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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------
FORM 10-K
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ______________ TO ______________ .
COMMISSION FILE NUMBERS:
333-75415
333-75415-03
CC V HOLDINGS, LLC*
CC V HOLDINGS FINANCE, INC.*
(Exact names of Registrants as specified in their charters)
<TABLE>
<S> <C>
DELAWARE 13-4029965
DELAWARE 13-4029969
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Numbers)
12444 POWERSCOURT DRIVE -- SUITE 100 63131
ST. LOUIS, MISSOURI (Zip code)
(Address of principal executive offices)
</TABLE>
(314) 965-0555
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No [ ].
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of the Form 10-K or any amendment to this
Form 10-K. X
State the aggregate market value of the voting equity securities held by
non-affiliates of the Registrants:
All of the issued and outstanding shares of capital stock of CC V Holdings
Finance, Inc. are held by CC V Holdings, LLC. All of the limited liability
company membership interests of CC V Holdings, LLC are held by Charter
Communications Holdings, LLC, a reporting company under the Exchange Act. There
is no public trading market for any of the aforementioned limited liability
company membership interests or shares of capital stock.
DOCUMENTS INCORPORATED BY REFERENCE
The following documents are incorporated into this Report by reference: None
* CC V Holdings, LLC and CC V Holdings Finance, Inc. meet the conditions set
forth in General Instruction J(1)(a) and (b) to the Form 10-K and are
therefore filing with the reduced disclosure format.
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CC V HOLDINGS, LLC
CC V HOLDINGS FINANCE, INC.
1999 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
<TABLE>
<S> <C> <C>
PART I
Item 1. Business.................................................... 1
Item 2. Properties.................................................. 2
Item 3. Legal Proceedings........................................... 3
PART II
Item 5. Market for Registrant's Common Equity and Related 4
Shareholder Matters.........................................
Item 7. Management's Discussion and Analysis of Financial Condition 5
and Results of Operations...................................
Item 7a. Quantitative and Qualitative Disclosures about Market 6
Risk........................................................
Item 8. Financial Statements and Supplementary Data................. 7
Item 9. Changes in and Disagreements with Accountants on Accounting 7
and Financial Disclosure....................................
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8
8-K.........................................................
Signatures.............................................................. 10
</TABLE>
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PART I
ITEM 1. BUSINESS
ORGANIZATION AND OWNERSHIP STRUCTURE
On November 15, 1999, Charter Communications Holding Company, LLC (Charter
Holdco) purchased (the "Charter Transaction") Avalon Cable of Michigan Holdings,
Inc. (Avalon Michigan Holdings) and directly and indirectly all of the equity
interests of Avalon Michigan Holdings, including CC V Holdings, LLC (CC V
Holdings, formerly known as Avalon Cable LLC). In connection with a multistep
restructuring following the acquisition of Avalon Michigan Holdings, Avalon
Michigan Holdings was merged with and into CC V Holdings. Effective January 1,
2000, these acquired interests were transferred to Charter Communications
Holdings, LLC, a wholly owned subsidiary of Charter Holdco. Charter
Communications Holdings, LLC is a reporting company under the Exchange Act.
GENERAL
CC V Holdings and its wholly owned subsidiaries (collectively, the
"Company") were formed to acquire, operate and develop medium-sized cable
television systems. The Company's systems are primarily clustered in Michigan
(the "Michigan Systems") and western New England (the "New England Systems"). As
of December 31, 1999, they passed approximately 401,200 homes and served
approximately 255,100 customers. The Company also owns and operates various
Internet service providers, which provide dial-up telephone access to the
Internet via a modem. CC V Holdings Finance, Inc. (formerly known as Avalon
Cable Holdings Finance, Inc.) was formed for the sole purpose of facilitating
financings associated with the acquisitions of various cable operating
companies. It conducts no other activities.
The Company's objective is to increase operating cash flow by increasing
the customer base and the amount of cash flow per customer. The Company intends
to achieve this objective by improving its technical plant, resulting in
increasing the bandwidth capacity of its systems, offering new products and
services, and maximizing customer satisfaction. The Company also believes that
by clustering systems it is able to realize economies of scale, such as reduced
payroll, reduced billing and technical costs per subscriber, reduced advertising
sales costs, increased local advertising sales, more efficient roll-out and
utilization of new technologies, and consolidation of its customer service
functions. The Company plans to offer new cable and broadband services including
digital television and high-speed Internet access.
The principal executive offices of the Company are located at 12444
Powerscourt Drive -- Suite 100, St. Louis, Missouri 63131.
THE MICHIGAN SYSTEMS
The Michigan Systems serve approximately 228,800 customers as of December
31, 1999, located in and around Grand Rapids, Traverse City, Lapeer and Monroe,
Michigan.
THE NEW ENGLAND SYSTEMS
The New England Systems serve approximately 26,300 customers as of December
31, 1999, located in and around Winsted, Connecticut; Berkshire, Massachusetts;
and Chatham, New York in western New England and Charlton, Belchertown and
Hadley, Massachusetts in central Massachusetts.
FORWARD-LOOKING STATEMENTS
This report contains forward-looking statements within the meaning of the
Securities Exchange Act of 1934, as amended, and of the Securities Act of 1933,
as amended, and is subject to the safe harbors created by those sections. The
Company's actual results could differ materially from those discussed herein,
and its current business plans could be altered in response to market conditions
and other factors beyond the Company's control. The forward-looking statements
within this Form 10-K are identified by words such as "believes", "anticipates",
"accepts", "intends", "may", "will" and other similar expressions. However,
these
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words are not the exclusive means of identifying such statements. In addition,
any statements that refer to expectations, projections or other
characterizations of future events or circumstances are forward-looking
statements. The Company undertakes no obligation to release publicly the results
of any revisions to these forward-looking statements that may be made to reflect
events or circumstances occurring subsequent to the filing of this Form 10-K
with the SEC.
Important factors that could cause actual results to differ materially from
the forward-looking statements contained herein include, but are not limited to:
- General economic and business conditions, both nationally and in the
regions where the Company operates;
- Anticipated capital expenditures for planned upgrades and the ability to
fund these expenditures;
- Technology changes;
- The Company's ability to effectively compete in a highly competitive
environment;
- Changes in business strategy or development plans;
- Beliefs regarding the effects of governmental regulation on the Company's
business;
- The ability to attract and retain qualified personnel;
- Liability and other claims asserted against the Company.
Readers are urged to review and consider carefully the various disclosures
made by the Company in this report and in the Company's other reports filed with
the SEC that attempt to advise interested parties of the risks and factors that
may affect the Company's business.
ITEM 2. PROPERTIES
A cable television system consists of three principal operating components.
The first component, known as the headend, receives television and information
signals generally by means of special antennas and satellite earth stations. The
second component, the distribution network, which originates at the headend and
extends throughout the system's service area, consists of microwave relays,
coaxial or fiber optic cables and associated electronic equipment placed on
utility poles or buried underground. Coaxial cable is a type of cable used for
broadband data and cable systems. This type of cable has excellent broadband
frequency characteristics, noise, immunity and physical durability. Fiber optic
cable is a communication medium that uses hair-thin glass fibers to transmit
signals over long distances with minimum signal loss or distortion. 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. An additional component used in certain systems is
the home terminal device, or converter/descrambler, that expands channel
capacity to permit reception of multiple channels of programming on a non-cable
ready television set and permits the operator to control the reception of
program offerings by subscribers.
The Company's principal physical assets consist of cable television
systems, including signal-receiving, encoding and decoding apparatus, headends,
distribution systems and subscriber house drop equipment for each of the
systems. The signal receiving apparatus typically includes a tower, antennas,
ancillary electronic equipment and earth stations for reception of satellite
signals. Headends, consisting of associated electronic equipment necessary for
the reception, amplification and modulation of signals, typically are located
near the receiving devices. The Company's distribution systems consist primarily
of coaxial cable, fiber optic cable and related electronic equipment. As
upgrades are completed, the Company will continue to incorporate fiber optic
cable. At December 31, 1999, approximately 15% of the Company's customers were
served by systems with at least 550 megahertz bandwidth capacity. Customer
equipment consists of house drops, converters/descramblers and, in some cases,
traps. The Company owns its distribution systems, various office fixtures, test
equipment and certain service vehicles. The physical components of the systems
require maintenance and periodic upgrading to keep pace with technological
advances.
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The Company's cables are generally attached to utility poles in accordance
with pole rental agreements with local public utilities, although in some areas
the distribution cable is buried in trenches or placed in underground ducts. The
FCC regulates most pole attachment rates under the Federal Pole Attachment Act,
although in certain cases attachment rates are regulated by state law.
The Company owns or leases parcels of real property for signal reception
sites (antenna towers and headends), microwave complexes and business offices.
The Company believes that its properties, both owned and leased, are in good
condition and are suitable and adequate for the Company's business operations as
presently conducted.
ITEM 3. LEGAL PROCEEDINGS
In connection with the Company's acquisition of Mercom, Inc. (Mercom),
former Mercom shareholders holding approximately 731,894 Mercom common shares
(approximately 15.3% of all outstanding Mercom common shares) gave notice of
their election to exercise appraisal rights as provided by Delaware law. On July
2, 1999, former Mercom shareholders holding 535,501 shares of Mercom common
stock filed a petition for appraisal of stock in the Delaware Chancery Court.
With respect to 209,893 of the total number of shares for which the Company
received notice, the notice provided to the Company was received from beneficial
holders of Mercom shares who were not holders of record. The Company believes
that the notice with respect to these shares did not comply with Delaware law
and is ineffective.
The Company cannot predict at this time the effect of the elections to
exercise appraisal rights on the Company since the Company does not know the
extent to which these former Mercom shareholders will continue to pursue
appraisal rights under Delaware law or choose to abandon these efforts and seek
to accept the consideration payable in the Mercom merger. If these former
shareholders continue to pursue their appraisal rights and if a Delaware court
were to find that the fair value of the Mercom common shares, exclusive of any
element of value arising from the acquisition of Mercom, exceeded $12.00 per
share, the Company would have to pay the additional amount for each Mercom
common share subject to the appraisal proceedings together with a fair rate of
interest. The Company could be ordered by the Delaware court also to pay
reasonable attorney's fees and the fees and expenses of experts for the
shareholders. In addition, the Company would have to pay its own litigation
costs. The Company has already provided for the consideration of $12.00 per
Mercom common share due under the terms of the merger with Mercom with respect
to these shares but has not provided for any additional amounts or costs. The
Company can provide no assurance as to what a Delaware court would find in any
appraisal proceeding or when this matter will be resolved. Accordingly, the
Company cannot assure that the ultimate outcome would have no material adverse
impact on the Company.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
There is no established trading market for the equity interests in CC V
Holdings or CC V Holdings Finance, Inc. Charter Communications Holdings, LLC
owns all of the limited liability company membership interests of CC V Holdings.
CC V Holdings owns all of the outstanding capital stock of CC V Holdings
Finance, Inc.
Effective with the Charter Transaction, the Company records distributions
when management fees charged to the Company exceed expenses incurred on its
behalf. For the period from November 15, 1999 to December 31, 1999, net
distributions totaled $273. The Company has not paid distributions to its
members since its inception. The Company's ability to pay distributions is
limited under the terms of covenants in the indentures governing the outstanding
senior discount notes and the credit agreement.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
The following table summarizes amounts and the percentage of total revenues
for certain items for the periods indicated (dollars in thousands):
<TABLE>
<CAPTION>
PERIOD FROM PERIOD FROM
NOVEMBER 15, 1999 TO JANUARY 1, 1999 TO FOR THE YEAR ENDED
DECEMBER 31, 1999 NOVEMBER 14, 1999 DECEMBER 31, 1998
--------------------- ------------------- -------------------
AMOUNT % AMOUNT % AMOUNT %
--------- ------ --------- ------ --------- ------
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Basic Services........................ $ 11,281 81.0 $ 76,721 81.3 $ 14,976 82.3
Premium Services...................... 1,008 7.2 7,088 7.5 1,468 8.1
Other................................. 1,641 11.8 10,574 11.2 1,743 9.6
-------- ----- -------- ----- -------- -----
13,930 100.0 94,383 100.0 18,187 100.0
-------- ----- -------- ----- -------- -----
Operating Expenses:
Programming, General and
Administrative and Other........... 8,281 59.4 53,089 56.3 10,722 58.9
Depreciation and Amortization......... 7,822 56.2 39,943 42.3 8,183 45.0
Corporate Expense Charges-Related
Party.............................. 501 3.6 -- -- -- --
-------- ----- -------- ----- -------- -----
Operating Income (Loss)................. (2,674) (19.2) 1,351 1.4 (718) (3.9)
Interest Income......................... -- -- 764 0.8 173 0.9
Interest Expense........................ (7,537) (54.1) (40,162) (42.5) (8,223) (45.2)
Other Expense, Net...................... -- -- -- -- (65) (0.4)
-------- ----- -------- ----- -------- -----
Loss Before Income Taxes................ (10,211) (73.3) (38,047) (40.3) (8,833) (48.6)
Provision (Benefit) for Income Taxes.... -- -- (13,936) (14.8) 186 1.0
-------- ----- -------- ----- -------- -----
Loss Before Minority Interest........... (10,211) (73.3) (24,111) (25.5) (9,019) (49.6)
Minority Interest....................... -- -- 4,499 4.7 (398) (2.2)
-------- ----- -------- ----- -------- -----
Loss Before Extraordinary Loss on Early
Extinguishment of Debt................ (10,211) (73.3) (19,612) (20.8) (9,417) (51.8)
Extraordinary Loss on Early Exting. of
Debt.................................. -- -- -- -- (5,965) (32.8)
-------- ----- -------- ----- -------- -----
Net Loss................................ $(10,211) (73.3) $(19,612) (20.8) $(15,382) (84.6)
======== ===== ======== ===== ======== =====
</TABLE>
Other financial data is as follows for the periods indicated (dollars in
thousands, except Revenue per Basic Customer):
<TABLE>
<CAPTION>
PERIOD FROM
NOVEMBER 15, 1999 TO FOR THE YEAR ENDED
DECEMBER 31, 1999 DECEMBER 31, 1998
---------------------- -------------------
<S> <C> <C> <C> <C>
EBITDA (a)............................. $ 5,148 $ 7,400
Adjusted EBITDA (b).................... 5,649 7,465
Homes Passed (at period end)........... 401,192 377,512
Basic Customers........................ 255,125 232,141
Basic Penetration...................... 63.6% 61.5%
Premium Units.......................... 71,756 60,462
Premium Penetration.................... 28.1% 26.0%
Average Monthly Revenue per Basic
Customer............................. $ 36.40 $ 34.89
</TABLE>
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(a) EBITDA represents earnings (loss) before extraordinary item before interest,
income taxes, depreciation and amortization. EBITDA is presented because it
is a widely accepted financial indicator of a cable company's ability to
service indebtedness. However, EBITDA should not be considered as an
alternative
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to income from operations or to cash flows from operating, investing or
financing activities, as determined in accordance with generally accepted
accounting principles. EBITDA should also not be construed as an indication
of a company's operating performance or as a measure of liquidity.
Management's discretionary use of funds depicted by EBITDA may be limited by
working capital, debt service and capital expenditure requirements and by
restrictions related to legal requirements, commitments and uncertainties.
(b) Adjusted EBITDA means EBITDA before corporate expense charges and other
income (expense). Adjusted EBITDA is presented because it is a widely
accepted financial indicator of a cable company's ability to service
indebtedness. However, adjusted EBITDA should not be considered as an
alternative to income from operations or to cash flows from operating,
investing or financing activities, as determined in accordance with
generally accepted accounting principles. Adjusted EBITDA should also not be
construed as an indication of a company's operating performance or as a
measure of liquidity. In addition, because adjusted EBITDA is not calculated
identically by all companies, the presentation here may not be comparable to
other similarly titled measures of other companies. Management's
discretionary use of funds depicted by adjusted EBITDA may be limited by
working capital, debt service and capital expenditure requirements and by
restrictions related to legal requirements, commitments and uncertainties.
COMPARISON OF RESULTS
As a result of the Charter Transaction, the application of push-down
accounting, and the allocation of purchase price, the financial results for the
periods presented above are not comparable. In addition, in 1999 prior to the
Charter Transaction, Avalon Michigan Holdings acquired the minority interest of
Mercom, and the Company acquired eight cable systems. These transactions further
complicate any comparison of the above results.
YEAR 2000 ISSUES
The Company has not experienced significant service disruptions or any
other problems since the beginning of the year 2000. Management can not assure,
however, that such problems will not arise in connection with customer billing
or other periodic information gathering. The cost of the year 2000 remediation
program was approximately $463,000. Management does not anticipate significant
additional expenditures during 2000.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
CONCENTRATION OF CREDIT RISK
Financial instruments which potentially expose the Company to a
concentration of credit risk include cash and customer and other receivables.
The Company had cash in excess of federally insured deposits at financial
institutions at December 31, 1999. The Company does not believe that such
deposits are subject to any unusual credit risk beyond the normal credit risk
associated with operating its business. The Company extends credit to customers
on an unsecured basis in the normal course of business. The Company maintains
reserves for potential credit losses and such losses, in the aggregate, have not
historically exceeded management's expectations. The Company's trade receivables
reflect a customer base centered in Michigan and New England. The Company
routinely assesses the financial strength of its customers; as a result,
concentrations of credit risk are limited.
INTEREST RATE HEDGE AGREEMENTS
The company manages fluctuations in interest rates by using interest rate
hedge agreements, as required by certain of its debt agreements. Interest rate
caps are accounted for as hedges of debt obligations, and accordingly, the net
settlement amounts are recorded as adjustments to interest expense in the period
incurred. Premiums paid for interest rate caps are deferred, included in other
assets, and are amortized over the original term of the interest rate agreement
as an adjustment to interest expense.
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Interest rate caps are entered into by the Company to reduce the impact of
rising interest rates on floating rate debt.
The Company's participation in interest rate hedging transactions involves
instruments that have a close correlation with its debt, thereby managing its
risk. Interest rate hedge agreements have been designated for hedging purposes
and are not held or issued for speculative purposes. Management believes that
the sellers of the interest rate hedge agreements will be able to meet their
obligations under the agreements. The Company has policies regarding the
financial stability and credit standing of the major counterparties.
Nonperformance by the counterparties is not anticipated nor would it have a
material adverse effect on the Company's consolidated financial position or
results of operations.
INTEREST RATE RISK
The following summarizes the contract terms and fair values of the
Company's financial instruments subject to interest rate risk at December 31,
1999 (dollars in thousands):
<TABLE>
<CAPTION>
EXPECTED MATURITY DATE
-------------------------------------------- FAIR
2000 2001 2002 2003 2004 THEREAFTER TOTAL VALUE
---- ---- ------- ------- ------ ---------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
DEBT
Fixed Rate...................... $-- $-- $ -- $72,979 $ -- $273,521 $346,500 $281,212
Avg. Interest Rate............ -- -- -- 11.8% -- 10.5% 10.8%
Variable Rate................... -- -- -- 1,250 1,250 167,500 170,000 170,000
Avg. Interest Rate............ -- -- -- 9.7% 9.8% 9.8% 9.8%
INTEREST RATE CAP............... $-- $-- $15,000 $ -- $ -- $ -- $ 15,000 $ 16
Avg. Cap Rate................. -- -- 9.0% -- -- -- 9.0%
</TABLE>
The notional amount of the interest rate cap presented above is used to
measure interest to be paid or received and does not represent the amount of
exposure to credit loss. The estimated fair value approximates the proceeds to
settle the outstanding contract. Interest rates on variable debt are estimated
using the average implied forward London Interbank Offering Rate rates for the
year of maturity based on the yield curve in effect at December 31, 1999.
Subsequent to year end, the Company repurchased all 150,000 of its senior
subordinated notes outstanding (each with a $1,000 face amount) and 16,250 of
its senior discount notes outstanding (each with a $1,000 face amount at
maturity), primarily pursuant to change of control offers. Both of these issues
were included in fixed-rate debt in the table above.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Company's consolidated financial statements, the related notes thereto,
and the reports of independent auditors are included in this Form 10-K beginning
on page F-1.
Separate financial statements for CC V Holdings Finance, Inc., have not
been presented as CC V Holdings Finance, Inc. had substantially no assets or
equity. Accordingly, management has determined that such financial statements
would not be material to investors.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
The Company filed a form 8-K dated January 28, 2000 (amended on February
24, 2000), which announced a change in the Company's principal independent
accountants from PricewaterhouseCoopers LLP to Arthur Andersen LLP.
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PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report:
1. Financial Statements: A listing of the financial statements, notes
and reports of independent auditors required by Item 8 begins on page F-1
of this Annual Report on Form 10-K.
2. Financial Statement Schedules: All schedules are omitted because
they are not required, not applicable, or the information is given in the
financial statements or notes thereto.
3. Exhibits (listed by numbers corresponding to the Exhibit Table of
Item 601 in Regulation S-K):
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
2.1 Taconic Technology Corp. acquisition agreement. (1)
2.2 Securities Purchase Agreement, dated as of May 13, 1999, by
and between Avalon Cable Holdings, LLC, Avalon Investors,
L.L.C., Avalon Cable of Michigan Holdings, Inc., CC V
Holdings, LLC (formerly known as Avalon Cable LLC), Charter
Communications Holdings LLC and Charter Communications, Inc.
(1)
3.1 Certificate of Formation of CC V Holdings, LLC (formerly
known as Avalon Cable LLC). (2)
3.1(a)* Amendment to Certificate of Formation of CC V Holdings, LLC
(formerly known as Avalon Cable LLC).
3.2 Certificate of Incorporation of CC V Holdings Finance, Inc.
(formerly known as Avalon Cable Holdings Finance, Inc.). (2)
3.5 Amended and Restated Limited Liability Company Agreement of
CC V Holdings, LLC (formerly known as Avalon Cable LLC). (2)
3.6* Amended and Restated By-Laws of CC V Holdings Finance, Inc.
(formerly known as Avalon Cable Holdings Finance, Inc.).
4.1 Indenture, dated as of December 10, 1998, by and among CC V
Holdings, LLC (formerly known as Avalon Cable LLC), Avalon
Cable of Michigan Holdings, Inc. and CC V Holdings Finance,
Inc. (formerly known as Avalon Cable Holdings Finance,
Inc.), as Issuers and The Bank of New York, as Trustee for
the Notes. (2)
4.2 Supplemental Indenture, dated as of March 26, 1999, by and
among CC V Holdings, LLC (formerly known as Avalon Cable
LLC), Avalon Cable of Michigan Holdings, Inc. and CC V
Holdings Finance, Inc. (formerly known as 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. (2)
10.10 Credit Agreement, dated as of November 15, 1999, among CC V
Holdings, LLC (formerly known as Avalon Cable LLC), CC
Michigan, LLC (formerly known as Avalon Cable of Michigan
LLC), and CC New England, LLC (formerly known as Avalon
Cable of New England LLC), several banks and other financial
institutions or entities named therein, First Union National
Bank and PNC Bank, National Association, as syndication
agents, Bank of Montreal, Chicago Branch and Mercantile Bank
National Association, as co-documentation agents, and Bank
of Montreal, as administrative agent. (3)
</TABLE>
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<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <S>
10.10(a) First Amendment to Credit Agreement, dated December 21,
1999, by and among CC Michigan, LLC (formerly known as
Avalon Cable of Michigan LLC) and CC New England, LLC
(formerly known as Avalon Cable of New England LLC) as
borrowers, CC V Holdings, LLC (formerly known as Avalon
Cable LLC) as guarantor and several banks and other
financial institutions named therein. (4)
27.1* Financial Data Schedule.
</TABLE>
- -------------------------
(1) Incorporated by reference to Amendment No. 1 to the Registration Statement
on Form S-4 (File No. 333-75453) filed by CC Michigan, LLC (formerly known
as Avalon Cable of Michigan LLC), CC New England, LLC (formerly known as
Avalon Cable of New England LLC), Avalon Cable Finance, Inc. and Avalon
Cable of Michigan, Inc. on May 28, 1999.
(2) Incorporated by reference to Amendment No. 1 to the Registration Statement
on Form S-4 (File No. 333-75415) filed by CC V Holdings, LLC (formerly known
as Avalon Cable LLC), CC V Holdings Finance, Inc. (formerly known as Avalon
Cable Holdings Finance, Inc.), Avalon Cable of Michigan Holdings, Inc. and
Avalon Cable of Michigan, Inc. on May 28, 1999.
