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S-4/A
AVALON CABLE OF MICHIGAN INC/ filed this Form S-4/A on 07/22/1999
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<PAGE>
 
                       AVALON CABLE LLC AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
                               December 31, 1998
 
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>

 
   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>

 
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