness permitted by the Indenture to be
incurred; (iv) Liens on property of a Person existing at the time such Person
is merged into or consolidated with any of the Issuers or any of their
Restricted Subsidiaries; provided that such Liens were not created in
contemplation of such merger or consolidation and do not extend to any assets
other than those of the Person merged into or consolidated with such Issuer;
(v) Liens on property existing at the
126
<PAGE>
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 (vi) of the second paragraph of the covenant described above under the
caption "--Incurrence of Indebtedness and Issuance of Preferred Stock" covering
only the assets acquired with such Indebtedness; (xiii) carriers',
warehousemen's, mechanics', landlords', materialmen's, repairmen's or other
like Liens arising in the ordinary course of business in respect of obligations
not overdue for a period in excess of 60 days or which are being contested in
good faith by appropriate proceedings promptly instituted and diligently
prosecuted; provided that any reserve or other appropriate provision as shall
be required to conform with GAAP shall have been made therefor; (xiv)
easements, rights-of-way, zoning and similar restrictions and other similar
encumbrances or title defects incurred, or leases or subleases granted to
others, in the ordinary course of business, which do not in any case materially
detract from the value of the Property subject thereto or do not interfere with
or adversely affect in any material respect the ordinary conduct of the
business of the Issuers and their Restricted Subsidiaries taken as a whole;
(xv) Liens in favor of customs and revenue authorities to secure payment of
customs duties in connection with the importation of goods in the ordinary
course of business and other similar Liens arising in the ordinary course of
business; (xvi) leases or subleases granted to third Persons not materially
interfering with the ordinary course of business of the Issuers or any of their
Restricted Subsidiaries; (xvii) Liens (other than any Lien imposed by ERISA or
any rule or regulation promulgated thereunder) incurred or deposits made in the
ordinary course of business in connection with workers' compensation,
unemployment insurance, and other types of social security; (xviii) deposits
made in the ordinary course of business to secure liability to insurance
carriers; (xix) Liens to secure Indebtedness permitted under the covenant
described above under the caption "--Incurrence of Indebtedness and Issuance of
Preferred Stock"; provided, that any such Lien encumbers only the assets so
purchased with the proceeds thereof; (xx) any attachment or judgment Lien not
constituting an Event of Default under clause (vii) of the first paragraph of
the section described above under the caption "Events of Default and Remedies";
(xxi) any interest or title of a lessor or sublessor under any operating lease;
(xxii) Liens under licensing agreements for use of Intellectual Property
entered into in the ordinary course of business; (xxiii) Liens encumbering
deposits made to secure obligations arising from statutory, regulatory,
contractual, or warranty requirements of any of the Issuers or any of their
Restricted Subsidiaries, including rights of offset and set-off; (xxiv)
bankers' Liens in respect of deposit accounts; (xxv) Liens created under the
Indenture; (xxvi) Liens imposed by law incurred by the Issuers or their
Restricted Subsidiaries in the ordinary course of business; and (xxvii) any
renewal of or substitution for any Lien permitted by clauses (i) through
(xxvi), provided, however, that with respect to Liens incurred pursuant to this
clause (xxvii), the principal amount secured has not increased nor the Liens
extended to any additional property (other than proceeds of the property in
question).
"Permitted Refinancing Indebtedness" means any Indebtedness of any of the
Issuers or any of their Restricted Subsidiaries issued in exchange for, or the
net proceeds of which are used to extend, refinance,
127
<PAGE>
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) Michigan Holdings ceases to be an
Issuer and together with Avalon Michigan becomes a guarantor under the
Indenture and (iv) certain Indebtedness of Avalon New England shall be assumed
by Avalon Michigan Inc.
"Restricted Investment" means any Investment other than a Permitted
Investment.
"Restricted Subsidiary" of a Person means any Subsidiary of the referent
Person that is not an Unrestricted Subsidiary; provided that, on the Issue
Date, all Subsidiaries of each of the Issuers shall be Restricted Subsidiaries
of each such Issuer.
"Senior Subordinated Notes" means the Senior Subordinated Notes due 2008 of
the Company Issuers, as co-obligors, issued under the Indenture dated as of
December 10, 1998.
"Significant Subsidiary" means any Subsidiary that would be a "significant
subsidiary" as defined in Article 1 Rule 1-02 of Regulation S-X, promulgated
pursuant to the Act, as such Regulation is in effect on the Issue Date.
"Stated Maturity" means, with respect to any installment of interest or
principal on any series of Indebtedness, the date on which such payment of
interest or principal was scheduled to be paid in the credit agreement or other
original documentation governing such Indebtedness, and shall not include any
contingent obligations to repay, redeem or repurchase any such interest or
principal prior to the date originally scheduled for the payment thereof.
128
<PAGE>
"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) 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.
129
<PAGE>
CERTAIN UNITED STATES FEDERAL INCOME TAX CONSEQUENCES
The following summary describes certain material United States federal
income tax consequences of the exchange of Old Notes for New Notes pursuant to
the exchange offer and the ownership and disposition of the New Notes. The
discussion is a summary and does not consider all aspects of U.S. federal
income taxation that may be relevant to the purchase, ownership and disposition
of the New Notes by a prospective investor in light of such investor's personal
circumstances. This discussion also does not address the U.S. federal income
tax consequences of ownership of notes not held as capital assets within the
meaning of Section 1221 of the U.S. Internal Revenue Code of 1986, as amended
(the "Code"), or the U.S. federal income tax consequences to investors subject
to special treatment under the U.S. federal income tax laws, such as dealers in
securities or foreign currency, tax-exempt entities, financial institutions,
insurance companies, persons that hold the notes as part of a straddle, a
hedging or a conversion or constructive sale transaction, persons that have a
"functional currency" other than the U.S. dollar, and investors in pass-through
entities. In addition, this discussion does not describe any tax consequences
arising under U.S. gift and estate taxes or out of the tax laws of any state,
local or foreign jurisdiction.
Furthermore, the discussion below is based upon the provisions of the Code,
and the regulations, rulings and judicial decisions thereunder as of the date
hereof, and such authorities may be repealed, revoked or modified, possibly on
a retroactive basis, so as to result in United States federal income tax
consequences different from those discussed below. Persons considering the
purchase, ownership or disposition of the New Notes should consult their own
tax advisors concerning the United States federal income tax consequences in
light of their particular situations as well as any consequences arising under
the laws of any other taxing jurisdiction.
The exchange of Old Notes for New Notes pursuant to the exchange offer will
not be treated as an "exchange" for federal income tax purposes because the New
Notes will not be considered to differ materially in kind or extent from the
Old Notes. Rather, the New Notes received by a holder will be treated as a
continuation of the Old Notes in the hands of such holder. As a result, there
will be no federal income tax consequences to holders exchanging Old Notes for
New Notes pursuant to the exchange offer.
Exchange of Old Notes
The exchange of Old Notes for New Notes with terms identical to those of the
Old Notes and the filing of a registration statement with respect to the resale
of the Old Notes will not be a taxable event to holders of the Old Notes.
Consequently, as a result of such an exchange or such a filing, no gain or loss
will be recognized by a holder, the holding period of the New Note will include
the holding period of the Old Note and the basis of the New Note will be the
same as the basis of the Old Note immediately before the exchange. The Issuers
are obligated to pay liquidated damages to the holders of the Old Notes under
certain circumstances 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.
Payments of Interest
Except as set forth below, Interest on a New Note will generally be taxable
to a United States Holder as ordinary income from domestic sources at the time
it is paid or accrued in accordance with the United States Holder's method of
accounting for tax purposes. As used herein, a "United States Holder" means a
holder of a New Note that is:
. a citizen or resident of the United States,
130
<PAGE>
. a corporation or partnership created or organized in or under the laws of
the United States or any political subdivision thereof,
. an estate the income of which is subject to United States federal income
taxation regardless of its source or
. a trust which is subject to the supervision of a court within the United
States and the control of one or more United States persons as described
in section 7701(a)(30) of the Code.
A "Non-United States Holder" is a holder that is not a United States Holder.
Original Issue Discount
The New Notes will bear original issue discount ("OID") in an amount equal
to the difference between their stated redemption price at maturity (the sum of
all payments to be made on the New Note) and their "issue price." United States
Holders should be aware that they generally must include OID in gross income as
it accrues; regardless of their regular method of accounting for federal income
tax purposes, and in advance of the receipt of cash attributable to that
income. However, United States Holders of such New Notes generally will not be
required to include separately in income cash payments received on the New
Notes, even if denominated as interest.
This summary is based upon final Treasury regulations addressing debt
instruments issued with OID (the "OID Regulations").
The "issue price" of a New Note will be the first price at which a
substantial amount of the particular offering of Old Notes to which such New
Note relates was sold (other than to an underwriter, placement agent or
wholesaler).
The amount of OID includible in income by the initial United States Holder
is the sum of the "daily portions" of OID with respect to the New Note for each
day during the taxable year or portion of the taxable year in which such United
States Holder held such New Note (including, in the case of the taxable year in
which such holder exchanged Old Notes for New Notes, each day during such
taxable year in which such holder held such Old Notes) ("accrued OID"). The
daily portion is determined by allocating to each day in any "accrual period" a
pro rata portion of the OID allocable to that accrual period. The "accrual
period" may be of any length and may vary in length over the terms of the New
Note, provided that each accrual period is no longer than one year and each
scheduled payment of principal or interest occurs on the first day or the final
day of an accrual period. The amount of OID allocable to any accrual period is
an amount equal to the product of the New Note's adjusted issue price at the
beginning of such accrual period and its yield to maturity (determined on the
basis of compounding at the close of each accrual period and properly adjusted
for the length of the accrual period). OID allocable to a final accrual period
is the difference between the amount payable at maturity and the adjusted issue
price at the beginning of the final accrual period. The "adjusted issue price"
of a New Note at the beginning of any accrual period is equal to its issue
price increased by the accrued OID for each prior accrual period and reduced by
any payments made on such New Note on or before the first day of the accrual
period. Under these rules, a United States Holder will have to include in
income increasingly greater amounts of OID in successive accrual periods. The
Issuers are required to provide information returns stating the amount of OID
accrued on New Notes held of record by persons other than corporations and
other exempt holders.
United States Holders may be able to elect to treat all interest on any New
Note as OID and calculate the amount includible in gross income under the
constant yield method described above. For the purposes of this election,
interest includes stated interest, acquisition discount, OID, de minimis OID
and unstated interest. The election is to be made for the taxable year in which
the United States Holder acquired the Old Note to which a New Note relates, and
may not be revoked without the consent of the IRS. United States Holders should
consult with their own tax advisors about this election and its availability.
Sale, Exchange, Redemption and Retirement of New Notes
A United States Holder's tax basis in a New Note will, in general, be the
United States Holder's cost therefor, increased by the amount of OID previously
included in income with respect to such New Note and
131
<PAGE>
reduced by any cash payments on the New Note (including, in each case, OID
included and cash payments made with respect to the Old Note for which such New
Note was exchanged). Upon the sale, exchange, redemption, retirement or other
disposition of a New Note, a United States Holder will recognize gain or loss
equal to the difference between the amount realized upon the sale, exchange,
redemption, retirement or other disposition and the adjusted tax basis of the
New Note. Such gain or loss will be capital gain or loss. Capital gains of
individuals derived in respect of capital assets held for more than one year
are eligible for reduced rates of taxation. The deductibility of capital losses
is subject to limitations.
Non-United States Holders
For purposes of the following discussion, interest, dividends and gain on
the sale, exchange or other disposition of a New Note will be considered "U.S.
trade or business income" if such income or gain is:
. effectively connected with the conduct of a U.S. trade or business and
. in the case of a qualified resident of a country having an applicable
income tax treaty with the United States containing a permanent
establishment provision, attributable to a U.S. permanent establishment
(or to a fixed base) in the United States.
Under present United States federal income and estate tax law, and subject
to the discussion below concerning backup withholding:
(a) A New Note beneficially owned by an individual who at the time of
death is a Non-United States Holder will not be subject to United States
federal estate tax as a result of such individual's death, provided that
such individual does not actually or constructively own 10% or more of the
total combined voting power of all classes of stock of any of the Issuers
entitled to vote within the meaning of section 871(h)(3) of the Code and
provided that the interest payments with respect to such New Note would not
have been, if received prior to the time of such individual's death, U.S.
trade or business income to such individual.
(b) (i) No withholding of United States federal income tax will be
required with respect to the payment by the Issuers or any paying agent of
principal or interest on a New Note owned by a Non-United States Holder,
provided that:
(A) the beneficial owner does not actually or constructively own 10%
or more of the total combined voting power of all classes of stock of
any of the Issuers entitled to vote (or, in the case of any Issuer
which is a limited liability company, 10% or more of the capital or
profits interest in such Issuer) within the meaning of section
871(h)(3) of the Code and the regulations promulgated thereunder,
(B) the beneficial owner is not a controlled foreign corporation
that is related to any of the Issuers as described in Section 864(d)(4)
of the Code,
(C) the beneficial owner is not a bank whose receipt of interest on
a New Note is described in section 881(c)(3)(A) of the Code, and
(D) the beneficial owner satisfies the statement requirement
(described generally below) set forth in section 871(h) and section
881(c) of the Code and the regulations promulgated thereunder (the
"Portfolio Interest Exception").
(ii) To satisfy the requirement referred to in (b)(i)(D) above, the
beneficial owner of such New Note, or a financial institution holding the
New Note on behalf of such owner, must provide, in accordance with
specified procedures, a paying agent of any of the Issuers with a statement
to the effect that the beneficial owner is not a United States person.
Currently, these requirements will be met if (1) the beneficial owner
provides its name and address, and certifies, under penalties of perjury,
that it is not a United States person (which certification may be made on
an Internal Revenue Service ("IRS") Form W-8 (or successor form))
132
<PAGE>
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, including OID, on the New Note is U.S. trade or
business income to the beneficial owner, the Non-United States Holder,
although exempt from the withholding tax discussed above, will be subject
to United States federal income tax on such interest, including OID, on a
net income basis in the same manner as if it were a United States Holder.
In addition, if such holder is a foreign corporation, it may be subject to
a branch profits tax equal to 30% of its effectively connected earnings and
profits for the taxable year, subject to adjustments. For this purpose,
interest, including OID, on a New Note will be included in such foreign
corporation's earnings and profits.
(d) Any gain or income realized upon the sale, exchange, redemption,
retirement or other disposition of a New Note generally will not be subject
to United States federal income tax unless (i) such gain or income is U.S.
trade or business income, or (ii) in the case of a Non-United States Holder
who is an individual, such individual is present in the United States for
183 days or more in the taxable year of such sale, exchange, retirement or
other disposition, and certain other conditions are met.
Information Reporting and Backup Withholding
In general, information reporting requirements will apply to certain
payments of principal, interest and OID paid on New Notes and to the proceeds
of the sale of a New Note made to United States Holders other than certain
exempt recipients (such as corporations). A 31% backup withholding tax will
apply to such payments if the United States Holder fails to provide a correct
taxpayer identification number or certification of foreign or other exempt
status or fails to report in full dividend and interest income.
In general, no information reporting or backup withholding will be required
with respect to payments made by the Issuers or any paying agent to Non-United
States Holders if a statement described in (b)(i)(D) under "Non-United States
Holders" has been received (and the payor does not have actual knowledge that
the beneficial owner is a United States person).
In addition, backup withholding and information reporting may apply to the
proceeds of the sale of a New Note within the United States or conducted
through certain U.S. related financial intermediaries unless the statement
described in (b)(i)(D) under "Non-United States Holders" has been received (and
the payor does not have actual knowledge that the beneficial owner is a United
States person) or the holder otherwise establishes an exemption.
Backup withholding is not an additional tax. Any amounts withheld under the
backup withholding rules may be returned or credited against the holder's U.S.
Federal income tax liability, provided that the required information is
furnished to the IRS.
133
<PAGE>
Holders of New Notes should consult their tax advisors as to their
qualification for exemption from backup withholding and the procedure for
obtaining such exemption.
PLAN OF DISTRIBUTION
A Broker-Dealer who holds Old Notes that are Transfer Restricted Securities
and that were acquired for its own account as a result of market-making
activities or other trading activities (other than those acquired directly from
the Issuers or their predecessors) may exchange such Old Notes in the exchange
offer; provided however, that each such Participating Broker-Dealer may be
deemed an "underwriter" under the Securities Act and therefore must deliver a
prospectus in connection with any resales of New Notes received on account of
such Old Notes in the exchange offer. Accordingly, each Participating Broker-
Dealer that receives New Notes for its own account pursuant to the exchange
offer must acknowledge that it will deliver a prospectus in connection with any
resale of such New Notes. This prospectus, as it may be amended or supplemented
from time to time, may be used by a Participating Broker-Dealer in connection
with the resale of New Notes received in exchange for Old Notes where such Old
Notes were acquired as a result of market-making activities or other trading
activities. The Issuers have agreed that for a period of 180 days from the
consummation of the exchange offer, they will make this prospectus, as amended
or supplemented, available to any Participating Broker-Dealer for use in
connection with any such resale.
The Issuers will not receive any proceeds from any sales of the New Notes by
Participating Broker Dealers. New Notes received by Participating Broker-
Dealers for their own account pursuant to the exchange offer may be sold from
time to time in one or more transactions in the over-the-counter market, in
negotiated transactions, through the writing of options on the New Notes or a
combination of such methods of resale, at market prices prevailing at the time
of resale, at prices related to such prevailing market prices or negotiated
prices. Any such resale may be made directly to purchasers or to or through
brokers or dealers who may receive compensation in the form of commissions or
concessions from any such Participating Broker-Dealer and/or the purchasers of
any such New Notes. Any Participating Broker-Dealer that resells the New Notes
that were received by it for its own account pursuant to the exchange offer and
any broker or dealer that participates in a distribution of such New Notes may
be deemed to be an "underwriter" within the meaning of the Securities Act and
any profit on any such resale of New Notes and any commissions or concessions
received by any such persons may be deemed to be underwriting compensation
under the Securities Act. The Letter of Transmittal states that by
acknowledging that it will deliver and by delivering a prospectus, a
Participating Broker-Dealer will not be deemed to admit that it is an
"underwriter" within the meaning of the Securities Act.