(3) Incorporated by reference to the report on Form 8-K of Charter
Communications, Inc. (File No. 333-83887) filed on November 29, 1999.
(4) Incorporated by reference to the Annual Report on Form 10-K of Charter
Communications, Inc. (File No. 000-27927) filed on March 28, 2000.
* Filed herewith.
(b) Reports on Form 8-K:
On November 30, 1999, the Company filed a Form 8-K announcing that on
November 15, 1999, all of the equity interests of Avalon Cable LLC (now known as
CC V Holdings, LLC) were acquired (directly or indirectly) by Charter
Communications, Inc. (Charter Communications) and Charter Holdco. Immediately
after this acquisition, Charter Communications contributed its indirect interest
in Avalon Cable LLC to Charter Holdco.
In addition, the Company filed a form 8-K dated January 28, 2000 (amended
on February 24, 2000), which announced a change in the Company's principal
independent accountants, provided results on the Company's change of control
offer for its senior discount notes, and discussed a corporate reorganization.
SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED PURSUANT TO
SECTION 15(D) OF THE ACT BY REGISTRANTS WHICH HAVE NOT REGISTERED SECURITIES
PURSUANT TO SECTION 12 OF THE ACT.
No annual reports or proxy materials were sent to the Registrants' security
holders during fiscal year 1999.
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CC V HOLDINGS, LLC
CC V HOLDINGS FINANCE, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C>
CC V HOLDINGS, LLC AND SUBSIDIARIES
Report of Independent Public Accountants.................... F-2
Consolidated Balance Sheet as of December 31, 1999.......... F-3
Consolidated Statements of Operations for the period from
November 15, 1999, through December 31, 1999 and for the
period from January 1, 1999, through November 14, 1999.... F-4
Consolidated Statement of Changes in Shareholders' Equity
for the period from January 1, 1999, through November 14,
1999...................................................... F-5
Consolidated Statements of Cash Flows for the period from
November 15, 1999, through December 31, 1999 and for the
period from January 1, 1999, through November 14, 1999.... F-6
Notes to Consolidated Financial Statements.................. F-7
AVALON CABLE LLC AND SUBSIDIARIES
Report of Independent Accountants........................... F-17
Consolidated Balance Sheet as of December 31, 1998 and
1997...................................................... F-18
Consolidated Statement of Operations for the year ended
December 31, 1998 and for the period from September 4,
1997 (inception) through December 31, 1997................ F-19
Consolidated Statement of Changes in Members' Interest for
the period from September 4, 1997 (inception) through
December 31, 1998......................................... F-20
Consolidated Statement of Cash Flows for the year ended
December 31, 1998 and for the period from September 4,
1997 (inception) through December 31, 1997................ F-21
Notes to Consolidated Financial Statements.................. F-22
AVALON CABLE OF MICHIGAN HOLDINGS, INC. AND SUBSIDIARIES
Report of Independent Accountants........................... F-35
Consolidated Balance Sheet as of December 31, 1998 and
1997...................................................... F-36
Consolidated Statements of Operations for the year ended
December 31, 1998 and for the period from September 4,
1997 (inception) through December 31, 1997................ F-37
Consolidated Statement of Changes in Shareholders' Equity
for the period from September 4, 1997 (inception) through
December 31, 1998......................................... F-38
Consolidated Statement of Cash Flows for the year ended
December 31, 1998 and for the period from September 4,
1997 (inception) through December 31, 1997................ F-39
Notes to Consolidated Financial Statements.................. F-40
CABLE MICHIGAN, INC. AND SUBSIDIARIES
Report of Independent Accountants........................... F-53
Consolidated Balance Sheets as of December 31, 1997 and
November 5, 1998.......................................... F-54
Consolidated Statements of Operations for the years ended
December 31, 1996 and 1997, and for the period from
January 1, 1998 to November 5, 1998....................... F-55
Consolidated Statements of Changes in Shareholders' Deficit
for the years ended December 31, 1996 and 1997, and for
the period from January 1, 1998 to November 5, 1998....... F-56
Consolidated Statements of Cash Flows for the years ended
December 31, 1996 and 1997, and for the period from
January 1, 1998 to November 5, 1998....................... F-57
Notes to Consolidated Financial Statements.................. F-58
</TABLE>
F-1
<PAGE> 13
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
TO CC V HOLDINGS, LLC:
We have audited the accompanying consolidated balance sheet of CC V
Holdings, LLC and subsidiaries as of December 31, 1999, and the related
consolidated statements of operations and cash flows for the period from
November 15, 1999, through December 31, 1999, and the consolidated statements of
operations, changes in shareholders' equity and cash flows for the period from
January 1, 1999, through November 14, 1999. 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 audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards 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. 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 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of CC V
Holdings, LLC and subsidiaries as of December 31, 1999, and the results of their
operations and their cash flows for the period from November 15, 1999, through
December 31, 1999, and for the period from January 1, 1999, through November 14,
1999, in conformity with accounting principles generally accepted in the United
States.
As discussed in Note 1 to the consolidated financial statements,
substantially all of CC V Holdings, LLC was acquired by Charter Communications
Holding Company, LLC as of November 15, 1999, in a business combination
accounted for as a purchase. As a result of the application of purchase
accounting, the consolidated financial statements of CC V Holdings, LLC and
subsidiaries as of December 31, 1999, and for the Successor Period (November 15,
1999, through December 31, 1999), are presented on a different cost basis than
financial statements presented for the Predecessor Period (January 1, 1999,
through November 14, 1999), and accordingly, are not directly comparable.
/s/ ARTHUR ANDERSEN LLP
St. Louis, Missouri,
February 16, 2000
F-2
<PAGE> 14
CC V HOLDINGS, LLC AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
SUCCESSOR
------------
DECEMBER 31,
1999
------------
<S> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 6,806
Accounts receivable, net of allowance for doubtful
accounts of $1,143..................................... 1,920
Prepaid expenses and other................................ 663
--------
Total current assets................................. 9,389
--------
INVESTMENT IN CABLE PROPERTIES:
Property, plant and equipment............................. 121,285
Franchises................................................ 721,744
--------
Total investment in cable properties................. 843,029
--------
DEFERRED FINANCING COSTS.................................... 1,983
--------
$854,401
========
LIABILITIES AND MEMBER'S EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses..................... $ 25,132
Payables to manager of cable systems--related parties..... 4,971
--------
Total current liabilities............................ 30,103
--------
LONG-TERM DEBT.............................................. 451,212
DEFERRED MANAGEMENT FEES--RELATED PARTIES................... 262
MEMBER'S EQUITY--100 units issued and outstanding........... 372,824
--------
$854,401
========
</TABLE>
The accompanying notes are an integral part of this consolidated statement.
F-3
<PAGE> 15
CC V HOLDINGS, LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
SUCCESSOR PREDECESSOR
------------ ------------
PERIOD FROM PERIOD FROM
NOVEMBER 15, JANUARY 1,
1999, 1999,
THROUGH THROUGH
DECEMBER 31, NOVEMBER 14,
1999 1999
------------ ------------
<S> <C> <C>
REVENUES:
Basic services............................................ $ 11,281 $ 76,721
Premium services.......................................... 1,008 7,088
Other..................................................... 1,641 10,574
-------- --------
13,930 94,383
-------- --------
OPERATING EXPENSES:
Programming............................................... 3,597 24,927
General and administrative................................ 1,991 10,968
Service................................................... 2,377 16,311
Marketing................................................. 316 883
Depreciation and amortization............................. 7,822 39,943
Corporate expense charges--related parties................ 501 --
-------- --------
16,604 93,032
-------- --------
(Loss) income from operations.......................... (2,674) 1,351
-------- --------
OTHER INCOME (EXPENSE):
Interest income........................................... -- 764
Interest expense.......................................... (7,537) (40,162)
-------- --------
(7,537) (39,398)
-------- --------
Loss before income taxes............................... (10,211) (38,047)
BENEFIT FROM INCOME TAXES................................... -- (13,936)
-------- --------
Loss before minority interest.......................... (10,211) (24,111)
MINORITY INTEREST IN LOSS OF SUBSIDIARY..................... -- 4,499
-------- --------
Net loss............................................... $(10,211) $(19,612)
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-4
<PAGE> 16
CC V HOLDINGS, LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONAL TOTAL
COMMON PAID-IN ACCUMULATED SHAREHOLDERS'
STOCK CAPITAL DEFICIT EQUITY
------ ---------- ----------- -------------
<S> <C> <C> <C> <C>
BALANCE, January 1, 1999............................ $-- $35,000 $ (8,918) $ 26,082
Net loss.......................................... -- -- (19,612) (19,612)
-- ------- -------- --------
BALANCE, November 14, 1999.......................... $-- $35,000 $(28,530) $ 6,470
== ======= ======== ========
</TABLE>
The accompanying notes are an integral part of this consolidated statement.
F-5
<PAGE> 17
CC V HOLDINGS, LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
SUCCESSOR PREDECESSOR
------------ ------------
PERIOD FROM PERIOD FROM
NOVEMBER 15, JANUARY 1,
1999, 1999,
THROUGH THROUGH
DECEMBER 31, NOVEMBER 14,
1999 1999
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................................. $(10,211) $(19,612)
Adjustments to reconcile net loss to net cash provided by
operating activities--
Depreciation and amortization.......................... 7,822 39,943
Deferred income taxes.................................. -- (16,969)
Minority interest in loss of subsidiary................ -- 4,499
Noncash interest expense............................... 1,855 11,764
Net change in certain assets and liabilities, net of
effects from acquisitions--
Accounts receivable.................................. 782 (1,182)
Prepaid expenses and other........................... 76 (409)
Receivable from affiliate............................ -- 124
Accounts payable and accrued expenses................ (3,399) 15,285
Payables to manager of cable systems--related
parties............................................. 4,971 --
Payable to affiliate................................. -- (2,206)
Other operating activities........................... (469) (2,905)
-------- --------
Net cash provided by operating activities.............. 1,427 28,332
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant and equipment................ (2,042) (13,683)
Payments for acquisitions, net of cash acquired........... -- (47,237)
Other investing activities................................ -- (11,414)
-------- --------
Net cash used in investing activities.................. (2,042) (72,334)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings of long-term debt.............................. 5,000 39,428
Repayments of long-term debt.............................. -- (20)
Payment of deferred financing costs....................... (2,000) --
Distributions............................................. (273) --
-------- --------
Net cash provided by financing activities.............. 2,727 39,408
-------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS........ 2,112 (4,594)
-------- --------
CASH AND CASH EQUIVALENTS, beginning of period.............. 4,694 9,288
-------- --------
CASH AND CASH EQUIVALENTS, end of period.................... $ 6,806 $ 4,694
======== ========
CASH PAID FOR INTEREST...................................... $ 2,551 $ 30,429
======== ========
CASH PAID FOR TAXES......................................... $ -- $ 283
======== ========
NONCASH TRANSACTION -- Increase in franchises and member's
equity resulting from the application of purchase
accounting................................................ $383,308 $ --
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-6
<PAGE> 18
CC V HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Organization and Basis of Presentation
The accompanying consolidated financial statements include the accounts of
CC V Holdings, LLC (CC V Holdings), (formerly known as Avalon Cable LLC (Avalon
Cable)), and its wholly owned subsidiaries (collectively, the "Company"). CC V
Holdings is a Delaware limited liability company. The Company derives its
primary source of revenues by providing various levels of cable programming and
services to residential and business customers. The Company operates primarily
in the state of Michigan and in the New England area. The Company also owns and
operates various Internet service providers, which provide dial-up telephone
access to the Internet via a modem.
All significant intercompany accounts and transactions have been eliminated
in consolidation.
Acquisition
On November 15, 1999, Charter Communications Holding Company, LLC (Charter
Holdco) purchased directly and indirectly all of the equity interests of Avalon
Cable of Michigan Holdings, Inc. (Avalon Michigan Holdings) for an aggregate
purchase price of $832,000, including assumed debt of $273,400 (the "Charter
Acquisition"). In connection with a multistep restructuring following the
acquisition of Avalon Michigan Holdings, Avalon Michigan Holdings was merged
with and into CC V Holdings. Effective January 1, 2000, these interests acquired
were transferred to Charter Communications Holdings, LLC, a wholly owned
subsidiary of Charter Holdco.
As a result of the Charter Acquisition, the Company has applied purchase
accounting in the preparation of the accompanying consolidated financial
statements. Accordingly, CC V Holdings' increased its member's equity to
$383,308 to reflect the amount paid in the Charter Acquisition and has allocated
that amount to assets acquired and liabilities assumed based on their relative
fair values including amounts assigned to franchises of $727,720. The allocation
of the purchase price is based, in part, on preliminary information, which is
subject to adjustment upon completion of certain appraisal and valuation
information. Management believes that finalization of the purchase price and
allocation will not have a material impact on the consolidated results of
operations or financial position of the Company.
As a result of the Charter Acquisition and the application of purchase
accounting, financial information in the accompanying consolidated financial
statements and notes thereto as of December 31, 1999, and for the period from
November 15, 1999, through December 31, 1999 (the "Successor Period") are
presented on a different cost basis than the financial information for the
period from January 1, 1999, through November 14, 1999, (the "Predecessor
Period") and therefore, such information is not comparable.
Prior to the Charter Acquisition, Avalon Michigan Holdings had a majority
interest in CC V Holdings.
Cash Equivalents
The Company considers all highly liquid investments with original
maturities of three months or less to be cash equivalents. These investments are
carried at cost that approximates market value.
Property, Plant and Equipment
Property, plant and equipment is recorded at cost, including all direct and
certain indirect costs associated with the construction of cable television
transmission and distribution facilities, and the cost of new customer
installations. The costs of disconnecting a customer are charged to expense in
the period incurred. Expenditures for repairs and maintenance are charged to
expense as incurred, while equipment replacement and betterments are
capitalized.
F-7
<PAGE> 19
Depreciation for the Successor Period is provided on the straight-line
method over the estimated useful lives of the related assets as follows:
<TABLE>
<S> <C>
Cable distribution systems.................................. 3-15 years
Buildings and leasehold improvements........................ 5-15 years
Vehicles and equipment...................................... 3-5 years
</TABLE>
Depreciation for the Predecessor Period was provided on the straight-line
method over the estimated useful lives of the related assets as follows:
<TABLE>
<S> <C>
Buildings and improvement................................... 10-25 years
Cable plant and equipment................................... 5-12 years
Vehicles.................................................... 5 years
Office furniture and equipment.............................. 5-10 years
</TABLE>
Franchises
Costs incurred in obtaining and renewing cable franchises are deferred and
amortized over the lives of the franchises. Costs relating to unsuccessful
franchise applications are charged to expense when it is determined that the
efforts to obtain the franchise will not be successful. Franchise rights
acquired through the purchase of cable systems, including the Charter
Acquisition, represent the excess of the cost of properties acquired over the
amounts assigned to net tangible assets and identifiable intangible assets at
the date of acquisition and are amortized using the straight-line method over a
period of 15 years. The period of 15 years is management's best estimate of the
useful lives of the franchises and assumes substantially all of those franchises
that expire during the period will be renewed by the Company. Accumulated
amortization was $5,976 at December 31, 1999. Amortization expense for the
period from January 1, 1999 through November 14, 1999 and for the period from
November 15, 1999, through December 31, 1999, was $29,679 and $5,976,
respectively.
Deferred Financing Costs
Costs related to the Senior Credit Facilities (as defined below) are
deferred and amortized to interest expense using the effective interest rate
method over the term of the related borrowing. As of December 31, 1999,
accumulated amortization of deferred financing costs is $17.
Impairment of Assets
If facts and circumstances suggest that a long-lived asset may be impaired,
the carrying value is reviewed. If a review indicates that the carrying value of
such asset is not recoverable based on projected undiscounted cash flows related
to the asset over its remaining life, the carrying value of such asset is
reduced to its estimated fair value.
Revenues
Cable television revenues from basic and premium services are recognized
when the related services are provided.
Installation revenues are recognized to the extent of direct selling costs
incurred. The remainder, if any, is deferred and amortized to income over the
estimated average period that customers are expected to remain connected to the
cable system. As of December 31, 1999, no installation revenue has been
deferred, as direct selling costs have exceeded installation revenue.
Fees collected from programmers to guarantee carriage are deferred and
amortized to income over the life of the contracts. Local governmental
authorities impose franchise fees on the Company ranging up to a federally
mandated maximum of 5.0% of gross revenues. Such fees are collected on a monthly
basis from the Company's customers and are periodically remitted to local
franchises. Franchise fees collected and paid are reported as revenues and
expenses.
F-8
<PAGE> 20
Interest Rate Hedge Agreements
The Company manages fluctuations in interest rates by using interest rate
hedge agreements, as required by certain of its debt agreements. Interest rate
caps are accounted for as hedges of debt obligations, and accordingly, the net
settlement amounts are recorded as adjustments to interest expense in the period
incurred. Premiums paid for interest rate caps are deferred, included in other
assets, and are amortized over the original term of the interest rate agreement
as an adjustment to interest expense.
Interest rate caps are entered into by the Company to reduce the impact of
rising interest rates on floating rate debt.
The Company's participation in interest rate hedging transactions involves
instruments that have a close correlation with its debt, thereby managing its
risk. Interest rate hedge agreements have been designated for hedging purposes
and are not held or issued for speculative purposes.
Income Taxes
Prior to the Charter Acquisition, the Company filed a consolidated income
tax return. The tax benefit of $13,936 in the accompanying consolidated
statement of operations for the period from January 1, 1999, through November
14, 1999, is recorded at 37%. This approximates the statutory tax rate of the
Company.
Beginning November 15, 1999, the Company and all subsidiaries are limited
liability companies such that all income taxes are the responsibility of the
equity member of the Company and are not provided for in the accompanying
consolidated financial statements. In addition, certain subsidiaries or
corporations are subject to income taxes but have no operations and, therefore,
no material income tax liabilities or assets.
Segments
Segments have been identified based upon management responsibility. The
Company operates in one segment, cable services.
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.
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, 1999. The Company does not believe that such
deposits are subject to any unusual credit risk beyond the normal credit risk
associated with operating its business. The Company extends credit to customers
on an unsecured basis in the normal course of business. The Company maintains
reserves for potential credit losses and such losses, in the aggregate, have not
historically exceeded management's expectations. The Company's trade receivables
reflect a customer base centered in Michigan and New England. The Company
routinely assesses the financial strength of its customers; as a result,
concentrations of credit risk are limited.
F-9
<PAGE> 21
2. MEMBER'S EQUITY:
For the period from November 15, 1999, through December 31, 1999, successor
member's equity consisted of the following:
<TABLE>
<S> <C>
BALANCE, November 15, 1999.................................. $383,308
Net loss.................................................. (10,211)
Distributions to Charter Communications, Inc. and
Charter Investment, Inc................................ (273)
--------
BALANCE, December 31, 1999.................................. $372,824
========
</TABLE>
3. ACQUISITIONS:
On March 26, 1999, Avalon Michigan Holdings acquired the minority interest
of Mercom Inc. (Mercom) for $21,875. In addition, the Company acquired eight
cable systems for an aggregate purchase price of $25,362 in 1999. These eight
acquisitions, which were completed during the Predecessor Period, were accounted
for using the purchase method of accounting and, accordingly, results of
operations of the acquired systems have been included in the accompanying
consolidated financial statements from the dates of acquisition. The purchase
prices were allocated to tangible and intangible assets based on estimated fair
market values at the dates of acquisition. The excess of the consideration paid
over the estimated fair market values of the net assets acquired was $12,940 and
was amortized using the straight-line method over 15 years during the
Predecessor Period. All goodwill was eliminated as a result of the Charter
Acquisition.
Unaudited pro forma operating results as though the 1999 acquisitions
discussed above, including the Charter Acquisition, had occurred on January 1,
1999, with adjustments to give effect to amortization of franchises, interest
expense and certain other adjustments are as follows:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1999
------------
(UNAUDITED)
<S> <C>
Revenues.................................................... $110,308
Loss from operations........................................ (17,580)
Net loss.................................................... (59,668)
</TABLE>
The unaudited pro forma financial information has been presented for
comparative purposes and does not purport to be indicative of the results of
operations had these transactions been completed as of the assumed date or which
may be obtained in the future.
4. PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment consists of the following at December 31,
1999:
<TABLE>
<S> <C>
Cable distribution systems.................................. $101,675
Buildings and leasehold improvements........................ 16,636
Vehicles and equipment...................................... 4,776
--------
123,087
Less--Accumulated depreciation.............................. (1,802)
--------
$121,285
========
</TABLE>
Depreciation expense for assets owned by the Company for the period from
January 1, 1999, through November 14, 1999, and for the period from November 15,
1999, through December 31, 1999, was $10,264 and $1,802, respectively.
F-10
<PAGE> 22
5. ACCOUNTS PAYABLE AND ACCRUED EXPENSES:
Accounts payable and accrued expenses consist of the following at December
31, 1999:
<TABLE>
<S> <C>
Accrued litigation costs--see Note 10....................... $ 9,435
Accrued interest............................................ 5,417
Accounts payable............................................ 3,427
Accrued programming......................................... 3,047
Accrued franchises.......................................... 1,578
Other....................................................... 2,228
-------
$25,132
=======
</TABLE>
6. LONG-TERM DEBT:
The Company has outstanding the following borrowings on long-term debt
arrangements at December 31, 1999:
<TABLE>
<S> <C>
Senior Credit Facility...................................... $170,000
Senior Subordinated Notes................................... 150,000
Senior Discount Notes....................................... 196,000
7.0% Note Payable, due May 2003............................. 500
--------
516,500
Less--Unamortized net discount.............................. (65,288)
--------
$451,212
========
</TABLE>
Credit Facilities
On November 6, 1998, Avalon Michigan became a co-borrower along with Avalon
Cable of New England LLC (Avalon New England) and Avalon Cable Finance, Inc.
(Avalon Finance), affiliated companies on the $320,888 senior credit facilities,
which included 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 "Old Credit Facilities").
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 Old Credit Facilities, and the availability under the Old Credit
Facilities was reduced to $195,875 prior to the Charter Acquisition.
The interest rate under the Old Credit Facilities was 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, an applicable
margin.
In connection with the Charter Acquisition, the Old Credit Facilities were
terminated.
Effective November 15, 1999, the Company became a borrower on $300,000
senior credit facilities, which includes term loan facilities consisting of (i)
a Term B Loan of $125,000 that matures on November 15, 2008, and (ii) a
revolving credit facility of $175,000 that matures on May 15, 2008
(collectively, the "Senior Credit Facilities"). The Senior Credit Facilities
also provide for, at the option of the lenders, supplemental credit facilities
in the amounts of $75,000, available until December 31, 2003.
The interest rate under the Senior Credit Facilities 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, an applicable
margin. The variable interest rate as of December 31, 1999, ranged from 7.995%
to 8.870%. A quarterly commitment fee of between 0.250% to 0.375% per annum is
payable on the unborrowed balance of the revolving credit facility.
F-11
<PAGE> 23
Commencing March 31, 2003, and at the end of each quarter thereafter
through September 30, 2008, the Term B Loan is payable in installments of 0.25%
of the outstanding balance, and the remaining 94.25% unpaid outstanding balance
is due on November 15, 2008. Commencing March 31, 2003, and at the end of each
quarter thereafter, available borrowings under the revolving credit facility
shall be reduced on an annual basis by 5.0% in 2003, 15.0% in 2004, 20.0% in
2005, 22.0% in 2006, 24.0% in 2007 and 14.0% in 2008.
The Senior Credit Facilities contain restrictive covenants which, among
other things, require the Company to maintain certain ratios including
consolidated leverage ratios and the interest coverage ratio, fixed charge ratio
and debt service coverage.
The obligations of the Company under the Senior Credit Facilities agreement
are secured by substantially all of the assets of the Company.
Senior Subordinated Notes
In December 1998, Avalon Michigan became a co-issuer of a $150,000
principal amount of 9.375% Senior Subordinated Notes (the "Senior Subordinated
Notes").
The indenture governing the Senior Subordinated Notes provides that upon
the occurrence of a change of control each holder of the Senior Subordinated
Notes has the right to require the Company to purchase all or any part (equal to
$1,000 or an integral multiple thereof) of such holder's Senior Subordinated
Notes at an offer price in cash equal to 101% of the aggregate principal amount
thereon plus accrued and unpaid interest and Liquidated Damages (as defined in
the indentures) thereof, if any, to the date of purchase. The Charter
Acquisition constituted a change of control.
Pursuant to a change of control offer dated December 3, 1999, 134,050 of
the Company's 9.375% Senior Subordinated Notes due December 1, 2008 were validly
tendered.
