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SEC Filings

AVALON CABLE OF MICHIGAN INC/ filed this Form S-4 on 04/01/1999
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equipment vendors. Plant and operating costs include expenses related to wages
and employee benefits, electricity, systems supplies, vehicles and other
operating costs. General and administrative expenses directly attributable to
the systems include wages and employee benefits for customer service,
accounting and administrative personnel, franchise fees and expenses related to
billing, payment processing and office administration.
   Pro Forma Operating Results. We have begun to implement operating changes in
the business formerly conducted by Cable Michigan. Most notably, we directly
manage Cable Michigan's operations through a twelve person corporate staff and
we no longer pay RCN Corporation a management fee or reimburse RCN Corporation
for allocated costs. As a result, we have eliminated the RCN Corporation
management fee of $3.2 million for the year ended December 31, 1998. To replace
the allocated costs of $1.1 million for the year ended December 31, 1998, we
estimate that we would have incurred corporate overhead expenses of
approximately $1.5 million for the year ended December 31, 1998. The additional
corporate overhead primarily represents personnel used in managing a larger
organization and will enable us to acquire additional cable systems without
incurring additional overhead. For example, we have eliminated management fees
and certain corporate overhead expenses at Amrac and Pegasus of approximately
$292,000 for the year ended December 31, 1998. Management expects to eliminate
certain corporate overhead expenses at Nova, Cross Country, Novagate, R/COM,
Traverse Internet, Galaxy and Hometown of $1.3 million for the year ended
December 31, 1998.
   In addition, we expect to eliminate non-recurring or one-time operating
costs incurred by Cable Michigan of $1.9 million for the year ended December
31, 1998. These non-recurring costs include costs associated with operating as
a public company such as public reporting, shareholder printing and mailing
expenses, certain public company fees, outside directors' fees and directors'
liability insurance costs. The one-time operating costs include certain special
promotions, certain one-time promotion accruals, certain expenses related to
the relocation of the customer service call center, certain litigation
expenses, certain costs related to our merger with Cable Michigan and certain
expenses associated with a May 1998 storm in Grand Rapids.
   Other operating changes include changes in the areas of customer service and
programming, all of which RCN Corporation managed for Cable Michigan. To better
serve subscribers located in Michigan, we relocated the customer call center
from Pennsylvania, which Cable Michigan shared with RCN Corporation and CTE, to
a site within Michigan and reconfigured the call center to operate as a stand-
alone entity. Management is currently analyzing its options for acquiring
programming for the Michigan Cluster. We are currently using our existing
membership in the National Cable Television Cooperative to program both the
Michigan Cluster and the New England Cluster. We are exploring joining the
programming consortium that RCN Corporation used in managing Cable Michigan as
well as engaging in direct negotiations with programming suppliers. Management
currently believes that, in the aggregate, our expenses in these areas for the
Michigan Cluster will not be materially different than those of Cable Michigan,
considering for these purposes both the direct costs incurred by Cable Michigan
and the allocated costs reimbursed to RCN Corporation.
   Giving effect to the foregoing operating and organizational changes and
other adjustments described above, the Issuers on a combined basis would have
had pro forma Adjusted EBITDA of $12.2 million and $48.7 million for the three
months and year ended December 31, 1998, respectively.
   We cannot assure you that we will fully realize our anticipated cost savings
associated with our planned operating changes or our elimination of certain
management fees, redundant corporate, general and administrative costs. We also
cannot assure you that unanticipated costs in combining or operating the
businesses we plan to acquire will not reduce or eliminate our anticipated cost
   Seasonality. We expect that our revenues and EBITDA will be slightly
seasonal. On a combined basis after giving effect to the Acquisitions, the
Issuers generated approximately 51.2% of the their revenues and 51.3% of their
EBITDA, for the fiscal year ended December 31, 1998 during the second and third