With respect to resales of the New Notes, based on interpretations by the
staff of the Commission set forth in no-action letters issued to third parties,
the Issuers believe that a holder or other person who receives New Notes,
whether or not such person is the holder (other than a person that is an
"affiliate" of any of the Issuers within the meaning of Rule 405 under the
Securities Act) who receives New Notes in exchange for Old Notes in the
ordinary course of business and who is not participating, does not intend to
participate, and has no arrangement or understanding with any person to
participate, in the distribution of the New Notes, will be allowed to resell
the New Notes to the public without further registration under the Securities
Act and without delivering to the purchasers of the New Notes a prospectus that
satisfies the requirements of Section 10 of the Securities Act. However, if any
holder acquires New Notes in the exchange offer for the purpose of distributing
or participating in a distribution of the New Notes, such holder cannot rely on
the position of the staff of the Commission enunciated in such no-action
letters or any similar interpretive letters, and must comply with the
registration and prospectus delivery requirements of the Securities Act in
connection with any resale transaction and such a secondary resale transaction
should be covered by an effective registration statement containing the selling
security holder information required by Item 507 or 508, as applicable, of
Regulation S-K under the Securities Act, unless an exemption from registration
is otherwise available. Further, each Participating Broker-Dealer that receives
New Notes for its own account in exchange for Old Notes, where such Old Notes
were acquired by such Participating Broker-Dealer as a result of market-making
activities or other trading activities,
134
<PAGE>
must acknowledge that it will deliver a prospectus in connection with any
resale of such New Notes. The Issuers have agreed that, for a period of up to
one year from the consummation of the exchange offer, it will make this
prospectus available to any Participating Broker-Dealer for use in connection
with any such resale.
LEGAL MATTERS
Certain legal matters relating to the issuance of the New Notes will be
passed upon for the Issuers by Kirkland & Ellis, Chicago, Illinois.
AVAILABLE INFORMATION
The Issuers have filed with the Commission a Registration Statement on Form
S-4 (the "Registration Statement," which term shall encompass all amendments,
exhibits, annexes and schedules thereto) pursuant to the Securities Act, and
the rules and regulations promulgated thereunder, covering the exchange offer
contemplated hereby. This prospectus does not contain all the information set
forth in the Registration Statement. For further information with respect to
the Issuers and the exchange offer, reference is made to the Registration
Statement. Statements made in this prospectus as to the contents of any
contract, agreement, or other document filed as an exhibit to the Registration
Statement, reference is made to the exhibit for a more complete description of
the document or matter involved, and each such statement shall be deemed
qualified in its entirety by such reference.
The Issuers are not currently subject to the periodic reporting and other
informational requirements of the Securities Exchange Act. Upon the
effectiveness of the Registration Statement, the Issuers will become subject to
the periodic reporting and other informational requirements of the Securities
Exchange Act, and in accordance therewith, will be required to file periodic
reports and other information with the SEC. The Issuers have agreed that,
whether or not they are required to do so by the rules and regulations of the
SEC, for so long as any of the Notes remain outstanding, the Issuers, on a
combined consolidated basis, will furnish to the holders of the Notes:
. quarterly and annual financial statements substantially equivalent to
financial statements that would have been included in a filing with the
SEC on Forms 10-Q and 10-K if the Issuers were required to file such
financial information, including a "Management's Discussion and Analysis
of Financial Condition and Results of Operations" that describes the
financial condition and results of operations of the Issuers and, with
respect to the annual information only, reports thereon by the Issuers'
independent public accountants, and
. all information that would be required to be filed with the SEC on Form
8-K if the Issuers were required to file such reports.
In addition, for so long as any of the Notes remain outstanding, the issuers
have agreed to furnish to the holders and to securities analysts and
prospective investors, upon their request, the information required to be
delivered by Rule 144A(d)(4) under the Securities Act.
The Registration Statement may be inspected at the public reference
facilities maintained by the SEC at 450 Fifth Street, N.W., Washington, D.C.
20549 and at the regional offices of the SEC located at 7 World Trade Center,
Suite 1300, New York, New York 10048 and Citicorp Center, 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661-2511. Copies of such materials may
be obtained from the Public Reference Section of the SEC, 450 Fifth Street,
N.W., Washington, D.C. 20549 at prescribed rates. The SEC maintains a web site
at http://www.sec.gov that contains reports and other information regarding
registrants, like Avalon, that file electronically with the SEC.
135
<PAGE>
EXPERTS
The financial statements of Avalon Cable of Michigan Holdings, Inc. and
Subsidiaries as of December 31, 1998 and for the period from June 2, 1998
(inception) through December 31, 1998, included in this prospectus, have been
so included in reliance on the report of PricewaterhouseCoopers LLP,
independent accountants, given on the authority of said firm as experts in
auditing and accounting.
The consolidated financial statements of Cable Michigan Inc. and
Subsidiaries as of December 31, 1997 and November 5, 1998, and for the year
ended December 31, 1997 and the period from January 1, 1998 through November 5,
1998, included in this prospectus, have been audited so included in reliance on
the report of PricewaterhouseCoopers LLP, independent accountants, given on the
authority of said firm as experts in auditing and accounting.
The financial statements of Avalon Cable LLC as of December 31, 1998 and for
the period from October 21, 1998 (inception) through December 31, 1998,
included in this prospectus, have been so included in reliance on the report of
PricewaterhouseCoopers LLP, independent accountants, given on the authority of
said firm as experts in auditing and accounting.
The financial statements of Amrac Clear View, a Limited Partnership as of
May 28, 1998 and for the period from January 1, 1998 through May 28, 1998,
included in this prospectus, have been so included in reliance on the report of
PricewaterhouseCoopers LLP, independent accountants, given on the authority of
said firm as experts in auditing and accounting.
The financial statements of Amrac Clear View, a Limited Partnership as of
December 31, 1996 and 1997 and for each of the three years in the period ended
December 31, 1997, included in this prospectus, have been so included in
reliance on the report of Greenfield, Altman, Brown, Berger & Katz, P.C.,
independent accountants, given on the authority of said firm as experts in
auditing and accounting.
The combined financial statements of Pegasus Cable Television of
Connecticut, Inc. and the Massachusetts operations of Pegasus Cable Television,
Inc. as of December 31, 1996 and 1997 and for each of the three years in the
period ended December 31, 1997, included in this prospectus, have been so
included in reliance on the report of PricewaterhouseCoopers LLP, independent
accountants, given on the authority of said firm as experts in auditing and
accounting.
The financial statements of Taconic CATV as of December 31, 1997 and 1998
and for the years then ended have been included herein and in the registration
statement in reliance upon the report of KPMG LLP, independent certified public
accountants, appearing elsewhere herein, and upon the authority of said firm as
experts in accounting and auditing.
The financial statements of Avalon Cable Holdings Finance, Inc. and 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.
136
<PAGE>
INDEX TO THE FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Avalon Cable LLC and Subsidiaries
Report of Independent Accountants ...................................... F-
Consolidated Balance Sheet as of December 31, 1998...................... F-
Consolidated Statement of Operations for the period from October 21,
1998 (inception) through December 31, 1998............................. F-
Consolidated Statements of Changes in Members' Interest from October 21,
1998 (inception) through December 31, 1998............................. F-
Consolidated Statement of Cash Flows for the period from October 21,
1998 (inception) through December 31, 1998............................. F-
Notes to the Consolidated Financial Statements.......................... F-
Avalon Cable of Michigan Holdings, Inc. and Subsidiaries
Report of Independent Accountants ...................................... F-
Consolidated Balance Sheets as of December 31, 1998 .................... F-
Consolidated Statement of Operations and Changes in Accumulated Deficit
for the period from June 2, 1998 (inception) through December 31, 1998. F-
Consolidated Statement of Cash Flows for the period from June 2, 1998
(inception) through December 31, 1998.................................. F-
Notes to the Consolidated Financial Statements.......................... F-
Avalon Cable Holdings Finance, Inc. and Subsidiary
Report of Independent Accountants ...................................... F-
Consolidated Balance Sheet as of December 31, 1998 ..................... F-
Consolidated Statement of Operations for the period from October 21,
1998 (inception) through December 31, 1998............................. F-
Consolidated Statement of Cash Flows for the period from October 21,
1998 (inception) through December 31, 1998............................. F-
Notes to the Consolidated Financial Statements.......................... F-
Cable Michigan, Inc. and Subsidiaries
Report of Independent Accountants....................................... F-
Consolidated Balance Sheets as of December 31, 1997 and November 5,
1998................................................................... F-
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-
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-
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-
Notes to Consolidated Financial Statements.............................. F-
Amrac Clear View, A Limited Partnership
Report of Independent Accountants....................................... F-
Balance Sheet as of May 28, 1998........................................ F-
Statement of Operations for the period from January 1, 1998 through May
28, 1998............................................................... F-
Statement of Changes in Partners' Equity (Deficit) for the period from
January 1, 1998 through May 28, 1998................................... F-
Statement of Cash Flows for the period from January 1, 1998 through May
28, 1998............................................................... F-
Notes to Financial Statements........................................... F-
</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-
Balance Sheets as of December 31, 1996 and 1997......................... F-
Statements of Net Earnings for the years ended December 31, 1995, 1996
and 1997............................................................... F-
Statements of Changes in Partners' Equity (Deficit) for the years ended
December 31, 1995, 1996 and 1997....................................... F-
Statements of Cash Flows for the years ended December 31, 1995, 1996 and
1997................................................................... F-
Notes to Financial Statements........................................... F-
Pegasus Cable Television, Inc.
Report of Independent Accountants....................................... F-
Combined Balance Sheets at December 31, 1996 and 1997 and June 30, 1998. F-
Combined Statement of Operations for the years ended December 31, 1995,
1996 and 1997 and the six months ended June 30, 1998................... F-
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-
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-
Notes to Combined Financial Statements.................................. F-
Taconic Technology Corp.
Independent Auditors' Report............................................ F-64
Balance Sheets at December 31, 1997 and 1998............................ F-
Statements of Operations and Component Equity for the two years ended
December 31, 1997 and 1998............................................. F-
Statements of Cash Flows for the years ended December 31, 1997 and 1998. F-71
Notes to Financial Statements........................................... F-
</TABLE>
F-2
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Managers of
Avalon Cable of Michigan Holdings, Inc. and Subsidiaries
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statement of operations, shareholders' equity and cash flows
present fairly, in all material respects, the financial position of Avalon
Cable of Michigan Holdings, Inc. and subsidiaries (collectively, the "Company")
at December 31, 1998, and the results of their operations, changes in
shareholders' equity and their cash flows for the period from June 2, 1998
(inception) to December 31, 1998, in conformity with generally accepted
accounting principles. The financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audit. We conducted our audit of these
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statements presentation. We believe that our audit provides a
reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
New York, New York
March 30, 1999
F-2--1
<PAGE>
AVALON CABLE OF MICHIGAN HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
December 31, 1998
(in thousands)
<TABLE>
<S> <C>
ASSETS
------
Cash.................................................................. $ 9,071
Accounts receivable, net of allowance for doubtful accounts of $873... 5,015
Prepayments and other current assets.................................. 1,267
Accounts receivable from related parties.............................. 371
Deferred income taxes................................................. 377
--------
Current assets.................................................... 16,101
Property, plant and equipment, net.................................... 104,965
Intangible assets, net................................................ 431,313
Deferred charges and other assets..................................... 1,270
--------
Total assets...................................................... $553,649
========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Accounts payable and accrued expenses................................. $ 10,194
Advance billings and customer deposits................................ 2,454
Accounts payable--affiliate........................................... 2,023
--------
Current liabilities............................................... 14,671
Long-term debt........................................................ 402,369
Notes payable--affiliate.............................................. 15,171
Deferred income taxes................................................. 80,811
--------
Total liabilities................................................. 513,022
--------
Commitments and contingencies (Note 10)............................... --
Minority interest..................................................... 13,855
--------
Stockholders equity:
Common stock.......................................................... --
Additional paid-in capital............................................ 35,000
Accumulated deficit................................................... (8,228)
--------
Total shareholders' equity........................................ 26,772
--------
Total liabilities and shareholders' equity........................ $553,649
========
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
F-2--2
<PAGE>
AVALON CABLE OF MICHIGAN HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Period from June 2, 1998 (inception) through December 31, 1998
(dollars in thousands)
<TABLE>
<S> <C>
Revenue:
Basic services...................................................... $11,119
Premium services.................................................... 1,036
Other............................................................... 1,502
-------
13,657
Operating expenses:
Selling, general and administrative................................. 2,719
Programming......................................................... 3,281
Technical and operations............................................ 1,718
Depreciation and amortization....................................... 6,614
-------
Loss from operations.................................................. (675)
Interest income....................................................... 173
Interest (expense).................................................... (6,957)
Other (expense), net.................................................. (65)
-------
(Loss) before income taxes............................................ (7,524)
(Benefit) from income taxes........................................... (2,754)
-------
(Loss) before minority interest and extraordinary item................ (4,770)
Minority interest in loss of consolidated entity...................... (398)
-------
(Loss) before extraordinary item...................................... (5,168)
Extraordinary loss on extinguishment of debt (net of tax $1,743)...... (3,060)
-------
Net loss............................................................ $(8,228)
=======
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
F-2--3
<PAGE>
AVALON CABLE OF MICHIGAN HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
For the Period from June 2, 1998 (inception) through December 31, 1998
(in thousands, except share amounts)
<TABLE>
<CAPTION>
Common Additional Total
Shares Common Paid-in Accumulated Shareholders'
Outstanding Stock Capital Deficit Equity
----------- ------ ---------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Balance, June 2, 1998... 100 $-- $ -- $ -- $ --
Net loss from date of
inception through
December 31, 1998...... -- -- -- (8,228) (8,228)
Contributions by parent. -- -- 35,000 -- 35,000
--- ---- ------- ------- -------
Balance, December 31,
1998................... 100 $-- $35,000 $(8,228) $26,772
=== ==== ======= ======= =======
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
F-2--4
<PAGE>
AVALON CABLE OF MICHIGAN HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
For the Period from June 2, 1998 (inception) through December 31, 1998
(in thousands)
<TABLE>
<S> <C>
Cash flows from operating activities:
Net (loss)......................................................... $ (8,228)
Extraordinary loss on extinguishment of debt....................... 3,060
Depreciation and amortization...................................... 6,414
Deferred income taxes, net......................................... 10,369
Provision for loss on accounts receivable.......................... 75
Increase (decrease) in minority interest........................... 398
Net change in certain assets and liabilities, net of business
acquisitions......................................................
Increase in accounts receivable.................................. (832)
Increase in prepayment and other current assets.................. (446)
Increase in accounts payable and accrued expenses................ 6,869
Increase in deferred revenue..................................... 967
--------
Net cash used by operating activities.......................... 18,646
--------
Cash flows from investing activities:
Additions to property, plant and equipment......................... (4,673)
Payment for acquisition............................................ (431,629)
--------
Net cash used in investing activities............................ (436,302)
--------
Cash flows from Financing Activities:
Proceeds from the issuance of the Credit Facility.................. 265,888
Principal payment on debt.......................................... (125,013)
Proceeds from the issuance of senior subordinated notes............ 150,000
Payments made on bridge loan....................................... (105,000)
Proceeds from bridge loan.......................................... 105,000
Proceeds from the senior discount notes............................ 110,411
Proceeds from the issuance of note payable affiliate............... 33,200
Payments made on note payable--affiliate........................... (18,037)
Payments made for debt financing costs............................. (2,978)
Proceeds from the issuance of common stock......................... 35,000
--------
Net cash provided by financing activities........................ 419,427
--------
Net increase in cash................................................. 1,771
Cash at beginning of the period...................................... 7,300
--------
Cash at end of the period........................................ $ 9,071
--------
Supplemental disclosures of cash flow information....................
Cash paid during the year for........................................
Interest........................................................... $ 2,639
Income taxes....................................................... --
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
F-2--5
<PAGE>
AVALON CABLE OF MICHIGAN HOLDINGS, 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 Holdings, Inc. ("The Company") was formed in June
1998, pursuant to the laws of the state of Delaware. Avalon Cable of Michigan
Inc. ("Avalon Michigan") was formed in June 1998, pursuant to the laws of the
state of Delaware as a wholly owned subsidiary of the Company. On June 3, 1998,
Avalon Michigan entered into an Agreement and Plan of Merger (the "Agreement")
among the Company, Cable Michigan, Inc. and Avalon Cable of Michigan Inc.
("Avalon Sub"), pursuant to which Avalon Sub will merge into the Company and
the Company will become a wholly owned subsidiary of the Company (the
"Merger").
In accordance with the terms of the Agreement, each share of common stock,
par value $1.00 per share ("common stock"), of Cable Michigan, Inc. ("Cable
Michigan") outstanding prior to the effective time of the Merger (other than
treasury stock, shares owned by the Company or its subsidiaries, or shares as
to which dissenters' rights have been exercised) shall be converted into the
right to receive $40.50 in cash (the "Merger Consideration"), subject to
certain possible closing adjustments.
In conjunction with the acquisition of Cable Michigan, Avalon Michigan
acquired Cable Michigan's 62% ownership interest in Mercom, Inc. ("Mercom").
On November 6, 1998, Avalon Michigan completed its merger into and with
Cable Michigan. The total consideration paid in conjunction with the merger,
including fees and expenses was $431,629, including repayment of all existing
Cable Michigan indebtedness and accrued interest of $135,205. Subsequent to the
merger, the arrangements with RCN and CTE were terminated. The Agreement also
permitted Avalon Michigan to agree to acquire the remaining shares of Mercom
that it did not own.
The Company contributed $137,375 in cash to Avalon Michigan, which was used
to consummate the Merger. On November 5, 1998, the Company received $105,000 in
cash in exchange for promissory notes to lenders (the "Bridge Agreement"). On
November 6, 1998, the Company contributed the proceeds received from the Bridge
Agreement and an additional $35,000 in cash to Avalon Michigan in exchange for
100 shares of common stock.
In March 1999, after the acquisition of Mercom, Inc. Avalon Michigan
completed a series of transactions to facilitate certain aspects of its
financing. As a result of these transactions:
. Avalon Cable of Michigan LLC has become the operator of the Michigan
cluster replacing Avalon Cable of Michigan, Inc.;
. Avalon Cable of Michigan LLC is an obligor on the Senior Subordinated
Notes replacing Avalon Cable of Michigan, Inc.; and
. Avalon Cable of Michigan, Inc. is a guarantor of the obligations of
Avalon Cable of Michigan LLC under the Senior Subordinated Notes. Avalon
Cable of Michigan, Inc. does not have significant assets, other than its
investment in Avalon Cable LLC.
Avalon Michigan provides cable services to various areas in the state of
Michigan. Avalon Michigan's cable systems offer customer packages for basic
cable programming services which are offered at a per channel charge or
packaged together to form a tier of services offered at a discount from the
combined channel rate. Avalon Michigan's cable systems also provide premium
cable services to their customers for an extra monthly charge. Customers
generally pay initial connection charges and fixed monthly fees for cable
programming and premium cable services, which constitute the principle sources
of revenue for the Company.
F-2--6
<PAGE>
AVALON CABLE OF MICHIGAN HOLDINGS, 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.