The aggregate repurchase price was $137,400, including accrued and unpaid
interest through January 28, 2000, and was funded with equity contributions from
Charter Communications Holdings, LLC (Charter Holdings), a wholly owned
subsidiary of Charter Holdco and parent of CC V Holdings, which made the cash
available from the proceeds of its sale of $1.5 billion of high yield notes in
January 2000 (the "January 2000 Charter Holdings Notes").
In addition to the above change of control repurchase, the Company
repurchased the remaining 15,950 notes (including accrued and unpaid interest)
in the open market for $16,300, also using cash received from equity
contributions ultimately from Charter Holdings, which made the cash available
from the sale proceeds of the January 2000 Charter Holdings Notes.
Senior Discount Notes
On December 10, 1998, Avalon Michigan Holdings and Avalon Cable Holdings
Finance, Inc. (collectively, the "Holdings Co-Issuers") issued $196,000
aggregate principal amount at maturity of 11.875% Senior Discount Notes (the
"Senior Discount Notes") due 2008.
The Senior Discount Notes were issued at a substantial discount from their
principal amount at maturity, for proceeds of approximately $110,400. Interest
on the Senior Discount Notes will accrue but not be payable before December 1,
2003. Thereafter, interest on the Senior Discount Notes will accrue on the
principal amount at maturity at a rate of 11.875% per annum commencing December
1, 2003, and will be payable semiannually in arrears on June 1 and December 1 of
each year. Prior to December 1, 2003, the accreted value of the Senior Discount
Notes will increase, representing amortization of original issue discount,
between the date of original issuance and December 1, 2003, on a semiannual
basis using a 360-day year comprised of twelve 30-day months, such that the
accreted value shall be equal to the full principal amount at maturity of the
Senior Discount Notes on December 1, 2003.
On December 1, 2003, the Holdings Co-Issuers will be required to redeem an
amount equal to $369.79 per $1,000 principal amount at maturity of each Senior
Discount Note then outstanding on a pro rata basis at a redemption price of 100%
of the principal amount at maturity.
F-12
<PAGE> 24
On or after December 1, 2003, the Senior Discount Notes will be subject to
redemption at any time at the option of the Holdings Co-Issuers, in whole or in
part, at the redemption prices, which are expressed as percentages of principal
amount, shown below plus accrued and unpaid interest, if any, and liquidated
damages, if any, thereon to the applicable redemption date, if redeemed during
the twelve-month period beginning on December 1 of the years indicated below:
<TABLE>
<CAPTION>
YEAR PERCENTAGE
- ---- ----------
<S> <C>
2003........................................................ 105.938%
2004........................................................ 103.958%
2005........................................................ 101.979%
2006 and thereafter......................................... 100.000%
</TABLE>
Notwithstanding the foregoing, at any time before December 1, 2001, the
holding companies may on any one or more occasions redeem up to 35% of the
aggregate principal amount at maturity of senior discount notes originally
issued under the Senior Discount Note indenture at a redemption price equal to
111.875% of the accreted value at the date of redemption, plus liquidated
damages, if any, to the redemption date, with the net cash proceeds of any
equity offering and/or the net cash proceeds of a strategic equity investment.
Upon the occurrence of a change of control, each holder of Senior Discount
Notes will have the right to require the Holdings Co-Issuers to repurchase all
or any part of such holder's Senior Discount Notes pursuant to a change of
control offer at an offer price in cash equal to 101% of the aggregate principal
amount thereof plus accrued and unpaid interest and liquidated damages thereon,
if any, to the date of purchase. The Charter Acquisition constituted a change of
control.
Upon expiration of the change of control offer (January 26, 2000), 16,250
of the Senior Discount Notes due were validly tendered.
The Senior Discount Notes were repurchased for $10,500 using cash received
from equity contributions from Charter Holdings. As of February 29, 2000,
179,750 Senior Discount Notes remain outstanding with an accreted value of
$116,400.
Based upon outstanding indebtedness at December 31, 1999, and the
amortization of term, and scheduled reductions in available borrowings of the
revolving credit facility, aggregate future principal payments on the total
borrowings under all debt agreements at December 31, 1999, are as follows:
<TABLE>
<CAPTION>
YEAR AMOUNT
---- --------
<S> <C>
2000........................................................ $ --
2001........................................................ --
2002........................................................ --
2003........................................................ 74,229
2004........................................................ 1,250
Thereafter.................................................. 441,021
--------
$516,500
========
</TABLE>
7. FAIR VALUE OF FINANCIAL INSTRUMENTS:
The carrying and fair values of the Company's significant financial
instruments as of December 31, 1999, are as follows:
<TABLE>
<CAPTION>
CARRYING NOTIONAL FAIR
VALUE AMOUNT VALUE
-------- -------- -----
<S> <C> <C> <C>
Debt:
Senior Credit Facilities.................................. $170,000 $ -- $170,000
Senior Subordinated Notes................................. 151,500 -- 151,500
Senior Discount Notes..................................... 129,212 -- 129,212
7.0% Note payable, due May 2003........................... 500 -- 500
Interest Rate Hedge Agreement:
Cap....................................................... -- 15,000 16
</TABLE>
F-13
<PAGE> 25
The carrying amount of the Senior Credit Facilities approximates fair value
as the outstanding borrowings bear interest at market rates. The fair values of
the Senior Subordinated Notes and Senior Discount Notes are based on quoted
market prices.
The interest pay rate for the interest rate cap agreement was 9.0% at
December 31, 1999.
The notional amount of the interest rate hedge agreement does not represent
amounts exchanged by the parties and, thus, are not a measure of the Company's
exposure through its use of the interest rate hedge agreement. The amounts
exchanged are determined by reference to the notional amount and the other terms
of the contract.
The fair value of the interest rate hedge agreement generally reflects the
estimated amount that the Company would receive (excluding accrued interest) to
terminate the contract on the reporting date, thereby taking into account the
current unrealized gains or losses of the open contract. Dealer quotations are
available for the Company's interest rate hedge agreement.
Management believes that the seller of the interest rate hedge agreement
will be able to meet their obligations under the agreement. In addition, the
interest rate hedge agreement is with certain of the participating banks under
the Company's Senior Credit Facilities thereby reducing the exposure to credit
loss. The Company has policies regarding the financial stability and credit
standing of the major counterparties. Nonperformance by the counterparties is
not anticipated nor would it have a material adverse effect on the Company's
consolidated financial position or results of operations.
8. RELATED-PARTY TRANSACTIONS:
Charter Investment, Inc. (Charter Investment) provides management services
to the Company including centralized customer billing services, and data
processing and related support. Costs for these services are charged directly to
the Company's operating subsidiaries and are included in operating costs. These
billings are determined based on the number of basic customers. Charter
Investment utilizes a combination of excess insurance coverage and
self-insurance programs for its medical, dental and workers' compensation
claims. Charges are made to the Company as determined by independent actuaries
at the present value of the actuarially computed present and future liabilities
for such benefits. Depreciation and amortization incurred by Charter Investment
and Charter have been allocated to the Company based on the number of the basic
customers. Such costs totaled $44 for the period from November 15, 1999, through
December 31, 1999, are reflected as a capital contribution. Management believes
that costs incurred by Charter Investment on the Company's behalf and included
in the accompanying financial statements are not materially different than costs
the Company would have incurred as a stand-alone entity.
Charter, an entity controlled by Paul G. Allen, was named manager of CC V
Holdings pursuant to the terms of the limited liability company agreement for CC
V Holdings dated as of November 15, 1999. Furthermore, Charter now manages and
operates the Company's cable systems pursuant to a Management Agreement entered
into with certain subsidiaries of CC V Holdings. The term of the management
agreement is 10 years, commencing on November 15, 1999. Charter is entitled to
reimbursement for all expenses, costs, losses and liabilities or damages
incurred by Charter in connection with the performance of its services. Payment
of the management fee is permitted under the Company's credit agreement, but
ranks below the Company's senior debt and shall not be paid except to the extent
permitted under the Senior Credit Facilities. Such costs totaled $501 for the
period from November 15, 1999, through December 31, 1999, and are recorded in
corporate expense charges-related parties in the accompanying consolidated
financial statements. Deferred management fees at December 31, 1999, are $262.
9. EMPLOYEE BENEFIT PLAN:
Avalon Michigan had a qualified savings plan under Section 401(k) of the
Internal Revenue Code (the "Plan"). In connection with the Charter Acquisition,
the Plan's assets were frozen as of November 14, 1999, and employees became
fully vested. Effective January 1, 2000, the Company's employees with two months
of service are eligible to participate in the Charter Communications, Inc.
401(k) Plan (the "Charter Plan").
F-14
<PAGE> 26
Employees that qualify for participation in the Charter Plan can contribute up
to 15% of their salary, on a before tax basis, subject to a maximum contribution
limit as determined by the Internal Revenue Service.
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 equipment under month-to-month operating leases. Rent expense was
$1,506 and $212 for the periods from January 1, 1999, through November 14, 1999,
and from November 15, 1999, through December 31, 1999, respectively. Rental
commitments are expected to continue at approximately the same level for the
foreseeable future, including pole rental commitments which are cancelable.
Regulation in the Cable Television Industry
The cable television industry is subject to extensive regulation at the
federal, local and, in some instances, state levels. The Cable Communications
Policy Act of 1984 (the "1984 Cable Act"), the Cable Television Consumer
Protection and Competition Act of 1992 (the "1992 Cable Act" and together with
the 1984 Cable Act, the "Cable Acts"), and the Telecommunications Act of 1996
(the "1996 Telecom Act"), establish a national policy to guide the development
and regulation of cable television systems. The Federal Communications
Commission (FCC) has principal responsibility for implementing the policies of
the Cable Acts. Many aspects of such regulation are currently the subject of
judicial proceedings and administrative or legislative proposals. Legislation
and regulations continue to change, and the Company cannot predict the impact of
future developments on the cable television industry.
The 1992 Cable Act and the FCC's rules implementing that act generally have
increased the administrative and operational expenses of cable television
systems and have resulted in additional regulatory oversight by the FCC and
local or state franchise authorities. The Cable Acts and the corresponding FCC
regulations have established rate regulations.
The 1992 Cable Act permits certified local franchising authorities to order
refunds of basic service tier rates paid in the previous twelve-month period
determined to be in excess of the maximum permitted rates. As of December 31,
1999, the amount refunded by the Company has been insignificant. The Company may
be required to refund additional amounts in the future.
The Company believes that it has complied in all material respects with the
provisions of the 1992 Cable Act, including the rate setting provisions
promulgated by the FCC. However, in jurisdictions that have chosen not to
certify, refunds covering the previous twelve-month period may be ordered upon
certification if the Company is unable to justify its basic rates. As of
December 31, 1999, approximately 26% of the Company's local franchising
authorities are certified to regulate basic tier rates. The Company is unable to
estimate at this time the amount of refunds, if any, that may be payable by the
Company in the event certain of its rates are successfully challenged by
franchising authorities or found to be unreasonable by the FCC. The Company does
not believe that the amount of any such refunds would have a material adverse
effect on the consolidated financial position or results of operations of the
Company.
The 1996 Telecom Act, among other things, immediately deregulated the rates
for certain small cable operators and in certain limited circumstances rates on
the basic service tier, and as of March 31, 1999, deregulated rates on the cable
programming service tier (CPST). The FCC has taken the position that it will
still adjudicate pending CPST complaints but will strictly limit its review, and
possible refund orders, to the time period predating the sunset date, March 31,
1999. The Company does not believe any adjudications regarding their pre-sunset
complaints will have a material adverse effect on the Company's consolidated
financial position or results of operations.
A number of states subject cable television systems to the jurisdiction of
centralized state governmental agencies, some of which impose regulation of a
character similar to that of a public utility. State governmental
F-15
<PAGE> 27
agencies are required to follow FCC rules when prescribing rate regulation, and
thus, state regulation of cable television rates is not allowed to be more
restrictive than the federal or local regulation.
Litigation
In connection with the Company's acquisition of Mercom, former Mercom
shareholders holding approximately 731,894 Mercom common shares (approximately
15.3% of all outstanding Mercom common shares) gave notice of their election to
exercise appraisal rights as provided by Delaware law. On July 2, 1999, former
Mercom shareholders holding 535,501 shares of Mercom common stock filed a
petition for appraisal of stock in the Delaware Chancery Court. With respect to
209,893 of the total number of shares for which the Company received notice, the
notice provided to the Company was received from beneficial holders of Mercom
shares who were not holders of record. The Company believes that the notice with
respect to these shares did not comply with Delaware law and is ineffective.
The Company cannot predict at this time the effect of the elections to
exercise appraisal rights on the Company since the Company does not know the
extent to which these former Mercom shareholders will continue to pursue
appraisal rights under Delaware law or choose to abandon these efforts and seek
to accept the consideration payable in the Mercom merger. If these former Mercom
shareholders continue to pursue their appraisal rights and if a Delaware court
were to find that the fair value of the Mercom common shares, exclusive of any
element of value arising from our acquisition of Mercom, exceeded $12.00 per
share, the Company would have to pay the additional amount for each Mercom
common share subject to the appraisal proceedings together with a fair rate of
interest. The Company could be ordered by the Delaware court also to pay
reasonable attorney's fees and the fees and expenses of experts for the
shareholders. In addition, the Company would have to pay their own litigation
costs. The Company has already provided for the consideration of $12.00 per
Mercom common share due under the terms of the merger with Mercom with respect
to these shares but has not provided for any additional amounts or costs. The
Company can provide no assurance as to what a Delaware court would find in any
appraisal proceeding or when this matter will be resolved. Accordingly, the
Company cannot assure you that the ultimate outcome would have no material
adverse impact on the Company.
11. ACCOUNTING STANDARDS NOT YET IMPLEMENTED:
The Company is required to adopt Financial Accounting Standards Board
issued Statement No. 133, Accounting for Derivative Instruments and Hedging
Activities (SFAS No. 133) in 2001. SFAS No. 133 establishes accounting and
reporting standards requiring that every derivative instrument (including
certain derivative instruments embedded in other contracts) be recorded on the
consolidated balance sheet as either an asset or liability measured at its fair
value and that changes in the derivative's fair value be recognized currently in
earnings unless specific hedge accounting criteria are met. Special accounting
for qualifying hedges allows a derivative's gains and losses to offset related
results on the hedged item in the income statement, and requires that a company
must formally document, designate and assess the effectiveness of transactions
that receive hedge accounting. The adoption of SFAS No. 133 is not expected to
have a material impact on the consolidated financial statements.
F-16
<PAGE> 28
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Managers of
Avalon Cable LLC
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements 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, 1997 and
1998 and the results of their operations, changes in members' interest and their
cash flows for the period from September 4, 1997 (inception), through December
31, 1997 and for the year ended December 31, 1998 in conformity with generally
accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on the 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.
/S/ PRICEWATERHOUSECOOPERS LLP
New York, New York
March 30, 1999, except for Note 12,
as to which the date is May 13, 1999
F-17
<PAGE> 29
AVALON CABLE LLC AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1998 1997
---------- ------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash........................................................ $ 9,288 $ --
Subscriber receivables, less allowance for doubtful accounts
of $943................................................... 5,862 --
Accounts receivable-affiliate............................... 124 --
Deferred income taxes....................................... 479 --
Prepaid expenses and other current assets................... 580 504
-------- ----
Total current assets........................................ 16,333 504
Property, plant and equipment, net.......................... 111,421 --
Intangible assets, net...................................... 462,117 --
Other assets................................................ 227 --
-------- ----
Total assets................................................ $590,098 $504
======== ====
LIABILITIES AND MEMBERS' INTEREST
CURRENT LIABILITIES:
Current portion of notes payable............................ $ 20 $ --
Accounts payable and accrued expenses....................... 11,646 --
Accounts payable, net-affiliate............................. 2,023 500
Advance billings and customer deposits...................... 3,171 --
-------- ----
Total current liabilities................................... 16,860 500
Note payable, net of current portion........................ 402,949 --
Note payable-affiliate...................................... 3,341 --
Deferred income taxes....................................... 1,841 --
-------- ----
Total liabilities........................................... 424,991 500
-------- ----
Minority interest........................................... 13,855 --
Commitments and contingencies (Note 10)
MEMBERS' INTEREST:
Members' capital............................................ 166,630 --
Accumulated earnings (deficit).............................. (15,378) 4
-------- ----
Total members' interest..................................... 151,252 4
-------- ----
Total liabilities and members' interest..................... $590,098 $504
======== ====
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-18
<PAGE> 30
AVALON CABLE LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE PERIOD FROM
FOR THE YEAR SEPTEMBER 4, 1997
ENDED (INCEPTION) THROUGH
DECEMBER 31, 1998 DECEMBER 31, 1997
----------------- -------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
REVENUE:
Basic services............................................. $ 14,976 $ --
Premium services........................................... 1,468 --
Other...................................................... 1,743 --
-------- -------
Total revenues............................................. 18,187 --
Operating expenses:
Selling, general and administrative........................ 4,207 --
Programming................................................ 4,564 --
Technical and operations................................... 1,951 --
Depreciation and amortization.............................. 8,183 --
-------- -------
Loss from operations....................................... (718) --
Other income (expense):
Interest income............................................ 173 4
Interest expense........................................... (8,223) --
Other expense, net......................................... (65) --
-------- -------
Income (loss) before income taxes.......................... (8,833) 4
Provision for income taxes................................. (186) --
-------- -------
Income (loss) before minority interest and extraordinary
item..................................................... (9,019) 4
Minority interest in consolidated entity................... (398) --
-------- -------
Income (loss) before the extraordinary loss on early
extinguishment of debt................................... (9,417) 4
Extraordinary loss on early extinguishment of debt......... (5,965) --
-------- -------
Net income (loss).......................................... $(15,382) $ 4
======== =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-19
<PAGE> 31
AVALON CABLE LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN MEMBERS' INTEREST
FROM THE PERIOD FROM SEPTEMBER 4, 1997 (INCEPTION)
THROUGH DECEMBER 31, 1998
<TABLE>
<CAPTION>
CLASS A CLASS B-1 ACCUMULATED TOTAL
---------------- ------------------ EARNINGS MEMBERS'
UNITS $ UNITS $ (DEFICIT) INTEREST
------ ------- ------- -------- ----------- --------
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
Net income for the period from
September 4, 1997 through December
31, 1997............................ -- $ -- -- $ -- $ 4 $ 4
Issuance of Class A units............. 45,000 45,000 -- -- -- 45,000
Issuance of Class B-1 units in
consideration for Avalon Cable of
New England LLC..................... -- -- 64,696 4,345 -- 4,345
Contribution of assets and liabilities
of Avalon Cable of Michigan Inc..... -- -- 510,994 117,285 -- 117,285
Net loss for the year ended December
31, 1998............................ -- -- -- -- (15,382) (15,382)
------ ------- ------- -------- -------- --------
Balance at December 31, 1998.......... 45,000 $45,000 575,690 $121,630 $(15,378) $151,252
====== ======= ======= ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-20
<PAGE> 32
AVALON CABLE LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE PERIOD FROM
SEPTEMBER 4, 1997
FOR THE YEAR ENDED (INCEPTION) THROUGH
DECEMBER 31, 1998 DECEMBER 31, 1997
------------------ -------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss).......................................... $ (15,382) $ 4
Adjustments to reconcile net income to net cash provided by
operating activities
Depreciation and amortization.............................. 8,183 --
Deferred income taxes, net................................. 1,010 --
Extraordinary loss on extinguishment of debt............... 5,965 --
Provision for loss on accounts receivable.................. 75 --
Minority interest in consolidated entity................... 398 --
Accretion of senior discount notes......................... 1,083 --
Changes in operating assets and liabilities Increase in
subscriber receivables................................... (1,679)
Increase in accounts receivable-affiliates................. (124) --
Increase in prepaid expenses and other current assets...... (76) (4)
Increase in accounts payable and accrued expenses.......... 4,863 --
Increase in accounts payable-affiliates.................... 1,523 --
Increase in advance billings and customer deposits......... 1,684 --
Change in Other, net....................................... (227) --
--------- ---------
Net cash provided by operating activities.................. 7,296 --
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures....................................... (11,468) --
Acquisitions, net of cash acquired......................... (554,402) --
--------- ---------
Net cash used in investing activities...................... (565,870) --
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of credit facility.................. 265,888 --
Principal payment on credit facility....................... (125,013) --
Proceeds from issuance of senior subordinated debt......... 150,000 --
Proceeds from issuance of note payable-affiliate........... 3,341 --
Proceeds from issuance of senior discount notes............ 110,411 --
Proceeds from other notes payable.......................... 600 --
Payments for debt issuance costs........................... (3,995) --
Contribution by members.................................... 166,630 --
--------- ---------
Net cash provided by financing activities.................. 567,862 --
Increase in cash........................................... 9,288 --
Cash, beginning of period.................................. -- --
--------- ---------
Cash, end of period........................................ $ 9,288 $ --
========= =========
Supplemental disclosures of cash flow information:
Cash paid during the period for interest................... $ 3,480 $ --
========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-21
<PAGE> 33
AVALON CABLE LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
(DOLLARS IN THOUSANDS)
1. BASIS OF PRESENTATION AND DESCRIPTION OF BUSINESS
Avalon Cable LLC ("Avalon"), and its wholly owned subsidiaries Avalon Cable
Holdings Finance, Inc. ("Avalon Holdings Finance") and Avalon Cable of Michigan
LLC ("Avalon Michigan"), 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. This contribution was between
entities under common control and was accounted for similar to a pooling-of-
interests. Under this pooling-of-interests method, the results of operations for
Avalon include the results of operations from the date of inception (September
4, 1997) of Avalon New England. 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) a $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 Cable of Michigan, Inc. was formed in June 1998, pursuant to the
laws of the state of Delaware, as a wholly owned subsidiary of Avalon Cable of
Michigan Holdings, Inc. ("Michigan Holdings".) On June 3, 1998, Avalon Cable of
Michigan, Inc. entered into an Agreement and Plan of Merger (the "Agreement")
among Avalon Cable of Michigan, Inc., Michigan Holdings and Cable Michigan, Inc.
("Cable Michigan"), pursuant to which Avalon Cable of Michigan, Inc. will merge
into Cable Michigan and Cable Michigan will become a wholly owned subsidiary of
Michigan Holdings (the "Merger"). As part of the Merger, the name of the company
was changed to Avalon Cable of Michigan, Inc.
In accordance with the terms of the Agreement, each share of common stock,
par value $1.00 per share ("common stock"), of Cable Michigan outstanding prior
to the effective time of the Merger (other than treasury stock shares owned by
Michigan Holdings or its subsidiaries, or shares as to which dissenters' rights
have been exercised) shall be converted into the right to receive $40.50 in cash
(the "Merger Consideration"), subject to certain possible closing adjustments.
In conjunction with the acquisition of Cable Michigan, Avalon Cable of
Michigan, Inc. acquired Cable Michigan's 62% ownership interest in Mercom, Inc.
("Mercom").
On November 6, 1998, Avalon Cable of Michigan, Inc. completed its Merger.
The total consideration payable in conjunction with the Merger, including fees
and expenses is $431,629, including repayment of all existing Cable Michigan
indebtedness and accrued interest of $135,205. Subsequent to the Merger, the
arrangements with RCN and CTE for certain support services were terminated. The
Agreement also permitted Avalon Cable of Michigan, Inc. to agree to acquire the
remaining shares of Mercom that it did not own.
Michigan Holdings contributed $137,375 in cash to Avalon Cable of Michigan,
Inc., which was used to consummate the Merger. On November 5, 1998, Michigan
Holdings received $105,000 in cash in exchange for promissory notes to lenders
(the "Bridge Agreement"). On November 6, 1998, Michigan Holdings contributed the
proceeds received from the Bridge Agreement and an additional $35,000 in cash to
Avalon Cable of Michigan Inc. in exchange for 100 shares of common stock.
F-22
<PAGE> 34
AVALON CABLE LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1998
(DOLLARS IN THOUSANDS)
On March 26, 1999, Avalon completed a series of transactions to facilitate
certain aspects of its financing between affiliated entities under common
control. As a result of these transactions:
- Avalon Cable of Michigan Inc. contributed its assets and liabilities
excluding deferred tax liabilities, net to Avalon in exchange for an
approximate 88% voting interest in Avalon. Avalon contributed these
assets and liabilities to its wholly-owned subsidiary, Avalon Cable of
Michigan.
- Avalon Michigan has become the operator of the Michigan cluster replacing
Avalon Cable of Michigan, Inc.
- Avalon Michigan 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 Michigan under the Senior Subordinated Notes. Avalon Cable of
Michigan, Inc. does not have significant assets, other than its
investment in Avalon.
- Avalon is an obligor on the Senior Discount Notes replacing Avalon Cable
of Michigan Holdings, Inc.
As a result of the reorganization between entities under common control,
Avalon accounted for the reorganization similar to a pooling-of-interests. Under
the pooling-of-interests method, the results of operations for Avalon include
the results of operations from the date of inception (June 2, 1998) inception of
Avalon Cable of Michigan, Inc. and the date of acquisition of the completed
acquisitions.
Avalon New England and Avalon Michigan provide cable service to the western
New England area and the state of Michigan, respectively. Avalon 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 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.
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, Avalon Michigan 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.
F-23
<PAGE> 35
AVALON CABLE LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1998
(DOLLARS IN THOUSANDS)
Revenue recognition
Revenue is recognized as cable services are provided. Installation fee
revenue is recognized in the period in which the installation occurs to the
extent that direct selling costs meet or exceed installation revenues.
Advertising costs
Advertising costs are charged to operations as incurred. Advertising costs
were $82 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 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 and New England. 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 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. 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.
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>
F-24
<PAGE> 36
AVALON CABLE LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1998
(DOLLARS IN THOUSANDS)
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.
Financial instruments
The Company estimates that the fair value of all financial instruments at
December 31, 1998 does not differ materially from the aggregate carrying values
of its financial instruments recorded in the accompanying balance sheet. The
fair value of the notes payable-affiliate are considered to be equal to carrying
values since the Company believes that its credit risk has not changed from the
time this debt instrument was executed and therefore, would obtain a similar
rate in the current market.
Income taxes
The Company is not subject to federal and state income taxes since the
income or loss of the Company is included in the tax returns of Avalon Cable of
Michigan, Inc. and the Company's minority partners. However, Mercom, its
majority-owned subsidiary is subject to taxes that are accounted for using
Statement of Financial Accounting Standards No. 109 -- "Accounting for Income
Taxes". The statement requires the use of an asset and liability approach for
financial reporting purposes. The asset and liability approach requires the
recognition of deferred tax assets and liabilities for the expected future tax
consequences of temporary differences between financial reporting basis and tax
basis of assets and liabilities. If it is more likely than not that some portion
or all of a deferred tax asset will not be realized, a valuation allowance is
recognized.
3. 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
F-25
<PAGE> 37
AVALON CABLE LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1998
(DOLLARS IN THOUSANDS)
is paid to the holders thereof (such distributions being the Company's "Priority
Distributions"). So long as any portion of the Company's Priority Distributions
remains unpaid, the holders of a majority of the Class A Units are entitled to
block certain actions by the Company including the payment of certain
distributions, the issuance of senior or certain types of pari passu equity
securities or the entering into or amending of certain related-party agreements.
In addition to the Company's Priority Distributions, each Class A Unit is also
entitled to participate in common distributions, pro rata according to the
percentage such unit represents of the aggregate number of the Company's units
then outstanding.
Class B Units
The Class B Units are junior equity securities which are divided into two
identical subclasses, Class B-1 Units and Class B-2 Units. After the payment in
full of Avalon's Priority Distributions, each Class B Unit is entitled to
participate in distributions pro rata according to the percentage such unit
represents of the aggregate number of the Avalon units then outstanding.
4. MERGER AND ACQUISITIONS
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. The purchase price was
allocated as follows: current assets and liabilities at fair values of $470,
approximately $94,000 to property, plant and equipment, $315,000 to cable
franchises and the excess of consideration paid over the fair market value of
the net assets acquired, or goodwill, of $81,705, offset by deferred taxes net
of $60,000.
The Merger agreement between Michigan Holdings and Avalon Cable of
Michigan, Inc. permitted Avalon Cable of Michigan, Inc. 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 Cable of
Michigan, Inc. and Mercom entered into a definitive agreement (the "Mercom
Merger Agreement") providing for the acquisition by Avalon Cable of Michigan,
Inc. of all of such shares at a price of $12.00 per share. Avalon Cable of
Michigan, Inc. 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 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.
On May 29, 1998, the Company acquired certain assets of Amrac Clear View, A
Limited Partnership ("Amrac") for consideration of $8,124, including acquisition
costs of $589. The acquisition was accounted for using the purchase method of
accounting. Accordingly, the consideration was allocated to the net assets
acquired based on the fair market values at the date of acquisition as
determined through the use of an independent appraisal. The excess of the
consideration paid over the estimated fair market value of the net assets
acquired, or goodwill, was $256.
On July 21, 1998, the Company acquired certain assets and liabilities from
Pegasus Cable Television, Inc. and Pegasus Cable Television of Connecticut, Inc.
(collectively, "Pegasus") for consideration of $30,467, including acquisition
costs of $175. The acquisition was accounted for using the purchase method of
accounting. Accordingly, the consideration was allocated to the net assets
acquired based on the fair market values at the date of acquisition as
determined through use of an independent appraisal. The excess of the
consideration paid over the estimated fair market value of the net assets
acquired, or goodwill, was $977.
F-26
<PAGE> 38
AVALON CABLE LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1998
(DOLLARS IN THOUSANDS)
Unaudited pro forma results of operations of the Company for the year ended
December 31, 1998, as if the Merger and acquisitions occurred on January 1,
1998.
<TABLE>
<CAPTION>
DECEMBER 31,
1998
------------
(UNAUDITED)
<S> <C>
Revenues.................................................... $ 96,751
========
Loss from operations........................................ $ (5,292)
========
Net loss.................................................... $(22,365)
========
</TABLE>
In September 1998, the Company entered into a definitive agreement to
purchase all of the cable systems of Taconic Technology Corporation ("Taconic")
for approximately $8,525 (excluding transaction fees). As of December 31, 1998,
the Company incurred $41 of transaction costs related to the acquisition of
Taconic. This merger is expected to close in the second quarter of 1999.
5. PROPERTY, PLANT AND EQUIPMENT
At December 31, 1998, property, plant and equipment consists of the
following:
<TABLE>
<S> <C>
Cable plant and equipment................................... $106,602
Vehicles.................................................... 2,572
Office furniture and fixtures............................... 1,026
Buildings and improvements.................................. 2,234
Construction in process..................................... 768
--------
113,202
Less: accumulated depreciation.............................. (1,781)
--------
$111,421
========
</TABLE>
Depreciation expense charged to operations was $1,781 for the year ended
December 31, 1998.
6. INTANGIBLE ASSETS
At December 31, 1998, intangible assets consist of the following:
<TABLE>
<CAPTION>
1998
--------
<S> <C>
Cable franchises............................................ $374,773
Goodwill.................................................... 82,928
Deferred financing costs.................................... 10,658
Non-compete agreement....................................... 100
--------
468,459
Less: accumulated amortization.............................. (6,342)
--------
$462,117
========
</TABLE>
Amortization expense was $6,342 for the year ended December 31, 1998.
F-27
<PAGE> 39
AVALON CABLE LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1998
(DOLLARS IN THOUSANDS)
7. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
At December 31, 1998, accounts payable and accrued expenses consist of the
following:
<TABLE>
<S> <C>
Accounts payable............................................ $ 5,321
Accrued corporate expenses.................................. 404
Accrued programming costs................................... 2,388
Taxes payable............................................... 1,383
Other....................................................... 2,150
-------
$11,646
=======
</TABLE>
8. DEBT
At December 31, 1998, Long-term debt consists of the following:
<TABLE>
<S> <C>
Senior Credit Facility...................................... $140,875
Senior Subordinated Notes................................... 150,000
Senior Discount Notes....................................... 111,494
Other Note Payable.......................................... 600
--------
402,969
Less: current portion of notes payable...................... 20
--------
$402,949
========
</TABLE>
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
$1,110.
On November 6, 1998, Avalon New England became a co-borrower along with
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 terminated on March 31, 1999. The tranche
A term loans are subject to minimum quarterly amortization payments commencing
on January 31, 2001 and maturing on October 31, 2005. The tranche B term loans
are 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.
F-28
<PAGE> 40
AVALON CABLE LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1998
(DOLLARS IN THOUSANDS)
On November 6, 1998, Avalon Michigan borrowed $265,888 under the Credit
Facility. In connection with the Senior Subordinated Notes and Senior Discount
Notes offerings, Avalon Michigan repaid $125,013 of the Credit Facility, and the
availability under the Credit Facility was reduced to $195,000. Avalon Michigan
had borrowings of $11,300 and $129,575 outstanding under the tranche A and
tranche B term note facilities, respectively, and had available $30,000 for
borrowings under the revolving credit facility. Avalon New England and Avalon
Finance had no borrowings outstanding under the Credit Facility at December 31,
1998.
The interest rate under the Credit Facility is a rate based on either (i)
the Base Rate (a rate per annum equal to the greater of the prime rate and the
federal funds rate plus one-half of 1%) or (ii) the Eurodollar Rate (a rate per
annum equal to the Eurodollar base rate divided by 1.00 less the Eurocurrency
reserve requirement plus, in either case, the applicable margin). As of December
31, 1998, the applicable margin was (a) with respect to the tranche B term loans
was 2.75% per annum for Base Rate loans and 3.75% per annum for Eurodollar loans
and (b) with respect to tranche A term loans and the revolving credit facility
was 2.00% per annum for Base Rate loans and 3.00% for Eurodollar loans. The
applicable margin for the tranche A term loans and the revolving credit facility
are subject to performance based grid pricing which is determined based upon the
consolidated leverage ratio of the Co-Borrowers. The interest rate for the
tranche A and tranche B term loans outstanding at December 31, 1998 was 8.58%
and 9.33%, respectively. Interest is payable on a quarterly basis. Accrued
interest on the borrowings incurred by Avalon Cable of Michigan Inc. under the
credit facility was $1,389 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
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.
A Change of Control as defined under the Credit Facility agreement would
constitute an event of default under the Credit Facility giving the lender the
right to terminate the credit commitment and declare all amounts outstanding
immediately due and payable.
Subordinated Debt
In December 1998, Avalon New England and Avalon Michigan became co-issuers
of a $150,000 principal balance, Senior Subordinated Notes ("Subordinated
Notes") offering. In conjunction with this financing, 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 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 Subordinated Notes will not be redeemable at the Co-Borrowers'
option prior to December 1, 2003. Thereafter, the Senior Subordinated Notes will
be subject to redemption at any time at the option of the Co-Borrowers, in whole
or in part at the redemption prices (expressed as percentages of principal
amount) set
F-29
<PAGE> 41
AVALON CABLE LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1998
(DOLLARS IN THOUSANDS)
forth below plus accrued and unpaid interest, if any, thereon to the applicable
redemption date, if redeemed during the twelve-month period beginning on
December 1 of the years indicated below:
<TABLE>
<CAPTION>
YEAR PERCENTAGE
- ---- ----------
<S> <C>
2003...................................................... 104.688%
2004...................................................... 103.125%
2005...................................................... 101.563%
2006 and thereafter....................................... 100.000%
</TABLE>
The scheduled maturities of the long-term debt are $2,000 in 2001, $4,000
in 2002, $7,000 in 2003, and the remainder thereafter.
At any time prior to December 1, 2001, the Co-Borrowers may on any one or
more occasions redeem up to 35% of the aggregate principal amount of Senior
Subordinate Notes originally issued under the Indenture at a redemption price
equal to 109.375% of the principal amount thereof, plus accrued and unpaid
interest, if any, to the redemption date, with the net cash proceeds of any
equity offering and/or the net cash proceeds of a strategic equity investment;
provided that at least 65% of the aggregate principal amount at maturity of
Senior Subordinated Notes originally issued remain outstanding immediately after
each such redemption.
As used in the preceding paragraph, "Equity Offering and Strategic Equity
Investment" means any public or private sale of Capital Stock of any of the
Co-Borrowers pursuant to which the Co-Borrowers together receive net proceeds of
at least $25 million, other than issuances of Capital Stock pursuant to employee
benefit plans or as compensation to employees; provided that to the extent such
Capital Stock is issued by the Co-Borrowers, the net cash proceeds thereof shall
have been contributed to one or more of the Co-Borrowers in the form of an
equity contribution.
The Indentures provide that upon the occurrence of a change of control (a
"Change of Control") each holder of the Notes has the right to require the
Company to purchase all or any part (equal to $1,000 or an integral multiple
thereof) of such holder's Notes at an offer price in cash equal to 101% of the
aggregate principal amount thereon plus accrued and unpaid interest and
Liquidated Damages (as defined in the Indentures) thereof, if any, to the date
of purchase.
The Senior Discount Notes
On December 3, 1998, the Company, Avalon Michigan and Avalon Cable Holdings
Finance, Inc. (the "Holding Co-Borrowers") issued $196.0 million aggregate
principal amount at maturity of 11 7/8% Senior Discount Notes ("Senior Discount
Notes") due 2008.
The Senior Discount Notes were issued at a substantial discount from their
principal amount at maturity, to generate gross proceeds of approximately $110.4
million. Interest on the Senior Discount Notes will accrue but not be payable
before December 1, 2003. Thereafter, interest on the Senior Discount Notes will
accrue on the principal amount at maturity at a rate of 11.875% per annum, and
will be payable semi-annually in arrears on June 1 and December 1 of each year,
commencing December 1, 2003. Prior to December 1, 2003, the accreted value of
the Senior Discount Notes will increase, representing amortization of original
issue discount, between the date of original issuance and December 1, 2003 on a
semi-annual basis using a 360-day year comprised of twelve 30-day months, such
that the accreted value shall be equal to the full principal amount at maturity
of the Senior Discount Notes on December 1, 2003. Original issue discount
accretion on the Senior Discount Notes was $1,083 at December 31, 1998.
F-30
<PAGE> 42
AVALON CABLE LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1998
(DOLLARS IN THOUSANDS)
On December 1, 2003, the Holding Co-Borrowers will be required to redeem an
amount equal to $369.79 per $1,000 principal amount at maturity of each Senior
Discount Note then outstanding on a pro rata basis at a redemption price of 100%
of the principal amount at maturity of the Senior Discount Notes so redeemed.
On or after December 1, 2003, the Senior Discount Notes will be subject to
redemption at any time at the option of the Holding Co-borrowers, in whole or in
part, at the redemption prices, which are expressed as percentages of principal
amount, shown below plus accrued and unpaid interest, if any, and liquidated
damages, if any, thereon to the applicable redemption date, if redeemed during
the twelve-month period beginning on December 1 of the years indicated below:
<TABLE>
<CAPTION>
YEAR PERCENTAGE
- ---- ----------
<S> <C>
2003...................................................... 105.938%
2004...................................................... 103.958%
2005...................................................... 101.979%
2006 and thereafter....................................... 100.000%
</TABLE>
Notwithstanding the foregoing, at any time before December 1, 2001, the
holding companies may on any one or more occasions redeem up to 35% of the
aggregate principal amount at maturity of senior discount notes originally
issued under the Senior Discount Note indenture at a redemption price equal to
111.875% of the accreted value at the date of redemption, plus liquidated
damages, if any, to the redemption date, with the net cash proceeds of any
equity offering and/or the net cash proceeds of a strategic equity investment;
provided that at least 65% of the aggregate principal amount at maturity of
Senior Discount Notes originally issued remain outstanding immediately after
each occurrence of such redemption.
Upon the occurrence of a Change of Control, each holder of Senior Discount
Notes will have the right to require the Holding Co-Borrowers to repurchase all
or any part of such holder's Senior Discount Notes pursuant to a Change of
Control offer at an offer price in cash equal to 101% of the aggregate principal
amount thereof plus accrued and unpaid interest and liquidated damages thereon,
if any, to the date of purchase.
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, Cable Michigan, Inc. 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.
Note payable
Avalon New England 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
F-31
<PAGE> 43
AVALON CABLE LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1998
(DOLLARS IN THOUSANDS)
annually. Additionally, Avalon New England has a $100 non-compete agreement. The
agreement calls for five annual payments of $20, commencing on May 29, 1999.
9. INCOME TAXES
The income tax provision in the accompanying consolidated financial
statements of operations relating to Mercom, Inc., a majority-owned subsidiary,
is comprised of the following:
<TABLE>
<CAPTION>
1998
----
<S> <C>
Current
Federal..................................................... $ --
State....................................................... --
----
Total Current............................................... --
----
Deferred
Federal..................................................... 171
State....................................................... 15
----
Total Deferred.............................................. 186
----
Total provision for income taxes............................ $186
====
</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 provision for income taxes...................... $(8,833)
=======
Federal tax provision at statutory rates.................... $(3,092)
State income taxes.......................................... (182)
Allocated to members........................................ 3,082
Goodwill.................................................... 6
-------
Provision for income taxes.................................. $ 186
=======
</TABLE>
<TABLE>
<CAPTION>
TAX NET
OPERATING EXPIRATION
YEAR LOSSES DATE
- ---- --------- ----------
<S> <C> <C>
1998.................................................... $922 2018
</TABLE>
F-32
<PAGE> 44
AVALON CABLE LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1998
(DOLLARS IN THOUSANDS)
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........................................... $ 922
Reserves.................................................... 459
Other, net.................................................. 20
-------
Total deferred assets....................................... 1,401
-------
Property, plant and equipment............................... (2,725)
Intangible assets........................................... (38)
-------
Total deferred liabilities.................................. (2,763)
-------
Subtotal.................................................... (1,362)
-------
Valuation allowance......................................... --
-------
Total deferred taxes........................................ $(1,362)
=======
</TABLE>
10. COMMITMENTS AND CONTINGENCIES
Leases
Avalon New England and Avalon Michigan rent poles from utility companies
for use in their operations. While rental agreements are generally short-term,
Avalon New England and Avalon Michigan anticipate such rentals will continue in
the future. Avalon New England and Avalon Michigan also lease office facilities
and various items of equipment under month-to-month operating leases. Rent
expense was $58 for the year ended December 31, 1998. Rental commitments are
expected to continue at approximately $1 million a year for the foreseeable
future, including pole rental commitments which are cancelable.
Legal matters
Avalon and its subsidiaries are subject to regulation by the Federal
Communications Commission ("FCC") and other franchising authorities.
Avalon and its subsidiaries are subject to the provisions of the Cable
Television Consumer Protection and Competition Act of 1992, as amended, and the
Telecommunications Act of 1996. Avalon and its Subsidiaries have 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
Avalon and its subsidiaries.
11. RELATED PARTY TRANSACTIONS AND BALANCES
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-33
<PAGE> 45
AVALON CABLE LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1998
(DOLLARS IN THOUSANDS)
12. SUBSEQUENT EVENT
In May 1999, the Company signed an agreement with Charter Communications,
Inc. ("Charter Communications") under which Charter Communications agreed to
purchase Avalon Cable LLC's cable television systems and assume some of their
debt. The acquisition by Charter Communications is subject to regulatory
approvals. The Company expects to consummate this transaction in the fourth
quarter of 1999.
This agreement, if closed, would constitute a change in control under the
Indenture pursuant to which the Senior Subordinated Notes and the Senior
Discount Notes (collectively, the "Notes") were issued. The Indenture provides
that upon the occurrence of a change of control of the Company (a "Change of
Control") each holder of the Notes has the right to require the Company to
purchase all or any part (equal to $1,000 or an integral multiple thereof) of
such holder's Notes at an offer price in cash equal to 101% of the aggregate
principal amount thereon (or 101% of the accreted value for the Senior Discount
Notes as of the date of purchase if prior to the full accretion date) plus
accrued and unpaid interest and Liquidated Damages (as defined in the Indenture)
thereof, if any, to the date of purchase.
This agreement, if closed, would represent a Change of Control which, on
the closing date, constitutes an event of default under the Credit Facility
giving the lender the right to terminate the credit commitment and declare all
amounts outstanding immediately due and payable. Charter Communications has
agreed to repay all amounts due under the Credit Facility or cause all events of
default under the Credit Facility arising from the Change of Control to be
waived.
F-34
<PAGE> 46
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 sheets and the
related consolidated statements of operations, changes in 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, 1997 and 1998, and the results of their operations,
changes in shareholders' equity and their cash flows for the period from
September 4, 1997 (inception) through December 31, 1997, and for the year ended
December 31, 1998, in conformity with generally accepted accounting principles.
These financial statements are the responsibility of the Company's management;
our responsibility is to express an opinion on these financial statements based
on our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audits to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statements presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
/S/ PRICEWATERHOUSECOOPERS LLP
New York, New York
March 30, 1999, except for Note 13,
as to which the date is May 13, 1999
F-35
<PAGE> 47
AVALON CABLE OF MICHIGAN HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1998 1997
---------- ------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
ASSETS
Cash........................................................ $ 9,288 $ --
Accounts receivable, net of allowance for doubtful accounts
of $943................................................... 5,862 --
Prepayments and other current assets........................ 1,388 504
Accounts receivable from related parties.................... 124 --
Deferred income taxes....................................... 377 --
-------- ----
Current assets.............................................. 17,039 504
Property, plant and equipment, net.......................... 111,421 --
Intangible assets, net...................................... 462,117 --
Deferred charges and other assets........................... 1,302 --
-------- ----
Total assets................................................ $591,879 $504
======== ====
LIABILITIES AND SHAREHOLDERS' EQUITY
Current portion of notes payable............................ $ 20 $ --
Accounts payable and accrued expenses....................... 11,646 --
Advance billings and customer deposits...................... 3,171 --
Accounts payable-affiliate.................................. 2,023 500
-------- ----
Current liabilities......................................... 16,860 500
Long-term debt.............................................. 402,949 --
Notes payable-affiliate..................................... 3,341 --
Deferred income taxes....................................... 80,811 --
-------- ----
Total liabilities........................................... 503,961 500
-------- ----
Commitments and contingencies (Note 11)..................... -- --
Minority interest........................................... 61,836 4
-------- ----
Stockholders equity:
Common stock................................................ -- --
Additional paid-in capital.................................. 35,000 --
Accumulated deficit......................................... (8,918) --
-------- ----
Total shareholders' equity.................................. 26,082 --
-------- ----
Total liabilities and shareholders' equity.................. $591,879 $504
======== ====
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-36
<PAGE> 48
AVALON CABLE OF MICHIGAN HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE PERIOD FROM
FOR THE YEAR SEPTEMBER 4, 1997
ENDED (INCEPTION) THROUGH
DECEMBER 31, 1998 DECEMBER 31, 1997
----------------- -------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
REVENUE:
Basic services............................................. $14,976 $ --
Premium services........................................... 1,468 --
Other...................................................... 1,743 --
------- -------
18,187 --
OPERATING EXPENSES:
Selling, general and administrative........................ 4,207 --
Programming................................................ 4,564 --
Technical and operations................................... 1,951 --
Depreciation and amortization.............................. 8,183 --
------- -------
Loss from operations....................................... (718) --
Interest income............................................ 173 4
Interest expense........................................... (8,223) --
Other expense, net......................................... (65) --
------- -------
Income (loss) before income taxes.......................... (8,833) 4
(Benefit) from income taxes................................ (2,754) --
------- -------
Income (loss) before minority interest and extraordinary
item..................................................... (6,079) 4
Minority interest in income of consolidated entity......... 1,331 (4)
------- -------
Income (loss) before extraordinary item.................... (4,748) --
Extraordinary loss on extinguishment of debt (net of tax of
$1,743).................................................. (4,170) --
------- -------
Net income (loss).......................................... $(8,918) $ --
======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-37
<PAGE> 49
AVALON CABLE OF MICHIGAN HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE PERIOD FROM SEPTEMBER 4, 1997 (INCEPTION) THROUGH DECEMBER 31, 1998
<TABLE>
<CAPTION>
COMMON ADDITIONAL TOTAL
SHARES COMMON PAID-IN ACCUMULATED SHAREHOLDERS'
OUTSTANDING STOCK CAPITAL DEFICIT EQUITY
----------- ------ ---------- ----------- -------------
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
Net income from date of inception
through December 31, 1997....... -- $-- $ -- $ -- $ --
Balance, January 1, 1998.......... 100 -- -- -- --
Net loss.......................... -- -- -- (8,918) (8,918)
Contributions by parent........... -- -- 35,000 -- 35,000
--- -- ------- ------- -------
Balance, December 31, 1998........ 100 $-- $35,000 $(8,918) $26,082
=== == ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-38
<PAGE> 50
AVALON CABLE OF MICHIGAN HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE PERIOD FROM
SEPTEMBER 4, 1997
FOR THE YEAR ENDED (INCEPTION) THROUGH
DECEMBER 31, 1998 DECEMBER 31, 1997
------------------ -------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss).......................................... $ (8,918) $ 4
Extraordinary loss on extinguishment of debt............... 4,170 --
Depreciation and amortization.............................. 8,183 --
Deferred income taxes, net................................. 82,370 --
Provision for loss on accounts receivable.................. 75 --
Increase in minority interest.............................. 1,331 --
Accretion on senior discount notes......................... 1,083
Net change in certain assets and liabilities, net of
business acquisitions Increase in accounts receivable.... (1,679) --
Increase in accounts receivable from related parties....... (124) --
Increase in prepayment and other current assets............ (884) (4)
Increase in accounts payable and accrued expenses.......... 4,863 --
Increase in accounts payable to related parties............ 1,523 --
Increase in deferred revenue............................... 1,684 --
Change in Other, net....................................... 1,339
--------- ---------
Net cash provided by operating activities.................. 92,338 --
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant and equipment................. (11,468) --
Payment for acquisition.................................... (554,402) --
--------- ---------
Net cash used in investing activities...................... 565,870 --
--------- ---------
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 sale to minority interest.................... 46,588 --
Proceeds from other notes payable.......................... 600 --
Proceeds from the issuance of note payable affiliate....... 3,341 --
Payments made for debt financing costs..................... (3,995) --
Proceeds from the issuance of common stock................. 35,000 --
--------- ---------
Net cash provided by financing activities.................. 482,820 --
--------- ---------
Net increase in cash....................................... 9,288 --
Cash at beginning of the period............................ -- --
--------- ---------
Cash at end of the period.................................. $ 9,288 $ --
--------- ---------
Supplemental disclosures of cash flow information..........