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.......................................................... 5 years
Other equipment................................................... 5-10 years
</TABLE>
F-2--7
<PAGE>
AVALON CABLE OF MICHIGAN HOLDINGS, 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-2--8
<PAGE>
AVALON CABLE OF MICHIGAN HOLDINGS, 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 the Company and Avalon Michigan permitted
Avalon Michigan to agree to acquire the 1,822,810 shares (approximately 38% of
the outstanding stock) of Mercom that it did not own (the "Mercom
Acquisition"). On September 10, 1998 Avalon Michigan and Mercom entered into a
definitive agreement (the "Mercom Merger Agreement") providing for the
acquisition by Avalon Michigan of all of such shares at a price of $12.00 per
share. Avalon Michigan completed this acquisition in March 1999. The total
estimated consideration payable in conjunction with the Mercom Acquisition,
excluding fees and expenses was $21,900.
Following is the unaudited pro forma results of operations for the year
ended December 31, 1998, as if the Merger occurred on January 1, 1998:
<TABLE>
<CAPTION>
December 31,
1998
------------
(Unaudited)
<S> <C>
Revenue................................... $ 88,178
========
Loss from operations...................... $ (4,664)
========
Net loss.................................. $(30,989)
========
</TABLE>
In March 1999, Avalon Michigan acquired the cable television systems of Nova
Cablevision, Inc., Nova Cablevision VI, L.P. and Nova Cablevision VII, L.P. for
approximately $7,800, excluding transaction fees.
4. Property, Plant and Equipment
Property, plant and equipment consists of the following:
<TABLE>
<S> <C>
Cable plant..................................................... $100,167
Vehicles........................................................ 2,475
Buildings and improvements...................................... 2,151
Office furniture and fixtures................................... 846
Construction in process......................................... 768
--------
Total property, plant and equipment............................. 106,407
Less--accumulated depreciation.................................. (1,442)
--------
Property, plant and equipment, net.............................. $104,965
========
</TABLE>
Depreciation expense was $1,442 for period from inception (June 2, 1998) to
December 31, 1998.
F-2--9
<PAGE>
AVALON CABLE OF MICHIGAN HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
5. Intangible Assets
Intangible assets consist of the following:
<TABLE>
<S> <C>
Cable Franchise................................................. $344,063
Goodwill........................................................ 81,705
Deferred Financing Costs........................................ 10,657
--------
Total........................................................... 436,425
Less--accumulated amortization.................................. (5,112)
--------
Intangible assets, net.......................................... $431,313
========
</TABLE>
Amortization expense charged to operations in during the period from
inception (June 2, 1998) through December 31, 1998 was $5,112.
6. Account payable and accrued expenses consist of the following:
<TABLE>
<S> <C>
Accounts payable................................................ $ 5,321
Accrued cable programming costs................................. 1,824
Accrued taxes................................................... 1,107
Other........................................................... 1,942
-------
$10,194
=======
7. Income Taxes
The income tax provision (benefit) in the accompanying consolidated
financial statements of operations is comprised of the following:
<CAPTION>
1998
-------
<S> <C>
Current
Federal........................................................ $ 243
State.......................................................... --
-------
Total Current................................................ 243
-------
Deferred
Federal........................................................ (2,757)
State.......................................................... (240)
-------
Total Deferred............................................... (2,997)
-------
Total (benefit) for income taxes............................. $(2,754)
=======
</TABLE>
The benefit for income taxes is different from the amounts computed by
applying the U.S. statutory federal tax rate of 35% for 1998. The differences
are as follows:
<TABLE>
<CAPTION>
1998
-------
<S> <C>
(Loss) before (benefit) for income taxes........................ $(7,524)
=======
Federal tax (benefit) at statutory rates........................ (2,633)
State income taxes.............................................. (198)
Goodwill........................................................ 77
-------
(Benefit) for income taxes...................................... (2,754)
=======
</TABLE>
<TABLE>
<CAPTION>
Tax Net
Operating Expiration
Year Losses Date
---- --------- ----------
<S> <C> <C>
1998................................................. $10,360 2018
</TABLE>
F-2--10
<PAGE>
AVALON CABLE OF MICHIGAN HOLDINGS, 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................................................ $ 5,363
Alternative minimum tax credits.................................. 141
Reserves......................................................... 210
Other, net....................................................... 309
-------
Total deferred assets.......................................... 6,023
-------
Property, plant and equipment.................................... (10,635)
Intangible assets................................................ (75,538)
-------
Total deferred liabilities..................................... (86,173)
-------
Subtotal......................................................... (80,150)
-------
Valuation allowance.............................................. --
-------
Total deferred taxes........................................... (80,150)
=======
</TABLE>
The tax benefit related to the loss on extinguishment of debt results in
deferred tax, and it approximating the statutory U.S. tax rate. The tax benefit
of $2,036 related to the exercise of certain stock options of Cable Michigan
Inc. was charged directly to goodwill in conjunction with the closing of the
merger.
8. Debt
At December 31, 1998, Long-term Debt consists of the following:
<TABLE>
<S> <C>
Senior credit facility.......................................... $150,000
Senior subordinated notes....................................... 140,875
Senior discount notes........................................... 111,494
--------
402,369
Current portion............................................... --
--------
$402,369
========
</TABLE>
Credit Facility
On November 6, 1998, Avalon Michigan became a co-borrower along with Avalon
New England and Avalon Cable Finance Inc (Avalon Finance), affiliated
companies, collectively referred to as the ("Co-Borrowers") on a $320,888
senior credit facility, which includes term loan facilities consisting of (i)
tranche A term loans of $120,888 and (ii) tranche B term loans of $170,000 and
a revolving credit facility of $30,000 (collectively, the "Credit Facility").
Subject to compliance with the terms of the Credit Facility, borrowings under
the Credit Facility will be available for working capital purposes, capital
expenditures and pending and future acquisitions. The ability to advance funds
under the tranche A term loan facility terminates on March 31, 1999. The
tranche A term loans are subject to minimum quarterly amortization payments
commencing on January 31, 2001 and maturing on October 31, 2005. The tranche B
term loans are scheduled to be repaid in two equal installments on July 31,
2006 and October 31, 2006. The revolving credit facility borrowings are
scheduled to be repaid on October 31, 2005.
On November 6, 1998, Avalon Michigan borrowed $265,888 under the Credit
Facility in order to consummate the Merger. In connection with the Senior
Subordinated Notes (as defined below) and Senior Discount Notes (as defined
below) offerings, Avalon Michigan repaid $125,013 of the Credit Facility, and
the availability under the Credit Facility was reduced to $195,000. Avalon
Michigan had borrowings of $140,875 outstanding under the tranche B term note
facilities, and had available $30,000 for borrowings under the revolving credit
facility. Avalon New England and Avalon Finance had no borrowings outstanding
under the Credit Facility at December 31, 1998.
F-2--11
<PAGE>
AVALON CABLE OF MICHIGAN HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The interest rate under the Credit Facility is a rate based on either (i)
the base rate (a rate per annum equal to the greater of the Prime Rate and the
Federal Funds Effective Rate plus 1/2 of 1%) or (ii) the Eurodollar rate (a
rate per annum equal to the Eurodollar Base Rate divided by 1.00 less the
Eurocurrency Reserve Requirements) plus, in either case, the applicable margin.
As of December 31, 1998, the applicable margin was (a) with respect to the
tranche B term loans was 2.75% per annum for Base Rate loans and 3.75% per
annum for Eurodollar loans and (b) with respect to tranch A term loans and the
revolving credit facility was 2.00% per annum for Base Rate loans and 3.00% for
Eurodollar loans. The applicable margin for the tranche A term loans and the
revolving credit facility are subject to performance based grid pricing which
is determined based on upon the consolidated leverage ratio of the Co-
Borrowers. The interest rate for the tranche B term loans outstanding at
December 31, 1998 was 9.19%. Interest is payable on a quarterly basis. Accrued
interest on the borrowings under the credit facility was $1,389 at December 31,
1998.
The Credit Facility contains restrictive covenants which among other things
require the Co-Borrowers to maintain certain ratios including consolidated
leverage ratios and the interest coverage ratio, fixed charge ratio and debt
service coverage ratio.
The obligations of the Co-Borrowers under the Credit Facility are secured by
substantially all of the assets of the Co-Borrowers. In addition, the
obligations of the Co-Borrowers under the Credit Facility are guaranteed by
Avalon Cable of Michigan Holdings, Inc., Avalon Cable LLC, Avalon Cable Finance
Holdings, Inc., Avalon Cable of New England Holdings, Inc. and Avalon Cable
Holdings, LLC.
Subordinated debt
In December 1998, Avalon Michigan became a co-issuer of a $150,000,
principal balance, Senior Subordinated Notes ("Subordinated Notes") offering
and Michigan Holdings became a co-issuer of a $196,000, gross proceeds, Senior
Discount Notes ("Senior Discount Notes") offering. In conjunction with these
financings, Avalon Michigan paid $18,130 to Avalon Finance as a partial payment
against Avalon Michigan's note payable--affiliate. Avalon Michigan paid $75 in
interest on this note payable--affiliate during the period from inception (June
2, 1998) through December 31, 1998.
The Subordinated Notes mature on December 1, 2008, and interest accrued at a
rate of 9.375% per annum. Interest is payable semi-annually in arrears on June
1 and December 1 of each year, commencing on
June 1, 1999. Accrued interest on the Subordinated Notes was $1,078 at December
31, 1998. The Senior Discount Notes mature on December 1, 2008. Until December
1, 2003, interest will not be paid currently on the Senior Discount Notes, but
the accreted value will increase (representing original issue discount) between
the date of original issuance and December 1, 2003. Beginning on December 1,
2003, interest will accrue at a rate of 11.875% per annum and will be payable
semi-annually in arrears on June 1 and December 1 of each year, to holders of
record on the immediately preceding May 15 and November 15. Original issue
discount accretion on the Senior Discount Notes was $1,083 at December 31,
1998.
The Senior Subordinated Notes will not be redeemable at the Co-Borrowers'
option prior to December 1, 2003. Thereafter, the Senior Subordinated Notes
will be subject to redemption at any time at the option of the Co-Borrowers, in
whole or in part at the redemption prices (expressed as percentages of
principal amount) plus accrued and unpaid interest, if any, thereon to the
applicable redemption date, if redeemed during the twelve-month period
beginning on December 1 of the years indicated below:
The scheduled maturities of the long-term debt are $2,000 in 2001, $4,000 in
2002, $72,479 in 2003, and the remainder thereafter.
At any time prior to December 1, 2001, the Co-Borrowers may on any one or
more occasions redeem up to 35% of the aggregate principal amount of Senior
Subordinate Notes originally issued under the Indenture at a redemption price
equal to 109.375% of the principal amount thereof, plus accrued and unpaid
interest, if any, to the redemption date, with the net cash proceeds of any
equity offering and/or the net cash proceeds of a
F-2--12
<PAGE>
AVALON CABLE OF MICHIGAN HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 employee
benefit plans or as compensation to employees; provided that to the extent such
Capital Stock is issued by the Co-Borrowers, the net cash proceeds thereof
shall have been contributed to one or more of the Co-Borrowers in the form of
an equity contribution.
Mercom debt
In August 1997, the Mercom revolving credit agreement for $2,000 expired.
Mercom had no borrowings under the revolving credit agreement in 1996 or 1997.
On September 29, 1997, Avalon Michigan purchased and assumed all of the bank's
interest in the term credit agreement and the note issued thereunder.
Immediately after the purchase, the term credit agreement was amended in order
to, among other things, provide for less restrictive financial covenants,
eliminate mandatory amortization of principal and provide for a bullet maturity
of principal on December 31, 2002, and remove the change of control event of
default. Mercom's borrowings under the term credit agreement contain pricing
and security provisions substantially the same as those in place prior to the
purchase of the loan. The borrowings are secured by a pledge of the stock of
Mercom's subsidiaries and a first lien on certain of the assets of Mercom and
its subsidiaries, including inventory, equipment and receivables at December
31, 1998, $14,151 of principal was outstanding. The borrowings under the term
credit agreement are eliminated in the Company's consolidated balance sheet.
9. Employee Benefit Plans
Avalon Michigan has a qualified savings plan under Section 401(K) of the
Internal Revenue Code. Contributions charged to expense for the period from
November to December 31, 1998 was $30.
10. Commitments and Contingencies
Leases
Total rental expense, primarily for office space and pole rental, was $43.
Rental commitments are expected to continue at approximately $1 million a year
for the foreseeable future, including pole rental commitments which are
cancelable.
F-2--13
<PAGE>
AVALON CABLE OF MICHIGAN HOLDINGS, 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, Avalon Michigan received $33,200 from Avalon Finance. In
consideration for this amount, Avalon Michigan executed a note payable to
Avalon Finance. The note matures on December 31, 2001. This note is recorded as
note payable-affiliate on the balance sheet at December 31, 1998. Interest
accrues at a rate of 4.47% per year, and is payable on December 31, 2001.
Accrued interest receivable of $102 has been recorded in connection with this
note at December 31, 1998. On December 10,1998, Avalon Michigan made a partial
payment of $18,130 against this note payable-affiliate to Avalon Finance.
Avalon Michigan receives support services such as finance, accounting and
human resources from Avalon Cable LLC, a related party. All shared costs are
allocated on the basis of average time spent servicing each entity. In the
opinion of management, the methods used in allocating costs from Avalon Cable
LLC are reasonable; however, the costs of these services as allocated are not
necessarily indicative of the costs that would have been incurred by the
combined operations on a stand-alone basis. For the period ended December 31,
1998, the Company was allocated charges related to such services of $250. The
Company had a payable of $250 related to these services at December 31, 1998.
At December 31, 1998, the Company had an accounts receivable-affiliate
balance of $247 with Avalon Cable LLC.
F-2--14
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Managers
of Avalon Cable LLC
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statement of operations, changes in members' interest and cash
flows present fairly, in all material respects, the financial position of
Avalon Cable LLC and its subsidiaries (the "Company") at December 31, 1998 and
the results of their operations, changes in members' interest and their cash
flows for the period from October 21, 1998 (inception), through December 31,
1998 in conformity with generally accepted accounting principles. The financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on the financial statements based on
our audit. We conducted our audit of these statements in accordance with
generally accepted auditing standards which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for the
opinion expressed above.
PricewaterhouseCoopers LLP
New York, New York
March 30, 1999
F-72
<PAGE>
AVALON CABLE LLC AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
December 31, 1998
(in thousands)
<TABLE>
<S> <C>
Assets
Current assets:
Cash.......... $ 217
Subscriber
receivables,
less
allowance for
doubtful
accounts of
$70.......... 847
Prepaid
expenses and
other current
assets....... 121
-------
Total
current
assets..... 1,185
Property, plant
and equipment,
net............ 6,456
Intangible
assets, net.... 30,804
Notes
receivable--
affiliate...... 15,171
Other assets.... 32
-------
Total
assets..... $53,648
=======
Liabilities and
Members'
Interest
Current
liabilities:
Current
portion of
notes
payable...... $ 20
Accounts
payable and
accrued
expenses..... 1,331
Accounts
payable,
net--
affiliate.... 247
Deferred
revenue...... 717
Accrued
interest..... 121
-------
Total
current
liabilities. 2,436
Note payable,
net of current
portion........ 580
Note payable--
affiliate...... 3,341
-------
Total
liabilities. 6,357
-------
Commitments and
contingencies
(Note 10)
Members'
interest:
Members'
capital...... 49,345
Accumulated
deficit...... (2,054)
-------
Total
member's
interest... 47,291
-------
Total
liabilities
and
member's
interest... $53,648
=======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-73
<PAGE>
AVALON CABLE LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
For the Period from October 21, 1998 (inception) through December 31, 1998
(in thousands)
<TABLE>
<S> <C>
Revenue:
Basic services..................................................... $ 1,117
Premium services................................................... 121
Other.............................................................. 61
-------
Total revenues................................................... 1,299
Operating expenses:
Selling, general and administrative................................ 343
Programming........................................................ 338
Technical and operations........................................... 136
Depreciation and amortization...................................... 440
-------
Income from operations............................................... 42
Other income (expense):
Interest income.................................................... 177
Interest (expense)................................................. (962)
-------
Net loss before the extraordinary loss on early extinguishment of
debt (743)
Extraordinary loss on early extinguishment of debt................... (1,311)
-------
Net loss......................................................... $(2,054)
=======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-74
<PAGE>
AVALON CABLE LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN MEMBERS' INTEREST
From the Period from October 21, 1998 (inception) through December 31, 1998
(in thousands, except share data)
<TABLE>
<CAPTION>
Class A Class B-1 Total
-------------- ------------- Net Members'
Units $ Units $ Loss Interest
------ ------- ------ ------ ------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balances at (inception)
October 21, 1998........... -- $ -- -- $ -- $ -- $ --
Issuance of Class A units... 45,000 45,000 -- -- -- 45,000
Issuance of Class B-1 units
in consideration
for Avalon New England..... -- -- 64,696 4,345 -- 4,345
Net loss.................... -- -- (2,054) (2,054)
------ ------- ------ ------ ------- -----------
Balance at December 31,
1998....................... 45,000 $45,000 64,696 $4,345 $(2,054) $ 47,291
====== ======= ====== ====== ======= ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-75
<PAGE>
AVALON CABLE LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
From the Period from October 21, 1998 (inception) through December 31, 1998
In thousands
<TABLE>
<S> <C>
Cash flows from operating activities:
Net loss........................................................... $ (2,054)
Adjustments to reconcile net income to net cash provided by
operating activities
Depreciation and amortization.................................... 440
Changes in operating assets and liabilities........................
Increase in subscriber receivables............................... (30)
Increase in prepaid expenses and other current assets............ (32)
Increase in accounts payable and accrued expenses................ 424
--------
Net cash used in operating activities.......................... (1,252)
--------
Cash flows from investing activities:
Capital expenditures............................................... (157)
--------
Net cash used in investing activities.......................... (157)
--------
Cash flows from financing activities:
Contributions by members........................................... 46,588
Proceeds from issuance of notes payable-affiliates................. 33,070
Increase in note receivable--affiliate............................. (15,362)
Payment of terms loans and revolving credit facility............... (29,600)
Payment of note payable to affiliates.............................. (33,070)
--------
Net cash provided by financing activities...................... 1,626
Increase in cash..................................................... 217
Cash, beginning of period............................................ --
--------
Cash, end of period.................................................. $ 217
========
Supplemental disclosures of cash flow information:
Cash paid during the period for interest........................... $ 841
========
Non-cash contributions by members.................................. $ 2,757
========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-76
<PAGE>
AVALON CABLE LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In thousands
1. Basis of Presentation and Description of Business
Avalon Cable LLC ("Avalon"), and its wholly owned subsidiary Avalon Cable
Holdings Finance, Inc ("Avalon Holdings Finance"), were formed in October 1998,
pursuant to the laws of the State of Delaware, as a wholly owned subsidiary of
Avalon Cable of New England Holdings, Inc. ("Avalon New England Holdings").
On November 6, 1998, Avalon New England Holdings contributed its 100%
interest in Avalon Cable of New England LLC ("Avalon New England") to Avalon in
exchange for a membership interest in Avalon. On that same date, Avalon
received $63,000 from affiliated entities, which was comprised of (i) a $45,000
capital contribution by Avalon Investors, LLC ("Avalon Investors") and (ii) an
$18,000 promissory note from Avalon Cable Holdings LLC ("Avalon Holdings"),
which was used to make a $62,800 cash contribution to Avalon New England.