Cash paid during the year for Interest..................... $ 3,480 $ --
Income taxes............................................... -- --
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-39
<PAGE> 51
AVALON CABLE OF MICHIGAN HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
DECEMBER 31, 1998
1. BASIS OF PRESENTATION AND DESCRIPTION OF BUSINESS
Avalon Cable of Michigan Holdings, Inc. ("the Company") was formed in June
1998, pursuant to the laws of the state of Delaware. Avalon Cable of Michigan
Inc. ("Avalon Michigan") was formed in June 1998, pursuant to the laws of the
state of Delaware as a wholly owned subsidiary of the Company. On June 3, 1998,
Avalon Michigan entered into an Agreement and Plan of Merger (the "Agreement")
among the Company, Cable Michigan, Inc. ("Cable Michigan") and Avalon Michigan,
pursuant to which Avalon Michigan will merge into Cable Michigan and Cable
Michigan will become a wholly owned subsidiary of the Company (the "Merger").
In accordance with the terms of the Agreement, each share of common stock,
par value $1.00 per share ("common stock"), of Cable Michigan 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 for certain support services 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.
On November 6, 1998, Avalon Cable of New England Holdings, Inc. contributed
its 100% interest in Avalon Cable of New England LLC ("Avalon New England") to
Avalon Cable LLC in exchange for a membership interest in Avalon Cable LLC. This
contribution was between entities under common control and was accounted for
similar to a pooling-of-interests. Under this pooling-of-interests method, the
results of operations for Avalon include the results of operations from the date
of inception (September 4, 1997) of Avalon New England. On that same date,
Avalon Cable LLC received $63,000 from affiliated entities, which was comprised
of (i) a $45,000 capital contribution by Avalon Investors, LLC ("Avalon
Investors") and (ii) a $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 Cable LLC received a dividend distribution
from Avalon New England in the amount of $18,206, which was used by Avalon Cable
LLC to pay off the promissory note payable to Avalon Holdings, plus accrued
interest.
F-40
<PAGE> 52
AVALON CABLE OF MICHIGAN HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
DECEMBER 31, 1998
On March 26, 1999, after the acquisition of Mercom, Inc., the Company
completed a series of transactions to facilitate certain aspects of its
financing between affiliated entities under common control. As a result of these
transactions:
- Avalon Michigan contributed its assets and liabilities excluding deferred
tax liabilities, net to Avalon Cable LLC in exchange for an approximate
88% voting interest in Avalon Cable LLC. Avalon Cable LLC contributed
these assets and liabilities to its wholly-owned subsidiary, Avalon Cable
of Michigan LLC ("Avalon Michigan LLC");
- Avalon Michigan LLC has become the operator of the Michigan cluster
replacing Avalon Michigan;
- Avalon Michigan LLC is an obligor on the Senior Subordinated Notes
replacing Avalon Michigan; and
- Avalon Michigan is a guarantor of the obligations of Avalon Michigan LLC
under the Senior Subordinated Notes. Avalon Michigan does not have
significant assets, other than its investment in Avalon Cable LLC.
- The Company contributed the Senior Discount Notes to Avalon Cable LLC and
became a guarantor of the Senior Discount Notes. The Company does not
have significant assets, other than its 88% investment in Avalon Cable
LLC.
As a result of this reorganization between entities under common control,
the Company accounted for the reorganization similar to a pooling-of-interests.
Under the pooling-of-interests method, the results of operations include the
results of operations from the earliest date that a member became a part of the
control group by inception or acquisition. For the Company, the results of
operations are from the date of inception (September 4, 1997) for Avalon New
England, a wholly-owned subsidiary of Avalon Cable LLC.
Avalon Michigan has a majority-interest in Avalon Cable LLC. Avalon Cable
LLC wholly-owns Avalon Cable Holdings Finance, Avalon New England, and Avalon
Michigan LLC.
Avalon New England and Avalon Michigan provide cable service to the western
New England area and the state of Michigan, respectively. Avalon New England and
Avalon Michigan LLC's cable systems offer customer packages for basic cable
programming services which are offered at a per channel charge or packaged
together to form a tier of services offered at a discount from the combined
channel rate. Avalon New England and Avalon Michigan LLC's cable systems also
provide premium cable services to their customers for an extra monthly charge.
Customers generally pay initial connection charges and fixed monthly fees for
cable programming and premium cable services, which constitute the principle
sources of revenue for the Company.
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 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.
F-41
<PAGE> 53
AVALON CABLE OF MICHIGAN HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
DECEMBER 31, 1998
Use of estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Revenue recognition
Revenues from cable services are recorded in the month the service is
provided. Installation fee revenue is recognized in the period in which the
installation occurs to the extent that direct selling costs meet or exceed
installation revenues.
Advertising expense
Advertising costs are expensed as incurred. Advertising expense charged to
operations was $82 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 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 Michigan and New England. 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 and improvements.................................. 10-25 years
Cable plant and equipment................................... 5-12 years
Vehicles.................................................... 5 years
Office furniture and equipment.............................. 5-10 years
</TABLE>
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
F-42
<PAGE> 54
AVALON CABLE OF MICHIGAN HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
DECEMBER 31, 1998
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.
3. MERGER AND ACQUISITIONS
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. The purchase price was
allocated as follows: current assets and liabilities at fair values of $470,
approximately $94,000 to property, plant and equipment, $315,000 to cable
franchises and the excess of consideration paid
F-43
<PAGE> 55
AVALON CABLE OF MICHIGAN HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
DECEMBER 31, 1998
over the fair market value of the net assets acquired, or goodwill, of $81,705,
offset by deferred taxes, net of $60,000.
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.
On May 29, 1998, the Company acquired certain assets of Amrac Clear View, A
Limited Partnership ("Amrac") for consideration of $8,124, including acquisition
costs of $589. The acquisition was accounted for using the purchase method of
accounting. Accordingly, the consideration was allocated to the net assets
acquired based on the fair market values at the date of acquisition as
determined through the use of an independent appraisal. The excess of the
consideration paid over the estimated fair market value of the net assets
acquired, or goodwill, was $256.
On July 21, 1998, the Company acquired certain assets and liabilities from
Pegasus Cable Television, Inc. and Pegasus Cable Television of Connecticut, Inc.
(collectively, "Pegasus") for consideration of $30,467, including acquisition
costs of $175. The acquisition was accounted for using the purchase method of
accounting. Accordingly, the consideration was allocated to the net assets
acquired based on the fair market values at the date of acquisition as
determined through use of an independent appraisal. The excess of the
consideration paid over the estimated fair market value of the net assets
acquired, or goodwill, was $977.
Following is the unaudited pro forma results of operations for the year
ended December 31, 1998, as if the Merger and acquisitions occurred on January
1, 1998:
<TABLE>
<CAPTION>
DECEMBER 31,
1998
------------
(UNAUDITED)
<S> <C>
Revenue..................................................... $ 96,751
========
Loss from operations........................................ $ (5,292)
========
Net loss.................................................... $(22,365)
========
</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.
In September 1998, the Company entered into a definitive agreement to
purchase all of the cable systems of Taconic Technology Corporation ("Taconic")
for approximately $8,525 (excluding transaction fees). As of December 31, 1998,
the Company incurred $41 of transaction costs related to the acquisition of
Taconic. This merger is expected to close in the second quarter of 1999.
F-44
<PAGE> 56
AVALON CABLE OF MICHIGAN HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
DECEMBER 31, 1998
4. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following:
<TABLE>
<S> <C>
Cable plant and equipment................................... $106,602
Vehicles.................................................... 2,572
Buildings and improvements.................................. 1,026
Office furniture and equipment.............................. 2,234
Construction in process..................................... 768
--------
Total property, plant and equipment......................... 113,202
Less-accumulated depreciation............................... (1,781)
--------
Property, plant and equipment, net.......................... $111,421
========
</TABLE>
Depreciation expense was $1,781 for the year ended December 31, 1998.
5. INTANGIBLE ASSETS
Intangible assets consist of the following:
<TABLE>
<S> <C>
Cable Franchise............................................. $374,773
Goodwill.................................................... 82,928
Deferred Financing Costs.................................... 10,658
Non-compete agreement....................................... 100
--------
Total....................................................... 468,459
Less-accumulated amortization............................... (6,342)
--------
Intangible assets, net...................................... $462,117
========
</TABLE>
Amortization expense for the year ended December 31, 1998 was $6,342.
6. ACCOUNT PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consist of the following:
<TABLE>
<S> <C>
Accounts payable............................................ $ 5,321
Accrued corporate expenses.................................. 404
Accrued cable programming costs............................. 2,388
Accrued taxes............................................... 1,383
Other....................................................... 2,150
-------
$11,646
=======
</TABLE>
F-45
<PAGE> 57
AVALON CABLE OF MICHIGAN HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
DECEMBER 31, 1998
7. INCOME TAXES
The income tax provision (benefit) in the accompanying consolidated
financial statements of operations is comprised of the following:
<TABLE>
<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.................... $(8,833)
=======
Federal tax (benefit) at statutory rates.................... $(3,092)
State income taxes.......................................... (177)
Goodwill.................................................... 77
Benefit for taxes allocated to minority partners............ 84
-------
(Benefit) for income taxes.................................. $(3,108)
=======
</TABLE>
<TABLE>
<CAPTION>
TAX NET
OPERATING EXPIRATION
YEAR LOSSES DATE
- ---- --------- ----------
<S> <C> <C>
1998.................................................... $10,360 2018
</TABLE>
F-46
<PAGE> 58
AVALON CABLE OF MICHIGAN HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
DECEMBER 31, 1998
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........................................... (76,199)
--------
Total deferred liabilities.................................. (86,834)
--------
Subtotal.................................................... (80,811)
--------
Valuation allowance......................................... --
--------
Total deferred taxes........................................ $(80,811)
========
</TABLE>
The tax benefit related to the loss on extinguishment of debt results in
deferred tax, and it approximates 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...................................... $140,875
Senior Subordinated Notes................................... 150,000
Senior Discount Notes....................................... 111,494
Other Note Payable.......................................... 600
--------
402,969
Current portion............................................. 20
--------
$402,949
========
</TABLE>
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
Cable LLC. The fees and associated costs relating to the early retirement of
this debt was $1,110.
F-47
<PAGE> 59
AVALON CABLE OF MICHIGAN HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
DECEMBER 31, 1998
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 terminated on March 31, 1999. The tranche A term
loans are subject to minimum quarterly amortization payments commencing on
January 31, 2001 and maturing on October 31, 2005. The tranche B term loans are
scheduled to be repaid in two equal installments on July 31, 2006 and October
31, 2006. The revolving credit facility borrowings are scheduled to be repaid on
October 31, 2005.
On November 6, 1998, Avalon 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 $11,300 and $129,575 outstanding under the tranche A
and tranche B term note facilities, and had available $30,000 for borrowings
under the revolving credit facility. Avalon New England and Avalon Finance had
no borrowings outstanding under the Credit Facility at December 31, 1998.
The interest rate under the Credit Facility is a rate based on either (i)
the base rate (a rate per annum equal to the greater of the Prime Rate and the
Federal Funds Effective Rate plus 1/2 of 1%) or (ii) the Eurodollar rate (a rate
per annum equal to the Eurodollar Base Rate divided by 1.00 less the
Eurocurrency Reserve Requirements) plus, in either case, the applicable margin.
As of December 31, 1998, the applicable margin was (a) with respect to the
tranche B term loans was 2.75% per annum for Base Rate loans and 3.75% per annum
for Eurodollar loans and (b) with respect to tranche A term loans and the
revolving credit facility was 2.00% per annum for Base Rate loans and 3.00% for
Eurodollar loans. The applicable margin for the tranche A term loans and the
revolving credit facility are subject to performance based grid pricing which is
determined based on upon the consolidated leverage ratio of the Co-Borrowers.
The interest rate for 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 the
Company, Avalon Cable LLC, Avalon Cable Finance Holdings, Inc., Avalon Cable of
New England Holdings, Inc. and Avalon Cable Holdings, LLC.
A Change of Control as defined under the Credit Facility agreement would
constitute an event of default under the Credit Facility giving the lender the
right to terminate the credit commitment and declare all amounts outstanding
immediately due and payable.
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 (defined below) offering. In conjunction with these
F-48
<PAGE> 60
AVALON CABLE OF MICHIGAN HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
DECEMBER 31, 1998
financings, Avalon Michigan paid $18,130 to Avalon Finance as a partial payment
against Avalon Michigan's note payable-affiliate. Avalon Michigan paid $76 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 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:
<TABLE>
<CAPTION>
YEAR PERCENTAGE
- ---- ----------
<S> <C>
2003...................................................... 104.688%
2004...................................................... 103.125%
2005...................................................... 101.563%
2006 and thereafter....................................... 100.000%
</TABLE>
The scheduled maturities of the long-term debt are $2,000 in 2001, $4,000
in 2002, $72,479 in 2003, and the remainder thereafter.
At any time prior to December 1, 2001, the Co-Borrowers may on any one or
more occasions redeem up to 35% of the aggregate principal amount of Senior
Subordinate Notes originally issued under the Indenture at a redemption price
equal to 109.375% of the principal amount thereof, plus accrued and unpaid
interest, if any, to the redemption date, with the net cash proceeds of any
equity offering and/or the net cash proceeds of a strategic equity investment;
provided that at least 65% of the aggregate principal amount at maturity of
Senior Subordinated Notes originally issued remain outstanding immediately after
each such redemption.
As used in the preceding paragraph, "Equity Offering and Strategic Equity
Investment" means any public or private sale of Capital Stock of any of the
Co-Borrowers pursuant to which the Co-Borrowers together receive net proceeds of
at least $25 million, other than issuances of Capital Stock pursuant to employee
benefit plans or as compensation to employees; provided that to the extent such
Capital Stock is issued by the Co-Borrowers, the net cash proceeds thereof shall
have been contributed to one or more of the Co-Borrowers in the form of an
equity contribution.
The Indentures provide that upon the occurrence of a change of control (a
"Change of Control") each holder of the Notes has the right to require the
Company to purchase all or any part (equal to $1,000 or an integral multiple
thereof) of such holder's Notes at an offer price in cash to 101% of the
aggregate principal amount thereon plus accrued and unpaid interest and
Liquidated Damages (as defined in the Indentures) thereof, if any, to the date
of purchase.
The Senior Discount Notes
On December 3, 1998, the Company, Avalon Cable LLC and Avalon Cable
Holdings Finance, Inc. ("Holdings Co-Borrowers") issued $196.0 million aggregate
principal amount at maturity of 11 7/8% Senior Discount Notes ("Senior Discount
Notes") due 2008.
The Senior Discount Notes were issued at a substantial discount from their
principal amount at maturity, to generate gross proceeds of approximately $110.4
million. Interest on the Senior Discount Notes will accrue
F-49
<PAGE> 61
AVALON CABLE OF MICHIGAN HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
DECEMBER 31, 1998
but not be payable before December 1, 2003. Thereafter, interest on the Senior
Discount Notes will accrue on the principal amount at maturity at a rate of
11.875% per annum, and will be payable semi-annually in arrears on June 1 and
December 1 of each year, commencing December 1, 2003. Prior to December 1, 2003,
the accreted value of the Senior Discount Notes will increase, representing
amortization of original issue discount, between the date of original issuance
and December 1, 2003 on a semi-annual basis using a 360-day year comprised of
twelve 30-day months, such that the accreted value shall be equal to the full
principal amount at maturity of the Senior Discount Notes on December 1, 2003.
Original issue discount accretion on the Senior Discount Notes was $1,083 at
December 31, 1998.
On December 1, 2003, the Holding Co-borrowers will be required to redeem an
amount equal to $369.79 per $1,000 principal amount at maturity of each Senior
Discount Note then outstanding on a pro rata basis at a redemption price of 100%
of the principal amount at maturity of the Senior Discount Notes so redeemed.
On or after December 1, 2003, the Senior Discount Notes will be subject to
redemption at any time at the option of the Holding Co-borrowers, in whole or in
part, at the redemption prices, which are expressed as percentages of principal
amount, shown below plus accrued and unpaid interest, if any, and liquidated
damages, if any, thereon to the applicable redemption date, if redeemed during
the twelve-month period beginning on December 1 of the years indicated below:
<TABLE>
<CAPTION>
YEAR PERCENTAGE
- ---- ----------
<S> <C>
2003...................................................... 105.938%
2004...................................................... 103.958%
2005...................................................... 101.979%
2006 and thereafter....................................... 100.000%
</TABLE>
Notwithstanding the foregoing, at any time before December 1, 2001, the
holding companies may on any one or more occasions redeem up to 35% of the
aggregate principal amount at maturity of senior discount notes originally
issued under the Senior Discount Note indenture at a redemption price equal to
111.875% of the accreted value at the date of redemption, plus liquidated
damages, if any, to the redemption date, with the net cash proceeds of any
equity offering and/or the net cash proceeds of a strategic equity investment;
provided that at least 65% of the aggregate principal amount at maturity of
Senior Discount Notes originally issued remain outstanding immediately after
each occurrence of such redemption.
Upon the occurrence of a Change of Control, each holder of Senior Discount
Notes will have the right to require the Holding Co-borrowers to repurchase all
or any part of such holder's Senior Discount Notes pursuant to a Change of
Control offer at an offer price in cash equal to 101% of the aggregate principal
amount thereof plus accrued and unpaid interest and liquidated damages thereon,
if any, to the date of purchase.
Note Payable
Avalon New England 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, Avalon
New England has a $100 non-compete agreement. The agreement calls for five
annual payments of $20, commencing on May 29, 1999.
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.
F-50
<PAGE> 62
AVALON CABLE OF MICHIGAN HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
DECEMBER 31, 1998
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. MINORITY INTEREST
The activity in minority interest for the year ended December 31, 1998 is
as follows:
<TABLE>
<CAPTION>
AVALON
CABLE
MERCOM LLC TOTAL
------- ------- -------
<S> <C> <C> <C>
Issuance of Class A units by Avalon Cable LLC......... $ -- $45,000 $45,000
Issuance of Class B-1 units by Avalon Cable LLC....... -- 4,345 4,345
Allocated to minority interest prior to
restructuring....................................... -- 365 365
Purchase of Cable Michigan, Inc....................... 13,457 -- 13,457
Income (loss) allocated to minority interest.......... 398 (1,729) (1,331)
------- ------- -------
Balance at December 31, 1998.......................... $13,855 $47,981 $61,836
======= ======= =======
</TABLE>
10. EMPLOYEE BENEFIT PLANS
Avalon Michigan has a qualified savings plan under Section 401(K) of the
Internal Revenue Code. Contributions charged to expense for the period from
November 5, 1998 to December 31, 1998 was $30.
11. COMMITMENTS AND CONTINGENCIES
Leases
Avalon New England and Avalon Michigan rent poles from utility companies
for use in their operations. While rental agreements are generally short-term,
Avalon New England and Avalon Michigan anticipate such rentals will continue in
the future. Avalon New England and Avalon Michigan also lease office facilities
and various items of equipment under month-to-month operating leases. Rent
expense was $58 for the year ended December 31, 1998. Rental commitments are
expected to continue at approximately $1 million a year for the foreseeable
future, including pole rental commitments which are cancelable.
Legal Matters
The Company and its subsidiaries are subject to regulation by the Federal
Communications Commission ("FCC") and other franchising authorities.
The Company and its subsidiaries are 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 and its subsidiaries have either
settled challenges or accrued for anticipated exposures related to rate
regulation; however, there is no assurance that there will not be further
additional challenges to its rates.
F-51
<PAGE> 63
AVALON CABLE OF MICHIGAN HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
DECEMBER 31, 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 and its subsidiaries.
12. RELATED PARTY TRANSACTIONS AND BALANCES
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 the rate of 5.57% per year and
Avalon New England has recorded accrued interest on this note of $100 at
December 31, 1998.
13. SUBSEQUENT EVENT
In May 1999, the Company signed an agreement with Charter Communications,
Inc. ("Charter Communications") under which Charter Communications agreed to
purchase Avalon Cable LLC's cable television systems and assume some of their
debt. The acquisition by Charter Communications is subject to regulatory
approvals. The Company expects to consummate this transaction in the fourth
quarter of 1999.
This agreement, if closed, would constitute a change in control under the
Indenture pursuant to which the Senior Subordinated Notes and the Senior
Discount Notes (collectively, the "Notes") were issued. The Indenture provides
that upon the occurrence of a change of control of the Company (a "Change of
Control") each holder of the Notes has the right to require the Company to
purchase all or any part (equal to $1,000 or an integral multiple thereof) of
such holder's Notes at an offer price in cash equal to 101% of the aggregate
principal amount thereon (or 101% of the accreted value for the Senior Discount
Notes as of the date of purchase if prior to the full accretion date) plus
accrued and unpaid interest and Liquidated Damages (as defined in the Indenture)
thereof, if any, to the date of purchase.
This agreement, if closed, would represent a Change of Control which, on
the closing date, constitutes an event of default under the Credit Facility
giving the lender the right to terminate the credit commitment and declare all
amounts outstanding immediately due and payable. Charter Communications has
agreed to repay all amounts due under the Credit Facility or cause all events of
default under the Credit Facility arising from the Change of Control to be
waived.
F-52
<PAGE> 64
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.
/s/ PRICEWATERHOUSECOOPERS LLP
New York, New York
March 30, 1999
F-53
<PAGE> 65
CABLE MICHIGAN, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, NOVEMBER 5,
1997 1998
------------ -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
ASSETS
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
======== ========
LIABILITIES AND SHAREHOLDERS' DEFICIT
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-54
<PAGE> 66
CABLE MICHIGAN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31, FOR THE PERIOD FROM
------------------------ JANUARY 1, 1998 TO
1996 1997 NOVEMBER 5, 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) $ (1.53)
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-55
<PAGE> 67
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-56
<PAGE> 68
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
======== ======== ========
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-57
<PAGE> 69
CABLE MICHIGAN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
DECEMBER 31, 1998
1. BACKGROUND AND BASIS OF PRESENTATION
Prior to September 30, 1997, Cable Michigan, Inc. and subsidiaries (the
"Company") was operated as part of C-TEC Corporation ("C-TEC"). On September 30,
1997, C-TEC distributed 100 percent of the outstanding shares of common stock of
its wholly owned subsidiaries, RCN Corporation ("RCN") and the Company to
holders of record of C-TEC's Common Stock and C-TEC's Class B Common Stock as of
the close of business on September 19, 1997 (the "Distribution") in accordance
with the terms of the Distribution Agreement dated September 5, 1997 among
C-TEC, RCN and the Company. The Company consists of C-TEC's Michigan cable
operations, including its 62% ownership in Mercom, Inc. ("Mercom"). In
connection with the Distribution, C-TEC changed its name to Commonwealth
Telephone Enterprises, Inc. ("CTE"). RCN consists primarily of C-TEC's bundled
residential voice, video and Internet access operations in the Boston to
Washington, D.C. corridor, its existing New York, New Jersey and Pennsylvania
cable television operations, a portion of its long distance operations and its
international investment in Megacable, S.A. de C.V. C-TEC, RCN, and the Company
continue as entities under common control until the Company completes the Merger
(as described below).
On June 3, 1998, the Company entered into an Agreement and Plan of Merger
(the "Agreement") among the Company, Avalon Cable of Michigan Holdings Inc.
("Avalon Holdings") and Avalon Cable of Michigan Inc. ("Avalon Sub"), pursuant
to which Avalon Sub will merge into the Company and the Company will become a
wholly owned subsidiary of Avalon Holdings (the "Merger").
In accordance with the terms of the Agreement, each share of common stock,
par value $1.00 per share ("common stock"), of the Company outstanding prior to
the effective time of the Merger (other than treasury stock, shares owned by
Avalon Holdings or its subsidiaries, or shares as to which dissenters' rights
have been exercised) shall be converted into the right to receive $40.50 in cash
(the "Merger Consideration"), subject to certain possible closing adjustments.
On November 6, 1998, the Company completed its merger into and with Avalon
Cable Michigan, Inc. The total consideration payable in conjunction with the
merger, including fees and expenses is approximately 431,600. Subsequent to the
merger, the arrangements with RCN and CTE (as described below) were terminated.
The Merger agreement also permitted the Company to agree to acquire the
remaining shares of Mercom that it did not own.
Cable Michigan provides cable services to various areas in the state of
Michigan. Cable Michigan's cable television systems offer customer packages for
basic cable programming services which are offered at a per channel charge or
packaged together to form a tier of services offered at a discount from the
combined channel rate. Cable Michigan's cable television systems also provide
premium cable services to their customers for an extra monthly charge. Customers
generally pay initial connection charges and fixed monthly fees for cable
programming and premium cable services, which constitute the principle sources
of revenue for the Company.
The consolidated financial statements have been prepared using the
historical basis of assets and liabilities and historical results of operations
of all wholly and majority owned subsidiaries. However, the historical financial
information presented herein reflects periods during which the Company did not
operate as an independent company and accordingly, certain assumptions were made
in preparing such financial information. Such information, therefore, may not
necessarily reflect the results of operations, financial condition or cash flows
of the Company in the future or what they would have been had the Company been
an independent, public company during the reporting periods. All material
intercompany transactions and balances have been eliminated.
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
F-58
<PAGE> 70
CABLE MICHIGAN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
DECEMBER 31, 1998
corporate office of C-TEC allocated the cost for these services pro rata among
the business units supported primarily based on assets; contribution to
consolidated earnings before interest, depreciation, amortization, and income
taxes; and number of employees. In the opinion of management, the method of
allocating these costs is reasonable; however, such costs are not necessarily
indicative of the costs that would have been incurred by the Company on a
stand-alone basis.
CTE, RCN and the Company have entered into certain agreements subsequent to
the Distribution, and governing various ongoing relationships, including the
provision of support services between the three companies, including a
distribution agreement and a tax-sharing agreement.
The fee per year for support services from RCN will be 4.0% of the revenues
of the Company plus a direct allocation of certain consolidated cable
administration functions of RCN. The direct charge for customer service along
with the billing service and the cable guide service will be a pro rata share
(based on subscribers) of the expenses incurred by RCN to provide such customer
service and to provide such billing and cable guide service for RCN and the
Company.
CTE has agreed to provide or cause to be provided to RCN and the Company
certain financial data processing services for a transitional period after the
Distribution. The fees for such services will be an allocated portion (based on
relative usage) of the cost incurred by CTE to provide such financial data
processing services to all three groups.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of estimates
The preparation of financial statements, in conformity with generally
accepted accounting principles, requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Cash and temporary cash investments
For purposes of reporting cash flows, the Company considers all highly
liquid investments purchased with an original maturity of three months or less
to be temporary cash investments. Temporary cash investments are stated at cost,
which approximates market.
Property, plant and equipment and depreciation
Property, plant and equipment reflects the original cost of acquisition or
construction, including payroll and related costs such as taxes, pensions and
other fringe benefits, and certain general administrative costs.
Depreciation is provided on the straight-line method based on the useful
lives of the various classes of depreciable property. The average estimated
lives of depreciable cable property, plant and equipment are:
<TABLE>
<S> <C>
Buildings................................................... 12-25 years
Cable television distribution equipment..................... 8.5-12 years
Vehicles.................................................... 5 years
Other equipment............................................. 12 years
</TABLE>
F-59
<PAGE> 71
CABLE MICHIGAN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
DECEMBER 31, 1998
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").
SFAS 121 requires that long-lived assets and certain identifiable
intangibles to be held and used by an entity be reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. In performing the review for recoverability, the Company
estimates the net future cash flows expected to result from the use of the asset
and its eventual disposition. If the sum of the expected net future cash flows
(undiscounted and without interest charges) is less than the carrying amount of
the asset, an impairment loss is recognized. Measurement of an impairment loss
for long-lived assets and identifiable intangibles expected to be held and used
is based on the fair value of the asset.
No impairment losses have been recognized by the Company pursuant to SFAS
121.
Revenue recognition
Revenues from cable programming services are recorded in the month the
service is provided. Installation fee revenue is recognized in the period in
which the installation occurs.
Advertising expense
Advertising costs are expensed as incurred. Advertising expense charged to
operations was $514, $560, and $505 in 1996, 1997, and for the period from
January 1, 1998 to November 5, 1998 respectively.
Stock-based compensation
The Company applies Accounting Principles Board Opinion No.
25 -- "Accounting for Stock Issued to Employees" ("APB 25") in accounting for
its stock plans. The Company has adopted the disclosure-only provisions of
Statement of Financial Accounting Standards No. 123 -- "Accounting for
Stock-Based Compensation" ("SFAS 123").
Earnings (loss) per share
The Company has adopted statement of Financial Accounting Standards No.
128 -- "Earnings Per Share" ("SFAS 128"). Basic earnings (loss) per share is
computed based on net income (loss) divided by the weighted average number of
shares of common stock outstanding during the period.
F-60
<PAGE> 72
CABLE MICHIGAN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
DECEMBER 31, 1998
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 Company accounts for income
taxes using Statement of Financial Accounting Standards No. 109 -- "Accounting
for Income Taxes". The statement requires the use of an asset and liability
approach for financial reporting purposes. The asset and liability approach
requires the recognition of deferred tax assets and liabilities for the expected
future tax consequences of temporary differences between financial reporting
basis and tax basis of assets and liabilities. If it is more likely than not
that some portion or all of a deferred tax asset will not be realized, a
valuation allowance is recognized.
Reclassification
Certain amounts have been reclassified to conform with the current year's
presentation.
3. BUSINESS COMBINATION AND DISPOSITIONS
The Agreement between Avalon Cable of Michigan Holdings, Inc. and the
Company permitted the Company to agree to acquire the 1,822,810 shares
(approximately 38% of the outstanding stock) of Mercom that it did not own (the
"Mercom Acquisition"). On September 10, 1998 the Company and Mercom entered into
a definitive agreement (the "Mercom Merger Agreement") providing for the
acquisition by the Company of all of such shares at a price of $12.00 per share.
The Company completed this acquisition in March 1999.
The total estimated consideration payable in conjunction with the Mercom
Acquisition, excluding fees and expenses was $21,900.
In March 1999, Avalon Michigan Inc. acquired the cable television systems
of Nova Cablevision, Inc., Nova Cablevision VI, L.P. and Nova Cablevision VII,
L.P. for approximately $7,800, excluding transaction fees.
In July 1997, Mercom sold its cable system in Port St. Lucie, Florida for
cash of approximately $3,500. The Company realized a pretax gain of $2,571 on
the transaction.
F-61
<PAGE> 73
CABLE MICHIGAN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
DECEMBER 31, 1998
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.
F-62
<PAGE> 74
CABLE MICHIGAN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
DECEMBER 31, 1998
6. INCOME TAXES
The income tax provision (benefit) in the accompanying consolidated
financial statements of operations is comprised of the following:
<TABLE>
<CAPTION>
1996 1997 1998
------- ------- -------
<S> <C> <C> <C>
Current
Federal..................................................... $(6,700) $ 245 $ 320
State....................................................... -- -- 28
------- ------- -------
Total Current............................................... (6,700) 245 348
------- ------- -------
Deferred:
Federal..................................................... 988 (4,359) (2,074)
State....................................................... -- -- (183)
------- ------- -------
Total Deferred.............................................. 988 (4,359) (2,257)
------- ------- -------
Total (benefit) for income taxes............................ $(5,712) $(4,114) $(1,909)
======= ======= =======
</TABLE>
The benefit for income taxes is different from the amounts computed by
applying the U.S. statutory federal tax rate of 35% for 1996, 34% for 1997 and
35% for the period from January 1, 1998 to November 5, 1998. The differences are
as follows:
<TABLE>
<CAPTION>
YEAR ENDED PERIOD FROM
DECEMBER 31, JANUARY 1, 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.
F-63
<PAGE> 75
CABLE MICHIGAN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
DECEMBER 31, 1998
Temporary differences that give rise to a significant portion of deferred
tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, NOVEMBER 5,
1997 1998
------------ -----------
<S> <C> <C>
NOL carryforwards................................... $ 1,588 $ 1,132
Alternative minimum tax credits..................... 141 141
Reserves............................................ 753 210
Other, net.......................................... 230 309
-------- --------
Total deferred assets............................... 2,712 1,792
-------- --------
Property, plant and equipment....................... (11,940) (10,515)
Intangible assets................................... (11,963) (10,042)
-------- --------
Total deferred liabilities.......................... (23,903) (20,557)
-------- --------
Subtotal............................................ (21,191) (18,765)
Valuation allowance................................. -- --
-------- --------
Total deferred taxes................................ $(21,191) $(18,765)
======== ========
</TABLE>
In the opinion of management, based on the future reversal of taxable
temporary differences, primarily depreciation and amortization, the Company will
more likely than not be able to realize all of its deferred tax assets. As a
result, the net change in the valuation allowance for deferred tax assets during
1997 was a decrease of $1,262, which $72 related to Mercom of Florida.
Due to the sale of Mercom of Florida, the Company's deferred tax
liabilities decreased by $132.
7. DEBT
Long-term debt outstanding at November 5, 1998 is as follows:
<TABLE>
<CAPTION>
DECEMBER 31, NOVEMBER 5,
1997 1998
------------ -----------
<S> <C> <C>
Term Credit Facility................................ $100,000 $100,000
Revolving Credit Facility........................... 28,000 20,000
Term Loan........................................... 15,000 15,000
-------- --------
Total............................................... 143,000 135,000
Current portion of long-term debt................... -- 15,000
-------- --------
Total Long-Term Debt................................ $143,000 $120,000
======== ========
</TABLE>
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").
F-64
<PAGE> 76
CABLE MICHIGAN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
DECEMBER 31, 1998
The interest rate on the Credit Facilities will be, at the election of the
Company, based on either a LIBOR or a Base Rate option (6.25% at November 5,
1998) (each as defined in the Credit Agreement).
The entire amount of the Term Credit Facility has been drawn and as of
November 5, 1998, $100,000 of the principal was outstanding thereunder. The
entire amount of the Revolving Credit Facility is available to the Company until
June 30, 2002. As of November 5, 1998, $20,000 of principal was outstanding
thereunder. Revolving loans may be repaid and reborrowed from time to time.
The Term Credit Facility is payable over six years in quarterly
installments, from September 30, 1999 through June 30, 2005. Interest only is
due through June 1999. The Credit Agreement is currently unsecured.
The Credit Agreement contains restrictive covenants which, among other
things, require the Company to maintain certain debt to cash flow, interest
coverage and fixed charge coverage ratios and place certain limitations on
additional debt and investments. The Company does not believe that these
covenants will materially restrict its activities.
Term Loan
On September 30, 1997, the Company assumed all obligations of CTE under a
$15 million credit facility extended by a separate group of lenders for which
First Union National Bank also acts as agent (the "$15 Million Facility"). The
$15 Million Facility matures in a single installment on June 30, 1999 and is
collateralized by a first priority pledge of all shares of Mercom owned by the
Company. The $15 Million Facility has interest rate provisions (6.25% at
November 5, 1998), covenants and events of default substantially the same as the
Credit Facilities.
On November 6, 1998, the long-term debt of the Company was paid off in
conjunction with the closing of the merger.
Mercom debt
In August 1997, the Mercom revolving credit agreement for $2,000 expired.
Mercom had no borrowings under the revolving credit agreement in 1996 or 1997.
On September 29, 1997, the Company purchased and assumed all of the bank's
interest in the term credit agreement and the note issued thereunder.
Immediately after the purchase, the term credit agreement was amended in order
to, among other things, provide for less restrictive financial covenants,
eliminate mandatory amortization of principal and provide for a bullet maturity
of principal on December 31, 2002, and remove the change of control event of
default. Mercom's borrowings under the term credit agreement contain pricing and
security provisions substantially the same as those in place prior to the
purchase of the loan. The borrowings are secured by a pledge of the stock of
Mercom's subsidiaries and a first lien on certain of the assets of Mercom and
its subsidiaries, including inventory, equipment and receivables. At November 5,
1998, $14,151 of 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
F-65
<PAGE> 77
CABLE MICHIGAN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
DECEMBER 31, 1998
opportunities to key employees when shareholders of the Company have received a
corresponding benefit through appreciation in the value of Cable Michigan Common
Stock.
The 1997 Plan contemplates the issuance of incentive stock options, as well
as stock options that are not designated as incentive stock options,
performance-based stock options, stock appreciation rights, performance share
units, restricted stock, phantom stock units and other stock-based awards
(collectively, "Awards"). Up to 300,000 shares of Common Stock, plus shares of
Common Stock issuable in connection with the Distribution related option
adjustments, may be issued pursuant to Awards granted under the 1997 Plan.
All employees and outside consultants to the Company and any of its
subsidiaries and all Directors of the Company who are not also employees of the
Company are eligible to receive discretionary Awards under the 1997 Plan.
Unless earlier terminated by the Board, the 1997 Plan will expire on the
10th anniversary of the Distribution. The Board or the Compensation Committee
may, at any time, or from time to time, amend or suspend and, if suspended,
reinstate, the 1997 Plan in whole or in part.
Prior to the Distribution, certain employees of the Company were granted
stock option awards under C-TEC's stock option plans. In connection with the
Distribution, 380,013 options covering Common Stock were issued. Each C-Tec
option was adjusted so that each holder would hold options to purchase shares of
Commonwealth Telephone Enterprise Common Stock, RCN Common Stock and Cable
Michigan Common Stock. The number of shares subject to, and the exercise price
of, such options were adjusted to take into account the Distribution and to
ensure that the aggregate intrinsic value of the resulting RCN, the Company and
Commonwealth Telephone Enterprises options immediately after the Distribution
was equal to the aggregate intrinsic value of the C-TEC options immediately
prior to the Distribution.
Information relating to the Company stock options is as follows:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
NUMBER OF EXERCISE
SHARES PRICE
--------- --------
<S> <C> <C>
Outstanding December 31, 1995............................... 301,000
Granted..................................................... 33,750 $ 8.82
Exercised................................................... (7,250) --
Canceled.................................................... (35,500) 10.01
------- ------
Outstanding December 31, 1996............................... 292,000 8.46
Granted..................................................... 88,013 8.82
Exercised................................................... -- --
Canceled.................................................... (375) 10.01
------- ------
Outstanding December 31, 1997............................... 379,638 8.82
Granted..................................................... 47,500 31.25
Exercised................................................... (26,075) 26.21
Canceled.................................................... (10,250) --
------- ------
Outstanding November 5, 1998................................ 390,813 $11.52
======= ======
Shares exercisable November 5, 1998......................... 155,125 $ 8.45
</TABLE>
The range of exercise prices for options outstanding at November 5, 1998
was $8.46 to $31.25.
F-66
<PAGE> 78
CABLE MICHIGAN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
DECEMBER 31, 1998
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.
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 DECEMBER 31, FROM JANUARY 1,
------------------ 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.
F-67
<PAGE> 79
CABLE MICHIGAN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
DECEMBER 31, 1998
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.
9. PENSIONS AND EMPLOYEE BENEFITS
Prior to the Distribution, the Company's financial statements reflect the
costs experienced for its employees and retirees while included in the C-TEC
plans.
Through December 31, 1996, substantially all employees of the Company were
included in a trusteed noncontributory defined benefit pension plan, maintained
by C-TEC. Upon retirement, employees are provided a monthly pension based on
length of service and compensation. C-TEC funds pension costs to the extent
necessary to meet the minimum funding requirements of ERISA. Substantially, all
employees of C-TEC's Pennsylvania cable television operations (formerly Twin
Country Trans Video, Inc.) were covered by an underfunded plan which was merged
into C-TEC's overfunded plan on February 28, 1996.
The information that follows relates to the entire C-TEC noncontributory
defined benefit plan. The components of C-TEC's pension cost are as follows for
1996:
<TABLE>
<S> <C>
Benefits earned during the year (service costs)............. $2,365
Interest cost on projected benefit obligation............... 3,412
Actual return on plan assets................................ (3,880)
Other components -- net..................................... (1,456)
------
Net periodic pension cost................................... $ 441
======
</TABLE>
The following assumptions were used in the determination of the
consolidated projected benefit obligation and net periodic pension cost (credit)
for December 31, 1996:
<TABLE>
<S> <C>
Discount Rate............................................... 7.5%
Expected long-term rate of return on plan assets............ 8.0%
Weighted average long-term rate of compensation increases... 6.0%
</TABLE>
The Company's allocable share of the consolidated net periodic pension
costs (credit), based on the Company's proportionate share of consolidated
annualized salaries as of the valuation date, was approximately $10 for 1996.
These amounts are reflected in operating expenses. As discussed below, no
pension cost (credit) was recognized in 1997.
In connection with the restructuring, C-TEC completed a comprehensive study
of its employee benefit plans in 1996. As a result of this study, effective
December 31, 1996, in general, employees of the Company no longer accrue
benefits under the defined benefit pension plans and became fully vested in
their benefit accrued
F-68
<PAGE> 80
CABLE MICHIGAN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
DECEMBER 31, 1998
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.
10. 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.
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.
F-69
<PAGE> 81
CABLE MICHIGAN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
DECEMBER 31, 1998
11. AFFILIATE AND RELATED PARTY TRANSACTIONS
The Company has the following transactions with affiliates:
<TABLE>
<CAPTION>
FOR THE YEAR FOR THE
ENDED PERIOD ENDED
------------------ NOVEMBER 5,
1996 1997 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.
12. OFF BALANCE SHEET RISK AND CONCENTRATION OF CREDIT RISK
The Company places its cash and temporary investments with high credit
quality financial institutions. The Company also periodically evaluates the
creditworthiness of the institutions with which it invests. The Company does,
however, maintain unsecured cash and temporary cash investment balances in
excess of federally insured limits.
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.
13. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments for which it is practicable to estimate
that value:
a. The fair value of the revolving credit agreement is considered to
be equal to carrying value since the debt re-prices at least every six
months and the Company believes that its credit risk has not changed from
the time the floating rate debt was borrowed and therefore, would obtain
similar rates in the current market.
b. The fair value of the cash and temporary cash investments
approximates fair value because of the short maturity of these instruments.
F-70
<PAGE> 82
CABLE MICHIGAN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
DECEMBER 31, 1998
14. QUARTERLY INFORMATION (UNAUDITED)
The Company estimated the following quarterly data based on assumptions
which it believes are reasonable. The quarterly data may differ from quarterly
data subsequently presented in interim financial statements.
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------
<S> <C> <C> <C> <C>
1998
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) (0.23)
1997
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 (0.16)
</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-71
<PAGE> 83
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunder duly authorized.
<TABLE>
<S> <C>
CC V HOLDINGS, LLC
Dated March 28, 2000 By: CHARTER COMMUNICATIONS, INC.
------------------------------------------
its Manager
By: /s/ JERALD L. KENT
------------------------------------------
Name: Jerald L. Kent
Title: President, Chief Executive Officer
CC V HOLDINGS FINANCE, INC.
Dated March 28, 2000 By: /s/ JERALD L. KENT
------------------------------------------
Name: Jerald L. Kent
Title: President, Chief Executive Officer
</TABLE>
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<S> <C> <C>
By: /s/ JERALD L. KENT March 28, 2000
-----------------------------------------------------
Name: Jerald L. Kent
Title: President and Chief Executive Officer of
Charter Communications, Inc. (Manager); CC V
Holdings, LLC; and CC V Holdings Finance, Inc.
By: /s/ KENT D. KALKWARF March 28, 2000
-----------------------------------------------------
Name: Kent D. Kalkwarf
Title: Senior Vice President and Chief Financial
Officer (Principal Financial Officer and Principal
Accounting Officer) of Charter Communications, Inc.
(Manager); CC V Holdings, LLC; and CC V Holdings
Finance, Inc.
</TABLE>
10
<PAGE> 84
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION PAGE
- ------- ----------- ----
<C> <S> <C>
2.1 Taconic Technology Corp. acquisition agreement.(1)
2.2 Securities Purchase Agreement, dated as of May 13, 1999, by
and between Avalon Cable Holdings, LLC, Avalon Investors,
L.L.C., Avalon Cable of Michigan Holdings, Inc., CC V
Holdings, LLC (formerly known as Avalon Cable LLC), Charter
Communications Holdings LLC and Charter Communications,
Inc.(1)
3.1 Certificate of Formation of CC V Holdings, LLC (formerly
known as Avalon Cable LLC).(2)
3.1(a) Amendment to Certificate of Formation of CC V Holdings, LLC E-3
(formerly known as Avalon Cable LLC).
3.2 Certificate of Incorporation of CC V Holdings Finance, Inc.
(formerly known as Avalon Cable Holdings Finance, Inc.).(2)
3.5 Amended and Restated Limited Liability Company Agreement of
CC V Holdings, LLC (formerly known as Avalon Cable LLC).(2)
3.6 Amended and Restated By-Laws of CC V Holdings Finance, Inc. E-4
(formerly known as Avalon Cable Holdings Finance, Inc.).
4.1 Indenture, dated as of December 10, 1998, by and among CC V
Holdings, LLC (formerly known as Avalon Cable LLC), Avalon
Cable of Michigan Holdings, Inc. and CC V Holdings Finance,
Inc. (formerly known as Avalon Cable Holdings Finance,
Inc.), as Issuers and The Bank of New York, as Trustee for
the Notes.(2)
4.2 Supplemental Indenture, dated as of March 26, 1999, by and
among CC V Holdings, LLC (formerly known as Avalon Cable
LLC), Avalon Cable of Michigan Holdings, Inc. and CC V
Holdings Finance, Inc. (formerly known as 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.(2)
10.10 Credit Agreement, dated as of November 15, 1999, among CC V
Holdings, LLC (formerly known as Avalon Cable LLC), CC
Michigan, LLC (formerly known as Avalon Cable of Michigan
LLC), and CC New England, LLC (formerly known as Avalon
Cable of New England LLC), several banks and other financial
institutions or entities named therein, First Union National
Bank and PNC Bank, National Association, as syndication
agents, Bank of Montreal, Chicago Branch and Mercantile Bank
National Association, as co-documentation agents, and Bank
of Montreal, as administrative agent.(3)
10.10(a) First Amendment to Credit Agreement, dated December 21,
1999, by and among CC Michigan, LLC (formerly known as
Avalon Cable of Michigan LLC) and CC New England, LLC
(formerly known as Avalon Cable of New England LLC) as
borrowers, CC V Holdings, LLC (formerly known as Avalon
Cable LLC) as guarantor and several banks and other
financial institutions named therein.(4)
27.1 Financial Data Schedule. E-23
</TABLE>
- -------------------------
(1) Incorporated by reference to Amendment No. 1 to the Registration Statement
on Form S-4 (File No. 333-75453) filed by CC Michigan, LLC (formerly known
as Avalon Cable of Michigan LLC), CC New England, LLC (formerly known as
Avalon Cable of New England LLC), Avalon Cable Finance, Inc. and Avalon
Cable of Michigan, Inc. on May 28, 1999.
(2) Incorporated by reference to Amendment No. 1 to the Registration Statement
on Form S-4 (File No. 333-75415) filed by CC V Holdings, LLC (formerly known
as Avalon Cable LLC), CC V Holdings
E-1
<PAGE> 85
Finance, Inc. (formerly known as Avalon Cable Holdings Finance, Inc.),
Avalon Cable of Michigan Holdings, Inc. and Avalon Cable of Michigan, Inc.
on May 28, 1999.