The cash contribution received by Avalon New England was used to (i)
extinguish existing indebtedness of $29,600 and (ii) fund a $33,200 loan to
Avalon Holdings Finance which matures on December 31, 2001.
On December 10, 1998, Avalon received a dividend distribution from Avalon
New England in the amount of $18,206, which was used by Avalon to pay off the
promissory note payable to Avalon Holdings, plus accrued interest.
Avalon New England provides cable service to the western New England area.
Avalon New England's cable systems offer customer packages of basic and premium
cable programming services which are offered at a per channel charge or are
packaged together to form a tier of services offered at a discount from the
combined channel rate. Avalon New England's cable systems also provide premium
cable services to their customers for an extra monthly charge. Customers
generally pay initial connection charges and fixed monthly fees for cable
programming and premium cable services, which constitute the principal sources
of revenue for Avalon New England.
Avalon Holdings Finance was formed for the sole purpose of facilitating
financings associated with the acquisitions of various cable operating
companies. Avalon Holdings Finance conducts no other activities.
2. Summary of Significant Accounting Policies
Principles of consolidation
The consolidated financial statements of Avalon and its subsidiaries,
include the accounts of Avalon and its wholly owned subsidiaries, Avalon New
England and Avalon Holdings Finance (collectively, the "Company"). All
significant transactions between Avalon and its subsidiaries have been
eliminated.
Use of estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and use
assumptions that affect the reported amounts of assets and liabilities and the
disclosure for contingent assets and liabilities at the date of the financial
statements as well as the reported amounts of revenues and expenses during the
reported period. Actual results may vary from estimates used.
Revenue recognition
Revenue is recognized as cable services are provided.
F-77
<PAGE>
AVALON CABLE LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Advertising costs
Advertising costs are charged to operations as incurred. Advertising costs
were $11 for the year ended December 31, 1998.
Concentration of credit risk
Financial instruments which potentially expose the Company to a
concentration of credit risk include cash and subscriber and other receivables.
The Company extends credit to customers on an unsecured basis in the normal
course of business. The Company maintains reserves for potential credit losses
and such losses, in the aggregate, have not historically exceeded management's
expectations.
Property, plant and equipment
Property, plant and equipment is stated at cost. Initial subscriber
installation costs, including material, labor and overhead costs, are
capitalized as a component of cable plant and equipment. The cost of
disconnection and reconnection are charged to expense when incurred.
Depreciation is computed for financial statement purposes using the straight-
line method based upon the following lives:
<TABLE>
<S> <C>
Vehicles...................................................... 5 years
Cable plant and equipment..................................... 5-12 years
Office furniture and equipment................................ 5-10 years
Buildings and improvements.................................... 10-25 years
</TABLE>
Intangible assets
Intangible assets represent the estimated fair value of cable franchises and
goodwill resulting from acquisitions. Goodwill is the excess of the purchase
price over the fair value of the net assets acquired, determined through an
independent appraisal. Amortization is computed for financial statement
purposes using the straight-line method based upon the anticipated economic
lives:
<TABLE>
<S> <C>
Cable franchises.............................................. 13-15 years
Goodwill...................................................... 15 years
Non-compete agreement......................................... 5 years
</TABLE>
Accounting for impairments
The Company follows the provisions of Statement of Financial Accounting
Standards No. 121--"Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed of" ("SFAS 121").
SFAS 121 requires that long-lived assets and certain identifiable
intangibles to be held and used by an entity be reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount
of an asset may not be recoverable. In performing the review for
recoverability, the Company estimates the net future cash flows expected to
result from the use of the asset and its eventual disposition. If the sum of
the expected net future cash flows (undiscounted and without interest charges)
is less than the carrying amount of the asset, an impairment loss is
recognized. Measurement of an impairment loss for long-lived assets and
identifiable intangibles expected to be held and used is based on the fair
value of the asset.
No impairment losses have been recognized by the Company pursuant to SFAS
121.
F-78
<PAGE>
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.
78--1
<PAGE>
AVALON CABLE LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED 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. Members' Capital
Avalon has authorized two classes of equity units; class A units ("Class A
Units") and class B units ("Class B Units") (collectively, the "Units"). Each
class of the Units represents a fractional part of the membership interests in
Avalon and has the rights and obligations specified in Avalon's Limited
Liability Company Agreement. Each Class B Unit is entitled to voting rights
equal to the percentage such units represents of the aggregate number of
outstanding Class B Units. The Class A Units are not entitled to voting rights.
Class A Units
The Class A Units are participating preferred equity interests. A preferred
return accrues annually (the Company's "Preferred Return") on the initial
purchase price (the Company's "Capital Value") of each Class A Unit at a rate
of 15, or 17% under certain circumstances, per annum. The Company cannot pay
distributions in respect of other classes of securities including distributions
made in connection with a liquidation until the Company's Capital Value and
accrued Preferred Return in respect of each Class A Unit is paid to the holders
thereof (such distributions being the Company's "Priority Distributions"). So
long as any portion of the Company's Priority Distributions remains unpaid, the
holders of a majority of the Class A Units are entitled to block certain
actions by the Company including the payment of certain distributions, the
issuance of senior or certain types of pari passu equity securities or the
entering into or amending of certain related-party agreements. In addition to
the Company's Priority Distributions, each Class A Unit is also entitled to
participate in common distributions, pro rata according to the percentage such
unit represents of the aggregate number of the Company's units then
outstanding.
Class B Units
The Class B Units are junior equity securities which are divided into two
identical subclasses, Class B-1 Units and Class B-2 Units. After the payment in
full of Avalon's Priority Distributions, each Class B Unit is entitled to
participate in distributions pro rata according to the percentage such unit
represents of the aggregate number of the Avalon units then outstanding.
F-79
<PAGE>
AVALON CABLE LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
4. Pending Acquisition
The Company has a definitive agreement to purchase all of the cable systems
of Taconic Technology Corporation ("Taconic") for approximately $8,525
(excluding transaction fees). As of December 31, 1998, the Company incurred $41
of transaction costs related to the acquisition of Taconic, which are included
in current assets. The merger is expected to close in the second quarter of
1999.
5. Prepaid Expenses and Other Current Assets
At December 31, 1998, prepaid expenses and other current assets consist of
the following:
<TABLE>
<S> <C>
Installation supplies............................................... $ 51
Deferred transaction costs.......................................... 41
Other............................................................... 29
----
$121
====
</TABLE>
6. Property, Plant and Equipment
At December 31, 1998, property, plant and equipment consists of the
following:
<TABLE>
<S> <C>
Cable plant and equipment......................................... $6,435
Vehicles.......................................................... 97
Office furniture and fixtures..................................... 180
Buildings and improvements........................................ 83
------
6,795
Less: accumulated depreciation.................................... (339)
------
$6,456
======
</TABLE>
7. Intangible Assets
At December 31, 1998, intangible assets consist of the following:
<TABLE>
<CAPTION>
1998
-------
<S> <C>
Cable franchises................................................. $30,711
Goodwill......................................................... 1,223
Non-compete agreement............................................ 100
-------
32,034
Less: accumulated amortization................................... (1,230)
-------
$30,804
=======
</TABLE>
F-80
<PAGE>
AVALON CABLE LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
8. Accounts Payable and Accrued Expenses
At December 31, 1998, accounts payable and accrued expenses consist of the
following:
<TABLE>
<S> <C>
Accrued corporate expenses........................................ $ 404
Accrued programming costs......................................... 564
Taxes payable..................................................... 276
Other............................................................. 87
------
$1,331
======
</TABLE>
9. Debt
Credit Facilities
On May 28, 1998, Avalon New England entered into a term loan and revolving
credit agreement with a major commercial lending institution (the "Credit
Agreement"). The Credit Agreement allowed for aggregate borrowings under Term
Loans A and B (collectively, the "Term Loans") and a revolving credit facility
of $30,000 and $5,000, respectively. The proceeds from the Term Loans and
revolving credit facility were used to fund the acquisitions made by Avalon New
England and to provide for Avalon New England's working capital requirements.
In December 1998, Avalon New England retired the Term Loans and revolving
credit agreement through the proceeds of a capital contribution from Avalon.
The fees and associated costs relating to the early retirement of this debt was
$1,311.
On November 6, 1998, Avalon New England became a co-borrower along with
Avalon Cable Michigan, Inc. ("Avalon Michigan") and Avalon Cable Finance, Inc.
("Avalon Finance"), affiliated companies (collectively referred to as the "Co-
Borrowers"), on a $320,888 senior credit facility, which includes term loan
facilities consisting of (i) tranche A term loans of $120,888 and (ii) tranche
B term loans of $170,000, and a revolving credit facility of $30,000
(collectively, the "Credit Facility"). Subject to compliance with the terms of
the Credit Facility, borrowings under the Credit Facility will be available for
working capital purposes, capital expenditures and pending and future
acquisitions. The ability to advance funds under the tranche A term loan
facility terminates on March 31, 1999. The tranche A term loans are subject to
minimum quarterly amortization payments commencing on January 31, 2001 and
maturing on October 31, 2005. The tranche B term loans are subject to minimum
quarterly payments commencing on January 31, 2001 with substantially all of
tranche B term loans scheduled to be repaid in two equal installments on July
31, 2006 and October 31, 2006. The revolving credit facility borrowings are
scheduled to be repaid on October 31, 2005.
On November 6, 1998, Avalon Michigan borrowed $265,888 under the Credit
Facility. In connection with the Senior Subordinated Notes and Senior Discount
Notes offerings, Avalon Michigan repaid $125,013 of the Credit Facility, and
the availability under the Credit Facility was reduced to $195,000. Avalon
Michigan had borrowings of $11,300 and $129,575 outstanding under the tranche A
and tranche B term note facilities, respectively, and had available $30,000 for
borrowings under the revolving credit facility. Avalon New England and Avalon
Finance had no borrowings outstanding under the Credit Facility at December 31,
1998.
The interest rate under the Credit Facility is a rate based on either (i)
the Base Rate (a rate per annum equal to the greater of the prime rate and the
federal funds rate plus one-half of 1%) or (ii) the Eurodollar Rate (a rate per
annum equal to the Eurodollar base rate divided by 1.00 less the Eurocurrency
reserve requirement plus, in either case, the applicable margin). As of
December 31, 1998, the applicable margin was (a) with respect to the tranche B
term loans was 2.75% per annum for Base Rate loans and 3.75% per annum for
F-81
<PAGE>
AVALON CABLE LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Eurodollar loans and (b) with respect to tranche A term loans and the revolving
credit facility was 2.00% per annum for Base Rate loans and 3.00% for
Eurodollar loans. The applicable margin for the tranche A term loans and the
revolving credit facility are subject to performance based grid pricing which
is determined based upon the consolidated leverage ratio of the Co-Borrowers.
The interest rate for the tranche A and tranche B term loans outstanding at
December 31, 1998 was 8.58% and 9.33%, respectively. Interest is payable on a
quarterly basis. Accrued interest on the borrowings incurred by Avalon Cable of
Michigan Inc. under the credit facility was $1,390 at December 31, 1998.
The Credit Facility contains restrictive covenants which among other things
require the Co-Borrowers to maintain certain ratios including consolidated
leverage ratios and the interest coverage ratio, fixed charge ratio and debt
service coverage ratio.
The obligations of the Co-Borrowers under the Credit Facility are secured by
substantially all of the assets of the Co-Borrowers. In addition, the
obligations of the Co-Borrowers under the Credit Facility are guaranteed by
affiliated companies; Avalon Cable of Michigan Holdings, Inc., Avalon Cable
Finance Holdings, Inc., Avalon New England Holdings, Inc., Avalon Cable
Holdings, LLC and the Company.
Subordinated Debt
In December 1998, Avalon New England became a co-issuer of a $150,000
principal balance, Senior Subordinated Notes ("Subordinated Notes") offering
and the Company became a co-issuer of $196,000, accreted value, Senior Discount
Notes ("Senior Discounts Notes") offering. In conjunction with these
financings, Avalon New England received $18,130 from Avalon Michigan as a
partial payment against the Company's note receivable--affiliate from Avalon
Michigan. Avalon Michigan paid $75 in interest during the period from October
21, 1998 (inception) through December 31, 1998. The cash proceeds received by
Avalon New England of $18,206 was paid to Avalon as a dividend.
The Subordinated Notes mature on December 1, 2008, and interest accrues at a
rate of 9.375% per annum. Interest is payable semi-annually in arrears on June
1 and December 1 of each year, commencing on June 1, 1999. The Senior Discount
Notes also mature on December 12, 2008, and interest accrues at a rate of
11.875% per annum on the principal amount at maturity on the Senior Discount
Notes. Interest is payable semi-annually in arrears on December 31, 1999.
Note payable
The Company issued a note payable for $500 which is due on May 29, 2003, and
bears interest at a rate of 7% per annum (which approximates Avalon New
England's incremental borrowing rate) payable annually. Additionally, the
Company has a $100 non-compete agreement. The agreement calls for five annual
payments of $20, commencing on May 29, 1999.
10. Commitments and Contingencies
Leases
The Company rents poles from utility companies for use in its operations.
While rental agreements are generally short-term, the Company anticipates such
rentals will continue in the future. The Company also leases office facilities
and various items of equipment under month-to-month operating leases. Rent
expense was $23 for the period from October 21 (inception) through December 31,
1998. Future minimum payments on equipment and office facilities under non-
cancelable operating lease commitments approximates $112, $108, $105, $100 and
$100 for the five years ended December 31, 2004.
Legal matters
The Company is subject to regulation by the Federal Communications
Commission ("FCC") and other franchising authorities.
F-82
<PAGE>
AVALON CABLE LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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.
11. Related Party Transactions and Balances
The Company provides support services such as finance, accounting and human
resources to Avalon New England and Avalon Cable of Michigan, Inc., who are
related entities. All shared costs are allocated on the basis of average time
spent servicing each entity. In the opinion of management, the methods used in
allocating costs from the Company are reasonable; however, the costs of these
services as allocated are not necessarily indicative of the costs that would
have been incurred by the combined operations on a stand-alone basis.
At December 31, 1998, the Company had an accounts payable, net--affiliate
balance of $247, with Avalon Cable of Michigan, Inc.
In November 1998, Avalon New England loaned $33,200 to Avalon Finance
Holdings. This note is recorded as a note receivable--affiliate on the balance
sheet at December 31, 1998. The note matures on December 31, 2001. Interest
accrues at a rate of 4.47% per year. During 1998, the Company received a
payment with the remaining $15,171 payable on December 31, 2001. Accrued
interest receivable of $102 has been recorded in connection with this note at
December 31, 1998.
During 1998, Avalon New England received $3,341 from Avalon Holdings. In
consideration for this amount, Avalon New England executed a note payable to
Avalon Holdings. This note is recorded as note payable--affiliate on the
balance sheet at December 31, 1998. Interest accrues at a rate of 5.57% per
year and Avalon New England has recorded accrued interest on this note of $100
at December 31, 1998.
F-83
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Managers of
Avalon Cable of Michigan Holdings, Inc. and Subsidiaries
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statement of operations, shareholders' equity and cash flows
present fairly, in all material respects, the financial position of Avalon
Cable of Michigan Holdings, Inc. and subsidiaries (collectively, the "Company")
at December 31, 1998, and the results of their operations, changes in
shareholders' equity and their cash flows for the period from June 2, 1998
(inception) to December 31, 1998, in conformity with generally accepted
accounting principles. The financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audit. We conducted our audit of these
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statements presentation. We believe that our audit provides a
reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
New York, New York
March 30, 1999
F-2--1
<PAGE>
AVALON CABLE OF MICHIGAN HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
December 31, 1998
(in thousands)
<TABLE>
<S> <C>
ASSETS
------
Cash.................................................................. $ 9,071
Accounts receivable, net of allowance for doubtful accounts of $873... 5,015
Prepayments and other current assets.................................. 1,267
Accounts receivable from related parties.............................. 371
Deferred income taxes................................................. 377
--------
Current assets.................................................... 16,101
Property, plant and equipment, net.................................... 104,965
Intangible assets, net................................................ 431,313
Deferred charges and other assets..................................... 1,270
--------
Total assets...................................................... $553,649
========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Accounts payable and accrued expenses................................. $ 10,194
Advance billings and customer deposits................................ 2,454
Accounts payable--affiliate........................................... 2,023
--------
Current liabilities............................................... 14,671
Long-term debt........................................................ 402,369
Notes payable--affiliate.............................................. 15,171
Deferred income taxes................................................. 80,811
--------
Total liabilities................................................. 513,022
--------
Commitments and contingencies (Note 10)............................... --
Minority interest..................................................... 13,855
--------
Stockholders equity:
Common stock.......................................................... --
Additional paid-in capital............................................ 35,000
Accumulated deficit................................................... (8,228)
--------
Total shareholders' equity........................................ 26,772
--------
Total liabilities and shareholders' equity........................ $553,649
========
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
F-2--2
<PAGE>
AVALON CABLE OF MICHIGAN HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Period from June 2, 1998 (inception) through December 31, 1998
(dollars in thousands)
<TABLE>
<S> <C>
Revenue:
Basic services...................................................... $11,119
Premium services.................................................... 1,036
Other............................................................... 1,502
-------
13,657
Operating expenses:
Selling, general and administrative................................. 2,719
Programming......................................................... 3,281
Technical and operations............................................ 1,718
Depreciation and amortization....................................... 6,614
-------
Loss from operations.................................................. (675)
Interest income....................................................... 173
Interest (expense).................................................... (6,957)
Other (expense), net.................................................. (65)
-------
(Loss) before income taxes............................................ (7,524)
(Benefit) from income taxes........................................... (2,754)
-------
(Loss) before minority interest and extraordinary item................ (4,770)
Minority interest in loss of consolidated entity...................... (398)
-------
(Loss) before extraordinary item...................................... (5,168)
Extraordinary loss on extinguishment of debt (net of tax $1,743)...... (3,060)
-------
Net loss............................................................ $(8,228)
=======
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
F-2--3
<PAGE>
AVALON CABLE OF MICHIGAN HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
For the Period from June 2, 1998 (inception) through December 31, 1998
(in thousands, except share amounts)
<TABLE>
<CAPTION>
Common Additional Total
Shares Common Paid-in Accumulated Shareholders'
Outstanding Stock Capital Deficit Equity
----------- ------ ---------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Balance, June 2, 1998... 100 $-- $ -- $ -- $ --
Net loss from date of
inception through
December 31, 1998...... -- -- -- (8,228) (8,228)
Contributions by parent. -- -- 35,000 -- 35,000
--- ---- ------- ------- -------
Balance, December 31,
1998................... 100 $-- $35,000 $(8,228) $26,772
=== ==== ======= ======= =======
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
F-2--4
<PAGE>
AVALON CABLE OF MICHIGAN HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
For the Period from June 2, 1998 (inception) through December 31, 1998
(in thousands)
<TABLE>
<S> <C>
Cash flows from operating activities:
Net (loss)......................................................... $ (8,228)
Extraordinary loss on extinguishment of debt....................... 3,060
Depreciation and amortization...................................... 6,414
Deferred income taxes, net......................................... 10,369
Provision for loss on accounts receivable.......................... 75
Increase (decrease) in minority interest........................... 398
Net change in certain assets and liabilities, net of business
acquisitions......................................................