(3) Incorporated by reference to the report on Form 8-K of Charter
Communications, Inc. (File No. 333-83887) filed on November 29, 1999.
(4) Incorporated by reference to the Annual Report on Form 10-K of Charter
Communications, Inc. (File No. 000-27927) filed on March 28, 2000.
E-2
<PAGE> 1
CERTIFICATE OF AMENDMENT
OF
AVALON CABLE LLC
AVALON CABLE LLC, a limited liability company organized and existing under
and by virtue of the Limited Liability Company Act of the State of Delaware,
DOES HEREBY CERTIFY:
1. Article 1. of the Certificate of Formation of the Limited Liability
Company is hereby amended to read as follows:
1. Name. The name of the Limited Liability Company is CC V HOLDINGS,
LLC
2. That the aforesaid amendment was duly adopted in accordance with the
applicable provisions of Section 18-202 of Title 6 of the Delaware Code.
IN WITNESS WHEREOF, said company has caused this Certificate to be signed
by an authorized person this 14th day of December, 1999.
/s/ LINDA C. REISNER
--------------------------------------
Name: Linda C. Reisner, Vice President
Authorized Person
STATE OF DELAWARE
SECRETARY OF STATE
DIVISION OF CORPORATIONS
FILED 09:00 AM 12/14/1999
991538103 -- 2958104
E-3
<PAGE> 1
AMENDED AND RESTATED BYLAWS
OF
AVALON CABLE HOLDINGS FINANCE, INC.
E-4
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
ARTICLE I -- OFFICES........................................
1.01 REGISTERED OFFICE...................................
1.02 OTHER OFFICES.......................................
ARTICLE II -- MEETINGS OF STOCKHOLDERS......................
2.01 ANNUAL MEETING......................................
2.02 SPECIAL MEETINGS....................................
2.03 NOTICE OF MEETING...................................
2.04 LIST OF STOCKHOLDERS................................
2.05 QUORUM..............................................
2.06 ADJOURNMENTS........................................
2.07 VOTING..............................................
2.08 PROXIES.............................................
2.09 JUDGES OF ELECTION..................................
2.10 WRITTEN CONSENT.....................................
ARTICLE III -- BOARD........................................
3.01 NUMBER..............................................
3.02 ELECTION AND TERM OF OFFICE.........................
3.03 VACANCIES AND ADDITIONAL DIRECTORSHIPS..............
3.04 POWERS..............................................
3.05 RESIGNATION OF DIRECTORS............................
3.06 REMOVAL OF DIRECTORS................................
3.07 COMPENSATION OF DIRECTORS...........................
3.08 RELIANCE ON ACCOUNTS AND REPORTS, ETC...............
ARTICLE IV -- MEETINGS OF THE BOARD.........................
4.01 PLACE...............................................
4.02 REGULAR MEETINGS....................................
4.03 SPECIAL MEETINGS....................................
4.04 QUORUM..............................................
4.05 ADJOURNED MEETINGS..................................
4.06 WRITTEN CONSENT.....................................
4.07 COMMUNICATIONS EQUIPMENT............................
4.08 WAIVER OF NOTICE....................................
4.09 OFFICERS OF THE BOARD...............................
ARTICLE V -- COMMITTEES OF THE BOARD........................
5.01 DESIGNATION, POWER AND ALTERNATE MEMBERS AND TERM OF
OFFICE..............................................
5.02 MEETINGS, NOTICES AND RECORDS.......................
5.03 QUORUM AND MANNER OF ACTING.........................
5.04 RESIGNATIONS........................................
5.05 REMOVAL.............................................
5.06 VACANCIES...........................................
</TABLE>
E-5
<PAGE> 3
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
ARTICLE VI -- OFFICERS......................................
6.01 OFFICERS AND MANAGEMENT COMMITTEE...................
6.02 DUTIES..............................................
6.03 RESIGNATIONS........................................
6.04 REMOVAL.............................................
6.05 VACANCIES...........................................
6.06 SECRETARY...........................................
6.07 ASSISTANT SECRETARIES...............................
6.08 TREASURER...........................................
6.09 ASSISTANT TREASURERS................................
ARTICLE VII -- INDEMNIFICATION..............................
7.01 ACTIONS OTHER THAN BY OR IN THE RIGHT OF THE
CORPORATION.........................................
7.02 ACTIONS BY OR IN THE RIGHT OF THE CORPORATION.......
7.03 DETERMINATION OF RIGHT OF INDEMNIFICATION...........
7.04 INDEMNIFICATION AGAINST EXPENSES OF SUCCESSFUL
PARTY...............................................
7.05 ADVANCE OF EXPENSES.................................
7.06 OTHER RIGHTS AND REMEDIES...........................
7.07 INSURANCE...........................................
7.08 CONSTITUENT CORPORATIONS............................
7.09 EMPLOYEE BENEFIT PLANS..............................
7.10 BROADEST LAWFUL INDEMNIFICATION.....................
7.11 TERM................................................
7.12 SEVERABILITY........................................
7.13 AMENDMENTS..........................................
ARTICLE VIII -- DEPOSIT OF CORPORATE FUNDS..................
8.01 BORROWING...........................................
8.02 DEPOSITS............................................
8.03 CHECKS, DRAFTS, ETC.................................
ARTICLE IX -- CERTIFICATES OF STOCK.........................
9.01 STOCK CERTIFICATES..................................
9.02 BOOKS OF ACCOUNT AND RECORD OF STOCKHOLDERS.........
9.03 TRANSFER OF SHARES..................................
9.04 REGULATIONS.........................................
9.05 LOST, STOLEN OR DESTROYED CERTIFICATES..............
9.06 STOCKHOLDER'S RIGHT OF INSPECTION...................
9.07 REPRESENTATION OF SHARES OF OTHER CORPORATIONS......
</TABLE>
E-6
<PAGE> 4
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
ARTICLE X -- MISCELLANEOUS..................................
10.01 BUDGETS............................................
10.02 RECORD DATES.......................................
10.03 DIVIDENDS..........................................
10.04 FISCAL YEAR........................................
10.05 CORPORATE SEAL.....................................
10.06 AMENDMENTS.........................................
</TABLE>
E-7
<PAGE> 5
AMENDED AND RESTATED BYLAWS
OF
AVALON CABLE HOLDINGS FINANCE, INC.
A DELAWARE CORPORATION
(THE "CORPORATION")
ARTICLE I -- OFFICES
1.01 REGISTERED OFFICE.
The registered office shall be maintained at 30 Old Rudnick Lane, Kent
County, Dover, Delaware 19901 and CorpAmerica, Inc. is the registered agent.
1.02 OTHER OFFICES.
The Corporation may also have other offices, either within or without the
State of Delaware, at such place or places as the Board of Directors (the
"Board") may from time to time appoint or the business of the Corporation may
require.
ARTICLE II -- MEETINGS OF STOCKHOLDERS
2.01 ANNUAL MEETING.
The date of the annual meeting of the stockholders for the election of
directors and for the transaction of such other business as properly may come
before such meeting shall be determined by resolution of the Board to be a
specific day in each year, if not a legal holiday, and, if a legal holiday, on
the next succeeding business day, at the time and place and within or without
the State of Delaware as may be designed by the Board and set forth in the
notice of the meeting or a duly executed waiver of notice thereof, provided,
however, that in any year, in advance of the date specified for the annual
meeting, the Board may act to change the meeting date for that year.
2.02 SPECIAL MEETINGS.
Special meetings of the stockholders for any proper purpose or purposes may
be called at any time by the Board or an Executive Officer, to be held on the
date, at the time and place within or without the State of Delaware as the Board
or an Executive Officer, whichever has called the meeting, shall direct. A
special meeting of the stockholders also shall be called whenever stockholders
owning a majority of the shares of the Corporation then issued and outstanding
and entitled to vote on all of the matters to be submitted to stockholders of
the Corporation at such special meeting shall make written application to an
Executive Officer. Any such written request shall state a proper purpose or
purposes of the meeting and shall be delivered to an Executive Officer.
2.03 NOTICE OF MEETING.
Notice, signed by the Secretary of the Corporation or an Executive Officer,
of every annual or special meeting of stockholders shall be prepared in writing
and personally delivered; mailed, postage prepaid; or sent by facsimile
transmission to each stockholder entitled to vote at such meeting not less than
ten (10) nor more than sixty (60) days before the meeting, except as otherwise
provided by statute. Every notice of a meeting of the stockholders shall state
the place, date and hour of the meeting, and in the case of a special meeting,
shall also state the purpose or purposes for which the meeting is called. If
mailed, such notice shall be directed to a stockholder at his address as it
shall appear on the stock record book of the Corporation, unless the stockholder
shall have filed with the Secretary a written request that notice intended for
him or her be mailed to some other address, in which case it shall be mailed to
the address designated in such request. Notice shall be deemed given when
personally delivered or deposited in the United States mail, as the case may be;
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provided, however, that such notice may also be given by telegram, facsimile or
other means of electronically transmitted written copy and in such case shall be
deemed given when ordered or, if a delayed delivery is ordered, as of such
delayed delivery time.
2.04 LIST OF STOCKHOLDERS.
A complete list of the stockholders entitled to vote at each meeting of
stockholders, arranged in alphabetical order and showing the address of each
such stockholder and the number of shares registered in the name of each such
stockholder, shall be open to the examination of any stockholder, for any
purpose germane to such meeting, during ordinary business hours, for a period of
at least ten (10) days prior to the meeting, either at a place within the city
where the meeting is to be held, which place shall be specified in the notice of
such meeting, or, if not specified, at the place where the meeting is to be
held. The list shall also be produced and kept at the time and place of the
meeting and during the whole time thereof, and may be inspected by any
stockholder who is present.
2.05 QUORUM.
The presence at any meeting, in person or by proxy, of the holders of
record of a majority of the shares then issued and outstanding and entitled to
vote shall be necessary and sufficient to constitute a quorum for the
transaction of business, except where otherwise provided by statute.
2.06 ADJOURNMENTS.
In the absence of a quorum, stockholders representing a majority of the
shares then issued and outstanding and entitled to vote, present in person or by
proxy, or, if no stockholder entitled to vote is present in person or by proxy,
any officer entitled to preside at or act as secretary of such meeting, may
adjourn the meeting from time to time without notice other than announcement at
the meeting, until a quorum shall be present or represented. At such adjourned
meeting at which a quorum shall be present or represented, any business may be
transacted which might have been transacted at the meeting originally noticed.
If the adjournment is for more than thirty (30) days, or if after the
adjournment a new record date is fixed for the adjourned meeting, a notice of
the adjourned meeting shall be given to each stockholder of record entitled to
vote at the meeting.
2.07 VOTING.
(a) At each meeting of the stockholders, each stockholder shall be
entitled to vote in person or by proxy each share or fractional share of the
stock of the Corporation which has voting rights on the matter in question and
which shall have been held by him or her and registered in his name on the books
of the Corporation:
(i) on the date fixed pursuant to Section 10.02 of these Bylaws as
the record date for the determination of stockholders entitled to notice of
and to vote at such meeting, or
(ii) if no such record date shall have been so fixed, then (x) at the
close of business on the day next preceding the day on which notice of the
meeting shall be given or (y) if notice of the meeting shall be waived, at
the close of business on the day next preceding the day on which the
meeting shall be held.
(b) Shares of its own stock belonging to the Corporation or to another
corporation, if a majority of the shares entitled to vote in the election of
directors in such other corporation is held, directly or indirectly, by the
Corporation, shall neither be entitled to vote nor be counted for quorum
purposes. Persons holding stock of the Corporation in a fiduciary capacity shall
be entitled to vote such stock. Persons whose stock is pledged shall be entitled
to vote, unless in the transfer by the pledgor on the books of the Corporation
he or she shall have expressly empowered the pledgee to vote thereon, in which
case only the pledgee, or his or her proxy, may represent such stock and vote
thereon. Stock having voting power standing of record in the names of two or
more persons, whether fiduciaries, members of a partnership, joint tenants,
tenants in common, tenants by the entirety or otherwise, or with respect to
which two or more persons have the same fiduciary relationship, shall be voted
in accordance with the provisions of the General Corporation Law of Delaware.
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(c) At any meeting of the stockholders all matters except as otherwise
provided in the Certificate of Incorporation, in these Bylaws, or by law, shall
be decided by the vote of a majority in voting interest of the stockholders
present in person or by proxy and entitled to vote thereat and thereon. The vote
at any meeting of the stockholders on any question need not be by ballot, unless
so directed by the chairman of the meeting. On a vote by ballot, each ballot
shall be signed by the stockholder voting, or by his proxy if there be such
proxy, and it shall state the number of shares voted.
2.08 PROXIES.
Any stockholder is entitled to vote by proxy, provided that the instrument
authorizing such proxy to act shall have been executed in writing (which shall
include telegram, facsimile or other means of electronically transmitted written
copy) by the stockholder himself or herself or by his or her duly authorized
attorney-in-fact and delivered to the secretary of the meeting. No proxy shall
be voted or acted upon after three years from its date, unless the proxy
provides for a longer period.
The attendance at any meeting of a stockholder who may theretofore have
given a proxy shall not have the effect of revoking the same unless he shall in
writing so notify the secretary of the meeting prior to the voting of the proxy.
2.09 JUDGES OF ELECTION.
The Board may appoint judges of election to serve at any election of
directors and at balloting on any other matter that may properly come before a
meeting of stockholders. If no such appointment shall be made, or if any of the
judges so appointed shall fail to attend, or refuse or be unable to serve, then
such appointment may be made by the presiding officer of the meeting at the
meeting.
2.10 WRITTEN CONSENT.
Any action which may be taken at any annual or special meeting of
stockholders may be taken without a meeting and without a vote, if a consent in
writing, setting forth the action so taken, shall be signed by the holders of
outstanding stock having not less than the minimum number of votes that would be
necessary to authorize or take such action at a meeting at which all shares
entitled to vote thereon were present and voted. Whenever any such action is
taken without a meeting by less than unanimous consent, all stockholders who
have not consented in writing must be promptly informed in writing of such
action.
ARTICLE III -- BOARD
3.01 NUMBER.
The number of directors which shall constitute the whole Board shall be
fixed at one (1) person, until changed from time to time by resolution of the
Board or stockholders at the annual meeting or any special meeting called for
that purpose.
3.02 ELECTION AND TERM OF OFFICE.
Directors shall be elected at the annual meeting of the stockholders except
as provided in Section 3.03 of this Article III. Each director (whether elected
at an annual meeting or to fill a vacancy or otherwise) shall continue in office
until a successor shall have been elected and qualified or until his or her
death, resignation or removal in the manner hereinafter provided, whichever
shall first occur.
3.03 VACANCIES AND ADDITIONAL DIRECTORSHIPS.
If any vacancy shall occur among the directors by reason of death,
resignation, or removal, or as the result of an increase in the number of
directorships, the directors then in office shall continue to act and may fill
any such vacancy by a vote of the majority of directors then in office, though
less than a quorum, and each director
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so chosen shall hold office until the next annual election of directors and
until his or her successor shall be duly elected and shall qualify, or until his
or her earlier death, resignation or removal.
3.04 POWERS.
The business of the Corporation shall be managed by its Board, which may
exercise all powers of the Corporation and do all lawful acts and things as are
not by law or by the Certificate of Incorporation or these Bylaws reserved to
the stockholders.
3.05 RESIGNATION OF DIRECTORS.
Any director may resign at any time by giving written notice of such
resignation to the Board or an Executive Officer. Any such resignation shall
take effect at the time specified therein or, if no time be specified, upon
receipt thereof by the Board or an Executive Officer; and unless specified
therein, the acceptance of such resignation shall not be necessary to make it
effective.
3.06 REMOVAL OF DIRECTORS.
At the annual meeting or any special meeting of the stockholders, duly
called as provided in these Bylaws, any director or directors may, by the
affirmative vote of the holders of a majority of the shares of stock issued and
outstanding and entitled to vote for the election of directors, be removed from
office, either with or without cause. At such meeting a successor or successors
may be elected by a majority of the votes cast, or if any such vacancy is not so
filled, it may be filled by the directors as provided in Section 3.03 of this
Article III.
3.07 COMPENSATION OF DIRECTORS.
Directors may receive such reasonable compensation for their services,
whether in the form of salary or a fixed fee for attendance at Board or Board
committee meetings, with expenses, if any, as the Board may from time to time
determine. Nothing herein contained shall be construed to preclude any director
from serving the Corporation in any other capacity and receiving compensation
therefor.
3.08 RELIANCE ON ACCOUNTS AND REPORTS, ETC.
A director, or a member of any committee designed by the Board shall, in
the performance of his duties, be fully protected in relying in good faith upon
the records of the Corporation and upon information, opinions, reports or
statements presented to the Corporation by any of the Corporation's officers or
employees, or committees designated by the Board, or by any other person as to
the matters the director or member reasonably believes are within such other
person's professional or expert competence and who has been selected with
reasonable care by or on behalf of the Corporation.
ARTICLE IV -- MEETINGS OF THE BOARD
4.01 PLACE.
The Board of the Corporation may hold meetings, both regular and special,
either within or without the State of Delaware.
4.02 REGULAR MEETINGS.
The Board by resolution may provide for the holding of regular meetings and
may fix the times and places at which such meetings shall be held. Notice of
regular meetings shall not be required to be given if the time and place has
been fixed by Board resolution, provided that whenever the time or place of
regular meetings shall be fixed or changed, notice of such action shall be
mailed promptly to each director who shall not have been present at the meeting
at which such action was taken. If the time and place for regular meetings has
not been fixed by the Board, then at least 10 days written notice addressed to
him or her at his or her residence or usual place of business, unless he or she
shall have filed with the Secretary a written request that notices
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intended for him or her be mailed to some other address, in which case it shall
be mailed to the address designated in such request, or shall be sent to him or
her at such place by telegram, facsimile or other means of electronically
transmitted written copy.
4.03 SPECIAL MEETINGS.
Special meetings of the Board may be called by any Executive Officer and
shall be called by any Executive Officer at the written request of any director.
Except as otherwise required by statute, notice of each special meeting shall be
given to each director, if by mail, when addressed to him or her at his or her
residence or usual place of business, unless he or she shall have filed with the
Secretary a request that notices intended for him or her be mailed to some other
address, in which case it shall be mailed to the address designated in such
request, at least 72 hours before, or shall be sent to him or her at such place
by telegram, facsimile, telephone or other means of electronically transmitted
written copy, or delivered to him or her personally, at least 48 hours before
the date on which the meeting is to be held. Such notice shall state the time
and place of such meeting, but need not state the purposes thereof, unless
otherwise required by statute, the Certificate of Incorporation of the
Corporation or these Bylaws.
4.04 QUORUM.
At any meeting of the Board two-thirds ( 2/3) of the whole Board shall
constitute a quorum for the transaction of business, and the act of the majority
of those present at any meeting at which a quorum is present shall be sufficient
for the act of the Board, except as may be otherwise specifically provided by
statute or by the Certificate of Incorporation of the Corporation.
4.05 ADJOURNED MEETINGS.
If a quorum shall not be present at a meeting of the Board, the directors
present thereat may adjourn the meeting from time to time, until a quorum shall
be present. Seventy-two (72) hours' notice of any such adjournment shall be
given personally to each director who was not present at the meeting at which
such adjournment was taken, and unless announced at the meeting, to the other
directors; provided, that then ten (10) days' notice shall be given if notice is
given by mail.
4.06 WRITTEN CONSENT.
Any action required or permitted to be taken at any meeting of the Board
may be taken without a meeting if all the members of the Board consent thereto
in writing, and the writing or writings are filed with the minutes of the
proceedings of the Board.
4.07 COMMUNICATIONS EQUIPMENT.
Any one or more members of the Board may participate in any meeting of the
Board by means of conference telephone or similar communications equipment by
means of which all persons participating in the meeting can hear each other, and
participation by such means shall be deemed to constitute presence in person at
such meeting.
4.08 WAIVER OF NOTICE.
Notice of any meeting need not be given to any directors who shall attend
such meeting in person or shall waive notice thereof, before or after such
meeting, in writing or by telegram, facsimile or other means of electronically
transmitted written copy.
4.09 OFFICERS OF THE BOARD.
The Board shall have a Chairman of the Board and may, at the discretion of
the Board, have one or more Vice Chairmen. The Chairman of the Board and the
Vice Chairmen shall be appointed from time to time by the Board and shall have
such powers and duties as shall be designated by the Board.
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ARTICLE V -- COMMITTEES OF THE BOARD
5.01 DESIGNATION, POWER AND ALTERNATE MEMBERS AND TERM OF OFFICE.
The Board may, by resolution passed by a majority of the whole Board,
designate one (1) or more committees. Each such committee shall consist of one
(1) or more of the directors of the Corporation. Any such committee, to the
extent provided in such resolution, shall have and may exercise the power of the
Board in the management of the business and affairs of the Corporation, and may
authorize the seal of the Corporation to be affixed to all papers which may
require it. The Board may designate one (1) or more directors as alternate
members of any committee who, in the order specified by the Board, may replace
any absent or disqualified member at any meeting of the committee. If at a
meeting of any committee one (1) or more of the members thereof should be absent
or disqualified, and if either the Board has not so designated any alternate
member or members, or the number of absent or disqualified members exceeds the
number of alternate members who are present at such meeting, then the member or
members of such committee (including alternates) present at any meeting and not
disqualified from voting, whether or not he or she or they constitute a quorum,
may unanimously appoint another director to act at the meetings in the place of
any such absent or disqualified member. The term of office of the members of
each committee shall be as fixed from time to time by the Board, subject to the
term of office of the directors and these Bylaws; provided, however, that any
committee member who ceases to be a member of the Board shall ipso facto cease
to be a committee member. Each committee shall appoint a secretary, who may be
the Secretary or an Assistant Secretary of the Corporation.
5.02 MEETINGS, NOTICES AND RECORDS.
Each committee may provide for the holding of regular meetings, with or
without notice, and a majority of the members of any such committee may fix the
time, place and procedure for any such meeting. Special meetings of each
committee shall be held upon call by or at the direction of its chairman or, if
there be no chairman, by or at the direction of any two (2) of its members, at
the time and place specified in the respective notices or waivers of notice
thereof. Notice of each special meeting of a committee shall be mailed to each
member of such committee, addressed to him or her at his or her residence or
usual place of business, unless he or she shall have filed with the Secretary a
written request that notices intended for him or her be mailed to some other
address, in which case it shall be mailed to the address designated in such
request, at least 72 hours before the day on which the meeting is to be held, or
shall be sent by telegram, facsimile or other means of electronically
transmitted written copy, addressed to him at such place, or telephoned or
delivered to him or her personally, at least 48 hours before the day on which
the meeting is to be held. Notice of any meeting of a committee need not be
given to any member thereof who shall attend the meeting in person or who shall
waive notice thereof by telegram, facsimile or other means of electronically
transmitted written copy. Notice of any adjourned meeting need not be given.
Each committee shall keep a record of its proceedings.
Each committee may meet and transact any and all business delegated to that
committee by the Board by means of a conference telephone or similar
communications equipment provided that all persons participating in the meeting
are able to hear and communicate with each other. Participation in a meeting by
means of conference telephone or similar communication shall constitute presence
in person at such meeting.
5.03 QUORUM AND MANNER OF ACTING.
At each meeting of any committee the presence of a majority of its members
then in office shall be necessary and sufficient to constitute a quorum for the
transaction of business, and the act of a majority of the members present at any
meeting at which a quorum is present shall be the act of such committee; in the
absence of a quorum, a majority of the members present at the time and place of
any meeting may adjourn the meeting from time to time until a quorum shall be
present. Subject to the foregoing and other provisions of these Bylaws and
except as otherwise determined by the Board, each committee may make rules for
the conduct of its business. Any determination made in writing and signed by all
the members of such committee shall be as effective as if made by such committee
at a meeting.
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5.04 RESIGNATIONS.
Any member of a committee may resign at any time by giving written notice
of such resignation to the Corporation, the Board, or an Executive Officer of
the Corporation. Unless otherwise specified in such notice, such resignation
shall take effect upon receipt thereof by the Board or any Executive Officer of
the Corporation.
5.05 REMOVAL.
Any member of any committee may be removed at any time by the affirmative
vote of a majority of the whole Board with or without cause.
5.06 VACANCIES.
If any vacancy shall occur in any committee by reason of death,
resignation, disqualification, removal or otherwise, the remaining members of
such committee, though less than a quorum, shall continue to act until such
vacancy is filled by the Board.
ARTICLE VI -- OFFICERS
6.01 OFFICERS AND MANAGEMENT COMMITTEE.
The Board shall determine the titles and duties of the officers of the
Corporation who shall be responsible for the overall supervision, direction and
control of the business and affairs of the Corporation (hereinafter referred to
as the "Executive Officers"), and shall elect persons to hold such positions.
The Corporation also shall have one or more Executive Vice Presidents and Senior
Vice Presidents, as well as a Treasurer and a Secretary. The Board also may, but
shall not be required to, appoint a Management Committee which shall be
comprised of the Executive Officers plus such other officers as may be selected
by the Board or in the absence of Board action by the Chairman of the Management
Committee. Any Executive Officer or Executive Vice President may, if so
designated by the Board, function in the capacity of Chief Executive Officer,
Chief Financial Officer, or Chief Operating Officer. In the absence or
disability of an elected Executive Officer, another Executive Officer shall
perform such other officer's duties. One of the Executive Officers shall preside
at meetings of stockholders.
The officers of the Corporation may also include one or more Regional or
other Vice Presidents and one or more Assistant Secretaries or Assistant
Treasurers, each of whom shall be elected by the Board or appointed by the
Executive Officers. Any number of offices may be held by the same person subject
to any limits imposed by the General Corporation Law of the State of Delaware;
provided that different officers shall have such titles and duties as may be
necessary to enable the Corporation to sign instruments and stock certificates
which comply with the General Corporation Law of the State of Delaware.
Each officer of the corporation elected by the Board or appointed by the
Executive Officers shall hold office until his or her successor is duly elected
or appointed and qualified or until his or her earlier resignation or removal.
6.02 DUTIES.
All officers, as between themselves and the Corporation, shall have such
authority and perform such duties in the management of the Corporation as may be
provided in these Bylaws, or, to the extent not so provided, as may be provided
by resolution of the Board or the supervising Executive Officers.
6.03 RESIGNATIONS.
Any officer may resign at any time by giving written notice of such
resignation to the Board or any Executive Officer. Unless otherwise specified in
such written notice, such resignation shall take effect upon receipt thereof by
the Board or any such Executive Officer.
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6.04 REMOVAL.
All officers serve at the sole pleasure and in the sole discretion of the
Board. Any Executive Officer or other officer elected by the Board may be
removed at any time, either with or without cause, by the vote of a majority of
all of the directors then in office. Any officers appointed by an Executive
Officer may be removed at any time by an Executive Officer with or without
cause. Such power of removal from office shall not be abridged by any employment
contract or other agreement.
6.05 VACANCIES.
A vacancy in any office by reason of death, resignation, removal,
disqualification or any other cause shall be filled for the unexpired portion of
the term in the manner prescribed by these Bylaws for regular election or
appointment to such office.
6.06 SECRETARY.
The Secretary shall: (a) record all the proceedings of the meetings of the
stockholders, the Board, and all committees of the Board in a book or books to
be kept for that purpose; (b) cause all notices to be duly given in accordance
with the provisions of these Bylaws as required by statute; (c) whenever any
committee shall be appointed in pursuance of a resolution of the Board, furnish
the chairman of such committee with a copy of such resolution; (d) be custodian
of the records and of the seal of the Corporation, and cause such seal to be
affixed to all certificates representing capital stock of the Corporation prior
to the issuance thereof and to all instruments the execution of which on behalf
of the Corporation under its seal shall have been duly authorized; (e) see that
the lists, books, reports, statements, certificates and other documents and
records required by statute are properly kept and filed; (f) have charge of the
stock record and stock transfer books of the Corporation, and exhibit such stock
books at all reasonable times to such persons who are entitled by statute to
have access thereto; and (g) in general, perform all duties incident to the
office of Secretary and such other duties as are given to him or her by these
Bylaws or as from time to time may be assigned to him or her by the Board or the
Executive Officers.
6.07 ASSISTANT SECRETARIES.
At the request of the Secretary or in his or her absence or disability, the
Assistant Secretary designated by him or her (or in the absence of such
designation, the Assistant Secretary designated by the Board or any Executive
Officer) shall perform all the duties of the Secretary, and, when so acting,
shall have all the powers of and be subject to all restrictions upon the
Secretary. The Assistant Secretaries shall perform such other duties as from
time to time may be assigned to them by the Board or the Executive Officers.
6.08 TREASURER.
The Treasurer shall: (a) have charge of and supervision over and be
responsible for the funds, securities, receipts and disbursements of the
Corporation; (b) cause the monies and other valuable effects of the Corporation
to be deposited in the name and to the credit of the Corporation in banks or
trust companies or with bankers or other depositories or to be otherwise dealt
with in such manner as the Board may direct; (c) select authorized depositories
of the Corporation and cause the funds of the Corporation to be disbursed by
checks or drafts upon the authorized depositories of the Corporation, and cause
to be taken and preserved proper vouchers for all monies disbursed; (d) render
to the Board and the Executive Officers, whenever requested, a statement of the
financial condition of the Corporation and of all his or her transactions as
Treasurer; (e) cause to be kept at the Corporation's principal office correct
books of account of all its business and transactions and such duplicate books
of account as he or she shall determine and upon application cause such books or
duplicates thereof to be exhibited to any Director; (f) be empowered, from time
to time, to require from the officers or agents of the Corporation reports or
statements giving such information concerning transactions of the Corporation;
and (g) in general, perform all duties incident to the office of Treasurer and
such other duties as are given to him or her by these Bylaws or as from time to
time may be assigned to him by the Board or the Executive Officers.
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6.09 ASSISTANT TREASURERS.
At the request of the Treasurer or any of the Executive Officers, the
Assistant Treasurer shall perform all the duties of the Treasurer and, when so
acting, shall have all the powers of the be subject to all restrictions upon the
Treasurer. The Assistant Treasurer shall perform such other duties as from time
to time may be assigned by the Board, the Executive Officers of the Treasurer.
ARTICLE VII -- INDEMNIFICATION
7.01 ACTIONS OTHER THAN BY OR IN THE RIGHT OF THE CORPORATION.
The Corporation shall indemnify any person who was or is a party or is
threatened to be made a party 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 the Corporation) by reason of the
fact that he is or was or has agreed to become 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, partnership,
joint venture, trust or other enterprise or as a member of any committee or
similar body, against expenses (including attorneys' fees), judgments, fines and
amounts paid in settlement actually and reasonably incurred by him in connection
with such action, suit 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 action or proceeding, had no
reasonable cause to believe his conduct was unlawful. The termination of any
action, suit or proceeding by judgment, order, settlement, conviction, or upon a
plea of nolo contendere or its equivalent, shall not, of itself, create a
presumption that the person did not act in good faith and in a manner which he
reasonably believed to be in, or not opposed to, the best interests of the
Corporation, and, with respect to any criminal action or proceeding, that he had
reasonable cause to believe that his conduct was unlawful.
7.02 ACTIONS BY OR IN THE RIGHT OF THE CORPORATION.
The Corporation shall 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
suit 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 or has agreed to become 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, partnership, joint venture, trust or other enterprise, or as a
member of any committee or similar body, against expenses (including attorneys'
fees) actually and reasonably incurred by him in connection with the defense or
settlement of such action or suit 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, except that no indemnification shall be made in respect of any
claim, issue or matter as to which such person shall have been adjudged to be
liable to the Corporation unless and only to the extent that the Court of
Chancery or the court in which such action or suit was brought shall determine
upon application that, despite the adjudication of liability but in view of all
the circumstances of the case, such person is fairly and reasonably entitled to
indemnity for such expenses which the Court of Chancery or such other court
shall deem proper.
7.03 DETERMINATION OF RIGHT OF INDEMNIFICATION.
Any indemnification under Section 7.01 or 7.02 of these Bylaws (unless
ordered by a court) shall be made by the Corporation only as authorized in the
specific case upon a determination that indemnification of the director,
officer, employee or agent is proper in the circumstances because he has met the
applicable standard of conduct set forth in Sections 7.01 and 7.02 of these
Bylaws. Such determination shall be made (a) by the Board by a majority vote of
a quorum consisting of directors who were not parties to such action, suit or
proceeding, or (b) if such a quorum is not obtainable, or, even if obtainable, a
quorum of disinterested directors so directs, by independent legal counsel in a
written opinion, or (c) by the stockholders.
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7.04 INDEMNIFICATION AGAINST EXPENSES OF SUCCESSFUL PARTY.
Notwithstanding the other provisions of this Article VII, to the extent
that a director, officer, employee or agent of the Corporation has been
successful on the merits or otherwise in defense of any action, suit or
proceeding referred to in Section 7.01 or 7.02 of these Bylaws, or in defense of
any claim, issue or matter therein, he shall be indemnified against expenses
(including attorneys' fees) actually and reasonably incurred by him in
connection therewith.
7.05 ADVANCE OF EXPENSES.
Expenses (including attorneys' fees) incurred by an officer or director in
defending a civil or criminal action, suit or proceeding may be paid by the
Corporation in advance of the final disposition of such action, suit or
proceeding as authorized by the Board upon receipt of an undertaking by or on
behalf of the director or officer, to repay such amount if it shall ultimately
be determined that he is not entitled to be indemnified by the Corporation as
authorized in this Article VII. Such expenses (including attorneys' fees)
incurred by other employees and agents may be so paid upon such terms and
conditions, if any, as the Board deems appropriate. The Board may authorize the
Corporation's counsel to represent such director, officer, employee or agent in
any action, suit or proceeding, whether or not the Corporation is a party to
such action, suit or proceeding.
7.06 OTHER RIGHTS AND REMEDIES.
The indemnification and advancement of expenses provided by, or granted
pursuant to, the other Sections of this Article VII shall not be deemed
exclusive and are declared expressly to be nonexclusive of any other rights to
which those seeking indemnification or advancements of expenses may be entitled
under any bylaw, agreement, vote of stockholders or disinterested directors or
otherwise, both as to action in his official capacity and as to action in
another capacity while holding such office.
7.07 INSURANCE.
Upon resolution passed by the Board, the Corporation may 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,
partnership, joint venture, trust or other enterprise or as a member of any
committee or similar body against any liability asserted against him and
incurred by him in any such capacity, or arising out of his status as such,
whether or not the Corporation would have the power to indemnify him against
such liability under the provisions of this Article VII.
7.08 CONSTITUENT CORPORATIONS.
For the purposes of this Article VII, references to "the Corporation"
include in addition to the resulting corporation, any constituent corporation
(including any constituent of a constituent) absorbed in a consolidation or
merger which, if its separate existence had continued, would have had power and
authority to indemnify its directors, officers and employees or agents, so that
any person who is or was a director, officer, employee or agent of such
constituent corporation or is or was serving at the request of such constituent
corporation as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise or as a member of any
committee or similar body, shall stand in the same position under the provisions
of this Article VII with respect to the resulting or surviving corporation as he
would have with respect to such constituent corporation if its separate
existence had continued.
7.09 EMPLOYEE BENEFIT PLANS.
For the purposes of this Article VII, references to "other enterprises"
shall include employee benefit plans; references to "fines" shall include any
excise taxes assessed on a person with respect to any employee benefit plan; and
references to "serving at the request of the Corporation" shall include any
service as a director, officer, employee or agent of the Corporation which
imposes duties on, or involves services by, such director, officer, employee or
agent with respect to an employee benefit plan, its participants or
beneficiaries;
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<PAGE> 15
and a person who acted in good faith and in a manner he reasonably believed to
be in the interest of the participants and beneficiaries of an employee benefit
plan shall be deemed to have acted in a manner "not opposed to the best
interests of the "Corporation" as referred to in this Article VII.
7.10 BROADEST LAWFUL INDEMNIFICATION.
In addition to the foregoing, the Corporation shall, to the broadest and
maximum extent permitted by Delaware law, as the same exists from time to time
(but, in case of any amendment to or change in Delaware law, only to the extent
that such amendment or change permits the Corporation to provide broader rights
of indemnification than is permitted to the Corporation prior to such amendment
or change), indemnify each person who was or is a party or is threatened to be
made a party to any threatened, pending or completed action, suit or proceeding,
whether civil, criminal, administrative or investigative by reason of the fact
that he is or was a director or officer of the Corporation, or is or was serving
at the request of the Corporation as a director, officer, employee or agent of
another corporation, 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 such
action, suit or proceeding. In addition, the Corporation shall, to the broadest
and maximum extent permitted by Delaware law, as the same may exist from time to
time (but, in case of any amendment to or change in Delaware law, only to the
extent that such amendment or change permits the Corporation to provide broader
rights of payment of expenses incurred in advance of the final disposition of an
action, suit or proceeding than is permitted to the Corporation prior to such
amendment or change), pay to such person any and all expenses (including
attorneys' fees) incurred in defending or settling any such action, suit or
proceeding in advance of the final disposition of such action, suit or
proceeding upon receipt of an undertaking by or on behalf of the director or
officer, to repay such amount if it shall ultimately be determined by a final
judgment or other final adjudication that he is not entitled to be indemnified
by the Corporation as authorized in this Section 7.10. The first sentence of
this Section 7.10 to the contrary notwithstanding, the Corporation shall not
indemnify any such person with respect to any of the following matters: (a)
remuneration paid to such person if it shall be determined by a final judgment
or other final adjudication that such remuneration was in violation of law; or
(b) any accounting of profits made from the purchase or sale by such person of
the Corporation's securities within the meaning of Section 16(b) of the
Securities Exchange Act of 1934 and amendments thereto or similar provisions of
any federal, state or local statutory law; or (c) actions brought about or
contributed to by the dishonesty of such person, if a final judgment or other
final adjudication adverse to such person establishes that acts of active and
deliberate dishonesty were committed or attempted by such person with actual
dishonest purpose and intent and were material to the adjudication; or (d)
actions based on or attributable to such person having gained any personal
profit or advantage to which he was not entitled, in the event that a final
judgment or other final adjudication adverse to such person establishes that
such person in fact gained such personal profit or other advantage to which he
was not entitled; or (e) any matter in respect of which a final decision by a
court with competent jurisdiction shall determine that indemnification is
unlawful; provided, however, that the Corporation shall perform its obligations
under the second sentence of this Section 7.10 on behalf of such person until
such time as it shall be ultimately determined by a final judgment or other
final adjudication that he is not entitled to be indemnified by the Corporation
as authorized by the first sentence of this Section 7.10 by virtue of any of the
preceding clauses (a) (b) (c) (d) or (e).
7.11 TERM.
The indemnification and advancement of expenses provided by, or granted
pursuant to, this Article VII shall, unless otherwise provided when authorized
or ratified, continue as to a person who has ceased to be a director, officer,
employee or agent and shall inure to the benefit of the heirs, executors and
administrators of such a person.
7.12 SEVERABILITY.
If any part of this Article VII shall be found, in any action, suit or
proceeding or appeal therefrom or in any other circumstances or as to any
particular officer, director, employee or agent to be unenforceable,
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<PAGE> 16
ineffective or invalid for any reason, the enforceability, effect and validity
of the remaining parts or of such parts in other circumstances shall not be
affected, except as otherwise required by applicable law.
7.13 AMENDMENTS.
The foregoing provisions of this Article VII shall be deemed to constitute
an agreement between the Corporation and each of the persons entitled to
indemnification hereunder, for as long as such provisions remain in effect. Any
amendment to the foregoing provisions of this Article VII which limits or
otherwise adversely affects the scope of indemnification or rights of any such
persons hereunder shall, as to such persons, apply only to claims arising, or
causes of action based on actions or events occurring, after such amendment and
delivery of notice of such amendment is given to the person or persons so
affected. Until notice of such amendment is given to the person or persons whose
rights hereunder are adversely affected, such amendment shall have no effect on
such rights of such persons hereunder. Any person entitled to indemnification
under the foregoing provisions of this Article VII shall, as to any act or
omission occurring prior to the date of receipt of such notice, be entitled to
indemnification to the same extent as had such provisions continued as Bylaws of
the Corporation without such amendment.
ARTICLE VIII -- DEPOSIT OF CORPORATE FUNDS
8.01 BORROWING.
No loans or advances shall be obtained or contracted for, by or on behalf
of the Corporation and no negotiable paper shall be issued in its name, unless
and except as authorized by the Board. Such authorization may be general or
confined to specific instances.
8.02 DEPOSITS.
All funds of the Corporation not otherwise employed shall be deposited from
time to time to its credit in such banks or trust companies or with such bankers
or other depositories as the Board may select, or as may be selected by any
officer or officers or agent or agents authorized to do so by the Board.
8.03 CHECKS, DRAFTS, ETC.
All checks, drafts or other orders for the payment of money, and all
negotiable and non-negotiable notes or other negotiable or non-negotiable
evidences of indebtedness issued in the name of the Corporation, shall be signed
or endorsed by such person or persons and in such manner as from time to time
shall be determined by the Board or the Executive Officers. The Corporation
shall obtain a fidelity bond for such persons with such signing authority as the
Board or the Executive Officers may require.
ARTICLE IX -- CERTIFICATES OF STOCK
9.01 STOCK CERTIFICATES.
Every holder of capital stock of the Corporation shall be entitled to have
a certificate or certificates in such form as shall be approved by the Board,
certifying the number of shares of capital stock of the Corporation owned by him
or her. The certificates representing shares of capital stock shall be signed in
the name of the Corporation by an Executive Officer and by the Secretary, an
Assistant Secretary, the Treasurer or an Assistant Treasurer (which signatures
may be facsimiles) and sealed with the seal of the Corporation (which seal may
be a facsimile). If any officer, transfer agent or registrar who shall have
signed or whose facsimile signatures has been placed upon such certificate shall
have ceased to be such officer, transfer agent or registrar before such
certificates are issued, they may nevertheless be issued by the Corporation with
the same effect as if such officer, transfer agent, or registrar were still such
at the date of their issue.
E-19
<PAGE> 17
9.02 BOOKS OF ACCOUNT AND RECORD OF STOCKHOLDERS.
The books and records of the Corporation may be kept at such places, within
or without the State of Delaware, as the Board may from time to time determine.
The stock record books and the blank stock certificate books shall be kept by
the Secretary or by any other officer or by the transfer agent or registrar, if
any, designated by the Board. There shall be entered on the stock books of the
Corporation the number of each certificate issued, the number of shares
represented thereby, the name of the person to whom such certificate was issued
and the date of issuance thereof.
9.03 TRANSFER OF SHARES.
Transfers of shares of capital stock of the Corporation shall be made on
the stock records of the Corporation only upon authorization by the registered
holder thereof, or by his attorney thereunto authorized by power of attorney
duly executed and filed with the Secretary or with the transfer agent, and on
surrender of the certificate or certificates for such shares properly endorsed
or accompanied by a duly executed stock transfer power and the payment of all
taxes thereon, if any. Except as otherwise provided by law, the Corporation
shall be entitled to recognize the exclusive right of a person in whose name any
share or shares stand on the record of stockholders as the owner of such share
or shares for all purposes, including, without limitation, the rights to receive
dividends or other distributions, and to vote as such owner, and the Corporation
shall not be bound to recognize any equitable or legal claim to or interest in
any such share or shares on the part of any other person whether or not the
Corporation shall have express or other notice thereof.
9.04 REGULATIONS.
The Board may make such additional rules and regulations, not inconsistent
with these Bylaws, as it may deem expedient concerning the issue, transfer and
registration of certificates for shares of the capital stock of the Corporation.
It may appoint, or authorize any officer or officers to appoint, one or more
transfer agents or one or more registrars and may further provide that no stock
certificate shall be valid until countersigned by one of such transfer agents
and registered by one of such registrars. Nothing herein shall be construed to
prohibit the Corporation from acting as its own transfer agent or registrar.
9.05 LOST, STOLEN OR DESTROYED CERTIFICATES.
The holder of any certificate representing any share or shares of the
capital stock of the Corporation shall immediately notify the Corporation of any
loss, theft, or destruction of such certificate. The Board may direct that a new
certificate or certificates be issued in the place of any certificate or
certificates theretofore issued by it which the owner thereof shall allege to
have been lost, stolen or destroyed upon the furnishing to the Corporation of an
affidavit to that effect by the person claiming that the certificate has been
lost, stolen or destroyed. When authorizing such issue of a new certificate or
certificates, the Board may, in its discretion, require such owner or his or her
legal representatives to give to the Corporation and its transfer agent(s) and
registrar(s) a bond in such sum, limited or unlimited, and in such form and with
such surety or sureties as the Board in its absolute discretion shall determine,
sufficient to indemnify the Corporation against any claim that may be made
against it on account of the alleged loss, theft or destruction of any such
certificate, or the issuance of a new certificate.
9.06 STOCKHOLDER'S RIGHT OF INSPECTION.
Any stockholder of record of the Corporation, in person or by attorney or
other agent, shall, upon written demand under oath stating the purpose thereof,
have the right during the usual hours for business to inspect for any proper
purpose the Corporation's stock ledger, a list of its stockholders, and its
other books and records, and to make copies or extracts therefrom. A proper
purpose shall mean a purpose reasonably related to such person's interest as a
stockholder. In every instance where an attorney or other agent shall be the
person who seeks the right to inspection, the demand under oath shall be
accompanied by a power of attorney or such other writing which authorized the
attorney or other agent to so act on behalf of the stockholder. The
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<PAGE> 18
demand under oath shall be directed to the Corporation at its registered office
in Delaware or at its principal place of business.
9.07 REPRESENTATION OF SHARES OF OTHER CORPORATIONS.
Any Executive Officer, Executive Vice President or the Secretary of this
Corporation is authorized to vote, represent and exercise on behalf of this
Corporation all rights incident to all shares of any other corporation or
corporations standing in the name of this Corporation. The authority herein
granted to said officers to vote or represent on behalf of this Corporation any
and all shares held by this Corporation in any other corporation or corporations
may be exercised either by such officers in person or by any person authorized
so to do by proxy or power of attorney duly executed by said officers.
ARTICLE X -- MISCELLANEOUS
10.01 BUDGETS.
The Board shall approve all annual and other significant operating budgets
of the Corporation.
10.02 RECORD DATES.
In order that the Corporation may determine the stockholders entitled to
notice of, or to vote at, any meeting of stockholders or any adjournment
thereof, or to express consent to corporate action in writing without a meeting,
or to receive payment of any dividend or other distribution or allotment of any
rights, or to exercise any rights in respect of any change, conversion or
exchange of stock or in respect of any other lawful action, the Board may fix,
in advance, a record date, which shall be not more than sixty (60) nor less than
ten (10) days before the date of such meeting, nor more than sixty (60) days
prior to any other action. Only those stockholders of record on the date so
fixed shall be entitled to any of the foregoing rights, notwithstanding the
transfer of any such stock on the books of the Corporation after any such record
date fixed by the Board.
10.03 DIVIDENDS.
Subject to any agreement to which the Corporation is a party or by which it
is bound, the Board may declare to be payable, in cash, in other property or in
stock of the Corporation of any class or series, such dividends in respect of
outstanding stock of the Corporation of any class or series as the Board may at
any time deem to be advisable. Before declaring any such dividend, the Board may
cause to be set aside any funds or other property or assets of the Corporation
legally available for the payment of dividends.
10.04 FISCAL YEAR.
The fiscal year of the Corporation shall be determined by resolution of the
Board.
10.05 CORPORATE SEAL.
The Corporate Seal shall be circular in form and shall bear the name of the
Corporation and the words and figures denoting its organization under the laws
of the State of Delaware and the year thereof and otherwise shall be in such
form as shall be approved from time to time by the Board.
10.06 AMENDMENTS.
All Bylaws of the Corporation may be amended, altered or repealed, and new
Bylaws may be enacted, by the affirmative vote of the holders of record of a
majority of the issued and outstanding stock of the Corporation entitled to vote
at any annual or special meeting, or by the affirmative vote of a majority of
the directors present at any regular or special meeting of the Board.
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<PAGE> 19
CERTIFICATE OF SECRETARY
The undersigned certifies:
(1) That the undersigned is duly elected and acting Secretary of Avalon
Cable Holdings Finance, Inc., a Delaware corporation; and
(2) That the foregoing Bylaws constitute the Amended and Restated Bylaws
of the Corporation adopted by the Board on the 15th day of November, 1999.
IN WITNESS WHEREOF, I have hereunto subscribed my name and affixed the seal
of the Corporation this 15th day of November, 1999.
/s/ CURTIS S. SHAW
--------------------------------------
Curtis S. Shaw, Secretary
[SEAL]
E-22
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