Increase in accounts receivable.................................. (832)
Increase in prepayment and other current assets.................. (446)
Increase in accounts payable and accrued expenses................ 6,869
Increase in deferred revenue..................................... 967
--------
Net cash used by operating activities.......................... 18,646
--------
Cash flows from investing activities:
Additions to property, plant and equipment......................... (4,673)
Payment for acquisition............................................ (431,629)
--------
Net cash used in investing activities............................ (436,302)
--------
Cash flows from Financing Activities:
Proceeds from the issuance of the Credit Facility.................. 265,888
Principal payment on debt.......................................... (125,013)
Proceeds from the issuance of senior subordinated notes............ 150,000
Payments made on bridge loan....................................... (105,000)
Proceeds from bridge loan.......................................... 105,000
Proceeds from the senior discount notes............................ 110,411
Proceeds from the issuance of note payable affiliate............... 33,200
Payments made on note payable--affiliate........................... (18,037)
Payments made for debt financing costs............................. (2,978)
Proceeds from the issuance of common stock......................... 35,000
--------
Net cash provided by financing activities........................ 419,427
--------
Net increase in cash................................................. 1,771
Cash at beginning of the period...................................... 7,300
--------
Cash at end of the period........................................ $ 9,071
--------
Supplemental disclosures of cash flow information....................
Cash paid during the year for........................................
Interest........................................................... $ 2,639
Income taxes....................................................... --
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
F-2--5
<PAGE>
AVALON CABLE OF MICHIGAN HOLDINGS, 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 Holdings, Inc. ("The Company") was formed in June
1998, pursuant to the laws of the state of Delaware. Avalon Cable of Michigan
Inc. ("Avalon Michigan") was formed in June 1998, pursuant to the laws of the
state of Delaware as a wholly owned subsidiary of the Company. On June 3, 1998,
Avalon Michigan entered into an Agreement and Plan of Merger (the "Agreement")
among the Company, Cable Michigan, Inc. and Avalon Cable of Michigan Inc.
("Avalon Sub"), pursuant to which Avalon Sub will merge into the Company and
the Company will become a wholly owned subsidiary of the Company (the
"Merger").
In accordance with the terms of the Agreement, each share of common stock,
par value $1.00 per share ("common stock"), of Cable Michigan, Inc. ("Cable
Michigan") outstanding prior to the effective time of the Merger (other than
treasury stock, shares owned by the Company or its subsidiaries, or shares as
to which dissenters' rights have been exercised) shall be converted into the
right to receive $40.50 in cash (the "Merger Consideration"), subject to
certain possible closing adjustments.
In conjunction with the acquisition of Cable Michigan, Avalon Michigan
acquired Cable Michigan's 62% ownership interest in Mercom, Inc. ("Mercom").
On November 6, 1998, Avalon Michigan completed its merger into and with
Cable Michigan. The total consideration paid in conjunction with the merger,
including fees and expenses was $431,629, including repayment of all existing
Cable Michigan indebtedness and accrued interest of $135,205. Subsequent to the
merger, the arrangements with RCN and CTE were terminated. The Agreement also
permitted Avalon Michigan to agree to acquire the remaining shares of Mercom
that it did not own.
The Company contributed $137,375 in cash to Avalon Michigan, which was used
to consummate the Merger. On November 5, 1998, the Company received $105,000 in
cash in exchange for promissory notes to lenders (the "Bridge Agreement"). On
November 6, 1998, the Company contributed the proceeds received from the Bridge
Agreement and an additional $35,000 in cash to Avalon Michigan in exchange for
100 shares of common stock.
In March 1999, after the acquisition of Mercom, Inc. Avalon Michigan
completed a series of transactions to facilitate certain aspects of its
financing. As a result of these transactions:
. Avalon Cable of Michigan LLC has become the operator of the Michigan
cluster replacing Avalon Cable of Michigan, Inc.;
. Avalon Cable of Michigan LLC is an obligor on the Senior Subordinated
Notes replacing Avalon Cable of Michigan, Inc.; and
. Avalon Cable of Michigan, Inc. is a guarantor of the obligations of
Avalon Cable of Michigan LLC under the Senior Subordinated Notes. Avalon
Cable of Michigan, Inc. does not have significant assets, other than its
investment in Avalon Cable LLC.
Avalon Michigan provides cable services to various areas in the state of
Michigan. Avalon Michigan's cable systems offer customer packages for basic
cable programming services which are offered at a per channel charge or
packaged together to form a tier of services offered at a discount from the
combined channel rate. Avalon Michigan's cable systems also provide premium
cable services to their customers for an extra monthly charge. Customers
generally pay initial connection charges and fixed monthly fees for cable
programming and premium cable services, which constitute the principle sources
of revenue for the Company.
F-2--6
<PAGE>
AVALON CABLE OF MICHIGAN HOLDINGS, 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.
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.......................................................... 5 years
Other equipment................................................... 5-10 years
</TABLE>
F-2--7
<PAGE>
AVALON CABLE OF MICHIGAN HOLDINGS, 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-2--8
<PAGE>
AVALON CABLE OF MICHIGAN HOLDINGS, 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 the Company and Avalon Michigan permitted
Avalon Michigan to agree to acquire the 1,822,810 shares (approximately 38% of
the outstanding stock) of Mercom that it did not own (the "Mercom
Acquisition"). On September 10, 1998 Avalon Michigan and Mercom entered into a
definitive agreement (the "Mercom Merger Agreement") providing for the
acquisition by Avalon Michigan of all of such shares at a price of $12.00 per
share. Avalon Michigan completed this acquisition in March 1999. The total
estimated consideration payable in conjunction with the Mercom Acquisition,
excluding fees and expenses was $21,900.
Following is the unaudited pro forma results of operations for the year
ended December 31, 1998, as if the Merger occurred on January 1, 1998:
<TABLE>
<CAPTION>
December 31,
1998
------------
(Unaudited)
<S> <C>
Revenue................................... $ 88,178
========
Loss from operations...................... $ (4,664)
========
Net loss.................................. $(30,989)
========
</TABLE>
In March 1999, Avalon Michigan acquired the cable television systems of Nova
Cablevision, Inc., Nova Cablevision VI, L.P. and Nova Cablevision VII, L.P. for
approximately $7,800, excluding transaction fees.
4. Property, Plant and Equipment
Property, plant and equipment consists of the following:
<TABLE>
<S> <C>
Cable plant..................................................... $100,167
Vehicles........................................................ 2,475
Buildings and improvements...................................... 2,151
Office furniture and fixtures................................... 846
Construction in process......................................... 768
--------
Total property, plant and equipment............................. 106,407
Less--accumulated depreciation.................................. (1,442)
--------
Property, plant and equipment, net.............................. $104,965
========
</TABLE>
Depreciation expense was $1,442 for period from inception (June 2, 1998) to
December 31, 1998.
F-2--9
<PAGE>
AVALON CABLE OF MICHIGAN HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
5. Intangible Assets
Intangible assets consist of the following:
<TABLE>
<S> <C>
Cable Franchise................................................. $344,063
Goodwill........................................................ 81,705
Deferred Financing Costs........................................ 10,657
--------
Total........................................................... 436,425
Less--accumulated amortization.................................. (5,112)
--------
Intangible assets, net.......................................... $431,313
========
</TABLE>
Amortization expense charged to operations in during the period from
inception (June 2, 1998) through December 31, 1998 was $5,112.
6. Account payable and accrued expenses consist of the following:
<TABLE>
<S> <C>
Accounts payable................................................ $ 5,321
Accrued cable programming costs................................. 1,824
Accrued taxes................................................... 1,107
Other........................................................... 1,942
-------
$10,194
=======
7. Income Taxes
The income tax provision (benefit) in the accompanying consolidated
financial statements of operations is comprised of the following:
<CAPTION>
1998
-------
<S> <C>
Current
Federal........................................................ $ 243
State.......................................................... --
-------
Total Current................................................ 243
-------
Deferred
Federal........................................................ (2,757)
State.......................................................... (240)
-------
Total Deferred............................................... (2,997)
-------
Total (benefit) for income taxes............................. $(2,754)
=======
</TABLE>
The benefit for income taxes is different from the amounts computed by
applying the U.S. statutory federal tax rate of 35% for 1998. The differences
are as follows:
<TABLE>
<CAPTION>
1998
-------
<S> <C>
(Loss) before (benefit) for income taxes........................ $(7,524)
=======
Federal tax (benefit) at statutory rates........................ (2,633)
State income taxes.............................................. (198)
Goodwill........................................................ 77
-------
(Benefit) for income taxes...................................... (2,754)
=======
</TABLE>
<TABLE>
<CAPTION>
Tax Net
Operating Expiration
Year Losses Date
---- --------- ----------
<S> <C> <C>
1998................................................. $10,360 2018
</TABLE>
F-2--10
<PAGE>
AVALON CABLE OF MICHIGAN HOLDINGS, 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................................................ $ 5,363
Alternative minimum tax credits.................................. 141
Reserves......................................................... 210
Other, net....................................................... 309
-------
Total deferred assets.......................................... 6,023
-------
Property, plant and equipment.................................... (10,635)
Intangible assets................................................ (75,538)
-------
Total deferred liabilities..................................... (86,173)
-------
Subtotal......................................................... (80,150)
-------
Valuation allowance.............................................. --
-------
Total deferred taxes........................................... (80,150)
=======
</TABLE>
The tax benefit related to the loss on extinguishment of debt results in
deferred tax, and it approximating the statutory U.S. tax rate. The tax benefit
of $2,036 related to the exercise of certain stock options of Cable Michigan
Inc. was charged directly to goodwill in conjunction with the closing of the
merger.
8. Debt
At December 31, 1998, Long-term Debt consists of the following:
<TABLE>
<S> <C>
Senior credit facility.......................................... $150,000
Senior subordinated notes....................................... 140,875
Senior discount notes........................................... 111,494
--------
402,369
Current portion............................................... --
--------
$402,369
========
</TABLE>
Credit Facility
On November 6, 1998, Avalon Michigan became a co-borrower along with Avalon
New England and Avalon Cable Finance Inc (Avalon Finance), affiliated
companies, collectively referred to as the ("Co-Borrowers") on a $320,888
senior credit facility, which includes term loan facilities consisting of (i)
tranche A term loans of $120,888 and (ii) tranche B term loans of $170,000 and
a revolving credit facility of $30,000 (collectively, the "Credit Facility").
Subject to compliance with the terms of the Credit Facility, borrowings under
the Credit Facility will be available for working capital purposes, capital
expenditures and pending and future acquisitions. The ability to advance funds
under the tranche A term loan facility terminates on March 31, 1999. The
tranche A term loans are subject to minimum quarterly amortization payments
commencing on January 31, 2001 and maturing on October 31, 2005. The tranche B
term loans are scheduled to be repaid in two equal installments on July 31,
2006 and October 31, 2006. The revolving credit facility borrowings are
scheduled to be repaid on October 31, 2005.
On November 6, 1998, Avalon Michigan borrowed $265,888 under the Credit
Facility in order to consummate the Merger. In connection with the Senior
Subordinated Notes (as defined below) and Senior Discount Notes (as defined
below) offerings, Avalon Michigan repaid $125,013 of the Credit Facility, and
the availability under the Credit Facility was reduced to $195,000. Avalon
Michigan had borrowings of $140,875 outstanding under the tranche B term note
facilities, and had available $30,000 for borrowings under the revolving credit
facility. Avalon New England and Avalon Finance had no borrowings outstanding
under the Credit Facility at December 31, 1998.
F-2--11
<PAGE>
AVALON CABLE OF MICHIGAN HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The interest rate under the Credit Facility is a rate based on either (i)
the base rate (a rate per annum equal to the greater of the Prime Rate and the
Federal Funds Effective Rate plus 1/2 of 1%) or (ii) the Eurodollar rate (a
rate per annum equal to the Eurodollar Base Rate divided by 1.00 less the
Eurocurrency Reserve Requirements) plus, in either case, the applicable margin.
As of December 31, 1998, the applicable margin was (a) with respect to the
tranche B term loans was 2.75% per annum for Base Rate loans and 3.75% per
annum for Eurodollar loans and (b) with respect to tranch A term loans and the
revolving credit facility was 2.00% per annum for Base Rate loans and 3.00% for
Eurodollar loans. The applicable margin for the tranche A term loans and the
revolving credit facility are subject to performance based grid pricing which
is determined based on upon the consolidated leverage ratio of the Co-
Borrowers. The interest rate for the tranche B term loans outstanding at
December 31, 1998 was 9.19%. Interest is payable on a quarterly basis. Accrued
interest on the borrowings under the credit facility was $1,389 at December 31,
1998.
The Credit Facility contains restrictive covenants which among other things
require the Co-Borrowers to maintain certain ratios including consolidated
leverage ratios and the interest coverage ratio, fixed charge ratio and debt
service coverage ratio.
The obligations of the Co-Borrowers under the Credit Facility are secured by
substantially all of the assets of the Co-Borrowers. In addition, the
obligations of the Co-Borrowers under the Credit Facility are guaranteed by
Avalon Cable of Michigan Holdings, Inc., Avalon Cable LLC, Avalon Cable Finance
Holdings, Inc., Avalon Cable of New England Holdings, Inc. and Avalon Cable
Holdings, LLC.
Subordinated debt
In December 1998, Avalon Michigan became a co-issuer of a $150,000,
principal balance, Senior Subordinated Notes ("Subordinated Notes") offering
and Michigan Holdings became a co-issuer of a $196,000, gross proceeds, Senior
Discount Notes ("Senior Discount Notes") offering. In conjunction with these
financings, Avalon Michigan paid $18,130 to Avalon Finance as a partial payment
against Avalon Michigan's note payable--affiliate. Avalon Michigan paid $75 in
interest on this note payable--affiliate during the period from inception (June
2, 1998) through December 31, 1998.
The Subordinated Notes mature on December 1, 2008, and interest accrued at a
rate of 9.375% per annum. Interest is payable semi-annually in arrears on June
1 and December 1 of each year, commencing on
June 1, 1999. Accrued interest on the Subordinated Notes was $1,078 at December
31, 1998. The Senior Discount Notes mature on December 1, 2008. Until December
1, 2003, interest will not be paid currently on the Senior Discount Notes, but
the accreted value will increase (representing original issue discount) between
the date of original issuance and December 1, 2003. Beginning on December 1,
2003, interest will accrue at a rate of 11.875% per annum and will be payable
semi-annually in arrears on June 1 and December 1 of each year, to holders of
record on the immediately preceding May 15 and November 15. Original issue
discount accretion on the Senior Discount Notes was $1,083 at December 31,
1998.
The Senior Subordinated Notes will not be redeemable at the Co-Borrowers'
option prior to December 1, 2003. Thereafter, the Senior Subordinated Notes
will be subject to redemption at any time at the option of the Co-Borrowers, in
whole or in part at the redemption prices (expressed as percentages of
principal amount) plus accrued and unpaid interest, if any, thereon to the
applicable redemption date, if redeemed during the twelve-month period
beginning on December 1 of the years indicated below:
The scheduled maturities of the long-term debt are $2,000 in 2001, $4,000 in
2002, $72,479 in 2003, and the remainder thereafter.
At any time prior to December 1, 2001, the Co-Borrowers may on any one or
more occasions redeem up to 35% of the aggregate principal amount of Senior
Subordinate Notes originally issued under the Indenture at a redemption price
equal to 109.375% of the principal amount thereof, plus accrued and unpaid
interest, if any, to the redemption date, with the net cash proceeds of any
equity offering and/or the net cash proceeds of a
F-2--12
<PAGE>
AVALON CABLE OF MICHIGAN HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 employee
benefit plans or as compensation to employees; provided that to the extent such
Capital Stock is issued by the Co-Borrowers, the net cash proceeds thereof
shall have been contributed to one or more of the Co-Borrowers in the form of
an equity contribution.
Mercom debt
In August 1997, the Mercom revolving credit agreement for $2,000 expired.
Mercom had no borrowings under the revolving credit agreement in 1996 or 1997.
On September 29, 1997, Avalon Michigan purchased and assumed all of the bank's
interest in the term credit agreement and the note issued thereunder.
Immediately after the purchase, the term credit agreement was amended in order
to, among other things, provide for less restrictive financial covenants,
eliminate mandatory amortization of principal and provide for a bullet maturity
of principal on December 31, 2002, and remove the change of control event of
default. Mercom's borrowings under the term credit agreement contain pricing
and security provisions substantially the same as those in place prior to the
purchase of the loan. The borrowings are secured by a pledge of the stock of
Mercom's subsidiaries and a first lien on certain of the assets of Mercom and
its subsidiaries, including inventory, equipment and receivables at December
31, 1998, $14,151 of principal was outstanding. The borrowings under the term
credit agreement are eliminated in the Company's consolidated balance sheet.
9. Employee Benefit Plans
Avalon Michigan has a qualified savings plan under Section 401(K) of the
Internal Revenue Code. Contributions charged to expense for the period from
November to December 31, 1998 was $30.
10. Commitments and Contingencies
Leases
Total rental expense, primarily for office space and pole rental, was $43.
Rental commitments are expected to continue at approximately $1 million a year
for the foreseeable future, including pole rental commitments which are
cancelable.
F-2--13
<PAGE>
AVALON CABLE OF MICHIGAN HOLDINGS, 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, Avalon Michigan received $33,200 from Avalon Finance. In
consideration for this amount, Avalon Michigan executed a note payable to
Avalon Finance. The note matures on December 31, 2001. This note is recorded as
note payable-affiliate on the balance sheet at December 31, 1998. Interest
accrues at a rate of 4.47% per year, and is payable on December 31, 2001.
Accrued interest receivable of $102 has been recorded in connection with this
note at December 31, 1998. On December 10,1998, Avalon Michigan made a partial
payment of $18,130 against this note payable-affiliate to Avalon Finance.
Avalon Michigan receives support services such as finance, accounting and
human resources from Avalon Cable LLC, a related party. All shared costs are
allocated on the basis of average time spent servicing each entity. In the
opinion of management, the methods used in allocating costs from Avalon Cable
LLC are reasonable; however, the costs of these services as allocated are not
necessarily indicative of the costs that would have been incurred by the
combined operations on a stand-alone basis. For the period ended December 31,
1998, the Company was allocated charges related to such services of $250. The
Company had a payable of $250 related to these services at December 31, 1998.
At December 31, 1998, the Company had an accounts receivable-affiliate
balance of $247 with Avalon Cable LLC.
F-2--14
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
of Avalon Cable Holdings Finance, Inc.
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statement of operations and of cash flows present fairly, in all
material respects, the financial position of Avalon Cable Holdings Finance,
Inc. and its subsidiary (the "Company") as of December 31, 1998 and the results
of their operations and their cash flows for the period from October 21, 1998
(inception) through December 31, 1998, in conformity with generally accepted
accounting principles. These consolidated financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these consolidated financial statements based on our audit. We
conducted our audit of these consolidated statements in accordance with
generally accepted auditing standards which requires that we plan and perform
the audit to obtain reasonable assurance about whether the consolidated
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the consolidated financial statements, assessing the accounting principles used
and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
New York, New York
March 30, 1999
F-90
<PAGE>
AVALON CABLE HOLDINGS FINANCE, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
December 31, 1998
(in thousands, except share amounts)
<TABLE>
<S> <C>
Assets
------
Cash................................................................... $ --
Note receivable--affiliate............................................. 15,171
-------
Total assets....................................................... $15,171
=======
Liabilities and stockholder's equity
------------------------------------
Note payable--affiliate................................................ $15,171
-------
Total liabilities.................................................. 15,171
-------
Commitments and contingencies (Note 5)
Common stock, par value of $.01; authorized 1,000 shares; issued 100
shares................................................................ --
-------
Total stockholder's equity......................................... --
-------
Total liabilities and stockholder's equity......................... $15,171
=======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-91
<PAGE>
AVALON CABLE HOLDINGS FINANCE, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF OPERATIONS
For the Period from October 21, 1998 (inception) through December 31, 1998
(in thousands)
<TABLE>
<S> <C>
Revenue.................................................................. $ --
Operating expenses....................................................... --
-----
Income from operations............................................... --
-----
Other income (expense):
Interest income........................................................ 177
Interest (expense)..................................................... (177)
-----
Net income........................................................... $ --
=====
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-92
<PAGE>
AVALON CABLE HOLDINGS FINANCE, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
For the Period from October 21, 1998 (inception) through December 31, 1998
(in thousands)
<TABLE>
<S> <C>
Cash flows from financing activities:
Net proceeds from issuance of note payable--affiliate............... $ 15,171
Receipts for payments on note receivable--affiliate................. (15,171)
--------
Net cash provided by financing activities......................... --
--------
Cash, end of period............................................... $ --
========
Supplemental disclosures of cash flow information
Cash paid during the year for:
Interest.......................................................... $ 75
--------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-93
<PAGE>
AVALON CABLE HOLDINGS FINANCE, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands)
1. Basis of Presentation and Description of Business
Avalon Cable Holdings Finance, Inc. (the "Company") was formed in October
1998, pursuant to the laws of Delaware, as a wholly owned subsidiary of Avalon
Cable Holdings LLC, for the sole purpose of facilitating financings associated
with the acquisitions of various cable television companies. The Company
conducts no other activities.
2. Summary of Significant Accounting Policies
Principles of consolidation
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiary, Avalon Cable Finance, Inc. ("Avalon Finance").
All significant transactions between the Company and its subsidiary have been
eliminated.
Use of estimates
The preparation of the consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and use assumptions that affect the reported amounts of assets and liabilities
and the disclosure for contingent assets and liabilities at the date of the
consolidated financial statements as well as the reported amounts of revenues
and expenses during the reported period. Actual results may vary from estimates
used.
Financial instruments
The Company estimates that the fair value of all financial instruments at
December 31, 1998 does not differ materially from the aggregate carrying values
of its financial instruments recorded in the accompanying balance sheet. The
fair value of the notes payable-affiliate are considered to be equal to
carrying values since the Company believes that its credit risk has not changed
from the time this debt instrument was executed and therefore, would obtain a
similar rate in the current market.
Accounting for income taxes
The Company has prepared its income tax provision using the liability method
in accordance with Financial Accounting Standards Board statement 109,
"Accounting for Income Taxes". Under this method, deferred tax assets and
liabilities are determined based on the difference between the financial
reporting and tax basis of assets and liabilities and are measured using tax
rates that will be in effect when the differences are expected to reverse. As
of December 31, 1998 the Company has no deferred tax assets or liabilities and
no tax provision to record.
3. Related Party Transactions
In November 1998, Avalon Finance received $33,200 from Avalon Cable of New
England LLC ("Avalon New England"). In consideration for this amount, Avalon
Finance executed a note payable to Avalon New England. The note matures on
December 31, 2001. Interest accrues at a rate of 4.47% per year, and is payable
in arrears on December 31, 2001. This note is recorded as note payable--
affiliate on the consolidated balance sheet at December 31, 1998. Avalon
Finance has recorded accrued interest payable on this note of $102 at December
31, 1998.
In November 1998, the Company loaned $33,200 to Avalon Cable of Michigan,
Inc. ("Avalon Michigan") in order to assist Avalon Michigan in consummating its
acquisition of Cable Michigan, Inc. The note matures on December 31, 2001.
Interest accrues at a rate of 4.47% per year, and is payable in arrears on
December 31, 2001. This note is recorded as note receivable--affiliate on the
consolidated balance sheet at December 31, 1998. Accrued interest receivable of
$102 has been recorded in connection with this note at December 31, 1998.
F-94
<PAGE>
AVALON CABLE HOLDINGS FINANCE, INC. AND SUBSIDIARY (continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In thousands
4. Debt
Credit Facilities
On May 28, 1998, Avalon New England entered into a term loan and revolving
credit agreement with a major commercial lending institution (the "Credit
Agreement"). The Credit Agreement allowed for aggregate borrowings under Term
Loans A and B (collectively, the "Term Loans") and a revolving credit facility
of $30,000 and $5,000, respectively. The proceeds from the Term Loans and
revolving credit facility were used to fund acquisitions and to provide for
Avalon New England's working capital requirements.
In December 1998, Avalon New England retired the Term Loans and revolving
credit agreement through the proceeds of a capital contribution from Avalon.
The fees and associated costs relating to the early retirement of this debt was
$1,310, which has been recorded as an extraordinary item by Avalon New England.
On November 6, 1998, Avalon Finance became a co-borrower along with Avalon
Cable Michigan, Inc. ("Avalon Michigan") and Avalon Cable of New England LLC
("Avalon New England"), affiliated companies, collectively referred to as the
"Co-Borrowers") on a $320,888 senior credit facility, which includes term loan
facilities consisting of (i) tranche A term loans of $120,888 and (ii) tranche
B term loans of $170,000, and a revolving credit facility of $30,000
(collectively, the "Credit Facility"). Subject to compliance with the terms of
the Credit Facility, borrowings under the Credit Facility will be available for
working capital purposes, capital expenditures and pending and future
acquisitions. The ability to advance funds under the tranche A term loan
facilities terminate on March 31, 1999. The tranche A term loans are subject to
minimum quarterly amortization payments commencing on January 31, 2001 and
maturing on October 31, 2005. The tranche B term loans are scheduled to be
repaid in two equal installments on July 31, 2006 and October 31, 2006. The
revolving credit facility borrowings are scheduled to be repaid on October 31,
2005.
94--1
<PAGE>
AVALON CABLE HOLDINGS FINANCE, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
On November 6, 1998, Avalon Michigan borrowed $265,888 under the Credit
Facility. In connection with the Senior Subordinated Notes and Senior Discount
Notes offerings, Avalon Michigan repaid $125,013 of the Credit Facility, and
the availability under the Credit Facility was reduced to $195,000. Avalon
Michigan had borrowings of $11,300 and $129,575 outstanding under the tranche A
and tranche B term note facilities, respectively, and had available $30,000 for
borrowings under the revolving credit facility. The Company and Avalon New
England had no borrowings outstanding under the Credit Facility at December 31,
1998.
The interest rate under the Credit Facility is a rate based on either (i)
the Base Rate (a rate per annum equal to the greater of the prime rate and the
federal funds rate plus one-half of 1%) or (ii) the Eurodollar Rate (a rate per
annum equal to the Eurodollar base rate divided by 1.00 less the Eurocurrency
reserve requirement) plus, in either case, the applicable margin. As of
December 31, 1998, the applicable margin was (a) with respect to the tranche B
term loans was 2.75% per annum for Base Rate loans and 3.75% per annum for
Eurodollar loans and (b) with respect to tranche A term loans and the revolving
credit facility was 2.00% per annum for Base Rate loans and 3.00% per annum for
Eurodollar loans. The applicable margin for the tranche A term loans and the
revolving credit facility are subject to performance based grid pricing which
is determined based on upon the consolidated leverage ratio of the Co-
Borrowers. The interest rate for the tranche A and tranche B term loans
outstanding at December 31, 1998 was 8.58% and 9.33%, respectively. Interest is
payable on a quarterly basis. Accrued interest on the borrowings incurred by
Avalon Cable of Michigan, Inc. under the credit facility was $1,390 at December
31, 1998.
The Credit Facility contains restrictive covenants which among other things
require the Co-Borrowers to maintain certain ratios including consolidated
leverage ratios and the interest coverage ratio, fixed charge ratio and debt
service coverage ratio.
The obligations of the Co-Borrowers under the Credit Facility are secured by
substantially all of the assets of the Co-Borrowers. In addition, the
obligations of the Co-Borrowers under the Credit Facility are guaranteed by
affiliated companies; Avalon Cable of Michigan Holdings, Inc., Avalon Finance,
Avalon Cable of New England Holdings, Inc., Avalon Cable Holdings, LLC and
Avalon Cable LLC.
Subordinated debt
In December 1998, Avalon Finance became a co-issuer of an $150,000 principal
balance, Senior Subordinated Notes ("Subordinated Notes") offering and the
Company became a co-issuer of an $196,000, accreted value, Senior Discount
Notes ("Senior Discounts Notes") offering. In conjunction with these
financings, Avalon Finance received $18,130 from Avalon Michigan as a partial
payment against the Company's note receivable--affiliate from Avalon Michigan.
Avalon Michigan paid $75 in interest during the period from October 21, 1998
(inception) through December 31, 1998. The cash proceeds received of $18,206
were used by Avalon Finance to make a partial principal payment of $18,130 on
its note payable--affiliate and an interest payment of $75 to Avalon New
England.
The Subordinated Notes mature on December 1, 2008, and interest accrues at a
rate of 9.375% per annum. Interest is payable semi annually in arrears on June
1 and December 1 of each year, commencing on June 1, 1999. The Senor Discount
Notes also mature on December 1, 2008, and interest accrues at a rate of
11.875% per annum on the principal amount at maturity on the Senior Discount
Notes. Interest is payable semi-annually in arrears on December 31, 1999.
5. Commitment and Contingencies
From time to time, the Company is involved with claims that arise in the
normal course of business. In the opinion of management, the ultimate liability
with respect to these claims will not have a material adverse effect on the
financial position of the Company.
F-95
<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-3
<PAGE>
CABLE MICHIGAN, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, November 5,
ASSETS 1997 1998
------ ------------ -----------
(dollars in thousands)
<S> <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>
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-4
<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-5
<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-6
<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-7
<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-8
<PAGE>
CABLE MICHIGAN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands Except per Share Data)
DATE
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-9
<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.
F-9--1
<PAGE>
CABLE MICHIGAN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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.
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").
F-10
<PAGE>
CABLE MICHIGAN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
SFAS 121 requires that long-lived assets and certain identifiable
intangibles to be held and used by an entity be reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount
of an asset may not be recoverable. In performing the review for
recoverability, the Company estimates the net future cash flows expected to
result from the use of the asset and its eventual disposition. If the sum of
the expected net future cash flows (undiscounted and without interest charges)
is less than the carrying amount of the asset, an impairment loss is
recognized. Measurement of an impairment loss for long-lived assets and
identifiable intangibles expected to be held and used is based on the fair
value of the asset.
No impairment losses have been recognized by the Company pursuant to SFAS
121.
Revenue recognition
Revenues from cable programming services are recorded in the month the
service is provided.
Advertising expense
Advertising costs are expensed as incurred. Advertising expense charged to
operations was $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.
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
F-11
<PAGE>
CABLE MICHIGAN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 $7,800,000, 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.
F-12
<PAGE>
CABLE MICHIGAN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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.
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-13
<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-14
<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-15
<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-16
<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>
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-17
<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
F-18
<PAGE>
CABLE MICHIGAN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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-19
<PAGE>
CABLE MICHIGAN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The information that follows relates to the entire C-TEC noncontributory
defined benefit plan. The components of C-TEC's pension cost are as follows for
1996:
<TABLE>
<CAPTION>
<S> <C>
Benefits
earned
during the
year
(service
costs)..... $ 2,365
Interest
cost on
projected
benefit
obligation. 3,412
Actual
return on
plan
assets..... (3,880)
Other
components--
net........ (1,456)
Net periodic
pension
cost....... $ 441
</TABLE>
The following assumptions were used in the determination of the consolidated
projected benefit obligation and net periodic pension cost (credit) for
December 31, 1996:
<TABLE>
<CAPTION>
<S> <C>
Discount
Rate....... 7.5%
Expected
long-term
rate of
return on
plan
assets..... 8.0%
Weighted
average
long-term
rate of
compensation
increases.. 6.0%
</TABLE>
The Company's allocable share of the consolidated net periodic pension costs
(credit), based on the Company's proportionate share of consolidated annualized
salaries as of the valuation date, was approximately $10 for 1996. These
amounts are reflected in operating expenses. As discussed below, no pension
cost (credit) was recognized in 1997.
In connection with the restructuring, C-TEC completed a comprehensive study
of its employee benefit plans in 1996. As a result of this study, effective
December 31, 1996, in general, employees of the Company no longer accrue
benefits under the defined benefit pension plans and became fully vested in
their benefit accrued through that date. C-TEC notified affected participants
in December 1996. In December 1996, C-TEC allocated pension plan assets of
$6,984 and the related liabilities to a separate plan for employees who no
longer accrue benefits after sum distributions. The allocation of assets and
liabilities resulted in a curtailment/settlement gain of $4,292. The Company's
allocable share of this gain was $855. This gain results primarily from the
reduction of the related projected benefit obligation. The curtailed plan has
assets in excess of the projected benefit obligation.
C-TEC sponsors a 401(k) savings plan covering substantially all employees of
the Company who are not covered by collective bargaining agreements.
Contributions made by the Company to the 401(k) plan are based on a specific
percentage of employee contributions. Contributions charged to expense were
$128 in 1996. Contributions charged to expense in 1997 prior to the
Distribution were $107.
In connection with the Distribution, the Company established a qualified
saving plan under Section 401(k) of the Code. Contributions charged to expense
in 1997 were $53. Contributions charged to expense for the period from January
1, 1998 to November 5, 1998 were $164.
F-20
<PAGE>
CABLE MICHIGAN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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.
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.
F-21
<PAGE>
CABLE MICHIGAN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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.
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.
F-22
<PAGE>
CABLE MICHIGAN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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-23
<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-35
<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-36
<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-37
<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-38
<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-39
<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-40
<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-41
<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-42
<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-43
<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-44
<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-45
<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-46
<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-47
<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-48
<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-49
<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-50
<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-51
<PAGE>
[THIS PAGE INTENTIONALLY LEFT BLANK]
F-52
<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-53
<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-54
<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-55
<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-56
<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-57
<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-58
<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-59
<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-60
<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-61
<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-62
<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-63
<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-100
<PAGE>
TACONIC CATV
(a component of Taconic Technology Corp.)
BALANCE SHEETS
December 31, 1997 and 1998
<TABLE>
<CAPTION>
1997 1998
---------- ----------
ASSETS
------
<S> <C> <C>
Cash..................................................... $ -- $ --
Accounts receivable, net of allowance of $23,177 in 1997
and $16,968 in 1998..................................... 109,834 55,435
Receivable from related entities......................... -- 457,987
Inventories.............................................. 135,192 116,627
Prepaid expenses......................................... 28,230 21,252
Property and equipment, net.............................. 2,030,428 1,692,175
Other assets, net........................................ 33,441 28,607
---------- ----------
$2,337,125 $2,372,083
========== ==========
<CAPTION>
LIABILITIES AND EQUITY
----------------------
<S> <C> <C>
Accounts payable and accrued expenses.................... $ 338,324 $ 294,073
Payable to related entities.............................. 27,917 --
Deferred income taxes.................................... 386,879 370,663
Bank debt................................................ 792,501 --
---------- ----------
1,545,621 664,736
Component equity......................................... 791,504 1,707,347
---------- ----------
$2,337,125 $2,372,083
========== ==========
</TABLE>
See accompanying notes to financial statements.
F-101
<PAGE>
TACONIC CATV
(a component of Taconic Technology Corp.)
STATEMENTS OF OPERATIONS AND COMPONENT EQUITY
Years ended December 31, 1997 and 1998
<TABLE>
<CAPTION>
1997 1998
---------- ---------
<S> <C> <C>
Revenues................................................. $2,004,672 2,085,964
Operating expenses:
Technical and operating................................ 841,528 948,484
Salaries, general and administrative................... 470,830 451,413
Depreciation and amortization.......................... 425,569 425,556
---------- ---------
1,737,927 1,825,453
---------- ---------
Operating income......................................... 266,745 260,511
Other income (expense):
Interest income........................................ 1,019 --
Interest expense....................................... (79,322) (17,192)
---------- ---------
(78,303) (17,192)
---------- ---------
Income before income taxes............................... 188,442 243,319
Income taxes............................................. 75,377 97,328
---------- ---------
Net income............................................... 113,065 145,991
Component equity at beginning of year.................... 678,439 791,504
Repayment of debt by ultimate parent company (note 4).... -- 769,852
---------- ---------
Component equity at end of year.......................... $ 791,504 1,707,347
========== =========
</TABLE>
See accompanying notes to financial statements.
F-102
<PAGE>
TACONIC CATV
(a component of Taconic Technology Corp.)
STATEMENTS OF CASH FLOWS
Years ended December 31, 1997 and 1998
<TABLE>
<CAPTION>
1997 1998
--------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income.............................................. $ 113,065 145,991
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization......................... 425,569 425,556
Provision for deferred taxes.......................... 58,199 (17,542)
(Increase) decrease in accounts receivable............ (6,590) 54,399
Increase in receivable from related entities.......... -- (457,987)
Decrease in inventories............................... 87,681 18,565
Decrease in prepaid expenses.......................... 6,964 6,978
Increase (decrease) in accounts payable and accrued
expenses............................................. 111,531 (44,251)
Decrease in payable to related entities............... (429,460) (27,917)
--------- --------
Net cash provided by operating activities........... 366,959 103,792
Cash flows from investing activities:
Capital expenditures.................................... (213,626) (81,143)
--------- --------
Net cash used by investing activities............... (213,626) (81,143)
Cash flows from financing activities:
Principal payment on bank debt.......................... (153,333) (22,649)
--------- --------
Net cash used by financing activities............... (153,333) (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
========= ========
</TABLE>
See accompanying notes to financial statements.
F-103
<PAGE>
TACONIC CATV
(a component of Taconic Technology Corp.)
NOTES TO FINANCIAL STATEMENTS
December 31, 1997 and 1998
(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-104
<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>
1997 1998
----------- ----------
<S> <C> <C>
Trunk and distribution system................... $ 3,360,169 3,358,529
Central equipment............................... 484,217 511,104
Subscriber devices.............................. 590,576 636,550
Converters...................................... 448,181 443,781
Miscellaneous................................... 34,263 34,263
----------- ----------
4,917,406 4,984,227
Less accumulated depreciation................... (2,886,978) (3,292,052)
----------- ----------
Property and equipment, net................... $ 2,030,428 1,692,175
=========== ==========
</TABLE>
F-105
<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>
1997 1998
-------- --------
<S> <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.
(5) Income Taxes
The components of the provision for income tax expense (benefit) are as
follows:
<TABLE>
<CAPTION>
1997 1998
------- -------
<S> <C> <C>
Current.................................................. $17,178 114,870
Deferred (benefit)....................................... 58,199 (17,542)
------- -------
$75,377 97,328
======= =======
</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>
1997 1998
--------- --------
<S> <C> <C>
Deferred tax assets:
Accounts receivable due to allowance for doubtful
accounts......................................... $ 8,756 10,082
Less valuation allowance.......................... -- --
--------- --------
Net deferred tax assets......................... 8,756 10,082
--------- --------
Deferred tax liabilities:
Plant and equipment, due to differences in
depreciation..................................... (386,879) (370,663)
--------- --------
Net deferred tax liability...................... $(378,123) (360,581)
========= ========
</TABLE>
F-106
<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.
(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-107
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
$196,000,000
Avalon Cable LLC
Avalon Cable
Holdings Finance, Inc.
Offer to Exchange Series B
11 7/8% Senior Subordinated
Notes due 2008
For All Outstanding
11 7/8% Senior Subordinated
Notes due 2008
----------------
PROSPECTUS
----------------
,1999
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II: INFORMATION NOT REQUIRED IN THE PROSPECTUS
Item 20. Indemnification of Directors and Officers.
Avalon Cable LLC. Avalon Cable LLC is a limited liability company organized
under the laws of the State of Delaware. Section 18-108 of the Delaware Limited
Liability Company Act (the "Act") provides that, subject to such standards and
restrictions, if any, as are set forth in its limited liability company
agreement, a limited liability company may, and shall have the power to,
indemnify and hold harmless any member or manager or other person from and
against any and all claims and demands whatsoever.
Section 3.14 of Avalon Cable LLC's Limited Liability Company Agreement
provides, among other things, that neither the managers, officers or members of
Avalon Cable LLC shall be liable to Avalon Cable LLC or any member for monetary
damages for a breach of duty to Avalon Cable LLC or any member. Section 3.14
also provides that the managers, officers and members of Avalon Cable LLC shall
be indemnified and held harmless by Avalon Cable LLC, including advancement of
reasonable attorney's fees and other expenses, but only to the extent that
Avalon Cable LLC's assets are sufficient therefor, from and against all claims,
liabilities, and expenses arising out of any management of Avalon Cable LLC
affairs (but excluding those caused by the gross negligence or willful
misconduct of such manager, officer member), to the fullest extent permitted
by, but subject to all limitations and requirements imposed by, the Act.
Section 3.14 of Avalon Cable LLC's Limited Liability Company Agreement also
provides that, the rights of indemnification will be in addition to any rights
to which such manager, officer or member may otherwise have against third
parties, and will inure to the benefit of the respective heirs and personal
representatives of the managers, officers and members.
Avalon Cable Holdings Finance, Inc. Avalon Cable Holdings Finance, Inc. is
incorporated under the laws of the State of Delaware. Section 145 of the
General Corporation Law of the State of Delaware, inter alia ("Section 145")
provides that a Delaware corporation may indemnify any persons who were, are or
are threatened to be made, parties to any threatened, pending or completed
action, suit or proceeding, whether civil, criminal, administrative or
investigative (other than an action by or in the right of such corporation), by
reason of the fact that such person is or was an officer, director, employee or
agent of such corporation, or is or was serving at the request of such
corporation as a director, officer, employee or agent of another corporation or
enterprise. The indemnity may include expenses, such as attorneys' fees,
judgments, fines and amounts paid in settlement actually and reasonably
incurred by such person in connection with such action, suit or proceeding,
provided such person acted in good faith and in a manner he or she reasonably
believed to be or not opposed to the corporation's best interests and, with
respect to any criminal action or proceeding, had no reasonable cause to
believe that his or her conduct was illegal. A Delaware corporation may
indemnify any persons who are, were or are threatened to be made, party to any
threatened, pending or completed action or suit by or in the right of the
corporation by reasons of the fact that such person was a director, officer,
employee or agent of such corporation, or is or was serving at the request of
such corporation as a director, officer, employee or agent of another
corporation or enterprise. The indemnity may include expenses, including
attorneys' fees, actually and reasonably incurred by such person in connection
with the defense or settlement of such action or suit, provided such person
acted in good faith and in a manner he or she reasonably believed to be in or
not opposed to the corporation's best interests, provided that no
indemnification is permitted without judicial approval if the officer,
director, employee or agent is adjudged to be liable to the corporation. Where
an officer, director, employee or agent is successful on the merits or
otherwise in the defense of any action referred to above, the corporation must
indemnify him or her against the expenses which such officer or director has
actually and reasonably incurred.
Avalon Cable Holdings Finance, Inc.'s Certificate of Incorporation provides
that to the fullest extent permitted by the General Corporation Law of the
State of Delaware as the same exists or may hereafter be amended, a director of
Avalon Cable Holdings Finance, Inc. shall not be liable to Avalon Cable
Holdings Finance, Inc. or its stockholders for monetary damages for a breach of
fiduciary duty as a director.
II-1
<PAGE>
Article V of the By-laws of Avalon Cable Holdings Finance, Inc. ("Article
V") provides, among other things, that each person who was or is made a party
or is threatened to be made a party to or is involved in any action, suit or
proceeding, whether civil, criminal, administrative or investigative, by reason
of the fact that he or she, or a person of whom he or she is the legal
representative, is or was a director or officer, of the corporation or is or
was serving at the request of Avalon Cable Holdings Finance, Inc. as a
director, officer, employee, fiduciary, or agent of another corporation or of a
partnership, joint venture, trust or other enterprise, shall be indemnified and
held harmless by Avalon Cable Holdings Finance, Inc. to the fullest extent
which it is empowered to do so unless prohibited from doing so by the General
Corporation Law of the State of Delaware, as the same exists or may hereafter
be amended but, in the case of any such amendment, only to the extent that such
amendment permits Avalon Cable Holdings Finance, Inc. to provide broader
indemnification rights than said law permitted the corporation to provide prior
to such amendment, against all expense, liability and loss, including
attorneys' fees actually and reasonably incurred by such person in connection
with such proceeding, and such indemnification shall inure to the benefit of
his or her heirs, executors and administrators; provided, however, that, Avalon
Cable Holdings Finance, Inc. shall indemnify any such person seeking
indemnification in connection with a proceeding initiated by such person only
if such proceeding was authorized by the board of directors of Avalon Cable
Holdings Finance, Inc.
Article V also provides that persons who are not covered by the foregoing
provisions of Article V and who are or were employees or agents of Avalon Cable
Holdings Finance, Inc., or who are or were serving at the request of Avalon
Cable Holdings Finance, Inc. as employees or agents of another corporation,
partnership, joint venture, trust or other enterprise, may be indemnified to
the extent authorized at any time or from time to time by the board of
directors.
Section 145 further authorizes a corporation to purchase and maintain
insurance on behalf of any person who is or was a director, officer, employee
or agent of the corporation, or is or was serving at the request of the
corporation as a director, officer, employee or agent of another corporation or
enterprise, against any liability asserted against him and incurred by him or
her in any such capacity, arising out of his or her status as such, whether or
not the corporation would otherwise have the power to indemnify him or her
under Section 145.
Article V further provides that Avalon Cable Holdings Finance, Inc. may
purchase and maintain insurance on its behalf and on behalf of any person who
is or was a director, officer, employee, fiduciary or agent of Avalon Cable
Holdings Finance, Inc. or was serving at the request of Avalon Cable Holdings
Finance, Inc. as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise against any liability
asserted against him or her and incurred by him or her in any such capacity,
whether or not Avalon Cable Holdings Finance, Inc. would have the power to
indemnify such person against such liability under Article V.
Avalon Cable of Michigan Holdings, Inc. Avalon Cable of Michigan Holdings,
Inc. is incorporated under the laws of the State of Delaware. Section 145 of
the General Corporation Law of the State of Delaware, inter alia ("Section
145") provides that a Delaware corporation may indemnify any persons who were,
are or are threatened to be made, parties to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative
or investigative (other than an action by or in the right of such corporation),
by reason of the fact that such person is or was an officer, director, employee
or agent of such corporation, or is or was serving at the request of such
corporation as a director, officer, employee or agent of another corporation or
enterprise. The indemnity may include expenses, such as attorneys' fees,
judgments, fines and amounts paid in settlement actually and reasonably
incurred by such person in connection with such action, suit or proceeding,
provided such person acted in good faith and in a manner he or she reasonably
believed to be or not opposed to the corporation's best interests and, with
respect to any criminal action or proceeding, had no reasonable cause to
believe that his or her conduct was illegal. A Delaware corporation may
indemnify any persons who are, were or are threatened to be made, party to any
threatened, pending or completed action or suit by or in the right of the
corporation by reasons of the fact that such person was a director, officer,
employee or agent of such corporation, or is or was serving at the request of
such corporation as a director, officer, employee or
II-2
<PAGE>
agent of another corporation or enterprise. The indemnity may include expenses,
including attorneys' fees, actually and reasonably incurred by such person in
connection with the defense or settlement of such action or suit, provided such
person acted in good faith and in a manner he or she reasonably believed to be
in or not opposed to the corporation's best interests, provided that no
indemnification is permitted without judicial approval if the officer,
director, employee or agent is adjudged to be liable to the corporation. Where
an officer, director, employee or agent is successful on the merits or
otherwise in the defense of any action referred to above, the corporation must
indemnify him or her against the expenses which such officer or director has
actually and reasonably incurred.
Avalon Cable of Michigan Holdings, Inc.'s Certificate of Incorporation
provides that to the fullest extent permitted by the General Corporation Law of
the State of Delaware as the same exists or may hereafter be amended, a
director of Avalon Cable of Michigan Holdings, Inc. shall not be liable to
Avalon Cable of Michigan Holdings, Inc. or its stockholders for monetary
damages for a breach of fiduciary duty as a director.
Article V of the By-laws of Avalon Cable of Michigan Holdings, Inc.
("Article V") provides, among other things, that each person who was or is made
a party or is threatened to be made a party to or is involved in any action,
suit or proceeding, whether civil, criminal, administrative or investigative,
by reason of the fact that he or she, or a person of whom he or she is the
legal representative, is or was a director or officer, of the corporation or is
or was serving at the request of Avalon Cable of Michigan Holdings, Inc. as a
director, officer, employee, fiduciary, or agent of another corporation or of a
partnership, joint venture, trust or other enterprise, including service with
respect to employee benefit plans, whether the basis of such proceeding is
alleged action in an official capacity as a director, officer, employee,
fiduciary or agent or in any other capacity while serving as a director,
officer, employee, fiduciary or agent, shall be indemnified and held harmless
by Avalon Cable of Michigan Holdings, Inc. to the fullest extent which it is
empowered to do so by the General Corporation Law of the State of Delaware, as
the same exists or may hereafter be amended but, in the case of any such
amendment, only to the extent that such amendment permits Avalon Cable of
Michigan Holdings, Inc. to provide broader indemnification rights than said law
permitted the corporation to provide prior to such amendment, against all
expense, liability and loss, including attorneys' fees actually and reasonably
incurred by such person in connection with such proceeding, and such
indemnification shall inure to the benefit of his or her heirs, executors and
administrators; provided, however, that, Avalon Cable of Michigan Holdings,
Inc. shall indemnify any such person seeking indemnification in connection with
a proceeding initiated by such person only if such proceeding was authorized by
the board of directors of Avalon Cable of Michigan Holdings, Inc.
Article V also provides that persons who are not covered by the foregoing
provisions of Article V and who are or were employees or agents of Avalon Cable
of Michigan Holdings, Inc., or who are or were serving at the request of Avalon
Cable of Michigan Holdings, Inc. as employees or agents of another corporation,
partnership, joint venture, trust or other enterprise, may be indemnified to
the extent authorized at any time or from time to time by the board of
directors.
Section 145 further authorizes a corporation to purchase and maintain
insurance on behalf of any person who is or was a director, officer, employee
or agent of the corporation, or is or was serving at the request of the
corporation as a director, officer, employee or agent of another corporation or
enterprise, against any liability asserted against him and incurred by him or
her in any such capacity, arising out of his or her status as such, whether or
not the corporation would otherwise have the power to indemnify him or her
under Section 145.
Article V further provides that Avalon Cable of Michigan Holdings, Inc. may
purchase and maintain insurance on its behalf and on behalf of any person who
is or was a director, officer, employee, fiduciary or agent of Avalon Cable of
Michigan Holdings, Inc. or was serving at the request of Avalon Cable of
Michigan Holdings, Inc. as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise against any
liability asserted against him or her and incurred by him or her in any such
capacity, whether or not Avalon Cable of Michigan Holdings, Inc. would have the
power to indemnify such person against such liability under Article V.
II-3
<PAGE>
Avalon Cable of Michigan, Inc. Avalon Cable of Michigan, Inc. is
incorporated under the laws of the State of Pennsylvania. Section 1741 of the
Pennsylvania Business Corporation Law, inter alia ("Section 1741") provides
that a business corporation has the power to indemnify any person who was or is
a party or is threatened to be made a party to any threatened, pending or
completed action or proceeding, whether civil, criminal, administrative or
investigative (other than an action by or in the right of the corporation), by
reason of the fact that he is or was a representative of the corporation, or is
or was serving at the request of the corporation as a representative of another
domestic or foreign corporation for profit or not-for-profit, partnership,
joint venture, trust or other enterprise, against expenses (including
attorneys' fees), judgments, fines and amounts paid in settlement actually and
reasonably incurred by him in connection with the action or proceeding if he
acted in good faith and in a manner he reasonably believed to be in, or not
opposed to, the best interests of the corporation and, with respect to any
criminal proceeding, had no reasonable cause to believe his conduct was
unlawful. Section 1742 of the Pennsylvania Business Corporation Law ("Section
1742") provides that a business corporation shall have power to indemnify any
person who was or is a party, or is threatened to be made a party, to any
threatened, pending or completed action by or in the right of the corporation
to procure a judgment in its favor by reason of the fact that he is or was a
representative of the corporation or is or was serving at the request of the
corporation as a representative of another domestic or foreign corporation for
profit or not-for-profit, partnership, joint venture, trust or other
enterprise, against expenses (including attorneys' fees) actually and
reasonably incurred by him in connection with the defense or settlement of the
action if he acted in good faith and in a manner he reasonably believed to be
in, or not opposed to, the best interests of the corporation. Indemnification
shall not be made under Section 1742 in respect of any claim, issue or matter
as to which the person has been adjudged to be liable to the corporation unless
and only to the extent that the court of common pleas of the judicial district
embracing the county in which the registered office of the corporation is
located or the court in which the action was brought determines upon
application that, despite the adjudication of liability but in view of all the
circumstances of the case, the person is fairly and reasonably entitled to
indemnity for the expenses that the court of common pleas or other court deems
proper. To the extent that a representative of a business corporation has been
successful on the merits or otherwise in defense of any action or proceeding
referred to in Section 1741 (relating to third-party actions) or Section 1742
(relating to derivative and corporate actions) or in defense of any claim,
issue or matter therein, he shall be indemnified against expenses (including
attorney fees) actually and reasonably incurred by him in connection therewith.
Article V of the By-laws of Avalon Cable of Michigan, Inc. ("Article V")
provides, among other things, that each person who was or is made a party or is
threatened to be made a party to or is involved in any action, suit or
proceeding, whether civil, criminal, administrative or investigative, by reason
of the fact that he or she, or a person of whom he or she is the legal
representative, is or was a director or officer, of the corporation or is or
was serving at the request of Avalon Cable of Michigan, Inc. as a director,
officer, employee, fiduciary, or agent of another corporation or of a
partnership, joint venture, trust or other enterprise, shall be indemnified and
held harmless by Avalon Cable of Michigan, Inc. to the fullest extent which it
is empowered to do so unless prohibited from doing so by the Business
Corporation Law of the State of Pennsylvania, as the same exists or may
hereafter be amended but, in the case of any such amendment, only to the extent
that such amendment permits Avalon Cable of Michigan, Inc. to provide broader
indemnification rights than said law permitted the corporation to provide prior
to such amendment, against all expense, liability and loss, including
attorneys' fees actually and reasonably incurred by such person in connection
with such proceeding, and such indemnification shall inure to the benefit of
his or her heirs, executors and administrators; provided, however, that, except
as otherwise provided, Avalon Cable of Michigan, Inc. shall indemnify any such
person seeking indemnification in connection with a proceeding initiated by
such person only if such proceeding was authorized by the board of directors of
Avalon Cable of Michigan, Inc.
Section 1747 of the Pennsylvania Business Corporation Law authorizes a
business corporation to purchase and maintain insurance on behalf of any person
who is or was a representative of the corporation or is or was serving at the
request of the corporation as a representative of another domestic or foreign
corporation for profit or not-for-profit, partnership, joint venture, trust or
other enterprise against any liability asserted against him
II-4
<PAGE>
and incurred by him in any such capacity, or arising out of his status as such,
whether or not the corporation would have the power to indemnify him against
that liability under the provisions of Subchapter D of Pennsylvania's Business
Corporation Law.
Article V further provides that Avalon Cable of Michigan, Inc. may purchase
and maintain insurance on its own behalf and on behalf of any person who is or
was a director, officer, employee, fiduciary or agent of Avalon Cable of
Michigan, Inc. or was serving at the request of Avalon Cable of Michigan, Inc.
as a director, officer, employee or agent of another corporation, partnership,
joint venture, trust or other enterprise against any liability asserted against
him or her and incurred by him or her in any such capacity, whether or not
Avalon Cable of Michigan, Inc. would have the power to indemnify such person
against such liability under Article V.
Item 21. Exhibits and Financial Statement Schedules.
(a) Exhibits.
<TABLE>
<CAPTION>
Exhibit
Number Exhibit
------- --------------------------------------------------------------------------
<S> <C>
2.1 Taconic Technology Corp. acquisition agreement.*
3.1 Certificate of Formation of Avalon Cable LLC.*
3.2 Certificate of Incorporation of Avalon Cable Holdings Finance, Inc.*
3.3 Certificate of Incorporation of Avalon Cable of Michigan Holdings, Inc.*
3.4 Certificate of Incorporation of Avalon Cable of Michigan, Inc.*
3.5 Amended and Restated Limited Liability Company Agreement of Avalon Cable
LLC.*
3.6 By-Laws of Avalon Cable Holdings Finance, Inc.*
3.7 By-Laws of Avalon Cable of Michigan Holdings, Inc.*
3.8 By-Laws of Avalon Cable of Michigan, Inc.*
4.1 Indenture, dated as of December 10, 1998 by and among Avalon Cable LLC,
Avalon Cable of Michigan Holdings, Inc. and Avalon Cable Holdings Finance,
Inc., as Issuers and The Bank of New York, as Trustee for the Notes.*
4.2 Supplemental Indenture, dated as of March 26, 1999 by and among Avalon
Cable LLC, Avalon Cable of Michigan Holdings, Inc. and Avalon Cable
Holdings Finance, Inc., as Issuers, Avalon Cable of Michigan, Inc., as
guarantor, and The Bank of New York, as Trustee for the Notes.*
4.3 Purchase Agreement, dated as of December 3, 1998, by and among Avalon
Cable of Michigan, Inc., Avalon Cable of New England LLC and Avalon Cable
Finance, Inc. and the Initial Purchasers of the Notes.*
4.4 Registration Rights Agreement, dated as of December 10, 1998, by and among
Avalon Cable of Michigan, Inc., Avalon Cable of New England LLC and Avalon
Cable Finance, Inc. and the Initial Purchasers of the Notes.*
4.5 Form of 9 5/8% Senior Subordinated Notes due 2008 (included in Exhibit 4.1
above as Exhibit A).*
5.1 Opinion of Kirkland & Ellis.*
</TABLE>
II-5
<PAGE>
<TABLE>
Exhibit
Number Exhibit
------- -------
<S> <C>
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).
10.3 Indenture relating to the Senior Subordinated Notes, dated as of December
10, 1998, by and between Avalon Cable of Michigan, Inc., Avalon Cable of
New England LLC and Avalon Cable Finance, Inc., as issuers, and The Bank
of New York, as Trustee.
10.4 Employment Agreement, dated November 6, 1998, by and between David W.
Unger and Avalon.*
10.5 Employment Agreement, dated as of November 6, 1998, by and between Joel C.
Cohen and Avalon.*
10.6 Employment Agreement, dated as of November 6, 1998, by and between Peter
Polimino and Avalon.*
10.7 Employment Agreement, dated as of November 6, 1998, by and between Peter
Luscombe and Avalon.*
10.8 Management Agreement, dated as of May 29, 1998, between ABRY and Avalon.*
12.1 Statement regarding computation of ratio of earnings to fixed charges.*
21.1 Subsidiaries of Avalon Cable LLC, Avalon Cable Holdings Finance, Inc.,
Avalon Cable of Michigan, Inc. and Avalon Cable of Michigan Holdings, Inc.
23.1 Consents of PricewaterhouseCoopers LLP, Independent Accountants.
23.2 Consent of Greenfield, Altman, Brown, Berger & Katz, P.C., Independent
Accountants.
23.3 Consent of KPMG LLP, Independent Accountants.
23.4 Consent of Kirkland & Ellis (included in Exhibit 5.1 above).*
24.1 Power of Attorney (included in Part II of the Registration Statement).
25.1 Statement of Eligibility of Trustee on Form T-1 with respect to the New
Notes.*
25.2 Statement of Eligibility of Trustee on Form T-1 with respect to the
guarantees of the New Notes.*
</TABLE>
II-6
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Exhibit
------- --------------------------------------------------------------------------
<S> <C>
27.1 Financial Data Schedule.*
99.1 Form of Letter of Transmittal.*
99.2 Form of Notice of Guaranteed Delivery.*
99.3 Form of Tender Instructions.*
</TABLE>
- --------
* To be filed by Amendment.
(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) The undersigned registrants hereby undertake as follows: that prior
to any public reoffering of the securities registered hereunder through use
of a prospectus which is a part of this registration statement, by any
person or party who is deemed to be an underwriter within the meaning of
Rule 145(c), the issuers undertake that such reoffering prospectus will
contain the information called for by the applicable registration form with
respect to reofferings by persons who may be deemed underwriters, in
addition to the information called for by the other Items of the applicable
form.
(5) The registrants undertake that every prospectus (i) that is filed
pursuant to paragraph (1) immediately preceding, or (ii) that purports to
meet the requirements of Section 10(a)(3) of the Act and is used in
connection with an offering of securities subject to Rule 415, will be
filed as a part of an amendment to the registration statement and will not
be used until such amendment is effective, and that, for purposes 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 that time shall be deemed to be the initial bona fide
offering thereof.
II-7
<PAGE>
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.
(6) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of this registration statement in reliance upon Rule 430A and contained in
a form of prospectus filed by the registrants pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(7) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
(8) 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.
(9) The undersigned registrants hereby undertake to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
II-8
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended,
Avalon Cable of Michigan LLC has duly caused this Registration Statement to be
signed on its behalf by the undersigned, thereunto duly authorized, in City of
New York, State of New York, on the day of March, 1999.
Avalon Cable of Michigan LLC
/s/ Joel C. Cohen
By: _________________________________
Name:Joel C. Cohen
Title: Chief Executive Officer,
President and Secretary
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Joel C. Cohen and Jay M. Grossman and each of
them, his or her true and lawful attorneys-in-fact and agents, with full power
of substitution and resubstitution, for him or her and in his or her name,
place and stead, in any and all capacities, to sign any or all amendments
(including post-effective amendments) to this registration statement, and to
file the same, with all exhibits thereto, and other documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents, and each of them, full power and authority to do
and perform each and every act and thing requisite and necessary to be done in
and about the premises, as fully to all intents and purposes as he or she might
or could do in person, hereby ratifying and confirming all that said attorneys-
in-fact and agents or any of them, or their, his or her substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
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 March, 1999.
<TABLE>
<CAPTION>
Signature Capacity
--------- --------
<S> <C>
/s/ Joel C. Cohen Manager, Chief Executive Officer, President
___________________________________________ and Secretary (Principal Executive
Joel C. Cohen Officer)
/s/ Peter Polimino Vice President--Finance (Principal
___________________________________________ Financial and Accounting Officer)
Peter Polimino
/s/ David W. Unger Manager and Assistant Secretary
___________________________________________
David W. Unger
/s/ Jay M. Grossman Manager, Vice President and Assistant
___________________________________________ Secretary
Jay M. Grossman
/s/ Peggy J. Koenig Manager, Vice President and Assistant
___________________________________________ Secretary
Peggy J. Koenig
/s/ Royce Yudkoff Manager
___________________________________________
Royce Yudkoff
</TABLE>
II-9
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended,
Avalon Cable of New England LLC has duly caused this Registration Statement to
be signed on its behalf by the undersigned, thereunto duly authorized, in City
of New York, State of New York, on the day of March, 1999.
Avalon Cable of New England LLC
/s/ Joel C. Cohen
By: _________________________________
Name:Joel C. Cohen
Title: Chief Executive Officer,
President and Secretary
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Joel C. Cohen and Jay M. Grossman and each of
them, his or her true and lawful attorney-in-fact and agent, with full power of
substitution and resubstitution, for him or her and in his or her name, place
and stead, in any and all capacities, to sign any or all amendments (including
post-effective amendments) to this registration statement, and to file the
same, with all exhibits thereto, and other documents in connection therewith,
with the Securities and Exchange Commission, granting unto said attorneys-in-
fact and agents, and each of them, full power and authority to do and perform
each and every act and thing requisite and necessary to be done in and about
the premises, as fully to all intents and purposes as he or she might or could
do in person, hereby ratifying and confirming all that said attorneys-in-fact
and agents or any of them, or their, his or her substitute or substitutes, may
lawfully do or cause to be done by virtue hereof.
* * *
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 March, 1999.
<TABLE>
<CAPTION>
Signature Capacity
--------- --------
<S> <C>
/s/ Joel C. Cohen Chief Executive Officer, President,
___________________________________________ Secretary and Manager (Principal
Joel C. Cohen Executive Officer)
/s/ Peter Polimino Vice President--Finance (Principal
___________________________________________ Financial and Accounting Officer)
Peter Polimino
/s/ David W. Unger Chairman and Assistant Secretary
___________________________________________
David W. Unger
/s/ Jay M. Grossman Manager, Vice President and Assistant
___________________________________________ Secretary
Jay M. Grossman
/s/ Peggy J. Koenig Manager, Vice President and Assistant
___________________________________________ Secretary
Peggy J. Koenig
/s/ Royce Yudkoff Manager
___________________________________________
Royce Yudkoff
</TABLE>
II-10
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended,
Avalon Cable Finance, Inc. has duly caused this Registration Statement to be
signed on its behalf by the undersigned, thereunto duly authorized, in City of
New York, State of New York, on the day of March, 1999.
Avalon Cable Finance, Inc.
/s/ Joel C. Cohen
By: _________________________________
Name:Joel C. Cohen
Title: Chief Executive Officer,
President and Secretary
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Joel C. Cohen and Jay M. Grossman and each of
them, his or her true and lawful attorney-in-fact and agent, with full power of
substitution and resubstitution, for him or her and in his or her name, place
and stead, in any and all capacities, to sign any or all amendments (including
post-effective amendments) to this registration statement, and to file the
same, with all exhibits thereto, and other documents in connection therewith,
with the Securities and Exchange Commission, granting unto said attorneys-in-
fact and agents, and each of them, full power and authority to do and perform
each and every act and thing requisite and necessary to be done in and about
the premises, as fully to all intents and purposes as he or she might or could
do in person, hereby ratifying and confirming all that said attorneys-in-fact
and agents or any of them, or their, his or her substitute or substitutes, may
lawfully do or cause to be done by virtue hereof.
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 March, 1999.
<TABLE>
<CAPTION>
Signature Capacity
--------- --------
<S> <C>
/s/ Joel C. Cohen Chief Executive Officer, President,
___________________________________________ Secretary and Director (Principal
Joel C. Cohen Executive Officer)
/s/ Peter Polimino Vice President--Finance (Principal
___________________________________________ Financial and Accounting Officer)
Peter Polimino
/s/ David W. Unger Manager and Assistant Secretary
___________________________________________
David W. Unger
/s/ Jay M. Grossman Director, Vice President and Assistant
___________________________________________ Secretary
Jay M. Grossman
/s/ Peggy J. Koenig Director, Vice President and Assistant
___________________________________________ Secretary
Peggy J. Koenig
/s/ Royce Yudkoff Director
___________________________________________
Royce Yudkoff
</TABLE>
II-11
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended,
Avalon Cable of Michigan, Inc. has duly caused this Registration Statement to
be signed on its behalf by the undersigned, thereunto duly authorized, in City
of New York, State of New York, on the day of March, 1999.
Avalon Cable of Michigan, Inc.
/s/ Joel C. Cohen
By: _________________________________
Name:Joel C. Cohen
Title: Chief Executive Officer,
President and Secretary
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Joel C. Cohen and Jay M. Grossman and each of
them, his or her true and lawful attorney-in-fact and agent, with full power of
substitution and resubstitution, for him or her and in his or her name, place
and stead, in any and all capacities, to sign any or all amendments (including
post-effective amendments) to this registration statement, and to file the
same, with all exhibits thereto, and other documents in connection therewith,
with the Securities and Exchange Commission, granting unto said attorneys-in-
fact and agents, and each of them, full power and authority to do and perform
each and every act and thing requisite and necessary to be done in and about
the premises, as fully to all intents and purposes as he or she might or could
do in person, hereby ratifying and confirming all that said attorneys-in-fact
and agents or any of them, or their, his or her substitute or substitutes, may
lawfully do or cause to be done by virtue hereof.
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 March, 1999.
<TABLE>
<CAPTION>
Signature Capacity
--------- --------
<S> <C>
/s/ Joel C. Cohen Chief Executive Officer, President,
___________________________________________ Secretary and Director (Principal
Joel C. Cohen Executive Officer)
/s/ Peter Polimino Vice President--Finance (Principal
___________________________________________ Financial and Accounting Officer)
Peter Polimino
/s/ David W. Unger Chairman and Assistant Secretary
___________________________________________
David W. Unger
/s/ Jay M. Grossman Director, Vice President and Assistant
___________________________________________ Secretary
Jay M. Grossman
/s/ Peggy J. Koenig Director, Vice President and Assistant
___________________________________________ Secretary
Peggy J. Koenig
/s/ Royce Yudkoff Director
___________________________________________
Royce Yudkoff
</TABLE>
II-12
<PAGE>
Exhibit 21.1
Subsidiaries of Avalon Cable LLC
<TABLE>
<CAPTION>
Name of Subsidiary State of Formation
- ------------------ ------------------
<S> <C>
Avalon Cable of Michigan LLC Delaware
Avalon Cable of New England LLC Delaware
Avalon Cable Holdings Finance, Inc. Delaware
Avalon Cable Finance, Inc. Delaware
</TABLE>
Subsidiaries of Avalon Cable Holdings Finance, Inc.
<TABLE>
<CAPTION>
Name of Subsidiary State of Formation
- ------------------ ------------------
<S> <C>
Avalon Cable Finance, Inc. Delaware
</TABLE>
Subsidiaries of Avalon Cable of Michigan, Inc.
<TABLE>
<CAPTION>
Name of Subsidiary State of Formation
- ------------------ ------------------
<S> <C>
Avalon Cable LLC (see above) Delaware
</TABLE>
Subsidiaries of Avalon Cable of Michigan Holdings, Inc.
<TABLE>
<CAPTION>
Name of Subsidiary State of Formation
- ------------------ ------------------
<S> <C>
Avalon Cable of Michigan, Inc. (see above) Pennsylvania
</TABLE>
<PAGE>
EXHIBIT 23.1
Consent of Independent Accountants
We hereby consent to the use in the Prospectus constituting part of this
Registration Statement on Form S-4 of Avalon Cable LLC, Avalon Cable Holdings
Finance, Inc., Avalon Cable of Michigan Holdings, Inc. and Avalon Cable of
Michigan, Inc. of (i) our report dated March 30, 1999 relating to the
consolidated financial statements of Avalon Cable of Michigan Holdings, Inc. and
Subsidiaries as of December 31, 1998 and for the period from June 2, 1998
(inception) through December 31, 1998, (ii) our report dated March 30, 1999
relating to the consolidated financial statements of Avalon Cable of Michigan,
Inc. and Subsidiaries as of December 31, 1998 and for the period from June 2,
1998 (inception) through December 31, 1998, (iii) our report dated March 30,
1999 relating to the consolidated financial statements of Cable Michigan, Inc.
and Subsidiaries as of December 31, 1997 and November 5, 1998 and for each of
the two years in the period ended December 31, 1997 and for the period from
January 1, 1998 through November 5, 1998, (iv) our report dated March 30, 1999
relating to the consolidated financial statements of Avalon Cable LLC and
Subsidiaries as of December 31, 1998 and for the period from October 21, 1998
(inception) through December 31, 1998 and (v) our report dated March 30, 1999
relating to the consolidated financial statements of Avalon Cable Holdings
Finance, Inc. and Subsidiary as of December 31, 1998 and for the period from
October 21, 1998 (inception) through December 31, 1998 which appear in such
Prospectus. We also consent to the references to us under the headings
"Experts" and "Selected Historical Financial and Other Data" in such Prospectus.
However, it should be noted that PricewaterhouseCoopers LLP has not prepared or
certified such "Selected Historical Financial and Other Data."
/s/PRICEWATERHOUSECOOPERS LLP
PRICEWATERHOUSECOOPERS LLP
New York, New York
March 31, 1999
<PAGE>
Consent of Independent Accountants
We hereby consent to the use in the Prospectus constituting part of this
Registration Statement on Form S-4 of Avalon Cable LLC, Avalon Cable Holdings
Finance, Inc., Avalon Cable of Michigan Holdings, Inc. and Avalon Cable of
Michigan, Inc. of our report dated September 11, 1998 relating to the financial
statements of Amrac Clear View, a Limited Partnership as of May 28, 1998 and for
the period from January 1, 1998 through May 28, 1998 which appear in such
Prospectus. We also consent to the references to us under the headings
"Experts" and "Selected Historical Financial and Other Data" in such Prospectus.
However, it should be noted that PricewaterhouseCoopers LLP has not prepared or
certified such "Selected Historical Financial and Other Data."
/s/PRICEWATERHOUSECOOPERS LLP
PRICEWATERHOUSECOOPERS LLP
Boston, Massachusetts
March 31, 1999
<PAGE>
Consent of Independent Accountants
We hereby consent to the use in the Prospectus constituting part of this
Registration Statement on Form S-4 of Avalon Cable LLC, Avalon Cable Holdings
Finance, Inc., Avalon Cable of Michigan Holdings, Inc. and Avalon Cable of
Michigan, Inc. of our report dated March 30, 1998 relating to the combined
financial statements of the Combined Operations of Pegasus Cable Television of
Connecticut, Inc. and the Massachusetts Operations of Pegasus Cable Television,
Inc. as of December 31, 1996, 1997 and June 30, 1998 and for each of the three
years in the period ended December 31, 1997 and for the period from January 1,
1998 through June 30, 1998 which appear in such Prospectus. We also consent to
the references to us under the headings "Experts" and "Selected Historical
Financial and Other Data" in such Prospectus. However, it should be noted that
PricewaterhouseCoopers LLP has not prepared or certified such "Selected
Historical Financial and Other Data."
/s/PRICEWATERHOUSECOOPERS LLP
PRICEWATERHOUSECOOPERS LLP
Philadelphia, Pennsylvania
March 31, 1999
<PAGE>
Exhibit 23.2
------------
Consent of Independent Accountants
We hereby consent to the use in the Prospectus constituting part of this
Registration Statement on Form S-4 of Avalon Cable of Michigan Holdings, Inc.,
Avalon Cable LLC, Avalon Cable Holdings Finance, Inc. and Avalon Cable of
Michigan, Inc. of our report dated February 13, 1998 relating to the financial
statements of Amrac Clear View, a Limited Partnership, which appears in such
Prospectus. We also consent to the references to us under the headings "Experts"
and "Selected Financial Data" in such Prospectus. However, it should be noted
that Greenfield, Altman, Brown & Katz, P.C. has not prepared or certified such
"Selected Historical Financial and Other Data."
/s/ Greenfield, Altman, Brown, Berger & Katz, P.C.
Greenfield, Altman, Brown, Berger & Katz, P.C.
Canton, Massachusetts
March 31, 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-64 herein and to the
reference to our firm under the heading "Experts" in the Form S-4 Registration
Statement filed by Avalon Cable LLC, Avalon Cable Holdings Finance, Inc., Avalon
Cable of Michigan Holdings, Inc., Avalon Cable of Michigan, Inc.
Albany, New York
March 31, 1999
